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In re Hudson & Manhattan Railroad Co.

decided: February 9, 1956.


Author: Lumbard

Before FRANK, HINCKS and LUMBARD, Circuit Judges.

LUMBARD, Circuit Judge.

Since December 14, 1954 the Hudson & Manhattan Railroad Company, which owns and maintains the Hudson Tubes, an electric railway running for 14 miles from Newark, New Jersey to lower and mid-town Manhattan, has been operated by a trustee appointed by the District Court in a Chapter X bankruptcy proceeding. This debtor now complains of orders 28 and 36, signed by Judge Walsh on February 23 and April 7, 1955 respectively. Order 28 denied the debtor authority to employ an engineering firm to value the debtor's property as of August 11, 1954, when three creditors filed an involuntary petition for a Chapter X bankruptcy proceeding. Order 36 denied the debtor's petition for leave to withdraw an "amended answer" and "consent to reorganization" which it had served and to file an "answer de novo" to the creditors' petition in place of its original answer of December 8, 1954.

Judge Walsh's orders were proper in all respects. As to Order 28, the debtor had long since been foreclosed from contesting the issue of insolvency by its answer of December 8, 1954, wherein it stated its inability to meet its debts as they matured, did not deny its insolvency, and consented to and prayed for its reorganization under Chapter X, 11 U.S.C.A. §§ 501 to 676. As to Order 36, it was well within the judge's discretion not to permit the debtor to change its position of consent, taken deliberately and with full knowledge of the consequences, when it made no showing of any good reason for such change. A brief recital of events preceding Orders 28 and 36 fully supports the judge's actions:

After three bondholders had, on August 11, 1954, filed a creditors' petition for a Chapter X reorganization, the debtor moved to dismiss on the ground that Chapter X did not apply as the debtor was part of a general railroad system. While this motion was awaiting decision the debtor on November 19, 1954 filed a voluntary petition alleging that it was unable to meet its debts as they matured and asking reorganization as a railroad under Chapter VIII, 11 U.S.C.A. § 205, sub. m. This petition was referred to Judge Walsh who, on December 1, 1954 in a well considered opinion reported at D.C., 126 F.Supp. 359, denied the motion to dismiss the Chapter X proceeding and dismissed the debtor's petition for a Chapter VIII reorganization on the ground that Hudson & Manhattan was an interurban electric railway not operated as part of a general railroad system and thus was not eligible for Chapter VIII treatment. It is doubtful that this determination is now subject to review inasmuch as no appeal was taken either from the dismissal of the debtor's petition or from the denial of the motion to dismiss the Chapter X petition. Stoll v. Gottlieb, 1938, 305 U.S. 165, 59 S. Ct. 134, 83 L. Ed. 104. In any event Judge Walsh's determination is well supported by the facts and the law.

The debtor's Board of Directors at a meeting on December 2 voted not to appeal Judge Walsh's decision. On the following day William Reid, president of the debtor and chairman of its Board of Directors, announced publicly that the Board had decided to file such papers as were necessary to permit reorganization to proceed immediately under Chapter X; he pointed out that this made "unnecessary any further litigation regarding the applicable section of the Bankruptcy Act." Thus the debtor took no appeal.

Thereafter debtor's counsel advised the directors to deny any acts of bankruptcy lest they be held personally liable under the New York Stock Corporation Law McK.Consol.Laws, c. 59, § 1 et seq., for any preferential transfers made when the debtor was insolvent. Thus the debtor's answer filed on December 8, already referred to above, denied any act of bankruptcy and denied that certain payments set forth in the petition had been preferential and had been made with intent to prefer any unsecured creditor. However, the debtor "without conceding the applicability of Chapter X" admitted that it was unable to meet its debts as they matured, consented to the reorganization and joined in so much of the petition as prayed for reorganization. The answer did not deny the creditors' allegation that the debtor was insolvent.

Section 142 of Chapter X, 11 U.S.C.A. § 542 reads:

"If an answer is not filed by a debtor to a petition against it, or if the answer filed does not controvert any material allegation of the petition, the judge shall enter an order approving the petition if satisfied that it complies with the requirements of this chapter and has been filed in good faith, or dismissing it if not so satisfied."

