MATTER OF DeGELLEKE CO., INC.

• Court: U.S. District Court — Eastern District of Wisconsin
• Writing for the Court: REYNOLDS
• Citation: MATTER OF DeGELLEKE CO., INC., 411 F.Supp. 1320 (E.D. Wis. 1976)
• Decision Date: 23 April 1976
• Docket Number: No. 74-B-430.,74-B-430.
• Parties: In the Matter of DeGELLEKE CO., INC., a Wisconsin Corporation, alleged bankrupt.

411 F. Supp. 1320

In the Matter of DeGELLEKE CO., INC., a Wisconsin Corporation, alleged bankrupt.

No. 74-B-430.

United States District Court, E. D. Wisconsin.

April 23, 1976.

E. H. Snyder, Milwaukee, Wis., for alleged bankrupt.

Kohner, Mann & Kailas, Milwaukee, Wis., for appellants.

DECISION AND ORDER

REYNOLDS, Chief Judge.

This is an appeal from an order of the bankruptcy court dismissing a petition to have DeGelleke Co., Inc., involuntarily adjudicated a bankrupt. For the reasons set forth below, the decision of the bankruptcy judge must be affirmed and the petition dismissed.

The operative facts in this case are not in dispute. On January 24, 1974, Anchor Coatings, Inc. ("Anchor"), a petitioner in the bankruptcy court but not one of the appellants presently before this court, obtained a judgment in the Circuit Court for Milwaukee County against DeGelleke Co., Inc. ("DeGelleke"). Five days later Anchor filed a copy of the judgment in the Circuit Court for Waukesha County. An order to execute on the judgment was duly given to the sheriff of Waukesha County on February 7, 1974, and returned completely unsatisfied. Anchor thereupon commenced an action in the Waukesha Circuit Court on February 26, 1974, petitioning for an order to issue directing DeGelleke to show cause why a state court receiver should not be appointed to take over DeGelleke's financial affairs. The matter came on for hearing March 4, 1974, and on Anchor's motion, an order was entered by the Waukesha Circuit Court appointing a receiver. No formal appearance was made on behalf of DeGelleke at the March 4 proceedings.

Within an hour after the entry of the Waukesha Circuit Court's order on the morning of March 4, 1974, the petition in the present case was filed in the bankruptcy court. Anchor, along with Midland Plastics, Inc. ("Midland"), Keene Building Products Corp. ("Keene"), and Flangeklamp Corp. ("Flangeklamp"), all appearing by the same attorneys who had represented Anchor in the previous proceedings, prayed to have DeGelleke declared an involuntary bankrupt under § 59(b) of the Bankruptcy Act, 11 U.S.C. § 95(b). In order for the petition to meet the requirement established for involuntary bankruptcy proceedings — that the alleged bankrupt committed some act of bankruptcy — see Rule 104(a), Bankruptcy Rules (1975), and Official Form No. 9, Official Bankruptcy Forms, paragraph 4 of the petition stated:

"4. Within the four months preceding the filing of this petition, the alleged bankrupt committed an act of bankruptcy in that he did on March 4, 1974, suffered, while insolvent, involuntary the appointment of a receiver to take charge of his property by Waukesha County Circuit Judge William E. Gramling, in Case No. 32391."

On March 15, 1974, petitioners obtained an order from the bankruptcy court demanding that DeGelleke show cause why a receiver should not be appointed by the bankruptcy judge to take immediate possession of the corporate assets. On March 18, DeGelleke responded by filing a motion to dismiss the petition, ostensibly on the ground that the petition was not filed in good faith in violation of § 146 of the Bankruptcy Act, 11 U.S.C. § 546. Briefs were filed and the matter came on for hearing on March 26, 1974. On March 29, 1974, the bankruptcy judge entered an order dismissing the petition, holding that Anchor and its attorneys were estopped from bringing the involuntary petition because of their active participation in the act of bankruptcy of DeGelleke: the creation of the receivership in Waukesha Circuit Court.¹ This appeal followed and is presently before the court on briefs filed by the parties and oral argument had January 13, 1976.

I.

In support of its position that the bankruptcy court's order of dismissal was erroneous, petitioners make the initial contention that DeGelleke's motion to dismiss was an "improper vehicle" to use to attack the sufficiency of the petition. Thus, the argument runs, since the issue of estoppel must be pleaded as an affirmative defense in an answer to the petition, the matter was not properly before the bankruptcy court on the motion to dismiss.

It is true that at one time heavy emphasis in bankruptcy proceedings was placed on the form of the papers filed by the parties. Thus, certain issues, such as disqualification of a petitioner in involuntary bankruptcy, have been held not to be properly before a court when raised by a motion instead of a responsive pleading. In Re Interstate Oil Corp., 63 F.2d 674, 676 (9th Cir. 1933). The current trend, however, is to move away from such formalistic distinctions. For example, Rule 12 of the Federal Rules of Civil Procedure, which has been relied upon by courts in prescribing the method of making an objection or defense to a petition in bankruptcy,² has been explicitly incorporated by the new Federal Bankruptcy Rules. See Rule 112, Bankruptcy Rules (1975).

