author: TAYLOR, District Judge.

text:
    In re ALDAY MOTOR CO.
    No. 5452.
    District Court, D. Tennessee, at Chattanooga.
    Dec. 26, 1930.

      Cantrell, Meacham & Moon, of Chattanooga, Tenn., for Hamilton Nat. Bank.
    Joe Frassrand, of Chattanooga, Tenn., for Chattanooga Finance Co.
   TAYLOR, District Judge.

This matter is before me on the referee’s certificate to review orders disallowing the claims of the Hamilton National Bank in the sum of $6,150, and of the Chattanooga Finance Company in the sum of $16,352 as secured. The claims were allowed as unsecured. There are also involved incidental items in connection with each. A stipulation was entered into under the terms of which the automobiles involved were sold and the proceeds are in the custody of the bankruptcy court, subject to the claims of all creditors.

The facts entering into a decision of the questions presented by both petitioners have been treated as practically identical, and they are consolidated in the certificate. A typical transaction will be detailed as representative.

The bankrupt was a local corporation engaged as dealer in automobiles at 1214 Broad street, Chattanooga, Tenn., with J. H. Alday president and R. B. Stewart secretary-treasurer. Petitioners for some time prior to adjudication were financing for the bankrupt the purchase of new cars from the manufacturer. When the bankrupt purchased automobiles, they were shipped consigned to the manufacturer, with sight drafts, bill of lading, and order notify, sent direct to the petitioner Hamilton National Bank or to some other bank. Upon notice to the bankrupt its secretary-treasurer would execute a note payable to one of the petitioners in an amount representing the value or practically the value of the shipment. The proceeds of the note would be deposited in the bankrupt’s account in the Hamilton National Bank, and at the same time the bankrupt would draw check against said account in favor of the bank holding the draft and bill of lading. When the petitioner finance company advanced the money, the transaction would be different only in that the money was advanced to' the bankrupt in the form of a cheek, which would be deposited by the bankrupt to its credit, and its cheek drawn against the account in favor of the bank holding the draft. At the same time the secretary-treasurer of the bankrupt, acting as agent of one of the petitioners, would execute a so-called trust receipt in the following form:

“Received of (either petitioner bank or petitioner finance corporation) for storage, the automobile described herein to be stored in the building 1214 Broad Street, Chattanooga, Tennessee (here description motor number of automobile).
“The undersigned custodian is not the owner of the automobile covered by this receipt, either solely, jointly or in common with others, but holds same as agent or a bailee for (one of petitioners) ready at any time to deliver to (one of petitioners) or its assigns upon return of this receipt properly endorsed.
“[Signed] B. B. Stewart.”

This trust receipt would he. attached as collateral to the note executed by the bankrupt. Upon receipt of bankrupt’s check drawn in favor of the bank holding the draft and bill of lading, both would be delivered to the bankrupt’s secretary-treasurer, who1 would return to its place of business and draw its check in favor of the railroad company for freight charges, etc. The matter of unloading and taking possession of the ears was turned over to the manager of the bankrupt’s used car department, who would place them on display. There was an agreement between petitioners and the bankrupt that the latter’s secretary-treasurer, who was employed and paid by it, would represent petitioners in the possession of the cars and in the matter of seeing that they were not sold by the bankrupt unless it could and would make a suitable payment on the appropriate note. -The bankrupt’s right to so sell for cash or on time or for part cash and in exchange for used ears was understood, and such transactions were numerous. ’ When used ears were taken in part payment for new ones, so-called trust receipts in the same form were customarily executed by Stewart in favor of the petitioner who had been interested in financing the purchase of the new car sold or exchanged. It was understood between petitioners and Stewart as their agent and the bankrupt that Stewart would not surrender possession of any liened ear unless and until the bankrupt was in position to and would discharge the lien; Nothing was done except as a matter of bookkeeping to identify or segregate either the used or new cars so handled or to bring notice to the public of the fact that they were claimed by either petitioner. For some time it had been the custom for the bankrupt to sell or exchange' the cars and deposit the proceeds of such sales to its credit and draw its checks in favor of the interested petitioners, and in trans- ' actions in which a used ear was involved to execute a so-called trust receipt covering the used ear and substitute such trust receipt as collateral just as though the transaction had been an original, one, as above stated. The proceeds of such sales were not segregated or turned over as such to either petitioner except occasionally.

Both petitioners claim security on the idea that the automobiles belonged to bankrupt and were pledged to them as security or that they were held as petitioner’s property under trust receipts.

The trust receipts, of course, indicate that they were executed upon the idea that the automobiles, both new and used, were the property of one of the petitioners, and held by Stewart as petitioner’s agent to be surrendered to petitioner at any time upon return of the receipt. This is inconsistent with a true pledge.' It appears therefore that the intention of the petitioners certainly was to secure the money advanced by them by the trust receipt method. If the trust receipts are to be held valid and enforceable, it is essential that petitioners once had title to the property, and likewise that their title came through the manufacturer or other than through the bankrupt — the borrower. If title vested in the petitioners prior to the execution of the trust receipts, it may be assumed here that nothing occurred thereafter to render the transaction invalid or unenforceable. As to the new ears involved, when the bankrupt borrowed money from one of petitioners with which to gain possession of the property, title was in the manufacturer. When the bankrupt deposited the proceeds of such loan to its account in the bank against which it customarily drew its cheeks, the title was not thereby affected. When the bankrupt drew its check payable to the bank holding the draft with bill'of lading attached, that was simply the usual method in transactions where similar property is shipped C. O. D., and the title passed with delivery of the bill of lading and paid' draft from the manufacturer to the bankrupt as between the bankrupt and petitioners with possession or at least custody of the property still with the railroad company. When the railroad company’s freight charges were satisfied, the property was delivered to the bankrupt, a’nd it then had both title and possession. I can see nothing'in this transaction vesting title in petitioners at any time, and certainly petitioners could not claim title through the manufacturer under these facts.

An examination of the numerous authorities cited leaves no question but that title , in the claimants, other than through the borrower, is essential to' the validity of a trust receipt, as such. Since this was the method attempted by the parties to secure the indebtedness, it may be that petitioners cannot be heard to now say they intended the property of the bankrupt to be held as a pledge by the secretary-treasurer of the bankrupt as petitioner’s agent, though that is not decided.

The ease of In re James, Inc. (C. C. A.) 30 F.(2d) 555, 557, very ably discusses the essential elements of trust receipts, and while certain statutes are involved in that ease not applicable here, the general principles controlling are not thereby affeeted.

In discussing and differentiating types of security and pointing out their essential elements, the court used this language: “In the ease of a mortgage, whether of chattels or realty, the security is dependent upon the title, as distinguished from a pledge, which rests upon possession. Title is given to the person, while possession may be given to the mortgagor, or the debtor, or his representative. The title thus conveyed to the mortgagee is as security for the performance of his obligation, and, in the ease of a trust receipt, title has never been in the importer or domestic buyer, and he consoquentlv cannot convey such title back to the holder of the trust receipt.”

The District Court, in its opinion [30 F.(2d) 551, 553], which was being reviewed in tho opinion just quoted, held “that the trust receipts, so called, are conditional contracts of sale rather than chattel mortgages, and that they are void for lack of filing.” The Circuit Court disagreed with that conclusion, for the reason that under the facts of that case title had never passed to the purchaser who was in that ease, as in this, the receiptor; that the bankrupt (receiptor) could not therefore convey title back to the holder of the trust receipt. The facts of the James Case are readily distinguishable from the present case, both as to the method of handling bills of lading and as to the form of the trust receipt which embraced the conditions under which a sale might be made, if at all, before payment of the balance due. But as we have seen, title, in the instant case, passed to the bankrupt when it acquired the bill of lading. If the title to this property was not in petitioners — holders of the so-called trust receipts — before the receipts were executed, and. title passed to the petitioners upon their execution, the distinction is readily seen, and the reasoning of the District Judge in the James Case, 30 F.(2d) 551, not questioned on review, becomes applicable here. If, as this court holds, title was in the manufacturer when the trust receipt was executed, and the receipt had the effect of passing the bankrupt’s after-acquired title to the petitioners, it could not be more than an unrecorded chattel mortgage, but it is not held that they would have been valid as mortgages had they been recorded. That they were not executed by the bankrupt, but by Stewart is one invalidity. Further in the opinion in the James Case on review [30 F.(2d) 555, 558], this language is found: “In a trust receipt, under no circumstances does title revert to the manufacturer or seller. It has been recognized that there are sound business reasons why it is unnecessary to record trust receipts, and also that they should have superior protection as compared with, an unrecorded chattel mortgage, when they are given to a lender of money by some one other than the debtor, and where either the delivery or possession against trust receipts is made to the debtor.” The case of In re A. E. Fountain, Inc., 282 F. 816, 25 A. L. R. 319, also decided by tho Second Circuit Court of Appeals, recognizes this principle.

As to the used cars taken by the bankrupt in part payment for new ears against which trust receipts had been executed by Stewart, either as secretary-treasurer of the bankrupt or trustee or trust agent of the petitioners, it can hardly be urged that title thereto was ever in the petitioners, or certainly not before the execution of the trust receipt. If title passed under the trust receipt, it must be upon the idea that in its execution Stewart was acting for the bankrupt and not as trust agent of the petitioners. Those who exchanged the used ears in part payment for new ones did not know the petitioners in the transactions, and there is no claim that title to the used cars passed to petitioners in that way.

It has been assumed hereinbefore that nothing transpired after the delivery of the new ears to the agent of petitioners that would render trust receipts unenforceable as against the trustee in bankruptcy, but that is not decided. I am of opinion, however, for the reasons above stated, that the liens cannot be enforced upon the trust receipt theory. But upon the idea that title vested in the bankrupt, and that thereafter possession was in Stewart as agent of petitioners to be held for them as pledges, there is much in the record to render that assumption unwarranted. The bankrupt had much too free hand in the sale and exchange of the property, and there was too loose an agreement with reference to the disposition of pro-eeds of sales by the bankrupt to permit a court to sanction it as an enforceable pledge.

