In re Latham Lithographic Corporation

• Court: U.S. Court of Appeals — Second Circuit
• Writing for the Court: SWAN, CHASE, and CLARK, Circuit
• Citation: In re Latham Lithographic Corporation, 107 F.2d 749 (2nd Cir. 1939)
• Decision Date: 27 November 1939
• Docket Number: No. 52.,52.
• Parties: In re LATHAM LITHOGRAPHIC CORPORATION.

107 F.2d 749 (1939)

In re LATHAM LITHOGRAPHIC CORPORATION.

No. 52.

Circuit Court of Appeals, Second Circuit.

November 27, 1939.

Brodsky & Stone, of New York City (Irving Brodsky, of New York City, of counsel), for appellant.

Weil & Fenster, of New York City, (Frederick Fenster, of New York City, of counsel), for creditor-appellee.

Duberstein & Schwartz, of Brooklyn, N. Y., (Samuel C. Duberstein and Max Schwartz, both of Brooklyn, N. Y., of counsel), for appellees.

Before SWAN, CHASE, and CLARK, Circuit Judges.

SWAN, Circuit Judge.

This appeal brings up a contest between two creditors over the election of a trustee of the bankrupt Latham Lithographic Corporation. The referee allowed the appellant Fisher to vote his claim, with the result that no nominee for the office of trustee had a majority in number and amount of the voted claims. The referee then appointed Samuel Rabin as trustee. Upon the petition of Bulkley, Dunton & Co., a creditor, the district court reversed the referee's order and adjudged Arthur S. Burton to have been elected trustee.

The correctness of the order appealed from turns on whether the appellant Fisher was entitled to vote. If he was, then no election was had and the referee's appointment of Rabin should have been confirmed; if he was not entitled to vote, the order of the district court was right. Fisher's alleged disqualification is rested on section 44 of the Bankruptcy Act as amended in 1938, 11 U.S.C.A. § 72, but before passing to a consideration of the meaning of that section, it is necessary to state the facts regarding the origin of his claim.

Prior to February 7, 1938 one Stein held two chattel mortgages made by predecessors of the bankrupt and covering all of its machinery and equipment. On that date the bankrupt gave to Gugler Lithographic Company (for brevity referred to hereafter as Gugler) another chattel mortgage upon the same personal property. By agreement of the same date between the bankrupt, Gugler, Stein and Stein as trustee, these three mortgages, securing an aggregate indebtedness of nearly $200,000, were in effect consolidated; the mortgagees assigned their respective mortgages to Stein as trustee and the bankrupt was to deliver to the trustee notes, payable to the order of the trustee, representing the consolidated debt and providing for payment of weekly instalments. Subsequently, in April 1938, the bankrupt executed another chattel mortgage of $5,000 to Kempland covering the same personal property, and by a further contract that mortgage was also brought under the consolidation agreement of February 7th. On October 11, 1938 Stein sold to Gugler his beneficial interest in the four chattel mortgages and the indebtedness secured thereby, and Stein as trustee agreed to give notice that the mortgages would be foreclosed by sale on October 24, 1938 and agreed to make specified dispositions of the proceeds of sale. Two days later, on October 13th, Fisher agreed to purchase one half of Gugler's interest in the mortgages and the indebtedness they secured. Notice of foreclosure sale was given by Stein as trustee and the sale was had on October 24. Gugler bid in the mortgaged chattels for $100.000, leaving a deficiency of $101,259.30. Through stock ownership Gugler controlled the bankrupt and caused it on October 24 to execute a general assignment for the benefit of creditors. The involuntary petition in bankruptcy was filed November 2, 1938. Fisher filed a claim for $50,629.65, one half of the deficiency, and Gugler a claim for the other half. Under § 44 of the Act as amended Gugler's claim was not permitted to vote because of Gugler's ownership of stock of the bankrupt. Fisher was not a stockholder nor otherwise disqualified under § 44, unless the fact that his assignor was disqualified creates a disqualification in him.

In our opinion § 44 creates a personal disability only. If a creditor who would be disqualified to vote the claim in the debtor's bankruptcy assigns it in good faith to a purchaser who is not disqualified, we can see no reason to bar the latter from voting it. The purpose of the provision under discussion is to prevent the election of a trustee who may be too friendly to the bankrupt and fail to protect the interests of creditors. The amendment merely extends and makes mandatory a policy which the courts had sometimes enforced in the absence of express statutory direction. See In re L. W. Day & Co., 2 Cir., 178 F. 545; In re McGill, 6 Cir., 106 F. 57; In re Stowe, D.C.Cal., 235 F. 463. This statutory purpose will be adequately served if the declared disability is construed to be personal to the creditor, as the language appears to make it. Of course, the transfer must not be a mere subterfuge; the disqualified assignor must part with all interest in the claim assigned and put no restrictions on how the assignee is to vote it.

In the case at bar the problem is complicated by the fact that only part of the claim was assigned. The argument of the appellant is that since a partial assignee may sue in his own name in the state courts,¹ he must also be entitled to file a proof of claim in bankruptcy and to vote upon it unless personally disqualified. On the other hand, the appellee argues that a single claim may not be split up so as to increase the number of the bankrupt's creditors and, since the...