In re Koch

• Decision Date: 17 December 1940
• Docket Number: No. 111.,111.
• Citation: 116 F.2d 243
• Parties: In re KOCH.
• Court: U.S. Court of Appeals — Second Circuit

116 F.2d 243 (1940)

In re KOCH.

No. 111.

Circuit Court of Appeals, Second Circuit.

December 2, 1940.

Rehearing Denied December 17, 1940.

Weisman, Celler, Quinn, Allan & Spett, of New York City (Milton C. Weisman, Arthur Sheinberg, and Max L. Rothenberg, all of New York City, of counsel), for appellant.

Peaslee, Brigham & Albrecht, of New York City (Ralph G. Albrecht, of New York City, of counsel), for appellee.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

SWAN, Circuit Judge.

On March 25, 1940 the appellant was appointed receiver in an action under the Martin Act, General Business Law Consol. Laws, c. 20, § 352 et seq., brought by the state of New York, by its attorney general, against Reinforced Paper Bottle Corporation, Safety Service Milk Bottle Corporation and Lydia B. Koch.^* The judgment directed the receiver, after filing a bond for the faithful discharge of his duties, to take possession of and title to all property derived by the defendants, or any of them, by means of fraudulent practices committed by them in the sale of stock of Reinforced Paper Bottle Corporation, including all property with which such property had been commingled if thereby identification of such property had become impossible, and to liquidate the same "for the benefit of all persons intervening in this action and establishing an interest in such property." Before any such person had intervened or the receiver had taken possession of any property of Lydia B. Koch other than her books of account and business records, Reinforced Paper Bottle Corporation, which she controlled, filed a petition under Chapter XI of the Chandler Act in the United States district court for the district of Delaware, the state of its incorporation. Four days later, on April 20, Mrs. Koch filed a similar petition in the court below. The carrying out of Mrs. Koch's plan of arrangement is contingent on confirmation by the court in Delaware of the corporation's plan. She is a creditor of the corporation in a large amount; both plans contemplate that a part of her indebtedness shall be canceled and that she shall receive from the corporation certain certificates of indebtedness; by the terms of her own plan these are to be turned over to her unsecured creditors. It is the claim of the state court receiver that the notes of the corporation held by Mrs. Koch represent loans to the corporation of money derived by her through fraudulent sales of stock, and that the defrauded purchasers can rescind their purchases and reclaim the notes she holds.

Mrs. Koch applied to the referee to whom her arrangement petition had been referred, for an order restraining the state court receiver from taking possession of or interfering with any property owned or possessed by her. Counsel for the receiver appeared before the referee in opposition to the proposed order and orally challenged the jurisdiction of the bankruptcy court over property with respect to which the state court judgment had directed the receiver to take possession and title. Temporary restraining orders intended to keep matters in statu quo were entered by the referee on May 6th and 22nd. These orders are not before us on this appeal. A hearing on confirmation of the debtor's arrangement having been duly noticed, and it appearing that no specifications of objection thereto and no reclamation claims had been filed, and that all unsecured creditors listed in the debtor's schedules had consented to the arrangement, the referee entered an order of confirmation on July 12, 1940. His order also directed the receiver to return to the debtor any of her property within his control, and enjoined him from instituting any proceedings for the purpose of taking possession of any property owned by her or of asserting any claim against her. Upon the receiver's petition the referee's order was reviewed and confirmed by the district court. From this order the receiver has appealed.

The first matter for consideration is the appellee's contention that the appeal must be dismissed because the receiver is not a party to the proceedings nor a person aggrieved by the order of confirmation. It is true that he did not formally intervene nor did he file any claim either in his own behalf or in behalf of defrauded purchasers of stock sold by the debtor. We may assume, without decision, that if the order had merely confirmed the arrangement the receiver would have no standing to appeal. See Bryan v. Welsh, 10 Cir., 72 F.2d 618, 619. But the order goes much further; it places him under an injunction and commands him to turn over property. There can be no question but that he is aggrieved by an order which places direct obligations upon him. See In re Bajardi, 2 Cir., 9 F. 2d 797, 798, where the state superintendent of banks was allowed to appeal from an order directing him to turn over securities deposited by the bankrupt. To the same effect is In re Faour, 2 Cir., 72 F.2d 719. The appeal cannot be dismissed.

The appellant contends that the state court judgment vested in him title to the property obtained by the debtor through fraudulent practices and thereby removed it from the summary jurisdiction of the bankruptcy court, which under sec. 311 of the Bankrupcty Act, 11 U.S.C.A. § 711, administers only property of the debtor. If it were true that prior to the institution of the debtor's arrangement petition, the state court had determined that specific property in the debtor's possession belonged not to her but to a defrauded purchaser of stock, the appellant's position would be unassailable. But the premise that the state court judgment ex proprio vigore vested the receiver with title to all or any of the debtor's property will not withstand scrutiny. The Martin Act permits the attorney general to institute an omnibus proceeding against a fraudulent defendant in which his victims may intervene to claim their property or its proceeds. If no intervenor establishes his right to property of which the receiver has taken possession, it is to be returned to the defendant. The state court judgment did not purport to decide what property of the debtor had been derived by means of her fraudulent practices, nor to vest the receiver with title to all of her property. Identification of the property of which he was to take title for the benefit of defrauded persons remained to be determined by further proceedings, and the receiver would have no right to take any specific property from the debtor's possession without a judicial finding that such property was the proceeds of the debtor's fraud or resulted from so intermingling such proceeds with other property that identification of the proceeds themselves was impossible. People v. Lowther, 241 App.Div. 524, 273 N.Y.S. 669. Without identification of property no title thereto can vest in the...