218 F. 659 | D.S.C. | 1914
This matter came on to be heard upon a petition for involuntary bankruptcy filed against the Maplecroft Mills, on September 10, 1914. This petition alleged that the Maplecroft Mills, a cotton manufacturing corporation, was insolvent, and that it had committed an act of bankruptcy, in that on the 25th of August, 1914, preceding it had allowed a receiver because of its insolvency to be put in charge of its property by the court of common pleas for Pickens county in the state of South Carolina. To this petition the Maplecroft Mills answered, denying insolvency, denying that it had committed the act of bankruptcy alleged in the petition, and requiring that the issues be inquired of by a jury. The cause was thereupon placed upon the docket for the trial of issues by a jury in bankruptcy, and was called at the October, 1914, term at Greenville. Upon the call a jury was impaneled, and for evidence to support their petition the petitioners introduced in evidence the record from the court of common pleas for Pickens county in the case of Carolina Supply Company and William Goldsmith v. Maplecroft Mills. The construction of that written record is for the court, and if in the opinion of the court it appeared upon the face of this record that the property of the Maple-croft Mills was upon the date stated placed in the hands of a receiver by the state court because of insolvency, it was the duty of the court to instruct the jury to find a verdict to that effect. There were other points at issue in the petition and answer; but inasmuch as if in the opinion of the court the construction of the record was as above stated, it determined and ende.d the cause. The court, therefore, being of the opinion that the proper construction of the record so.puf ip evidence was to the effect that it appeared upon the face thereof that because, of insolvency a receiver was, on August 25, 1914, by the court of common pleas for Pickens copnty placed in charge of the property pf the Maple-croft Mills, it thereupon directed a. verdict to-that effect, to he rendered
Full argument and consideration has been had upon such argument, and the matter is now before the court for determination. If the conclusion of the court be that it was in error in its ruling as to the construction of the proceedings in the state court, then a new trial should be ordered on any other issues involved in the petition which would justify an adjudication in bankruptcy; if, however, the opinion of the court is finally that it was correct in its construction of that record made at the time of trial, then a new trial would be refused and an adjucation in bankruptcy ordered. The question, therefore, primarily and for the purposes of this present decision entirely depends upon the proper construction to be placed upon the proceedings and the order thereon made in the state court.
“Tinder the second provision it has been held that where the creditors’ petition charges a single act of bankruptcy, viz., ‘because of insolvency a receiver or trustee has been put in charge of his property under the laws of a state; the act of bankruptcy is dependent upon the state of facts disclosed upon the record in the case before the court making the appointment of a receiver. In re Douglas Coal & Coke Co. (D. C.) 131 Fed. 769; In re Spalding, 139 Fed. 244 [71 C. C. A. 370].” Exploration Merc. Co. v. Pacific H. & S. Co. (C. C. A., 9th Circuit) 177 Fed. 825, 840, 101 C. C. A. 39, 54.
An inspection of this complaint in itself would justify the characterization that for a proceeding in equity it is one of a very anomalous kind. There is no distinct equitable ground for the.jurisdiction of a court of equity alleged. , The proceeding is not brought nominally to liquidate the corporation as insolvent and marshal and distribute its assets. It is not brought to enforce a lien of any kind. It does not expressly and in words purport to be brought because the corporation is insolvent and the assets must be preserved and marshaled and distributed and sold for the benefit of its creditors. It does not allege a single controversy or disputed question to. be adjudicated by a court. There appear to be no antagonistic interests or parties. The court is. not asked to do anything of a judicial nature. It is brought, according to the theory of counsel, only in order that the' court shall do what is styled conserve the property of the corporation and continue its business. In other words, the proposition of plaintiffs in the state court is that the court of equity, where.the stock
There is no jurisdiction in the court of equity to perform any such task as this. A court of equity does not exist for the purpose of operating industrial and manufacturing enterprises. It is supposed to exist for the purpose of administering justice by adjudicating disputed questions and by awarding to suitors their rights. Incidentally to its proper jurisdiction to marshal and distribute assets a court of equity has power to take possession of and to preserve property and have its receivers temporarily and for the purposes of preservation only, until a sale can be had, and in certain cases, to accomplish these purposes, to operate the property, and issue receivers’ certificates. In the case o'f industrial corporations, who have no duty to perform to the public, this power is to be very carefully, cautiously, and rarely exercised, and only in ordinary cases for the purpose of actual preservation of the property. There is no known authority or power in a‘ court of equity to take possession of the property not for the purpose of granting and decreeing some definite relief, but for the purpose simply indefinitely, for no fixed purpose, of operating the property and'creating liens thereon to the destruction of other interests and in the meanwhile of indefinitely warding or barring or fencing off creditors and others having legal claims from asserting their just
An inspection of this proceeding in the court of common pleas for Pickens county shows upon the face of it no ground in equity for any court to take possession of this property and operate it actively as it is .prayed, and thus indefinitely prevent creditors from enforcing their statutory and legal rights and remedies save and except upon the ground of insolvency. It is to be assumed, therefore, that the state court as a court of equity could only have taken possession of the property of the corporation upon some definite and fixed ground of equity jurisdiction. Upon the face of the complaint that fixed arid definite ground of equity jurisdiction could only have consisted in the power of the court of equity to take possession of the assets of an insolvent corporation for the benefit of its creditors and forthwith to proceed to wind up, liquidate, sell out, and distribute all the assets among the parties entitled, and for that purpose to enjoin and debar
“If the court had merely appointed a receiver, without reciting the grounds of its judgment, the record could have been referred to, or the grounds shown by evidence aliunde. Russell v. Place, 94 U. S. 608 [24 L. Ed. 214]; Davis v. Brown, 94 U. S. 428 [24 L. Ed. 204].” In re Spalding (C. C. A., 2d Circuit) 139 Fed. 244. 247, 71 C. C. A. 370, 373.
