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IN RE ELOISE CURTIS

December 6, 1966

In the Matter of ELOISE CURTIS, INC., Bankrupt


The opinion of the court was delivered by: WYATT

WYATT, District Judge.

 This is a petition by James Talcott, Inc. (Talcott) to review an order, filed March 15, 1966, of Referee in Bankruptcy Ryan. Bankruptcy Act (Act of July 1, 1898, c. 541, 30 Stat. 544, as amended; the "Act") 39(c); 11 U.S.C. § 67(c).

 The order of the Referee disapproved the appointment of New York Credit Men's Adjustment Bureau, Inc. (Bureau) by creditors as trustee in bankruptcy of Eloise Curtis, Inc. (Curtis).

 The Act provides that a trustee shall be appointed by the creditors at their first meeting (Section 44a, 11 U.S.C. § 72a) but further provides for approval of such appointment by the Referee (Section 2a(17), 11 U.S.C. § 11a(17)).

 The March 15, 1966 order of the Referee also appointed James G. Foley, Esq. (Foley), trustee of Curtis and fixed the amount of his bond. The Act provides in relevant part: "If the creditors do not appoint a trustee or if the trustee so appointed fails to qualify as herein provided, the court [Referee] shall make the appointment" (Section 44a, 11 U.S.C. § 72a).

 Petitioner Talcott is a general non-priority creditor of Curtis for $10,796.21 and is the largest of such creditors. Talcott nominated and voted for the Bureau as trustee at the first meeting of creditors.

 The petitioner contends that the findings and conclusions of the Referee are "clearly erroneous" or "patently erroneous" (Brief, pp. 20, 27, 68) and were not the exercise of a judicial discretion (Brief, p. 80) but the result of "bias" and "prejudice" (Brief, pp. 31, 39, 41, 48, 69). The petitioner further contends that, if the Referee did exercise a discretion which is sustained by this Court, the matter should be remanded to the Referee for appointment of a new trustee by creditors, it being asserted that the Referee has no power to appoint under the circumstances here. The petitioner also contends that the order under review is a nullity because of an alleged violation by the Referee of Rule 21(a) of the Bankruptcy Rules of this Court.

 Two of these contentions may be dealt with summarily.

 Rule 21(a), just mentioned, is as follows:

 
"Referees shall make and file decisions within two months after final submission and shall forthwith give notice of such filing to the parties or their attorneys."

 It is asserted for Talcott that the Referee did not make his decision within the two month period. Assuming this to be true (and in view of the lengthy record, it is not surprising), certainly the order of the Referee does not thereby become a "nullity" (Brief, p. 90). The Rule does not so provide; it is highly doubtful that this Court would have authority so to provide. This contention for Talcott is without merit.

 As for bias and prejudice by Referee Ryan, I conclude after a careful study of the entire record that no bias and prejudice on his part is shown by the record. In disapproving the Bureau, Referee Ryan undoubtedly exercised a discretion as a judicial officer.

 The issue is not whether this Court would have made the same decision as the Referee made. The issue here is whether the Referee abused the discretion vested in him by Section 2a(17) of the Act (11 U.S.C. § 11a(17)).

 Thus the problems raised by the petition to review are (a) whether the exercise of discretion by the Referee in disapproving the Bureau as trustee was within permissible limits and (b) if so, whether appointment of a new trustee is properly to be made by the Referee or by creditors.

 The conclusion which I have reached is that the order of the Referee of March 15, 1966 should be in all respects approved and confirmed.

 The present petition is but the latest move in a long contest which has required substantial attention from counsel, the Referee, this Court and the Court of Appeals. It may be helpful to an understanding of the present problems if the background events are related chronologically.

 I

 Eloise Curtis, Inc. and Young Things, Inc. (Young) are two New York corporations. They made dresses in the same premises at 498 Seventh Avenue in New York City. The ownership of the two corporations was the same. Eloise Curtis and her husband, Harry Jaffe, owned all the stock of Curtis and, although the stock of Young was never issued (and the subscription price never paid), apparently it was in their ownership also. Eloise and Harry directed and operated the two enterprises. Eloise designed the dresses, the piece goods were cut on the premises, and the garments were sewn and finished by outside contractors. Curtis made dresses for women; Young made dresses for children. The only reason there were two corporations instead of one was that union labor on clothes for children is cheaper than on clothes for women. The separation was to facilitate this advantage for the children's clothes.

