Ohio Motor Car Co. v. Eiseman Magneto Co.

230 F. 370, 144 C.C.A. 512, 1916 U.S. App. LEXIS 1444

• Court: Court of Appeals for the Sixth Circuit
• Decided: February 8, 1916
• Docket: No. 2652
• Status: Published

Opinion

WARRINGTON, Circuit Judge

(after stating the facts as above). [1] It is to be observed that the receivership proceeding was begun in the state court September 25, 1912, and practically concluded April 21, 1913, and that the bankruptcy proceeding was commenced in the court below October 28, 1912; but, aside from the filing of the answer and allowance of a single intervention, nothing was done in the case until May 14, 1913. At that time an order was made, reciting that the petitioners and intervener had withdrawn their application in bankruptcy and that respondent was demanding dismissal, directing that' notice of these facts be given to all the creditors and fixing June 2d to hear the matter of dismissal. It is to be inferred from the proof of the execution of this order that there were 349 creditors. It was not until the day fixed for the hearing that any creditor appears to have objected to the dismissal. On that day one corporate creditor, having a claim for $456.45, filed an objection; and on the same day the only person who had then intervened “moved for his dismissal and that of the cause itself. On June 7th, however, 5 creditors sought to intervene for the purpose of prosecuting the two acts of preference alleged in the original petition. They admitted estoppel as to, and so abandoned, any claim to adjudication “upon the ground of the appointment of said receiver having constituted an act of bankruptcy.” Concededly these creditors, as well as all the other creditors, filed their claims in the suit and participated in the distribution made of respondent’s assets in the state court. According to the .record, no step of importance was taken in the state court after appointment of the receiver, until seasonable notice and opportunity to be-heard had been given to the creditors. Although the present petitioning creditors were not made formal parties to the receivership suit,, they seem, at least through their counsel, to have appeared at such hearings and acquiesced in the orders that followed; certainly none of the creditors appears to have objected to any of the orders. The significance of such a situation- as this cannot escape attention. The-conduct of all the creditors was calculated to induce each to believe that the rest were assenting to the orders made in the state court. Further, the fact that 343 of the 349 creditors are, so- far as appears here, still satisfied with the results of the course they pursued in the state court, justifies an inference that the creditors then believed their interests.would under the existing conditions be as well subserved in the receivership suit as in the bankruptcy proceeding — if, indeed, they would not be better subserved, in view of the additional expense of maintaining the bankruptcy proceeding. There was nothing in the law to forbid the creditors to adopt such a course; but whether the law also sanctions their subsequent adoption of an opposed course is a different matter.

Every creditor so taking the benefits of the receivership suit was chargeable with notice of the bankruptcy proceeding and of the acts of bankruptcy alleged. This is because of the representative character of a bankruptcy suit; it is for the benefit of all the creditors. This characteristic, of course, pervades the Bankruptcy Act. It was, for instance, in virtue of section 59f (which authorizes creditors other than the original petitioners “at any time” to “enter their appearance and join in the petition”), that the interveners were permitted to join in the petition, although more than four months had elapsed after the acts of bankruptcy were alleged to have been committed. In re Stein, 105 Fed. 749, 751, 45 C. C. A. 29 (C. C. A. 2d Cir.); In re Romanow (D. C.) 92 Fed. 511, 512; In re Mammouth Pine Lumber Co. (D. C.) 109 Fed. 308, 310; In re Mackey (D. C.) 110 Fed. 355; 1 Loveland (4th Ed.) 388, note 7; Collier (9th Ed.) 779. And see In re Haff, 136 Fed. 78, 81, 82, 68 C. C. A. 646 (C. C. A. 2d Cir.). Furthermore, in the present instance the interveners admitted knowledge of the bankruptcy suit and of the acts of bankruptcy there charged, since they averred in their petition of June 7, 1913, that “petitioners are familiar with, adopt, and approve the allegations of the principal petition herein as to the insolvency of the respondent and the commission of the acts of bankruptcy as therein alleged.” It is not suggested,*and it would scarcely be claimed, that the acts of bankruptcy charged, one as well as another, could not be waived by the creditors; and the question at last is whether in effect they have not done so.

The express waives, the abandonment, contained in the intervening petition was in recognition of the rule laid down by this court in Simonson v. Sinsheimer, 95 Fed. 948, 954, 37 C. C. A. 337, 344, where it was held that a man will not be allowed to complain of an aót of bankruptcy, such as the making of an assignment for the beneht of creditors, if he induced the act—

,or alter its commission lie so acted with, regard to it that he gave others the right to act on the faith of its validity so far as his subsequent conduct would affect it. On the one hand, it would be gross inequity to allow him to subject the debtor to judgment for an act he induced; and, on the other,_ it would be equally unjust to allow him to repudiate, as invalid, a_transaction, when by his conduct he had induced others to change their position on the faith of its validity.”

