Schwartz v. Mills, 192 F.2d 727, 2d Cir. (1951)
Schwartz v. Mills, 192 F.2d 727, 2d Cir. (1951)
2d 727
SCHWARTZ
v.
MILLS.
No. 22.
Docket 22036.
Joseph Lewis Simon, of New York City (Rubin Cohen, of New York
City, on the brief), for petitioning creditor-appellant.
N. William Welling, of New York City, for appellee.
Before SWAN, Chief Judge, and CLARK and FRANK, Circuit Judges.
CLARK, Circuit Judge.
the Bankruptcy Act, 11 U.S.C.A. 92. Thereupon the referee chose the trustee
in the person of Henry A. Mills, who had been serving as receiver under
appointment by the district court and who was also the nominee of the New
York Meat interests. All parties agreed that Mills was both qualified and
disinterested. Nonetheless this creditor sought review by the district court and,
losing there, now appeals to us.
3
Petitioner's first contention relies upon the facts that both New York Meat and
Grade A are family corporations, owned and controlled by the same
individuals, that their offices are located in the same building, and that the
business affairs of each have been dominated by a long tradition of
intercompany transactions. He therefore argues that even though New York
Meat does not directly own Grade A stock, it is nevertheless within the
disfranchising provision added to 44, sub. a, of the Act, 11 U.S.C. 72, sub.
a, by the Chandler Amendments of 1938. That section in its presently important
part now provides that the creditors of a bankrupt, "exclusive of the bankrupt's
relatives or, where the bankrupt is a corporation, exclusive of its stockholders
or members, its officers, and the members of its board of directors or trustees or
of other similar controlling bodies," shall appoint a trustee, with provision for
appointment by the court if the creditors fail to act. This quoted language thus
employed to overturn the older tradition which allowed these classes to vote in
the election of a trustee seems to us notably clear and explicit. It refers
primarily to individuals, since a corporation cannot be a relative, officer, or
director of the bankrupt. It also is limited to stockholders of the bankrupt. Thus
the language of the statute would appear to be inapplicable to New York Meat,
the claimant corporation. West Hills Memorial Park v. Doneca, 9 Cir., 131 F.2d
374, 376.
But petitioner seeks to go behind the corporate form, citing Pepper v. Litton,
308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281, and Taylor v. Standard Gas &
Electric Co., 306 U.S. 307, 59 S.Ct. 543, 83 L.Ed. 669. It is of course true that
bankruptcy courts can and must pierce the proverbial corporate veil in the
interests of substantial justice to subordinate the claims of corporate affiliates or
individual insiders who have obtained an unfair advantage from their favored
position. But we do not think that the doctrines expressed in such cases cover
the situation at bar. For subordination is not mechanically automatic upon the
showing of identity between the stockholders and officers of the claimant and
debtor corporations; we have traditionally stressed the elements of fraud and
actual injury to the debtor interests, and have thus held that mere illegality
under the antitrust laws in the purchase of a claim would not require
subordination. West 52nd Theatre Co. v. Tyler, 2 Cir., 178 F.2d 128. Petitioner
here has given no hint even of fraudulent conveyance, manufactured claim, or
Next petitioner contends that even if New York Meat is not thus disqualified
from voting, its Proof of Claim failed to satisfy the requirements of 57, sub. a,
11 U.S.C.A. 93, sub. a, which specifies a statement under oath "setting forth
the claim" and "the consideration therefor." New York Meat's claim, filed in
accepted form, described the consideration for the debt as "money loaned and
borrowed by the Alleged Bankrupt from the Claimant, goods, wares and
merchandise sold and delivered to the said Bankrupt" at the latter's special
instance and request.
7
Here we think this Proof sufficient under this functional test. It does not appear
that the petitioning creditors or later the trustee were actually harmed or misled
by the succinctness of the statement. Any deficiency in knowledge was in fact
supplied during the creditors' meeting. Schneider testified to his personal
knowledge of loans of at least $20,000, or more than sufficient to create the
impasse in selection of the trustee. He also testified that the company books
showed the bankrupt owed claimant approximately $93,000, the greater part for
money loaned, the balance for meat. In addition there was offered the report of
accountants for the creditors' committee showing the exact amount claimed as
disclosed in the bankrupt's books. This was excluded by the referee without
statement of reasons. Had the proceedings resolved themselves into a trial on
the merits as to the validity of the claim, such evidence might have been
considered hearsay. Under the circumstances here, we think it available to
supplement the ex parte statement of the Proof of Claim. See West Hills
Memorial Park v. Doneca, supra. Petitioner did not assert that no claim at all
existed or suggest fraudulent transactions between claimant and the bankrupt.
