Petition for A Writ of Certiorari — World Market Centers, Inc. v. Hardin

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| FEB 26 1976

MIGHARL Bee ak ge ON

IN THE

SUPREME COURT OF THE UNITED STATES

en,

No. __. T5- 3 24

INSURANCE COMPANY

Plaintiff in Interpleader

WORLD MARKET CENTERS, INC., Bankrupt

Petitioner

JUNE D. HARDIN, Respondent

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT

OF APPEALS

FOR THE TENTH CIRCUIT

Wm. O. Callaway, Jr.

2900 Fort Worth Natl. Bank Bldg.

Fort Worth, Texas 76102

Attorney for Petitioner

Of Counsel:

Rufus S. Garrett, Jr.

GARRETT, SETTLE & CALLAWAY

2900 Fort Worth National Bank Bldg.

Fort Worth, Texas 76102

CASTLEBERRY & LILE

1100 City National Bank Tower

Oklahoma City, Okla. 73102

Fort Worth Brief Printing Co., 610 S. Jennings Street Phone 332-4070

INDEX

Page

BRIEF

Petition for a Writ of Certiorari 1

Opinions Below 2

Jurisdiction 2

Questions Presented 2

Statutes and Rules Involved 3

Statement of the Case 4

Reasons for Granting Writ 5

Conclusion 16

APPENDIX

A. Opinion and order of the United States Court

of Appeals for the Tenth Circuit 19

B. Memorandum Opinion and Order of the United

States District Court, Western District of

Oklahoma 28

eee |

CITATIONS

Cases: Page

In re Abraham, 421 F2d 226, 227 (CA 5, 1970) -..0.....0000..... 7,8

In re American Fidelity Corp., Ltd.,

28 F.Supp. 462, 467 (S.D.Cal. 1939) .8

Cline v Kapian, 323 U.S.97; 89 L.Ed. 97, 98, 99;

I, i cseeiceitainauannonmnenn 6, 10

In re Estes, 105 F.S. 761, 764 (N.D.Tex. 1952)

eg Ra ER 12

Katchen v Landy, 382 U.S. 323, 327, 328, 329;

15 L.Ed 2d 391, 396; 86 S.Ct. 467 (1966) —..0-.. 7,9

Murphy-Palmer Seeds, Inc. v Mert L. Mitchell,

Trustee in Bankruptcy, 425 F2 705, 706,

I a cncmansnennnnbanananst 10-11

Phelps v United States, 421 U.S. 330; 44 L.Ed2 201;

I a dsetsnnccnannanbiinease 13, 14

Taubell-Scott-Kitzmiller v Fox, 264 U.S. 426,

432, 4383; 68 L.Ed. 770, 774; 44 S.Ct. 396,

i a pebseimennnannneacihonnahan 7,14

Statutes:

ae, I PO TT sncciensscnantnbsenabevusnidosnveseemantinn 3, 5, 16

Tex.Rev.Civ.Stat.Anmn., Art. 23(1) .................c....rccccrseeees 12-13

Miscellaneous:

MU, GE GD oss ccecsceccccecsssescesessccrseecersenane 10, 15

EP TREE PLN EP IL, OL TER LMC eS OE NE TE

IN THE

SUPREME COURT OF THE UNITED STATES

nme LOPS

ON Sita ta ate

GUARANTEE RESERVE LIFE

INSURANCE COMPANY

Plaintiff in Interpleader

WORLD MARKET CENTERS, INC., Bankrupt

- Petitioner

JUNE D. HARDIN, Respondent

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT

OF APPEALS

FOR THE TENTH CIRCUIT

TO the Honorable Chief Justice and

the Associate Justices of the

Supreme Court of the United States:

Petitioner, World Market Centers, Inc., acting

through Ben M. Gilbert, Trustee in Bankruptcy, prays

that a Writ of Certiorari issue to review the order and

judgment of the United States Court of Appeals for

the Tenth Circuit entered in that Court in the above

entitled case, affirming the judgment of the United

States District Court for the Western District of Okla-

homa, sitting at Oklahoma City, Oklahoma.