The Sixth Circuit Court of Appeals case of Biles & Co. v. Elliotte, 215 F. 340, 342, bears no material analogy to the case now being considered. True in the Biles Case there was a bill of sale and delivery to Biles & Co. at the time the bankrupt procured the loan. But the decision in that case seems to rest upon a subsequent transaction. Biles & Co. sold the car to the bankrupt. The bankrupt gave Biles & Co. possession, and thereafter the property was entrusted to the bankrupt as bailee. While such bailee, the bankrupt lost possession of the property without the consent of Biles & Co., and thereafter Biles & Co. regained possession by replevin and had possession when the trustee brought the reclamation proceeding. The terms of the agreement between Biles & Co. and the bankrupt as to how the bankrupt was to deal with the ear or its proceeds, if it were later sold, do not appear, further than the opinion recites the possession as bailee afforded “opportunity for demonstration and sale of the ear.” It cannot be assumed that the agreement, as in this case, authorized sale and commingling of funds. In the present case the proceeds of sale were commingled with other funds of the bankrupt, and the only limitation upon a sale for cash seemed to be that thereafter a payment equal to the amount received would be made to the petitioner, whose security was thought thereby reduced. There was nothing in such agreement to create other than the relationship of debtor and creditor between petitioner and bankrupt as to such proceeds. It was not to be segregated or held expressly for petitioner’s account.

The principle announced in the ease of McClung v. Colwell, 107 Tenn. 592, 64 S. W. 890, 89 Am. St. Rep. 961, is relied upon by petitioners. The rule there announced seems to be in accord with the generally accepted idea that the pledgee’s lien is not lost by surrendering possession to the pledgor as agent for a specific purpose not inconsistent with the contract of pledge— in that ease to exchange pledged stock for stock in another corporation, the latter stock to be taken in the pledgee’s name. In eases of which this transaction is typical, the courts are in accord that the lien is not lost. In eases in which the surrender of possession of the pledged property to the pledgor is for such purposes and under such circumstances that the pledgor may pass title in it to another under promise to thereafter discharge the obligation to secure which the pledgee was taken, the lien of the pledgee is lost, and he becomes the unsecured creditor of the pledgor. The test is not whether the pledgee has lost possession of the property, but whether he has surrendered possession generally to the pledgor — as to sell with the promise on the pledgor’s part to thereafter discharge the secured obligation. If possession passed to the pledgor to sell as pledgee’s agent the proceeds of the sale would come into pledgor’s hands as pledgee’s agent impressed with a trust. It must be borne in mind that the bankrupt was a corporation, and it was the corporation and not Stewart to which the power of sale was delegated. Stewart was the agent of the petitioners, and it is to Stewart petitioners insist they intrusted the pledged property. Stewart, the agent of petitioners, permitted the corporation to sell the ears, and I think the following factual situation is determinative. I accept the statement of fact carried into one of the briefs of a petitioner that: “Mr. Thompson of the Finance Company repeatedly warned Stewart, especially after he started unloading them at 100 per Cent, (value) not to let them out of his possession unless the indebtedness against the automobile could be paid off. He told Stewart as treasurer of the Alday Motor Company and as pledge holder of these particular automobiles not to let them out of his possession unless they were paid off. The instructions given by Thompson to Stewart not to let the automobiles out of his possession unless they could be paid off was always followed by Stewart.”

It was the practice, as the proof clearly shows, for the bankrupt to deposit the proceeds of sales of ears with its general funds and draw its check to a petitioner. This was notice of and acquiescence in the practice of trusting the bankrupt to sell the ears not as agent of the pledgee, but on its own account with the assurance that it was able to and would thereafter discharge the debt to secure which the ear had been pledged. Only on a few occasions was this practice varied, and then only when the bankrupt thought its bank account might become overdrawn by reason of outstanding checks before a check given pledgee would reach the bank. In such cases the purchaser’s check was indorsed over to pledgee. This was the exception, not the rule or understanding. The understanding or agreement existing with reference to the automobiles in the bankrupt's hands when the petition was filed must be determined not altogether from the words used by the parties, but from the course of dealing that had existed between them with reference to other automobiles held by Stewart under the same agreement.

The learned referee has ably and painstakingly reviewed the facts and the law applicable to them, and his conclusions are satisfactory.

As to the various excessive interest charges claimed by the trustee, the record shows, in so far as it shows anything upon the subject, that such usurious interest was in fact paid by purchasers (not by the bankrupt) and simply passed on by the bankrupt to one-of the petitioners. In such a situation the trustee has no claim to it.

I think what has been said relative to the ears in the bankrupt’s hands when the petition was filed is inapplicable to the proceeds' paid over and alleged to constitute preferences. In those instances the fund actually reached the petitioner before the bankruptcy petition was filed, the fund involved was created by the advances made by the petitioners, and the particular transactions were under such circumstances as to leave the question at least so close and doubtful and the equities so strongly favorable to the petitioners that I do not feel disposed to disturb the referee’s findings with reference thereto.

If time permitted, it would be desirable to go more fully into detail with reference to the facts involved, and to somewhat further discuss the numerous authorities cited by petitioners, but the referee’s opinion and the certificate are so clear and at the same time exhaustive that further discussion may not be necessary.

The referee’s order will be confirmed.


source: Caselaw Access Project

author: SCHOONMAKER, District Judge,

license: Public Domain

text:
    In re SHADELAND BEACH IMPROVEMENT Co.
    No. 15340.
    District Court, W. D. Pennsylvania.
    May 13, 1931.
    Curtis L. Webb, of Meadville, Pa., for receiver.
    Kountz & Fry, of Pittsburgh, Pa., for Acme Equipment Co. and R. O. Murphy.
    A. G. Richmond, of Meadville, Pa., for referee.
   SCHOONMAKER, District Judge,

This case now comes before the court on petition to review an order of the referee in bankruptcy entered February 20, 1931, making absolute a rule to show cause granted by the referee upon the petition of the receiver, the effect of which order is to direct that a certain steam shovel, claimed by the receiver to be a part of -the bankrupt estate, be returned to the receiver; and that' the Acme Equipment Company pay :the receiver the sum of $193.75 out of certain moneys received by said company on account of a bailment contract made by the said Acme Equipment Company with Warren P, Smith. The Acme Company is protecting the right of the referee by summary’ proceedings to direct it to pay this sum to the receiver and to return to him the steam shovel,

We have reviewed the testimony on this rule taken before the referee, and find that by a bailment contract dated January 12, 1929, tbe Acme Equipment Company leased to the Shadeland Beaeh Improvement Com-jiany a steam shovel valued at $2,500, at certain stipulated rentals to be paid monthly, with option to purchase at any time during the terms o£ the lease; credit to he given on purchase price for the amount of the rentals paid. Default having been made in the payment of rentals on December 10, 1929, It. 0. Murphy and another officer of the Acme Equipment Company went to the premises and demanded the shovel; and, having taken possession of it, they hauled it to a point where the railroad right of way cuts through the real estate of the Shade-land Beach Improvement' Company. The Acme Equipment Company and the Shade-land Beaeh Improvement Company then commenced negotiations, whereby a written agreement was entered into on the 18th of December, 1929, wherein payments on account of lease were extended; $337.50 to be paid on the execution of the agreement, the receipt of which was acknowledged; $337.50 to be paid on the 20th of January, 1930; and $168.75 to be paid on the 20th of Eebruary, 1930, together with the costs of. moving the shovel; $100 to be paid when a • bill of sale was delivered for the shovel.

As we consider this agreement, the effect of it was to restore the possession of the shovel to the Shadeland Beach Improvement Company. Thereafter, the sheriff of Crawford County levied upon the steam shovel and advertised it for sheriff’s sale as the property of the Shadeland Beaeh Improvement Company. Subsequently, on January 15, 1930, and before the seeond payment on the agreement of December 18th became due, an involuntary petition in bankruptcy was filed in this court, with the result that a receiver was appointed and the execution-creditor, who levied upon the steam shovel as the property of the Shadeland Beaeh Improvement Company, was restrained from further proceeding on said execution. The receiver then went into custody of the shovel.

Thereafter, on the 10th day of 'May, 1930, the Acme Equipment Company, without any petition on its part to reclaim this shovel from possession of the receiver in bankruptcy, undertook to take possession of it, remove it from the railroad premises, and lease it to a man by the name of Warren P. Smith. The receiver objected, and claims that an agreement was made between him and the Acme Equipment Company, whereby that company was to sell the shovel to- him for $2,000, to collect the amount that was due the company under the agreement of December, 1929, and to turn the balance over to the receiver. The Acme Equipment Company denied the existence of that agreement. Nevertheless, the referee found that it was made, and, basing his findings upon the making of that verbal agreement, made the order here complained of, to the effect that, out of $1,200 which the Acme Company received on account of the steam shovel from Smith, it retain the amount that was due it under the contract of December 18, 1929, and certain expenses in regard to the shovel, and then pay the balance to the receiver.

Under this state of facts, we are of the opinion that this court is without power to make the summary order eomplaiped of. As we view the law, the remedy of the receiver was to exact an enforcement of his alleged verbal agreement against the Acme Company in a plenary suit for an accounting and assignment of the bailment contract with Smith;' or, in view of the fact that this steam shovel was taken out of the custody of this court without any lawful order, the receiver might have recourse to recover the steam shovel from the person in whose possession it now unlawfully is.

