Crenshaw v. McKinley, 56.

• Decision Date: 13 January 1941
• Docket Number: No. 56.,56.
• Citation: 116 F.2d 877
• Parties: CRENSHAW v. McKINLEY et al.
• Court: U.S. Court of Appeals — Second Circuit

116 F.2d 877 (1941)

CRENSHAW v. McKINLEY et al.

No. 56.

Circuit Court of Appeals, Second Circuit.

January 13, 1941.

Root, Clark, Buckner & Ballantine, of New York City (John E. F. Wood and Lyman M. Tondel, Jr., both of New York City, of counsel), for appellant.

David W. Kahn, of New York City, for McKinley & Co., Inc., and Lindsay Parker McKinley.

Wachtell, Manheim & Grouf, of New York City (Myron K. Wilson, of New York City, of counsel), for Marjorie M. McKinley and Marie Pierce.

Before L. HAND, CHASE, and CLARK, Circuit Judges.

CHASE, Circuit Judge.

The appellant is the trustee in bankruptcy of Lindsay Parker McKinley who filed a voluntary petition in the District Court for the Southern District of New York on December 18, 1937, and was adjudicated a bankrupt on December 20, 1937.

Invoking Federal jurisdiction under the provisions of the Bankruptcy Act, the appellant on December 6, 1939, sued the bankrupt's wife, Marjorie M. McKinley; McKinley & Company, Inc., a New York corporation of which she had been the sole stockholder; and the bankrupt, his wife and Marie Pierce as co-partners doing business under the firm name and style of McKinley & Company; to set aside alleged fraudulent transfers of assets made by the bankrupt and for an accounting. The parties were all alleged to be citizens of New York. The complaint set up two causes of action but only the second is involved in the appeal. The defendants moved to dismiss the second cause of action (1) for failure to state a cause of action and (2) for lack of jurisdiction. The motion was granted and the plaintiff has appealed.

It was alleged that on February 2, 1930, when the bankrupt owed each of three creditors, whose claims have been proved and allowed, thousands of dollars aggregating over half a million, and was insolvent to the knowledge of all the defendants, he secured loans on his credit from one Schwarz and one Baettenhousen to the amount of $10,000 and "caused notes in that amount of the defendant Marjorie M. McKinley to be given to said Schwarz and Baettenhousen;" that he and his wife on or about that date conceived a scheme whereby he was to continue in his business as a stockbroker and investment advisor in which he had "a great financial reputation" and possessed "a valuable following of customers" and would do so "in such a manner that his creditors would be unable to reach the fruits of his labor". That the bankrupt and his wife on or about February 7, 1930, caused the New York corporation of McKinley & Company, Inc., to be organized to carry on the business which had formerly been done by a dissolved partnership, McKinley & Company, of which the bankrupt had been a member and that they caused all of the stock of the corporation to be issued to the wife for the $10,000 borrowed on the credit of the bankrupt; that the scheme was "formulated * * * with the intent and purpose of defrauding the creditors of said Lindsay Parker McKinley;" that the corporation "made large sums of money solely through the reputation, efforts and skill of the defendant Lindsay Parker McKinley and paid out dividends from its earnings to the defendant Marjorie M. McKinley, claiming that she was the sole stockholder of said corporation, whereas in truth and in fact said Marjorie M. McKinley held the said stock under said scheme or plan merely as a nominee of said Lindsay Parker McKinley and as a step in said plan or scheme to withhold the earnings of said defendant Lindsay Parker McKinley from his creditors."

It also alleged that the bankrupt and his wife caused the corporation to pay Messrs. Schwarz and Baettenhousen $9,000 during the first year of its existence and reduced its capital to $1,000 and that in 1931 the remaining $1,000 was paid to the lenders "with funds supplied by the defendant Lindsay Parker McKinley". Also, that the corporation continued in business until January 17, 1939, when it was dissolved and its assets transferred to a new partnership, McKinley & Company, in which the bankrupt, his wife, and Marie Pierce were the co-partners. And finally, that the bankrupt and his wife caused the corporation to pay her "various sums of money allegedly as salaries, although said Marjorie M. McKinley rendered no services to said corporation".

Although the motion to dismiss the complaint was based on the two grounds above stated, they really merge for present purposes for we are only concerned with whether or not a good cause of action was alleged over which the district court had jurisdiction. The parties are all citizens of the same state and Federal jurisdiction is based upon Sec. 70, sub. e(1) of the Bankruptcy Act, 11 U.S.C.A. § 110, sub. e(1), which provides that, "A transfer made or suffered or obligation incurred by a debtor adjudged a bankrupt under this Act title which, under...