OPINIONS BELOW

The memorandum opinion of the United States

Court of Appeals for the Tenth Circuit is attached as

Appendix A. The memorandum opinion of the United

States District Court for the Western Division of

Oklahoma, Oklahoma City Division, is attached as

Appendix B.

JURISDICTION

The judgment of the United States Court of Appeals

for the Tenth Circuit was dated and entered Novem-

ber 10, 1975. Petitioner’s petition for rehearing en

bane was denied by Order dated January 15, 1976.

The Supreme Court’s jurisdiction to review the judg-

ment of the United States Court of Appeals for the

Tenth Circuit is invoked pursuant to Title 28, U.S.

Code, Section 1254(1).

QUESTIONS PRESENTED

The petitioner, World Market Centers, Inc. (acting

through Ben M. Gilbert, Receiver in a Chapter XI Re-

organization under the Bankruptcy Act, and subse-

quently serving as Trustee in Bankruptcy), and re-

spondent adversely claim ownership of a policy of

insurance and its proceeds. The questions presented

are:

1. Does the bankruptcy court have exclusive juris-

diction to determine whether the petitioner’s claim of

ownership is of the nature that gives the bankruptcy

court summary jurisdiction to determine the merits of

this controversy?

2. Does the District Court sitting in a plenary pro-

ceeding have jurisdiction to determine that summary

jurisdiction does not exist in the bankruptcy court,

and then determine the merits of the controversy in

a plenary proceeding?

3. In affirming jurisdiction in the District Court,

did the Court of Appeals improperly apply the juris-

dictional tests prescribed by this Court and impose a

new test which limits the jurisdictional grant to the

Bankruptcy Court under the Bankruptcy Act?

4. Does the actual possession by the bankruptcy

court of the policy of insurance give the bankruptcy

court summary jurisdiction?

5. Does the possession of the proceeds of the insur-

ance policy by the insurance company (at the institu-

tion of the Chapter XI proceeding), which is not a:-

serting a claim to the proceeds, nor holding the pro-

ceeds as custodian for the respondent, give the bank-

ruptcy court constructive possession of the proceeds

and summary jurisdiction?

STATUTES AND RULES INVOLVED

§711. EXCLUSIVE JURISDICTION OF DEBTOR

AND PROPERTY

“Where not inconsistent with the provisions of this

chapter, the court in which the petition is filed shall,

for the purposes of this chapter, have exclusive juris-

diction of the debtor and his property, wherever lo-

cated.”

rT ow:

STATEMENT OF THE CASE

On November 14, 1972, Guaranty Reserve Insur-

ance Company filed its complaint in interpleader (Title

27 U.S. Code Federal Rules of Civil Procedure, Rule

22) alleging jurisdiction pursuant to Title 28 U.S.

Code, Section 1332. Guaranty Reserve sought to inter-

plead the proceeds of a $100,000.00 policy of insur-

ence. Guaranty Reserve Insurance Company asked the

District Court in a plenary proceeding to determine

the respective rights of the petitioner and respondent

to the policy of insurance and its proceeds. Guaranty

Reserve Insurance Company asserted no adverse claim

of ownership in the policy and its proceeds. The policy

of insurance at all times was in the possession of the

petitioner and the premium cost of the policy was paid

by the debtor corporation.

The petitioner filed a motion to dismiss for lack of

jurisdiction and a motion for change of venue, which

motion contended that exclusive jurisdiction was in

the Uni.» States Bankruptcy Court for the North-

ern District of Texas, Fort Worth Division, to deter-

mine whether the merits of this controversy should

be determined under the summary proceedings of the

Bankruptcy Act or in a plenary proceeding in the Dis-

trict Court. Until such determination was made by

the Bankruptcy Court, there was no jurisdiction in the

District Court to proceed in a plenary proceeding to

determine the merits of the controversy.

