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Schwartz v. Mills.

decided: November 15, 1951.


Author: Clark

Before SWAN, Chief Judge, and CLARK and FRANK, Circuit Judges.

CLARK, Circuit Judge.

This appeal attacks the validity of the appointment of a trustee in bankruptcy made by a referee on failure of choice by the creditors. An objecting creditor challenged the right of another claimant to vote, and repeats the challenge here after denial of his petition for review, and affirmance of the referee's action, by the district court.

The bankrupt is Grade A Foods Corp., which was adjudicated on a petition filed December 22, 1950, by appellant and other creditors. The first creditors' meeting was held on February 20, 1951. Some eight creditors appeared, presenting claims of about $100,000. Of this, $93,000 however, was made up of the claim presented for New York Meat Packing Co., Inc., by Schneider, its president and fifty per cent stockholder, who was likewise president and half owner of the bankrupt Grade A. Over the objections of other creditors, the referee permitted this claim to be voted in the election of the trustee; and in consequence neither of the two candidates being voted upon received the necessary majority in both number and amount of claims, as required by § 56 of the Bankruptcy Act, 11 U.S.C.A. § 92. Thereupon the referee chose the trustee in the person of Henry A. Mills, who had been serving as receiver under appointment by the district court and who was also the nominee of the New York Meat interests. All parties agreed that Mills was both qualified and disinterested. Nonetheless this creditor sought review by the district court and, losing there, now appeals to us.

Petitioner's first contention relies upon the facts that both New York Meat and Grade A are family corporations, owned and controlled by the same individuals, that their offices are located in the same building, and that the business affairs of each have been dominated by a long tradition of intercompany transactions. He therefore argues that even though New York Meat does not directly own Grade A stock, it is nevertheless within the disfranchising provision added to § 44, sub. a, of the Act, 11 U.S.C. § 72, sub. a, by the Chandler Amendments of 1938. That section in its presently important part now provides that the creditors of a bankrupt, "exclusive of the bankrupt's relatives or, where the bankrupt is a corporation, exclusive of its stockholders or members, its officers, and the members of its board of directors or trustees or of other similar controlling bodies," shall appoint a trustee, with provision for appointment by the court if the creditors fail to act. This quoted language thus employed to overturn the older tradition which allowed these classes to vote in the election of a trustee seems to us notably clear and explicit. It refers primarily to individuals, since a corporation cannot be a relative, officer, or director of the bankrupt. It also is limited to stockholders of the bankrupt. Thus the language of the statute would appear to be inapplicable to New York Meat, the claimant corporation. West Hills Memorial Park v. Doneca, 9 Cir., 131 F.2d 374, 376.

But petitioner seeks to go behind the corporate form, citing Pepper v. Litton, 308 U.S. 295, 60 S. Ct. 238, 84 L. Ed. 281, and Taylor v. Standard Gas & Electric Co., 306 U.S. 307, 59 S. Ct. 543, 83 L. Ed. 669. It is of course true that bankruptcy courts can and must pierce the proverbial corporate veil in the interests of substantial justice to subordinate the claims of corporate affiliates or individual insiders who have obtained an unfair advantage from their favored position. But we do not think that the doctrines expressed in such cases cover the situation at bar. For subordination is not mechanically automatic upon the showing of identity between the stockholders and officers of the claimant and debtor corporations; we have traditionally stressed the elements of fraud and actual injury to the debtor interests, and have thus held that mere illegality under the antitrust laws in the purchase of a claim would not require subordination. West 52nd Theatre Co. v. Tyler, 2 Cir., 178 F.2d 128. Petitioner here has given no hint even of fraudulent conveyance, manufactured claim, or mismanagement. Further he makes no objection on the broad equity ground that this election is bankrupt controlled, a valid ground for reversal had proof in support been adduced. In re McGill, 6 Cir., 106 F. 57, 62.It is true that in In re Loewer's Gambrinus Brewery Co., 2 Cir., 167 F.2d 318, this court affirmed D.C.S.D.N.Y., 74 F.Supp. 909, to hold, after a full trial upon objections filed by the trustee, that a claim of a solvent corporation having the same stockholders as the debtor should be subordinated to the claims of other creditors. But this was not stated as an absolute rule of law, to be applied notwithstanding the injustice it might cause, as would be the case where the creditor corporation was itself insolvent and its own creditors thus prejudiced. On the contrary, the first opinion in the report of the case expressly eliminates the situation where creditors of the creditor corporation show that they are adversely affected; the concurring opinion is clearly of like tenor; while the third judge merely concurs in the particular result.