As to which of these two methods should be followed, we express no opinion, for, as we view the fact, it is a subject for a plenary suit. Being of this opinion, the order of the referee complained of will be reversed and set aside.


author: LINDLEY, District Judge.

text:
    INTERNATIONAL SPOTLIGHT CORPORATION et al. v. UNITED MFG. CO.
    No. 9426.
    District Court, N. D. Illinois, E. D.
    June 8, 1931.

      Williams, Bradbury, McCaleb & Hinkle, of Chicago, Ill., for plaintiffs.
    Dyrenforth, Lee, Chritton & Wiles, of Chicago, Ill., for defendant.
   LINDLEY, District Judge.

Plaintiff brought suit to recover for infringement of patents as follows: Cousino, No. 1,327,945, claims 5 and 6; Wielage, 1,-434,468, claims 1 and 2; Sklarek, 1,675,915, claims 3 and 4; Sklarek, 1,699,124, claim 18; and Sklarek, 1,682,150, claims 5 and 7. Defendant denied validity of all of said patents and infringement of certain ones thereof. In its counterclaim it charged plaintiff with infringement of five patents, but at the trial relied upon only two patents to Ramsey and one to Aiken hereinafter discussed. The two claims of Cousino relied upon appear in the margin.

The patentee described and claimed a spotlight mounting device designed, intended and adapted to be operated from the interior of, and inserted through the physical framework of, a closed automobile. He mounted a lamp head rotatably upon a housing which was included within and carried by a hollow shaft, likewise rotatable and of comparatively small dimensions, making it capable of easy penetration of or of insertion through a supporting element (corner post) of the frame of a closed car. Upon the inner end of said shaft he mounted a short manipulating handle, conveniently located near the driver, which, operating through a second housing on the shaft, effected a swinging movement of the lamp head and lamp carrying housing (bracket) with the hollow shaft about the horizontal axis of said shaft. Within the mechanism patentee placed á rack and pinions to transmit the rotation of the operating handle to the lamp about the axis of the handle, which when transmitted produced rotation of the lamp about an axis perpendicular to that of the hollow shaft. Thus he achieved rotation of the lamp both horizontally and perpendicularly by a compact device conveniently located, inserted through the front corner post of a closed car nearest the driver’s seat, easily operated and producing efficient results. Obviously the rack and pinions used to transmit rotation from handle to lamp were one of several mechanical equivalents,, including beveled gears and wheel sprockets and chains.

Searchlights, including double rotation, were old, and many delvers had vainly attempted successfully to adapt the art to the specific needs faced by Cousino when the latter entered the field. As admitted by counsel, his result, if patentable, must be limited to the specific combination of elements or mechanical equivalents thereof described and claimed by him. It is noteworthy that his device met with immediate favor, followed by substantial commercial success. Defendant and its officers at one time sought a license under the patent and have adopted all the substantial elements of the device. The former patented combinations, some forty in number, have disappeared from the field, and competition therewith has been swept away. The lamp permits the driver to look over the beam of light, a desirable advantage in night driving. It achieves great length of light, possesses facility, accuracy of direction, and the desirable quality of naturalness of the movements of the handle in directing the light. The rays, without falling within the ear, have a length or width of 280 degrees; the compactness of the lamp meets the restrictions of the ear and the demands of the driver.

Bearing these facts in mind, and following the presumption of validity, in view of the results achieved invention must be ascribed to the device, unless there is proof of anticipation.

Lourdin (French patent No. 426,722)., was delving in the same art as Cousino, but he provided a cumbersome and impracticable supporting frame for application to the cowl. He made use of a plurality of beveled gears and counter shafts. The device did not .possess compactness, was not adapted to be located near the driver and was apparently awkward and impractical. He was not dealing with the specific problem of Cousino, that is, placing a compact lamp in a confined space, easily operated by the driver. He lacked Cousino’s essential elements, the guide sleeve or guide, the rotatable shaft, the spotlight carrying bracket attached to a part of the hollow rotating shaft. He provided no rotatable handle, such as Cousino describes, to oscillate the spotlight on the axis intersecting the axis of the sleeve. He did not anticipate the device described and claimed by Cousino.

. Bice, No. 1,241,150 provided a mounting, the handle of which was intended to be near .the steering wheel of the automobile and within the curtained inelosure of an open car or inside an armored vehicle, but he makes no provision for attachment through the windshield post. His device lacks the clamping attachment of claim 5. He achieves a rocking rather than a rotating movement of his pitman rod, and the requirements of his description necessitated the use of a tube of substantial diameter. Apparently his model was never put upon the market, and, though he made a possible lighting device, it did not possess the advantages of Cousino.

Hills, No. 484,964, includes no hollow .shaft or guide sleeve; no handle roekable with a hollow shaft to oscillate the spotlight on a perpendicular axis. His device could not be mounted through a windshield post, and was wholly unadapted for or incapable of use as Cousino’s light. He used two handles, necessitating the use of both hands or of one hand twice.

Bees, No. 1,392,850, Love, No. 103,905, Ward, No. 449,719, MacHaffie et al., No. 576,683, and Everett, No. 930,059, all dealt with the same subject-matter as Cousino. Bees’ application followed the issuance of Cousino’s patent. It appears obvious that Love is of no pertinence. Ward disclosed a hollow shaft operating a dirigible spotlight, but he made use of two handles to effect the two different characters of movement. His mechanism is clearly distinguishable from that of Cousino. MacHaffie and Faure did not disclose a mechanism which was adapted for automobile equipment. Their device lacked the distinctive rocking handle of Cousino. Apparently the Cincinnati light, using the same type of handle movement as MacHaffie and Faure, has been forced from the market by the later lamp of the Cousino type.

Everett, No. 930,059, made use of a push and pull movement to rock the light about its trunnions and a turning movement to rotate both the lamp and bracket about a perpendicular base, but he did not make use of the specific combination of Cousino. Nor did Bamsey in either of his patents achieve the result of Cousino. His light was placed outside of the body, operated from outside of the body, and was clumsy and awkward in its operation. It could not without considerable modification be mounted within a closed ear.

The court is of the opinion that, when Cousino, dealing as he was in a crowded art, conceived the idea of a compact searchlight upon the corner post of a closed ear, with a handle inside of the door, near the driver’s seat, permitting all desired motion of the lamp to be transmitted by one handle, located near the driver, along the axis of the shaft, he achieved a result which possessed utility and novelty. He made it possible to use a shaft of comparatively small diameter; the chosen movements of the motivating handle being peculiarly adapted to the operation in an automobile structure and the anatomy of the driver. Meeting with immediate favor and commercial success, preceded by many combinations, none of which appears to have been successful, embracing a specific combination not included in any of the preceding results, it follows that the patent is valid.

Wielage followed Cousino, and purported to add an improvement to the device of the latter. For the rack and pinions of Cousino he substituted a rotary shaft carrying double gears meshing with pinions on the handle and lamp. This change, it would seem, needs no discussion to justify the conclusion that it amounted merely to a substitution of mechanical equivalents. In addition, Wielage ran the wires from the lamp through his inner shaft, making the latter tubular. Ramsey had done this previously, but, in the opinion of the court, the inclosing of the wires did not amount to invention in either Wielage or Ramsey. In Cousino. we had one steel shaft inclosed within the hollow shaft. The wires were carried down the exterior of the shaft. Any mechanic building a lamp, exercising the ordinary skill of a mechanic, would quite naturally and easily conclude that all he needed to do in order to cover the exposed wires would be to put them through a conduit included within the device. What would be a more natural conduit than the inner shaft, easily converted from a solid to a hollow shaft? The court believes that Wielage achieved no invention, and that the claims relied upon are void.

Sklarek adopted the elements of Cousino and the inclosed wires of Wielage, substituted for Cousino’s rack and pinions Ward’s beveled gears, and placed his switch at the end of his handle carrying bracket. He changed the switch from the push-button form of the prior devices to the toggle or lever switch. As suggested by counsel, pull switches are used overhead and under lamp shades, push-button switches are used where space is at a premium, and lever switches are used where ease of operation in the dark is important, but the court is not willing to concede invention to Sklarek because of' his mere choice of switches. He achieves no new function, and none whatever as to the respective advantages of the push-button switch or a toggle switch. The claims are void for want of invention.

In his assembly patent Sklarek relies upon claim 18, as follows: “In a dirigible spotlight of the character described, the combination with a supporting member; of a lamp disposed at one side of said member; means for rotating said lamp about axes substantially at right angles to each other, said means including concentric shafts, extending through said supporting member, the inner of said shafts being provided with an end portion polygonal in cross section; and means for independently rotating said shafts, said means being in the form of an assembled unit comprising a handle support telescopically engageable with the outer of said concentric shafts and being provided with an angularly extended handle by means of which said handle support may be rotated to rotate said outer shaft, said handle being provided with a rotatable element cooperating with a second rotatable member carried by said handle support, said second rotatable member having a polygonal opening adapted for detachable reception of the polygonal end portion of said inner shaft.” Without prolonged discussion, the court agrees with defendant’s contentions that the claim is void for variance between claim and specification, for lack of invention, if construed to cover the structure of its own specification, and for late insertion after defendant entered the field. If we attribute validity to the claim, it must be limited to the narrow confines of the specific device described. Defendant’s lamp does not come within those limitations. It includes no handle provided with a separate rotary element, and follows the teachings of Cousino in its provision for one rotary handle, the end of which is formed into a gear. Consequently there is no infringement.

Sklarek patent, 1,682,150, of August 28, 1928, describes a tool intended to help in attaching spotlights to the comer posts. The court is of the opinion the device shows the simplest mechanical • adaptation of the common principles of jigs to a special situation, and that there is no invention involved in the claim sued upon.