On December 22, 1972, by order of the United States

District Court, Western District of Oklahoma, the pe-

RE RRL RN SOE OE DY PRT SEUAITION

titioner’s motion to dismiss for lack of jurisdiction and

venue were overruled.

On January 23, 1973, Guaranty Reserve Life In-

surance Company tendered into the registry of the

United States District Court, proceeds of the policy of

insurance in the amount of $100,000.00.

On July 25, 1973, the United States District Court

entered its order granting interpleader to Guaranty

Reserve Life Insurance Company. The petitioner’s re-

newed motion to dismiss for lack of jurisdiction and

venue was overruled.

The District Court proceeded to determine the mer-

its of the controversy and on July 29, 1974, entered

its judgment in favor of the respondent, from which

judgment the petitioner took its appeal to the United

States Court of Appeals for the Tenth Circuit.

The United States Court of Appeals affirmed the

judgment of the District Court.

REASONS FOR GRANTING THE WRIT

The Court of Appeals’ affirmance of jurisdiction in

the District Court in a plenary proceeding to deter-

mine that summary jurisdiction does not exist in the

Bankruptcy Court conflicts with applicable decisions

of this Court and with applicable decisions of the Court

of Appeals for the Fourth Circuit, and the Fifth Cir-

cuit.

Title 11, U.S. Code, Section 711 (Section 311 of the

Bankruptcy Act) confers exclusive summary jurisdic-

tion in the United States Bankruptcy Court, Northern

District of Texas, to determine controversies with re-

spect to property which at the time of the institution

of the proceeding under Chapter XI of the Bankruptcy

Act were either owned by the debtor, or in the actual

or constructive possession of the Bankruptcy Court.

The District Court did not have Jurisdiction to de-

termine the merits of the respondent’s claim in a ple-

nary proceeding. In Cline v Kaplan, 323 U.S. 97; 89

L.Ed 97; 65 S.Ct. 155 (1944), this ©. art held that the

right of the respondent to proceed in a plenary pro-

ceeding is contingent upon a finding by the bankruptcy

court that the respondent has a right to have the “mer-

its of his claim passed on in a plenary suit and not

summarily”.

Cline v Kaplan, 323 U.S. at pp. 98, 99; 89 L.Ed at

99 held:

A bankruptcy court has the power to adjudicate

summarily rights and claims to property which

is in the actual or constructive possession of the

court. *** If the property is not in the court’s

possession and a third person asserts a bona fide

claim adverse to the receiver or trustee in bank-

ruptcy, he has the right to have the merits of his

claim adjudicated “in suits of the ordinary char-

acter, with the rights and remedies incident there-

to” *** But the mere assertion of an adverse claim

does not oust a court of bankruptcy of its juris-

diction. *** It has both the power and the duty

to examine a claim adverse to the bankruptcy

estate to the extent of ascertaining whether the

claim is ingenuous and substantial. *** Once it

is established that the claim is not colorable nor

frivolous, the claimant has the right to have the

merits of his claim passed on in a plenary suit and

not summarily. Of such a claim the bankruptcy

court cannot retain further jurisdiction unless the

claimant consents to its adjudication in the bank-

ruptcy court. (Citations omitted.)

In Taubel-Scott-Kitzmiller v Fox, 264 U.S. 426, 433,

68 L.Ed. 770, 774; 44 S.Ct. 396, 399 (1924):

“As every court must have power to determine in

the first instance, whether it has jurisdiction to

proceed, the bankruptcy court has, in every case,

jurisdiction to determine whether it has posses-

sion, actual or constructive.

The Court of Appeals’ holding is contra to Katchen

v Landy, 382 U.S. 323, 327; 15 L.Ed. 2d 391; 86 S.Ct.

467 (1966):

“The bankruptcy courts are expressly invested by

statute with original jurisdiction to conduct pro-

ceedings under the Bankruptcy Act.”

