In re Gillespie Tire Co.

• Decision Date: 25 September 1942
• Docket Number: No. B-1691.,B-1691.
• Citation: 54 F. Supp. 336
• Court: U.S. District Court — District of South Carolina
• Parties: In re GILLESPIE TIRE CO.

54 F. Supp. 336

In re GILLESPIE TIRE CO.

No. B-1691.

District Court, W. D. South Carolina, Greenville Division.

September 25, 1942.

J. W. Hicks and Price & Poag, all of Greenville, S. C., for Gillespie Tire Co.

Haynsworth & Haynsworth, of Greenville, S. C., for General Tire & Rubber Co. and for Trustee.

WATKINS, District Judge.

The Gillespie Tire Company was adjudicated a voluntary bankrupt on February 25, 1941, and by Order of General Reference dated February 26, 1941, the case was referred to E. M. Blythe, Referee in bankruptcy.

Ever since the date of its organization in January, 1938, the corporation had been managed and controlled and its business conducted entirely by Mrs. Mabry Gillespie, its President and Treasurer, and owner of 98% of the capital stock. It appears further from the testimony adduced in the case that Mrs. Gillespie had owned the business personally prior to its incorporation and after its bankruptcy in 1941 proceeded to conduct the same business in the same manner and at the same place.

Before entering upon a discussion of the financial transactions of Mrs. Gillespie, Mabry Gillespie Tire Co. and the Gillespie Tire Company, it is important to review the manner in which the business was conducted and the essential ownership of same. The Gillespie Tire Company was incorporated in January 1938, with an authorized capital stock of $10,000, of which one share each was issued to J. C. Butler and Boyce Green, and the remainder to Mrs. Mabry Gillespie. Mrs. Mabry Gillespie, J. C. Butler and Boyce Green were elected directors. Mrs. Gillespie was named President and Treasurer of the company and had complete supervision and control of it from its organization until it was adjudicated bankrupt on February 26, 1941. Boyce Green acted as bookkeeper throughout. The testimony indicates conclusively that during the whole of its existence, Mrs. Gillespie was to all legal intents the Gillespie Tire Company, was its alter ego, and the shares issued to Green and Butler were so issued not for the purpose of giving them any control of the company but as qualifying shares in order to comply with corporation statutory requirements.

In October 1939, at a time when the Gillespie Tire Co. was insolvent, Mrs. Gillespie caused the corporation to transfer its business assets and liabilities to the Mabry Gillespie Tire Co., which was not incorporated but was used by her as a trade name under which she might personally, and did, beginning on that date, conduct the business for about five months, that is, until April 1940. Mrs. Gillespie testified that she conducted the business in the manner stated because the Gillespie Tire Co. did not have sufficient credit with which to continue. However, there is no dispute of the fact that she took over all the assets of the corporation, treated them as her own, made collections of outstanding accounts and sold the physical properties in such manner as to establish the fact not only that she was in reality the corporation, but her dealings with its properties conclusively established the fact that she was clothed with all of the liabilities and responsibilities of a trustee. A significant fact going to show the violation of this trust relationship and the liability incurred by Mrs. Gillespie personally, is the manner in which after taking over the corporation and when it was, to say the least, in a very precarious financial condition, she charged and paid to herself large salaries and rentals and gave preference in payment of corporate liabilities to favored creditors at the expense particularly of General Tire & Rubber Co., her largest creditor. We will not take time here to discuss the details of the manner in which she conducted the business after she decided in April 1940 again to conduct it under the corporate name of Gillespie Tire Co. The evidence is sufficient to convince the Court, although the referee did not so find and there is no exception to his report in that respect, that in these transactions a legal fraud was committed against the interest of certain creditors for which Mrs. Gillespie should be liable. The report and order of the referee which bears date, March 24, 1942, contains an able discussion both of the law and of the facts of the case, and his final conclusions in both respects meet with the approval of this Court.

It appears that in due course after adjudication of the bankrupt, claims were filed against the estate, including certain claims of Mrs. Gillespie personally for salary, rent and moneys alleged to have been advanced or paid by her for the corporation, and including also an unsecured claim for $13,092.27 filed by the principal creditor, General Tire and Rubber Company.

