Christian & Porter Aluminum Co., Matter of

• Citation: 584 F.2d 326
• Decision Date: 17 October 1978
• Docket Number: No. 75-2587,75-2587
• Parties: In the Matter of CHRISTIAN AND PORTER ALUMINUM COMPANY, Bankrupt. Kerry H. GOUGH, Trustee, Petitioner-Appellee, v. DeWayne F. TITUS et al., Respondents-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 326

584 F.2d 326

In the Matter of CHRISTIAN AND PORTER ALUMINUM COMPANY, Bankrupt.

Kerry H. GOUGH, Trustee, Petitioner-Appellee, v. DeWayne F. TITUS et al., Respondents-Appellants.

No. 75-2587.

United States Court of Appeals, Ninth Circuit.

Oct. 17, 1978.

Gordon W. Nelson, Fremont, Cal., William L. Mahaffey, Jr., Walnut Creek, Cal., for respondents-appellants.

Robert R. Barton, Oakland, Cal., for petitioner-appellee.

Before TRASK and TANG, Circuit Judges and TAKASUGI, ^* District Judge.

TAKASUGI, District Judge.

Appellants ¹ are seeking review of an order of the district court affirming the bankruptcy judge's ruling in favor of the trustee and against appellants for $462,039.39. The appeal presents the following issues:

(1) Can a corporate litigant defend or appeal a federal action if it has been suspended for non-payment of its California Franchise Taxes?

(2) Was there jurisdiction in the bankruptcy court to determine the adverse claims of appellants by summary proceedings?

(3) Was appellee entitled to recover from appellants any of the disputed property value thereof?

(4) Was the amount of the judgment awarded against appellants excessive?

FACTS

The bankrupt, Christian & Porter Aluminum Company (herein "Bankrupt"), is a California corporation. All of the issued and outstanding stock of the corporation was owned by Nick and Menas Christian. Bankrupt had established a line of credit with the United California Bank (herein "UCB") secured by a perfected security agreement which established a lien on the accounts receivable, inventory and general intangibles of Bankrupt as well as its major piece of equipment, an aluminum extrusion press. UCB had made considerable advances to Bankrupt, who was increasingly unable to repay its debts or meet its current obligations.

As a result of these circumstances, Bankrupt negotiated with appellant DeWayne Titus (herein "Titus") for the sale of Bankrupt's stock and business to Titus or one of several corporations owned and controlled by him. On June 14, 1976, an agreement was reached under which Alameda Diversified Industries (herein "ADI") would lease the real property on which Bankrupt did business. It was also agreed that the capital stock of Bankrupt would be transferred to ADI. It is alleged that the stock was to be purchased and further money advanced pending purchase only on the condition that a settlement was reached between Bankrupt and its creditors. The bankruptcy judge found that at this time Titus promised to pay Nick and Menas Christian $150,000 for their Christian & Porter Stock.

According to appellants, UCB stopped all financing of Bankrupt on June 21, 1968, and called its loan. At this time, there was approximately $70,000 outstanding on the UCB loan for the extrusion press and nearly $150,000 outstanding on other advances by the bank. Other creditors had unpaid demands amounting to about $180,000. The termination of UCB's advances resulted in Bankrupt's inability to meet its on-going expenses; it had approximately $33,000 on hand.

On June 24, 1968, Nick Christian emptied his company's bank account by withdrawing $32,430 and delivered this sum to W. J. Knowles (herein "Knowles"), Titus' attorney. Knowles deposited it in his "trust account."

Appellants recite that on June 27, 1968, attorneys representing Bankrupt and ADI met "with a body of creditors of the aluminum company," and offered them a cash settlement of 25% Or, in the alternative, a payment of 100% Over a period of four years, with a two-year moratorium. Both alternatives were rejected.

On June 28, 1968, Nick Christian, as president of Bankrupt, executed a security agreement and financing agreements with Harbor Steel, another of Titus' corporations. This financing statement was duly filed the same day. Again, according to appellants' brief, this arrangement exchanged an agreement on the part of Harbor Steel to advance Bankrupt's current operating expenses for a security interest in all of Bankrupt's assets, subject to prior existing liens.

Appellants allege that between June 24, 1968, and July 10, 1968, Harbor Steel advanced approximately $45,000 to Bankrupt that in this same time period Knowles delivered another $12,000 of Bankrupt's receipts; and that he disbursed "virtually all of the money he had received to creditors and employees of Bankrupt." The bankruptcy court, on the other hand, found "no proof that any money was ever loaned to or paid for the benefit of (Bankrupt), by Titus or Harbor Steel or any other respondent." The court found that the checks issued by Harbor Steel during this interval:

were paid for the benefit of respondents, then in control of and about to acquire the (Bankrupt's) business and assets; a substantial part of those payments were 'C.O.D.' purchases of inventory that was transferred to and used by respondents in their continuance of (Bankrupt's) business. Most, if not all, of those payments came from the $32,430 of (Bankrupt's) money that was given to Knowles and collections on (Bankrupt's) accounts receivable that respondents received.

