IN RE MIDDLETOWN PACKING COMPANY

• Decision Date: 01 December 1961
• Docket Number: No. H 1105.,H 1105.
• Citation: 199 F. Supp. 657
• Court: U.S. District Court — District of Connecticut
• Parties: In the Matter of MIDDLETOWN PACKING COMPANY, Incorporated.

199 F. Supp. 657

In the Matter of MIDDLETOWN PACKING COMPANY, Incorporated.

No. H 1105.

United States District Court D. Connecticut.

December 1, 1961.

Sachs, Sachs, Giaimo & Sachs, by Allen H. Duffy, New Haven, Conn., for petitioner.

Widett & Kruger, by Irving Widett, Boston, Mass., for trustee.

BLUMENFELD, District Judge.

This case comes before the court on a petition for review of an order of the referee in bankruptcy to turn over to its trustee the sum of $14,246.10, the balance remaining in the debtor's commercial checking account with The Community Bank & Trust Company the bank when the debtor was adjudicated a bankrupt.

The bank asserted that the court of bankruptcy had no jurisdiction over the fund in controversy averring that "the property * * * was * * * in its possession by virtue of claims adverse to Petitioner" Trustee; and that "these claims arise out of certain actions of Bankrupt which have caused Respondent to become exposed to claims for damages by Moog & Greenwald as set forth in the letter attached hereto and marked Exhibit `A'. Respondent's possible liability to Moog & Greenwald for the alleged damages gives Respondent by way of set-off, or otherwise, substantial claims against Bankrupt."

The referee in bankruptcy held a hearing upon the question of his jurisdiction as well as upon the trustee's petition for the turnover order. That was proper practice and counsel for the bank appeared specially and throughout the hearing preserved objection to the exercise of summary jurisdiction by the referee.

The applicable principles of law are well established, as stated by the Supreme Court in Cline v. Kaplan, 323 U.S. 97, 98, 99, 65 S.Ct. 155, 156, 89 L. Ed. 97 (1944):

"A bankruptcy court has the power to adjudicate summarily rights and claims to property which is in the actual or constructive possession of the court. Thompson v. Magnolia Petroleum Co., 309 U.S. 478, 481, 60 S.Ct. 628, 629, 84 L.Ed. 876. If the property is not in the court's possession and a third person asserts a bona fide claim adverse to the receiver or trustee in bankruptcy, he has the right to have the merits of his claim adjudicated `in suits of the ordinary character, with the rights and remedies incident thereto.' Galbraith v. Vallely, 256 U.S. 46, 50, 41 S.Ct. 415, 416, 65 L.Ed. 823; Taubel-Scott-Kitzmiller Co. v. Fox, 264 U.S. 426, 44 S.Ct. 396, 68 L.Ed. 770. But the mere assertion of an adverse claim does not oust a court of bankruptcy of its jurisdiction. Harrison v. Chamberlin, 271 U.S. 191, 194, 46 S.Ct. 467, 468, 70 L.Ed. 897. It has both the power and the duty to examine a claim adverse to the bankrupt estate to the extent of ascertaining whether the claim is ingenuous and substantial. Louisville Trust Co. v. Comingor, 184 U.S. 18, 25, 26, 22 S.Ct. 293, 296, 46 L. Ed. 413."

The rules by which a referee shall be guided in applying these principles are set forth in In re Meiselman (2 Cir. 1939), 105 F.2d 995, where the court stated at p. 998:

"A claimant cannot avoid a summary order by the very audacity of his claims of either fact or law. The referee must proceed to determine whether the adverse claim is `plainly without color of merit and a mere pretense' on a proper weighing of the testimony considered in the light of the claimant's self-interest and a due consideration of existing law."

After receiving evidence, the referee found the following facts: The bankrupt prior to the adjudication of bankruptcy in involuntary proceedings instituted on August 30, 1958 was engaged in the business of purchasing, slaughtering and selling live stock. On July 30, 1958, one of its suppliers, Moog & Greenwald M & G of Chicago, Illinois, shipped two carloads of live cattle to the bankrupt, which were received and unloaded on August 2, 1958. On August 4, 1958, the bank received a sight draft drawn by M & G on the bankrupt relating to the shipments in question in the amount of $14,246.10. Accompanying this draft was a straight bill of lading and a letter of instruction from the shipper's transmitting bank, Drovers National Bank of Chicago Drovers to wire nonpayment. On August 4, 1958, there were insufficient collected funds on deposit to pay the draft which condition continued until August 7, 1958. On August 6, 1958, the bank notified Drovers that the draft had not yet been paid because it was against uncollected funds, which were expected to be collected by August 7, 1958. On August 7, 1958, the bankrupt, having previously authorized the bank to honor the draft, notified the bank to stop all payments of checks and drafts against its account; and, on the same day, the bank notified Drovers that the funds were still uncollected. On August 8, 1958, the bank telegraphed Drovers advising of the receipt of the stop payment order. On August 22, 1958, the bank received a letter from the attorneys for M & G as follows:

