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Klein v. Nu-Way Shoe Co.

June 9, 1943

KLEIN
v.
NU-WAY SHOE CO., INC., ET AL.



Appeal from the District Court of the United States for the Southern District of New York.

Author: Clark

Before AUGUSTUS N. HAND, CHASE, and CLARK, Circuit Judges.

CLARK, Circuit Judge.

Appellant, Rose Klein, appeals from orders of the district court affirming orders of a referee in bankruptcy which struck out answers filed by a state court receiver of Klein's Outlet, Inc., and by appellant, as its minority stockholder, to creditors-appellees' involuntary petition in bankruptcy against it, refused thereafter on motion to vacate this order, and at length adjudicated the corporation a bankrupt upon the consent of its officers and directors. The referee's decisions were based upon his conclusion that neither appellant nor the receiver had ever properly intervened in the bankruptcy proceeding and that accordingly they were without standing to be heard. Appellant also appeals separately from another order of the district court constituting a subsequently appointed trustee in bankruptcy of the corporation coplaintiff with herself in the action, brought by her in the Supreme court of New York on behalf of the corporation, against various of its directors and officers for misfeasance and malfeasance in office, in which she had obtained the appointment of the abovementioned receiver.

Judgment had been rendered for appellant in the state court action in 1940. An able justice of the Supreme Court of New York found that the defendants had fraudulently purchased merchandise on the corporation's credit for an independent business venture, and referred the matter to a referee to ascertain the damage. Thereafter he granted plaintiff's motion for the appointment of a receiver of the corporation, and appointed Harold L. Lipton as permanent receiver. Notice of his decision was given on September 24, 1941. The next day three creditors of the corporation brought an involuntary petition against it alleging that it was insolvent and that it had made preferential payments in the amount of $2,000 on that same day to various of its creditors, whose names were unknown. A referee in bankruptcy ordered that the debtor be continued in possession.

Appellant and Lipton joined forces to oppose the exercise of bankruptcy jurisdiction by the federal court. On September 30, 1941, and October 3, 1941, they respectively filed separate answers to the involuntary petition challenging the allegations of insolvency and of preferential payments and the good faith of the creditors in filing the petition. They contended that the creditors were colluding with the management of Klein's Outlet to defeat the state court judgment. The corporation countered on October 3 with an answer by way of a petition for an arrangement pursuant to 11 U.S.C.A. § 721. This entire matter was then referred by the court to a referee.

Neither appellant nor Lipton had yet sought formally to intervene. But on October 18, 1941, Lipton petitioned the court for an order to intervene, to strike out the petition for an arrangement, and to bring to trial the issues raised in his answer. Appellant also made a motion, referred to later by the district court as "for various relief," which, it appears to be conceded, did not include a specific request for leave to intervene. These matters were also referred to the referee, who on November 17, 1941, denied both motions.

Those orders, together with an order of the referee of november 10 refusing Lipton possession of the devbtor's business, came on for hearing on petitions for review before Judge Bondy, who in an opinion dated February 26, 1942, In re Klein's Outlet D.C., 50 F.Supp. 557, substantially reversed the referee. The following passages from the opinion are a focal point in this appeal:

"By petitioning for an arrangement in the involuntary bankruptcy proceeding the debtor has blocked the trial of the issue of insolvency and delayed the appointment of a trustee. In view of these facts and the findings in the stockholder's suit, the court is of the opinion that it is advisable to appoint Lipton as receiver pending the determination in the bankruptcy proceedings as to whether the arrangement should be consummated, or a trustee appointed, or the bankruptcy proceedings dismissed, in which last case Lipton would continue in possession as receiver appointed by the state court. * * *

"Since both Rose Klein, as astockholder, and Lipton, as State Court receiver, may be able to adduce proof of fraud or bad faith before the referee, they should be permitted to intervene. See In re Hewitt Grocery Co., D.C., 33 F.Supp. 493, 495."

The order upon this opinion, dated June 6, 1942, decreed that "the Referee proceed in accordance with the opinion herein."

Meanwhile Lipton's appointment as permanent receiver was modified upon appeal in the state court proceedings to that of a temporary receiver. Some objection was then made in the district court that he thereupon lost all status as a party in interest under 11 U.S.C.A. § 11, sub. a(3). But judge Bondy, after a hearing and after receiving briefs, rejected the contention and on April 16, 1942, made Lipton a Federal Receiver in Bankruptcy for the corporation. No appeal was taken from this determination.

The matter then came before the referee again in accordance with Judge Bondy's direction. At the outset of the hearing appellant's counsel stated that he intended to challenge the involuntary petition, first because it was filed in bad faith, and second "we raise the issues of the allegations alleged in the petition." The attorney for creditors-appellees objected to the latter "at this hearing," but admitted that it was a "ground that must be taken up in due course at a proper time." The referee said: "I will take it for any purpose at this time." Appellant then offered evidence in an attempt to show that the officers of the corporation had induced the filing of the petition, and continued to do so at several adjourned hearings. At the close of the evidence on this issue, however, and over the specific objection of appellant's counsel that a full trial had not been had on the allegations of the answer, the referee on May 25, 1942, struck out the answers - notwithstanding the fact that the debtor had been permitted to withdraw its petition for an arrangement and to consent orally to an involuntary adjudication. The corporation was adjudicated a bankrupt on June 6, 1942, and on June 24, 1942, the referee denied applications to vacate his earlier orders.

The referee's certification of the petitions of Receiver Lipton and appellant for a review of these orders stated in justification of his action that Lipton's answer was not filed by a permanent receiver as it purported to be and, therefore, was ineffective; that appellant had never filed a petition to intervene and accordingly had no right to answer; that neither Lipton nor appellant had complied with Rule 24(c), Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c, by serving, together with their answer, a motion to intervene upon all parties to the bankruptcy proceeding; that appellant also had failed to comply with Bankruptcy Rule 12 of the district court, requiring an immediate demand after answer filed for a trial by court or jury, in omission of which the answer should be deemed stricken out; and finally that upon the striking of the answers and upon the ...


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