Summary
In Bird Sons Sales Corp. v. Tobin, 78 F.2d 371, 100 A.L.R. 654 (8th Cir. 1935), most but not all of the bankrupt's then-existing creditors signed an agreement whereby the creditors so signing agreed to subordinate the payment of the then-existing indebtedness owing to them by the bankrupt to the prior payment and satisfaction of all future indebtedness or liabilities of the bankrupt.
Summary of this case from In re Credit Industrial Corp.Opinion
Nos. 10301, 10312.
July 1, 1935.
Appeal from the District Court of the United States for the Eastern District of Missouri; Charles B. Davis, Judge.
Proceeding by Bird Sons Sales Corporation against Edward W. Tobin, trustee in bankruptcy for Barney Grosberg, Inc., a bankrupt. From an order dismissing petition of Bird Sons Sales Corporation for a review of order of referee relating to payment of claims and priorities, Bird Sons Sales Corporation were allowed an appeal by the District Court and an appeal was also allowed by Circuit Court of Appeals from such order.
Appeal allowed by District Court dismissed, and order affirmed on appeal allowed by Circuit Court of Appeals.
An involuntary petition in bankruptcy was filed against Barney Grosberg, Inc., in the United States District Court for the Eastern District of the Eastern Division of Missouri on July 27, 1933, and the said Barney Grosberg, Inc., was duly adjudged a bankrupt on October 2, 1933, and an order of reference was made to the referee in bankruptcy for said District, and subsequently Edward W. Tobin was duly elected trustee and qualified as such. Bird Sons Sales Corporation, a corporation, a general creditor of the bankrupt, filed its claim in said estate on the 1st day of December, 1933, and said claim was allowed on the same date as a general claim in the amount of $6,953.58. On or about January 12, 1933, prior to the petition in bankruptcy, Barney Grosberg, Inc., a bankrupt, was financially embarrassed and involved, and a large number and percentage, but not all of its then existing creditors signed a certain agreement, whereby the creditors signing it agreed to subordinate the payment of the then existing indebtedness owing to them by the bankrupt to the prior payment and satisfaction of all future indebtedness or liabilities of the bankrupt. The paragraph of the contract in question provided that during the operation of the agreement "the company (the bankrupt) may borrow additional funds or obtain additional credit facilities, upon the following terms and conditions: (a) In the event any additional funds or credit facilities are loaned or extended to the Company, then the creditors signing this Agreement agree to subordinate the payment of the present indebtedness of the Company to said creditors to the prior payment and satisfaction of all future indebtedness or liabilities of the Company, whether as maker, endorser, drawer, acceptor, guarantor or otherwise, to the parties loaning said additional funds or extending said additional credit to the Company, it being understood and agreed that any parties loaning any additional funds or extending any additional credit after the signing of this Agreement shall receive full and complete payment and satisfaction of every such debt and liability growing out of the loaning of such additional funds or the extending of such additional credit, including any extensions or renewals thereof, prior to the payment to the parties signing this Agreement of any amount now due them. (b) In the event of the liquidation of the business of the Company, it is expressly understood and agreed that any and all additional funds loaned or credit extended shall have priority over any indebtedness of the Company to the creditors signing this Agreement."