 In the early spring of 1963, Curtis and Young were in serious financial difficulties and their owners, Eloise and Harry, consulted Harris Levin, Esq. They had no operating capital, there were lawsuits pending, in one or more of such lawsuits judgments could be entered shortly, there was a dispossess proceeding, the expected volume of sales had not materialized, the inventory was too large, and the gross profit was too small. The good accounts receivable of both companies had been assigned to MGM Factors Corporation (MGM). The three - Levin, Eloise and Harry - concluded that liquidation was inevitable and the only question was whether it should be by way of bankruptcy in the federal court or by way of an assignment for the benefit of creditors in the state court (New York Debtor and Creditor Law §§ 1 and following). Levin advised that the assignment method in the state court be used and at his suggestion (because some of the creditors were members of groups affiliated with the Bureau) assignments to the Bureau for the benefit of creditors were executed by Curtis and by Young. The two assignments were delivered to the Bureau on April 3, 1963 and after being accepted for the Bureau on April 4, 1963 they were then recorded on the morning of the same day in the office of the Clerk of the County of New York (Debtor and Creditor Law § 3).

 The Bureau called a meeting of creditors of both companies for April 8, 1963 and sent a notice to all such creditors having claims for more than $500. The meeting was held and Joseph S. Herbert, accountant for the assignors, was present to make a report which included, among other things, that in the two campanies designing expenses were so much that the sales were insufficient to enable the business to show a profit. The creditors formed one committee of five members for both companies, the committee being representative of the five largest general creditors. This committee met on the same day and recommended that the Bureau as assignee employ Fred Landau & Co. (Landau) as accountants, and Hahn, Hessen, Margolis & Ryan, Esqs., as attorneys. This was done. The books and records of the two companies were then turned over to Landau and a report from Landau was asked.

 Neither Curtis nor Young ever filed the "Debtor's Schedule" (which includes an inventory of all property) required to be filed by them (Debtor and Creditor Law § 4, subd. 1) nor did the Bureau as assignee follow the statutory procedure to compel them to do so (Debtor and Creditor Law § 4, subd. 2).

 No assignee in New York may deal with the assigned estate in any way until a bond is filed in an amount determined by the judge (Debtor and Creditor Law § 6).

 On April 15, 1963 the Bureau as assignee of Curtis petitioned the state court to fix bond in the amount of $13,000 and to permit a sale of all assets at auction. It was represented that the assets were at 498 Seventh Avenue and consisted of machinery and equipment ($2,000), piece goods and finished garments ($6,000), and equity in accounts receivable ($5,000). An order as prayed for was made by the court at Special Term Part II on April 15, 1963. A file for Curtis was opened at Special Term Part II Assignment Bureau under volume 28, page 29. The Bureau filed on April 22, 1963 a bond as assignee of Curtis.

 No order was sought fixing bond as assignee of Young and, of course, no file for Young was opened at Special Term Part II.

 The Bureau, in qualifing as assignee of Curtis but not as assignee of Young, took the arbitrary position that all the property at 498 Seventh Avenue belonged to Curtis and that Young had no assets. This was after an explanation by counsel that it "would appear" that Young "had no assets" (SM 700-01), that Herbert had treated the two companies "as a consolidated matter" (SM 701) and that they "would eventually have to consolidate both Eloise Curtis and Young Things into one" (SM 701).

 (The stenographic minutes are principally in four volumes, marked I, II, III, and 4; volumes I through III cover the period April 10, 1964 - March 8, 1965 and their pages are numbered consecutively in the upper right corner from 1 through 1509 but pages 1508 and 1509 have been renumbered in the lower right corner 1507-A and 1507-B; volume 4 covers the period September 4, 1963 - March 16, 1964 and its pages are numbered in the lower right corner consecutively from 1508 through 1683; SM references are to upper right numbers from 1 through 1507 and to lower right numbers from 1507-A through 1683; SM references to minutes after March 8, 1965 identify the date and page number.)

 The Bureau, by authority of the state court, sold at auction on April 22, 1963 all the property on the premises of the two companies at 498 Seventh Avenue. Apparently this was on the assumption that everything belonged to Curtis and nothing to Young. The gross amount realized from the sale was $18,606.98, out of which the Bureau paid $2,562.97 to the auctioneer and for expenses.

