In re Dunlap Carpet Co.

• Decision Date: 08 July 1913
• Docket Number: 2,741.
• Citation: 206 F. 726
• Parties: In re DUNLAP CARPET CO.
• Court: U.S. District Court — Eastern District of Pennsylvania

206 F. 726

In re DUNLAP CARPET CO.

No. 2,741.

United States District Court, E.D. Pennsylvania.

July 8, 1913

Henry C. Huey, of Philadelphia, Pa., for trustees.

William Ewin Bonn, of Baltimore, Mo., for Assets Realization Co.

John P Walsh and Ralph S. Rounds, both of New York City, and George Wentworth Carr, of Philadelphia, Pa., for Sovereign Bank of Canada.

J. B McPHERSON, Circuit Judge.

It may be useful to preface the following opinion by a short outline of what has taken place in the course of this particular dispute:

The Carpet Company was adjudged bankrupt on March 30, 1907, and within a week-- on April 5-- Joseph Reichardt of New York trading under the firm name of Reichardt Bros., filed a proof of claim in which the bankrupt was declared to owe the firm $11,212.11 for three lots of wool delivered in December 1906, and January, 1907. The claim encountered no objection and was therefore allowed, and a dividend of 25 per cent. was paid upon it in the following July.

Toward the end of September the claim was bought by the Assets Realization Company for 40 per cent. of its face value, and on October 31 another dividend (of 20 per cent.) was declared and was paid to that company. In February, 1908, the Sovereign Bank of Canada presented a claim identical in all essential details with the Reichardt claim, and thereupon it was manifest that hostile contestants were asserting ownership of the same debt. Recognizing this antagonism, the Assets Company immediately objected to the allowance of the bank's claim on a variety of grounds-- some of them technical, but several going to the merits (see (D.C.) 171 F. 539)-- and the claimants became involved at once in a controversy over the burden of proof. The District Court decided that the existence and formal proof of the Reichardt claim did not debar the bank from claiming to be the owner of the same debt; that the first duty of the bank was to offer prima facie evidence of its asserted right; but that the rule laid down in Whitney v. Dresser, 200 U.S. 532, 26 Sup.Ct. 316, 50 L.Ed. 584, had made the sworn proof of claim prima facie evidence that the averments contained therein were true. The District Court decided also, as a necessary corollary, that, while the bank's claim was open to attack, the Supreme Court had required the objectors to undertake the burden of repelling the prima facie case, and of proving that the claim should be rejected. In re Dunlap Carpet Co. (D.C.) 171 F. 532. Of course, the two claims being identical, it is manifest that only one can survive, and this situation has been accepted by the contestants, although no attack has been made in form upon the Reichardt claim by a motion to expunge. After the decision reported in 171 Fed., the Assets Company offered evidence in support of its objections, and upon the completion of its case the bank moved to dismiss the objections on the ground that they had not been sufficiently proved. The referee refused this motion on February 20, 1911, and directed the bank to offer evidence in rebuttal if it desired to do so. As this order was interlocutory, it could not be reviewed at that time. Accordingly, the bank proceeded in rebuttal, and the contestants were fully heard, both by oral and written evidence and by argument. In November, 1912, the referee made a final order disallowing and expunging the claim of the bank, and thereupon the present certificate was obtained; the two orders (of February and November) being thus brought up for review. As the final order raises all the questions that need be considered, the interlocutory order needs no discussion; but if I dispose of it formally the record will be simplified, and I therefore overrule the objections made thereto, and hold that the decision of the referee, requiring the bank to offer its evidence in rebuttal, was not an erroneous exercise of discretion.

