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MCNELLIS v. DUBNOFF

June 5, 1968

Proceeding #1 Phillip J. McNELLIS, as Trustee in Bankruptcy of Donald S. Potter, Plaintiff,
v.
Herman DUBNOFF, Defendant. Proceeding #2 Herman DUBNOFF, Petitioner, v. Honorable David J. GOLDSTEIN, Referee in Bankruptcy in the United States District Court for the Northern District of New York, Respondent



The opinion of the court was delivered by: TIMBERS

TIMBERS, District Judge.

QUESTION PRESENTED

 Upon remand from the Court of Appeals for this Circuit, *fn1" Honorable David J. Goldstein, Referee in Bankruptcy, after a full evidentiary hearing, entered an order on February 7, 1968 refusing to disqualify himself from hearing and determining Proceeding #1 because of alleged interest under Section 39(b) of the Bankruptcy Act, 11 U.S.C. § 67(b). No petition to review the referee's order was filed within 10 days after its entry as provided by Section 39(c) of the Bankruptcy Act, 11 U.S.C. § 67(c).

 On March 11, 1968-33 days after entry of the referee's order - Dubnoff filed in the District Court *fn2" a motion for leave to serve an "amended petition" seeking a writ of prohibition or a writ of mandamus directing the referee to desist from acting further in Proceeding #1 or an order transferring that proceeding to another referee.

 The trustee's motion to quash Dubnoff's motion for leave to serve an amended petition presents for determination the narrow question whether the 10 day time limitation prescribed by Section 39(c) within which a petition to review a referee's order must be filed may be circumvented by filing long after the 10 day period a motion for leave to serve an "amended petition." *fn3" The Court holds that Section 39(c) may not be thus circumvented. The trustee's motion to quash is granted.

 Alternatively, even if Dubnoff's amended petition were timely, the Court would deny it on the merits. To the extent that it seeks transfer of Proceeding #1 to another referee pursuant to Section 22(b) of the Bankruptcy Act, 11 U.S.C. § 45(b), the Court would deny the petition in the exercise of its discretion. To the extent that it seeks review of the referee's order refusing to disqualify himself because of alleged interest pursuant to Section 39(b) of the Bankruptcy Act, 11 U.S.C. § 67(b), the Court would deny the petition on the ground that the referee's order is not a final order, nor is it such an interlocutory order as to be reviewable at this stage of the proceeding; the referee having fully complied with the mandate of the Court of Appeals and of this Court upon remand, his order refusing to disqualify himself must await review of the final order to be entered by the referee in Proceeding #1. Alternatively, therefore, Dubnoff's motion for leave to serve an amended petition is denied.

 On the basis of the motions, affidavits, exhibits, pleadings, transcripts of proceedings before the referee, the referee's findings, decision and order, and the briefs of counsel, the Court makes the following findings of fact and conclusions of law in support of its order entered on the instant motions.

 FINDINGS OF FACT

 (1) On May 28, 1963, Donald S. Potter was adjudicated a bankrupt in this Court. The matter was referred to Honorable David J. Goldstein as referee. The referee appointed Phillip J. McNellis as trustee. The trustee employed the Syracuse law firm of Smith & Sovik as special counsel, compensation to be paid upon application and approval by the referee.

 (2) In the bankruptcy proceeding, Herman Dubnoff filed a claim for $37,500. The trustee moved to expunge the claim; he also sought to recover from Dubnoff all interest paid to him by the bankrupt which the trustee claimed was in excess of six per cent per annum and also to recover certain repayments of principal on the ground that they were fraudulent conveyances. On July 8, 1964, after trial in the bankruptcy court, the referee expunged Dubnoff's claim and granted judgment in favor of the trustee against Dubnoff for $62,628.82.

 (3) Petitions to review the referee's order were filed by the respective parties. On March 18, 1966, Judge Port entered an order reversing the referee, remanding the matter to him for further findings and granting to each of the parties the right to introduce additional evidence. On September 21, 1966, the Court of Appeals affirmed Judge Port's order. McNellis v. Dubnoff, 367 F.2d 513 (2 Cir. 1966).