The District Court in a plenary proceeding is not

vested with jurisdiction to determine whether the con-

troversy was one under the Bankruptcy Act.

Exclusive jurisdiction is vested in the Bankruptcy

Court to initially determine whether this controversy

was or was not a proceeding under the Bankruptcy

Act. Otherwise, the purposes of the act would be de-

feated.

In re Abraham, 421 F.2d 226, 227 (CA 5, 1970):

Where the bankruptcy court seeks to exercise

its summary powers, as opposed to independent

plenary suit in district court, the bankruptcy court

itself has power to decide whether or not actual or

constructive possession exists that is the basis of

its summary jurisdiction.

As every court must have power to determine,

in the first instance, whether it has jurisdiction

to proceed, the bankruptcy court has, in every

case, jurisdiction to determine whether it has

possession actual or constructive. It may con-

clude, where it lacks actual possession, that the

physical possession held by some other persons

is of such a nature that the property is con-

structively within the possession of the court.

(Quoted from Taubel-Scott-Kitzmiller Co., Inc.

v Fox, 264 U.S. 426, 433, 68 L.Ed. 770, 774, 44

S.Ct. 396, 399 (1924).)

In re Abraham, supra, the court adopted the lan-

guage of In re American Fidelity Corp., Ltd., 28 F.

Supp. 462, 467 (S.D. Cal. 1939) which said:

The bankruptcy court has summary jurisdic-

tion to determine claims against title to, and liens

upon property in the actual or constructive pos-

session of the bankruptcy court by and through

its officers, such as receivers and trustees, and by

and through the bankrupt himself, whether that

possession existed at the commencement of the

bankruptcy proceeding or arose subsequently. This

jurisdiction cannot be disturbed by the processes

of other courts. All property in the actual or con-

structive possession of the bankrupt, in which he

claims an interest, passes upon the filing of the

petition in bankruptcy, into the custody of the

bankruptcy court. To protect its jurisdiction from

interference, that court may issue an injunction

and determine, preliminarily, all questions con-

cerning possession; and, for that purpose, may

even go into the merits of the controversy to de-

termine whether or no the bankruptcy court has

acquired possession, actual or constructive.

The effect of the Court of Appeals’ holding is to re-

institute the diminution of the estate by multiplicity

of suits.

Through the guise of an interpleader suit, adverse

claimants and creditors can attempt to remove selected

properties from the equal sharing and priorities con-

ferred by the Bankruptcy Act. The bankrupt estate is

forced to fund expensive cumbersome plenary proceed-

ings in state and federal courts.

In Katchen v Landy, 382 U.S. 323, 328, 329; 15 L.

Ed. 2d 391, 396; S.Ct. 467, this Court defined the chief

purpose of the Bankruptcy Act as follows:

“T6] When Congress enacted general revisions of

the bankruptcy laws in 1898 and 1938, it gave

‘special attention to the subject of making [the

bankruptcy laws] inexpensive in [their] admin-

istration.’ HR Rep No. 1228, 54th Cong. Ist Sess,

p. 2; HR Rep No. 1409, 75th Cong. 1st Sess. p. 2;

S Rep No. 1916, 75th Cong., 3d Sess., p. 2. More-

over, this Court has long recognized that a chief

purpose of the bankruptcy laws is ‘to secure a

prompt and effectual administration and settle-

ment of the estate of all bankrupts within a lim-

ited period,’ Ex parte Christy, *3 How 292, 312,

11 L ed 603, 612, and that provision for sum-

mary disposition, ‘without regard to usual modes

of trial attended by some necessary delay,’ is one

of the means chosen by Congress to effectuate

that purpose, Bailey v Glover, 21 Wall 342, 346,

22 L ed 636, 638.”

cia

The Court of Appeals’ holding as to jurisdiction is

as follows:

“The policy itself is of no real consequence on

this problem as the carrier had begun the inter-

pleader suit seeking to deposit the proceeds with

the court, and such deposit was made. The action

was commenced by the insurance company. It was

asserted that the trial court had jurisdiction un-

der the general jurisdictional statutes. Rule 22,

Fed.R.Civ.P., of course, provides for the partic-

ular type of suit. Thus with the commencement of

the suit and the initial orders of the court, the

‘property’ was in the possession of the trial court.

