In re Manufacturers Trading Corp.

• Citation: 194 F.2d 948
• Decision Date: 05 February 1952
• Docket Number: No. 11290,11291.,11290
• Parties: In re MANUFACTURERS TRADING CORP. KIERSTED v. HADDEN (two cases).
• Court: U.S. Court of Appeals — Sixth Circuit

194 F.2d 948 (1952)

In re MANUFACTURERS TRADING CORP. KIERSTED v. HADDEN (two cases).

Nos. 11290, 11291.

United States Court of Appeals Sixth Circuit.

As Amended March 17, 1952.

February 5, 1952.

COPYRIGHT MATERIAL OMITTED

Seth C. Taft, Cleveland, Ohio (Jones, Day, Cockley & Reavis, all of Cleveland, Ohio, on the brief), for appellant.

B. B. Fensterstock, New York City (L. C. Wykoff, Cleveland, Ohio, on the brief, Arter, Hadden, Wykoff & Van Duzer, Cleveland, Ohio, Zalkin & Cohen, New York City, of counsel), for appellee.

Before MARTIN, McALLISTER and MILLER, Circuit Judges.

McALLISTER, Circuit Judge.

The Manufacturers Trading Corporation, a company engaged in loaning money to business enterprises upon miscellaneous collateral, filed its petition in bankruptcy for reorganization under the provisions of Chapter X of the Bankruptcy Act, 11 U.S. C.A. § 501 et seq., in the district court. An order was entered by the court, appointing John A. Hadden, Disinterested Trustee, and providing that the Trustee, upon his qualification,

"(a) shall forthwith investigate the acts, conduct, property, liabilities and financial condition of the Debtor; the operation of its business and the desirability of the continuance thereof; and any other matter relative to the proceeding or to the formulation of a plan, and report thereon to this Court;

"(b) may examine the officers and directors of the Debtor and any other witnesses concerning the foregoing matters or any of them;

"(c) shall report to this Court any facts ascertained by him pertaining to fraud, mismanagement and irregularities, and to any cause of action available to the estate;

"(d) shall, at the earliest date practicable, prepare and submit a brief statement of his investigation of the property, liabilities and financial condition of the Debtor, the operation of its business and the desirability of the continuance thereof, in such form and manner as this Court may direct, to the creditors, the stockholders, Securities & Exchange Commission, and such other persons as this Court may designate."

The proceedings were referred to Honorable Carl D. Friebolin, as Special Master. Subsequently, appellant herein, Robert W. Kiersted, was served with a subpœna duces tecum, to which was attached an exhibit requiring him to bring with him numerous documents relating to accounting work performed for the debtor in bankruptcy, Manufacturers Trading Corporation, by the firm of Barrow, Wade, Guthrie & Company, of which appellant Kiersted was a partner. In answer to the subpœna, Kiersted appeared before the Special Master, accompanied by his attorney, who, acting apparently on the authority of Shotkin v. Nelson, 10 Cir., 146 F.2d 402, inquired of counsel for the Trustee in Bankruptcy what purpose he had in examining Kiersted. Counsel for the Trustee replied that the purpose of the examination was to enable the Trustee to determine whether or not any basis for a cause of action existed in favor of the Trustee against the accounting firm of Barrow, Wade, Guthrie & Company, arising out of the preparation and submission by this firm of various audit reports over a period of years.

Counsel for appellant then stated to the Special Master that already one creditor of the Manufacturers Trading Corporation had sued the accounting firm of Barrow, Wade, Guthrie & Company in the district court in New York, claiming damages of One and a Half Million Dollars, and that there were other creditors of the bankrupt debtor with claims of hundreds of thousands of dollars on whose behalf demand had theretofore been made upon the accounting company to produce documents and submit to examination, under threat of litigation. Counsel then declared that he could not be oblivious to the fact that interests other than the Trustee's would be served by the examination of the appellant by the Special Master; that he had every confidence that the court would sustain him in his contention that the examination of appellant for the purposes announced by the Trustee's counsel, was improper, unlawful, oppressive, and beyond the duties and rights of the Trustee; and he thereupon submitted a motion to quash the subpœna on the above mentioned grounds. See Rule 45(b) of the Federal Rules of Civil Procedure, 28 U.S.C.A.

