In re Landquist

• Court: U.S. Court of Appeals — Seventh Circuit
• Writing for the Court: ALSCHULER, SPARKS, and FITZHENRY, Circuit
• Citation: In re Landquist, 70 F.2d 929 (7th Cir. 1934)
• Decision Date: 25 June 1934
• Docket Number: No. 5133,5034,5046.,5133
• Parties: In re LANDQUIST et al. HARDENBROOK et al. v. LANDQUIST et al. In re PARMENTER. FELSENTHAL et al. v. PARMENTER.

70 F.2d 929 (1934)

In re LANDQUIST et al.

HARDENBROOK et al. v. LANDQUIST et al.

In re PARMENTER.

FELSENTHAL et al. v. PARMENTER.

Nos. 5133, 5034, 5046.

Circuit Court of Appeals, Seventh Circuit.

May 3, 1934.

Rehearing Denied June 25, 1934.

Edward Sonnenschein, Herbert M. Lautmann, Henry S. Moser, and Ben I. Greenebaum, Jr., all of Chicago, Ill., for appellants.

Walter E. Wiles, of Chicago, Ill. (George E. Q. Johnson, Luther D. Swanstrom, and Samuel G. Clawson, all of Chicago, Ill., of counsel), for appellees.

Before ALSCHULER, SPARKS, and FITZHENRY, Circuit Judges.

SPARKS, Circuit Judge.

These cases, by agreement of the parties were consolidated in this court for the purpose of argument. In the discussion we shall refer first to No. 5133, Hardenbrook v. Landquist.

The questions presented arise out of the court's ruling with respect to a petition filed by appellees in the District Court, sitting as a court of bankruptcy. The petition was filed pursuant to section 74 of the Bankruptcy Act as amended March 3, 1933 (11 USCA § 202), and alleged that appellees as co-partners and individuals were unable to meet their debts as they matured, and that they desired to obtain an extension of time in which to pay them. With the petition were filed schedules which showed liabilities in excess of assets. The principal asset was an undivided interest in real property. The principal liability was a mortgage indebtedness in the sum of $92,000 evidenced by bonds executed by appellees and one Danielson and wife, which were secured by a first mortgage deed duly recorded, conveying the aforesaid real property in trust.

The court approved the petition and made a general reference of the cause to a referee in bankruptcy. Appellees then filed a petition alleging that the names and addresses of the owners and holders of the bonds were to them unknown and that appellants were in possession of records showing that information, and they prayed for a subpœna duces tecum directing appellants to produce all records in their possession which would disclose the names and addresses of all persons to whom said bonds were originally sold, the names and addresses of the assignees and transferees of such persons, and the amounts and numbers of bonds owned and held by each, together with all copies, drafts and vouchers relating to them. Answer being filed, a hearing was had, and over appellants' objection the subpœna was issued as prayed, and served upon appellant Hardenbrook. Appellants then filed a petition to quash the subpœna alleging that they were members of a committee of which one of their number was secretary, under a deposit agreement which was exhibited; that pursuant to a call for deposit of the outstanding unpaid bonds there had been deposited with the committee, bonds in the aggregate of $60,900, of which appellants were the legal owners and holders and were creditors of appellees to that extent; that appellees were not entitled to the information contemplated by the subpœna because it was not pertinent nor material to the issues and would not disclose the names and addresses of appellees' creditors other than appellants, and would be of no avail to appellees; that the underwriters who originally sold the bonds had been for many years past, and their successor was then, engaged in selling securities to the public, and their lists of customers constituted a property right of great value, and to require a disclosure of them would deprive appellants and said underwriters of property without due process of law in violation of the Fifth Amendment of the Federal Constitution; that appellees were not in good faith in seeking the information, but were actuated by ulterior motives in attempting to promote their personal gain by thus hindering and delaying the reorganization of the property involved. The motion to quash further alleged that section 74 of the Act, in so far as it attempts to bring within the jurisdiction of the federal bankruptcy court the obligations and property of persons not insolvent, merely for the purpose of extending the time for payment of their debts, contravenes article 1, sections 1 and 8, article 3, section 1, and the Fifth and Tenth amendments of the Federal Constitution.

The referee found the facts specially and denied and dismissed appellants' petition to quash for want of equity. Upon appellants' petition to review that ruling, the District Court affirmed the order of the referee and from that order this appeal is prosecuted. The facts are not controverted and the questions presented are (1) whether section 74 of the Bankruptcy Act contravenes the Federal Constitution, and (2) was the subpœna duces tecum rightfully issued.