It never was in the possession, actual or construc-

tive, of the company, the widow, or the Receiver.

The fund was thus held by the court or the clerk,

and against which they could assert their claims.

The initial holding was adverse to both claimants

and it would not be released until one of them as-

serted a superior right as part of, and during the

course of, the proceedings contemplated. A simi-

lar adverse position was asserted or represented

by the insurance company at the time it started

the action, and by its commencement of the ac-

tion.”

The Court of Appeals improperly concluded that the

property was the fund or proceeds. At the institution

of the proceeding under Chapter XI, there was no

fund or proceeds. Rather, there was a chose in action.

The property in controversy was the debt owed by the

imsurance company to either petitioner or respondent.

Possession of the policy of insurance is possession

of the chose in action. In Murphy-Palmer Seeds, Inc.

v Mert L. Mitchell, Trustee in Bankruptcy, 425 F2

705, 706, 707 (4 Cir., 1970), the court held in regard

to a dispute between Trustee and adverse claimant to

the proceeds of insurance policy, that the bankruptcy

court had summary jurisdiction to determine the rights

of the parties. The adverse claimant had instituted

a prior proceeding in state court to establish a lien

against the policy proceeds and garnish the proceeds

of the policy held by the insurance companies. The

Court of Appeals held:

“T1-3] Murphy-Palmer’s lien arose during the

four month preference period of §60 of the Bank-

ruptey Act, 11 U.S.C. $96. Under §67(a) (4), 11

U.S.C. §107, therefore, the bankruptcy court has

summary jurisdiction in a proceeding to deter-

mine the rights of the parties relative to the lien.

See 1 Collier on Bankruptcy 2.06 at 158. Further-

more, the insurance companies, at the time the vol-

untary petition was filed, held the proceeds of the

bankrupt’s policies, but made no claim to the pro-

ceeds. As a result, the bankruptcy court had ‘con-

structive possession’ of the property and, there-

fore, summary jurisdiction to determine claims

to the property because it was within the court’s

‘custody’. See 2 Collier on Bankruptcy 23.05.

Finally (Emphases added)

where the matters in controversy are directly

connected with the basic control of the bank-

ruptey court over the administration of the

estate—such as determination of priorities,

proof and allowance of claims, distribution of

dividends, and the like

action in nonbankruptcy forums is not war-

ranted, except upon the express consent of the

eee. |

bankruptcy court. 1 Collier on Bankruptcy {2.07

at 159-168, 169 n. 33.”

In re Estes 105 F.S. 761, 764 (N.D.Tex.1952) affr.

203 F2 313 (5 Cir., 1953) held in regard to jurisdic-

tion to decide the controversy between the trustee and

an adverse claimant to the proceeds of insurance pol-

icies :

“T1, 2] The first point in this review questions

jurisdiction for a summary proceeding on the

trustee’s application. The general rule is that the

bankruptcy court may exercise summary juris-

diction in dealing with adverse claims to property

in the actual or constructive possession of the

court held as part of the estate, but cannot pro-

ceed summarily to determine a contest of prop-

erty rights between the trustee in bankruptcy and

an adverse claimant in possession of the disputed

property, unless the contention of the adverse

claimant is merely colorable, or unless said claim-

ant by lack of objection or otherwise waives any

question of summary jurisdiction. The trustee in

this instance had possession of the insurance pol-

icy in question and the bankrupt is the insured

therein named, although the loss payable provi-

sion makes Rapstine the payee to the extent of his

interest. The thing in dispute is an intangible, a

kind of chose in action, and eludes visible pos-

session.”

