Mader's Store for Men, Inc., In re

• Decision Date: 17 May 1977
• Docket Number: No. 75-32,75-32
• Citation: 77 Wis.2d 578,254 N.W.2d 171
• Parties: In re MADER'S STORE FOR MEN, INC. James S. GELATT, Jr., Appellant, v. N. George DeDAKIS, Receiver, Respondent.
• Court: Wisconsin Supreme Court

Page 171

254 N.W.2d 171

77 Wis.2d 578

In re MADER'S STORE FOR MEN, INC. James S. GELATT, Jr., Appellant, v. N. George DeDAKIS, Receiver, Respondent.

No. 75-32.

Supreme Court of Wisconsin.

Argued Nov. 29, 1976.

Decided May 17, 1977.

Paul W. Henke, Jr., La Crosse, for appellant; L. E. Sheehan and Moen, Sheehan & Meyer, Ltd., La Crosse, on brief.

N. George DeDakis, pro se.

ABRAHAMSON, Justice.

Two questions are presented on this appeal: First, whether the provisions of ch. 128, Stats., relating to the appointment of a receiver for an insolvent corporation have been suspended by the national Bankruptcy Act, Title 11, U.S.C.A. Second, whether in this ch. 128 proceeding, the claim of James S. Gelatt, an officer-shareholder, for advances made to his corporation was properly subordinated to the claims of other general creditors on the theory that the advances, though in form loans, were in substance contributions to capital.

I.

Mader's Store for Men, Inc., was in the retail clothing business in La Crosse, Wisconsin, from March 28, 1966 through October 8, 1973, when its assets were sold to Dad's & Lad's of La Crosse, Inc., in a bulk transfer pursuant to ch. 406, Stats. On October 4, 1973, four days before the sale, the instant proceedings were commenced in the circuit court for La Crosse county upon the complaint of a creditor of Mader's, Gant Shirt Makers Division of Consolidated Foods Corp., a Maryland corporation. In its complaint and supporting affidavit Gant alleged that Mader's was indebted to it for $8,491.22; that Mader's was insolvent or was in imminent danger of insolvency; that Mader's had sent to its creditors notice of a bulk sale of its assets to Dad's & Lad's of La Crosse, Inc.; that the address shown for Dad's & Lad's was the same as the address of Mader's; that the notice provided that proceeds of the sale would not be used to pay Mader's debts as they matured; that the notice stated that the transfer would be for $5,000 new consideration plus the cost price of inventory, which price had not been determined; that Mader's debts were estimated at $157,680; and that unless immediate steps were taken to protect general creditors such as Gant any interest which should in equity flow to them by reason of the sale would be dissipated. In its complaint Gant prayed that the court sequestrate the property and assets of Mader's and appoint a receiver to administer the assets in accordance with ch. 128, Stats.

Based upon the complaint and affidavit, the circuit court signed an order restraining Mader's from alienating or disposing of any assets except in the usual course of business and directing Mader's to show cause on October 8, 1973, why a receiver should not be appointed. Thereafter Gant and Mader's entered into a stipulation to the effect that the restraining order might be dissolved and the bulk transfer consummated as planned, and to the further effect that N. George DeDakis, who was attorney for Gant, might be appointed receiver and in that capacity have delivered to him the proceeds of the bulk sale. An order corresponding to the stipulation was signed by the circuit court on October 8, 1973, and the sale apparently was closed the same date, as had been planned.

Some 36 claims were eventually filed with the receiver, totalling approximately $149,000 (excluding costs of administration). Of this amount $141,069 was claimed by unsecured general creditors. The receiver reported that he had available to pay claims $36,030 cash and accounts receivable totaling $8,186. The receiver objected to several of the claims filed, including the claim of James S. Gelatt, Jr., for $49,250 principal and interest on four loans made by him to Mader's between May of 1971 and December of 1972. An objection was also filed to the claim of Robert L. Hurtgen for $8,512 due on a $15,000 loan made to the corporation in January of 1973. At the time the claimed loans were made Gelatt and Hurtgen each owned half of Mader's outstanding stock, and each was an officer and a director of the corporation. As to both the Gelatt and Hurtgen claims the trial court concluded, after a hearing, that although the advances for which claim was made were in fact made to and used by the corporation, and although neither of the claimants were shown to have acted in bad faith in respect of their dealings with the corporation, the advances were in substance contributions to capital rather than loans. The trial court entered an order subordinating the claims of both men to the claims of other general creditors. From this order Gelatt has taken the instant appeal.

II.