 When Landau was ready to submit a report, the Bureau called a meeting of the committee of creditors. This meeting was held on June 7, 1963. A written report by Landau as of April 4, 1963 was submitted. This gave figures for Curtis and Young separately but treated them in a "combined statement of affairs" (Ex. 6, p. 3).

 On a combined basis, it was estimated by Landau that $34,526 would be realized from the assets as follows: from trade accounts receivable (over and above debt to MGM), $11,835; from cash surrender value of insurance policies, $2,300; from cash, employee receivables, merchandise inventory on the premises and furniture and fixtures (at amounts actually realized on auction), $20,391. The unsecured claims of creditors were shown at $273,781. Among the amounts owing to creditors were $383 in "wages payable" and $35,461 in "union benefits payable". This total amount of $35,844 would be preferred in the state court (Debtor and Creditor Law § 22) and, since expenses of administration are paid first out of assets, it was clear on the basis of the Landau report that unsecured creditors would receive nothing on their claims from the assignment proceedings. The Landau report also showed liabilities for federal, state and other taxes amounting to $33,142.

 Counsel for the assignee pointed out to the committee of creditors at the June 7, 1963 meeting the preferred status of the "union benefits payable" in the state court assignment proceedings, namely, that these amounts would be paid in priority to general creditors; he also pointed out that there would be no such priority in bankruptcy. It was then agreed by the committee that, to avoid the state court priority to union benefits, an involuntary petition in bankruptcy would be filed, that the three petitioners required would be three of the creditors represented on the committee, that a letter would be sent out by the Bureau to creditors of Curtis (SM 777) advising that the petition in bankruptcy had been filed and soliciting proofs of claim and powers of attorney running to the committee, that these powers would be voted for the election of the Bureau as trustee, and that the committee as then constituted would become the "official committee" (SM 771) of creditors in bankruptcy (11 U.S.C. § 72b).

 It is of interest to note that bankruptcy was agreed upon by the committee for Curtis only. Young was to be left in the state court. The two corporations were separate entities and their assets and liabilities were separate. However, either in reliance upon advice of counsel or for some other reason, the committee of creditors and the Bureau arbitrarily treated all assets of the two corporations as belonging to Curtis and ignored the assets and liabilities of Young. This procedure was bound to create serious confusion at the least.

 It is also of interest to note that the decision in favor of bankruptcy and to eliminate the preferred status of "union benefits payable" was made by general non-priority creditors who had a very remote interest, if any, in the administration of the estate. In bankruptcy, taxes are entitled to priority over general creditors (11 U.S.C. § 104). There were $33,142 in taxes due on a combined basis and on that basis, with expenses of administration being paid first, it was obvious that general creditors would receive nothing in bankruptcy out of an estate estimated to realize $34,526. A member of the committee of creditors stated at the first meeting of creditors that "tax claims will more than eat up whatever is in it. There is nothing here for creditors, even before we sit down * * * there is nothing there, absolutely nothing." (SM 1514). As was stated by Talcott in a petition verified April 8, 1964: "The priority tax claims will consume all of the sums which will be on hand after the payment of proper administration expenses".

 What in fact will happen to the claims of creditors of Young, after treatment of all assets as belonging to Curtis, is an intriguing matter of speculation.

 In any event, the general non-priority creditors without any real interest in the matter were able to determine that the assets should be distributed in bankruptcy to pay tax claims rather than in assignment proceedings to pay union benefit claims.

 On June 27, 1963, an involuntary petition in bankruptcy was filed in this Court against Curtis by three creditors (one of them being Talcott) whose representatives were members of the committee of creditors. The act of bankruptcy was alleged to be the assignment for the benefit of creditors (11 U.S.C. § 21a(4)). The attorneys for the petitioning creditors were the same attorneys who had been retained by the Bureau as assignee of Curtis and Young.

 On the default of Curtis, Judge McMahon made an order on July 17, 1963, adjudging Curtis a bankrupt and referring the matter to Referee Ryan.

 No petition in bankruptcy has ever been filed against Young. The Bureau is in theory still acting as assignee of Young under state law but has in general proceeded on the mistaken assumption that Young had no assets.

