In re Fair Creamery Co.

• Decision Date: 23 January 1952
• Docket Number: No. 11306.,11306.
• Parties: In re FAIR CREAMERY CO. KAVANAGH et al. v. KAYES.
• Court: U.S. Court of Appeals — Sixth Circuit

193 F.2d 5 (1951)

In re FAIR CREAMERY CO.

KAVANAGH et al. v. KAYES.

No. 11306.

United States Court of Appeals Sixth Circuit.

November 29, 1951.

As Amended January 23, 1952.

Edmund M. Sloman, Detroit, Mich., (Edmund M. Sloman, Detroit, Mich., on the brief), for appellants.

Ralph L. Seltzer, Detroit, Mich. (Berger, Manason & Kayes, Detroit, Mich., on the brief; Ralph L. Seltzer, Detroit, Mich., of counsel), for appellee.

Before ALLEN, MARTIN and McALLISTER, Circuit Judges.

PER CURIAM.

In this bankruptcy case a petition for arrangement was filed on June 19, 1939, and later the retail business of the bankrupt corporation was sold in accordance with a petition filed by the receiver as ordered by the court. The arrangement was duly confirmed by the referee December 7, 1939, and the receiver filed his final report. The plan of arrangement provided that preferred and secured creditors were to be given priority of payment and that unsecured creditors were to be paid in full over a period of years. The plan set up a trust mortgage and pledge of the capital stock to secure the payments. The debtor corporation was operated at a loss for some months. It failed to make the first payment under the arrangement and the trust mortgage was foreclosed. The property was sold by the trustees under the terms of the trust mortgage. The attorneys for the petitioning debtor on August 12, 1941 agreed to a decree approving all proceedings without retaining jurisdiction in the court. An order was entered August 15, 1941, closing the estate.

On March 14, 1947, a petition was filed, alleging fraud in the handling of the estate and concealment of the assets. The referee recommended that the estate be reopened and an ex parte order to this effect was entered by the District Court. On September 17, 1947, a petition to vacate the order reopening the estate was filed. The referee in bankruptcy, who under the local rule, No. 21, of the Eastern District of Michigan, is required to investigate and to report upon all bankruptcy matters, heard testimony on the petition to vacate, found that no proof of fraud existed, and recommended that the estate be reclosed. The referee stated: "* * * The Court further finds that an investigation of the alleged fraud does not justify any finding that actual, active fraud was perpetrated upon this Court or any of the creditors at any time, and there was not even any suggestion of fraud prior to the confirmation of the plan. Since there would not be any assets coming into this estate if further administration were had, even if that were possible, the order reopening the estate should now be set aside and the estate reclosed. The Court further finds all of the parties to the petition to reopen this estate were guilty of laches. Certainly the President and Secretary of this Corporation knew on or about April 1, 1940 enough about the situation to have put them on notice if there had been any thought of a fraudulent transaction in the disposition of the assets. The other petitioner, the Globe Paper Company, knew in December, 1939 that it had not received the first 5% dividend which was to have been paid under the Plan of Arrangement, and should have made its investigation and acted at that time and not waited for more than seven years to seek any relief. * *"

The District Court found that no formal order of general reference had been made and concluded that it was compelled to hear testimony in the case. We think the court erred in this conclusion. The local bankruptcy rule No. 21, on "References," requires that all petitions in bankruptcy and in proceedings for arrangement, upon being filed with the clerk shall be by him as of course forthwith referred generally to the referee in bankruptcy. It also provides that the referees shall take all proceedings, do all acts and perform all duties with reference thereto except those which by law are expressly and specifically reserved solely to the judges. The record shows that on June 4, 1947, the clerk entered an order of general reference upon the filing of the petition to reopen the estate. The petition to vacate the order reopening the estate...