Nor did he request adjournment to make a formal attack upon the claim. Its
allowance for the purpose of the vote was therefore not error. Sloan's Furriers
v. Bradley, 6 Cir., 146 F. 2d 757.
occurred, and New York Meat subsequently filed a voluntary petition for
reorganization under Chapter X of the Act. 11 U.S.C.A. 501 et seq. Refusal to
adjourn a creditors' meeting is error only when there has been such a serious
abuse of discretion as unjustly to prejudice a creditor. See In re Grat,
D.C.Mass., 228 F. 925. No prejudice is here shown.
10
Affirmed.
11
12
1. I think it well to begin by stating the facts somewhat more in detail than my
colleagues have done, in order to bring out dramatic aspects of the case to
which I think the majority opinion has given insufficient attention. This I do
because, although the amounts of assets and liabilities involved are small, the
principles are of considerable importance.
13
The bankrupt, Grade A Foods Corp., had but two stockholders, Schneider and
Jacobs, each owning one-half the stock. They owned in exactly that same
proportion all the stock of New York Meat Packing Co. Schneider was
President of both companies. As President of the Meat Packing Co., he filed on
its behalf a $93,000 proof of claim naming himself as proxy against the
bankrupt company. In the meeting of creditors at which the voting was held, he
was examined under oath and testified, first as President of the Meat Co.
(concerning its proof of claim), and then as President of the bankrupt
(concerning the filing of its schedules). He shifted mercurially from one
capacity to another, resembling an actor who "doubles," playing both the hero
and the hero's villainous twin brother. Obviously, when he came to vote the
Meat Co.'s claim, no one could tell whether his motivation was that of halfowner of the bankrupt or half-owner of a company asserting a creditor's claim.
If ever there was an instance of split-personality or dual allegiance, this is it.1
14
Schneider, as proxy, voted the Meat Co.'s $93,000 claim for Mills. All the
other creditors objected (on grounds which I shall discuss later) to the voting of
this claim. All the other claims, seven in number and aggregating some $6,000,
were voted in behalf of one Levy. As the $93,000 Meat Company's claim was
the only one of any importance voted for Mills, if that claim could not lawfully
vote, Levy was elected. But the Referee held that it had been lawfully voted.
As a result, deciding that no one was elected, the Referee appointed Mills, the
Meat Company's candidate. I disagree with the Referee. I think that Levy was
elected by the seven claims totalling $6,000, and that the Meat Company's
claim, voted for Mills, should not have been counted.
15
In Re Loewers Gambrinus Brewery Co., 2 Cir., 167 F.2d 318, we decided that
where as here the stockholders of a bankrupt corporation were identical
with those of a creditor corporation, then, without any proof of either any kind
of fraud or unfairness whatsoever, the claim of the creditor corporation had to
be subordinated to those of all other creditors. In so ruling, we cited and relied
on Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281, and Taylor v.
Standard Gas & Electric Co., 306 U.S. 307, 59 S.Ct. 543, 83 L.Ed. 669; and we
"pierced the corporate veil," holding that, in such a situation, the claim of the
creditor corporation must be treated exactly as if it were held directly by the
stockholders of that corporation.2
16
I am not suggesting, however, that the Meat Company's claim should have been
subordinated on the showing made at the time of the voting for the trustee. I
cite the Brewery Co. case because there without the aid of any statute
whatever we considered it necessary to disregard the shadowy corporate
insulation. Subordination is indeed harsh. Far less should be needed to
penetrate such tissue-paper insulation as we have here, when (1) voting only is
in issue and (2) we have a statutory provision the 1938 Amendment of
Section 44, sub. a, 11 U.S.C.A. 72, sub. a which aims to prevent those
controlling the bankrupt from voting for a trustee. True, the literal language of
that statutory provision covers no more than a claim by a bankrupt company's
stockholders, directors or officers. But the interpretation of the statute to
include a twin corporation carries out its patent purpose, i. e., to disqualify
persons with "too close a connection with the bankrupt to make it proper that
their votes should be counted in the selection of the trustee." Analysis of
H.R.12889, 74th Cong. 2d Sess. (1936) 157. The amendment was designed by
its proponents to exclude "from participation in the appointment of a trustee * *
* creditors who are officers or directors of a bankrupt corporation, so that the
appointment of a trustee will be the act of persons who are interested in the
estate as creditors, and not because of any tie with the bankrupt, personally."