In view of all the circumstances and the objection made by General Tire & Rubber Co. and the Trustee, to Mrs. Gillespie's claims, it was agreed that an audit of the books and accounts of Gillespie Tire Co. should be made prior to the taking of testimony in order that all facts concerning the financial transactions of the bankrupt, should be clearly before the Court. Upon completion of this audit, the accuracy of which has not been questioned, two references were held, the first on September 5, 1941, at which 24 pages of testimony were taken and the second which was a continuation of this hearing and at which 28 additional pages of testimony were taken. At these hearings, numerous exhibits were introduced, including minutes of meetings, audits and books of account of Gillespie Tire Co., and likewise books and accounts of Mabry Gillespie Tire Co., the trade name under which Mrs. Gillespie personally transacted business. At the hearings, objection was made to the claim of Mrs. Gillespie and testimony was taken in regard thereto, and the request was made that the Trustee be directed to bring suit against Mrs. Gillespie for $22,216.68, moneys alleged to have been improperly received by her from the Bankrupt. Involved in the question of suit by the Trustee, were not only the independent claims of the corporation against Mrs. Gillespie, but also the right to apply offsets to the claims which she had filed.

At the conclusion of the foregoing proceedings, and after going into the matter at great length, both in the testimony and in argument, the referee filed his order and report above referred to, in which some of Mrs. Gillespie's claims were allowed and others rejected. The referee also reached the conclusion that since Mrs. Gillespie was already before the Court, and full testimony had been taken relative to all claims and offsets, he had jurisdiction to render judgment against her personally, and it was not necessary that the Trustee bring suit. Accordingly he directed in his report that the Trustee have judgment against Mrs. Gillespie for certain amounts received by her from the bankrupt corporation by way of rent and salary. The law and facts upon which the order of the referee is based, are so well and fully presented, it is unnecessary that this Court repeat the details in this order.

The attorneys for Mrs. Gillespie excepted to the referee's report and a hearing was had before me at which certain questions were raised, including the question of the jurisdiction of the referee to render judgment. In order to be entirely fair to all parties, the court on its own motion recommitted the matter to the referee for a supplemental report, and such report was duly filed. In this supplemental report the referee explains that although the original contention of counsel for General Tire and Rubber Co. and the Trustee was that an independent suit should be filed by the Trustee, after hearing the matter fully, the referee came to the conclusion that under the Chandler Act an independent suit was not necessary, that the evidence had been gone into so fully and showed so conclusively that the trustee was entitled to judgment in the case in which Mrs. Gillespie was a party, he was of the opinion that if a suit were brought in another court by the trustee there would be no substantial difference in proof or claims, and hence to require suit to be brought under the circumstances would be to prolong the litigation unnecessarily.

When the matter again came before me, after the filing of the referee's supplemental report, counsel for Mrs. Gillespie insisted that the case had been tried and evidence taken upon a misunderstanding; that they had other testimony which they would have offered, if given an opportunity, to show the non-liability of Mrs. Gillespie upon the items asserted against her and upon which judgment was rendered by the referee. Upon this contention being presented, in order to be entirely fair and to afford counsel for Mrs. Gillespie full opportunity to present such additional evidence as they might have bearing upon the questions involved, the court on its own motion again recommitted the matter to the referee. Counsel, at the court's request, agreed to prepare and did prepare certain stipulations, not necessary here to be recounted, which were filed with the referee outlining the issues to be covered in the testimony. Another hearing was held and testimony taken and the referee in his report thereon stated, and I fully agree with him, that no additional testimony had been presented which in any way affected his first conclusions. The main issue, and in fact the only substantial issue remaining in the case, is one of law—the question of the jurisdiction of the referee and of the court in this action not only to pass upon the claims of Mrs. Gillespie, but also to hear and give judgment against her personally upon the claims presented by the trustee.

The general purpose of the Amendatory or Chandler Act of 1938 was to clarify the Bankruptcy Law and improve administrative processes, and also as to the powers and jurisdiction of referees in bankruptcy, Geo. E. G. Johnson of the Chicago Bar, in his Commentary on the Chandler Act has this to say.

"Clarification of...