Fortner and Perrin, Inc. v. Smith

• Decision Date: 12 February 1964
• Docket Number: No. 18497.,18497.
• Citation: 327 F.2d 801
• Parties: FORTNER AND PERRIN, INC., a California corporation, as assignee of Carmen E. Fortner and Stan Ruzicka, Appellant, v. James A. A. SMITH, Trustee in Bankruptcy, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

327 F.2d 801 (1964)

FORTNER AND PERRIN, INC., a California corporation, as assignee of Carmen E. Fortner and Stan Ruzicka, Appellant, v. James A. A. SMITH, Trustee in Bankruptcy, Appellee.

No. 18497.

United States Court of Appeals Ninth Circuit.

February 12, 1964.

C. Douglas Wikle, Los Angeles, Cal., for appellant.

Quittner, Stutman, Treister & Glatt, and George M. Treister, Los Angeles, Cal., for appellee.

Before BARNES and DUNIWAY, Circuit Judges, and PENCE, District Judge.

PENCE, District Judge.

In May of 1960, Mrs. Carmen E. Fortner and Stan Ruzicka (sometimes referred to hereinafter as the claimants) owned the stock of two corporations doing engineering and machine shop business. On May 3, 1960, they entered into an agreement with Robert F. Feland, Jr., whereby they sold their stock to him — part payment in cash, and the balance of $152,000 for Mrs. Fortner and $20,000 for Mr. Ruzicka to be paid over a period of years. After the sale, Feland transferred the assets so acquired to Conair, Inc.

On November 1, 1960, Feland had Conair, Inc., file a petition for arrangement under Chapter XI of the Bankruptcy Act. The appellee here was appointed receiver on the same date (and thereafter operated the business until bankruptcy ensued and the corporation's assets were liquidated).

On December 1, 1960, a first meeting of the creditors under Chapter XI was held pursuant to Section 334 of the Bankruptcy Act, 11 U.S.C. § 734, for the purpose of electing a trustee. There was also calendared for the same time a hearing on an order to show cause which raised the issue of whether the claimants or Feland had the right to speak for the debtor corporation, Conair, Inc., in the arrangement.

At that meeting, attorney Charles R. Anderson appeared on behalf of the claimants and the following appears, chronologically, in the record.

"MR. ANDERSON: Your Honor, I have some 38 claims here, totalling $34,000.00, and an additional claim, which is in the amount of $152,000.00, for Carmen E. Fortner, and an additional claim, in the amount of $20,000.00, for Stanley Ruzicka, and I would like to vote these claims for * * *. (R. 72) * * * Mr. Russ of the firm of Russ, York & Galloway, in Glendale, who is the C.P.A. and whom we would nominate as trustee." (R. 75)

* * * * * *

"THE REFEREE: * * * Also there was a $20,000.00 claim that you say will be filed for Ruzicka?

"MR. ANDERSON: Yes, sir.

"THE REFEREE: Who is the one who had the $152,000.00 claim?

"MR. ANDERSON: Carmen E. Fortner.

"THE REFEREE: Both officers of the corporation?

"Mr. ANDERSON: Yes, sir.

"THE REFEREE: I am going to disqualify their claims for voting purposes. I don\'t think they are proper persons to vote claims, because of a possible conflict of interest, particularly in view of the battle that apparently is going on as to who are the officers there." (R. 75-76)

* * * * * *

"MR. ANDERSON: Your Honor, we anticipated that the question as to Carmen E. Fortner\'s claim and Stanley Ruzicka\'s claim would be determined on the hearing on the petition on the order to show cause which is scheduled for this morning, and until that petition is heard and their case is heard we don\'t believe it can be determined or should be determined that either Carmen E. Fortner\'s or Stanley Ruzicka\'s claim should not be allowed. There is a question of ownership involved. We take the position they are the owners, but until there is a determination by the Court to that effect we have to defer the hearing on the petition." (R. 80)

* * * * * *

"* * * Our position in this matter this morning is not a rescission position. Our position is that the transfer of the title to the assets of the bankrupt corporation never passed, that because of the fraud of Mr. Feland, the petitioner for the arrangement herein, a sale never took place and title never passed. * * * A sale never took place." (R. 86-87)

* * * * * *

"A Chapter XI proceeding * * is a voluntary debtor proceeding on the debtor\'s behalf as well as for the protection of the creditors. * * *

"The evidence will show * * * as a matter of fact, they Mrs. Fortner and Mr. Ruzicka are still the owners under California law of this corporate entity and these assets * * *." (R. 88-89)

* * * * * *

"We take the position * * * that * * * a sale was never consummated between Mrs. Fortner and Mr. Ruzicka and Mr. Feland, and the sale having not taken place, the title to the property remains in Mrs. Fortner and Mr. Ruzicka. This is incidental to the main problem, which is: Who will speak for the debtor in these arrangement proceedings?