"Wiggin & Dana 205 Church St., New Haven, Conn August 21, 1958 Registered Mail Community Bank & Trust Company 692 Chapel Street New Haven, Connecticut Gentlemen:

We represent Moog & Greenwald, a Chicago, Illinois partnership whose sight draft signed by one of the partners, Segel Hess, for $14,246.10 drawn on the Middletown Packing Company, Inc., of Middletown, Connecticut, was forwarded to your bank for collection on July 31, 1958. It is our understanding that your bank is holding sufficient funds of the Middletown Packing Company to pay the draft. This is to put you on notice that our clients claim that amount as theirs on the grounds that it is consideration for cattle sold and delivered to the Middletown Packing Company, and of the sale of such cattle by the Middletown Packing Company.

We would also like to advise you of our opinion that because of your bank's failure to advise promptly our clients of the Middletown Packing Company's inability or unwillingness to pay the above mentioned draft, our clients may suffer great financial losses and that our clients hold you responsible for any and all losses they might so suffer.

Very truly yours s/ Wiggin & Dana IH/g cc: Robert N. Giaimo, Esq 185 Church Street New Haven, Connecticut"

On March 7, 1959, M & G filed an unsecured claim in the amount of $14,246.10.

The respondent's petition is grounded on "claims adverse to Petitioner"¹ which raise questions of law, since facts are not in dispute here. Respondent's own characterization is, "These claims arise out of certain actions of Bankrupt which have caused Respondent to become exposed to claims for damages by Moog & Greenwald as set forth in the letter attached hereto." Quoted above. The claim set forth in the last paragraph of the letter from M & G's attorneys is considered first. Whether this claim is a mere pretense or colorable and not substantial requires an examination of the basis for it which must be found upon the facts disclosed by the record.

M & G's claim that the bank was negligent is a claim against the bank, not a claim against the property of the debtor. In the collection of the sight draft, the bank was acting as agent of M & G and not of the debtor. Klein v. Munson, 111 Conn. 709, 151 A. 177. There is no basis for arguing that because the bank may ultimately be held liable to M & G for its own negligence in failing to properly comply with the instructions of Drovers to wire nonpayment of the sight draft it is, therefore, entitled to treat the property of the bankrupt in its possession as an indemnity bond against liability for its own negligent conduct. The respondent cites no authority in support of this ingenious contention. The referee properly concluded:

"(C) Conclusion of Law. (2) the claim of Community Bank and Trust Company based upon a possible liability in negligence to Moog & Greenwald is colorable and is not sufficient to support the bank's assertion of an adverse claim sufficient to defeat the summary jurisdiction of the court."

Whether the remainder of the letter sets forth any claim of the bank adverse to the petitioner is considered next. Nowhere does it appear that the bank asserts for itself any claim of adverse title to the funds on deposit. It does contend, however, that M & G has made a claim to possession of the fund adverse to the trustee. Any basis for such a contention could be found only by reading into the letter received from M & G's attorneys something that is not there. The letter of August 21, 1958 which claims that the "bank is holding sufficient funds of the Middletown Packing Company to pay the draft" refutes that contention on its face. On August 7, 1958, two weeks before this letter was received, the debtor had notified the bank to stop payment of the M & G draft. That notice effectively terminated the bank's right to pay that draft out of the debtor's funds. Calamita v. The Tradesmens National Bank, 135 Conn. 326, 64 A.2d 46 (1949). The debtor's authorization to the bank prior to August 7, 1958 to pay the draft did not operate as an assignment of any part of the debtor's account. As held in Calamita, supra, at p. 330, 64 A.2d at p. 48, quoting from Cincinnati, H. & D. R. Co. v. Metropolitan National Bank, 54 Ohio St. 60, 71, 42 N.E. 700, 31 L.R.A. 653:

"The bank's agreement with the depositor involves or implies no agreement with the holder of a check. The giving of a check is not an assignment of so much of the creditor's claim. It passes no title, legal or equitable, to the holder in the moneys previously deposited; nor does it create a lien on the fund, for there is no special fund out of which the check can be paid, nor does it transfer any money to the credit of the holder. It is simply an order which may be countermanded and payment forbidden by the drawer any time before it is actually cashed or accepted."

The next sentence of the letter which claims "that amount $14,246.10 as theirs M & G's on the ground that it is consideration for cattle sold and delivered to Middletown Packing Company" is read by the court to assert no more than that...