 The first meeting of creditors of Curtis took place on September 4, 1963. A member of the committee of creditors attended the meeting with powers of attorney from 79 general non-priority creditors who had filed claims aggregating $69,807.17 (Ex. 49), out of $94,198 total owed by Curtis to general creditors (Ex. 6, p. 5) or about 75% in dollar amount of claims of general creditors. Talcott nominated the Bureau as trustee, there were no other nominations, the claim of Talcott was found by the Referee to be "proper for voting purposes" (SM 1510), and such claim was voted for the Bureau as trustee. The other claims were not voted because there was no necessity to do so. The Referee found that the Bureau had been appointed as trustee (SM 1511). The Referee fixed the bond of the trustee at $16,000 but postponed the filing of a bond until after his decision whether to approve. At the first meeting, there was also appointed by the creditors a committee of five, the members being the same as those who had been on the committee in the state court assignment proceedings.

 The Referee at the first meeting on September 4, 1963, stated a belief that "the assignee for the benefit of creditors is not qualified to be elected trustee, because he has a definite conflict of interest * * *" (SM 1514). He adjourned the meeting to September 16 to give Talcott an opportunity to put anything on the record to indicate why the Bureau was not disqualified (SM 1510).

 There was a hearing at the adjourned meeting on September 16 at which Talcott presented the testimony of the assistant secretary of the Bureau.

 By order with opinion filed September 30, 1963, the Referee disapproved the appointment of the Bureau as trustee because it had been assignee and its accounts as such were unsettled. The Referee by the same order appointed Foley as trustee and fixed his bond at $16,000. Foley filed the required bond on October 3 (11 U.S.C. § 78b). The Referee approved the retainer by Foley of Melvin Lloyd Robbins, Esq., as his counsel.

 On October 9, 1963, in the motion part I granted a motion by Talcott to stay Foley from acting as trustee pending decision by the District Court of the petition by Talcott to review the September 30 order of the Referee.

 On October 10 at the adjourned first meeting a member of the committee of creditors attempted to nominate another trustee, taking the position that upon disapproval by the Referee of a trustee, creditors (and not the Referee) had the right to appoint a new or substitute trustee. The Referee refused to permit the nomination by creditors of another trustee.

 By order with memorandum filed November 6 Judge Murphy confirmed "on the opinion of Referee Ryan" the order of Referee Ryan of September 30, both as to disapproval of the Bureau as trustee and as to appointment of Foley as trustee. Judge Murphy also vacated my stay of Foley acting as trustee.

 Talcott then filed notice of appeal to the Court of Appeals from the November 6 order of Judge Murphy.

 By order filed November 13 Judge Murphy stayed Foley from acting as trustee pending decision on the appeal. The stay was later modified to expire December 2 so as to enable the Court of Appeals to determine whether there should be a stay.

 By order filed November 21, the Referee ordered the Bureau to account to the bankruptcy court as assignee of Curtis. The Bureau filed such an account on November 29.

 On December 2, 1963, the Court of Appeals granted a motion by Talcott for a stay of Foley acting as trustee. Argument of the appeal was set in the same order for December 9.

 On January 23, 1964, the Court of Appeals reversed the order of Judge Murphy (326 F.2d 698; Smith and Hays, C.JJ.; Clark, C.J., had heard oral argument but did not participate in the decision). Judge Hays for the Court stated that the Bureau should not be disapproved as trustee solely for the reason that it had been assignee, but that the Referee "should exercise his discretion in the light of the particular facts before him", and that in the case at bar there "may be a question as to the Bureau's eligibility to act as trustee in the light of its conduct as assignee" (326 F.2d at 701). The Court of Appeals did not consider this last question but noted that it would be "relevant to the referee's deliberations on remand" (326 F.2d at 701). The Court of Appeals remanded the case "with instructions to the referee to determine the issue as an issue of discretion, rather than an issue of law" (326 F.2d at 701). The Court of Appeals declined to pass on the question whether, on disapproval of a trustee, the Referee had the right to appoint a trustee (326 F.2d at 701).

 At adjourned first meetings on February 13 and 17, 1964, Talcott suggested that the Referee should hold hearings on the qualifications of the Bureau as trustee. The Referee declined and on February 17, 1964, filed a "memorandum on remand". This explained that the September 30, 1963, order had been made in the exercise of discretion. The Referee continued "to decline to approve the appointment of the Bureau as the trustee" and stated: "James G. Foley shall continue to serve as trustee ".

