In re Dejay Stores, Inc.

• Decision Date: 17 July 1963
• Citation: 220 F. Supp. 497
• Parties: In the Matter of DEJAY STORES, INC., Bankrupt.
• Court: U.S. District Court — Southern District of New York

220 F. Supp. 497

In the Matter of DEJAY STORES, INC., Bankrupt.

United States District Court S. D. New York.

July 17, 1963.

Ballon, Stoll, Shyman & Levine, New York City (Harvey R. Miller, New York City, of counsel), for petitioners.

Krause, Hirsch, Gross & Heilpern, New York City, for trustee.

EDELSTEIN, District Judge.

This is a petition for review of an order of the Referee in Bankruptcy appointing the New York Credit Men's Adjustment Bureau, Inc. as the Trustee of the bankrupt's estate. The petitioners herein, the American Credit Indemnity Co., a creditor, and Bernard Sands, Chairman of the official Creditors Committee, seek reversal of the order on the ground that the Bankruptcy Act does not provide the Referee with the authority unilaterally to appoint a trustee without first calling a meeting of creditors subsequent to the dismissal of the Debtor-in-Possession's Chapter XI petition and its adjudication in bankruptcy.

On October 15, 1962, at 12:58 p. m., Joan Iris Corp., Sanjo Dress, Inc., and Royal Frocks, Inc. filed an involuntary petition in bankruptcy against Dejay Stores, Inc. Bankruptcy Act, § 59 sub. b, as amended, 76 Stat. 571, 11 U.S.C.A. § 95, sub. b (Supp.1962). Two minutes later on the same day, at 1:00 p. m., Dejay filed its own petition proposing an Arrangement pursuant to the provisions of Chapter XI of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq.

On November 2, 1962, the Referee entered an order staying the ordinary bankruptcy proceedings. See Bankruptcy Act, § 325, 11 U.S.C.A. § 725. On November 9, 1962, the first meeting of creditors in the Chapter XI proceeding was held pursuant to Bankruptcy Act, § 334, 11 U.S.C.A. § 734.¹ At this meeting an official creditors committee was appointed and the Referee called for nominations for a trustee as provided by the Act. See Bankruptcy Act, § 338, 11 U.S.C.A. § 738. 8 Collier, Bankruptcy ¶ 5.49 (14th ed. 1941). Under § 338, a trustee who is nominated by the creditors does not serve while the Chapter XI proceeding is viable, but becomes active only in the event that the Chapter XI proceedings yield to an ordinary bankruptcy proceeding. If the Chapter XI proceedings are superseded by an ordinary bankruptcy, the nominated trustee is then appointed by the court.² At the creditors meeting held during the pendency of the Chapter XI proceeding two nominees were proposed for trustee but neither of them obtained the requisite majority in both number and amount of those creditors present and voting. The Referee thereupon ruled as follows: "Since neither party has a majority in number or amount, I declare no election. As a matter of fact, no nomination. In the event there is an adjudication then we will have to have a first meeting of creditors and have an election. In the meantime, if adjudication occurs I will appoint a receiver."

On November 29, 1962, the Referee directed Dejay to file a bond on or before December 11, 1962, to indemnify the estate against the possibility of subsequent loss or diminution. Bankruptcy Act, § 326, 11 U.S.C.A. § 726. Thereafter, on December 4, 1962, Judge Palmieri of this court granted the Securities and Exchange Commission's motion pursuant to § 328 of the Act, 11 U.S.C.A. § 728,³ to dismiss the Chapter XI proceedings unless a petition pursuant to Chapter X, the corporate reorganization section, was filed within ten days of the date of his order. At the adjourned hearing on the indemnity bond and at the adjourned initial meeting, both of which were jointly held on December 11, 1962, counsel for Dejay stated that the required indemnity under Chapter XI had not been and would not be filed, and that the debtor would not file a Chapter X petition. Counsel for the creditors committee then moved for Dejay's adjudication as a bankrupt. The Referee granted the motion, dismissed the Chapter XI proceedings, adjudged Dejay a bankrupt, and directed that bankruptcy be proceeded with. See Bankruptcy Act § 327, 11 U.S. C.A. § 727.⁴ Although the creditors had failed to nominate a trustee at the first meeting held pursuant to § 338 of the Act, 11 U.S.C.A. § 738,⁵ the Referee without ordering that another first meeting of creditors be convened, sua sponte appointed a trustee to serve in the ordinary bankruptcy proceedings.

