Exploration Mercantile Co. v. Pacific Hardware & Steel Co.

177 F. 825, 101 C.C.A. 39, 1910 U.S. App. LEXIS 4419

• Court: Court of Appeals for the Ninth Circuit
• Decided: February 14, 1910
• Docket: No. 1,745
• Status: Published

Opinion

MORROW, Circuit Judge.

The defendants in error have moved to dismiss the writ of error, first, on the ground that no notice of the petition for the writ of error or of the hearing thereof was given as provided by law. The defendants in error were duly served with a citation signed by the District J udge to appear in this court and show cause why the judgment mentioned in the writ of error should not lie corrected. In proceedings on error the citation signed by the judge of the court to which the writ is addressed or any judge or justice of the appellate court is the notice required by section 998 of the Revised Statutes (U. S. Comp. St. 1901, p. 712) for the removal of any cause to the appellate court. Foster’s Federal Practice (4th Ed.) § 507.

The second ground of the motion is that the proceedings for contempt have been brought against the officers and attorneys of the Exploration Mercantile Company, and pending such proceeding's the)1' are not entitled to any relief other than such as may result from a showing in clearing the parties of the charge of contempt. Beach on Modern Equity Practice states the rule as follows:

“Tiie general rule is that one who is in contempt is never to be heard by motion or otherwise until he has cleared his contempt and paid the costs. But the rule applies to. matters of favor, and a party, although adjudged in contempt, may be heard on matters of strict right.”

In support of the rule thus stated the author cites a large number of English and American cases, among others the case of Brinkley v. Brinkley, 47 N. Y. 40, where Judge Folger, discussing the subject at length and after citing cases, says:

“The conclusion to 'be drawn from them is this: That a party in contempt and until he is purged of it will not be permitted to ask for the favor of the court, nor to take any aggressive proceedings against his adversary; but that it is his right to take measures to protect himself, and to make any motion designed to show that the order adjudging him in contempt was erroneous. He may move to discharge the order though in contempt for not obeying it. * * * And if a party may move to set aside or discharge the order as erroneous, to rid himself of a contempt, he may, it must follow, take any other course which the law allows to a party to establish that it is erroneous; and an appeal from it, and a review of it in an appellate court, is such other course.”

See, also, Kaehler v. Dobberpuhl, 56 Wis. 497, 501, 14 N. W. 631, 633.

The third ground of the motion is that this court has no jurisdiction, for the reason that the only alleged error which can be considered by a reviewing court is the claim made that the District Court had no jurisdiction of the subject-matter of the controversy; and the only court which can review that question is the Supreme Court of the United States. The jurisdictional question involved in this case is not of the class of jurisdictional questions over which the Supreme Court takes jurisdiction. The District Court has jurisdiction of all bankruptcy proceedings. The question whether the petition in this case alleged an act of bankruptcy against the Exploration Mercantile Company-does not go to the jurisdiction of the bankruptcy court. In that respect it is like the question whether the alleged bankrupt is one who may be proceeded against in involuntary bankruptcy under the act. Denver First Nat. Bank v. Klug, 186 U. S. 202, 22 Sup. Ct. 899, 46 L. Ed. 1127; Schweer v. Brown, 195 U. S. 171, 25 Sup. Ct, 15, 49 L. Ed. 144; Lucius v. Cawthon-Coleman Co., 196 U. S. 149, 25 Sup. Ct. 214, 49 L. Ed. 425; Columbia Iron Works Co. v. National Lead Co., 127 Fed. 99, 62 C. C. A. 99, 64 L. R. A. 645. The motion to dismiss the writ of error is overruled.

