Curtis v. Drybrough

• Decision Date: 24 February 1947
• Docket Number: No. 1224.,1224.
• Citation: 70 F. Supp. 151
• Parties: CURTIS v. DRYBROUGH.
• Court: U.S. District Court — Western District of Kentucky

70 F. Supp. 151

CURTIS v. DRYBROUGH.

No. 1224.

District Court, W. D. Kentucky, at Louisville.

February 24, 1947.

Joseph R. Rubin and Skaggs, Hays & Fahey, all of Louisville, Ky., and Howard R. Hirsch, of Cleveland, Ohio, for plaintiff.

D. A. Sachs, Jr., of Louisville, Ky., for defendant.

SHELBOURNE, District Judge.

Jerome A. Curtis, as successor trustee for the bankrupt estate Forest City Brewery, Cleveland, Ohio, filed this action against F. W. or Fritz Drybrough, in which plaintiff for the bankrupt estate seeks to recover a money judgment in the sum of $297,000, the amount of profit alleged to have been realized by the defendant and Joseph G. Ehrlich out of the purchase and subsequent sale by Ehrlich June 19, 1940, when Ehrlich was the duly qualified and acting Trustee in Bankruptcy, of Forest City Brewery, an Ohio Corporation, which had been adjudged bankrupt May 10, 1940 in the District Court for the Northern District of Ohio, Eastern Division.

The defendant filed a motion to dismiss on four separate grounds—

1. That the complaint fails to state a claim upon which relief can be granted.

2. Lack of jurisdiction over the subject matter.

3. That the claim is barred by the two-year Statute of Limitations embodied in Title 11, U.S.C.A. § 29, subs. d, e.

4. That the claim is barred by the five-year Statute of Limitations embodied in Section 413.120, Kentucky Revised Statutes.

For the purpose of considering the motion to dismiss, the allegations of the complaint should be taken as true.

It is alleged that Joseph G. Ehrlich was elected Operating Trustee of the bankrupt's property, having been prior to his election as Operating Trustee, the Operating Receiver for the company's property, business and affairs. That at the time he offered the property for sale Ehrlich and defendant Drybrough participated in purchasing the property and that they organized a new corporation identical in name with that of the bankrupt and without disclosing to the Court the fact that Ehrlich was a substantial stockholder, director and officer in the newly formed corporation, the sale was consumated, and that as a direct result of the participation and collaboration of Ehrlich and the defendant, profits and gains in the aggregate sum of $297,000 were realized.

Counsel for defendant, in support of his contention that the complaint does not state a claim upon which relief can be granted, says:

"We do not understand that persons interested in organizing a corporation and in subscribing and paying for stock in the same * * * are precluded from inviting the expert selected by the Court to operate the business, to become a stockholder in said corporation, and in fact to be an executive officer and operate the new business. It may well be argued that neither this defendant, nor the other parties mentioned in the complaint, would be willing to make investments of the magnitude disclosed in the complaint unless the individual, Ehrlich, would have consented to become interested in and take over the management of the new corporation."

Defendant's Counsel has fairly summarized the statements of the complaint. It charges that the Trustee in Bankruptcy and defendant, together with certain other persons "collaborated" to organize a corporation, in which each of the parties would take stock, and the corporation would, under the plan, acquire assets of the bankrupt estate. It further charges that the plan was consumated and after the corporation had acquired the assets, the Trustee acquired all the stock in the newly formed corporation, then sold the assets and dissolved the corporation.

Counsel says he does not understand that persons interested in organizing a corporation are precluded from inviting the expert selected by the Court to operate a bankrupt business from becoming a stockholder or executive officer in the new business. He insists that defendant and those organizing the new corporation would not have been willing to go into the venture had the Trustee, Erhlich, not agreed to become interested and take over the management of the new business.

In re Wesley Corporation, D.C., 18 F.Supp. 347, Judge Ford considered the rule involved and said:

"By long-established principles of equity jurisprudence, nothing is more clearly established than that a trustee may not become the purchaser of the trust estate either directly or through agents or other persons acting in his behalf. Both creditors and bankrupt alike have the right to expect that the trustee will not use his official position to speculate for his personal profit in the property entrusted to his care. The duty to enforce these principles rests no greater upon any courts than upon the federal courts of bankruptcy. The prime object of Congress in enacting the bankruptcy laws was to secure for creditors as well as bankrupts the efficient and fair administration of estates. In re Frazin & Oppenheim, 2 Cir., 181 F. 307; In re Allen B. Wrisley Company, 7 Cir., 133 F. 388; In re Hawley, D.C., 117 F. 364; Remington on Bankruptcy, § 3560. It is not important whether the price paid at sale was adequate in a particular instance. The rule rests upon vital considerations of public policy and is applicable in every case. If the facts alleged in this amendment be true, the duty of the court to require the trustee to account for all proceeds derived from the property, including any profits from its resale, is clear and imperative." 18 F.Supp. at page 355.

In Re Van Sweringen Company et al., 6 Cir., 119 F.2d 231, the rule is thus stated:

"It seems soundly settled that one who knowingly joins a fiduciary in purchasing for profit the property of the trust estate in unlawful circumstances becomes jointly and severally liable with him for resultant profits." 119 F.2d at page 234.

The above opinion quotes with approval an excerpt from Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545; 62 A.L.R. 1 (opinion of Chief Justice Cardoza)—

"Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of...