Porterfield v. Gerstel

• Decision Date: 10 May 1955
• Docket Number: No. 14913.,14913.
• Citation: 222 F.2d 137
• Parties: C. B. PORTERFIELD and Morris Margulis, Intervenors, Appellants, v. L. M. GERSTEL, Receiver of Metal Extrusions, Inc., Bankrupt, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

222 F.2d 137 (1955)

C. B. PORTERFIELD and Morris Margulis, Intervenors, Appellants, v. L. M. GERSTEL, Receiver of Metal Extrusions, Inc., Bankrupt, Appellee.

No. 14913.

United States Court of Appeals, Fifth Circuit.

March 30, 1955.

Rehearing Denied May 10, 1955.

Thomas H. Anderson, Miami, Fla., Marion E. Sibley, Miami Beach, Fla., Joseph Gassen, Sibley & Davis, Miami Beach, Fla., Anderson & Nadeau, Miami, Fla., for appellants.

Marx Faber, Herbert U. Feibelman, Harold Friedman, Miami, Fla., Feibelman & Friedman, Miami, Fla., for appellee.

Before HUTCHESON, Chief Judge, and RIVES and TUTTLE, Circuit Judges.

TUTTLE, Circuit Judge.

This appeal presents the question as to whether the District Court erred in ratifying and confirming an order of the Referee in Bankruptcy for the Miami Division of the Southern District of Florida dismissing a petition on behalf of owners of 50% of the common stock of a corporate voluntary petitioner in bankruptcy, who were also two of five directors of the corporation, protesting the adjudication and seeking to have it set aside on the ground that the Bankruptcy Court was being improperly and fraudulently used to assist the other 50% stock interest and three directors to "freeze out" intervenors, and that no bona fide corporate purpose or action existed to authorize the filing of the voluntary petition.

On August 26, 1953, the secretary and treasurer of Metal Extrusions, Inc. signed and caused to be filed in the District Court, as a Court of Bankruptcy, a petition purporting to be a voluntary petition in bankruptcy of Metal Extrusions, Inc.

The attached schedule showed that the company had an excess of assets over liabilities of approximately $80,000.

The District Court entered adjudication of bankruptcy on the same day and referred the matter to the Referee.

On September 4th, approximately 10 days later, appellants here, C. B. Porterfield and Morris Margulis, filed an intervention alleging that they were owners of 50% of the stock of the bankrupt for which they had paid $50,000 and that Porterfield was also the owner of $29,500 of the corporation's debentures or other obligations and that they were two of the five directors of the company. In effect they then charged substantially as follows:

That the corporation was not insolvent; that its affairs were in good shape; it was doing a flourishing business and had made a profit every month of its short operation; that on August 1st, less than a month before the date they acted to put the company into bankruptcy, the majority of the directors, Ben Marden, Sonny Marden and J. J. Pass, had bought the remaining 50% of the stock of the company from its original owners and had also bought from them debentures of the corporation and other loans owed by the company so that either they themselves or their controlled corporation, National Steel & Copper Plate Company, invested in the bankrupt some $148,000; that following acquisition of the stock Sonny Marden and Pass were elected to the Board of Directors, which thereafter consisted of Porterfield, President, Margulis, Vice-President, Marden, Secretary, and Pass, Treasurer. Thereupon Ben Marden, a brother of Sonny, advanced $30,000 to the Company on a 90-day note, and it was alleged that he represented to the intervenors that he would advance such other funds as the company needed and secure a line of credit of $100,000 at 4½% interest at a bank if the stockholders would elect him a director and chairman of the board; that they did so, relying upon his statement, thus giving the new stockholders a majority of the board; that, contrary to this promise, there was no intent to carry it out, but, it was alleged, a conspiracy had been made by the Mardens and Pass to get control of the corporation in this manner and put it into bankruptcy for the sole purpose of wiping out the interests of Porterfield and Margulis and owning the corporation's business and assets for themselves; that immediately after acquiring a majority position on the board of directors, the newcomers took physical charge of the business to the exclusion of intervenors, deliberately diverted funds of the corporation, deliberately and wilfully injured the company's credit, and took other improper steps to lend color to the filing of a contemplated petition in bankruptcy; that on August 24th, a special meeting of the directors was called, at which, without any discussion being permitted, the directors, by the vote of the Mardens and Pass against the vote of the two intervenors, voted to place the company in voluntary bankruptcy in accordance with their prearranged plan. The filing of the petition in bankruptcy followed.

