In re Purkett, Douglas & Co.

• Decision Date: 30 March 1931
• Docket Number: No. 16277-H.,16277-H.
• Citation: 50 F.2d 435
• Parties: In re PURKETT, DOUGLAS & CO.
• Court: U.S. District Court — Panama Canal Zone

50 F.2d 435 (1931)

In re PURKETT, DOUGLAS & CO.

No. 16277-H.

District Court, S. D. California, Central Division.

March 30, 1931.

Hiram E. Casey, of Los Angeles, Cal., for Wm. H. Moore, Jr., receiver.

Guy Richards Crump, of Los Angeles, Cal., for petitioner.

McAdoo, Neblett & Clagett and William H. Neblett, all of Los Angeles, Cal. (Hubert F. Laugharn, of Los Angeles, Cal., of counsel), for respondent.

HOLLZER, District Judge.

On March 11, 1931, Purkett, Douglas & Company, hereinafter referred to as petitioner, filed a voluntary petition in bankruptcy herein and was adjudged a bankrupt on said date. Practically at the same time, petitioner filed a verified petition wherein it was charged that on December 18, 1930, petitioner had executed and delivered to William H. Neblett, hereinafter referred to as respondent, a note in the sum of $50,000 with interest at 6 per cent. per annum, payable sixty days thereafter, and as security for the payment of said note had pledged with respondent bonds of the Dollar Oil Corporation, Limited, of the par value of $85,000, and in addition thereto had transferred to respondent other bonds of the Dollar Oil Corporation, Limited, of the par value of $25,000 and also 150,000 shares of the capital stock of said last-named corporation of the par value of $1 per share, as a bonus to respondent on said loan. The said petition further charged that the transfer of said last-mentioned bonds and shares of stock to respondent was a usurious payment of interest on account of said loan, also that respondent had caused notice to be given of intention to sell, on March 11, 1931, the bonds pledged with him as aforesaid; that unless restrained from so doing, respondent would cause said bonds to be sold for a sum of money grossly disproportionate to the true value thereof and thereby would cause irreparable loss to the estate of petitioner and great injury to the creditors of petitioner.

In accordance with the prayer of said petition an order was issued by this court, restraining respondent until the further order of the court from proceeding further with any sale as pledgee of said bonds pledged as aforesaid.

On March 14, 1931, two affidavits were filed by and on behalf of respondent, one being made by respondent and the other by R. B. Powell. The denials and statements hereinafter referred to will be found contained in one or both of said affidavits. Respondent denies that any bonds or stock were received by him as a usurious payment of interest on account of said loan, or that unless restrained by this court he will cause said bonds or any of them to be sold for a sum disproportionate to the true value thereof, or that a sale thereof will cause great or irreparable loss to the bankrupt estate or any injury to the creditors of the bankrupt. In addition, it is alleged in substance that the $25,000 par value of bonds, and the 150,000 shares of stock, were transferred to the law firm of which respondent is a member in payment of services rendered by said firm in connection with the organization and the financing of the bond issue of said Dollar Oil Corporation, Limited, and in consideration of respondent going on the board of directors of said last-named corporation; also, that neither the $25,000 in bonds nor said shares of stock at any time had any market value on the open market and that a reasonable value of said bonds was between 25 per cent. and 50 per cent. of their face value and that said stock was worthless. It is further alleged that the petitioner is not insolvent and that it has concealed or disposed of $40,000 in bonds and 600,000 shares of stock in contemplation of bankruptcy.

Upon these affidavits an order was granted requiring the petitioner to show cause why the temporary restraining order issued herein should not be dissolved.

At the hearing upon said order to show cause, it was conceded that the customary practice was being followed herein with respect to the calling of a meeting of the creditors before the referee for the purpose of electing a trustee.

It is contended by respondent that this court had no jurisdiction to grant said restraining order, and hence that the same should be dissolved.