See, also, In re Romanow, supra, 92 Fed. at page 511; Clark v. Henne & Meyer, 127 Fed. 288, 297, 62 C. C. A. 172 (C. C. A. 5th Cir.); Moulton v. Coburn, 131 Fed. 201, 203, 66 C. C. A. 90 (C. C. A. 1st Cir.); Depres v. Galbraith, 213 Fed. 190, 192, 193 (C. C. A. 8th Cir.); Utz & Dunn Co. v. Regulator Co., 213 Fed. 315, 317, 130 C. C. A. 17 (C. C. A. 8th Cir.); Lowenstein v. Henry McShane Mfg. Co. (D. C.) 130 Fed. 1007, 1008; In re Gold Run Mining & Tunnel Co. (D. C.) 200 Fed. 162, 163; In re Commonwealth Lumber Co. (D. C.) 223 Fed. 667, 672, 673.

True, the acts of bankruptcy complained of in those cases were either assignment or receivership proceedings; and counsel for appellant concede that kindred case has been found where any act of bankruptcy, other than acts such as these, was involved. This might he controlling, if it were not for the doctrine that fraud itself may be waived. We may say in passing, however, that one, if not both, of the acts of preference alleged would seem to have proved practically harmless. We think it safe to say upon the present record that the Miami Valley National Bank, as well as the Fifth-Third National Bank, made a loan to the adjudged bankrupt (under the corporate name it then bore — Jewel Carriage Company) upon the faith of the company’s promise to transfer to the bank certain automobiles by bill of sale or chattel mortgage to secure the loan; that the transactions as to both banks were carried into execution. But concededly the lien of the Fifth-Third Bank was so far preserved as not to he questioned here, while as to that of the other bank the District Judge found:

“The admitted transfer of the automobiles was not effective, either as a sale or pledge. * * * No possession passed, and the company continued to deal with the automobiles as its own.”

It would therefore seem that the Miami Bank lost the substantial portion of the loan and the entire subject of the intended pledge; for (1) we do not discover that the bank received anything for the automobiles, though (2) it is alleged in the amended answer of the Motor Company, without denial (the fact, however, not otherwise distinctly appearing), that the loan was included in the claim of the bank which was disputed, and ultimately reduced and allowed, and upon which the 15 per cent, dividend was paid; and this is in accord with the natural inference that the bank would prove its claim for all the lawful loans it held against the Motor Company.

In the view we take of the case, however, it is not necessary to pass upon the alleged acts of preference. Granting that either or both of these acts were committed, it is difficult to see why the conduct of the intervening creditors should admittedly estop them from claiming adjudication upon the first act of bankruptcy charged and should be totally without effect as to the others. The creditors were put to an election of the course they should pursue the moment they saw the difference between the appraisement of the property and the price at which it was proposed to sell it. The receiver reported the offer November 19, 1912; notice was thereupon given to the creditors, and a hearing granted December 2d. It was not until December 11th that the 'sale was ordered; and it is to- be remembered that the time as originally fixed for filing creditors’ claims in the receivership suit did not expire until January 10, 1913, and, as extended, until February 10th. Upon such return and hearing the creditors knew, if they did not know before, that the assets would fall far short of satisfying the indebtedness, even though the subjects of the alleged preferences were included; still they took no action in either of the courts, state or federal, to prevent the consummation of the sale. On the contrary, they sought and accepted their proportionate shares of the sales proceeds. Such conduct gives emphasis and evidential weight to- the very silence of the great body of creditors who are not here urging adjudication. It cannot be that it is the purpose of the Bankruptcy Act to foster and encourage such a change, not to say repudiation, as the interven-ers now present. The equitable objects of the statute are unmistakable ; and apart from every other consideration, the change in position now sought to have sustained is unjust to- the other creditors.

It is not a sufficient answer to- say that any recovery would be for the common benefit of all the creditors. The apparent adherence of the main body of the creditors to their original course is repellant of' such an answer. This situation is unlike that arising on the initial proceedings, where the attitude of creditors other than those petitioning is unimportant, and where no question can arise whether the acts of the petitioning creditors have misled the others. It is not claimed, and it is not seen how it rightfully could be, that the other creditors would have taken the course they did in the state court, if they had known that the present interveners did not mean what their conduct then fairly indicated. Above all, a change in attitude from an assenting to an antagonistic course, under conditions anything like these, has never been sanctioned by any decision to which our attention has been called.