 Talcott petitioned for review of the February 17, 1964 order and on April 8, 1964, Judge Palmieri signed ex parte an order staying Foley from acting as trustee until hearing of an order to show cause seeking the same relief.

 By order with opinion filed July 29, 1964 Judge Bryan reversed the Referee's February 17, 1964 order "because under the unusual circumstances which exist here the ends of justice will be better served by giving Talcot an opportunity to present any further proof which may be available on the questions raised and because a full hearing on the subject may cast light on the dark corners which it has been inferred may exist." Judge Bryan declined to pass on the authority of the Referee to appoint Foley as trustee. Judge Bryan remanded for further hearings.

 The further hearings directed by Judge Bryan commenced before the Referee on September 30, 1964. Counsel for Foley appeared. Counsel for the Bureau and for Talcott objected to any participation by Foley in the proceedings on the ground that the order appointing Foley had been reversed. The Referee overruled this objection and counsel for Foley did participate in the proceedings.

 Evidence was presented at hearings on September 30; on November 13 and 19; on December 2 and 11, 1964; and on January 18, 1965.

 On January 19, 1965, counsel for the Bureau (being the same as counsel for Talcott) presented to the Referee an application for approval of the payment of a bill of the reporter for stenographic minutes of the hearings before the Referee. The payment was to be made out of funds in the hands of the Bureau as assignee of Curtis. The Referee declined to approve the application because it was "very carefully couched in terms that studiously avoid any recognition of the status of Mr. Foley" (SM 1057), whereas the Referee believed Foley to be the lawfully appointed trustee (SM 1057).

 The hearings thereafter continued for the receipt of evidence on January 19, 20 and 22, 1965, and on March 8, 1965 at which time there was an adjournment to April 12, 1965.

 Evidently concerned, among other things, over payment of the reporter for the stenographic minutes (a problem left open by his refusal to approve payment by the Bureau as assignee), the Referee on his own initiative made an order on January 21, 1965, directing the Bureau to turn over to Foley, as trustee of Curtis, all property of Curtis in the hands of the Bureau as assignee of Curtis. The Bureau was also ordered "fully to account * * * by filing * * * a detailed supplemental statement, under oath, showing further disposition". It was recited in the preamble to this order, among other things, that the accounting of the Bureau as assignee, filed November 29, 1963, appeared to be "not complete".

 The Bureau applied to the Referee for an extension of time within which to file a petition to review his January 21, 1965 order. By memorandum and order filed January 29, 1965, this application was denied as "without merit"; the memorandum was critical of the Bureau both as to the Curtis estate and as to its practices generally.

 On the same day as the last described order of the Referee, either before that order was filed or being unaware of its filing, the Bureau obtained from Judge Metzner an order extending its time to petition for review of the January 21, 1965 order of the Referee and staying compliance with that order pending determination of the petition to review.

 On February 11, 1965, the Bureau filed its petition to review the January 21, 1965 order.

 Bankruptcy Rule 21(c) of this Court is as follows:

 
"To enable referees to comply with Section 39a(8) of the Bankruptcy Act, the party who files with the referee a petition to review a referee's order, shall, within ten days thereafter, or within such further time as the referee may for cause shown allow, furnish the referee with (1) a transcript of the evidence or a summary thereof agreed on by the parties; (2) all exhibits, and (3) the expense, if any, of transporting the same to the clerk."

 On February 24, 1965, the Referee, acting under this rule, made the following order:

 
"ORDERED, that the petitioner for review shall, on or before the 8th day of March, 1965, furnish the undersigned with (1) a transcript of the evidence or the summary thereof agreed on by the parties, and (2) all exhibits not heretofore furnished to the Court.".

 The Bureau filed a petition to review this February 24, 1965 order.

 In addition to the two petitions to review, two orders to show cause were obtained.

 By order signed March 4 and filed March 5, 1965 and on petition of the Bureau, Judge Levet required Referee Ryan to show cause before this Court why his February 24, 1965 order should not be vacated. Pending determination of this application Judge Levet stayed compliance by the Bureau with that order of the Referee.

 By order signed March 19 and filed March 24, 1965 and on petition of Talcott, Judge Cannella required Referee Ryan to show cause before this Court why his January 21, 1965 order should not be vacated.

 Talcott applied to the Referee for an adjournment of the hearings before him until after determination by this Court of the two petitions to review and the two orders to show cause. ...


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