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IN RE AUTOCUE SALES & DISTRIB. CORP.

April 28, 1958

In the Matter of AUTOCUE SALES & DISTRIBUTING CORP., Bankrupt


The opinion of the court was delivered by: DIMOCK

This is a petition to review the order of Referee in Bankruptcy Irwin Kurtz directing Allen Murray Myers and Teleprompter Corporation to turn over to the trustee certain accounts receivable transferred to Myers by the bankrupt after the filing of the petition. The petition also seeks review of the Referee's order which held that the controversy could be determined in a summary proceeding.

The Trustee moved by order to show cause on June 13, 1957, to set aside the transfers. The trustee's petition alleged that, between the time of the filing of the petition in bankruptcy and the adjudication, transfers of certain accounts receivable were made by the bankrupt to petitioner Myers who mas acting on behalf of petitioner Teleprompter Corporation. Petitioners' answer admitted the fact of transfers, alleged that they had acted in good faith and had paid a present fair equivalent value therefor, offered to rescind the transfers in return for the consideration paid and prayed that, in the event of a turnover order, it be upon the condition that the trustee would return the consideration.

 On September 5, 1957, the Referee ordered a preliminary hearing on the question of the summary jurisdiction of the bankruptcy court to determine the controversy. Myers and Teleprompter Corporation appeared specially to contest the summary jurisdiction of the bankruptcy court and, after a hearing, the Referee, in an opinion and order dated December 30, 1957, decided that the bankruptcy court had summary jurisdiction and set the matter down for hearing on the merits on January 9, 1958 unless both parties stipulated that the controversy be decided on the record made at the preliminary hearing. The trustee moved on January 3, 1958, for a turnover order based on the record on the preliminary hearing. On January 9, 1958, Myers and Teleprompter Corporation, hereinafter petitioners, petitioned for review of the order which declared that the court had summary jurisdiction and refused to proceed with further hearing. The Referee then made the turnover order on January 16 and, on January 20, petitioners filed their supplemental petition to review both orders.

 Petitioners assign error in the entering of the final turnover order before review of the order on the question of summary jurisdiction. Assuming that the first order was reviewable, petitioners were in no way prejudiced by the execution of that order before review. No application was made pursuant to section 39(c), 11 U.S.C. § 67, to suspend execution of the order pending review. Petitioners had a hearing on all the issues; they were entitled to a further hearing but, since they did not choose to have one held, the Referee's completion of the proceeding was not error. I will review both orders.

 An involuntary petition in bankruptcy was filed on September 5, 1956, an amended petition was filed on October 10, 1956, pursuant to stipulation with the petitioning creditors, and the second and final amended petition was filed on November 29, 1956, pursuant to stipulation and by order of the District Court. The transfers in question were made on November 30, 1956, December 3 and December 7, all after the filing of the final amended petition. The order of adjudication was entered on December 10, 1956.

 Section 70(d) and subdivisions (1), (3) and (5) thereof, 11 U.S.C. § 110(d)(1), (3), (5), provide:

 '(d) After bankruptcy and either before adjudication or before a receiver takes possession of the property of the bankrupt, whichever first occurs --

 '(1) A transfer of any of the property of the bankrupt, other than real estate, made to a person acting in good faith shall be valid against the trustee if made for a present fair equivalent value or, if not made for a present fair equivalent value, then to the extent of the present consideration actually paid therefor, for which amount the transferee shall have a lien upon the property so transferred;

 '(3) A person having actual knowledge of such pending bankruptcy shall be deemed not to act in good faith unless he has reasonable cause to believe that the petition in bankruptcy is not well founded;

 '(5) A person asserting the validity of a transfer under this subdivision shall have the burden of proof. Except as otherwise provided in this subdivision and in subdivision g of section 21 of this Act, no transfer by or in behalf of the bankrupt after the date of bankruptcy shall be valid against the trustee'.

 By reason of a statement in petitioners' answer that, at the time of the transfers, they had knowledge 'of the filing of the involuntary petition in bankruptcy', the Referee held that petitioners had admitted that they had had actual knowledge of the pendency of the petition. In addition he found that they had not sustained their burden of proof that they had reasonable cause to believe that the petition in bankruptcy was not well founded. The Referee held, therefore, that petitioners were not acting in good faith and that the trustee was entitled to recover the transferred accounts.

 Petitioners contend that they were entitled to a plenary proceeding because their claim was substantial. It is true that, where the controversy is with respect to property transferred before the filing of the petition, the bankruptcy court must, before it can hear the controversy in a summary proceeding, make a preliminary inquiry to determine whether the adverse claim is substantial or merely colorable. Taubel-Scott-Kitzmiller Co. v. Fox, 264 U.S. 426, 44 S. Ct. 396, 68 L. Ed. 770. Once the petition is filed, however, the trustee is vested with title to all property in the possession of bankrupt, section 70(a), 11 U.S.C. § 110(a), and the bankruptcy court has summary power to determine controversies with respect to property transferred after that date irrespective of the substantiality of the transferee's claim. In re Borok, 2 Cir., 50 F.2d 75; Street v. Pacific Indemnity Co., 9 Cir., 61 F.2d 106; Bank of California National Ass'n v. McBride, 9 Cir., 132 F.2d 769; cf., In re Worrall, 2 Cir., 79 F.2d 88. Since, in this case, the bankrupt had undisputed possession of the accounts receivable at the time of the filing of the petition and title to that property had vested in the trustee as of that time, the controversy as to the subsequent transfer was properly determined in a summary proceeding.

 Petitioner cites 4 Collier on Bankruptcy, 14 ed., § 70.68, p. 1337, in support of his contention that a plenary suit is required to determine a substantial claim under section 70(d). Collier's statement is erroneous. See MacLachlan, Bankruptcy, § 194, p. 206; § 293, p. 346. He relies on four cases as ground for it: In re Zotti, 2 Cir., 186 F. 84, certiorari denied 223 U.S. 718, 32 S. Ct. 522, 56 L. Ed. 628; In re Laplume Condensed Milk Co., D.C.M.D.Pa., 145 F. 1013; In re Retail Stores Delivery Corporation, D.C.S.D.N.Y., 11 F.Supp. 658, and In re Ferrell, D.C.S.D.Fla., 2 F.Supp. 348.

 The Laplume case is the only one of the four cases cited by Collier which lends him any support and its language is contra to In re Borok, supra, ...


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