The answer filed by the debtor on December 8 empowered the court under this section to approve the petition without a hearing and to appoint a trustee. The debtor's consent to reorganization and admission of inability to pay debts made the controverted allegations relating to acts of bankruptcy immaterial.In Moore v. Linahan, 2 Cir., 1941, 117 F.2d 140, certiorari denied Sargent & Co. v. Moore, 314 U.S. 628, 62 S. Ct. 59, 86 L. Ed. 504, we held that under Chapter X the debtor's answer, even though it requests reorganization and admits the allegations of the petition, cannot itself become a voluntary petition. We pointed out there, however, that the requirement in § 131, 11 U.S.C.A.§ 531, that an act of bankruptcy be alleged in an involuntary petition was for the protection of the debtor. We suggested that a creditor or shareholder should not be permitted to controvert the allegation of an act of bankruptcy if the debtor consents to reorganization and does not choose to avail itself of such a defense. But see 6 Collier on Bankruptcy 1631-32. For the same reason, if the debtor consents to reorganization it may not at the same time raise an issue as to the existence of an act of bankruptcy. The only purpose of raising such an issue is to protect the debtor from an unnecessary reorganization. It is does not desire that protection, it cannot impose upon the court the necessity of a hearing on the issue. Judge Walsh was correct in his view that the debtor's answer rendered immaterial any issues relating to insolvency or acts of bankruptcy. Cf. In re Palisades-on-the-Desplaines, 7 Cir., 1937, 89 F.2d 214, 216, 217; Snyder v. Fenner, 3 Cir., 1939, 101 F.2d 736. This conclusion is not inconsistent with Moore v. Linahan, supra, for we do not hold that the debtor's answer becomes a voluntary petition, but merely that the filing of such an answer makes it unnecessary for the petitioner to allege or prove any of the acts required by § 131, 11 U.S.C.A. § 531.

This result finds further support in the fact that the debtor's answer constituted a written admission of inability to pay its debts and willingness to be adjudged a bankrupt. This would itself constitute an act of bankruptcy under § 3, sub. a(6) of the Bankruptcy Act, 11 U.S.C.A. § 21, sub. a(6). In re Waxaid Co., D.C.D.Md.1943, 55 F.Supp. 289, 291. Thus even if the petitioning creditors were required to prove an act of bankruptcy and failed to do so, they could immediately file a new petition alleging the debtor's answer as an act of bankruptcy.

Judge Walsh was therefore correct in treating the pleadings as if the answer had not controverted any material allegation of the petition and finding that the petition "by reason of the Debtor's answer and consent to reorganization" complied with the requirements of Chapter X. He approved the petition and in the same order on December 14 appointed Herman T. Stichman as trustee.Eight days later, on December 22, and within the time permitted by 11 U.S.C.A. § 537, stockholder Kyriacos Dimitriou filed an answer which denied the debtor's insolvency, the commission of any acts of bankruptcy, and inability to meet debts as they matured.

Thereafter on December 27 the debtor served what it called an "amended answer" in which, for the first time, it specifically denied that it was insolvent. The debtor again set forth its inability to meet its debts and its consent to reorganization. Such an amended answer, filed without leave of the court after Judge Walsh's order of December 14 which was based on the debtor's original answer of December 8, was a nullity. We assume that Rule 15, Fed.Rules Civ.Proc. 28 U.S.C.A., is applicable under Chapter X. That Rule provides that "if * * * the action has not been placed upon the trial calendar," a party may amend his pleading as a matter of course "at any time within 20 days after it is served." But that Rule cannot be construed as permitting amendment without leave of court after the court has determined the issues to which the pleadings are directed. Especially must this be so in view of the ten day time limit for filing the answer under 11 U.S.C.A. § 536 and the need for expedition in reorganization proceedings. But even if the amendment was timely it would not alter the result since the debtor reiterated its consent to reorganization and its inability to meet its debts as they matured.

On February 18, 1955 the debtor petitioned for authorization to retain an engineering firm to appraise its property. When this was heard on February 23 debtor's counsel argued that insolvency was a condition to the reorganization proceeding and that this was still to be determined. Judge Walsh denied the motion on the grounds that the debtor's answer had made insolvency immaterial and that in any event the debtor was barred from contesting the issue. In both of these conclusions he was correct. We have already pointed out that when the debtor consented to reorganization and alleged the essentials of a voluntary petition, the issues relating to acts of bankruptcy and insolvency were removed from the case. In addition § 149 of Chapter X, 11 U.S.C.A. § 549, made the Court's order of December 14 approving the petition conclusive against the debtor. Section 149 provides: "An order, which has become final, approving a petition filed under this chapter shall be a conclusive determination of the jurisdiction of the court." Of course the order of December 14 was not a final order conclusive against the shareholder who answered under § 137, 11 U.S.C.A. § 537. Since his answer was timely filed he cannot be barred except by a final order determining the issues raised by his answer. 6 Collier on Bankruptcy 1805-06. But the debtor may not answer under § 137; its only means of contesting the petition is by answering within ten days under § 136, 11 U.S.C.A. § 536. Since it has answered under ...

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