Texas by statute classifies the property as being the

policy of insurance, and by statute Texas confers upon

an intangible chose of action the classification of tan-

gible property by providing in Tex.Rev.Civ.Stat.Ann.

Art. 23(1) as follows:

“*Property’ includes real and personal prop-

erty, and life insurance policies and the effects

thereof.”

Possession of the policy of insurance by the bank-

ruptcy court gave the bankruptcy court possession of

the property and exclusive jurisdiction to determine

the merits of the controversy in its summary pro-

ceedings.

The Court of Appeals found the property was the

proceeds of the insurance. It further found that when

the insurance company instituted its interpleader suit,

possession of the proceeds were in the District Court.

It held that the District Court holding was adverse to

the petitioner and respondent.

In Phelps v United States, 421 US 330; 44 L.Ed.2

201, 95 S.Ct. 1728 this Court again restated the test

of the summary jurisdiction of the bankruptcy court:

“T3] The assignee claims no interest in the

proceeds of $38,000. The Ninth Circuit of Ap-

peals Wood Products Corp. held that that cir-

cumstances, without more, subjected property to

the bankruptcy court’s summary jurisdiction to

enter a turnover order. Wood Products relied on

the statement in Taubel-Scott-Kitzmiller v Fox,

264, US 426, 432-433, 68 L Ed 770, 44 S Ct 396

(1924), that constructive possession of the prop-

erty by the bankruptcy court ‘exists . . . where

the property is held by some other person who

makes no claim to it.’ 483 F2d, at 976. That re-

liance is misplaced. The statement read in the

context of the facts of that case and its holding

applied only to property in the hands of a non-

adverse third person who was not holding it as

agent for a bona fide adverse claimant. Tauble

itself held that the bankruptcy court had not been

given jurisdiction by summary proceedings to

avoid a lien created by levy under a judgment of

a state court where the sheriff possessed the prop-

erty for the judgment creditor, and neither he nor

the judgment creditor had consented to adjudica-

tion of the controversy by the bankruptcy court.

Similarly in this case, the United States is a bona

fide adverse claimant to the $38,000 proceeds held

by the assignee and has not consented to adjudi-

cation of its claim by the bankruptcy court.”

It is clear that the Court of Appeals test confers a

separate and independent ground in the respondent

for a plenary proceeding. As set out in Phelps v United

States, supra., and Taubel-Scott-Kitzmiller v. Fox, 264

U.S. 426, 432-433; 68 L Ed 770, 774; 44 S Ct 396

(1924):

“Under that case law, an assignee for the ben-

efit of creditors who held assets as ‘a mere naked

bailee for the creditors . . . has no right to retain

the possession as against the trustee in bank-

ruptcy.’ In re McCrum, 214 F 207, 209 (1914).

Here the assignee held as custodian for the Unit-

ed States, a bona fide adverse claimant. Galbraith

v Vallely, supra.”

Neither the insurance company nor the District

Court held actual possession of the fund ‘“‘as custo-

dian” for the respondent.

At the institution of the proceeding under Chapter

XI, the actual possession of the fund was in the in-

surance company, which made no claim to the funds,

nor held the funds as custodian for the respondent.

IEE TED ANE PTFE EI RELL EIGER FEI FIAT . SY PRET OA N DORE ATE TLS

If the fund or the proceeds of the policy are the

property, they were in the constructive possession of

the bankruptcy court.

The Court of Appeals has mistakenly set up a new

test to determine the jurisdiction of the bankruptcy

court, which test does not rely upon the rationale that

it is the actual or constructive possession of the ad-

verse claimant that gives the adverse claimant the

right to have the merits decided in a plenary suit.

The Court of Appeals, cn page 7 of its opinion,

found as follows:

“The Receiver in his brief, as the proof also

indicates, states:

“‘ ‘When the policy was issued by Guaranty Re-

serve Insurance Company, it was delivered by

Mr. Davis to Brewer at the corporate offices.