The bankrupt, in its answer, admitted the facts as to the acquisition of the stock and election of directors, but denied that control was acquired for any ulterior or improper purpose; alleged that there was dissension between intervenors themselves which caused improper operation of the plant, which was therefore closed; that the company was not able to pay its debts as they matured and that their action in filing the petition in bankruptcy was for the protection of the creditors of the corporation.

The Referee conducted a hearing on the issues joined by the intervention and answer. After hearing intervenors' testimony he dismissed the intervention without making any findings of fact or conclusions of law. He is not required to make any such findings or conclusions. On the filing of a petition to the District Court for review of the Referee's order, the Referee filed his certificate of review,¹ containing his findings and conclusions.

The law permits any ordinary business corporation to file a petition in bankruptcy to avail itself of the benefits of the bankruptcy statute.² Ordinarily it is unimportant what may be the purpose or motive of the corporation,³ if in truth and in fact it is the act of the corporation and not of officers or directors acting for their own benefit as distinguished from that of the corporation to which they have a fiduciary responsibility. It is equally clear, we think, that even a voluntary petition may not be filed to perpetrate a fraud.⁴ This principle has been recognized by this court in Shearin v. Cortez Oil Co., 5 Cir., 92 F.2d 855, although in that case we sustained the district court in holding that no sufficient showing of the facts alleged had been made.

This, then, brings us to the question as to whether the intervention alleges facts, which, if proved, would authorize a holding by the Referee that the adjudication should be vacated and, if so, whether we think the proof introduced on behalf of the intervenors, unless controverted by the bankrupt, required that the adjudication be set aside.

We think it quite clear that, if the allegations of the intervention were true, then the Referee should have vacated the order of adjudication and dismissed the voluntary petition. If these allegations were true, the vote of the majority of the directors at the meeting on August 24th, was not truly the act of the corporation, but it was an act of the new directors taken for their own benefit and to the detriment of their corporation. Under such circumstances the filing of a voluntary petition in the name of the corporation would be a fraud on the court as well as a fraud on the corporation and its other stockholders.

In view of the fact that the Bankruptcy Court is made available for the prompt relief of all interested persons, the bankrupt, the creditors, and the individual stockholders of the bankrupt, we recognize that an appellate court should be slow to upset action taken in such a proceeding. On the other hand, the very summary nature of the proceedings in the Bankruptcy Court, which in this case permitted the Mardens and Pass to buy into a successfully operating corporation, put it into bankruptcy within four weeks and to obtain an order for the sale of its assets two weeks later, such sale being delayed only because of the filing of this intervention, and actually followed by a sale in less than two months from the filing of the petition, makes it necessary for the courts to prevent, so far as possible, any abuse of this procedure. The beneficent purpose of the bankruptcy laws, with their emphasis on summary action and easy transition of property from the hands of a debtor into the hands of creditors, will be largely frustrated if these summary procedures are permitted to be used for purposes entirely foreign to the desirable objectives of these laws.

We, of course, do not imply that the facts alleged in the intervention are true. The alleged bankrupt has not put in its proof in reply, but we do hold that the intervenors made out a prima facie case, and unless the proof already adduced is met by countervailing evidence, the intervention must be sustained and the adjudication set aside. Without attempting to set out all the evidence, it is sufficient we think to point to the testimony of the disinterested witness, Faden, who testified, among other things, that the Mardens said this was not going to be a bankruptcy due to finances, it was just sort of a family argument, a civil war; that the Mardens were going to own the company and that Porterfield and Margulis were going to be washed out; he also testified that Sonny Marden said Porterfield and Margulis tried to hold him up on selling him their stock and he was going to wipe them out — they wouldn't have a penny coming to them as far as common stock was concerned⁵ It is, of course, not necessary, in order for a person or corporation to file a voluntary petition in bankruptcy, that it, in fact, be insolvent. The question of solvency is, however, extremely important in ascertaining whether the benefits of the Bankruptcy Act are being used in bad faith or fraudulently if there is any substantial evidence to that effect, since no one would contend that the bankruptcy court exists for any purpose other than to aid...