"I understand that the Court can designate through whom the receiver will work in the arrangement proceedings * * * but we are standing on two claims here. Number 1, we are the owner. We are willing and able and anxious to submit a plan of arrangement under this Chapter XI proceeding which was brought about by Mr. Feland in his management of the corporation since July 22. We can\'t do this until a determination of who speaks for the debtor corporation is made * * *. We do know, however, that this Court is vitally interested in saving our business, as vitally as we are, and we want to cooperate, but in order to cooperate we must be recognized, and in order to recognize us as the person in possession of the debtor corporation, actual possession, Mr. Feland, must be vacated. That is our position, your Honor." (R. 90-91)

* * * * * *

"The question is, through whom must the receiver act in order to perfect an arrangement proceeding under Chapter XI? Ordinarily in a Chapter XI proceeding it is a debtor proceeding, and the debtor in this case happens to be Carmen E. Fortner and Stanley Ruzicka, as the sole stockholders of this corporation, Conair, Inc." (R. 92)

* * * * * *

"We offered * * * to return to Mr. Feland whatever he had invested in this company * * *. We know * * * that he hasn\'t one dime of equity in this company * *. We don\'t feel that a man who has nothing invested can operate for the best interests of the company. * *

"We are not asking you to tell the receiver Appellee Smith here what to do * * * but * * * in order for an arrangement proceeding to be effective, there must be someone speaking for the debtor who has something to lose if the arrangement proceeding fails * * *. As to who is hired * * * to press the buttons over at the company, we realize this is the function of the receiver and we concur in this function." (R. 95-96-97)

* * * * * *

"THE REFEREE: Mr. Anderson, let\'s get one point straight now. Are Fortner and Ruzicka shareholders or creditors?

"MR. ANDERSON: Shareholders.

"THE REFEREE: Very well. They are disqualified from voting for a trustee, which is what is before the Court at this time. You stated you had 38 claims to file. Do you have them? (Mr. Anderson handing claims to the Referee). We will take a recess at this time so that I can check over these claims, the amount and number." (R. 100-101)

* * * * * *

"THE REFEREE: This is the tme for the election of a trustee, and it is the claims on file at this time that are going to count.

"MR. SULMEYER: Attorney for debtor corporation and Feland * * * I just want to point out to the Court you will see the powers of attorney on Mr. Anderson\'s claims are given to Mr. Anderson and/or Carmen Fortner. Mrs. Fortner he says is a stockholder and I think signed the petition as president.

"THE REFEREE: I have already disqualified them.

"MR. SULMEYER: But I think they are disqualified under the powers of attorney to vote the claims. Both Mr. Anderson and Mrs. Fortner, as shareholders, claim to be the debtor and claim to represent the debtor, so they cannot vote claims for a trustee.

"MR. ANDERSON: Your Honor, may I comment on this? There is nothing in a Chapter XI proceeding to disqualify or make it improper for a debtor to approach creditors either to represent them or in an arrangement proceeding.

"MR. SULMEYER: Mr. Anderson, I think you are confusing consents to a plan and proofs of claim. A debtor under Chapter XI certainly, under express statutory provision, may solicit consents, but here you are talking about claims, and you are purporting to vote your claims. Basically there is a division of interest between the receiver or trustee and the debtor. Just as Mr. Feland or I may not vote any claims, may not solicit powers of attorney for any claims, may not even vote our own claims, similarly Mr. Anderson and Mrs. Fortner may not vote claims or solicit powers of attorneys for claims." (R. 103-104)

* * * * * *

"THE REFEREE: Before we recess, are there any other creditors in court that have any claims to file or nominations to make for a trustee to be appointed in this matter in the event of an adjudication? Any other creditors?" (R. 104-105)

* * * * * *

"MR. ANDERSON: Your Honor, I told you I have 38 claims. The latest count on the claims I gave you is 64, I believe." (R. 106)

As indicated above, the claimants had secured powers of attorney to vote other claims, and attorney Kemby was assisting attorney Anderson at the time. While the arguments (supra) had been going on, Kemby had been reviewing the claims as to amount and number, and apparently made up a pile of claims separately from the 38 claims originally referred to by Anderson. When it was time to vote the claims, Anderson picked up both piles of claims before him and placed them on the referee's desk, with the statement that he had 38 claims. Shortly after that, Kemby, as he later testified, told Anderson that the correct number was 64, hence Anderson's statement: "The latest count on the claims I gave you is 64, I believe."

The referee took all claims filed by all creditors into chambers and immediately started making a tabulation to determine which group had the majority in number and amount of claims, since two different persons had been nominated as trustee. The referee's tabulation had just gotten under way when Anderson and attorney Treister, who represented other claimants, announced...