In re Edward Ellsworth Co.

• Decision Date: 11 October 1909
• Docket Number: 3,383.
• Citation: 173 F. 699
• Parties: In re EDWARD ELLSWORTH CO.
• Court: U.S. District Court — Western District of New York

173 F. 699

In re EDWARD ELLSWORTH CO.

No. 3,383.

United States District Court, W.D. New York.

October 11, 1909

William T. Tomlinson, Frank L. Gibbons, and H. Edson Webster, for intervening creditors.

George P. Keating, for creditor's committee.

Louis L. Babcock, for receivers.

HAZEL District Judge.

This motion is to enjoin the sale of the assets of the Edward Ellsworth Company, a corporation, by receivers appointed in an equity action brought against it by contract creditors until there can be an adjudication in bankruptcy on an involuntary petition filed by creditors subsequent to such appointment. The inquiry presented is whether the corporation proceeded against, by admitting the material allegations of the bill in the equity action and joining in the application for the appointment of receivers, can be held in a legal sense to have applied therefor pursuant to section 3a, subd 4, of the bankruptcy act (Act July 1, 1898, c. 541, 30 Stat 546 (U.S.Comp.St. 1901, p. 3422)), as amended by Act Feb. 5 1903, c. 487, Sec. 2, 32 Stat. 797 (U.S.Comp.St.Supp. 1907, p. 1025).

If the company, while insolvent, had voluntarily brought an action to wind up its affairs for the benefit of its creditors, and had applied for the appointment of receivers to take charge of its property, the superior right of the bankruptcy court could not safely be questioned; but the interposition of an answer in an action brought by a contract creditor, admitting therein the truth of the allegations of the bill and joining in the prayer for relief, is not believed to be the equivalent of the term 'being insolvent, applied for a receiver or trustee for its property. ' In the equity action the complainants applied for receivers on the ground that the Edward Ellsworth Company was unable to pay its debts as they matured, and that it would be to the advantage of creditors and stockholders to have its affairs would up. Nowhere in the bill is it asserted that the corporation is insolvent, as that term is defined by section 1, subd. 15, of the bankruptcy act. In fact, the bill contains an affirmative allegation that the defendant is solvent. Such averments together with the admission by the corporation of their truth and its consent to the appointment of receivers of its property, undoubtedly vested the Circuit Court, in view of the diversity of citizenship of the parties, with power and authority to act in the premises. Re Metropolitan Railway Receivership, 208 U.S. 90, 28 Sup. 219, 52 L.Ed. 403.

The bankruptcy act has not superseded the right and power of a court of equity to take charge of the property of an insolvent corporation for the protection of stockholders and creditors, marshal the same, recognize and enforce valid liens and priorities, and equitably distribute the surplus proceeds among its creditors. It is only where a receiver has been appointed in another court because of insolvency, as that term is defined in the bankruptcy law, or where the corporation on its own initiative has applied for the appointment of a receiver or custodian of its property, that an act of bankruptcy under section 3a, subd. 4, has been committed. This provision of the bankruptcy law must be strictly construed. Collier on Bankruptcy (7th Ed.) 83, and cases cited. Inasmuch as the record in the Circuit Court action does not assert or claim that the Edward Ellsworth Company was insolvent, within the meaning of the bankruptcy act, this court is precluded from considering evidence aliunde to contradict the decree or judgment appointing receivers and setting forth the basis of such appointment. This appears to be settled by abundant authority. Blue Mountain Iron & Steel Co. v. Portner, 131 F. 57, 65 C.C.A. 295; In re Douglas Coal & Coke Co. (D.C.) 131 F. 769; In re Spaulding, 139 F. 245, 71 C.C.A. 370; Moss, etc. v. Arend, 146 F. 351, 76 C.C.A. 629; Collier on Bankruptcy (7th Ed.) 82; Thomkins Co. v. Catawba Mills (C.C.) 82 F. 780.

The petitioning creditors have not intervened in the equity action, or asked leave to institute suit to subject the property and assets of the corporation to the payment of their debts; nor do they dispute the debt which is the subject of the bill in equity. True, it is claimed that there was collusion between the parties to the equity suit to defeat the operation of the bankruptcy act; but it is not contended that there was fraud or wrongful act by either of the parties to confer jurisdiction upon the Circuit Court. Such being the fact, the particular object sought to be accomplished in the equity action, the winding up of the business of the corporation, or perhaps its reorganization or readjustment of its affairs or any wrongs to dissatisfied creditors that are supposed to ensue therefrom, are not...