After the presentation of the foregoing motion, the Special Master observed to counsel for appellant: "Isn't the difficulty here that you fail to understand that under the express provisions of the Bankruptcy Act, under sections 167 and 21-A, that a Trustee may examine at length with regard to the accounts and property of the bankrupt, and anybody who had relations with the bankrupt? There is no issue about it. This is a fishing expedition, deliberately so, and expressly so, and admittedly so, and entirely proper. Everything you say may be conceded, but that doesn't void the requirement that a witness appear and testify. Your motion would be valid and have some effect if after you began examination they started talking about the witness' domestic relations, or something of that kind. But as long as he is talking about some relations between Barrow, Wade, and Guthrie, and Manufacturers Trading Corporation or, perhaps, some creditor of Manufacturers Trading Corporation, which might elicit information that they had a claim against Barrow, Wade, and Guthrie or somebody else, all that may be gone into. * * * You can roam all over the field. * * * It may be quite true that all of this is entirely for nothing. It happens over and over again. The Trustee very frequently strikes a dry hole after drilling for days and weeks. That is just all it is. It is not testimony for anything. It can't be used. The transcript can't be used, except with your consent, and except, possibly, to impeach the witness. But as evidence it never can be introduced. I am afraid that is the difficulty, that you misunderstand section 167 and 21-A, which is also part of it."

Counsel for appellant then stated to the Special Master: "We take the position, your Honor, that the provisions of 167, as well as 21-A do not permit the inquiry into and cross-examination for the purpose of determining or exploring whether or not there is a cause of action by the Trustee against the witness or the firm of which he is a partner."

Following this discussion, counsel for the Trustee in Bankruptcy proceeded to the examination of appellant Kiersted, who thereupon refused to answer a question as to the names of the partners of Barrow, Wade, Guthrie & Company. The Special Master then directed him to answer, and he again refused. Appellant then presented his motion to quash the subpœna, which the Special Master denied, stating that it was entirely frivolous. Counsel for appellant then applied to the district court to sustain the motion to quash.

Upon the hearing before the district court, the motion to quash was denied, and Kiersted was directed to continue his examination before the Special Master. When the hearing was resumed, Kiersted again refused to answer the above mentioned question, and the Special Master forthwith certified the proceedings to the district court and recommended that Kiersted be adjudged in contempt and punished therefor. An order of the district court was then issued, directed to Kiersted, ordering him to show cause why he should not be adjudged in contempt of court and why he should not then and there be committed to prison or otherwise dealt with until he should obey the order of the court. On the hearing of the order to show cause, Kiersted continued to insist that he was not obliged to answer the question addressed to him in the examination before the Special Master; and the district court, accordingly, entered an order holding him in contempt of court and committing him to the custody of the marshal until he should obey the order of the court and submit to the examination before the Special Master. It should here be observed that execution of the order of commitment was withheld by the court to enable appellant's counsel to apply to the court of appeals for supersedeas, which was thereafter granted.

On his appeal, Kiersted contends that the district court was in error in entering its order denying the motion to quash the subpœna duces tecum and ordering him to submit to examination; and in entering the order adjudging appellant guilty of contempt, within the period during which, as appellant claims, he was entitled to an automatic stay of ten days after the entry of the orders. In this regard, he bases his claim upon Rules 54 and 62 of the Federal Rules of Civil Procedure. Appellant further contends that the district court was in error in requiring him to submit to cross-examination for the purpose of exploring the possibility of the existence of a cause of action against him or the firm of accountants of which he was a partner; and that the court further erred in not quashing the subpœna duces tecum on the ground that the command requiring him to produce the documents called for therein was improper, unreasonable, and unlawful. No claim is made that any constitutional privilege against self-incrimination, or unlawful search and seizure, is involved; nor is the competency or relevance of the evidence sought by the Trustee questioned by appellant in so far as it relates to the express purpose of the examination of the witness.

We shall first discuss the question whether appellant was entitled to an automatic stay of ten days after entry of the order denying the motion to quash, before being required to testify and produce records in answer to the subpœna. It is provided in Rule 54 of the Federal Rules of Civil Procedure that a "judgment," as used in those Rules, includes any order from which an appeal may be taken; and under Rule 62 of the Federal Rules of Civil Procedure, it is provided, subject to certain exceptions not here pertinent, that no execution shall issue upon a judgment nor shall proceedings be taken for...