Manhattan Rubber Mfg. Co. v. Lucey Mfg. Co. ( 1925 )

MANTON, Circuit Judge.

Receivers in equity were appointed for the appellant on August 17, 1923, on a creditors’ bill filed in the District Court. The bill of complaint alleged that the appellant was indebted to the complainant in upwards of $3,000 and that it owed other sums to creditors in excess o£ $2,015,000. It alleged that it had assets more than sufficient' to meet its obligations and was solvent but temporarily financially embarrassed. Further, it alleged that in order to preserve its property for equitable distribution among those entitled thereto, it believed the District Court should intervene and appoint,a receiver to take charge of all the assets of the defendant, which receiver should conduct, maintain, and administer the same under the power to be conferred upon him in the proposed decree which was submitted upon the filing of the complaint. In the prayer for relief, an injunction was asked, restraining creditors from proceeding to collect the obligations owed by the appellant. An answer was filed admitting the allegations of the hill, and the decree was entered on consent appointing the receivers. The corporation had property in California, hut no receivers were applied for or appointed in either an ancillary or original bill in that jurisdiction.

On October 6, 1924, the receivers appointed filed a petition asking for an order that the corporation should voluntarily take action necessary to cause it to be adjudicated a bankrupt. The petition alleged that the corporation was insolvent; that the receivers had asked the defendant, its officers and directors, to voluntarily file a petition in bankruptcy or consent to the adjudication of the corporation as a bankrupt, and this request had been refused. It set forth that a meeting of the directors was called for and that the directors had consistently refused to cause the defendant to take such action. It alleges that one J. F. Lueey owns the majority of the stock of the corporation, and that he selected the majority of the directors and controls them; that he has refused to permit the directors to file a petition in bankruptcy for the reason that he would be personally liable for indebtedness owing in California, since such liability is imposed upon stockholders under the law of that state. It sets forth that a creditor in California has attached the property of the corporation in that jurisdiction for a large indebtedness, and the property so attached is valued at $550,00'0, with a realizable value of from $200,000 to $300,000.

Upon hearing, this application, the Distinct Court entered an order which commanded that the corporation should admit in writing its inability to pay its debts and its willingness to be adjudicated a bankrupt on the ground that it is insolvent. And it was further ordered “that each and every officer and director of the defendant authorized to act by such resolution, shall without delay, act in aeeordancé therewith.” The theory of such proceedings was to avoid the creditors in California securing the advantage they had by their writ of attachment and to cause the property in that state to come under the jurisdiction of the bankruptcy court for administration. Indeed, all the property of the corporation would at once be transferred to the bankruptcy court.

To this creditors’ bill the corporation made no defense, nor to the application for receivers, through its duly constituted authority to give' consent by admissions of the allegajtions of the complaint. Therefore, the administration of the assets' of this corporation is within the function of this court of equity and the parties are before the court. It has the power to proceed with such administration. Under the creditors’ bill, courts of equity have lent their assistance to common-law courts to enable judgment creditors to reach, through receivers, property beyond the reach of execution. The scope of these suits has extended into equitable levies in favor of all judgment creditors entitled to seize the defendant’s property. No distinction is drawn between corporations and individuals. Now the practice has been established of permitting creditors having judgments to apply to courts of equity to take possession of the assets and undertake, through receivers, their general administration. And now the judgment creditor is not essential unless the corporation objects. A creditor may file a bill, and if the corporation does not object, but consents, the court of equity may appoint the receiver, and through such officers the court will have the same general administration. Penn. Steel Co. v. N. Y. City Railway Co., 198 F. 721, 117 C. C. A. 503; Graselli Chemical Co. v. Ætna Explosives Co., 252 F. 456, 164 C. C. A. 380. The pippose of this creditors’ bill, like all such bills, whether brought by one creditor or for the benefit of all the creditors, has for its primary purpose securing equality of distribution of assets. The chief purpose of such a bill is to gather in and preserve its assets. As to the extent and method of administration, we have said in the ¿Etna Case, supra:

“The court possesses jurisdiction over the, corporation, as well as over the property of the corporation, and it has complete power to deal with either, and it is essential that it should have, for-it could not control the property without the power to control the corporation. The appointment of the receiver supersedes the power of the directors to carry on the business of the corporation, and the receivers take possession of the corporation, its books, its records, and assets. Indeed, it is often the custom for courts of equity, in an order appointing the receiver, to expressly restrain the corporation and its officers from exercising any of the privileges or franchises of the corporation until the further order of the court. The court’s power to take from the directors their right to direct can also, while in control, restrain action by the stockholders, when it deems it for the best interests of all concerned to do so.”

It is argued by'the appellee that our decision in the ¿Etna Case is authority for the order appealed from. That was a receivership in equity on a creditor’s bill. The amended certificate of incorporation of the defendant provided that the preferred stock had no voting rights except in the event that there should'be a default in the payment of dividends on the preferred stock for a period of eight months. Then it was provided that each share of the preferred stock should have nine votes. During the pendency of the equity receivership, eight months elapsed without the payment of dividends upon the preferred stock. The annual meeting of the stockholders was appointed to be held on March 19, 1918, and it appears that there was to be a contest for the control of the board of directors to be elected at that meeting. A plan of reorganization was under consideration. The stockholders were enjoined from holding a meeting because the court found that it would be inequitable to permit the preferred stock, under the circumstances, to exert the voting rights with the prospect of interference with the plan of reorganization. In supporting the order there entered, we considered the extent to which a court might interfere with the internal affairs of the corporation in aid of the proper fulfillment of the purposes of the suit. All that was done in that case was to preserve the res, keep it within the jurisdiction of the court, and assist a plan of reorganization. It enjoined prospective interference with such purposes.

