157 F. 609 | S.D. Ohio | 1907
On the 17th day of August, 1907, a petition in involuntary bankruptcy was filed in this court against the partnership firm of Rieger, Kapner & Altmark, and Frank Rieger, Jacob Kapner, Adolph Kapner, and Louis Altmark, the four individuals composing such firm. The defendants other than Rieger, who had disappeared and whose whereabouts was unknown, answered, consenting to an adjudication against them respectively. On the 20th day of August a petition in involuntary bankruptcy was filed in the United States District Court for the Southern District of New York against the same parties, other than Jacob Kapner, who was subsequently, by amendment, brought into the case. Frederick C. McLaughlin was in that case appointed receiver of all of the property of the defendants, and on the 24th day of August he was directed to take possession of the hosiery mills of the Kapner Bros. & Duga Hosiery Company, an Ohio corporation, operating at Zanesville, Dresden, and Frazeysburg, Ohio. The alleged bankrupts were restrained at the same time from interfering in any wise with the receiver in his possession and in his taking possession of the property, and this court was requested to assist the receiver in securing and maintaining possession of such property, and to make such ancillary orders as may be proper and requisite.
On the 26th day of August, on application of the petitioners filed in this court, C. T. Marshall and Frederick C. McLaughlin were appointed receivers of all the property belonging to the partnership firm, and directed to take charge of the same. • On the same day an application was made to extend the receivership to the property of the above-named corporation, which is alleged to be a subsidiary company to the partnership. The application recites that the capital stock of the corporation is $50,000, divided into 500 shares, all of which is owned by the partners, which certificates of stock constitute a part of the assets of the alleged bankrupts. Of the stock issued, shares of the face value of $27,200 are in the possession of McLaughlin as receiver. Other shares of the face value of $12,300 are held by Edward Moyse & Company, stockbrokers of New York City, who desire the receivers to take possession of the property of the corporation, and the residue of the stock, being the holdings of Jacob Kapner, is said to be held by the Guardian Trust Company, of Pittsburg, Pa. The application further charges that the confessed bankrupts are in control of the corporate business, that the partnership business which was conducted in the city of New York was abandoned on the 14th day of August, and that if the defendants be permitted to remain in control of the property and assets of the corporation they will remove and dispose of it, to the irreparable damage of the creditors of both the partnership and the corporation. The prayer of the application is that the receivers be given possession of the corporate property as part of the assets of the bankrupts’ estate, and that the offi
The corporation was organized in 1896, to manufacture hosiery, and was owned by the Kapners and Duga. The partnership was formed in 1901, and engaged in a commission business, selling hosiery and gloves, and in the manufacture of pants and coats. It asserts itself to be the sole agent of the corporation. The firm business was so loosely conducted that neither Altmark, who had charge of the hosiery department, nor Jacob Kapner could give any idea of its debts. The corporation and the firm each kept its own books and bank account, but the business between the corporation and the partnership has been so conducted that the state of accounts between them is in dispute, and, so far as the record shows, is unknown, although the partnership took the corporation’s entire product, and the books of either concern ought to show the exact condition of the two concerns with reference to each other. Jacob Kapner, who was the president and treasurer of the corporation and in charge of its finances, was unable to state even approximately the condition of the account, or how much the corporation owed the firm, whether it was $60,000 or more. He professes not to know which owes the other, or when the corporation last invoiced.. He bought the merchandise, and looked after the raw material for the corporation, and yet states that he does not know what the corporation owes, although, on further inquiry, he testifies that it owes between $60,000 and $70,000, in addition to the $118,000 mortgage given to O’Neal. The secretary, Abe Kapner, testifies that the past-due obligations of the corporation are from $150,-000 to $200,000. Jacob Kapner first states that he could not recollect who the corporation directors were prior to the 29th day of August, although on that date the board of directors held a meeting at which he presided, and at which one was removed, and three, including himself, went through the formality of resigning. Further examination was required to develop from him that the board consisted of the four partners and his son, Abe. He disclaims knowledge of the firm’s assets which are in New York, or an understanding of the
Are the partnership and the corporation separate and distinct legal entities, or is one subsidiary and auxiliary to the other? These are the questions to be answered, and, although Jacob Kapner and Alt-mark repeatedly assert that the partnership is the sole agent of the corporation, and that the two concerns exist and have existed as such entities, these questions must be determined by the court from the facts adduced and the law applicable thereto. Altmark’s testimony shows that the corporate stock purchased in 1901 was bought by the partnership for partnership purposes and to insure to the partnership the control of the product of the corporation’s mills.