The state court as a court of equity, must, in the absence of any-grounds being stated, be presumed to have acted upon the only grounds which at law or in equity would, on the face of the record by any possibility, have authorized the order. Upon the face of the record in the state court no ground can be assigned which would stand the test of such authorization, save the ground of insolvency, and the state court must be presumed to have made the appointment on that ground. It cannot be assumed that the state court acted except upon recognized principles of law and equity.
The effect now of this appointment in the state court is to be construed in its relation to the Bankrupt Act. The Bankrupt Act embodies a system of paramount and general provisions for the enforcement by creditors of their rights against corporations and individuals in the contingencies provided for in the act. Upon the happening of the contingencies mentioned in the Bankrupt Act the provisions of the act become paramount and imperative, and the rights of the creditors can be stayed by no pretense or device to the contrary. In other words, where a condition arises which by its situation calls for the paramount operation of the Bankrupt Act, its operation cannot be stayed by the fact that it may be attempted under any guise or method whatsoever to take away from its operation that which should properly be subjected thereto. To hold otherwise would be to destroy the whole effect of the operation of the act. If the effect of the action of the state court in the taking possession of the assets of the corporation be in result to subtract from the operation of the Bankrupt Act that which would be subject to it, the so'wording of the order as that the state court’s action may be placed on another ground would not be effective to prevent the operation of the Bankrupt Act. In other words, where the real and substantial result of the state court’s order was that a receiver was appointed because of the insolvency of the corporation, and the effect of the proceedings in the .state court should logically be to wind up and liquidate the assets of the corporation and distribute them as the assets of an insolvent corporation the operation of the Bankrupt Act cannot be defeated because in the proceedings or pleadings or orders or decrees of the state court its action may be based upon no ground at all, or upon any other ground than insolvency. To hold otherwise would be to allow, in any case where for the purpose of effecting such'results pre-
“The corporate entity cannot be so disguised that it can successfully masquerade in the name of a stockholder, and, evading the searching eyes of a court of equity, hinder, delay, and defraud its creditors and defeat the provisions of the bankruptcy act. A court of equity looks through forms to the substance of things, thus preserving the rights of innocent parties against all forms of deception and fraud.” Exploration Merc. Co. v. Pacific H. & S. Co. (C. C. A., 9th Circuit) 177 Fed. 825, 839, 101 C. C. A. 39, 53.