Hearings before the House Committee on the judiciary on H.R. 6439 and H.R.
8046, 75th Cong. 1st Sess. 92.3
17
It is well to remember that not only legislators, lawyers, and judges but men in
every kind of activity14 meet that problem of communication we call
"interpretation."15 The mathematicians alone seem able to solve the problem
with complete satisfaction, although some mathematicians more than suggest
that the satisfaction is sometimes an illusion;16 and certainly today lawyers
know that their language cannot begin to approximate that of mathematicians.
Indeed, at times, lawyers may join those who rejoice in "the resources of
ambiguity."17
20
However that may be, no one can deny that "legislative intention" is sometimes
a good deal of a fiction;18 then the effort to interpret may become irksome, and
literalism may seem an inviting exit from perplexity. But when the legislative
purpose is discoverable, although ambiguously expressed (for one of a variety
of reasons),19 then, as Holmes20 and Learned Hand have warned, priggishly to
stay within the enclosure of the precise words is a mistake. Holmes counselled
that a court ought not be school-marmish with legislators, as if to say to them:
"This will teach you boys to be more careful the next time." The present case
seems to me to be one where literal interpretation spells just such judicial
uppishness.
21
23
2. Even if the Meat Company's claim did not suffer from the affiliation-defect,
it should not have been allowed to vote. For Section 57, sub. a, of the
Bankruptcy Act 11 U.S.C.A. 93 states that a "proof of claim shall
consist of a statement under oath, in writing and signed by a creditor, setting
forth the claim; the consideration therefore; * * *" To set forth a claim
properly, the creditor must tell enough details about the circumstances and
terms of the transaction to (1) enable other creditors to dig out and expose fraud
or illegality in the claim and (2) allow the referee to pass on the claim
intelligently. Although a claim approved for voting can later be challenged and
disallowed, the courts have recognized the importance of screening out
fraudulent claims at an early stage, for, since a fair and impartial trustee is an
essential of a successful bankruptcy proceeding, fraudulent claims should not
contribute to a trustee's election. Furthermore, a valid proof of claim shifts the
burden of going forward with evidence of fraud, at any later stage, to objecting
creditors; and the formal proof has itself probative force as evidence of the
claim's validity if later challenged. Whitney v. Dresser, 200 U.S. 532, 26 S.Ct.
316, 50 L. Ed. 584; In re Louis Elting, Inc., D.C.S.D. N.Y., 4 F.Supp. 732; In re
Falk, D.C.S.D. N.Y., 83 F.Supp. 817. For these reasons, the courts require a
creditor to show prima facie that he has a good claim before they allow him to
vote for a trustee.
25
It is true that, at this stage, the creditor may state the basis of his claim by oath
or affidavit; he is entitled to be believed if this testimony is not selfcontradictory. If another creditor doubts his word, that creditor must disprove
it. If he suspects an illegal preference from the facts in the claim, he must show
that, too. In re Bronx Ice Cream Co., 2 Cir., 66 F.2d 620, 624. Precisely for this
reason so that creditors can get clues to fraudulent claims the claimant
must tell all about the transaction giving rise to the debt. If he fails to do so, his
claim has no prima facie validity, and cannot be allowed, whether or not any
other creditors introduce evidence to show its fraudulent nature. In re Pringle
Thus, claims no more vague and non-informative than this one have been
struck down. Debts charged for "expenses of the bankrupt", In re Pringle
Engineering & Mfg. Co., supra; "services rendered", Hutson v. Coffman, 9 Cir.,
100 F.2d 640; "printing done for * * * bankrupt at its request", In re Blue Ridge
Packing Co., D.C.N.D.Pa., 125 F. 619, 621; "deficiency on chattel mortgage,
on * * * goods, wares and merchandise sold * * * to the * * * bankrupt", In re
Federal Silk Hosiery Works, 2 Cir., 68 F.2d 899, 900; "goods sold and
delivered", In re Louis Elting, D.C.S.D.N.D., 4 F.Supp. 732, 733 all these
have been held bad. The creditor must tell when the transactions occurred,
which specific goods or services passed, at what prices or charges in short,
everything a normally acute businessman wants to know about any bill before
he acknowledges it.