WMC agreed that Hardin could keep the portion

of the $100,000 coverage for personal coverage

provided he reimburse the company for the pro-

portionate premium cost. Otherwise, Hardin was

instructed, and agreed, to transfer the policy of

ownership and beneficiary to WMC. Although...

had repeated conversations with Hardin, he de-

clined to keep any amount of the policy as per-

sonal coverage.’

“Thus it appears at the time of his death the

decedent had made no selection of the amount he

wanted to keep. He had delayed doing so, and the

separation also intervened.”

Pursuant to this agreement, Mr. Hardin’s owner-

ship of the policy and its proceeds was predicated on

his performance of two condition precedents, viz, se-

o-_— 2 22 Gee ae om se 6 ee 6

POOR COPY

lection of the amount and reimbursement of World

Market Centers, Inc. for proportionate premium cost.

Since these condition precedents were not performed

by Milton A. Hardin prior to his death, ownership of

the policy and its proceeds were in the debtor corpo-

ration. The Court of Appeals finding is tantamount

to a finding that ownership was in the debtor at the

institution of the proceeding under Chapter XI of

the Bankruptcy Act. Again, ownership being in the

debtor, the bankruptcy court had exclusive jurisdic-

tion to determine the merits of this controversy in its

summary proceeding pursuant to Title 11, U.S. Code,

Section 711.

CONCLUSION

The Court of Appeals’ error is twofold.

First, jurisdiction is exclusively vested in the bank-

ruptcy court to initially determine whether the pres-

ent proceeding was one within its summary proceed-

ings. Thus the determination of the bankruptcy court’s

jurisdiction by a nonbankruptcy forum, “except on the

express consent of the bankruptcy court”, violates the

statutory purpose of the Bankruptcy Act. Any over-

reaching by the bankruptcy court as to its jurisdiction

is subject to review by its Court of Appeals and this

Court. However, the interference with the bankruptcy

court’s statutory purposes by the process of other

courts vitiates the purpose of the bankruptcy laws,

which seek a “prompt and effectual administration

and settlement of the estate of all bankrupts”.

Deseret LAREN INO ME IIE EN EPR DHS OM RNY IRS ONSET TS FNC Qe ARR AR ARTA i eS EE pe

PRR AIS «*

Secondly, the Court of Appeals applied a possessory

test which conflicts with the statutory purpose of the

Bankruptcy Act and this Court’s constructions of the

Act.

The right of a plenary proceeding is a right con-

ferred on the claimant who asserts a pecuniary inter-

est in the disputed asset. In cases where the adverse

claimant has actual or constructive possession of the

property at the institution of the proceeding under the

Bankruptcy Act, the adverse claimant has the right to

have the merits of his claim determined in state or

federal plenary proceedings. It is his claim of interest

in the property coupled with possession that gives him

the right to elect to proceed in a plenary proceeding or

consent to a summary proceeding. There is no right

in a party who has possession but claims no property

interest.

The District Court jurisdiction cannot be enhanced

by its own possession after the commencement of the

proceeding under the Bankruptcy Act. The District

Court’s jurisdiction to determine the merits in 2 ple-

nary proceeding is conditioned upon the responcent’s

right to have the merits of her claim determined in a

plenary proceeding. In case of the fund, if it be the

property, the District Court’s jurisdiction to deter-

mine the merits in plenary proceeding would only

arise if the insurance company, which was possessor

of the funds when the proceeding under the Bank-

ruptcy Act was commenced, held these funds as cus-

DENIER DALES ELIS A ERIN RISA, PEM EY AES FE SELL REE LOG DRE LETTE RIE

todian for the respondent; thereby giving respondent

a right to a plenary proceeding.

Respgottully submitted,

m. O. Callaway, Jr.

2900 Fort Worth Natl. Bank Bldg.

Fort Worth, Texas 76102

Attorney for Petitioner

Of Counsel:

Rufus S. Garrett, Jr.