According to appellants, on July 10, 1968, UCB demanded payment in full on its notes and placed its receiver in Bankrupt's plant. On the same day, Harbor Steel ceased making advances and also demanded payment in full. When Bankrupt failed to comply, Harbor Steel took possession of Bankrupt's plant on July 12, 1968, claiming to be the creditor in possession under the provisions of the security agreement. Thereafter, the business of Bankrupt was continued in the name of National Building Components (herein "NBC"), a corporation formed by Titus on July 15, 1968. Bankrupt's plant, assets and business were turned over to NBC on the same day.

This transfer of possession, according to appellants, was designated a private sale of the collateral securing Harbor Steel's claim, and a bill of sale was executed to document it. However, the bankruptcy court found:

No sale or purported sale of any (of Bankrupt's) asset under the provisions of the June 28th security agreement has been made, and there has been no accounting to (Bankrupt of) assets and money acquired by Titus and Harbor Steel and the other respondents.

Immediately after July 17, 1968, Nick and Menas Christian were employed by Titus or his corporations, NBC and ADI.

On July 23, 1968, Titus personally purchased an assignment of UCB's security interest for $212,000, paid for with funds borrowed by Titus from UCB the same day, unsecured. On August 5, 1968, Titus purported to sell to NBC the collateral acquired pursuant to the assignment of the UCB security agreement. According to appellants, the sale was advertised in the newspaper, and all the creditors with claims over $500 were mailed individual notices. The only bid was for $267,000 on behalf of NBC. The price was paid by check, which was, however, never negotiated since it was not funded. Thereafter, NBC operated the aluminum business and collected approximately $202,000 on Bankrupt's old accounts receivable. These funds were used by Titus to repay his loan of $212,000 at UCB.

On August 9, 1968, a creditors' involuntary bankruptcy petition was filed against Bankrupt, and on March 7, 1969, the corporation was adjudicated bankrupt after a contested trial. This order was affirmed by the district court, In re Christian and Porter Aluminum Company, 316 F.Supp. 1340 (N.D.Cal.1970), and the Bankrupt's appeal to this court was dismissed on July 27, 1971. On October 23, 1969, the Trustee filed an application with the bankruptcy court seeking an order requiring appellants Titus and his corporations to turn over the assets they had received from the Bankrupt and a temporary restraining order, restraining appellants from transferring any of their assets, Except in the ordinary course of business. An order to show cause and temporary stay were issued by the court on the same day. Appellants filed an answer and objection to jurisdiction on October 31, 1969. On November 26, 1969, a settlement agreement was executed by the Trustee and appellants, and an order authorizing and approving the compromise and dissolving the restraining order was filed the same day. On May 30, 1970, the Trustee amended his application for a turnover order to allege fraudulent conveyances. On June 15, 1970 appellants filed another objection to jurisdiction and answer to the allegation of fraudulent conveyances. The initial decision of the bankruptcy court was appealed and referred to a new trial. Judgment in favor of the Trustee and against appellants for $462,039.39 was rendered on August 20, 1974, by the bankruptcy court. On appeal, the district court affirmed the bankruptcy court's judgment.

I. CAPACITY TO APPEAL

Before dealing with the substantive issues, the procedural issue that must first be resolved is whether the fourteen corporate appellants, ² who have failed to pay their California Franchise Taxes and have subsequently been "suspended," are precluded from appealing the case at bar.

The capacity of a corporate litigant to sue or be sued in a federal case is directly controlled by Fed.R.Civ.P. 17(b) which provides, in pertinent part, "(t)he capacity of a corporation to sue or be sued shall be determined by the law under which it is organized." This rule is explicitly made applicable to bankruptcy proceedings pursuant to Bankruptcy Rule 717, which states that "(e) xcept as provided in Rules 212(f) and 512(d) (not applicable in the present case), Rule 17 of the Federal Rules of Civil Procedure applies in adversary proceedings."

The "local law" which is relevant to the particular facts in the case at bar is California Revenue and Taxation Code § 23301 (herein "Section 23301") which provides, in pertinent part, that "(e)xcept for the purpose of amending the articles of incorporation to set forth a new name, the corporate powers, rights and privileges of a domestic taxpayer shall be suspended (for nonpayment of its franchise tax)."

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