Crown Sportswear, Inc., In re, No. 77-1487

• Decision Date: 17 May 1978
• Docket Number: No. 77-1487
• Citation: 575 F.2d 991
• Parties: In re CROWN SPORTSWEAR, INC., Appellant.
• Court: U.S. Court of Appeals — First Circuit

Page 991

575 F.2d 991

In re CROWN SPORTSWEAR, INC., Appellant.

No. 77-1487.

United States Court of Appeals First Circuit.

Argued March 9, 1978.

Decided May 17, 1978.

George R. Desmond, Framingham, Mass., for appellant.

Scott P. Lewis, Boston, Mass., with whom Palmer & Dodge, Boston, Mass., was on brief, for appellee.

Before CAMPBELL, Circuit Judge, BOWNES, Circuit Judge, PETTINE, ^* District Judge.

BOWNES, Circuit Judge.

The issue in this bankruptcy appeal is whether an involuntary petition in bankruptcy brought by a single creditor alleging that the number of creditors was fewer than twelve should have been dismissed as a matter of law. The bankrupt-appellant moved to dismiss on the ground that, since it had more than eleven creditors, the bankruptcy court had no jurisdiction of the petition.

On June 4, 1976, appellant, Crown Sportswear, Inc., had made a general assignment for the benefit of creditors. Bassett-Walker Knitting Company, Inc., a creditor of Crown to the amount of $51,702, brought a creditor's petition in bankruptcy on September 24, 1976, alleging that Crown had fewer than twelve creditors and citing the assignment as an act of bankruptcy, which it clearly was. No question is raised as to Crown's insolvency at the time the petition was filed or as to the timeliness of the petition.

The bankruptcy judge found, as is agreed by the parties, that there were in fact more than eleven creditors. He also found that the allegation of fewer than twelve creditors was not made in bad faith, nor was the conduct of the petitioner's attorney reckless. The motion to dismiss the petition was denied by the bankruptcy judge and upheld by the district court on the ground "that he applied the correct legal standard, and that his findings of fact were not clearly erroneous, and indeed warranted by the evidence. Bankruptcy Rule 810." Order of district court, October 25, 1977.

At the outset, we are faced with the fact that, in making his findings, the bankruptcy judge went outside the record and relied on material submitted in a memorandum in opposition to the motion to dismiss. The only evidence on the record and, therefore, the only evidence that the bankruptcy judge should have considered was the testimony of Peter Terris, attorney for the petitioning creditor. Terris testified that his investigation as to the number of creditors consisted of conversations with his client, specifically a woman in the credit department who told him she had no information as to the number of creditors, and obtaining a copy of an assignment for the benefit of creditors, executed by the bankrupt, from the town clerk of Framingham. This, also, was of no help as to the number of creditors.

The bankruptcy judge found no bad faith, but then went on to find further:

On what information and belief then was this allegation made? I find that it was on the mistaken assumption that the aggregate amount of the then outstanding debts of Crown was approximately $72,000 (as opposed to the correct figure of $92,000) of which $51,702 was owed to Bassett-Walker. Attributing 5/7 of that amount to the debt owing Bassett-Walker and some substantial portion of the remainder to the Shawnut Bank of Framingham, guarantor of Crown's debt to Bassett-Walker, it was considered unlikely by counsel for Bassett-Walker that the number of remaining eligible creditors, assumed by way of the Bankruptcy Act, Section 59(e)(3), 11 U.S.C. 95(e)(3) to be creditors who had not assented to an assignment for the benefit of creditors of Crown, would number 12 or more. (See Memorandum in Opposition to Motion to Dismiss ) (emphasis added).

This reasoning may have been correct, but it was based on facts, assumptions and inferences that have no foundation in the record. In re Aughenbaugh, 125 F.2d 887 (3d Cir. 1942).

Since the only record facts are clear and undisputed and not susceptible of interpretation, we resist the temptation to remand, and will determine on the basis of the testimony of Attorney Terris whether or not the petition should be dismissed as a matter of law.

The Bankruptcy Act permits a single creditor to file an involuntary bankruptcy petition if his claim is for at least $500, and if the debtor has fewer than twelve creditors. Bankruptcy Act § 59(b), 11 U.S.C. § 95(b). ¹ Bankruptcy Rule 104(e) specifically provides: "If it appears that there are 12 or more creditors as counted under § 59e of the title, the court shall thereupon afford a reasonable opportunity for other creditors to join in the petition before a hearing is held thereon." Intervention is a matter of right unless the bankruptcy court finds the petition was made in bad faith for the purpose of improperly invoking its jurisdiction. Good faith is presumed and the burden of showing bad faith rests on the alleged bankrupt or another interested party. 3 Collier on Bankruptcy P 59.30, pp. 647-648.

It seems obvious that Rule 104(e) anticipated that one-person petitions might be mistaken as to the number of creditors:

Joinder of Petitioners After Filing. Creditors other than the original petitioners may join in an involuntary petition at any time before its dismissal. If the answer to an involuntary petition filed by one or 2 creditors avers the existence of 12 or more creditors, the alleged bankrupt shall file with the answer a list of all his creditors with their addresses, a brief statement of the nature of their claims, and the amounts thereof. If it...