What has been said concerning the pri- or devices pleaded against the plaintiff's patents applies with equal force to the patents of the defendant relied upon in its counterclaim. Ramsey, No. 1,093,009, may be held valid upon the ground that it was an advance in the art. It was characterized by a pump handle operating device, and was obviously devised for use only in an open ear. As we have said, he did not achieve the same result as Cousino. Ramsey inclosed his wires, but, as has previously been said, this was an exercise only of mechanical skill. If he achieved invention, it was of something other than that which Cousino achieved, and what plaintiff now does and what defendant now does was in no way taught to them by either of Ramsey’s patents.

In Ramsey, No. 1,147,973, is another pump handle operated lamp, and the device makes use of the push and pull rod. Nei-tlier the plaintiff nor the defendant follow his teachings, if we ascribe validity to his device.

Aiken, No. 1,144,956, followed Ramsey, and apparently achieved nothing over Ramsey. The court is of the opinion that Aiken did not teach either plaintiff or defendant how to make their respective lamps; that he was anticipated by Ramsey; that he achieved no invention; and that, if his patent should be held valid, there is no infringement of the same.

There remains only the question of infringement of the Cousino patent by defendant. It appears from an examination of the device manufactured by the defendant that it embraces every element of Cousino, substituting only certain mechanical equivalents for certain ones in the latter’s invention; that the specific combination to which Cousi-no must be restricted is infringed by defendant.

There will be a decree finding claims 5 and 6 of the Cousino patent valid, infringement thereof by the defendant, and for an accounting. The decree will direet that the plaintiff’s suit be dismissed as to all of its other patents relied upon, for want of equity, and that the defendant’s counterclaim be dismissed for want of equity. The costs will be taxed two-thirds against defendant and one-third against the plaintiff. Proper decree may be submitted.

The foregoing memorandum is adopted by the court as its findings of fact and conclusions of law herein.

      5. A windshield, a spotlight mounting device including a guide sleeve, a friction clamp anchored adjacent said windshield and embracing said sleeve, a spotlight carrying bracket at one side of said clamp, and a handle extending rearwardly from the sleeve at the other side of the clamp, said handle being movable to rotate said sleeve as to the clamp to rock the spotlight bracket, and said handle being rotatable to oscillate the spotlight bracket on an axis intersecting the axis o£ the sleeve.
      6. A windshield frame, a spotlight mounting device mounted on said frame and including a guide projecting laterally therefrom, a spotlight carrying bracket on the outer end of said guide, and a handle transversely extending rearwardly on the inner end of said guide, said handle connected through the guide to rock the spotlight bracket on said guide as a horizontal axis, and said handle rotatable to oscillate the spotlight bracket on an axis intersecting the axis of the guide.


author: PATTERSON, District Judge.

text:
    In re ELMSFORD COUNTRY CLUB.
    No. 50478.
    District Court, S. D. New York,
    March 12, 1931.
    Arthur Leonard Ross, of New York City, for petitioning creditors.
    . Samuel Robert Weltz, of New York City (Benjamin M. Franklin, of New York City, of counsel), for judgment creditors Geo. Alexander & Son.
    Mark, Allin & Tucker, of New York City, for receiver Irving Trust Co.
   PATTERSON, District Judge.

An involuntary petition in bankruptcy was filed against the Elmsford Country Club on January 28, 1931. On January 31, 1931. the club appeared and filed its consent to be adjudged bankrupt. The order of adjudication followed on February 3,1931. On Feb-raary 9th George Alexander and. Philip Alexander, judgment creditors in whose behalf levy of execution had been made, moved to vacate the adjudication on the ground that the club is a membership corporation not engaged in conducting business for gain or profit, and that the proceedings were therefore jurisdictionally defective. On the argument of the motion, it was conceded that the club is a membership corporation which operated a golf course for the pleasure of its members.

The club is undoubtedly capable of being a voluntary bankrupt. The only exceptions to the generality that all persons may become voluntary bankrupts are municipal, railroad, insurance, and banking corporations. It is equally clear that the club, a membership corporation formed for furnishing recreation to its members, cannot be the object of involuntary proceedings in bankruptcy. Section 4 of the Bankruptcy Act (11 USCA § 22) states that any moneyed, business, or commercial corporation, except a municipal, railroad, insurance, or banking corporation, may be adjudged an involuntary bankrupt. The alleged bankrupt is not within the class of moneyed, business, or commercial corporations. In re Fulton Club (D. C.) 113 F. 997; In re Supreme Lodge of Masons Annuity (D. C.) 286 F. 180. The petition stated that the alleged bankrupt was a membership corporation. A membership corporation is one organized for other purposes than that of pecuniary gain (Membership Corporations Law, § 2, Consolidated Laws of New York, c. 35), and there is nothing to show that the club departed from its original purpose and entered the field of commerce. The petition was thus defective on its face. The defect, moreover, was a jurisdictional one; the pleading showed a lack of jurisdiction over the subject-matter of the proceeding. In re New York Tunnel Co. (C. C. A.) 166 F. 284.

But the club answered the petition, setting forth its willingness to be adjudged bankrupt. This fact raises the question whether the proceeding was changed from an involuntary one to a voluntary one and the jurisdictional defect thus cured; for no one can doubt that the club might have filed a voluntary petition and thus been adjudged bankrupt. There is plausibility in the argument of the petitioning creditors that the answer thus broadened the court’s jurisdiction, but the authorities which I have read are against it. It has been decided in several cases that the filing of an answer by an alleged bankrupt, asking that he be adjudged bankrupt, does not convert an involuntary proceeding into a voluntary one. In re Supreme Lodge, supra. See, also, In re Condon (C. C. A.) 209 F. 800; Central State Bank v. Harrington (C. C. A.) 4 F.(2d) 514.

Finally, the petitioning creditors accuse the moving parties of laches, and say that they have no standing to have the adjudication vacated. There is no merit in this argument. The act, in section 18 (11 USCA § 41), accords to creditors, as well as to the alleged bankrupt, the right to oppose the petition within an indicated time, and here the moving parties made their opposition within such time. It is true that the order of adjudication had already been entered, but that was due to the premature answer of the alleged bankrupt. Such an adjudication does not cut off the right of creditors to register their opposition within the time set by section 18 and to ask that the adjudication be vacated. The moving parties are therefore before the court as of right and not as matter of favor, and there is no basis for the charge of laches. In this respect the case differs from eases like In re Urban & Suburban Realty Title Co. (D. C.) 132 F. 140, and In re New England Breeders’ Club (C. C. A.) 169 F. 586, where the creditors seeking to vacate the adjudication did not appear until long after the time fixed.in section 18.

The motion will accordingly be granted and the adjudication vacated. The club may, of course, file a voluntary petition.


text:
    In re GINSBURG et al.
    District Court, S. D. New York.
    March 24, 1931.
    Krause & Hirsch, of New York City, for trustee, Irving Trust Co.
    H. & J. J. Lesser, of New York City (Jacob J. Lesser, of New York City, of counsel), for bankrupts.
   PATTERSON, District Judge.

This is a petition to review an order of Peter B. Olney, Jr., referee, directing the bankrupt Julius Ginsburg to turn over to the trustee in bankruptcy underwear, gloves, and dry goods of the value of $13,424.86. The propriety of the order is attacked by the bankrupt. ,

The bankrupts, mother and son, were partners engaged in selling underwear, stockings, gloves, and various notions. The son, who is the present respondent, was in sole charge of the business. A voluntary petition in bankruptcy was filed on September 7,1929. A few months later the trustee commenced this proceeding, charging that Ginsburg had in his possession merchandise worth $43,-882.63 belonging to the bankrupt estate. This figure was arrived at from the firm’s books and financial statements, of whieh the trustee made proof, in the following manner: A financial statement signed by Ginsburg gave the inventory on January 1’, 1929, at $57,630.45. To this was added the purchases in 1929, shown by the firm books as $69,601.-32, making an aggregate of $127,231.77. From this there were deducted the following items: Sales during 1929, $78,761.20; merchandise on hand at bankruptcy, $1,443.89; pledged goods, $3,144.05. The aggregate deductions were $83,349.14, and the shortage was $43,882.63. The trustee also offered evidence tending to show that the decline in values of goods of this sort from January to September, 1929, was from 3 to 5 per cent.; one witness put it as high as 10 per cent.

To account for the shortage, Ginsburg testified to an inflation of the January inventory and to sales at a loss. As to the inventory figure, he first defended it, but finally claimed that the fair market value of the stock in January was only 75 per cent, of the figure shown in the financial statement. As for losses in sales, he listed quite a number on whieh the total loss was $3,808.94, adding that there were more whieh he had not figured up, although he was given access to the hooks. He also testified to trouble with marshals who were making levies in the last few months.

• The referee stated that Ginsburg did not impress him favorably, and that the attempted explanation of the shortage was unconvincing. He nevertheless gave Ginsburg the benefit of the doubt on each disputed item where his testimony was at all specific. He took 25 per cent, off the January inventory, although Ginsburg himself had claimed for some time that the financial statement was true. He allowed a 10 per cent, depreciation on all goods; this being the highest estimate of the 1029 decline in market values. He accepted Ginsburg’s testimony as to the losses on specific sales and in one case an estimated loss. The only matters in which he refused to follow Ginsburg were in his blanket denial of concealment and in his vague claims of sales at a loss. With the allowances made by the referee, he arrived at an unexplained shortage of $13,424.86, whieh he ordered Ginsburg to turn over.