Section 8, article 1 of the Constitution of the United States provides that Congress shall have power to establish uniform laws on the subject of bankruptcies throughout the United States, and it is conceded that the power of Congress to pass the amendment of 1933, if it had such power, must be based on that section. It will be noted that section 74 provides that any person, except a corporation, who is insolvent or unable to meet his debts as they mature may avail himself of the statute with respect to a composition of his debts, or an extension of time in which to pay them. The purpose of the amendment, as stated therein, is for the relief of debtors, and is in addition to voluntary and involuntary proceedings in bankruptcy. It is contended by appellants that the matter of extension of time for the payment of debts by an embarrassed debtor is not germane to and cannot be included in the subject of bankruptcies, hence they say there was no warrant of law for the enactment of section 74. It will be noted that in appellants' answer to the petition for the subpœna, the constitutional challenge is based upon the attempted grant of power to all debtors named in section 74, while in their motion to quash the subpœna the challenge is to such grant to debtors who are not insolvent. It is not denied, however, that appellees were insolvent, and were unable to meet their debts as they matured.

The history of bankruptcy legislation has provoked much discussion as to the meaning of the words "bankrupt" and "bankruptcy legislation." Owing to the difference in purpose of the several acts, and in the limitations in the various enactments with respect to the persons entitled to their benefit, the legislative meaning of the words has not always been the same in all jurisdictions or in all ages. Mr. Justice Story in his comment on the bankruptcy provision of the Constitution, as quoted in Re Reiman, Fed. Cas. No. 11,673, at page 493, stated, "Perhaps, as satisfactory a description of a bankrupt law as can be framed is, that it is a law for the benefit and relief of creditors and their debtors, in cases in which the latter are unable or unwilling to pay their debts. And a law on the subject of bankruptcies, in the sense of the constitution, is a law making provisions for cases of persons failing to pay their debts." It is not necessary for us to say that mere unwillingness, or mere failure to pay his debts has ever been sufficient under our laws to entitle a debtor to the benefit of a bankruptcy act, but we do say that, except under the act of 1867 (14 Stat. 517), inability to pay has always been recognized as a proper cause for the adjudication whether that inability were caused by a lack of assets or a lack of liquidity of assets. The Bankruptcy Act of 1898, of which the enactment of 1933 is an amendment, expressly recognized this principle. 11 USCA §§ 1 and 21; In re Hargadine-McKittrick Dry Goods Co. (D. C.) 239 F. 155 (reversed on other points C. C. A. 244 F. 719); In re Foster Paint & Varnish Co. (D. C.) 210 F. 652. It is clear that appellees at the time of filing their petition were bankrupts within the meaning of the law, and that Congress was empowered by the Constitution to enact such bankruptcy legislation as it might deem proper for the benefit and relief of all persons so situated and their creditors, providing the enactment were uniform throughout the United States.

The principal contention of appellants, however, is, that legislation which does not provide for pro rata distribution of a bankrupt's property among his creditors, and for the discharge of the bankrupt from liability for his existing debts, is in fact not bankruptcy legislation. This contention is based on the illogical assumption that the broad power of the Constitution is limited by congressional legislation on the subject of bankruptcy since the Constitution was adopted. In other words it is argued in substance that because Congress has heretofore provided that after adjudication there shall be a pro rata distribution of the net assets and a discharge of the debtor, further legislation can not be classified as bankruptcy legislation unless it contains those provisions, or is in aid of them. The history of bankruptcy legislation both in England and the United States does not support this position. The earlier laws of England granted no discharge from existing debts, and limited the persons who might be declared bankrupts to traders, merchants, and dealers in money. Voluntary bankruptcy of the debtor was not permitted. In many instances less than a full disclosure of assets was allowed. It was more than one hundred sixty years after the first English bankruptcy statute was enacted that a discharge of the bankrupt was granted, and it was not until a hundred twenty years later that a composition statute similar to our own was enacted as a part of their bankruptcy statutes.

Under our Constitution the first bankruptcy statute was enacted in 1800 (2 Stat. 19) and was repealed in 1803 (2 Stat. 248). In all respects it was quite similar to the British act in force at the time, and was framed along the lines of suppressing fraudulent and criminal practices. Indeed it was an act against the bankrupt rather than in his favor,...