In support of this contention, respondent cites the cases of In re Rathman (C. C. A.) 183 F. 913, 915; Taubel-Scott-Kitzmiller Co. v. Fox, 264 U. S. 426, 44 S. Ct. 396, 398, 68 L. Ed. 770; and Weidhorn v. Levy, 253 U. S. 268, 40 S. Ct. 534, 64 L. Ed. 898.

In the case first cited the question presented for determination as declared in the opinion of the court was: "Has the United States District Court sitting in bankruptcy jurisdiction against the objection of a respondent who is in possession of real and personal property under a sale pursuant to a decree of a state court of foreclosure of mortgages that were made by the mortgagor more than four months before the petition in bankruptcy against him was filed, to adjudicate summarily on an order to show cause, the claim of the trustee in bankruptcy that the mortgages, the decree, and the sale were void, that the trustee recover of the respondent the value of the personal property which he purchased under the decree, and that the trustee be permitted to redeem the real estate from the mortgage and the foreclosure sale by paying the amount which the respondent paid for it at the sale less the amount which the mortgagor realized from the sale of a portion of the mortgaged property before the foreclosure sale of the balance to the respondent?"

In deciding the foregoing question in the negative, the Circuit Court of Appeals, in the course of its opinion, pointed out that the filing of a petition in bankruptcy creates no lien against parties who claim a lien upon or a title to the property of the bankrupt, "and that until the bankruptcy court by some act of one of its officers takes actual possession of the property, or makes such claimants parties to the proceeding by some order or process, or notice of the proceeding comes to them, their liens, titles, and remedies are unaffected thereby, and they are strangers to the proceeding. * * * In cases in which the bankruptcy court finds it absolutely necessary so to do for the preservation of the estate, it may by summary proceedings take possession of the property claimed to belong to the bankrupt as his property, in whosoever's hands it may be, upon the filing of the petition in bankruptcy and before a trustee is appointed, under clause 3 of section 2 of the bankruptcy law 11 USCA § 11 (3)."

After reviewing several decisions of the United States Supreme Court in which the rule had been announced that actual possession by the bankruptcy court is the indispensable condition of its exclusive and of its summary jurisdiction in cases of this character, the opinion proceeded as follows: "Here is the touchstone of the exclusive and of the summary jurisdiction of the bankruptcy court to determine the merits of adverse claims to liens upon and titles to property claimed to belong to the bankrupt. It is the taking possession of the property, as the property of the bankrupt, by the act of some officer of the bankruptcy court, such as a referee, a receiver or a trustee. * * * Conceding, however, but neither deciding nor admitting, that the bankruptcy court might have enjoined the suit in the state court, might have taken the mortgaged property from the receiver of that court and have administered it, the fact remains that it did not do so, and that it and the creditors who were parties to that proceeding must have known from the bankrupt's inventory of this property of the possession and the continuing sales of this mortgaged property by the assignee and the receiver of the state court."

In Taubel-Scott-Kitzmiller Co. v. Fox, supra, the trustees in bankruptcy, by a summary proceeding before the referee, sought to have the execution lien of a certain judgment creditor declared void and to obtain possession of the property involved. Thereupon the judgment creditor appeared before the District Court, challenged the jurisdiction of the referee and the bankruptcy court, furnished substantial support for its claims, and insisted that, since the bankrupt did not have, and the bankruptcy court did not acquire, possession of the property, the execution lien and the right to possession under the levy could not be assailed by the trustees except by a plenary suit in the appropriate forum. The District Court sustained the contention of the judgment creditor and stayed the proceeding before the referee. The latter order in turn was reversed by the Circuit Court of Appeals. 286 F. 351. On a writ of certiorari the judgment rendered by the latter tribunal was reversed by the United States Supreme Court. In the course of his opinion, Mr. Justice Brandeis declared:

"Wherever the bankruptcy court had possession, it could, under the Act of 1898, as originally enacted, and can now, determine in a summary proceeding controversies involving substantial adverse...