The original petition praying that the.plaintiff in error be adjudged a bankrupt was filed by certain creditors in the United States District Court for the district of Nevada on September 12, 1908. To this petition a demurrer was interposed by the plaintiff in error which was sustained, with leave, to the petitioning creditors to file an amended petition. An amended petition was accordingly filed on October 24, 1908, alleging, in substance, that for the greater portion of six months next preceding the time of filing the original petition and ever since said time plaintiff in error had its principal place of business at Goldfield, county of Esmeralda, state of Nevada, and at all of said times it had been and was then engaged principally in trading and mercantile pursuits; and at the time of filing the original petition owed debts to the amount of $ 1,000, and had continued to owe debts in that amount: that at the date of filing the original petition on September 12, 1908, and for four mouths continuously next prior thereto, and ever since that time the plaintiff in error had been and was then insolvent; that at the date of filing the original petition on September 12, 1908, and for more than four months continuously next prior thereto and ever since that time the property of the plaintiff in error at a fair valuation amounted to less than the sum of $60,000, and that all the said times its debts were in excess of $74,000; and that within four months next preceding the date of the filing of the original petition the plaintiff in error had committed an act of bankruptcy in that on or about the 6th day of August, .1908, it being insolvent had applied for a receiver for its property; that is to say: It is alleged that the plaintiff in error was organized on the 14th day of February, 1906, by W. C. Stone, C. E. Wylie, and Frank G. Hobbs; that the amount of the capital stock was then and ever since had been $50,000, divided into 50,000 shares of the par value of $1 each; that W. C. Stone owned 48,000 shares, C. E. Wylie, 1,000 shares, and Frank G. Hobbs, 1,000 shares; that the persons mentioned had continued to own all the stock in the corporation; that, although the articles of incorporation of the plaintiff in error provided that: the board of directors should be five, there never had been more than three directors, and the persons named as stockholders had ever since the organization of such corporation continued to be and were such directors ; that W. C. Stone had been and was president, C. E- Wylie, vice president, and Frank G. Hobbs, secretary and treasurer of the corporation; that on and prior to the 6th day of August, 1908, certain creditors of the plaintiff in error which was then and there insolvent were demanding payment of their just claims against the corporation; that Stone, Wylie, and Hobbs, the directors and officers o f the corporation, then and there conspired and agreed together and ever since had conspired and agreed together to take such measures and do such acts as would hinder, delay, and defraud the creditors of the corporation, and would compel the creditors to accept less than the full payment of their just claims, and thereby obtain for such directors and officers a large part of the property of the corporation and prevent said creditors from obtaining a knowledge of its true condition and of the affairs of the corporation, and from having or participating in the choice o f a person or persons to act as trustee of such corporation or its property; that in pursuance of said conspiracy and agreement said directors and officers acting for and on behalf, and as the act and deed, of said corporation on the 6th day of August, 1908, caused to be filed in the district court of the First judicial district of the state' of Nevada in and for the county of Esmeralda an application praying for the appointment of a receiver with a view to the dissolution of the corporation. In this petition to the state court W. C. Stone was plaintiff and the plaintiff in error was the defendant.

The petition in the state court recited that the plaintiff Stone was president, Wylie, vice president, and Hobbs, secretary and treasurer of the corporation; that the corporation had liabilities in the sum of about $65,000, and its assets exceeded $95,000; that owing to the depressed condition in business, and the inability of the defendant corporation at that time to collect the amounts owing- to it, the said corporation was in danger of its assets being wasted through attachment or litigation, as the claims mentioned and other claims were due, and the corporation was at any time liable to be attached and therefore would be unable to carry on -and continue its business, or to be put to very large and useless expense by way of litigation, and the assets of the property be wasted thereby; that the plaintiff, Stone, was the holder of more than one-tenth of the capital stock of the corporation, and that by reason of the facts stated the corporation should be dissolved and a receiver appointed to take charge of the business and affairs of the corporation that its property might be preserved, its creditors paid, and its assets cared for. The prayer of the petition was that the court should appoint a receiver to take charge of the affairs of the corporation and conduct and -manage the same with a view of its dissolution under the orders and direction of the court; that the corporation and its directors and each of them be enjoined and restrained from exercising any of its powers or doing any business except through, by, and under said receiver. The creditors’ amended petition alleges, further, that on the 6th day of August, 1908, when said petition was filed in the state court, summons was issued and delivered to C. E. Wylie as manager and director of the plaintiff in error who accepted service of the same, and thereupon said directors and officers, acting for and on behalf and as the act and deed-of the corporation, caused to be filed with the clerk of the court thereof an appearance and application for the appointment of a receiver for the property of the plaintiff in error as follows:

“Now comes C. E. Wylie, manager and one of tlie directors of tlie anovenamed defendant, and enters tlie appearance of tlie said defendant in tlie above-entitled cause, and asks the above-entitled court to appoint as receiver of said defendant, O. E.‘ Wylie, the undersigned, one of the directors of said corporation.”

