In re Woodmar Realty Company

• Decision Date: 02 October 1961
• Docket Number: No. 13215.,13215.
• Citation: 294 F.2d 785
• Parties: In the Matter of the WOODMAR REALTY COMPANY, a Corporation, Debtor, WOODMAR REALTY COMPANY, a Corporation, Appellant, v. Walter A. McLEAN, Trustee and Herschel B. Davis, Trustee's Attorney, Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

294 F.2d 785 (1961)

In the Matter of the WOODMAR REALTY COMPANY, a Corporation, Debtor,

WOODMAR REALTY COMPANY, a Corporation, Appellant, v. Walter A. McLEAN, Trustee and Herschel B. Davis, Trustee's Attorney, Appellees.

No. 13215.

United States Court of Appeals Seventh Circuit.

June 23, 1961.

As Amended on Denial of Rehearing October 2, 1961.

Benjamin Wham, Chicago, Ill., Owen W. Crumpacker, Hammond, Ind., for appellant.

Gilbert Gruenberg, Gary, Ind., for appellees.

Before KNOCH and CASTLE, Circuit Judges, and MERCER, District Judge.

MERCER, District Judge.

The only issue before us for decision upon this appeal by the bankrupt, Woodmar Realty Company, is whether the court below properly dismissed Woodmar's amended petition for the removal of the appellees, Walter A. McLean and Herschel B. Davis, as trustee in bankruptcy and attorney for the trustee, respectively. For convenience, the parties are hereinafter sometimes referred to as appellant and appellees.

Appellant's amended petition, filed January 7, 1959, charged that appellees had perpetrated, and were perpetrating, a fraud upon the court and Woodmar and requested that appellees be removed by the court as trustee in bankruptcy and as counsel, respectively. Appellees moved to dismiss. After a hearing, the court granted that motion upon its conclusion that "the amended petition is so wanting in merit and so contemptuously violative of the rules of pleading, particularly Rules 8 and 9 of the Federal Rules of Civil Procedure" that it might be summarily dismissed and upon his finding that the amended petition was not filed in good faith.

We have reviewed the record and the amended petition carefully and are convinced that the petition is so wanting in sufficient allegations of fact as to present not even token compliance with the provisions of Rule 9(b) which require a pleader averring fraud to state "with particularity" the circumstances alleged to constitute fraud. F.R.C.P. 9(b), 28 U.S.C.A. This opinion might rest there and the judgment be affirmed without further discussion, were it not for the pervading impression gathered from this record that the removal petition constitutes an attempt by appellant's attorney, Mr. Crumpacker, to harass appellees in the continued performance of their official functions and a near-contemptuous abuse of the processes of a federal court.

For the above reason we think it necessary to analyze the amended petition at some length in the light of the record as it has come to our knowledge. In that endeavor, we rely upon the procedural history of this case as summarized in the opinions upon prior appeals. In re Woodmar Realty Co., 7 Cir., 284 F.2d 815; In re Woodmar Realty Co., 7 Cir., 241 F.2d 768, 64 A.L.R.2d 883. Basically, we hereinafter supplement those summaries, but we have not hesitated to resort to repetition thereof to the extent deemed necessary to demonstrate the propriety of our conclusions which are hereinabove and hereinafter expressed.

The inception of this cause lies in the depression which struck the nation with tornadic force in 1929. In the 1920's, appellant, a corporation, was engaged in the business of subdividing and selling real estate in the City of Hammond, Indiana. Substantial improvements touching the various parcels of appellant's lands were made by the City of Hammond and financed by special assessment bonds issued and sold pursuant to the so-called Barrett Law.

By separate lot and parcel, appellant's real estate was impressed with the liens of Barrett Bonds issued on some sixty separate bond rolls. In each instance, appellant in consideration of the privilege of paying the assessment obligation in installments spread over a period of years, executed a statutory waiver of the right to question the legality of assessment and agreement to pay installments as the same became due.

It appears that appellant had been a completely inactive corporation for many years prior to January, 1941, when this cause was commenced. No payments had been made by it on account of the principal and interest of Barrett bond obligations after 1929. Suits had then been commenced in state courts for the foreclosure of Barrett bonds issued upon some fifty rolls affecting appellant's real estate and, as the court below has found, sale of much of the land in foreclosure was imminent.