[2-4] Furthermore, it was not necessary that the creditors should adopt the course they did in the state court. Either the original petitioners or the present interveners, in spite of respondent’s demand for trial by jury, might have applied in the court below to- have the hearing upon the question of adjudication expedited. This does not appear to have been done. It is not to be presumed that such an application would have been denied. They might have applied for an order to stay the sale of the property in the state court, or any other step proposed to be taken in that court. Since thé property was in possession of a receiver appointed by the state court, the application should in the first instance, in obedience to the rule of comity, have been presented to the state court, and it cannot be presumed that the application would have been denied. Carling v. Seymour Lumber Co., 113 Fed. 483, 491, 51 C C. A. 1 (C. C. A. 5th Cir.); In re Knight (D. C.) 125 Fed. 35, 45, 46. An application so made and denied could not have been employed as an estoppel against further action in the bankruptcy proceeding, since the object would have been to prevent the sale or distribution in the state court. Leidigh Carriage Co. v. Stengel, 95 Fed. 637, 642, 643, 37 C. C. A. 210 (C. C. A. 6th Cir). That decision points the distinction that was made in the Simonson Case, before cited.

Further, in view of the paramount character of the Bankruptcy Law, the jurisdiction of the bankruptcy court, when properly invoked, is exclusive as respects the administration of the affairs of insolvent persons and corporations. The inhibition of section 720 of the Revised Statutes against the issue of injunctions to stay proceedings in a state court, or to take possession of the property, distinctly excepts cases where the injunction is authorized by the bankruptcy law. In re Watts & Sachs, 190 U. S. 1, 27, 30, 23 Sup. Ct. 718, 47 L. Ed. 933. Orders of injunction, where necessary, as to insolvency proceedings pending in state courts, have been of frequent occurrence in bankruptcy courts (New River Coal Land Co. v. Ruffner Bros., 165 Fed. 881, 888, 91 C. C. A. 559 [C. C. A. 4th Cir.]; In re Gutwillig, 92 Fed. 337, 338, 34 C. C. A. 377 [C. C. A. 2d Cir.]; Davis v. Bohle, 92 Fed. 325, 328, 329, 34 C. C. A. 372 [C. C. A. 8th Cir.]; In re Knight, supra); but of course such orders must be sought in respect of proceedings commenced in the state court within the four months period (New River Coal Land Co. v. Ruffner Bros., supra; In re Farrell, 176 Fed. 506, 512, 100 C. C. A. 63, and citations [C. C. A. 6th Cir.]). If the report and hearing upon the offer of sale in the instant case be included, the evidence offered here was then available for all purposes of the adjudication. It follows that the present petitioning creditors had abundant opportunity to protect their interests in the court below, if they had chosen to resort to the remedies open to them. They had the choice, however, both of forums and laws for enforcing such rights as they then desired to have determined; and we do not see why they should not now be precluded from denying that they voluntarily made a final selection of the state tribunal and state laws.

It is true the question is attended with difficulty, but it is believed the safer rule is to hold litigants to the logical consequences of what must be concluded to have been their voluntary action. It is not meant to say that a creditor’s action is voluntary where a course adopted by him in a state court is taken in ignorance of certain acts, such as fraudulent transfers, of the debtor. It has been held that where, in such a case, no rights of others have been prejudiced by the conduct of the creditor, he may join in a bankruptcy proceeding to secure his rights (In re Curtis, 94 Fed. 630, 633, 36 C. C. A. 430 [C. C. A. 7th Cir.]); but it is fairly to be implied from the reasoning of the court in that case that, if the creditor’s action in the state court had been taken with knowledge of such transfers, he would upon the theory of election of remedies have been precluded from resorting later to a bankruptcy proceeding. While the theory of preclusion is not of controlling importance, it was doubted in the Simonson Case, 95 Fed. 954, 37 C. C. A. 344, whether the doctrine of election of remedies was applicable. It is enough to say here' that these creditors are estopped from prosecuting tire proceeding in bankruptcy.

[5] While the assignments fail to set out the error considered, the question was presented at the argument and has been discussed in the briefs, and the error is of such a character that we think it should be noticed under the option reserved in the concluding clause of rule 11 (150 Fed. xxvii, 79 C. C. A. xxvii).

The decree must be reversed, with costs, and with direction to dismiss the petition.