Gelatt's first contention is that the provisions of ch. 128, Stats., relating to the involuntary appointment of a receiver over the property of an insolvent corporation have been suspended by the national Bankruptcy Act, Title II, U.S.C.A. Sec. 128.08(1), Stats., provides:

"The court within the proper county may sequestrate the property of a debtor and appoint a receiver therefor:

"(a) When an execution against a judgment debtor is returned unsatisfied in whole or in part.

"(b) When a corporation has been dissolved or is insolvent or is in imminent danger of insolvency or has forfeited its corporate rights."

The contention is that by virtue of the asserted suspension of the statute the circuit court was here without jurisdiction to enter the order subordinating Gelatt's claim or to otherwise act in the matter. This issue is raised for the first time on appeal. The receiver argues that the statutes are not suspended by the national Act, and further urges that Gelatt has waived objection to the validity of the receivership proceedings by virtue of his participation therein.

In Home Bank v. Becker, 48 Wis.2d 1, 179 N.W.2d 855 (1970), cited by the receiver, the debtor moved in the trial court to have the order appointing a receiver under ch. 128 set aside. This court held that objections based upon the creditor's failure to exhaust legal remedies, inadequacy of the petition, and insufficiency of the receiver's bond were waived because not timely raised. The debtor had appeared at the hearing on the order to show cause why a receiver should not be appointed, had filed a schedule of creditors and an inventory, and had sat by while her creditors' claims were approved and her property sold, all without objecting to the receiver's appointment.

In the instant case it is a creditor, rather than the debtor, as in Home Bank, who is challenging the receivership. A creditor entering receivership proceedings after the receiver is appointed is not bound by previous conduct of others constituting a waiver, but if the creditor subsequently participates in the proceedings his right to object may be waived. In the context of an assignment for the benefit of creditors, this court has held that a creditor's filing and proving his claim was a waiver of objections to the validity of the assignment and the authority of the court to restrain creditors from proceeding independently against assets in the hands of the assignee. In re Assignment of Gilbert, 94 Wis. 108, 68 N.W. 863 (1896); Littlejohn v. Turner, 73 Wis. 113, 40 N.W. 621 (1888).

In the instant case Gelatt filed his claim with the receiver and successfully petitioned the court for an extension of the time for filing claims. He participated in the proceedings regarding adjudication of the receiver's objection to his claim, submitting evidence to support the validity of the claim. He joined in the stipulated statement of facts upon which the circuit court largely based its decision. All of this was done without objecting in any way to the validity of the proceedings.

Gelatt clearly has waived his right to assert most objections to the validity of the receivership. However, it is fundamental that parties cannot confer subject matter jurisdiction upon a court by waiver or consent. The United States Supreme Court has characterized proceedings under suspended state insolvency legislation as "utterly null and void," Straton v. New, 283 U.S. 318, 327, 51 S.Ct. 465, 75 L.Ed. 1060 (1931), and subject to collateral attack, International Shoe Co. v. Pinkus, 278 U.S. 261, 49 S.Ct. 108, 73 L.Ed. 318 (1929). If Gelatt is correct in asserting that the receivership provisions of ch. 128 are suspended, and if the jurisdiction of the circuit court depended thereon, subject matter jurisdiction would be absent. To that extent Gelatt's claims must be considered notwithstanding his participation in the receivership without complaint. ¹

Disposition of Gelatt's contentions requires a brief consideration of the history of ch. 128, Stats.

As originally constituted, ch. 128, Stats., was entitled "Voluntary Assignments," and dealt almost entirely with that subject. It contained elaborate procedures whereby any person who had made a voluntary assignment for the benefit of creditors could obtain a discharge from his debts. Secs. 128.19-128.29, Stats.1925. In Voluntary Assignment of Tarnowski, 191 Wis. 279, 210 N.W. 836 (1926), this court held that the discharge provisions of the chapter were suspended by the Bankruptcy Act, but determined that they could be severed so as to leave the remainder of the chapter in force. As so construed ch. 128 was upheld by the United States Supreme Court in Pobreslo v Joseph M. Boyd Co., 287 U.S. 518, 53 S.Ct. 262, 77 L.Ed. 469 (1933), affirming this court's decision at 210 Wis. 20, 242 N.W. 725 (1932). The United States Court said:

"In the case now before us the Wisconsin statutory provisions relating to discharge of insolvent debtors were not invoked. There is nothing in the assignment, the application to the circuit court to take jurisdiction, or its order thereon, to suggest that the discharge of the assignor was contemplated. The provisions regulating the administration of trusts created by voluntary assignments for the benefit of creditors apply whether the assignor is solvent or insolvent. They do not prevent creditors...