McDonough v. Owl Drug Co.

• Decision Date: 04 March 1935
• Docket Number: No. 7485.,7485.
• Citation: 75 F.2d 45
• Parties: McDONOUGH et al. v. OWL DRUG CO. et al.
• Court: U.S. Court of Appeals — Ninth Circuit

75 F.2d 45 (1935)

McDONOUGH et al. v. OWL DRUG CO. et al.

No. 7485.

Circuit Court of Appeals, Ninth Circuit.

January 28, 1935.

Rehearing Denied March 4, 1935.

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Herbert W. Erskine, Bertram H. Ross, Joseph E. Bien, Samuel T. Bush, and William H. Penaat, all of San Francisco, Cal., for appellants.

William M. Kearney, of Reno, Nev., and John Francis Neylan, Bartley C. Crum, and Chickering & Gregory, all of San Francisco, Cal., for appellee Owl Drug Co.

Thatcher & Woodburn, Geo. B. Thatcher, Wm. Woodburn, and Wm. J. Forman, all of Reno, Nev., and Clarence A. Shuey and Grant H. Wren, both of San Francisco, Cal., for appellee Edler, trustee.

Before GARRECHT, Circuit Judge, and WEBSTER, District Judge.

WEBSTER, District Judge.

Appellants, preferred stockholders of the Owl Drug Company, a corporation, organized under the laws of the state of Nevada, are prosecuting this appeal from an order or judgment of the District Court for the District of Nevada — the Honorable Jeremiah Neterer presiding — dismissing, on motion of the appellees, appellants' petition praying that the order of the District Court adjudging the Owl Drug Company a bankrupt be set aside and annulled upon the ground that such adjudication had been procured by extrinsic fraud and that the District Court was being used as an agency or instrumentality through the mediumship of which the alleged fraudulent scheme or enterprise was being carried to consummation. It is conceded by appellants, through their counsel, that the United States District Court for the District of Nevada was a court of competent jurisdiction to entertain the voluntary petition in bankruptcy filed by the Owl Drug Company, and that under the conditions then disclosed to the court there was no alternative but to make the adjudication of bankruptcy now sought to be set aside.

The sole claim of appellants is that because of after-discovered fraud on the part of the bankrupt and its controlling stockholder, the order of adjudication should be canceled. The petition filed by appellants contains many general and indefinite allegations, some of which are based on information and belief, as well as many conclusions, both of fact and law. In effect it is alleged in the petition substantially that the voluntary bankruptcy of the Owl Drug Company was part of, or a step in, a preconceived plan or scheme by the controlling stockholder of that company to acquire the interests of appellants and some other preferred stockholders of the company; that this scheme was being carried into effect by causing the bankrupt company to file a voluntary petition in bankruptcy in the District Court of Nevada at a time when the fair value of the company's assets exceeded its liabilities, and by causing a purchase to be made of the entire assets of the bankrupt company by a subsidiary corporation of the bankrupt at the bankruptcy sale of such assets; that prior to such bankruptcy the controlling stockholder of the bankrupt company had, by certain transactions and manipulations, caused the subsidiary companies of such stockholder to be fraudulently and unjustly enriched at the expense of the bankrupt company and its stockholders; that appellants contemplated the bringing of a suit against the subsidiaries of the bankrupt company and its controlling stockholder on behalf of the bankrupt company to recover damages for the alleged wrongful and fraudulent acts of such controlling stockholder, and also to have the property of the bankrupt company, purchased at the bankruptcy sale, declared to be held in trust for the benefit of the bankrupt company; and that in order for appellants, as preferred stockholders of the bankrupt company, to maintain such a suit or action, it is necessary that the offending adjudication of bankruptcy be annulled. Since the petition was dismissed on motion of the appellees-defendants, and in order to promote a full and clear understanding of the controversy, the petition, omitting formal parts, will be set forth at length.

In ruling upon the motion to dismiss the petition, the trial court held that all matters of fact properly pleaded in the petition stood admitted for the purpose of the motion; that conclusions of law and generalizations and characterizations of fact were not so admitted; and that in passing upon the motion it was permissible for it to take judicial cognizance of the records and files of the bankruptcy proceeding in which the petition was filed. This ruling clearly was correct. Ben C. Jones & Co. v. West Publishing Co. (C. C. A.) 270 F. 563-565; Hutton v. Joseph Bancroft & Sons Co. et al. (C. C.) 83 F. 17-19.

We are not dealing with a case where, on consideration of a demurrer at law or motion to dismiss in equity, the court goes outside and takes judicial notice of matters wholly extrinsic to the record of the proceeding in which the ruling was made. Here the petition under review was filed by appellants in the bankruptcy proceeding, and it would be going far to say that, in exercising discretionary powers to protect itself against fraud, a court may not take judicial cognizance of the very proceedings in connection with which its action is invoked. During the course of the argument in the court below, and after the court had indicated its purpose to sustain the motion to dismiss the petition upon the ground of laches, counsel for appellants asked leave of the court to reduce to writing an amendment to the petition, which the appellants wished to be allowed to file. The scope and purport of the proposed amendment was stated by counsel in this language: "We want to amend to show that we had no actual knowledge of the bankruptcy, no actual knowledge of the sale, and no actual knowledge of the fact that the sale took place in pursuance of the fraud which we allege, and no (actual) knowledge of the right or rights of these people until the senatorial hearing took place in San Francisco and was completed some time in December or January, 1933; and that we had no opportunity thereafter to protect ourselves by litigation until we got our petition on file, because the time intervening was consumed in getting the stockholders together and forming the necessary committee and in raising the money to employ attorneys, and thereafter in employing attorneys, and that is what consumed the time, and that is our excuse, as stated in our brief but not stated in our petition, for the intervening delay."

Leave thus to amend was...