This appearance and application is signed by C. E. Wylie, manager and director of the corporation.

ft is further alleged in the creditors’ amended petition that on the 6th day of August, 1908, the directors and officers of the plaintiff in error acting for and on behalf and as the act and deed of said corporation moved the said court upon the said petition for an order appointing- said C. E. Wylie receiver of the property of the plaintiff in error, with the full power to take charge of the assets and control the business of said company; that said -C. E. Wylie was thereupon appointed receiver and filed his bond as such, and took the oath of office on the 7th clay of August, 1908, taking possession of the business property and effects of said corporation as such receiver; that on September 8, 1908, and at other times in further pursuance of’ said conspiracy and agreement the said W. C. Stone, acting for and on behalf and as the act and deed of said corporation, sought to bring about a settlement of the claims of said creditors of said corporation whereby said creditors would obtain not to exceed 60 per centum of their claims; that said Stone said to the creditors that by making such settlement the creditors would obtain a greater sum of money than they would if they litigated their claims, or if the affairs of said corporation were administered in bankruptcy by the United States court; that by making such settlement the directors and officers would make something for themselves; that the directors and officers of said corporation in pursuance of said conspiracy and agreement had ever since the (5th day of August, 1908, refused petitioners access to the books of the corporation and at all times had refused to permit the agent and representative of the petitioners to take or assist in taking an inventory of the property of the corporation, although such access and opportunity were requested; that ever since the 6th clay of August, 1908, the plaintiff in error and each and all the said directors had acquiesced in, upheld, ratified, and confirmed the said proceedings and application for, and appointment of said receiver; that said Hobbs had ratified and confirmed the same and had since been continuously in the employ of said receiver. The petition prayed that the plaintiff in error should be adjudged a bankrupt.

To this amended creditors’ petition the plaintiff in error filed its answer and demanded a jury trial. The answer and demand for a jury trial was signed by Frank G. Hobbs, secretary. In its answer plaintiff in error alleged, among other things, that the proceeding in the state court was taken against it and was not the act of the plaintiff in error; that the plaintiff in error was not insolvent; that its property at a fair valuation was more than sufficient to pay its debts. It clenied the conspiracy charged against its officers and directors; denied that they conspired or agreed to measures or acts to hinder, delay, and defraud creditors or to compel such creditors to accept less than the full payment of their just claims. Admitted that vStone did by way of compromise make a proposition to the petitioning creditors to adjust their claims upon a basis approximately at 60 per centum. Denied that this proposition of compromise was made in furtherance of any conspiracy. Asserted the jurisdiction of the state court over the subject-matter and the person of the plaintiff in error and of the receiver. Denied the jurisdiction of the United States District Court in the premises and demanded that the matter be inquired into by jury. A jury trial was had and resulted in a verdict answering the following interrogatories submitted by the court:

“Interrogatory No. 1. Whether on the <>th day of August, 1908, the date of the appointment of C. E. Wylie as receiver of the Exploration Mercantile Company by the district court of the First .judicial district of the state of Nevada, in the case of W. O. ¡Stone v. Exploration Mercantile Company, the aggregate of the property of the said Exploration Mercantile Company was at a fair valuation, sufficient in amount to pay its debts? Answer: No.

“Interrogatory No. 2. Whether on the 12th day of September, 1908, the date of the filing of the petition in bankruptcy in these proceedings, the aggregate of the-property of said Exploration Mercantile Company was, at a fair valuation, sufficient in amount to pay its debts? Answer: No.

“Interrogatory No. 3. Whether on the 6th day of August, A. D. 1908, the Exploration Mercantile Company being insolvent applied for a receiver for its property? Answer: Tes.”

The plaintiff in error thereupon moved the court in ‘arrest of judgment because of the insufficiency of the creditors’ amended petition. This motion being denied by the court, the plaintiff in error was adjudged a bankrupt.