 (4) The Smith & Sovik firm has acted as counsel of record for the trustee throughout all proceedings herein referred to. Laurence Sovik, a member of that firm, has been in personal charge of all representation of the trustee.

 (5) On December 16, 1966, trial began before the referee pursuant to the remand by Judge Port as affirmed by the Court of Appeals. After some evidence was taken, the trial was adjourned to January 3, 1967.

 (6) Prior to the January 3, 1967 hearing, Dubnoff's attorney (Victor Levine, Esq.) learned that the Sovik firm had purchased from the referee's son, long prior to the instant bankruptcy proceeding, a group life insurance policy on the lives of lawyers and members of the staff of the Sovik firm. This matter was raised before the referee on January 3, 1967. As a result thereof, petitions were filed in this Court by Dubnoff and the referee, each brought on by order to show cause.

 (7) Relying on Sections 39(b), 34(b) and 22(b) of the Bankruptcy Act, 11 U.S.C. §§ 67(b), 62(b), and 45(b), respectively, Dubnoff petitioned the Court to prohibit the referee from acting any further in the proceeding because of his alleged indirect interest therein; to remove him for misconduct; and to have the case transferred for cause to another referee. The referee petitioned the Court to vacate and quash Dubnoff's petition; to expunge the papers filed by Dubnoff seeking the referee's removal; and to dismiss the proceedings brought on by Dubnoff's petition.

 (8) By order entered March 10, 1967, Judge Port vacated that part of the order to show cause obtained by Dubnoff directing the referee to show cause why he should not be removed for misconduct; expunged from the Court's records Dubnoff's petition relative to the removal of the referee; denied the referee's petition to vacate the balance of the order to show cause obtained by Dubnoff; and denied Dubnoff's petition to prohibit the referee from acting further because of alleged interest.

 (9) On Dubnoff's appeal from Judge Port's order, the Court of Appeals on September 14, 1967 affirmed this Court's denial of Dubnoff's petition to remove the referee pursuant to Section 34(b) of the Act; dismissed the appeal from this Court's denial of Dubnoff's petition to transfer the case to another referee pursuant to Section 22(b) of the Act; dismissed the appeal from this Court's denial of Dubnoff's petition because of alleged bias of the referee; dismissed the appeal from this Court's denial of Dubnoff's petition to prohibit the referee from acting further because of alleged interest pursuant to Section 39(b) of the Act; and directed this Court to remand the matter to the referee with instructions to proceed in a manner not inconsistent with the opinion of the Court of Appeals - specifically, to hold an evidentiary hearing on the question of the referee's alleged interest and to enter a definitive order ruling upon the legal sufficiency of such evidence. Dubnoff v. Goldstein, supra note 1, at 721, 724.

 (10) By order entered October 4, 1967, Judge Port remanded to the referee the matter of his qualification to continue to act in the bankruptcy proceeding and directed the referee to proceed on the remand in a manner not inconsistent with the opinion of the Court of Appeals.

 (11) Pursuant to an order entered November 1, 1967 by the referee in response to Judge Port's order, a hearing on the remand was held before the referee on November 8, 1967. The referee's son, under examination by Dubnoff's attorney, testified that he had been selling insurance to several lawyers. A substantial portion of the examination of the referee's son was devoted to comparing a proposal made to the Sovik firm by the Northwestern Life Insurance Company with the policy actually issued to that firm by the Lincoln National Life Insurance Company (the one sold by the referee's son). Exhibits were introduced to show that the total commissions received by the referee's son from all the Sovik policies since November 15, 1962 amounted to $6,000.48; and that he had received commissions totalling $2,832.77 from thirty policies sold to other lawyers during that period.

 (12) Although Dubnoff's attorney subpoenaed the trustee's counsel, Laurence Sovik, to appear at the November 8, 1967 hearing before the referee and he appeared in response thereto, Sovik was not examined by Dubnoff's attorney. During a discussion at the hearing, however, Dubnoff's attorney asked Sovik whether there was some basis upon which the Dubnoff bankruptcy proceeding could be settled; to this, Sovik replied that he would not discuss settlement of the bankruptcy ...


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