Wynne v. Rochelle

• Court: U.S. Court of Appeals — Fifth Circuit
• Writing for the Court: PER CURIAM
• Citation: Wynne v. Rochelle, 385 F.2d 789 (5th Cir. 1967)
• Decision Date: 13 December 1967
• Docket Number: No. 23491.,23491.
• Parties: Angus G. WYNNE, Jr., Bankrupt, Appellant, v. William J. ROCHELLE, Jr., Trustee in Bankruptcy, et al., Appellees.

385 F.2d 789 (1967)

Angus G. WYNNE, Jr., Bankrupt, Appellant, v. William J. ROCHELLE, Jr., Trustee in Bankruptcy, et al., Appellees.

No. 23491.

United States Court of Appeals Fifth Circuit.

July 31, 1967.

Rehearing Denied December 13, 1967.

COPYRIGHT MATERIAL OMITTED

Byron L. Williams, Dallas, Tex., Sydney Krause, New York City, for appellant.

Lawrence L. Beason, Ernest E. Figari, Jr., Dallas, Tex., for intervenors.

William Madden Hill, Arthur S. Goldberg, Dallas, Tex., for appellees.

Before GEWIN and COLEMAN, Circuit Judges, and INGRAHAM, District Judge.

Rehearing En Banc Denied December 13, 1967.

GEWIN, Circuit Judge:

This bankruptcy case involves a novel question as to the power of a district court sitting in bankruptcy to enter a nunc pro tunc order which retroactively adjudicated the appellant a bankrupt. The appellant, Angus G. Wynne, Jr., was adjudged a bankrupt in the United States District Court for the Northern District of Texas on November 24, 1964, pursuant to the second involuntary petition in bankruptcy filed by three of the appellant's creditors. The first petition filed by the same creditors on September 3, 1964, was dismissed on November 19, 1964.¹ Subsequently, a motion was filed by the trustee in bankruptcy and three other creditors seeking to have the order dismissing the first petition vacated and set aside. They also sought to have the two proceedings consolidated and the appellant adjudged a bankrupt as of September 3, 1964, the date of the filing of the first petition. After a hearing before the referee, and on his recommendation, the district court granted the motion. The bankrupt appeals from that order asserting that the district court lacked the power to set aside the dismissal, and that if it had the power, the retroactive adjudication denied his right to a trial by jury. We affirm that portion of the order setting aside the dismissal, but reverse that portion of it adjudicating the appellant a bankrupt, without the benefit of a jury trial, and remand the case for trial by a jury.

The first involuntary petition in bankruptcy was filed on September 3, 1964, by Watermann-Lider Corp., Sidney Wand d/b/a Modern Frosted Foods Co., and Edward Boker, Inc., three creditors of the appellant, alleging that the appellant was insolvent and that certain transfers made within four months prior to the date the petition was filed constituted an act of bankruptcy. After securing an extension of time in which to plead,² the appellant answered denying that the petitioners were his creditors, that he was insolvent, or that he made the alleged transfers. A demand for a jury trial was also timely made.

The transfers which the creditors alleged constituted an act of bankruptcy were made by Wynne-Compass Fair, Inc., a joint venture in which Wynne was a member, in June and July of 1964 to Embassy Grocery Corp. Wynne-Compass Fair, Inc. was organized by the appellant Wynne and Compass Fair, Inc., a New York corporation, to operate the Texas pavilion and musical show at the New York World's Fair. The venture was unsuccessful from the outset, and when an arrangement with creditors under Chapter XI of the Bankruptcy Act proved impossible, it was adjudicated a bankrupt in August of 1964 by the United States District Court for the Southern District of New York.

After the September 3 petition was filed, the creditors sought to take the deposition of the appellant. They tried unsuccessfully to obtain the appellant's consent to take the deposition and subsequently notice was given pursuant to the F.R.Civ.P. to take the appellant's deposition on October 23. This attempt to compel discovery irked the appellant's attorneys and for some reason no deposition was taken.³ Finally, a meeting was held on November 19, 1964 between the attorneys for the creditors and the bankrupt. At that time the attorneys for the bankrupt pointed out that the transfers which the creditors alleged constituted an act of bankruptcy were actually made by Wynne-Compass Fair, Inc. and not by the appellant. They further informed the creditors that if the petition was dismissed, they did not care about a second petition and would even give the creditors an act of bankruptcy. Presented with the choice between going to trial with the possibility that they could not sustain the petition, and permitting the original petition to be dismissed with an assurance that they would be given an act of bankruptcy, the creditors chose the latter alternative and did not oppose the motion to dismiss.