In my opinion, the order of the referee is sustained by the proof. It is contended in behalf of Ginsburg that the proof offered by the trustee was not of the clear and con-vineing character required in such cases, and that the referee disregarded the rule laid down in Oriel v. Russell, 278 U. S. 358, 49 S. Ct. 173, 73 L. Ed. 419. The criticism is made that the case against the bankrupt was built up solely by an accountant. But the figures used by the accountant, except for the trifling value given to the goods passing to the receiver, were the bankrupt’s own figures, and the calculation was not a complex one. I do not regard the Oriel ease as discountenancing proof of this kind or as requiring from now on the testimony of unimpeachable eyewitnesses who saw the bankrupt removing his goods by stealth. The proof furnished by the trustee was of the same character as that heretofore given in many eases in this circuit, where turnover orders were issued, and the general rule here has for many years been the same as that recently laid down by the Supreme Court in the Oriel Case — proof of a clear and convincing character, a mean between the extremes of mere preponderance and proof beyond reasonable doubt. I think that the referee gave full effect to the Oriel Case when he went along with the bankrupt as to every matter in which the latter gave any tangible figures tending to explain the large discrepancy, and this despite the poor opinion which he had formed of the bankrupt’s credibility.

The petition to review the order will therefore be dismissed.


text:
    In re OSOFSKY et al.
    No. 48597.
    District Court, S. D. New York.
    March 23, 1931.
    Samuel Rosenzweig, of New York City, for petitioner Stewart Lumber Co.
    David Haar, of New York City, for bankrupts.
   PATTERSON, District Judge.

An ex parte' order was obtained by Abe Osofsky, one of the bankrupts, on February 19, 1931, staying Stewart Lumber Company from taking further action on a judgment it had recovered against him in the Municipal Court of New York City until after a hearing of his application for discharge. Thereupon the judgment creditor moved to vacate the stay, on the ground that its claim was one which would not be affected by a discharge. The question is whether the claim on which the judgment was based was duly scheduled by the bankrupt.

. On May 1,1929, Abe Osofsky executed a series of promissory notes to the order of Mechanics Show Case & Fixture Company, Inc., in payment of goods sold and delivered. Several of these notes were transferred by the payee by proper indorsement to Stewart Lumber Company in October, 1929. The first fell due on January 2, 1939, and was duly protested for nonpayment. The notice of protest which was received by Osofsky showed that the note had been transferred to the lumber company and by the latter to a bank. This defaulted note was paid and taken up by the payee, the show case company. According to the president of this concern, he told Osofsky shortly afterwards that his concern had been obliged to make the note good, and also that the lumber company held three other notes not yet matured.

The Osofskys were adjudicated bankrupts on April 21, 1930. The schedules filed by them did not list the lumber company as a creditor. They did contain, under Schedule A 4 of the partnership lists (which schedule bears the printed heading “Liabilities on Notes or Bills Discounted, Which Ought To Be Paid by the Drawers, Makers, Acceptors or Endorsers”), the following entry: “Mechanics Show Case Co., 51 Roekaway Avenue, Brooklyn, New York, $1,200.” Thereafter in October and November, 1930, two of the notes held by the lumber company fell due and were not paid. The lumber company then commenced an action in the Municipal Court on the two notes against Osofsky as maker and the show ease company as indorser, and obtained judgment for the full amount on December 27, 1930. When it attempted to realize on the judgment, it then learned for the first time, as it says, that Osofsky was in bankruptcy. At the same time Osofsky obtained an ex parte order restraining the judgment. creditor from proceeding further to collect its judgment. If the debt is a dischargeable one, the ex parte order should stand. If not dischargeable, then the order should be vacated and the judgment creditor permitted to pursue his ordinary remedies on the judgment in the state courts.

Section 17 of the Bankruptcy Act (11 USCA § 35) excepts from debts barred by discharge those that “have not been duly scheduled in time for' proof and allowance, with the name of the creditor, if known to the bankrupt, unless such creditor had notice or actual knowledge of the proceedings in bankruptcy.”

The bankrupt erroneously listed the notes in the partnership schedule instead of in his personal schedules. He made another error when he put the item in the schedule intended for debts on which the bankrupt was secondarily liable; the proper schedule was A-3. I will pass these mistakes as not serious enough to take the debt out of the dis-chargeable class (see Kreitlein v. Ferger, 238 U. S. 21, 35 S. Ct. 685, 59 L. Ed. 1184), and will consider only the fact that the bankrupt listed as his creditor the payee of the notes rather than the actual holder.

We have here the statement' of the payee that two or three months prior to bankruptcy the bankrupt was told that these notes had been transferred to the lumber company. If this is the fact, it is clear that the debt represented by the two notes is not dischargeable. Columbia Bank v. Birkett, 174 N. Y. 112, 66 N. E. 652, 102 Am. St. Rep. 478, affirmed in 195 U. S. 345, 25 S. Ct. 38, 49 L. Ed. 231. The bankrupt, however, denies knowledge of any transfer. Even if this were true as to these two notes of late maturities, he was certainly cognizant of the ’ transfer of the note of the same series which had fallen due prior to bankruptcy. And it would seem that this circumstance was sufficient to charge him with the duty of inquiry concerning the later notes. When he made-up his schedules, he could readily have learned from the payee whether the notes had been passed on to others. Lansing Liquidation Corp. v. Heinze, 184 App. Div. 129, 171 N. Y. S. 738, is a far stronger ease for the bankrupt. There the obligation was nonnegotiable and had been assigned by the creditor prior to bankruptcy of the debtor. The schedules set it forth as owing to the original creditor. It was held that the bankrupt’s lack of knowledge of the assignment was immaterial, in the absence of a showing by him of due diligence to find out who was the owner of the obligation, and that the discharge in bankruptcy was not a defense. It may be questioned whether this is not too onerous on the bankrupt, especially in a case where the obligation is nonnegotiable. But in the present ease the notes were negotiable. Transfer of such instruments is to be expected. The bankrupt maker knew that a companion note had been negotiated by the payee. Under such circumstances, he should have inquired of the payee whether the later notes had also been negotiated. The probability is that the payee told him in January what the situation was as to the later notes, and that he neglected to pass the information on to his lawyer three months later when the schedules were being drafted. I have concluded that the failure to list the lumber company in the schedules was due to the bankrupt’s oversight.

There is nothing here to indicate any notice or actual knowledge of the bankruptcy on the part of the lumber company. Its notes did not mature until six months after bankruptey, and there was no reason for it to inquire about the financial condition of the maker before maturity. I think that it is in good faith in its statement that the news of the bankruptcy first reached it in February, 1931.

In a case of this sort, there is a dashing between the two purposes sought to be accomplished by the Bankruptcy Act, a discharge from debts of the honest debtor who is engulfed and an equitable distribution of his estate among his creditors. To hold that the bankrupt is not. discharged is to defeat in part the former purpose. To hold that he is discharged is to deprive the creditor of his right to participate in the administration of the estate and in the proceeds. In this dilemma the law favors the bankrupt. It does not call upon him to run down all his obligations and name the present holders of them, at the risk of having his discharge held ineffective against them. Such a task would often be a formidable one. But this does not mean that the bankrupt may list the original creditor, when ho knows, or ought to know, that -another is the present holder of his obligation, and in my opinion that is this ease. I therefore hold that the debt represented by the judgment was not duly scheduled and is not dischargeable, and that the stay should be vacated.


text:
    In re SCHULTE-UNITED, Inc.
    No. 50355.
    District Court, S. D. New York.
    March 24, 1931.
    Allen C. Bragaw, of New York City, for . Charfhays Corporation.
    Davies, Auerbach & Cornell, of New York City, for Irving Trust Co.
   PATTERSON, District Judge.

This is a petition by the mortgagee of real estate owned by the bankrupt for leave to commence a foreclosure in the New York Supreme Court.

The mortgage is a curious one, although valid in all respects. It is for the face amount of $204,000, payable without interest in equal monthly installments of $833.34 until April 1,1949. There is a provision that upon the death of one Haye-s the monthly ' payments shall drop to one-half the fixed amount, and upon the death of his wife thereafter shall cease altogether. Hayes is evidently the sole stockholder of the corporate mortgagee, and in selling the property to the bankrupt and taking a purchase-money mortgage desired that the consideration should be in effect an annuity. The petition shows that the mortgagor was adjudicated bankrupt on January 21, 1931; that the installment of $833.34 due February 1, 1931, has not been paid; that $182,333.16 is the present unpaid balance of the principal; and that the petitioner has duly elected, pursuant to an acceleration clause in the mortgage, to declare the entire amount now due and payable. It is also shown that the bankrupt has defaulted in paying interest on certain prior mortgages, and that the equity of redemption is worthless, the property having a value of only $110,000.

The trustee in bankruptcy resists the petition. It is pointed out that the transaction was one whereby the bankrupt acquired the property on what was virtually an annuity arrangement, that the real estate was never worth more than $110,000 in cash, and that the present value of the stipulated monthly payments, measured by the American Experience Tables of Mortality, is only $104,015. It is urged that the petition be denied, or, if granted, that it be on terms that the mortgagee be restrained from sharing in the assets of the bankrupt estate through any deficiency judgment.

I have no doubt that the petitioner is entitled to the relief asked for, without terms , of any sort.