Here the court commands the directors to, in effect, end the success of this suit, and, indeed, makes it valueless. It purposes to turn over to the bankruptcy court all the assets. It defeats the plea to protect against creditors temporarily and to enable the corporation to restore itself to the position to meet its obligations due to creditors.

In Gay v. Hudson River Electric Power Co., 184 F. 689, 106 C. C. A. 643, the corporation was in equity receivership. A mortgagee under a mortgage existing prior to the receivership, was restrained, by the order appointing the receivers, from foreclosing its mortgage. Am application to vacate the injunction as to it was denied, and on appeal this court reversed the order holding that the mortgagor might proceed with the foreclosure, and we said:

“But, although a court of equity will be astute to protect all equitable interests, there is a limit beyond which it may not go. In the case of successive mortgages upon a single piece of real estate, it may often be a great hardship to the holder of a junior mortgage to have the property sold under foreclosure of the first mortgage at a time when general financial distress will preclude any hope of enough being realized to pay more than the amount secured under the first mortgage, while, if all action could be suspended for two or three years, the property would sell for a price sufficient to pay both mortgages in full. But there is no power in a court of equity to abrogate the right of foreclosure and sale for which the first creditor stipulated, which is incorporated in the contract and on the strength of which he lent his money. ® It may be a 'grievous wrong’ to them to permit such sales; but, if it is the clear right of the mortgagee to have such a sale go on, the court may not deny him his right, however great may be the hardship to others.”

In Odell v. H. Batterman Co., 223 F. 292, 138 C. C. A. 534, the defendant was in equity receivership, and the landlord of the premises of which the defendant had a lease applied to the court for permission to commence an ejectment action in the state court. It was held to be an abuse of discretion to refuse to permit the landlord to adjudicate his claim, even though it resulted in dispossessing the corporation.

In Oliver v. Parlin Co., 105 F. 272, 45 C. C. A. 200, in a suit in equity to recover possession of real property and to cancel a deed of trust executed by prior owners thereof for fraud in which the grantors and grantees of such deeds were made defendants, the court of equity, where the defendant was in equity receivership, refused to restrain the foreclosure proceedings in the state court.

These cases illustrate the limitations'that are imposed upon the equity court in the administration of the corporation’s affairs. It is the bankruptcy court that must determine whether the defendant should be adjudicated a bankrupt under the Bankruptcy Act (Comp. St. §§ 9585-9656). The appellant has a right to a trial by jury on the issues of insolvency and the commission of the act of bankruptcy on such application for adjudication. This right must not be denied. C. Elliot v. Toeppner, 187 U. S. 327, 23 S. Ct. 133, 47 L. Ed. 200. Here the bill and answer agreed that tile assets are sufficient to pay all its indebtedness. No solvent corporation can be adjudged a bankrupt without its consent. It must be a voluntary act of the board of directors, or a creditor may show the commission of an act of bankruptcy. The present effort is to compel its officers, without their consent and, indeed, over the protest of some of the board of directors, and without an application of a creditor, to allege or admit insolvency so that the bankruptcy court may take possession and jurisdiction of the res collected and maintained by this court of equity. The hope is to defeat the attachment of property of the corporation in California. This effort resulting in this order is wholly beyond the court’s power to command. The directors have the privilege of placing the corporation in bankruptcy if they so desire — if .the business necessities require it. The failure to go into bankruptcy is not a legal wrong.

In Wilson v. City Bank, 84 U. S. (17 Wall.) 473, 21 L. Ed. 723, the Supreme Court said:

“As before remarked, the voluntary clause is wholly voluntary. [Bankruptcy Act.] No intimation is given that the bankrupt must file a petition under any circumstances. While his right to do so is without any other limit than his own sworn averment that he is unable to pay all his debts, there is not a word from which we can infer any legal obligation on him to do so. Such an obligation would take from the right the character of a privilege, and confer on it that of a burdensome and, often, ruinous duty.

“It is, in its essence, involuntary bankruptcy. But the initiation in this kind of bankruptcy is, by the statute, given to the creditor, and is not imposed on the debtor. And it is only given to the creditor in a limited class of cases.”

See, also, Summers v. Abbott, 122 F. 38, 58 C. C. A. 352; Richmond Steel Co. v. Allen, 148 F. 657, 78 C. C. A. 389; In re New Amsterdam Motor Co. (D. C.) 180 F. 943.

The debtor is under no obligation to proceed voluntarily into bankruptcy. He cannot be forced to bring such a proceeding. Even in an involuntary proceeding, his failure to appear does not convert the proceeding into a voluntary one. Creditors have the right, if cause be shown under the Bankruptcy Act, to file a petition. No great.er rights are accorded receivers. A court of equity cannot add to the bankruptcy statute any more than it can take from the mortgagee his right to foreclose his lien or the owner his right to possession if entitled thereto before the receivers took possession of the res. This leaves the right of creditors to proceed under the Bankruptcy Act unimpaired if good cause be shown. 'We think the command of the order below reaches out into limits that a court of equity may not go in administering the property of the corporation in possession of its receiver. The case is not in conflict with the authority of the ¿Etna Case upon which the appellee relies. There is a clear distinction.

Order reversed.