In the bankruptcy proceedings a number of creditors filed claims seeking priority of payment, basing their claims upon this provision of the contract. Bird Sons Sales Corporation, appellant, had signed the agreement. On August 6, 1934, Edward W. Tobin, trustee, filed with the referee in bankruptcy his suggestions regarding the allowance of claims and payment of dividends, in which the trustee suggested that the referee in making his order of distribution of dividends recognize the contract of January 12, 1933, and order that the dividend which would ordinarily be paid to the creditors who signed the agreement be withheld, and be paid over to those creditors whose indebtedness accrued subsequent to the execution of the agreement, until such creditors be paid their claims in full. Whereupon Bird Sons Sales Corporation duly filed its exceptions to the trustee's suggestions. No other creditor filed exceptions. After due notice had been given to all creditors who had filed claims, the suggestions of the trustee came on for hearing on or about September 14, 1934, and the matter was submitted to the referee, and on January 22, 1935, the referee made and entered an order adopting the trustee's suggestions regarding allowance of claims and payment of dividends, determining priority of payment of certain claims, overruling the exceptions of Bird Sons Sales Corporation, and providing for the distribution of a first dividend of 18 per cent. to general creditors. The referee ordered the gross amount of the dividend to creditors, who had signed the agreement, to be withheld and to be distributed pro rata to the subsequent creditors, whose indebtedness as above stated accrued subsequent to the execution of the agreement and in reliance thereon. On January 31, 1935, Bird Sons Sales Corporation filed its petition for review of the referee's order of January 22, 1935; the referee in his certificate setting forth that the only question for the determination of the court was whether the court should enforce and give effect to the provisions of the said contract of January 12, 1933, for the subordination of the claims of the creditors signing it, to the claims of creditors extending credit or lending funds to the bankrupt in reliance thereon. It appears from the involuntary petition in bankruptcy on file in this case, but not from the certificate of the referee in bankruptcy forwarded to the United States District Court, that Bird Sons Sales Corporation is one of the petitioning creditors in the within bankruptcy proceedings.
The matter came on for hearing in the United States District Court for the Eastern Division of the Eastern District of Missouri on March 6, 1935, and was submitted to the court upon the certificate of the referee, together with exhibits attached, arguments of counsel, and briefs, and on March 13, 1935, the Honorable Charles B. Davis, United States District Judge, made and entered an order overruling and dismissing the petition of Bird Sons Sales Corporation for review of the order of the referee of January 22, 1935, and approving and confirming the said order of the referee in all respects. On March 16, 1935, Bird Sons Sales Corporation filed its appeal to the United States Circuit Court of Appeals, Eighth Circuit, from the order of the District Court, and said appeal was allowed and order entered, and on March 21, 1935, after due notice to the attorney for the trustee, it presented its petition for leave to appeal in the United States Circuit Court of Appeals, Eighth Circuit, and said petition was submitted, and on March 22, 1935, said appeal was allowed by the United States Circuit Court of Appeals, Eighth Circuit, and order filed.
Harold J. Abrams, of St. Louis, Mo., for appellant.
Harry S. Gleick, of St. Louis, Mo., for appellee.
Before STONE, WOODROUGH, and BOOTH, Circuit Judges.
The position of the appellant is that the bankruptcy court had no jurisdiction to hold the appellant to the contract by which it agreed to subordinate its indebtedness against Barney Grosberg, Inc., to the prior payment of indebtedness of the company to parties extending additional credit to the company in reliance on the agreement. It contends that the order now presented for review is violative of section 65a of the Bankruptcy Act, 11 USCA § 105(a), which provides: "Dividends of an equal percentum shall be declared and paid on all allowed claims, except such as have priority or are secured." Its theory is that the Bankruptcy Act compels equality in the distribution of dividends to general creditors and that section 65a defines and restricts the power of the court. In other words, that when the claim of general creditors has been allowed section 65a establishes an inexorable rule for the distribution of the fund and the court is without power to recognize rights, however just and equitable, which some members of the class may be shown to have against others.
Appellant's contentions are elaborated in able briefs and have compelled careful consideration, but we are not persuaded that the powers of the bankruptcy court can be so narrowly limited. The provisions of section 65a for the equal distribution of dividends, when interpreted in the light of the broad equity powers granted the bankruptcy court under sections 1 and 2 of the Bankruptcy Act, 11 USCA §§ 1, 11, do not preclude that court from considering such a contract as was executed by appellant in this case, nor from applying equitable principles to the situation presented. Local Loan Co. v. Hunt, 292 U.S. 234, 240, 54 S. Ct. 695, 78 L. Ed. 1230, 93 A.L.R. 195; Bardes v. Hawarden First Nat. Bank, 178 U.S. 524, 534, 20 S. Ct. 1000, 44 L. Ed. 1175. By its adjustment of the order of payment the bankruptcy court conformed the distribution of the estate to accord with the rights of the parties, as such rights were fixed by their own contract. The contract violated no public policy nor the spirit of the bankruptcy law, but was entered into by the appellant and relied upon by those who extended credit on the faith of it in the hope that Barney Grosberg, Inc., could be maintained as a going concern.