1. The contention that the bankruptcy court has jurisdiction over the real estate which cannot be interfered with by foreclosure suits later commenced in other courts is entirely sound. This is merely an application of the general principle that the jurisdiction of the court which first takes possession of property through its officers will be preserved, whether that court be a United States court (Murphy v. Hofman, 211 U. S. 562, 29 S. Ct. 154, 53 L. Ed. 327) or a state court (Harkin v. Brundage, 276 U. S. 36, 48 S. Ct. 268, 72 L. Ed. 457). But this does not mean that the bankruptcy court may not give to the mortgagee permission to commence a foreclosure action in the state court and thus voluntarily relinquish its jurisdiction over the property. “It is always within the discretion of a court, having custody of a res, to allow claims against it to be litigated elsewhere.” In re Kelley (D. C.) 297 F. 676, 678. There is nothing in Isaacs v. Hobbs Tie & Timber Company, 282 U. S. 734, 51 S. Ct. 270, 75 L. Ed. 645, decided February 24, 1931, by the Supreme Court and relied upon here by the trustee in bankruptcy, which prevents the bankruptcy court from giving such permission to the mortgagee. Cases come up where it. is advantageous to all the parties, including those interested in the bankrupt estate, to have a foreclosure in the state court rather than a sale free and clear of liens in the bankruptcy court. For example, a better price might be realized on foreclosure sale, or a better title to the purchaser might be obtained. See In re Myrtle Plumbing Supplies, Inc. (D. C.) 10 F.(2d) 374, affirmed (C. C. A.) 10 F.(2d) 374. And when it is shown that the unpaid balance on the mortgage greatly exceeds the market value of the property, I know of no case in which permission to commence foreclosure in the state court has been withheld. In re Zehner (D. C.) 193 F. 787; In re Victor Color & Varnish Co. (C. C. A.) 175 F. 1023; Remington on Bankruptcy § 2371. Since it is quite certain here that the bankrupt’s equity of redemption is worthless, the mortgagee will be granted leave to bring a foreclosure action in the New York Supreme Court.

2. The trustee in bankruptcy submits that equity would be done by having the mortgagee receive back the property, the point being made that the sums already received by it exceed the fair rental value of the real estate. In wha.t way the court could or should compel the mortgagee to cancel or satisfy its - mortgage on any such terms is not explained. The transaction was not a lease; it was a sale and purchase-money mortgage, and the mortgagee is entitled to stand on it.

3. The trustee also asks that the mortgagee be restrained from proving as a claim against the estate the amount of any deficiency judgment. There may possibly be difficulties in the way of allowing such a claim against the bankrupt estate, due to the peculiar provisions of the bond and mortgage and to the fact that the entire unpaid balance had not been declared due at the time of adjudication. But any such matters will not bo anticipated at this time.

It follows that the petition for leave to institute a foreclosure action will be granted, without conditions.


author: NIELDS, District Judge.

text:
    CONGRESS CIGAR CO., Inc., v. HERING, formerly Collector of Internal Revenue.
    No. 1.
    District Court, D. Delaware.
    May 19, 1931.
    Ivan Culbertson and Edmund S. Hell-ings, both of Wilmington, Del., for plaintiff.
    Leonard E. Wales, U. S. Dist. Atty., of Wilmington, Del., for defendant.
   NIELDS, District Judge.

In this action Congress Cigar Company, Inc., a Delaware corporation, seeks to recover from a former collector of internal revenue of the First Delaware tax collection district, the sum of $1,566.10, with interest from July 19, 1926, claimed as taxes illegally collected. The ease was tried to the court without the intervention of a jury.

Findings of Fact.

1. Congress Cigar Company (hereinafter referred to as the Pennsylvania corporation) was incorporated under the laws of the state of Pennsylvania August 10, 1921, with a total capital stock of $500,000, divided into 5,000 shares of the par value of $100 each, which was later increased to 14,000 shares of common stock of the par value of $100' each.

2. The directors of the Pennsylvania corporation resolved to reorganized and refinance the business of that company. Accordingly, early in January, 1926, at a meeting of its stockholders, a resolution was regularly adopted authorizing the directors to take all necessary steps to organize a new Delaware corporation and transfer to such Delaware corporation all of the assets of the Pennsylvania corporation upon the assumption by such Delaware corporation of all of its liabilities, and thereafter to effect the dissolution of the Pennsylvania corporation.

3. On January 14, 1926, Congress Cigar Company, Inc., the plaintiff (hereinafter referred to as the Delaware corporation), was incorporated under the laws of the state of Delaware, with a total authorized capital stock of $1,400,000, divided into 350,000 shares, all of one class and of the par value of $4 a share, which was afterwards, on January 26, 1926, changed by amendment of its charter to 350,000 shares, all of one class and without nominal or par value.

4. Incident to the reorganization of the Pennsylvania corporation, on January 11, 1926, Samuel and Jacob Paley, holding approximately 12,000 of the 14,000 shares of the capital stock of the Pennsylvania corporation, entered into an agreement with Goldman, Sachs & Company, New York bankers, that 70,000 shares, or one-fifth of the total authorized capital stock of the new Delaware corporation, to be organized to take over the cigar business of the Pennsylvania corporation, should be transferred to Goldman, Sachs & Company, at $35 a share, or for the sum of $2,450,000. These 70,000 shares were to be obtained by each shareholder of the Delaware corporation giving up one-fifth of the shares of the Delaware corporation he would otherwise have been entitled to receive.

5. On January 16, 1926, the directors of the new Delaware corporation- resolved to transfer its entire authorized capital of 350,-000 shares to the Pennsylvania corporation, and to assume all the liabilities of the latter company as consideration for the assignment of the entire cigar property and business to the Delaware corporation.

6. On January 18, 1926, the Pennsylvania corporation changed its name to Paeong Cigar Company, Inc., and a certificate for 350,000 shares of stock of the Delaware corporation was delivered to it in accordance with the agreement theretofore made.

7. On February 10, 1926, the Paeong Cigar Company, Inc., pursuant to a request dated February 5, 1926, signed by all its stockholders, directed its transfer agent to transfer 70,000 shares of the 350,000 shares of the Delaware corporation, theretofore received by it, to O. Krause, nominee of Goldman, Sachs & Company, and to transfer the remaining 280,000 shares to the various persons who had been stockholders of the old Pennsylvania corporation in the same proportions as they had been stockholders in that corporation, and these transfers were in due course made in accordance with such direction.

8. For the 70,000 shares delivered to O. Krause, Goldman, Sachs & Company paid to Samuel and Jacob Paley $2,450,000, which sum, although it does not definitely appear from the record, was probably, and may be assumed to have been, distributed by them pro rata to the persons contributing the 70,-000 shares of stock.

9. The 70,000 shares of the Delaware corporation received by Goldman, Sachs & Company were sold by that company in varying amounts to the investing public, whereby several hundred new stockholders became interested in the company and the pro rata share of each of the old stockholders was reduced one-fifth.

10. Paeong Cigar Company, Inc., was dissolved August 24, 1926, and the decree of dissolution filed in the office of the secretary of the commonwealth of Pennsylvania September 2,1926.

11. For several years prior to July 1, 1925, the Pennsylvania corporation operated several cigar factories, one of which, known as Factory No. 1313, was located in Wilmington in the First Deleware tax collection district.

12. On or about July 1,1925, pursuant to tbe requirements of section 702 of tbe Revenue Act of 1924, the Pennsylvania corporation filed with'the defendant a return showing the number of cigars manufactured and sold by its Factory No. 1313 for the period from July 1, 1924, to June 30, 1925, the return being accompanied with a remittance for $2,256.50, in payment of all taxes for manufacturing and removing cigars from Factory No. 1313 during the period from July 1, 1925, to June 30, 1926.

13. On or about January 25, 1926, the Delaware corporation took over the assets and liabilities of the Pennsylvania corporation, and succeeded the Pennsylvania corporation in the maintenance and operation of Factory No. 1313, and conducted the business in the same manner as it had been theretofore conducted by the Pennsylvania corporation.

14. -Shortly after the reorganization of the Pennsylvania corporation and the transfer of its assets and liabilities to the Delaware corporation, demand was made by the defendant for the payment by the Delaware corporation of the special cigar manufacturers’ tax under the Revenue Act of 1924, for the period from January 1,1926, to June 30, 1926, together with the filing of a return by the Delaware corporation for tbe purpose of determining tbe amount of the tax.

15. Returns were filed by the Delaware corporation with the defendant showing the number of cigars manufactured and removed from its Factory No. 1313 from January 1, 1926, to June 30, 1926. '

16. The plaintiff filed with the Treasury-Department a claim for a refund of the special tax paid for and on account of its Factory No. 1313, for the period-from January 1, 1926, to June 30, 1926, which claim was rejected in its entirety by the Commissioner of Internal Revenue.

The question presented arises under the Internal Revenue Act of June 2, 1924 (43 Stat. 253, 327). Section 702 of that act provides: “On and after July 1, 1924, there shall be levied, collected, and paid annually, in lieu of the taxes imposed by section 100-2 of the Revenue Act of 1921, the following special taxes, the amount of such taxes to be computed on the basis of the sales for the preeéding year euding June 30 — * * * Manufacturers of cigars whose annual sales exceed four hundred thousand cigars shall each pay $24, and at the rate of 10 cents per thousand cigars, or fraction thereof, in respect to the excess over four hundred thousand cigars.” Protesting against the legality of the demand of- the Commissioner of Internal Revenue, the plaintiff paid the special tax assessed against it in the sum of $1,566.10 for the period from January 1, 1926, to June 30, 1926, and thereafter filed its claim for the refund of the tax so paid. The claim for refund was rejected in its entirety, and the plaintiff brought this action to recover the amount paid with interest as tax illegally collected.

No question is raised as to the amount of the tax, or the validity of the statute under which it was assessed. The plaintiff contends that the Delaware corporation and the Pennsylvania corporation should be regarded in law, so far as the matters here in dispute áre concerned, as one and the same corporation. And, further, that' the Pennsylvania corporation having paid the special tax as a cigar manufacturer, operating Factory No. 1313 for the entire year from July 1, 1925, to June 30, 1926, the assessment against and collection from the Delaware corporation of a like tax under the same revenue act as a cigar manufacturer-operating the same factory for the period from January 1, 1926, to June 30, 1926, constituted direct double taxation, was unwarranted and illegal.

In the. first place, it should be noted that the tax in question is a special tax imposed on eigar manufacturers, and is a privilege or occupation tax, and not a tax,on cigars manufactured. That it is a privilege or occupation tax and not a tax on cigars manufactured, to be paid by the manufacturer thereof, is nfade clear by the fact that section 400 of the same act (26 USCA § 832, note) imposes a tax upon cigars manufactured, to be paid by the manufacturer, and it is reasonable to assume that a different tax was imposed by section 702 of the same act. Nor is the tax a new one, for Congress in the past has frequently imposed special cigar manufacturers’ taxes to help defray the burdens of war.

