Soviero v. Franklin National Bank of Long Island

• Citation: 328 F.2d 446
• Decision Date: 24 February 1964
• Docket Number: No. 162,Docket 28262.,162
• Parties: Joseph F. SOVIERO, Jr., Trustee in Bankruptcy of Raphan Carpet Corporation, Trustee-Appellee, v. The FRANKLIN NATIONAL BANK OF LONG ISLAND, Claimant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

328 F.2d 446 (1964)

Joseph F. SOVIERO, Jr., Trustee in Bankruptcy of Raphan Carpet Corporation, Trustee-Appellee, v. The FRANKLIN NATIONAL BANK OF LONG ISLAND, Claimant-Appellant.

No. 162, Docket 28262.

United States Court of Appeals Second Circuit.

Argued November 8, 1963.

Decided February 24, 1964.

Abraham & Koenig, New York City (Jacob W. Abraham and Herbert J. Silver, New York City, of counsel), for trustee-appellee.

Levin & Weintraub, New York City (Elias Mann, New York City, and Herman A. Bursky, Brooklyn, of counsel), for claimant-appellant.

Before WATERMAN, MOORE and SMITH, Circuit Judges.

LEONARD P. MOORE, Circuit Judge.

Pursuant to an order to show cause, the Trustee in bankruptcy of the Raphan Carpet Corporation sought an adjudication that the assets of thirteen separate corporations, each bearing "Raphan" in its corporate name ("Affiliates") and the assets of the 1081 Hempstead Turnpike Realty Corp. ("Realty") in fact belonged to the bankrupt, and requested leave to sell the fixtures of certain Affiliates free and clear of liens and encumbrances. The Franklin National Bank of Long Island (the "Bank") by answer, claimed a lien on the fixtures of those Affiliates which had executed chattel mortgages securing a loan made by it to the bankrupt. The Bank alleged that the fixtures were owned by the Affiliates and were not the bankrupt's property, and that the Referee in bankruptcy lacked jurisdiction to summarily adjudicate title to property adversely held without the instigation of a plenary suit. After a hearing, the Referee determined that the assets of the Affiliates and Realty belonged to the bankrupt and that they should be administered as part of the bankrupt estate. The Referee's findings and turnover order were confirmed by the District Court. The Bank appeals.

The preliminary question to be determined is whether the court properly exercised summary jurisdiction or whether a plenary suit was necessary. "A bankruptcy court has the power to adjudicate summarily rights and claims to property which is in the actual or constructive possession of the court." Cline v. Kaplan, 323 U.S. 97, 98, 65 S.Ct. 155, 156, 89 L.Ed. 97 (1944); see also Thompson v. Magnolia Co., 309 U.S. 478, 481, 60 S.Ct. 628, 84 L.Ed. 876 (1940). Where the trustee does not have actual physical possession, as in the case at bar, jurisdiction turns on constructive possession. The bankrupt and, consequently, the court, is deemed to have constructive possession where at the time of the filing of the petition in bankruptcy the property in question is held by one whose adverse claim lacks substance and is at best only colorable. However, where the adverse claim "`discloses a contested matter of right, involving some fair doubt and reasonable room for controversy,'" and is not "without color of merit, and a mere pretense," Harrison v. Chamberlin, 271 U.S. 191, 195, 46 S.Ct. 467, 469, 70 L.Ed. 897 (1926), the merits of the claim can be determined only in a plenary suit. See Sahn v. Pagno, 302 F.2d 629 (2d Cir.), cert. denied, 371 U.S. 819, 83 S.Ct. 34, 9 L.Ed.2d 59 (1962); In re Meiselman, 105 F.2d 995, 997 (2d Cir. 1939). See generally 2 Collier, Bankruptcy, ¶ 23.07 (14th ed. 1962); Seligson and King, Jurisdiction and Venue in Bankruptcy, 36 Ref.J. 36, 37 (1962). On this appeal we must determine whether the adverse claims of corporate separateness presented such a fair doubt or a reasonable controversy as to render the Referee's order piercing the corporate entities unjustified.

At the hearing before the Referee, the facts surrounding the various Raphan enterprises were not in dispute. The Referee found that Henry S. Raphan and Herman Raphan were President and Secretary, respectively, the sole directors and stockholders of the bankrupt, the Affiliates and Realty. The Affiliates, like the bankrupt, were engaged in selling carpeting at retail. Realty, as the name suggests, owned the land and building where the bankrupt conducted business. The bankrupt paid the monies to finance the organization of the Affiliates and Realty. Although each corporation filed separate tax returns, individual accounting records were kept by the same staff of bookkeepers at the bankrupt's place of business. None of the corporations maintained corporate minutes reflecting their activities. Henry S. Raphan informed creditors that the bankrupt was a consolidated enterprise and issued a consolidated financial statement which listed, without separation, assets of the Affiliates and Realty as those of the bankrupt. The Affiliates had no working capital and whenever they required funds they were provided by the bankrupt with bookkeeping entries setting up the payments as loans and exchanges. When one Affiliate failed, the bankrupt paid the losses. In almost all instances, the bankrupt signed and remained liable on the Affiliates' leases, provided security deposits where necessary, and at times paid rent for some of them.

The Affiliates were situated in various cities in New York, Connecticut and New Jersey, while the bankrupt was located on Long Island. Although each Affiliate maintained a bank account from which it paid local obligations, such as rent and utilities, the proceeds of their carpet sales were turned over to the bankrupt for deposit in its account. The Affiliates sold only by...