In re American Fidelity Corporation

• Court: U.S. District Court — Southern District of California
• Writing for the Court: Sanders & LaMotte, of San Diego, Cal., and Cobb & Byrne, of Los Angeles, Cal., for alleged bankrupt
• Citation: In re American Fidelity Corporation, 28 F.Supp. 462 (S.D. Cal. 1939)
• Decision Date: 24 July 1939
• Docket Number: No. 1372.,1372.
• Parties: In re AMERICAN FIDELITY CORPORATION, Limited.

28 F. Supp. 462

In re AMERICAN FIDELITY CORPORATION, Limited.

No. 1372.

District Court, S. D. California, S. D.

July 24, 1939.

COPYRIGHT MATERIAL OMITTED

J. K. Stickney, Jr., and W. H. Wylie, both of San Diego, Cal., for petitioning creditors.

Sanders & LaMotte, of San Diego, Cal., and Cobb & Byrne, of Los Angeles, Cal., for alleged bankrupt.

Marie Herney, of San Diego, Cal., for Hal G. Hotchkiss, trustee.

Dempster McKee, of San Diego, Cal., for Lawrence Holzman, trustee in bankruptcy for Frank A. Scott's Estate.

Weinberger & Miller, DeWitt A. Higgs, and Richard F. Kahle, all of San Diego, Cal., for Edwin A. Mueller, trustee in bankruptcy for Russell O. Jackson's Estate.

James B. Abbey, Dist. Atty., for San Diego County, and Wm. A. Glen, Deputy Dist. Atty., both of San Diego, Cal., for the State of California.

JENNEY, District Judge.

On January 29, 1938, an involuntary petition in bankruptcy was filed in this court by creditors against the American Fidelity Corporation, Ltd., a California corporation. An adjudication was entered March 7, 1938. The first meeting of creditors was held before Referee Stanley T. Howe at San Diego. The creditors divided into two principal factions over the appointment of a trustee. One faction, represented by attorneys Wylie and Stickney, voted for Lawrence Holzman. The other faction, represented by attorneys Weinberger and Miller, voted for Edwin A. Mueller. The referee decided that Mueller was the appointee of creditors holding the majority in number and amount of allowed claims and made an order approving his appointment, pursuant to the power conferred upon him by General Order No. XIII. Upon review, Judge McCormick of this Court, on May 12, 1938, affirmed this order of the referee.

There were also pending, at the same time and before the same referee, the bankrupt estates of Russell O. Jackson and Frank A. Scott, former officers, directors, and stockholders of the corporation. Prior to the three bankruptcies, Jackson and Scott had been indicted in San Diego County, California, for alleged violations of the California Corporate Securities Act (St.1917, p. 673, as amended). They were released on bail furnished by the Maryland Casualty Company, which company in turn required the deposit with it of $25,000 cash as indemnity. This money was actually paid over to it by Esther J. Jackson, the mother of Russell O. Jackson. Jackson and Scott were convicted in the criminal proceeding, voluntarily surrendered themselves, and were sent to the penitentiary. The sentence of Jackson included a fine of $15,000, and that of Scott a fine of $10,000.

On May 20, 1937, the state court issued a writ of execution upon these fines directed to the Maryland Casualty Company, which was served by the sheriff of Los Angeles County on May 21, 1937. An alias writ of execution was issued January 5, 1938,—apparently as a precautionary measure in the event the original levy was invalid for any reason. Both writs were returned by the sheriff unsatisfied. On January 10, 1938, the Maryland Casualty Company, answering the alias writ, stated that it did not know who owned the indemnity money.

On the same date, January 10, 1938, the district attorney of San Diego County commenced a civil action in the Superior Court of that county, entitled, "State of California vs. Maryland Casualty Company, Russell O. Jackson and Frank A. Scott." The purpose of this suit was to ascertain the ownership of the money deposited with the Maryland Casualty Company, and to enforce, as against the fund, the liens of the State of California created by the levy of the writs of execution. The complaint in this suit prayed, (1) for judgment in the amount of the fines, plus interest; (2) for an order enjoining the Maryland Casualty Company from disposing of the funds until the final order of the court; and (3) for an order, bringing into said court and making parties to the action, all persons claiming any interest in the fund. On February 9, 1938, the Maryland Casualty Company filed its answer and cross-complaint admitting that it had on hand the $25,000, disclaiming any interest therein, and alleging that various persons claimed an interest in that fund, including Francesca Jackson, Esther J. Jackson, Ralph Jackson, the American Fidelity Corporation, Ltd., and certain creditors of the bankrupt estate of that corporation. Thereupon certain creditors of the American Fidelity Corporation, that corporation on its own behalf, Russell O. Jackson, Frank A. Scott, Francesca Jackson, Esther J. Jackson and Ralph Jackson likewise appeared in this suit by way of answer, denying that the money in question was the property of Russell O. Jackson and alleging that the same was the property of Esther J. Jackson, Francesca Jackson and Ralph Jackson, relatives of Russell O. Jackson. These appearances were all made after the commencement of the bankruptcy proceedings against the American Fidelity Corporation, but were prior to its adjudication as a bankrupt.