Even where subordination on equitable grounds appears indicated, a judgment without reservation to this effect at the outset is of dubious efficacy, "because it is based on a state of affairs as of a particular time and invites multiplicity and renewal of litigation if and as the administration progresses toward solvency. It is a temporary solution only." 3 Collier on Bankruptcy 187, 14th Ed. 1941. Moreover, it would serve to inject a troublesome issue into initial proceedings whose purpose is to elect a court fiduciary who can proceed expeditiously to the conserving of the estate and the careful scrutiny and, if need be, rejection of claims presented. At least there must result a considerable trial where other equities, if any, would need exploration; thus the trustee now asserts that pursuant to direction of the referee he has brought suit to recover an alleged preferential payment from the bankrupt to one of those voting for petitioner's nominee. Since a trustee should not owe his election to those whom he must sue for restoration of the bankrupt's estate, In re Stowe, D.C.N.D.Cal., 235 F. 463; In re Anson Mercantile Co., D.C.N.D.Tex., 185 F. 993, this issue would clearly require adjudication before subordination can be settled. But surely when circumstances indicate that subordination would be unjust there should be no such delay and trial. That is the case here. For there was pending at the time a petition to force New York Meat into insolvency; and it now appears to be in voluntary reorganization in Chapter X proceedings. Hence subordination would be distinctly unfair to its creditors.

Next petitioner contends that even if New York Meat is not thus disqualified from voting, its Proof of Claim failed to satisfy the requirements of § 57, sub. a, 11 U.S.C.A. § 93, sub. a, which specifies a statement under oath "setting forth the claim" and "the consideration therefor." New York Meat's claim, filed in accepted form, described the consideration for the debt as "money loaned and borrowed by the Alleged Bankrupt from the Claimant, goods, wares and merchandise sold and delivered to the said Bankrupt" at the latter's special instance and request.

Some of the older cases do speak in terms of a detailed statement, compiled "with meticulous care," of the consideration for the claim. See cases cited in 3 Collier on Bankruptcy 127, 128, 14th Ed. 1941. Without considering whether or not such exacting requirements can have any real meaning in the day-to-day realities of creditors' meetings, we think the better rule is that no error will lie if there was reasonable ground for the allowance. See In re Rosenfeld-Goldman Co., D.C.Mass., 228 F. 921. Hence a Proof of Claim should be held to comply with the requirement for statement of the consideration if the creditors and trustees are thereby supplied with enough information as to the circumstances giving rise to the debt to be able to test and pass on its validity, legality, and substantial accuracy.

Here we think this Proof sufficient under this functional test. It does not appear that the petitioning creditors or later the trustee were actually harmed or misled by the succinctness of the statement. Any deficiency in knowledge was in fact supplied during the creditors' meeting. Schneider testified to his personal knowledge of loans of at least $20,000, or more than sufficient to create the impasse in selection of the trustee. He also testified that the company books showed the bankrupt owed claimant approximately $93,000, the greater part for money loaned, the balance for meat. In addition there was offered the report of accountants for the creditors' committee showing the exact amount claimed as disclosed in the bankrupt's books. This was excluded by the referee without statement of reasons. Had the proceedings resolved themselves into a trial on the merits as to the validity of the claim, such evidence might have been considered hearsay. Under the circumstances here, we think it available to supplement the ex parte statement of the Proof of Claim. See West Hills Memorial Park v. Doneca, supra.Petitioner did not assert that no claim at all existed or suggest fraudulent transactions between claimant and the bankrupt. Nor did he request adjournment to make a formal attack upon the claim. Its allowance for the purpose of the vote was therefore not error. Sloan's Furriers v. Bradley, 6 Cir., 146 F.2d 757.

Petitioner did request an adjournment on the ground that an involuntary petition against New York Meat was to be tried in three days in the bankruptcy court, and now complains of the referee's refusal to grant his request. His showing of injury was quite attenuated at best; it was apparently based on the hope that the proceedings would result in an adjudication, followed by the appointment of a trustee who would vote with him. It appears that in fact the trial never occurred, and New York Meat subsequently filed a voluntary petition for reorganization under Chapter X of the Act. 11 U.S.C.A. § 501 et seq. Refusal to adjourn a creditors' meeting is error only when there has been such a serious abuse of discretion as unjustly to prejudice a creditor. See In re Grat, D.C.Mass., 228 F. 925. No prejudice is here shown.


FRANK, Circuit Judge (dissenting).

1. I think it well to begin by stating the facts somewhat more in detail than my colleagues have done, in order to bring out dramatic aspects of the case to which I think the majority opinion has given insufficient attention. This I do because, although the amounts of assets and ...

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