The petition for review presents as one of the issues for determination the question of whether the Referee's gloss of § 378 of the Bankruptcy Act, 11 U.S.C.A. § 778, as applied to the instant facts and circumstances, was correct. Section 378 of the Act, 11 U.S.C.A. § 778 provides:

"§ 778. Procedure upon order directing that bankruptcy be proceeded with

"Upon the entry of an order directing that bankruptcy be proceeded with—

"(1) in the case of a petition filed under section 721 of this title, the bankruptcy proceeding shall be deemed reinstated and thereafter shall be conducted, so far as possible, as if such petition under this chapter had not been filed; and

"(2) in the case of a petition filed under section 722 of this title, the proceeding shall be conducted, so far as possible, in the same manner and with like effect as if a voluntary petition for adjudication in bankruptcy had been filed and a decree of adjudication had been entered on the day when the petition under this chapter was filed; and the trustee nominated by creditors under this chapter shall be appointed by the court, or, if not so nominated or, if the trustee so nominated fails to qualify within five days after notice to him of the entry of such order, a trustee shall be appointed as provided in section 72 of this title."

The Referee proceeded on the theory that his authority unilaterally to appoint a trustee, under the circumstances, was derived from § 378(2). Underlying the Referee's application of § 378(2) was his holding that the Chapter XI petition filed by Dejay was an original petition filed pursuant to § 322 of the Act, 11 U.S.C.A. § 722,⁶ i. e., a petition for an arrangement filed when no ordinary bankruptcy proceeding is pending. Section 321 of the Act, 11 U.S.C.A. § 721, provides that "A debtor may file a petition under this chapter in a pending bankruptcy proceeding either before or after his adjudication." The Referee, in directing that bankruptcy be proceeded with pursuant to § 778(2), held, in effect, that Dejay's Chapter XI petition was not filed in a pending bankruptcy for he questioned "whether the filing of an involuntary bankruptcy, minutes before the filing of the Chapter XI petition, justifies considering this case as one arising under § 321."⁷

The Referee's Findings of Fact are not contested and the dispute involves only his legal conclusions to which the "clearly erroneous" rule does not pertain. See 11 U.S.C.A. § 67, sub. c as amended, 11 U.S.C.A. § 67, sub. c (Supp.1962). In the Matter of Transatlantic and Pacific Corp., 216 F.Supp. 546 (S.D.N.Y.1963); In re Hot Springs Broadcasting, Inc., 210 F.Supp. 533 (W. D.Ark.1962); In re Novelty Belts Mfg. Co., 173 F.Supp. 461 (S.D.N.Y.1959). And the presumption of correctness which applies to a Referee's Findings of Fact does not apply to his Conclusions of Law. In the Matter of Tauber on Broadway, Inc., 271 F.2d 766, 79 A.L.R. 2d 752 (7th Cir. 1959); Walker v. Commercial Nat. Bank, 217 F.2d 677 (8th Cir. 1954); In re Hot Springs Broadcasting, Inc., supra; In re Novelty Belts Mfg. Co., supra.

The petitioners contend that the appointment of a trustee by the Referee, pursuant to Section 378(2), without affording the petitioners and other creditors the opportunity to nominate and vote was in contravention of the Act. They urge that the Referee's construction of Dejay's petition for an Arrangement, as an "original petition" under § 322, was erroneous since the filing of an involuntary petition two minutes prior to the voluntary petition should not have been ignored. Therefore, the petitioners claim that the Referee should have considered Dejay's petition as a petition in a pending bankruptcy proceeding pursuant to § 321 of the Act and further, that the Referee should have followed the procedure of § 378(1) rather than the procedure of § 378(2). And they contend that if the § 378(1) procedure had been followed the administration of the Bankrupt's estate would have proceeded as an ordinary bankruptcy proceeding and thus a first meeting of creditors would have had to have been convened for the purpose of providing creditors with an opportunity to nominate and appoint a trustee. Bankruptcy Act, § 55, sub. a, as amended, 11 U.S. C.A. § 91, sub. a (Supp.1962); § 44, sub. a, 11 U.S.C.A. § 72, sub. a.

As an alternative argument, petitioners assert that assuming arguendo that the Referee correctly construed the Chapter XI petition to be an original petition under § 322—so that § 378(2) rather than § 378(1) should have been applied— the Referee still did not have the authority to appoint a trustee without first calling a meeting of creditors subsequent to the adjudication of bankruptcy.

In reply to these arguments, the appointed Trustee contends that the Referee was correct in ignoring the miniscule time differential between the filing of the respective petitions. He urges that fractions of a day are to be disregarded in the computation of time periods and that all transactions occurring on the same day are deemed to have occurred at the same instant of time. See In re Gubelman, 10 F.2d 926 (2d Cir. 1925), modified on other grounds sub nom. Latzko v. Equitable Trust Co., 275 U.S. 254, 48 S.Ct. 60, 72 L.Ed. 267 (1927); In re Susquehanna Chemical Corp., 81 F.Supp. 1 (W.D.Pa.1949); aff'd sub nom. Susquehanna Chemical Corp. v. Producers Bank & Trust Co., 174 F.2d 783 (3rd Cir. 1949); In re Ledbetter, 267 F. 893 (N.D.Ga.1920). Acceptance of the Trustee's contention would place the involuntary petition and the Chapter XI petition on a temporal par and perhaps justify the exercise of the Referee's discretion in deeming the Chapter XI petition as having been filed when no bankruptcy...