27
The same rule applies to claims for "money loaned and borrowed by the
bankrupt." The dates of the loans should be itemized; the amounts loaned in
each instance; the purposes for which the money was lent; the terms and
maturity dates of repayment; the rate of interest charged. See, e. g., In re Falk,
supra; In re Lansaw, D.C.Mo., 118 F. 365; In re Wooter, D.C. S.D.N.C., 118 F.
670; In re Castle Braid Co., D.C.S.D.N.Y., 145 F. 224; In re Century Silk Mills,
D.C.N.Y., 296 F. 713; In re Coventry Evans Furniture Co., D.C.N. D.N.Y., 166
F. 516. Check stubs, memos, or notes evidencing the loan should be attached.
See In re Greenfield, D.C.Pa., 193 F. 98. All this information is essential to a
determination of the claim's validity. How else can a referee tell if the claim is
on its face barred by the statute of limitations? See In re Ballantine, D.C.
N.D.N.Y., 232 F. 271. How can he tell if the money has been loaned at a
usurious rate of interest? In re Falk, supra.
28
It has been suggested that, because of the provision for a creditors' meeting at
which the bankrupt is publicly examined, there is no longer any need for
informative claims. That suggestion lacks cogency. Creditors without clues
should not have to question the bankrupt about every possible type of fraud that
might be involved in every claim presented for payment. Such indiscriminate
questioning would soon become perfunctory or be omitted altogether. Creditors
should be able to concentrate their inquiries on those claims that elicit suspicion
on their face.
29
The New York Meat Company's claim rates a flat zero on all the tests of a valid
claim, according to the cases. It did not show when the loans were made, in
what amounts, when they matured, what interest, if any, they bore, for what
purposes they were made. The President of the Meat Company also, as we
So, since Meat Company's claim was on its face insufficient for voting
purposes, I think that the candidate elected by a majority in number and amount
of the other creditors, i. e., Levy, should have been appointed trustee, and Mills,
the trustee named by the Referee, has no valid claim to the office.
Notes:
1
The attorney who had filed an appearance for the bankrupt appeared at the
meeting as attorney for the Meat Co. He was allowed to withdraw his
appearance for the bankrupt. As attorney for the Meat Co., he significantly
referred to it as"the parent company of this subsidiary."
In one of the opinions in that case, it was said that there was no need there to
consider whether a different result would be required if creditors of the creditor
company would be affected. But the other opinion, that of Judge Learned Hand,
did not even mention the question
The following excerpt is taken from the testimony of Mr. Hunt, member of the
National Bankruptcy Conference which sponsored the 44-a amendment: "The
matter has been seriously considered at all of the various meetings of the
conference. What we are trying to arrive at is the selection of a person as
receiver and trustee who is absolutely impartial, who does not have, as the
courts expressed it,any entangling alliances; in other words, a man who is, like
Caesar's wife, above suspicion. You have got to have that to have an honest
administration. * * * We find that, if we want to have the proper administration,
we have got to divorce the bankruptcy from any influence that would tend to
minimize the efficiency of administration, and we felt, after due deliberation,
that this provision was essential." Hearings before House Committee on the
Judiciary on H.R. 6439 and H.R. 8046, 75th Cong. 1st Sess. 94-95.