The partnership owns 99 per cent, of the stock. As the record does not disclose the interest óf the respective partners in the firm, the presumption is that they are equal partners; and it is significant that the number of shares of corporate stock standing in the name of each is the same, excepting that the shares accredited to Adolph Kapner are seven less than to each of his copartners. That Abe Kapner and R. Kapner, son and uncle, respectively, of Jacob Kapner, hold five shares of the stock does not militate seriously against ‘the sole ownership by the members of the firm. In Bank v. Trebein Co., 59 Ohio St. 316, 52 N. E. 834, 4 out of 500 shares of stock were held by Trebein’s relatives by blood or marriage, but that fact did not, under the circumstances of that case, deter the court from holding that the corporation was in substance another Trebein. The Great Western Natural Gas & Oil Co. was held, in Re Muncie Pulp Co., 139 Fed. 546, 71 C. C. A. 530, to be a mere agent of the pulp company, and as having “no shadow of claim to the property” held in its name, notwithstanding the fact that one of it? shares of stock was held by a person who was not a party to its organization, as an agent and creation, of-the pulp company. It is hot shown when or how R. Kapner acquired his four shares of stock, or that as a stockholder he ever participated in the corporate affairs. Instead of -the partnership being the agent of the corporation, the cor
The fiction of legal corporate entity cannot be so applied by the partners as to work a fraud on a part of their creditors, or hinder and delay them in the collection of their claims, and thus defeat the provisions of the bankrupt act. ,The doctrine of corporate entity is not so sacred that a court of equity, looking through forms to the substance of things, may not in a proper case ignore it to preserve the rights of innocent parties or to circumvent fraud. The case of Re
“The Great Western Company has no shadow of claim to the property in controversy, and to permit it, or its president or shareholders, to dispose of such property is to sanction a fraud upon the creditors of the Pulp Company. * * * The new oil company was the old company under another name.”
The president of the oil company was required to turn over to the receiver the property of the bankrupt in his possession or under his control. In Interstate Telegraph Co. v. Baltimore & Ohio Telegraph Co. (C. C.) 51 Fed. 49, affirmed in 54 Fed. 50, it appears that the railroad company caused the telegraph company to be incorporated, became the sole owner of its stock, selected its own officers and employés as officers of the new company, and represented such company to have authority to contract with reference to its whole railway telegraph system. It was held that the railroad company was not only the actual owner of the telegraph company, but that the latter company was a mere department, or bureau, of the railroad company, created and maintained for the railroad company’s benefit as an agent to make contracts. It follows as a corollary that, had the railroad company become insolvent while the telegraph company was in existence, the property in the possession of the telegraph company, notwithstanding its corporate entity, would, if necessary, have been treated as property of the railroad company. The Supreme Court of Ohio has repeatedly ignored the fiction of legal corporate entity when used as a shield for fraudulent or other illegal acts. The rule is clearly stated in Bank v. Trebein Co., 59 Ohio St. 316, 52 N. E. 834, as follows:
“In contemplation of law, a corporation is a legal entity, an ideal person, separate from the real persons who compose it. This fiction, however, is limited to the uses and purposes for which it was adopted — convenience in the transaction of business, and in suing and being sued in its corporate name, and the continuance of its rights and liabilities, unaffected by changes in its corporate members. But the fiction cannot be abused. A corporation cannot be formed for the purpose of 'accomplishing a fraud or other illegal act under the disguise of the fiction; and, when this is made to appear, the fiction will be disregarded by the courts, and the acts of the real parties dealt with as though no such corporation had been formed, on the ground that fraud vitiates everything into which it enters, including the most solemn acts of men. * * * The good faith of the parties to such a transaction must be determined by its legal effect on the rights of others. If its legal effect works a fraud on their rights, the finding of a court that the parties acted in good faith is simply an erroneous conclusion of law from the facts.”
After the bankruptcy proceedings were commenced — the institution of which was a caveat “to all the world, and, in effect, an attachment and injunction” (Mueller v. Nugent, 184 U. S. 1, 22 Sup. Ct. 269, 46 L. Ed. 405) — after the receiver had been appointed and qualified, and authorized and directed to take possession of the hosiery mills in question and all- the property of the firm, and the alleged bankrupts were enjoined from taking any steps to interfere with or prevent the receiver from so taking possession, a portion of the corporate directors, on the day before the hearing of this cause, went through the formality of selecting a new directory. Rieger and Adolph Kapner were not notified of the meeting. However, it may be said, as regards Rieger, that his location was unknown. The record of that meeting shows that, notwithstanding the rule that a director cannot vote by proxy (Marshall on Private Corporations, 125) Jacob Kapner held the proxy of Adolph Kapner “to perform such duties as a director as the said Adolph Kapner would be entitled to perform were he personally present hereat.” Abe Kapner, who was continued as a director, however, testifies that he held the proxy. Rieger was removed without notice. The three remaining directors resigned in turn, and the places of all four were successively filled by persons who had each purchased from the corporation, through Adolph Kapner as -president, one share of stock. One of the newly elected directors is the attorney of the partnership; another is a mortgage creditor of the corporation and the attorney of other creditors. Whether the other two directors are creditors, or represent creditors, of the corporation is not disclosed by the record. Without casting any reflection on the newly elected directors, for we may assume they believed the corporation not to be subsidiary to the partnership, it is safe to say the change of the directory was made in the interest of the corporate creditors. The partners who participated in the directors’ meeting, however honestly they originally intended to deal with all the creditors, thereby assumed the aggressive in hindering and delaying a part of their creditors in the pursuit of their legal remedies against the bankrupts and their property for the collection of their claims, and, under the doctrine of Bank v. Trebein, supra, their conduct was fraudulent. The validity or the invalidity of the directors’ meeting, of Rieger’s removal from the directory, of the election of the new directors, of the sale to them and the purchase by them of corporate stock, is at this time immaterial, and need not be considered. The law prohibits the bankrupts from discriminating against any class of their creditors, and no board of directors, whether it be new or old, will be permitted to withhold from administration the property of the bankrupts. Re Muncie Pulp Co., supra, and the cases therein cited are authority for the receiver’s recovery of the property in a summary proceeding like this.