The case is here upon a writ of error with an assignment of errors, but as no exceptions were taken, and there is therefore no bill of exceptions in the record, the main question to be determined is the sufficiency of the creditors’ amended petition in bankruptcy. Section 3 of the Bankruptcy Act of July 1, 1898, 30 Stat. 544, 546 (U. S. Comp. St. 1901, p. 3422), provided as follows:

“a. Acts of bankruptcy shall consist of his having * * * (4) made a general assignment for the benefit of his creditors.”

The amendatory act of February 5, 1903, c. 487, 32 Stat. 797 (U. S. Comp. St. Supp, 1909, p. 1309), added the following provision:

“Or being insolvent applied for a receiver or trustee for his property, or because of insolvency a receiver or trustee has been put in charge of his property under the laws of a state, of a territory, or of the United States.”

■ The objection made by the plaintiff in error by its motion in arrest of judgment that the creditors’ petition was insufficient in law could have been raised by demurrer. It took the alternative procedure of interposing an answer denying that on the 6th day of August, 1908, application was made to the state court for the appointment of a receiver for its property; denied that it was insolvent, but it averred that, on the contrary, its property at a fair valuation was more than sufficient to pay its debts. It denied that it had committed an act of bankruptcy as alleged in the creditors’ petition, but averred on the contrary that the proceedings taken in the state court for the appointment óf a receiver were taken against it, and was not its act. Bor the determination of these issues it demanded a jury trial, that is to say, it demanded that these issues should be tried and determined as questions of fact. A jury trial was had, and resulted in a verdict and judgment in which these issues were found and adjudged against the plaintiff in error. No error is alleg-ed to have been committed by the court in the course of the trial, and no exceptions were taken either to the admission or rejection of evidence or to the instructions to the j ury. It was therefore found and determined as a fact that the plaintiff in error was insolvent when application was made to the. state .court for the appointment of a receiver for its property. It was further found and determined as a fact that the plaintiff in error being insolvent applied to the state court for the appointment of a receiver of its property. To enable the jury to find and determine these issues it will be presumed that the court instructed the jury correctly as to the law of insolvency, and the acts that would under the bankruptcy act constitute an application on the part of a corporation tq the state court for the appointment of a receiver of its property.

The charge in the creditors’ petition that the plaintiff in error being insolvent applied for a receiver for its property is followed by the direct allegation that the corporation was “then and there insolvent.” This is a sufficient allegation that the plaintiff in error was insolvent when the application for a receiver was made.

With respect to the other question as to whether the charge that the plaintiff in error had committed an act of bankruptcy in applying for a receiver of its property, the objection is made that the facts stated in the creditors’ petition do not show that the plaintiff in error applied for the appointment of a receiver for its property; on the contrary, that the application was made by a stockholder. Without imputing to the plaintiff in error a waiver of this question as a question of law it is obvious that upon a motion in arrest of judgment the question is reduced to narrow limits. We cannot for example consider the objection that it is not alleged that there was a stockholders’ meeting of the corporation, or a meeting of the board of directors, or that there was no resolution of any kind by the corporation and no allegation of corporate authority granted or given to any agent or person to apply for the appointment of a receiver.

We are not here dealing with the lawful act of the plaintiff in error acting in a lawful corporate capacity, but with the acts of certain individuals holding all the stock of the corporation and constituting its officers and directors, who, it is alleged, have “conspired and agreed together to take such measures and do such acts as would hinder, delay, and defraud the creditors of said corporation * * * and would evade the provisions of the laws of the United States in reference to bankruptcy, and prevent such creditors from obtaining a knowledge of the true condition of said corporation’s affairs, and from having or participating in the choice of a person or persons to act as trustee of said corporation or its properly.” With respect to the acts of these parties it is alleged:

•‘That in pursuance of said conspiracy and agreement said directors and officers acting for and on belialf and as the act and deed of said corporation, which was then and there insolvent as aforesaid, on the (5th day of August, 1908, caused to be filed in the district court of the First judicial district, of the state of Nevada, in and for the county of Esmeralda, an application praying for the appointment of a receiver with a view to the dissolution of said corporation.”

The application Tor a receiver in the name of the stockholder as set forth in the petition is charged to be the act and deed of the corporation ; and it is further charged that the directors and officers of the corporation acting for and on behalf and as the act and deed of the corporation accepted the service issued in the case, and thereupon caused to be filed with the court an appearance and application for tire appointment of a receiver. We think these allegations are sufficient and charge the corporation with having committed an act of bankruptcy in applying for a receiver of its property. 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.