Before taking up the two vital questions in the case, let me say a few words about the findings and opinion of the learned referee. Naturally these are such as are thought to be pertinent from the point of view that he regarded as controlling. But I have found myself unable to agree that this point of view is decisive, and it has seemed best on the whole to make no effort either to reconstruct the findings or to take them up separately; it has rather appeared that confusion would be avoided if new findings were made upon such matters only as seem to be essential. In this connection it should be noticed in the first instance that the attitude of the bank to the trustees in bankruptcy has apparently been misapprehended. After the bank's claim had been proved prima facie, two additional dividends (of 20 and 10 per cent., respectively) were declared in March and November, 1908, and, as the contest over this money had then become well known to all concerned, the referee at first directed the trustees to withhold payment from both claimants; but he afterwards modified this order and permitted the Assets Company to receive the dividends upon giving security for repayment in the event of the bank's final success. A bond was accordingly given, and, so far as the last two dividends are concerned, the trustees are therefore well protected. It is not denied also that the Assets Company is abundantly able to repay the second dividend, but I lay no weight upon the satisfactory position of the trustees, for the bank is making no attempt in this review, and indeed none could be made, to hold the trustees liable to pay any of the dividends a second time-- not even the first two, one of which (as already stated) was paid to Reichardt Bros., and the other to the Assets Company without security. Indeed, the brief of the bank expressly disclaims attacking the trustees now or hereafter, or attempting to hold them personally liable for any of the payments referred to. It is certain that no such liability could be the result of the present review, which is purely a controversy between the bank and the Assets Company concerning the title to property-- especially the title to a chose in action-- and does not put in issue the liability of the trustees at all. Moreover, it is highly important to observe that the trustees have still in hand a sum of money large enough to pay to the bank its share of all the dividends that have heretofore been declared; and of course, if the bank be lawfully entitled to receive, and does receive, payment of this sum, it will have obtained full satisfaction, and can have no further complaint against the trustees or against any other person. If the bank should thus succeed, the trustees would no doubt be under a duty to compel the Assets Company or its surety to repay the amounts of the third and fourth dividends, and would also be under a duty to recover from the Assets Company, if possible, the amount of the second dividend that was paid to that company in mistake. They would also be under obligation to recover from Reichardt Bros., if possible, the amount of the first dividend paid to them in mistake; and out of the moneys realized from these two sources-- Reichardt Bros. and the Assets Company-- a final dividend would be declared. But this is only to say, what is not likely to be disputed, that if dividends have been paid to the wrong claimant the trustees should endeavor to regain the money; and this is very far from deciding that they have incurred any liability under the circumstances of the erroneous payments. To state these facts is, I think, to show clearly that the present certificate raises, and can raise, no question concerning the liability of the trustees, and that further consideration of this subject may therefore be dismissed. The contemplated danger to the trustees probably had some influence on the referee's decision, and for that reason I have spoken of the matter with more particularity than might otherwise have been necessary.

At this point I may speak briefly of an argument made by the bank, but I think not earnestly relied upon, namely, that the Assets Company has no interest in the present controversy; the trustees alone being concerned. The decisions cited in support of this position do not sustain it. When the validity-- that is, the very existence-- of a claim is denied, either in whole or in part, this is no doubt a matter that concerns the other creditors generally, and the trustee is their proper representative in such a controversy; but where the validity of the claim is conceded, and the only dispute is between two persons about the ownership, I do not perceive how the other creditors are interested in the result of such a controversy. The bankrupt estate is liable, whichever contestant may succeed, and the dispute therefore concerns these two alone.

It being clear therefore that the present inquiry does not affect the liability of the trustees in any way, and that the Assets Company has the right to object to the bank's claim, it remains to consider the two controlling questions and of these the first may be thus stated: At the time of the bankruptcy, who owned the true legal title to the debt due by the Carpet Company? I may say at once that in my opinion the bank was the owner, and not Reichardt Bros.; and at the same time I may also express my regret that this prolonged and expensive dispute has been apparently promoted (at least in large measure) by an unfortunate oversight or misunderstanding of the Carpet Company. Instead of crediting the bank with the amount due for the wool, the company's books gave the credit to Reichardt Bros., and the books were therefore apparently in accord with the claim presented by that firm. But I think there is no doubt that this was a mistake-- although perhaps an excusable mistake-- and that the Carpet Company had sufficient...