In re Holbrook Shoe & Leather Co.

• Decision Date: 05 December 1908
• Docket Number: 559.
• Citation: 165 F. 973
• Parties: In re HOLBROOK SHOE & LEATHER CO.
• Court: U.S. District Court — District of Montana

165 F. 973

In re HOLBROOK SHOE & LEATHER CO.

No. 559.

United States District Court, D. Montana.

December 5, 1908

Binnard & Rodgers, for trustee.

Clayberg & Horsky and H. A. Frank, for Packard Shoe Co.

J. L Wines, for bankrupt.

HUNT District Judge.

Max Fried, trustee in bankruptcy of the Holbrook Shoe & Leather Company, bankrupt, on June 5, 1908, filed with the referee in bankruptcy at Butte a petition for a summary order directed to the Packard Shoe Company, as agent of the bankrupt, to surrender to him, as trustee, certain property within the possession of the Packard Shoe Company at Helena, Mont.

Upon June 6th the trustee asked the referee for an order restraining the Packard Shoe Company from disposing of property in its possession. The allegations of this petition were, in substance, that the examination of the officers and directors of the bankrupt corporation had disclosed that the above-named bankrupt was the owner of more than eight-tenths of the subscribed capital stock of the Packard Shoe Company that the Packard Shoe Company was a Montana corporation organized about August 29, 1907; that the directors of the Packard Shoe Company and of the bankrupt corporation were F P. Holbrook, D. L. Dunn, and Henry Swanson; that since the adjudication in bankruptcy Dunn has possessed the stock of goods of the Packard Shoe Company, which said stock was valued at between $4,000 and $5,000; that about $1,000 in money was deposited in bank at Butte, and that some money was deposited in Helena; that the stock of goods and the money in possession of the Packard Shoe Company were held by said corporation as the agent of said bankrupt, and that the officers of the Packard Shoe Company refused to turn over the same; that the officers of the Packard Shoe Company have conspired to cheat, deprive, and defraud the bankrupt of its interest in the Packard Shoe Company; and that in violation of the rights of the bankrupt and of petitioner, as trustee, they had passed a resolution, dated May 11, 1908, whereby D. L. Dunn, president of the Packard Shoe Company, was authorized 'to sell, transfer, mortgage, execute deed of assignment, or take such other action as in his good judgment he may consider for the best interests of the company, of its assets. ' Petitioner then alleged that, with intent to cheat and defraud the bankrupt and the trustee, on May 11th the officers of the Packard Shoe Company fraudulently amended article 8 of the by-laws of the said company, by resolution, changing the by-laws so as to require a written request and six months' notice for a meeting, whereas, before such change, the by-laws permitted a meeting to be called merely after written request. It was also alleged that the Packard Shoe Company was insolvent, and that each of its directors was insolvent.

An order to show cause was issued. An answer was filed by the Packard Shoe Company, D. L. Dunn, as its president, F. P. Holbrook, as its vice president and treasurer, Henry Swanson, as its secretary, and D. L. Dunn, F. P. Holbrook, and Henry Swanson, as individuals. They denied that the stock of goods and money in the possession of the Packard Shoe Company was the property and money of the Holbrook Shoe & Leather Company, or that the same were being held by the said Packard Company, or its officers, as the agent of the bankrupt. They denied all allegations of conspiracy and cheating. They admitted the passage of the resolution passed on May 11th by the board of directors of the Packard Company, but denied that it was passed with intent to cheat or defraud the bankrupt. They alleged that on the 22d of May, 1908, and prior to the filing of the petition for a restraining order, a meeting of the directors of the Packard Shoe Company was held, and the resolution referred to was recalled and rescinded. They denied that they were selling or about to sell the goods in the possession of the Packard Shoe Company with intent to place the proceeds beyond the reach of the bankrupt or the trustee, or that any injury would come to the bankrupt by retaining the goods in their possession.

They then set up that the Packard Shoe Company was incorporated in due form, and was engaged in the shoe business at Helena, and that the bankrupt company was the owner of 800 shares of the capital stock of the Packard Shoe Company; that Dunn was the owner of 150 shares of said company, and that Holbrook and Swanson each owned 1 share in the said company; that the Packard Shoe Company had about $5,000 worth of merchandise, $1,000 worth of fixtures, and cash, in about the sum of $1,200, on deposit; and that its liabilities did not exceed $150. The answer also alleged that the Holbrook Shoe & Leather Company, bankrupt, had no right or interest in the property of the Packard Shoe Company, save as the owner of 800 shares of the capital stock of the said Packard Shoe Company; that the said Packard Company was regularly conducting its retail shoe business; and that, by reason of the restraining order having been issued, the business of the Packard Company had been closed, and that it had been greatly injured.

Hearing was had before the referee, and on September 18th he granted the summary order prayed for by the trustee.

Petition for review was filed, and three questions are certified by the referee: (1) Did the referee in the first instance have jurisdiction to proceed in said matter, and take testimony upon the petitions filed by the trustee and the answers filed thereto? (2) Does the testimony taken in this proceeding sustain the findings of the referee? (3) Was the referee without jurisdiction to make the summary order by him made in this proceeding?

A very careful study of the record certified in this matter leads me to conclude that it was the duty of the referee to hear the testimony, in order to pass upon the question whether the claim of the Packard Shoe Company to the property in its possession had an actual basis; that is, was it a real or merely colorable claim? Power and duty to make such inquiry must exist under the bankruptcy act, else we cannot escape from the illogical conclusion that the mere assertion of what may be designated an adverse claim can oust the summary jurisdiction of the bankruptcy court, and, as a result, the trustee cannot expeditiously collect the estate for the creditors. But we are not without judicial authority in the premises, as the Supreme Court has expressly declared there is no such ouster, and that jurisdiction exists. Mueller v. Nugent, 184 U.S. 1, 22 Sup.Ct. 269, 46 L.Ed. 405.

But how much farther may the bankruptcy court go? Counsel well say it is a serious matter to adjudge that property claimed by one person or corporation shall be summarily surrendered to the trustee in bankruptcy for the creditors of another corporation, as belonging to the latter; and it is in recognition of the strength of this argument that no such order will be made unless it follows a most cautious scrutiny of evidence and consideration of the correct principles of law. On the other hand, we must be mindful of a correlative rule of care for preservation of rights of creditors, and that the bankrupt law is founded upon the doctrine of the need for prompt and simple proceedings, whereby it is made the express duty of the court 'to cause the estates of bankrupts to be collected, reduced to money and distributed, and determine controversies in relation thereto,' except as otherwise provided in the bankrupt law.

Jurisdiction by bill in the nature of plenary suit obtains, as was held in Whitney v. Wenman, 198 U.S. 539, 25 Sup.Ct. 778, 49 L.Ed. 1157; but such jurisdiction does not preclude litigation of the rights of parties in bankruptcy proceedings, as distinguished from controversies by independent suits, where the trustee applies for an order requiring one to turn over property in his possession, basing the application upon the ground that the property so held belongs to the bankrupt and is held without color...