Cornwall Press v. Ray Long & Richard R. Smith, Inc.

• Decision Date: 11 February 1935
• Docket Number: No. 213.,213.
• Citation: 75 F.2d 276
• Court: U.S. Court of Appeals — Second Circuit
• Parties: CORNWALL PRESS, Inc., v. RAY LONG & RICHARD R. SMITH, Inc., et al.

75 F.2d 276 (1935)

CORNWALL PRESS, Inc., v. RAY LONG & RICHARD R. SMITH, Inc., et al.

No. 213.

Circuit Court of Appeals, Second Circuit.

February 11, 1935.

Morris J. Goldston, of New York City (Harold G. Aron, of New York City, of counsel), for plaintiff.

Milbank, Tweed, Hope & Webb, of New York City, for Farrar & Rinehart.

Leo L. Fenbert, of New York City, for J. J. Little & Ives.

Leo L. Fenbert, Henry L. Flattau, and William W. Walling, all of New York City, trustees pro se.

Parker, Chapin & Flattau, of New York City (A. Donald MacKinnon, Leo L. Fenbert, Henry L. Flattau, and Lucien Hilmer, all of New York City, of counsel), for Bank of Manhattan Co.

Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

MANTON, Circuit Judge.

This suit is in equity, asking for the appointment of a receiver of Ray Long & Richard Smith, Inc., which was adjudicated a bankrupt March 9, 1934, and to enjoin the other defendants from interfering with the assets, or otherwise expending the funds of the bankrupt; also it prays that the bankrupt be ordered to withdraw its consent to the adjudication, and that other appellees be required to account for the assets and properties of the bankrupt which came into their possession.

The bill alleges that the appellant is a creditor of the bankrupt, and that it has in its possession certain assets of the bankrupt's educational book department as security for its claim; that the appellees J. J. Little & Ives Company and the Bank of Manhattan Company are creditors of the bankrupt; that an involuntary petition was filed against the bankrupt, and consent to an adjudication given by the bankrupt; that such consent was the result of a conspiracy to defraud or given under duress and coercion; that the trustees in bankruptcy sold to appellees, Farrar & Rinehart, Inc., the educational book department of the bankrupt at a grossly inadequate price, and that the purchaser refused to pay the appellant the amount of its lien; that the trustees have wasted and are wasting the assets of the bankrupt; and that the entire proceedings have been a scheme to turn over to Farrar & Rinehart, Inc., the most valuable asset of the bankrupt for an inadequate price. It alleges further that the corporation is not a bankrupt within the meaning of the act, that the proceedings are invalid, and that the actions of the trustee are without authority of law, and that the estate has been impaired in a large amount, and that the appellant has no adequate remedy at law. Nowhere in the bill is there an allegation that the appellant intervened or proceeded in the bankruptcy court to have the adjudication vacated and the sale there set aside.

The appellees, alleging that the bill failed to state a cause of action, moved for its dismissal. The motion was granted, and a decree entered accordingly, from which this appeal is taken.

We think the dismissal was properly granted. In Re Cohn, 227 F. 843 (C. C. A. 3), it was pointed out that, if opposing creditors to a petition in involuntary bankruptcy could prove that the written admission thereof was the result of fraud and collusion between the debtor and certain creditors, or in aid of a collusive scheme, an order of adjudication would not be entered. The appellant cannot be heard to say that no relief could have been obtained by it in a bankruptcy court. The bankruptcy court has, within its own jurisdiction, full equity powers, and cannot be compelled to, nor will it, exercise its powers in aid of a fraud. In Zeitinger v. Hargadine-McKittrick Dry Goods Co., 244 F. 719, 722 (C. C. A. 8), an appeal from a decree of adjudication in bankruptcy, the appellant showed that the object of the bankruptcy proceedings was to avoid the effect of a judgment. The appellant contended that to permit an adjudication would result in a fraud upon the petitioners as well as upon the court. The court said:

"The District Court, however, could have safely relied upon the proposition that there is and can be no law or practice which would compel a court of bankruptcy or any other court to become a party to a fraud. * * *

"The District Judge * * * is not a ministerial, but a judicial, officer, whose first duty is to see that those who minister in the temple of justice shall not invoke his authority for the accomplishment of fraud. * * * It was the clear duty of the District Court, as well as of this court, in order to prevent the perpetration of what clearly would be a fraud upon the circuit court, the court of bankruptcy, and the interveners, to dismiss the voluntary petition of appellee."

In Re Syracuse Stutz Co. (Dempster v. Morris), 55 F.(2d) 914, we said that collusion between a debtor and petitioning creditors might invalidate a consent to adjudication. See Struthers Furnace Co. v. Grant, 30 F.(2d) 576 (C. C. A. 6).

In Chicago Bank of Commerce v. Carter, 61 F.(2d) 986, 987, 989 (C. C. A. 8), the court said that, "As a general rule, a general creditor has no such standing in a...