In re Beaver Cotton Mills

• Decision Date: 27 July 1921
• Docket Number: 7310.
• Citation: 275 F. 498
• Parties: In re BEAVER COTTON MILLS.
• Court: U.S. District Court — Northern District of Georgia

275 F. 498

In re BEAVER COTTON MILLS.

No. 7310.

United States District Court, N.D. Georgia, Northern Division.

July 27, 1921

Spalding McDougald & Sibley and Little, Powell, Smith & Goldstein, all of Atlanta, Ga., for intervener.

H. H Turner, of Atlanta, Ga., for bankrupt.

Dorsey Brewster, Howell & Heyman, Hugh Howell, Brandon & Hynds, and A. S. Grove, all of Atlanta, Ga., for intervening creditors.

SIBLEY District Judge.

A. H Penfield, a minority stockholder, seeks to annul an adjudication of Beaver Cotton Mills as a voluntary bankrupt because (1) the directors were without authority at the time of filing the petition, and (2) because the petition was in fraud of his stockholders' bill then pending in the state court.

The facts in outline are these: On April 19, 1920, the stockholders of the Beaver Mills, including Penfield, unanimously voted to unite with two other mills in the organization of a new corporation to be called Couch Cotton Mills, Inc., to which they would sell their respective plants and assets for stock in the new corporation, which would assume their several liabilities. About June 1st, the new corporation was organized. Beaver Mills made a deed to its plant and an assignment of all its assets and received the stipulated stock. The Couch Company took possession of the assets, operated the plant, assumed the debts, amounting to some $114,000, and paid many of them, as was also true as to the other merging mills. In October, 1920, Penfield demanded of the directors of Beaver Mills, who were also directors of the new company and majority stockholders in both, that the property of the Beaver Mills be restored to it on account of misrepresentation of the condition of the other merging companies and of the failure on the part of one of them to clear its property of liens as agreed. The Couch Company passed a resolution offering to do this if Beaver Mills would repay what had been paid to its creditors and assume the loss in operation of its mill since June 1st and its proportion of the overhead expenses of Couch Company during that time. Beaver Mills took no action on the proposal, and Penfield, on December 20, 1920, filed in a state court his bill in behalf of himself as a stockholder and all other stockholders similarly situated, and, averring the invalidity of the transfer of the Beaver Mills assets to Couch Company because of the fraud and failure of consideration mentioned above, and that the Couch Company and the directors had wasted and converted the assets and mixed them inextricably with those of the Couch Company, he prayed an accounting and a judgment in favor of Beaver Mills against the Couch Company and the directors for the value of the assets so converted and a special lien on such as remained to secure the judgment, and prayed for a receiver for the assets of both the Beaver and Couch Companies to preserve them to meet the judgment. An order was obtained setting a hearing as to the receiver for January 8, 1921, and an injunction issued against the defendants prohibiting them from 'in any wise changing the status of the properties of Beaver Cotton Mills. ' The hearing was not had as appointed.

On May 14, 1921, a petition in involuntary bankruptcy was filed against Couch Cotton Mills, Inc., and a receiver appointed to take charge of all the property in its possession, including that coming from the Beaver Company. On May 17th, Penfield amended his bill in the state court, alleging rights as a creditor and otherwise altering his case and his prayers, which were made to cover a liquidation of Beaver Company and a distribution to its creditors and stockholders. A temporary receiver was appointed and a new hearing set for May 28th, as to making the receivership permanent. The temporary receiver applied to this court in effect for the surrender to him by the receiver for Couch Company of the Beaver Mills properties. This was declined pending the hearing for permanent receiver. On June 8th, the directors, being also the majority stockholders, passed a resolution authorizing voluntary bankruptcy of the Beaver Mills. On June 8th the state court made its receiver permanent 'under the rights asserted in the original bill in this case,' and on the same day the voluntary petition in bankruptcy was filed and an adjudication had. Besides the intervention of Penfield seeking to annul the adjudication, an intervention by numerous creditors of the Couch Cotton Mills, Inc., who became such between june 1st and December 20th, has been allowed, who allege special rights in the controversy, and seek to uphold the adjudication and pray that the property be retained in the hands of the receiver of this court for marshaling and administration.

1. A motion is made to dismiss the intervention of Penfield on the broad ground that a stockholder, and especially a minority stockholder, has no standing to object to a voluntary bankruptcy by his corporation. Where directors bring litigation of the corporation before the court, collateral inquiry will ordinarily not be made into the propriety of their action at the instance of stockholders. Their remedy, if any, is in a direct proceeding against the directors in a court of original jurisdiction. Railway Co. v. Alling, 99 U.S. 463, 472, 25 L.Ed. 438. A voluntary bankruptcy, however, presents a special situation, for it involves an abandonment of the corporate enterprise, a thing about which all stockholders ought to have a hearing somewhere, especially if the corporation be not insolvent. A proceeding by them in any other court would not be a satisfactory remedy because it would involve the enjoining of the proceeding in bankruptcy, which would seem inadmissible and also impracticable, as the directors lose control of the bankruptcy proceeding so soon as they file it. The bankruptcy court, as a court of equity, has power, and should in a proper case exercise it, of inquiring into the propriety of the voluntary bankruptcy. Illustrative cases are In re Associated Oil Co. (D.C.) 271 F. 788; Zeitinger v. Hargadine-McKittrick Dry Goods Co., 244 F. 719, 157 C.C.A. 167. In each of these cases the corporation was solvent. The assets had been taken from the directors' control by a receiver in the state court, and the only substantial indebtedness was controlled by the directors who could, through it, control the bankruptcy administration. The case alleged in the intervention here is similar to these and is such as to entitle it to a hearing. The motion to dismiss is overruled.

2. The contention of intervener that the appointment by the state court of a receiver between the time of the passage, on June 8th, of the resolution authorizing the bankruptcy and the actual filing of the petition on June 28th, deprived the directors of power to file it, is not sustainable. The directors of a Georgia corporation have general control of it and exercise its ordinary corporate powers. Wood Mining Co. v. King, 45 Ga. 34. They must be considered as having power to place the company's affairs in voluntary bankruptcy. In re United Grocery Co. (D.C.) 239 F 1016; In re De Camp Glass Casket Co. (C.C.A.) 272 F. 558. The appointment of a receiver for the preservation of certain assets pending a suit about them did not destroy the corporation nor deprive the directors of their powers, except that they could not interfere with the receiver's control of the property committed to him. The injunction prohibiting them from 'in any wise changing the status of the properties of the Beaver Cotton Mills' disabled them to themselves dispose of the assets, as did the charter in the case of the Glass Casket Co., supra, but would hardly be construed as prohibiting an invocation of the...