The contentions of the appellant do not present a question of first impression. The propriety of the order of the bankruptcy court herein is fully sustained by the precedents. Searles v. Mechanics' Loan Trust Co. (C.C.A. 9) 249 F. 942; In re Geo. P. Schinzel Son, Inc. (D.C.N.Y.) 16 F.2d 289; In re Handy-Andy Community Stores (D.C. La.) 2 F. Supp. 97; In re Bowman Hardware Electric Co. (C.C.A. 7) 67 F.2d 792; In re Royce Dry Goods Co. (D.C. Mo.) 133 F. 100; E.E. Gray Corp. v. Meehan (C.C.A. 1) 54 F.2d 223; Litzke v. Gregory (C.C.A. 8) 1 F.2d 112; In re Paris Modes Co. (C.C.A. 2) 196 F. 357; In re Salem Co-Operative Window Glass Co. (D.C. Wyo.) 40 F.2d 298; see Remington on Bankruptcy, §§ 2218, 2219, and 2220.
Appellant claims that the doctrine of the above citations is contrary to the law in this circuit. The particular question here involved has not been frequently touched upon by this court, but such expressions as we have found are completely in accord with the general course of adjudication.
Consideration of In re Hawks, 204 F. 309, 321 (D.C. Kan.) discloses that the question there was whether a claimant had been guilty of fraud, not towards the bankrupt, but towards other creditors "which would warrant the court to refuse the allowance of its claim, or postpone it until after the other creditors have been paid. * * *" The trial court found no fraud and the conclusion was affirmed on appeal to this court. Crowder v. Allen-West Commission Co., 213 F. 177. Judge Walter H. Sanborn, speaking for this court, said:
"A creditor must have been guilty of some moral turpitude or some breach of duty by which other creditors were deceived, to their damage, to constitute such a fraud as will estop him from sharing with them in the distribution of the proceeds of the estate of his debtor in bankruptcy. A willful intent to deceive or such gross negligence as is tantamount thereto is an essential element of such an estoppel. Henshaw v. Bissell, 18 Wall. 255, 271, 21 L. Ed. 835; New York Life Ins. Co. v. McMaster, 87 F. 63, 67, 30 C.C.A. 532, 536; Daniels v. Benedict, 97 F. 367, 380, 38 C.C.A. 592, 605; Farmers' Merchants' Bank v. Farwell, 58 F. 633, 639, 7 C.C.A. 391, 397." Crowder v. Allen-West Commission Co., 213 F. 177, 184 (C.C.A. 8).
The opinions leave no doubt that if the alleged fraud had been found this court would have subordinated the claimant to the other creditors in making distribution of the estate.
The District Court for Nebraska granted a preference to the claim of one general creditor over that of another and the case came on appeal to this court. Moise v. Scheibel, 245 F. 546, 547. Although this court found that there was no evidence of facts which "would create an estoppel on the part of Moise from receiving his dividends on an equality with the Auto Top Company," it is fairly inferable from the opinion of this court that if such facts had been found the action of the trial court would have been sustained.
Appellant contends that the views expressed by this court in Barks v. Kleyne (C.C.A. 8) 15 F.2d 153, Burton Coal Co. v. Franklin Coal Co. (C.C.A. 8) 67 F.2d 796, and Southern Bell T. T. Co. v. Caldwell (C.C.A. 8) 67 F.2d 802, are in conflict with an affirmance here, but we do not consider that the questions ruled upon in those cases were analogous to the question here presented.
Appellant has not called attention to any authoritative precedent directly sustaining its position here. The remarks of the referee in Re Goodman-Kinstler Cigar Co., 32 A.B.R. 624, have been noted as in conflict with our conclusion.
Two appeals have been taken from the order herein, one allowed by the District Court and one by this court. It is clear that the order complained of was made in a proceeding in bankruptcy and the appeal allowed by the District Court is dismissed.
Affirmed.