On that same day, November 19, 1964, a motion to dismiss, carefully couched in terms of a dismissal on the merits, was submitted to the district court. After a short conference with the attorneys, during which counsel for the creditors advised the court that they would pursue the bankruptcy matter further, the court granted the motion. The following day, November 20, 1964, a second involuntary petition in bankruptcy was filed by the same creditors. The bankrupt admitted his inability to pay his debts, and he was adjudged a bankrupt on November 24, 1964.

The motion which gave rise to the controversy before us was filed on February 4, 1965 by the trustee in bankruptcy and three other creditors, Flagstaff Foods Corp., L & M Fashions, Inc., and Factory Sales Corp. The motion prayed to have the order dismissing the original petition set aside as improvidently granted, the two proceedings consolidated, and the appellant adjudged a bankrupt as of the date the original petition in bankruptcy was filed, September 3, 1964. The district court referred the case to the referee in bankruptcy as a Special Master to hold hearings and make a recommendation to the court. The referee concluded, after a full hearing at which evidence was presented by both parties, that the order dismissing the September 3 petition should be deemed to have been secured by consent. Since no notice was given to creditors as required by § 59(g) of the Bankruptcy Act, 11 U.S.C. § 95(g) (1964), he further recommended that the order be set aside as improvidently granted. He also found that the dismissal was the result of a hard fought legal battle and was not the product of collusion. In addition, he recommended that the proceedings be consolidated, and that the appellant be adjudged a bankrupt as of September 3, 1964. The district court adopted the referee's report and entered a judgment in accordance therewith. The appellant's motion for a new trial and/or rehearing was denied, and this appeal was taken.

The appellant argues that the district court lacked the power to set aside the order dismissing the September 3 petition because the dismissal was on the merits. As such it was a final judgment which could not be attacked by third parties. In essence, he asserts that the dismissal was entered pursuant to § 18(d) of the Bankruptcy Act, 11 U.S.C. § 41(d) (1964), and not pursuant to § 59(g), 11 U.S.C. § 95(g) (1964) as the appellees contend. Thus, the dismissal was not subject to being set aside as improvidently granted for lack of notice to creditors since a § 18(d) dismissal does not require such notice.

Section 59(g) provides that a petition in bankruptcy shall not be dismissed by consent or for want of prosecution until after notice has been given to other creditors.⁴ Since the notice provisions of the section were designed to prevent the bankrupt and the petitioning creditors from entering into a settlement which might operate to the detriment of the other creditors, the appellant contends that collusion among the parties is necessary for a dismissal to fall within the ambit of the section. The referee found after a full hearing that no collusion existed, but that the dismissal was the result of a hard fought legal battle.⁵ The appellant contends that the petitioning creditors acceded to the dismissal because they realized that they could not prove that the appellant committed the acts of bankruptcy alleged in the petition since the transfers were made by Wynne-Compass Fair, Inc., and not the appellant. Therefore, he concludes, the dismissal was not under § 59(g) but one under § 18(d). Since it is well established that notice is not required for a § 18(d) dismissal, the order is final and may not be set aside.

As the appellant correctly observes, the notice provisions of § 59(g) of the Bankruptcy Act were designed to prevent injurious settlements and to protect the estate for creditors other than those who brought the petition. If such other creditors desired the bankruptcy proceedings continued, they could intervene upon notice of the pending dismissal under § 59(f), 11 U.S.C. § 95(f), and prosecute the matter further. By intervening they would preserve the date of bankruptcy established by the original petition. While a collusive settlement between the parties is clearly one of the evils sought to be prevented by the notice requirement, it is not the only harm with which the section is concerned. The statute requires notice before a petition may be dismissed by consent, for want of prosecution, or upon application of the petitioner or petitioners. It applies where both voluntary and involuntary petitions in bankruptcy are involved. If the only evil threatened was that of a dismissal obtained through collusion, the statute would have been much simpler and surely would not apply where a voluntary petition was involved. By employing the multifarious approach used, it is clear that the statute is concerned with evils other than collusive settlements and that notice is required in situations other than where collusion was established or alleged. Thus, to effectuate the purpose of the notice provisions and protect the rights of creditors who have relied upon the pending petition, be it voluntary or involuntary, the section is to be given a liberal construction.

That is not to say that all dismissals require notice. It is well established that notice is not required where the matter has been...