Against that background, this proceeding was commenced on January 13, 1941, when an involuntary petition was filed on behalf of three bondholders for reorganization of appellant under Chapter X of the Bankruptcy Act. 11 U.S. C.A. § 501 et seq. Appellant's only assets were substantial real estate located in Hammond, which was then encumbered by a lien for state taxes in the sum of $161,000.00, by the lien of mortgage bonds in an aggregate sum in excess of $290,000.00, and by the defaulted Barrett bonds which were, respectively, liens upon separate lots, tracts and parcels of the total real estate holdings. In addition, appellant was then indebted to general creditors in the aggregate sum of approximately $14,000.00.

A proposed plan of reorganization was approved by Judge Slick. Barrett bond claims were classified as class 2 claims. With court approval, the tax claim and mortgage claims were compromised and settled for a nominal percentage of the respective amounts thereof. Appellant's real estate was sold free of all liens under court orders providing that all liens would attach to the proceeds of the sales in the hands of the trustee. Such sales continued until early 1951, and were approved by the court upon some fifty separate petitions reporting sales as they were made from time to time.

Also, when the reorganization petition was approved on January 25, 1941, an injunction was issued by the court enjoining creditors and all other persons from enforcing liens against appellant's property, and from prosecuting, or continuing the prosecution of, any suit against appellant in any court for the foreclosure of liens against its property. Pursuant to that injunction, the pending foreclosure suits were dismissed insofar as they related to appellant's real estate.

On December 22, 1952, appellee McLean was appointed successor trustee as a result of circumstances hereinafter related and appellee Davis was retained as attorney for the trustee. Thereafter, on February 16, 1953, after notice and a hearing, Judge Swygert entered an order converting the proceedings into a straight bankruptcy, and ordered that bankruptcy be proceeded with pursuant to Section 236 (2) of the Bankruptcy Act. 11 U.S.C.A. § 636(2).

On September 7, 1955, appellee McLean filed his final report as trustee and petitions recommending the allowance of more than 300 class 2 lien claims. By that report, he proposed that substantially all of the funds in his hands be allocated to the payment of those claims. Thereafter, appellant and some of its stockholders filed objections to a substantial number of the class 2 claims. On March 5, 1956, after a hearing upon motions filed by the trustee and a number of the class 2 claimants, Judge Swygert entered an order striking appellant's objections. An appeal was taken and we reversed that judgment, holding that appellant, though adjudicated a bankrupt, had standing to object to claims because of the circumstance that disallowance of class 2 claims might result in a surplus of assets for refund to appellant. In re Woodmar Realty Co., 7 Cir., 241 F.2d 768, 64 A.L.R.2d 883.

Before our mandate was filed, Judge Swygert disqualified himself to preside further in the cause because of circumstances which are hereinafter related and the cause was assigned to Judge Parkinson.

Upon the return of our mandate, Judge Parkinson scheduled a pre-trial conference upon all claims and objections thereto. On the day preceding that conference, June 27, 1957, appellant filed a petition for removal of appellees as trustee and as counsel for the trustee. At the pre-trial conference on June 28, Judge Parkinson determined that he would schedule a trial of a representative claim to establish the law of the case with respect to all of appellant's objections. Claim No. 441 was selected for that purpose. At the same time, an order, which we believe to be patently erroneous, was entered directing the trustee and his attorney not to participate in the trial of objections to that claim.¹ Other class 2 claimants were, however, invited to participate. On the same date, a hearing upon appellant's petition for removal of appellees was set for July 17, 1957.

A trial of objections upon claim 441 was held on July 15, 1957, and briefs were ordered. On July 17, the date set for a hearing upon the removal petition, that petition was withdrawn by appellant.

Thereafter, while the issues presented upon the trial of objections were still under advisement, Judge Parkinson was elevated to this court and the case was assigned to his successor, Judge Grant. Judge Grant disqualified himself for personal reasons, and the case was reassigned by Judge Duffy, then Chief Judge of the Seventh Circuit, to Judge Tehan. By stipulation of interested parties, the issues upon the trial of objections were taken by Judge Tehan for decision upon the record made before Judge Parkinson.

In the meantime, on May 19, 1958, counsel for appellant filed a petition for removal of appellees which was almost an exact duplicate of the petition which had been withdrawn by him on July 17, 1957. The petition was answered and set for a hearing. On the date set for that hearing, Judge Tehan, on his own motion, ordered appellant to replead to comply with the requirements of Rule 9(b). Appellant's amended petition was then filed on January 7, 1959.

The amended petition is characterized by a gross lack of any sufficient allegation of fraud as we have hereinabove concluded. In fact, counsel can give arguable credence to this appeal and arguable merit to the amended petition only by asserting supposed legal...