In Anargyros v. Edwards (D. C.) 22 F.(2d) 707, 709, affirmed (C. C. A.) 26 F.(2d) 319, the court, in construing section 1002 of the Revenue Act of 1918 (40 Stat. 1128), in terms like section 702 of the Revenue Act of 1924 (43 Stat. 327), held that this special tax is “an excise tax on the privilege of carrying on the occupation of manufacture of cigarettes, measured by the amount of its sales.” While a tax upon cigars manufae-tured by a cigar manufacturer at a certain factory during a certain period may not be collected twice, a tax on the privilege of manufacturing cigars at a certain factory during a certain period may be collected from as many different persons, entities, or tax-ables as exercise the privilege within the period.

The vital question for determination, therefore, is whether or not under the facts of this ease the plaintiff, the Delaware corporation, and Congress Cigar Company, the Pennsylvania corporation, are to he considered and treated not only as separate legal, but as separate taxable, entities.

In rejecting the claim of the plaintiff for a refund of the tax paid, the commissioner stated: “This office has held that when a corporation organized under the laws of one state, engaged in the manufacture of cigars, incorporates under the laws of another state, a separate legal entity is created under the laws of the other state, and the new corporation is deemed to have commenced business when it began operating under the new charter. This view is in harmony with the established practice of the Department.”

The Commissioner relied o'n an opinion given to the Commissioner of Internal Revenue by the then Solicitor of Internal Revenue, October 15, 1919, on facts almost identical with those in this case, construing section 408 of the Revenue Act of 1916 (39 Stat. 791) in terms similar to section 702 of the Revenue Act of 1924, 43 Stat. 327 (Law Opinion No. 935), and the fact that the construction of the statute as set out in that opinion had been consistently applied by the Treasury Department since 1919. The defendant (citing Grand Rapids & I. Ry. Co. v. Doyle [D. C.] 245 F. 792, 796) urges that this decision is but a rule promulgated for the guidance of the collector, and although entitled to some consideration, it is not entitled to great weight. It is equally true, however, as stated by the Supreme Court in United States v. Moore, 95 U. S. 760, 763, 24 L. Ed. 588, that “The construction given to a statute by those charged with the duty of executing it is always entitled to the most respectful consideration, and ought not to be overruled .without cogent reasons.” This is particularly so in cases where the construction has been uniformly adhered to for several years, and Congress has re-enacted the law many times in substantially the same language. Just what weight should be given to the opinion of the Solicitor of the Treasury is, however, immaterial, for I am in entire accord with his reasoning and conclusion.

The avowed purpose of the stockholders and directors was a reorganization of the Pennsylvania corporation. The reorganization was effected by transferring the property and business to a Delaware corporation, with a new capital structure and’with enlarged powers respecting the manner of doing business. The capital structures of the old and new corporations were entirely different. The authorized capital of the Pennsylvania corporation was 20,000 shares of the par value of $100 each, with 14,000 shares issued and outstanding. The authorized capital of the new Delaware corporation was 350,000 shares of the par value of $4 per share, changed twelve days after its incorporation to 350,000 shares of no par value. The old corporation had nine stockholders. The new corporation shortly after the reorganization had several hundred stockholders. The Delaware charter imposed a different measure of responsibility to the public, different rights between different stockholders and the company, and between stockholders inter sese. In Marr v. United States, 268 U. S. 536, 45 S. Ct. 575, 577, 69 L. Ed. 1079, a new corporation organized to continue the business of the old was created under the laws of another state, with a different capital structure, and with different rights and powers. The court said: “In the ease at bar, the new corporation is essentially different from the old. A corporation organized under the laws of Delaware does not have the same rights and powers as when organized under the laws of New Jersey. Because of these inherent differences in rights and powers, both the preferred and the common stock of the old corporation is an essentially different thing from stock of the same general kind in the new.” As a result of the reorganization, the new Delaware company commenced business as a cigar manufacturer in January, 1926, succeeding the Pennsylvania corporation in the operation of the Wilmington Factory No. 1313. While it is true that the Delaware company conducted the business at that factory in the same manner as it had theretofore been conducted by the Pennsylvania corporation, it was nevertheless a new corporation, operating under a new charter, engaged in the business of manufacturing cigars, and became liable to tax as a manufacturer of cigars, under the revenue act in question. The old Pennsylvania corporation continued its separate corporate existence for some time after the new Delaware corporation came into being and commenced tbe manufacture of cigars at Factory No. 1313, and was not dissolved until , August 24, 1926, some weeks after tbe close of the taxable period in question. The fact that the Pennsylvania corporation had paid the government on or about July 1, 1925, pursuant to the requirements of the revenue act, all taxes assessed against it for manufacturing and removing cigars from Factory No. 1313 during the period from July 1, 1925, to June 30, 1926, cannot relieve the new Delaware corporation from the tax assessable against it when it commenced the business of a cigar manufacturer in January, 1926, for the period commencing on the date of the beginning of manufacture and ending June 30, 1926. In this connection it is important to bear in mind, as before stated, that the tax assessed is a tax on the privilege of manufacturing cigars at this factory, and not a tax on the cigars there manufactured. Whether or not the Pennsylvania corporation, on ceasing business in January, 1926, would have been entitled to a rebate or a refund of a portion of the fax theretofore paid by it for the privilege of manufacturing cigars at this factory for the full year from July 1, 1925, to June 30(, 1926, is a question with which we are not here concerned.

Conclusions of Law.

■ 1. The plaintiff, Congress Cigar Company, Inc., the new Delaware corporation, was a separate taxable entity from Congress Cigar Company, the old Pennsylvania corporation.

2. The plaintiff was liable for the payment of the special tobacco manufacturers’ tax assessed against it for the period from January 1, 1926, to June 30, 1926.

A verdict will be rendered for the defendant.

Exceptions, if any, may be filed within four days from the date hereof.

       Section 4, Act of June 13, 1898 (30 Stat. 448, 450); section 4, Act of October 22, 1914 (38 Stat. 745, 752) ; section 408, Act of September 8, 1916 (39 Stat. 756, 791); section 1002, Act of February 24, 1919 (40 Stat. 1057, 1128); section 1002, Act of November 23, 1921 (42 Stat. 224, 297).


author: BALTZELL, District Judge.

text:
    In re KNOX CONSOL. COAL CO. STEMPFEL v. LOWISH.
    No. 7142.
    District Court, S. D. Indiana, Indianapolis Division.
    May 9, 1931.
    Louis B. Ewbank and Samuel Dowden, both of Indianapolis, Ind., for petitioner.
    Charles E. Cox and Robert A. Adams, both of Indianapolis, Ind., for respondent.
   BALTZELL, District Judge.

On the 16th day of April, 1928, there was filed in the superior court of Marion county, room 2, at Indianapolis, Ind., a suit by Banus E. Neal against the Knox Consolidated Coal Company, which suit was filed by Neal as a stockholder in such coal company (which is hereinafter designated as the company) and as a holder of bonds issued by it. The relief prayed was that a receiver be appointed for the defendant and for its properties. Such proceedings were had in the state court that afterwards a finding,. in part, was entered, “that the defendant is not now insolvent, but that said defendant is in imminent danger of insolvency and that a receiver should be appointed for said defendant’s properties.” At that time the company had among its assets cash and. accounts receivable in the aggregate sum of approximately $500,000. Its creditors consisted of various persons holding its first mortgage 7 per cent, bonds which had not matured. The order of the court in that proceeding provided, among other things, that Edwin B. Logsdon be appointed receiver, that he take possession of the company’s properties and assets, and that he be authorized to carry on the business of the company until the further order of the court. Logs-don qualified as receiver, and conducted the affairs of the company, making reports to the court until the 14th day of March, 1931, at which time he was removed as such receiver, and Martin E. Lowish was appointed as his successor. No claims were filed in the proceeding in the state court by creditors, and no orders were made therein with reference to the filing of claims or the payment of any creditors.

There was oustanding and unpaid at the time of the appointment of the state court receiver a bond issue in the sum of $3,500,-000, and no principal or interest owing on such issue has been paid since the appointment of the state court receiver. On the 16th day of March, 1931, the company was in default in the payment of all interest accruing on such bonds subsequent to the 1st day of February, 1928, and was also in default in the payment of the principal of such bonds as had matured during the years 1920 and 1930. The Fletcher American National Bank of Indianapolis, Ind., was trustee under a deed of trust which secured the payment of the bonds, and as such trustee elected, under the powers conferred upon it by such deed of trust, to mature and make immediately payable the entire amount due under such bond issue and the interest owing thereon. Pursuant to such election, the trustee, under the deed of trust, on the 16th day of March, 1931, made a written demand upon the company for the payment of the entire principal, and interest’ then owing on such bond issue. The company was unable to pay the same, and therefore on such date-defaulted in the payment thereof.

On the next succeeding day the company adopted a resolution setting forth that, since the appointment of the receiver in the state court, bonds and interest upon the first mortgage 7 per cent, bond issue in the amount of over a million dollars have become due and payable and are long since due and unpaid; that such company has not sufficient assets to pay such interest, and that it has qot on hand sufficient cash to pay the interest and bonds long past due. A voluntary petition in bankruptcy, with schedules attached, pursuant to such resolution, was filed in this court on March 18* 1931, on which date such company was adjudicated a bankrupt. Subsequent thereto, a large number of such bondholders filed their claims with the referee in bankruptcy, which claims were allowed, as general, unsecured claims, in amounts constituting two-thirds of the face value thereof. The aggregate of the claims thus filed constitutes a preponderant majority in number and amount of the entire sum of the bonds issued and outstanding. On the 8th day of April, 1931, at a meeting of such- creditors, Theodore Stempfel was elected trustee.

