The opinion of the court was delivered by: WALSH
After a hearing on the issues raised by the answer of a stockholder, the approval of the creditors' petition for reorganization of the debtor is reaffirmed.
The debtor is an interurban electric railway running between New York, Jersey City, Hoboken and Newark. The petition for its reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. was filed on August 11, 1954 by three of its bondholders. On December 8, 1954, after unsuccessfully moving to dismiss it, the debtor filed an answer which denied any act of bankruptcy but admitted its inability to meet its debts as they matured, and which consented to and joined in the prayer for reorganization.
On December 14, 1954, the petition for reorganization was approved.
On December 22, 1954, a stockholder, pursuant to section 137 of the Bankruptcy Act, filed an answer controverting the debtor's inability to meet its debts as they matured and also denying its alleged insolvency and acts of bankruptcy. A hearing has been held, limited to the issue of the debtor's inability to meet its debts as they mature, and the proof has established this allegation of the petition.
The first question is whether the pleadings presented any issue other than inability to meet debts as they mature. And the second is whether that inability was established by the proof.
The Issues Requiring Trial
The good faith of the petition, which the statute requires, was admitted by the debtor and subsequently was established at the hearing on the stockholder's answer. The answer of the debtor joining in the prayer for reorganization was free from collusion. In bitter litigation the debtor had tried to secure the dismissal of the petition (D.C.N.Y., 126 F.Supp. 359). It has also attempted to file its own voluntary petition for reorganization as a railroad under Section 77, 11 U.S.C.A. § 205.
Under these circumstances, notwithstanding the debtor's denial of the alleged acts of bankruptcy, the petition for reorganization was approved without a hearing. Proof of acts of bankruptcy are not required when the debtor, itself, petitions for reorganization,
but only when the debtor controverts an involuntary petition.
Even though the debtor's prayer was expressed by answer rather than petition, it was believed to have the same effect so far as reducing the issues necessary to be tried. The debtor's answer admitted the allegations necessary for a voluntary petition.
Section 143 requires a hearing only if the debtor controverts a material allegation of the petition. Its denial of the acts of bankruptcy was regarded as immaterial in the light of its prayer for reorganization. Its answer was therefore regarded as noncontroversial.
This view is supported by In re Palisades-on-the-Desplaines, 7 Cir., 89 F.2d 214; In re Park Beach Hotel Bldg. Corp., 7 Cir., 96 F.2d 886 and Snyder v. Fenner, 3 Cir., 101 F.2d 736, all decided under Section 77B, the predecessor of Chapter X. It is not precluded by holdings in liquidation proceedings that a debtor's consent to reorganization by answer cannot transform an involuntary proceeding into a voluntary one, In re Condon, 2 Cir., 209 F. 800; Klein v. Nu-Way Shoe Co., 2 Cir., 136 F.2d 986, 989-990; In re Supreme Lodge of the Masons Annuity, D.C.N.D.Ga., 286 F. 180, 182; In re Elmsford Country Club, D.C.S.D.N.Y., 50 F.2d 238. The liquidation precedents are not applicable because in liquidation proceedings, unlike Chapter X proceedings, a debtor may file a voluntary petition even after an involuntary petition is filed. In these cases, there was therefore no need to permit the debtor to 'transform' the nature of the original involuntary proceeding, with possible attendant confusion as to the exact meaning of the resulting judgment, or confusion as to the period prior to the petition as to which preferential payments might be set aside.
The debtor did not need this alternative; he could always commence a fresh voluntary proceeding upon his own petition. In reorganization proceedings, however, section 126 prevents the filing of subsequent petitions while a prior petition for reorganization is pending. Once the creditors have taken the initial step, the only way the debtor can eliminate the need for proving acts of bankruptcy without admitting them, is by the type of answer filed here.
Moore v. Linahan, 2 Cir., 117 F.2d 140, 142, does not compel a contrary conclusion. In that case a board of directors, knowing that it was about to be voted out of office, filed an answer to an involuntary petition, consenting to reorganization. When the new board attempted to withdraw the answer, the lower court held that the answer was to be treated as a petition even to the extent of preventing its withdrawal without notice to all creditors under section 59, sub. g, 11 U.S.C.A. § 95, sub. g. The Court of Appeals reversed, holding that section 59, sub. g did not apply to a debtor's answer even though it consented to and prayed for reorganization. It did not hold that an act of bankruptcy must be proved notwithstanding the debtor's desire for reorganization. Its reference to the liquidation cases above cited and its comments upon the difference between Chapter X and Section 77B did not require such an interpretation.
It did not disapprove the holdings of In re Palisades-on-the Desplaines, In re Park Beach Hotel Bldg. Corp., and Snyder v. Fenner, supra; it merely declined to extend them to the extreme of treating a consenting answer as a voluntary petition in form as well as substance. The court's own language emphasized that it was not using a matter of form to defeat a substantial right but rather it was refusing to permit a substantial right to be defeated by a mis-asserted technical claim of form. It said (117 F.2d at page 144):
'* * * Thus on that view of 59, sub. g, (governing the right to withdraw a voluntary petition) our decision would turn upon a question of form rather than of substance, which is to be avoided when possible, though here it seems to us impossible to avoid it for the reasons we have given. Be that as it may, we need not too much regret it even if in this instance form may prevail, because, although directors, so long as they hold office and use an honest judgment, are immune from the control of their shareholders * * * the power to commit a corporation one day before they know they are to be displaced, to a course known to be disapproved by the majority is not one to be generously extended. * * *'
The petition was thus approved without a hearing. As between the petitioning creditors and the debtor this approval of the petition was a final determination.
The debtor did not appeal. Its time to appeal has expired. Proof of an act of bankruptcy not being a jurisdictional fact necessary to the power to hear the case,
but at most a fact necessary to the relief granted, the debtor's only remedy was by appeal. It could not attack this determination collaterally in the proceeding on the stockholder's answer. In re Park Beach Hotel Bldg. Corp., 7 Cir., 96 F.2d 886, 891; Gilbertson v. United States, 7 Cir., 168 F. 672, 674; Edelstein v. United States, 8 Cir., 149 F 636, 638.
After the approval of the petition and before the date set for hearing on the qualifications of the trustee who had been appointed, the stockholder, as permitted by section 137, filed an answer denying the debtor's inability to meet its debts as they matured. It also denied the debtor's insolvency and the commission of any act of bankruptcy. The stockholder, now joined by the debtor, claims that the denials of insolvency and acts of bankruptcy framed material issues requiring a hearing.
Having concluded that the petition of the creditors and answer of the debtor taken together left the proceeding with the same issues as though a voluntary petition had been filed, the stockholder's answer was appraised accordingly. The allegations of acts of bankruptcy having been rendered immaterial by the debtor's prayer for reorganization, the stockholder's denial of those allegations was likewise held to be immaterial. His answer was given the same effect as though it ...