In re E. T. Kenney Co.

• Decision Date: 13 April 1905
• Docket Number: 1,894.
• Citation: 136 F. 451
• Parties: In re E. T. KENNEY CO.
• Court: U.S. District Court — District of Indiana

136 F. 451

In re E. T. KENNEY CO.

No. 1,894.

United States District Court, D. Indiana.

April 13, 1905

Hempstead C. Shaw and Charles A. Dryer, for the Deposit Banking Co. of Delaware, Ohio.

John T Dye, E. A. Foote, Kline, Tolles & Goff, and James W. Noel for 118 creditors.

ANDERSON District Judge.

Previous to the filing of the petition in bankruptcy in this case certain creditors of the Aultman Company and four other 'allied' corporations, all of which were insolvent and in the hands of receivers or trustees of the state or federal courts, assigned and transferred, for a valid and sufficient consideration, their claims against these corporations, including all notes, bonds, and other evidences of indebtedness upon which the claims were founded, to E. G Tillotson and others, of Cleveland, Ohio, who describe themselves as a committee. By the terms of this assignment, it became absolute and irrevocable within 10 days afterwards. The committee has all the rights and powers of ownership over these claims. It can sell or hypothecate them, or make any other disposition of them. It can prove them under receiverships or in bankruptcy, and is entitled to receive all dividends that may be declared upon them. It has all the right and title and interest of the individual creditors in these claims, and is the legal owner of them. On the other hand, the committee has undertaken to buy the property of these insolvent corporations from the receivers and trustees, and sell or dispose of it again in the interest of these particular creditors, as distinguished from the general creditors of insolvent or bankrupt estates, and finally to account for the net proceeds that are realized after a deduction of all costs and expenses, including a remuneration for the services of their attorneys and themselves. One hundred and eighteen of these creditors, who owned and held claims against the bankrupt previous to the assignment and transfer of them to the committee, proved separate claims against the estate in bankruptcy at the first meeting of the creditors for the choice of a trustee, and claimed the right to cast 118 votes. The referee allowed them to prove separate claims, but held that, for reasons of public policy, they should not be allowed to cast more than 1 vote. Under this ruling of the referee, there was not a majority in number and value of the votes cast for any person or corporation as trustee, and the referee thereupon appointed as trustee the Indiana Trust Company, which had been acting as receiver of the E. T. Kenney Company, by appointment of the Marion superior court, for more than five months, and whose administration of its affairs is unobjectionable. Exceptions to the ruling of the referee were taken by the 118 creditors, and cross-exceptions to his allowance of any claim or vote of these 118 creditors, or any one of them, were also taken by the Deposit Banking Company of Delaware, Ohio, and the ruling of the referee is now before the court for review upon both exceptions and cross-exceptions.

This combination of creditors for the control of judicial proceedings in their own interest, as distinguished from the interest of the general creditors, for whose benefit the proceedings in bankruptcy are instituted, and out of whose money the costs and expenses of such proceedings, including the fees of Kline, Tolles & Goff, the solicitors for the petitioning creditors, who are also solicitors for the committee and the 118 creditors, are paid, is clearly against public policy, for the reasons assigned by the referee, and for other reasons which are equally obvious. One of these reasons is that it is a part of the undertaking and purpose of the committee to purchase in the interest of a portion of the creditors, the property of the bankrupt; and it is certainly undesirable that they should be permitted to select the trustee from whom such purchase is to be made. A single interest should vote as a single interest, and not otherwise. In re Messengill (D.C.) 7 Am.Bankr.Rep. 669, 113 F. 366; In re Coburn (D.C.) 11 Am.Bankr.Rep. 212, 126 F. 218; Moulton v. Coburn (C.C.A.) 12 Am.Bankr.Rep. 553, 131 F. 201; Lowenstein et al. v. McShane Mfg. Co. (D.C.) 12 Am.Bankr.Rep. 601, 130 F. 1007; In re Frank, Fed. Cas. No. 5,050.

The referee held, upon the evidence, that the various instruments and agreements conferred upon the committee powers coupled with an interest, and also that the members of the committee are trustees of an express trust, and that the legal title in all these claims is in them. If the powers of the committee were coupled with an interest or legal title in the claims, it is not 'a substitute acting in the place and name of another, but is a principal acting in its own name,' or the names of its members, and these claims should have been proved by them as a single claim, accordingly. Hunt v. Rousmanier, 8 Wheat. 174, 5 L.Ed. 589.

As trustee of an express or implied trust, the legal title is in them, and it must be conceded that the whole amount due the trust estate, or themselves as trustees, might have been proved by them as a single claim. But it is contended that each of these 118 creditors has a beneficial interest in his original claim, which is a provable claim in bankruptcy. His beneficial interest is in the net proceeds of his original claim after the costs and expenses of administering the trust by the committee are paid, and not in the claim itself. It is therefore unliquidated, and could not become a provable claim in bankruptcy until after its liquidation according to the provisions of the bankrupt act, Sec. 63b (Act July 1, 1898, c. 541, 30 Stat. 563 (U.S.Comp.St. 1901, p. 3447)).

A court of bankruptcy has such jurisdiction 'at law and in equity' as will enable it to exercise jurisdiction in the allowance or disallowance of claims. Section 2. But the distinction between law and equity is preserved in it, as in all other courts of the United States. 'By the language of the Constitution, it is expressly declared (article 3, Sec. 2, cl. 1) that the judicial power of the United States shall extend to all cases in law and equity arising under the Constitution, the laws of the United States, and treaties made under their authority. By the statute which organized the judiciary of the United States it is provided that the Circuit Courts shall have jurisdiction of suits of a civil nature 'at common law or in equity.' Vide 1 Stat. 78, c. 20, Sec. 11. In the interpretation of these clauses of the Constitution and the statute, the court has repeatedly ruled that by cases at common law are to be understood suits in which legal rights are to be ascertained and determined, in contradistinction to those where equitable rights alone are recognized, and equitable remedies are administered. Vide Parsons v. Bedford, 3 Pet. 447, 7 L.Ed. 732, are Robinson v. Campbell, 3 Wheat. 212, 4 L.Ed. 372. That by cases in equity are to be understood suits in which relief is sought according to the principles and practice of the equity jurisdiction, as established in English jurisprudence. ' Irvine v. Marshall et al., 20 How. 558, 564, 15 L.Ed. 994.

The constitutional grant of judicial power to all courts of the United States, upon which the separation of law and equity is founded (article 3, Sec. 2), and the legislative grant of jurisdiction to courts of bankruptcy (section 2, Bankr. Act), are in the same words. General order No. 37 in bankruptcy (89 Fed.xiv, 32 C.C.A.xxxvi) expressly provides:

'In proceedings in equity, instituted for the purposes of carrying into effect the provisions of the act, or for enforcing the rights and remedies given by it, the rules of equity practice established by the Supreme Court of the United States shall be followed as nearly as may be. In proceedings at law, instituted for the same purpose, the practice and procedure in cases at law shall be

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