On the 11th day of April, 1931, the trustee in bankruptcy filed in this court a petition asking that the state court receiver be ordered to deliver to him, as such trustee, all the property and assets belonging to the bankrupt. The state court receiver was served with notice to deliver such property, and refused so to do. The answer filed in response to such petition admits that a request upon the superior court of Marion county, room 2, for an order directing its receiver to deliver such property, would be useless, because such court would refuse to enter such an order. A formal request upon the state court for such an order was waived by the receiver.

The question to be determined arises upon the petition of the trustee for an order requiring the state court receiver to deliver to him the property and assets of the bankrupt, and the answer thereto filed by the receiver. The property of the bankrupt had been in the possession of the state court receiver for more than four months prior to the adjudication in bankruptcy, and it is the contention of the receiver that under the law this court is without authority to order him to deliver such property to the trustee in bankruptcy.

After the adjudication in bankruptcy, but prior to the hearing upon the petition of the trustee, one William Johnson, a stockholder, filed, by leave of court, an intervening petition in this cause seeking to have the adjudication set aside. Such petition alleged, among other things, that the adjudication “was erroneous and should not have been made for the reason that the purpose and effect of sueh petition in voluntary bankruptcy was to perpetrate a fraud upon this court, the bankruptcy court, the'Superior Court of Marion County, Indiana, Room 2, the judge thereof, and certain minority stockholders and bondholders.”

A hearing upon the intervening petition failed to disclose any act or acts committed by the company which could be construed as fraudulent, and sueh petition was accordingly denied.

The voluntary petition in bankruptcy was filed by the company pursuant to a resolution adopted' by the board of directors thereof, authorizing the same, and was in compliance- with the provisions of the Bankruptcy Act. The mere fact that the stockholders were not consulted, or a vote thereof taken as to the advisability of filing sueh petition, does not in any manner invalidate the same or constitute a fraud. Neither does an effort on the part of the officers and directors -of a company to substitute federal for state control constitute fraud. Struthers Furnace Co. v. Grant (6th C. C. A.) 30 F.(2d) 576; In re Dressler Producing Corp. (2d C. C. A.) 262 F. 257.

Prior to the hearing upon the petition of the trustee, the state court receiver filed a motion to dismiss such petition upon the ground that this court has no jurisdiction to order that the property and assets of the company be delivered to the trustee in bankruptcy. While other reasons are assigned in the motion to dismiss the petition, the principal ground relied upon is that the receiver holds possession of the property and assets of the company under appointment by the state court in an action therein pending more than four months prior to the adjudication in bankruptcy. After a hearing upon this motion, it was by the court overruled, the court holding that the proper determination of the question should be finally made upon a hearing of the facts in the case upon the issues joined by the petition of the trustee and the answer afterwards filed by the receiver.

- A final hearing was had upon the petition, at which hearing a stipulation was entered into by and between the parties, setting forth the facts in detail; there being no dispute as to the facts.

In addition to the contention that the federal court has no authority to order the property and assets of the company delivered into the possession of the trustee in bankruptcy because sueh property and assets have been in the hands of the state court receiver for a period of more than four months prior to the adjudication in bankruptcy, the receiver also contends that the officers and directors of the company were estopped from the filing of a voluntary petition in bankruptcy because such officers and directors had co-operated with the plaintiff in the filing of the petition for receivership in the state .court. This contention cannot be sustained. The petition in the state court was not filed by either an officer or a director of the company. Furthermore, at the time of the appointment of the state court receiver, the company was solvent, and the receiver was appointed for the sole purpose of conserving its assets. ’ When the voluntary petition in bankruptcy was filed, the company was insolvent, and the creditors thereof have the right, under the Bankruptcy Law, to have the estate administered by the bankruptcy court. Struthers Furnace Co. v. Grant, supra; In re American & British Mfg. Corp. (D. C.) 300 F. 839; Union Electric Co. et al. v. Hubbard et al. (C. C. A. 4th) 242 F. 248.

There remains but one question to be determined, and that is.whether or not the fact that the property has been in possession of the state court receiver for a period of more than four months prior to the filing of the voluntary petition and the adjudication in bankruptcy, entitles him to retain possession thereof as against the trustee in bankruptcy. In determining this question, it must be borne in mind that the suit in the state court is one brought by a stockholder and bondholder against the company, not by a creditor, and that such suit was brought for the purpose of conserving the assets of the company; that no claims of creditors were ever filed in the state court; that the state court receiver was not appointed because of the insolvency of the company; that no petition was ever filed in the state court proceeding seeking to dispose of the assets of the company, and no order was ever entered therein for that purpose. It must be further borne in mind that no act of bankruptcy was committed by the company until within the month of March, 1931, • at which time it admitted its inability to pay its debts and filed its voluntary petition in bankruptcy.

The receiver has cited many eases in his brief supporting his contention that this court should deny the petition of the trustee. A careful examination of these cases reveals the fact that each is a hostile proceeding begun in the state court by a creditor that is seeking to establish a lien upon the property and assets of the defendant. A marked distinction is to be noted where the proceeding in the state court is instituted by a stockholder or bondholder seeking the appointment of a receiver for the purpose of conserving the assets. The authorities are practically unanimous in holding that the federal court is without authority to order the property and assets of a bankrupt delivered into the possession of the trustee in bankruptcy where such property and assets are in the custody and control of a state court receiver appointed in a hostile proceeding more than four months prior to the adjudication in bankruptcy. A recent case which had its origin in this court and which was affirmed by the Seventh Circuit Court' of Appeals is authority upon this subject. See Clements v. Conyers (7th C. C. A.) 32 F.(2d) 5. In that case the proceedings were begun in the state court by a creditor seeking to establish a lien upon the property of the defendant and asking that a receiver be appointed. The receiver operated the property for more than two years under the order of the court. Various creditors filed their claims with the state court receiver, some of which claims were allowed and paid. Some creditors had filed their claims in both the state and bankruptcy courts. The property had been ordered sold upon petition of the receiver by the state court at the time application was made to this court by the trustee in bankrupcy for an order enjoining the receiver from making a sale of the property and ordering him to deliver the same to the trustee. In that ease the creditors had selected the court in which they desired the estate to be administered; the selection having been made more than four months prior to the adjudication of the defendant in bankruptcy. Under the law, they were bound by this selection, and this court was without authority to order the state court receiver to surrender possession of the property and assets held by him as such receiver. See, also, Neely v. McGehee (5th C. C. A.) 2 F.(2d) 853; Blair v. Brailey (5th C. C. A.) 221 F. 1.

The instant case presents an entirely different situation from that presented in the case of Clements v. Conyers, supra. The proceeding in the state court in the instant case was begun by a stockholder and bondholder, wherein the appointment of a receiver was sought for the conservation of the property of the company. No creditor appeared in such proceeding; no claims were filed. Under the Bankruptcy Act (11 USCA), creditors are given the right to have the estate of a bankrupt administered by a bankruptcy court if they so desire. In the instant case, they have so expressed their desire by the filing of their claims, the election of a trustee, etc. In a ease where the facts were very similar to those presented in this ease, the Fourth Circuit Court of Appeals, in a well-reasoned opinion, said: “The ease then comes to this: Does the pendency of a suit in a state court instituted against a corporation by stockholders for the protection of their rights, and the possession of the corporate property by a receiver appointed in such suit, deprive creditors of the corporation of the superior right conferred on them by the federal statute to have the corporate assets brought into the federal court for administration under an adjudication in bankruptcy when they have duly asserted the right and had the corporation declared bankrupt as soon as it was known to be insolvent and had committed an aet of bankruptcy? It seems clear that to this question there can be only a negative answer. An affirmative answer would mean that the stockholders of a corporation or the members of a partnership could at their will deprive creditors of the right conferred upon them by the federal statute to have the property of an insolvent debtor administered by the bankruptcy court.” Bank of Andrews et al. v. Gudger (In re Cherokee Tanning Extract Co.) 212 F. 49, 54 (4th C. C. A.)

The creditors' having had no connection with the proceedings in the state court and having elected to have the estate of the company administered in the bankruptcy court, they are, under the law, entitled to have the property and assets delivered to the trustee elected by them for administration. Furthermore, the ease in the state court, in which the receiver was appointed and is now acting, has been before the Supreme Court of the state of Indiana upon a petition for a writ of prohibition against the present judge. Such petition sought to prohibit him from recalling the case from the circuit court of Marion county, Ind., to which court it had been transferred by the judge of the superior court, room 2, in December, 1930, just prior to his vacating the bench as such judge, under an order made upon application of plaintiff for a change of venue from the judge. In refusing to grant the writ, the Supreme Court determined the nature of the action pending in the state court' in the’ following language: “The civil aetion between Banus E. Neal and the Knox Consolidated Coal Company had been tried and fully determined by the judgment appointing the receiver twenty months before NeaFs affidavit for a change of venue was filed. - No other issue re'mained as to Neal upon which trial was to be had.” State ex rel. Neal v. Superior Court of Marion County (Ind. Sup.) 174 N. E. 732, 734.

The receiver in the state court having acquired possession of the property in a suit filed by a stockholder and bondholder, in which suit no lien has been acquired, his right of possession and the jurisdiction of the state court so appointing him came to an end immediately upon the adjudication in bankruptcy. After such adjudication, the state court receiver had no further authority to retain custody of such property and assets, and the right of the trustee in bankruptcy to the possession of such property and assets is fully sustained. The title to all the property and assets is in the trustee, and he is entitled to immediate possession thereof. The state court receiver should immediately deliver all such property and assets into the possession of the trustee in bankruptcy.

An order will be entered in accordance herewith.