See, e. g., Kiss, Equity and Law, in the volume, Science of Legal Method
(1917) 146
Learned Hand, How Far is a Judge Free in Rendering a Decision, Law Series, I
Lectures, No. 14 (National Advisory Council on Radio in Education (1933)
10
Here Judge Hand was repeating what Aristotle and Plowden had said. See
Aristotle, Nicomachean Ethics, 1173b; 2 Plowden, 450, 465-467 (1574), 75
Eng. Rep., 695-696. See also N. L. R. B. v. National Maritime Union, 2 Cir.,
175 F. 2d 686, 690 notes 4 and 7; Usatorre v. The Victoria, 2 Cir., 172 F.2d
434, 439-441, and notes 12-16; Commissioner v. Beck's Estate, 2 Cir., 129 F.2d
243, 245 note 4; Slifka v. Johnson, 2 Cir., 161 F.2d 467, 470
11
In affirming, the Supreme Court, in Markham v. Cabell, 326 U.S. 404, 409, 66
S.Ct. 193, 195, 90 L.Ed. 165, said: "The policy as well as the letter of the law is
a guide to decision."
12
Commissioner v. Ickelheimer, 2 Cir., 132 F.2d 660, 662, 145 A.L.R. 556,
dissenting opinion; cf. Lehigh Valley Coal Co. v. Yensavage, 2 Cir., 218 F.
547, 552-553
13
14
Literary criticism has much to teach lawyers as the lawyers have much to
teach literary critics about "interpretation."
As to the problem in still other fields, cf. Popper, The Open Society (1950)
213-218, 632.
15
16
17
18
So Gray has pointed out. Gray, Nature and Sources of Law (2d ed.) Sec. 370
Interestingly, if a bit exaggeratedly, Radin, after quoting, "Ascertainment of the
intention of Congress in this situation is impossible," went on to say: "If by this
statement Justice Jackson is thinking of `intention' in accordance with the
meaning usually given it, as an idea or a group of ideas in the minds or minds of
determinate human beings, I fully and enthusiastically agree with him. The use
of the term, however, generally implies that bloodless and sinewless fiction of
interpreters, the imaginary `legislator,' le legislateur, der Gesetzgeber, the
homo legiferens, own cousin to the `economic man.' What this spectre thought
or did not think, intended or did not intend, imagined or did not imagine, is
utterly irrelevant, since he is created for the purpose of having a particular
intention of the interpreter imputed to him. But if we have in mind not this
figment, but the actual human beings, several hundred of them, who voted in
favor of the Fair Labor Standards Act in the House of Representatives and the
Senate, Justice Jackson is overwhelmingly right in saying that we cannot
possibly determine what their intentions were, beyond the actual words they
used in the statute." Radin, A Case Study in Statutory Interpretation: Western
Union Co. v. Lenroot, 33 Calif.Law Rev. (1945) 222-223. Cf. Wurzel, loc. cit.
355-356.
19
20
21
22
23
"Mr. Welling: Your Honor, on behalf of the receiver, I think I ought to say this:
I notice that the proxies run to Feder and Cohen. The examination of Jacobs, an
officer of the bankrupt, disclosed that after the business closed down and while
the business was hopelessly insolvent, $1000 was paid by this man Jacobs on
behalf of the bankrupt out of the bankrupt's funds to Messrs. Feder and Cohen
which, according to this testimony, was deposited in a special account. The
bankrupt's, that is, Jacobs' testimony, further recited that he didn't definitely
know what that money was in payment for. The trustee will, of course, have to
investigate the circumstances surrounding this payment and take any action that
may be necessary to recover, and I think that it is the receiver's duty to report
that so as to assure an election of a trustee whose independence "
24
"Q. Do you know specifically what loans were made, when and where, by the
New York Meat to Grade A Foods? A. To May, 1950, I know of about twenty
odd thousand dollars
"Q. Do you know of any loan from May, 1950 to the date of the petition for
involuntary proceeding in this matter? A. No.
"Q. You have no knowledge of your own whatsoever of any loans made
"Mr. Feder: I object to this claim further on the ground there is no evidence of
any moneys loaned or borrowed from the alleged bankrupt, New York Meat
Packing Co., Inc. * * * If Your Honor please, I renew the objection that there is
nothing to indicate how the amount of $92,029.38 is arrived at. There is no
schedule attached whatsoever to show the nature of this claim in any way