There are cases in which receivers can be appointed by state courts of corporations which are not insolvent, and for purposes which would not call for the operation of the Bankrupt Act. It has been held in the case of a public service corporation that whefie the administration contumaciously refuses to perform the duties which it is ordered to perform by the decree of the court, the court can appoint a receiver to take possession and perform them. It has been held that where a majority of stockholders override the rights of minority stockholders and pay no attention to the decrees of the court requiring them to.respect such rights, the court will take possession of the assets and appoint a receiver who will protect the rights of the minority stockholders. It has been held that where the administration of the corporation is guilty of fraud or mismanagement, or insists upon so performing its business in violation of the plain instructions of law that loss of its charter is threatened, with the destruction of its property, to the great detriment of its minority stockholders, a court of equity will, under certain circumstances, appoint a receiver. But these are all cases in which the corporation still continues as a solvent, existing corporation, and in which there is primarily no question as to the rights of creditors. Where., however, it is a question of the rights of creditors and the appeal to the court is plainly based upon the fact that there is not enough to meet the rights of the creditors, and the action of the state court is to protect and liquidate and care for the rights of creditors, then it is that the Bankrupt Act comes in. That act has prescribed a general, uniform system for the liquidation of insolvent corporations and for the assertion of the rights of creditors, to which every creditor is entitled, and wherever it is endeavored to take away from the operation of the act that which is properly subject to it, it is the duty of the court to consider the substantial results, whatever may be the cloak that is used to cover them. In the present case there is, under the allegations of the complaint in the state court, no known ground of equity jurisdiction to justify .the action of that court in taking possession of the assets of this corporation and appointing a receiver, unless it be to protect creditors and for their benefit to liquidate the corporation and wind up its affairs and distribute its assets upon the hypothesis that it is insolvent, and it must be inferred that the state court acted upon the only ground that could justify its action.
“When it appears that the application for a receiver has relation to insolvency, and that the purpose of the proceeding is to have the corporation managed with a view to its dissolution and the distribution of its assets among the creditors of the insolvent, then the application for a receiver is clearly an act of bankruptcy.” Exploration Merc. Co. v. Pacific H. & S. Co. (C. C. A., 9th Circuit) 177 Fed. 825, 841, 101 C. C. A. 39, 55.
“The operation of the bankruptcy laws of the United States cannot be defeated by insolvent commercial corporations applying to be wound up under state statutes. The bankruptcy law is paramount, and the jurisdiction of the federal courts in bankruptcy;’ when properly invoked, in the administration of the affairs of insolvent persons and corporations, is essentially exclusive.” In re Watts & Sachs, 190 U. S. 1, 23 Sup. Ct. 718, 47 L. Ed. 933.
To allow the state court, or any other court for that matter, save the federal, to administer the assets of such a corporation by receivers is to nullify the provisions of the Bankrupt Act. It is to allow these corporations whose property really belongs to their creditors to be taken away from the control and possession of the creditors and put in the control and possession of an appointee of the court. This control and possession for administration is the right which under the Bankrupt Act is expressly given to creditors, and it is the duty of the court which is charged with the administration of the Bankrupt Act to see that their rights in this respect are enforced and protected. If, therefore, a corporation is in the position in which a receiver has been appointed of its assets because of its insolvency, then the right of the creditors to control, manage, and administer its assets at once arises under the Bankrupt Act, and to remit them to the state court upon the theory that it is in that tribunal that they should make the question that the court has acted erroneously in the proceeding in which they are not parties would be wholly destructive of those rights.
It is better for both courts that there should be some uniform rule on this subject, and it would relieve the federal court of the disagree
If, therefore, it were recognized as a uniform rule that wherever the proceedings in the state court show that what is sought in that court is the ultimate effectuation of these purposes, that is to say, the liquidation of the corporation and the application of its assets to the payment of creditors because of insolvency, then the provisions of the Bankrupt Act directing the method of administration in the United States Court become paramount, and the state court would not attempt to take possession, it would put an end to all question and friction whatsoever. The federal court would be thus relieved from the invidious duty of deciding whether or not in any particular case it should interfere with a court of equal dignity and concurrent jurisdiction because the nominal ground upon which the state court acted was not stated to be insolvency, although the whole result of the action in that court was necessarily based upon the theory that the corporation was to be liquidated as an insolvent corporation.
These conclusions are in conflict in many particulars with the conclusions of the United States Circuit Court of Appeals for the First Circuit, in the case of In re Wm. Butler & Co., Inc., 207 Fed. 705, 125 C. C. A. 223. That decision, however, was by a divided court, an able judge (Judge Putnam) dissenting. The reasoning and conclusions of the United States Circuit Court of Appeals for the Ninth Circuit in Exploration Merc. Co. v. Pacific H. & S. Co., 177 Fed. 825, 101 C. C. A. 39, seem the better, and in the absence of any controlling decision in this circuit have been followed.
It is therefore ordered that the motion for a new trial be and the same is hereby refused.
It is further ordered, adjudged and decreed that it appears that the said Maplecroft Mills was insolvent at the date of the filing of the petition for involuntary. bankruptcy herein, and that within four months prior to the filing of said petition a receiver was by the court of common pleas for Pickens county, because of insolvency, put in charge of its property, and it is thereupon ordered, adjudged, and decreed that the said Maplecroft Mills be, and the same is hereby, declared* to be a bankrupt under the provisions of the statute of the United States in such case made and provided.