In re Ira Haupt & Co.

• Decision Date: 11 August 1964
• Citation: 234 F. Supp. 167
• Parties: In the Matter of IRA HAUPT & Co., a Limited Partnership, Bankrupt. In the Matter of IRA HAUPT & CO., a Limited Partnership, Debtor.
• Court: U.S. District Court — Southern District of New York

234 F. Supp. 167

In the Matter of IRA HAUPT & Co., a Limited Partnership, Bankrupt In the Matter of IRA HAUPT & CO., a Limited Partnership, Debtor.

United States District Court S. D. New York.

August 11, 1964.

Krause, Hirsch, Gross & Heilpern, Delson & Gordon, New York City, for debtor and debtor-in-possession; Sydney, Krause, George J. Hirsch, Norman Moloshok and Charles Singer, New York City, of counsel.

Rosenman, Colin, Kaye, Petschek & Freund, New York City, for petitioners, Bernard Klebanow, et al.; Max Freund, Jerome E. Sharfman and Joseph Zuckerman, New York City, of counsel.

Milbank, Tweed, Hadley & McCloy, New York City, for The Chase Manhatten Bank, a creditor.

PALMIERI, District Judge.

This litigation arose out of the financial disaster which befell Ira Haupt & Co. (Haupt) as a result of the so-called salad oil scandal in November 1963. The facts are substantially as follows:

Haupt was a limited partnership with sixteen general partners and thirteen limited partners. It was engaged in a general brokerage and commission business with its principal place of business in New York City, with a number of branches throughout the country, and utilizing the services of approximately seven hundred employees. Morton Kamerman, a general partner, was, under the partnership agreement, the sole managing partner during its term and sole liquidating trustee after the expiration of that term on December 31, 1963.

As a result of certain transactions with Allied Crude Vegetable Oil Refining Co., Haupt, on November 18, 1963, found itself in dire financial straits. On the following day, Haupt informed the New York Stock Exchange that it lacked the ratio of assets to liabilities required by the Exchange's rules and by the Securities Act of 1934. Haupt was suspended by the Exchange from further operations on November 20, 1963.

On November 21, 1963, the extent of Haupt's capital deficiency was in the neighborhood of twenty million dollars. In an effort to afford a rapid accommodation for valid customer claims and the curtailment of all unnecessary expenses, and in order to preserve public confidence in the stock market, the Exchange and Haupt's creditor banks entered into an agreement whereby the Exchange would advance a fund to pay the Haupt creditors — 20,000 customers among them — and the banks would defer their claims against Haupt to the extent of two dollars for every dollar advanced by the Stock Exchange.

This agreement, clearly setting forth its purpose as one of "orderly liquidation,"¹ was proposed to the Haupt general partners on November 25, 1963, when the deficit had grown to over twenty-five million dollars. They were told that no promises were being made about their debts, and it was made clear that they would continue to be obligated to the crediors as general partners. The agreement was signed providing for appointment of a Committee on which the Exchange and the banks were equally represented. James P. Mahony, Chief Examiner of the Exchange, was named "Liquidator," with broad powers of attorney signed by all the general partners, and which were attached to the agreement. The Committee was chaired by a Vice President of one of the banks, and counsel to it and Mr. Mahony was a law firm which has long represented the Stock Exchange and one of the banks.

During the period of liquidation, Mr. Kamerman was engaged by Mr. Mahony to assist in the liquidation of Haupt but he made no decisions, merely following Mr. Mahony's directions.

The Exchange advanced $7,500,000 at the time of the agreement and an additional $2,000,000 by March 10, 1964. By early March, 1964, all but about 100 or 150 of the 20,000 customer accounts of Haupt having been satisfactorily liquidated, the Committee entered into a supplemental agreement with the general partners, effective March 10, 1964, which provided, among other things, for the appointment of Edward Feldman as successor Liquidator, thereby permitting Mr. Mahony and his assistants to return to their duties at the Exchange. The minutes of the Committee meeting of March 11, 1964, make it clear that the purpose of the steps taken in March 1964 was to permit "the continued liquidation of Haupt in an orderly fashion." The general partners were told, in the course of their discussion prior to signing it, that if they did not sign the agreement, Haupt would go into bankruptcy and the creditors would have their own trustee appointed anyway.

The limited partners took no part in these transactions. In February 1964, certain of them, three of whom are the respondents here, commenced an action in the Supreme Court, New York County, for the appointment of a Receiver of Haupt's assets and affairs. This application was denied on March 18, the Court granting instead a motion by petitioners here to compel arbitration under the Constitution and Rules and Regulations of the Exchange.

On March 23, 1964, an involuntary petition in bankruptcy was filed in this Court against Haupt by three of the limited partners who acted as petitioning creditors and who are among the respondents here. This was countered on March 30, 1964 by a petition of the general partners under Chapter XI for an arrangement which was tantamount to an implementation of the original agreement. Two of the general partners, Messrs. Kamerman and Kaufman, did not join in the petition.

From the facts just stated, several conclusions are inescapable. Haupt was hopelessly insolvent when it was suspended by the Exchange on November 20, 1963 and it has not engaged in the business for which it was organized since that time. No one has suggested in the course of these proceedings that its business can be rehabilitated. On the contrary, its affairs have been the subject of systematic liquidation, a course of action for which the Committee created by the agreement of November 25, 1963, and not the partnership, has been responsible. Similarly, the institution of proceedings under Chapter XI of the Bankruptcy Act was the act of the Committee and not of the partnership.

Since nearly all the public customers have been paid out,² what remains to be done with respect to the Haupt affairs no longer affects the public interest at large, but does affect substantial interests of the banks, the Exchange, the general and the limited partners, and probably others as well. There is ample evidence that these interests are not concordant. As the following discussion is intended to demonstrate, they can be safeguarded only by the normal bankruptcy procedures.

The case came on before Referee Ryan who granted a motion to dismiss the Chapter XI petition and denied a motion for a stay of the pending involuntary bankruptcy proceedings. The record before Referee Ryan is a very extensive one, consisting of several hundred exhibits, many of them lengthy, and a record of testimony running to nearly 1000 pages. I am convinced from a study of this record that the conclusions of the Referee are amply substantiated by the factual record and by valid authority.

It is clear that Ira Haupt & Co. is today an expired partnership and its only future consists in the winding up of its affairs. It has no haven except the Bankruptcy Court.

In the light of this factual background, Referee Ryan was justified in relying upon In re Pure Penn Petroleum Co., 188 F.2d 851, 24 A.L.R.2d 1206 (2d Cir. 1951), as a ground for the dismissal of the Chapter XI petition. This holding made it clear that Chapter XI arrangements "must comprehend something more than a mere surrender by the debtor of all his assets for liquidation and distribution to creditors." (at p. 855). If all that is in prospect is liquidation, a statutory process for attaining this end...