In the record before this court on appeal, it appears that in addition to the motion papers and briefs, affidavits were submitted by DeGelleke in support of its motion to dismiss and not excluded by the bankruptcy judge in reaching his decision. Thus, the proceedings below closely resembled the process under Rule 12(b), Federal Rules of Civil Procedure, whereby a district court may on a motion to dismiss consider additional factual material and treat the motion as one for summary judgment. The bankruptcy judge's usage of an estoppel theory, rather than the "bad faith" notion initially relied upon by DeGelleke (which would have necessitated the taking of evidence on the question of petitioners' alleged bad faith),³ merely underscores the conclusion that in substance the proceedings below were analogous to those provided for in Rule 12(b). Thus, without deciding whether in all bankruptcy petitions the issues raised by the alleged bankrupt may be raised by motion rather than responsive pleading, I hold that under the circumstances of this case the bankruptcy judge properly considered the sufficiency of the petition on DeGelleke's motion to dismiss. Thus, petitioner's position on this point is rejected.

II.

The petitioners further argue that since a state court receiver had been appointed, DeGelleke itself has no separate, cognizable interest in opposing the petition filed in the bankruptcy court. In other words, petitioners' position is that DeGelleke lacks standing. Under the facts disclosed in this record and in oral argument, the Court must hold otherwise.

There is no doubt that Anchor, Midland, Keene, and Flangeklamp were engaged in a strategy to bring DeGelleke into federal bankruptcy court on an involuntary petition. Counsel for the petitioners admitted as much during oral argument on this appeal.⁴ Federal law, however, clearly prevents a creditor from becoming a petitioner in bankruptcy if that creditor affirmatively participated in, consented to, or secured the commission of the appointment of a non-bankruptcy receiver, and that appointment is the act of bankruptcy relied upon in the petition. In Re Gold Run Mining & Tunnel Co., 200 F. 162 (D.C.Colo.1912); Woolford v. Diamond State Steel Co., 138 F. 582 (D.C. Del.1905); Lowenstein v. Henry McShane Mfg. Co., 130 F. 1007 (D.C.Md.1904). See generally 3 Collier on Bankruptcy ¶ 59.39, at 680-684 (14th ed. 1975). The underlying rationale for the rule has been variously expressed as estoppel,⁵ election of remedies,⁶ and volenti non fit injuria.⁷ It is apparent, however, that no matter which rationale is subscribed to, the natural and traditional party to raise the matter is the alleged bankrupt who, it can be inferred, enjoys some concomitant right to be free from parallel proceedings begun by the same creditor where one proceeding is dependent on the other.

The Court is not impressed with petitioners' argument that since a state court receiver had been appointed, the alleged bankrupt lost its ability to independently challenge the sufficiency of the petition in bankruptcy court. There is nothing in the record before this Court to indicate that efforts were made to serve the receiver in the bankruptcy proceedings, even though he was known to petitioners. No appearance was ever made on behalf of the receiver in this action. Moreover, during oral argument it was disclosed that the receiver initially appointed was totally inactive, and that after the bankruptcy judge made his ruling in this matter, these petitioners caused a new receiver to be appointed by the state court. In essence, the receiver was a necessary part of the strategy of bringing a successful involuntary petition in bankruptcy court, and was used as such. Under these circumstances it would be unreasonable to expect the receiver to raise the important issues presently before the court.

The alleged bankrupt has been the traditional party to raise the issue presently before the court. Lowenstein v. Henry McShane Mfg. Co., supra; Woolford v. Diamond State Steel Co., supra.⁸ Moreover, on this record, I find that the alleged bankrupt has a personal stake in the issues raised sufficient to insure the "concrete adverseness which sharpens the presentation of issues," Baker v. Carr, 369 U.S. 186, 204, 82 S.Ct. 691, 703, 7 L.Ed.2d 663, 678 (1962), and that the interest DeGelleke seeks to protect by its motion is arguably within the zone of interests sought to be protected by the substantive bankruptcy law discussed above. See Jenkins v. McKeithen, 395 U.S. 411, 89 S.Ct. 1843, 23 L.Ed.2d 404 (1969). Cf. Association of Data Processing Services Organizations, Inc. v. Camp, 397 U.S. 150, 90 S.Ct. 827, 25 L.Ed.2d 184 (1970). Thus, DeGelleke does have standing to raise the issues presently before the Court, and petitioners' arguments to the contrary are rejected.

III.

Petitioners' final argument is that the bankruptcy court erred in barring Kohner, Mann & Kailas, counsel for Anchor, as well as Anchor, from bringing the involuntary petition in bankruptcy.⁹ The effect of the...