It is further objected that the laws of the state of Nevada do not permit or1 authorize a corporation to apply for the appointment of a receiver; that the state court did not have jurisdiction over such an application, and that the application for a receiver for a corporation to be an act of bankruptcy under the bankruptcy act must be an apoplication made under the laws of the state, that is to say, it must in every respect be a lawful application conforming to the laws of the state. This is not the language of the bankruptcy act; nor do we think it was the purpose of Congress to make the act of bankruptcy dependent upon the pretended regularity of the proceedings of the state court. That court may be imposed upon and its jurisdiction invoked to defeat the jurisdiction of the bankruptcy court as charged in this case. It is sufficient that the corporation is insolvent, and, being insolvent, has applied for a receiver whereby the property of the corporation is to be taken possession of and administered and distributed by the state court. It is against sucia proceedings that the bankruptcy act confers exclusive jurisdiction on the bankruptcy court. “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 and Sachs, 190 U. S. 1, 27, 23 Sup. Ct. 718, 724, 47 L. Ed. 933.

It is further contended that the application for the appointment of a receiver did not constitute an act of bankruptcy for the reason that it did not appear on the face of.the proceeding in the state court that the application was made to that court on the ground of insolvency''; that unless the proceeding in the state court is based on insolvency it is not an act of bankruptcy; and that the question of solvency or insolvency as related to the application for a receiver is not an issue to be tried in the bankruptcy court but must be found on the facts appearing on-the record in the state court. The act of February 5, 1903 (32 Stat. 797), amending the bankruptcy act of July 1, 1898, added two provisions to the section providing two additional acts of bankruptcy, viz.: (1) Being insolvent applied for a receiver or trustee for his property. (2) Because of insolvency a receiver or trustee has been put in charge of his property under the laws of a state, of a territory, or of the United-States.

Undér 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 rapon the record in tlae case before the court making the appointment of a receiver. In re Douglas Coal & Coke Co. (D. C.) 12 Am. Bankr. Rep. 539, 131 Fed. 769; In re Spalding, 14 Am. Bankr. Rep. 129, 139 Fed. 244, 71 C. C. A. 370. But our_attention lias not been called to any case that holds that under the first provision of the statute where the creditors’ petition charges a single act of bankruptcy, viz., “being insolvent applied for a receiver or trustee for his property,'’ the act of bankruptcy is dependent upon the record in the court to which the application for a receiver is made; that is to say, we do not find any case holding that unless the petition to the court for a receiver states that the application is based upon the insolvency no act of bankruptcy has been committed. The charge, of “being a bankrupt” in the first provision of the statute is an issue to be tried and determined in the bankruptcy court, and upon the determination of that court rests the question as to whether the bankrupt was insolvent when the application for a receiver was made.

With respect to the application for a receiver it may be conceded that if it appears from the record and is established by proof that the application is made under some statutory authority or general equity jurisdiction having no relation to insolvency, then the act of applying for a receiver is not an act of bankruptcy. But 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.

Turning now to the application that was made to the state court for the appointment of a receiver in this case we find that it was alleged:

‘■'That, owing to the depressed 'condition in business and the inability oí said defendant corporation at the present time to collect the amounts owing to it, the said corporation is in danger of its assets being wasted through attachment or litigation, as the aforesaid claims and other claims are due, and the said corporation is liable at any time to be attached and therefore be unable to carry oil and continue its business or to be put to very large and useless expense by way of litigation, and the assets of the property be wasted thereby and “that by reason of ihe facts aforesaid the said, corporation should be dissolved, and that a receiver should be appointed to take charge of the business and affairs of said corporation, that its property may be preserved, its creditors paid, and its assets cared for.”

In our opinion these facts appearing upon the face of the record in the state court coupled with the fact of insolvency charged in the creditors’ petition are sufficient to constitute an act of bankruptcy under the first clause of the amendment of February 5, 1903.

It follows that the creditors’ amended petition states facts sufficient to constitute a cause of action in bankruptcy, and the decree of the District Court must be affirmed; and it is so ordered.