Thereafter Edwin A. Mueller, as trustee in bankruptcy of the American Fidelity Corporation, with the consent of the referee in bankruptcy, appeared and filed an answer in this civil suit. Subsequently the same Edwin A. Mueller, as trustee in bankruptcy for Russell O. Jackson, also with the consent of the referee in bankruptcy, appeared and filed another answer. Mueller, as trustee, thus intervened and became a party to the suit on behalf of two bankrupt estates. Both interventions were made by him through the same counsel. In each answer Mueller alleged under oath that the particular estate for which he was then appearing owned the fund; that is, he alleged under oath, on the one hand, that the bankrupt estate of American Fidelity Corporation owned the fund and, on the other hand, that the bankrupt estate of Russell O. Jackson was the owner.

On May 4, 1938, creditors of the American Fidelity Corporation filed a petition in this District Court of the United States, asking for an injunction to restrain prosecution of the state court suit brought to determine title to the fund. The grounds alleged were that (1) the state court did not have jurisdiction over the subject matter of the suit, (2) the bankruptcy court had exclusive jurisdiction, (3) a plenary suit was unjustified, and (4) the matter should be disposed of by a summary proceeding in the bankruptcy court.

On May 4, 1938, Judge McCormick of this District Court issued an order to show cause and temporary restraining order, enjoining the state court proceedings until the further order of this court. On May 6, 1938, the State of California filed a petition to modify the restraining order, upon the grounds: (1) That the State had levied an execution on the fund on May 21, 1937, and had thus acquired a lien thereon more than four months prior to the bankruptcy of the American Fidelity Corporation; (2) that the trial of the state court suit to determine title to the fund was set for May 17, 1938; and (3) that unless the trial was promptly held the State might lose the benefit of its execution lien. (Under the state law the writ of execution would not be a lien after May 21, 1938, one year from the date of its levy. Code Civ.Proc.Cal. § 688). On May 12, 1938, a minute order was made by Judge McCormick granting the modification of the restraining order requested by the state. On May 12, 1938, an answer to the petition for injunction was filed by the state. On the same day certain creditors of the bankrupt estate of American Fidelity Corporation filed an amended petition for an injunction restraining the prosecution of the state court suit. On that day also certain creditors filed an answer to this amended petition for injunction.

On May 20, 1938, Judge McCormick issued a formal written order dissolving the temporary restraining order and providing that the parties could proceed to prosecute the state court suit to final judgment, except that no party other than the trustee in bankruptcy of the American Fidelity Corporation should procure any execution on any judgment rendered in the state court suit until a full report of all proceedings in the state court had been made to the federal court and full opportunity given to all parties to be heard. Judge McCormick, in this formal written order, expressly reserved "the right of reviewing said proceedings in said action on the question of jurisdiction of the parties and the subject matter involved in said action, * * *" He further stated that if the bankruptcy court found, upon such further hearing, that execution should not issue, an order prohibiting the parties to the action from securing such a writ would issue out of the bankruptcy court.

On October 20, 1938, a report of the state court proceedings was filed in the American Fidelity Corporation bankruptcy proceeding by Mueller, as trustee. This report showed that the state court suit had been tried May 17, 1938, before Judge Griffin, of the Superior Court of San Diego County. It disclosed that during the trial, Mueller, as trustee in bankruptcy of the estate of American Fidelity Corporation, had represented that the books and records of the bankrupt corporation were in the possession of the United States Bureau of Internal Revenue and were unavailable for study by the trustee. A motion for continuance, the report showed, had been denied and the trial of the case had been finished in the Superior Court on May 18, 1938. The report further showed that on May 19, 1938, the Superior Court had rendered its judgment in favor of the State of California to the extent of giving a lien upon the fund in the sum of about $15,000, but had directed that the entire fund be paid over to the bankrupt estate of Russell O. Jackson as its property, subject to the lien of the State of California. Motions for a new trial in the Superior Court were made and denied.

Thereafter Mueller, as trustee in bankruptcy of the estate of American Fidelity Corporation,...