GARRETT, SETTLE & CALLAWAY

2900 Fort Worth National Bank Bldg.

Fort Worth, Texas 76102

CASTLEBERRY & LILE

1100 City National Bank Tower

Oklahoma City, Okla. 73102

MIN ET 0 MRL A NO RETF RII INGA PLES ORV EO TES

APPENDIX A

[FILED NOV. 10, 1975

HOWARD K. PHILLIPS, CLERK

UNITED STATES COURT OF APPEALS

TENTH CIRCUIT]

NOT FOR ROUTINE PUBLICATION

UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

No. 74-1881

GUARANTEE RESERVE LIFE

INSURANCE COMPANY,

Plaintiff in Interpleader,

WORLD MARKET CENTERS, INC.

Defendant-Appellant,

JUNE D. HARDIN,

Defendant-Appellee.

Appeal From The

United States District Court

For The Western District

of Oklahoma

(D. C. # 74-795-D)

William O. Callaway, Jr., Garrett, Settle & Callaway,

Fort Worth, Texas (Gene A. Castleberry, Castleberry

DMD eCrnopoyv

& Lisle, Oklahoma City, Oklahoma, with him on the

Brief), for Defendant-Appellant.

Eric J. Groves, Oklahoma City, Oklahoma (Jack T.

Crabtree, Oklahoma City, Oklahoma, with him on the

Brief), for Defendant-Appellee.

Before HILL, SETH and DOYLE, Circuit Judges.

SETH, Circuit Judge.

This action began as a federal interpleader suit

filed in the Western District of Oklahoma by the

Guarantee Reserve Life Insurance Company which

named as defendants the parties to this appeal. The

insurance company deposited the proceeds from a

policy it had written on the life of Milton A. Hardin.

His widow is one of the defendant-claimants. The

other claimant is the Receiver for a corporation

known as World Market Centers, Inc. The corpora-

tion at the time of suit was being administered under

Chapter XI of the Bankruptcy Act in the Northern

District of Texas. The decedent had been an officer

of the corporation, and corporate funds had been used

to pay the initial, and only, premium paid on the

policy.

The trial court entered judgment awarding the

proceeds of the policy to Mrs. Hardin, and the

Receiver has taken this appeal. The issues raised on

appeal include the assertion by the Receiver that the

trial court was without jurisdiction because the

bankruptey court in Texas had summary jurisdiction

by reason of the fact that the Receiver had succeeded

EEE WOE LEME NTL LS CIOS IF TLE NII TT GN CRN INS Pa tel pet are TL EKG ANAS MRT 4

to posession of the life insurance policy itself. The

Receiver also asserted that venue in Oklahoma was

improper. On the merits, the appellant-Receiver

argues that the policy belonged to and was for the

corporation from the outset, and it was entitled to the

proceeds,

The record shows that the decendent Hardin,

James Brewer, and Joe Stevens were the officers and

apparently the stockholders of the company. Brewer

and Stevens initially each owned fifty per cent of

the stock. The decedent, a Certified Public Accountant,

was employed on a wekly salary on March 1, 1971,

with an option to purchase stock. Decedent worked

was employed on a weekly salary on March 1, 1971,

when he left the company. During this time he was

Secretary and Treasurer. The officers apparently de-

cided to apply for “key man’ insurance coverage on

their lives. Applications were made for large policies,

but were rejected. Other applications were then made

for smaller amounts of coverage with no indication

to the carriers that the policies were other than

ordinary life policies with the named insured owning

the policy and the wife as beneficiary. A number of

applications were so made apparently because the

total coverage sought would exceed the amount that

would ordinarily be written by reason of the rela-

tively modest salaries paid to the officers. One of the

applications for $100,000 coverage on the life of the

decedent Hardin was approved by Guarantee Reserve

Life Insurance Company. This is the policy in issue,

and it was written with the insured as the owner of

the policy, his wife the benficiary, and his children as

contingent beneficiaries. The initial premium was paid

with a check of the company signed by Brewer and

the decedent. A similar policy or policies were written

on the life of Brewer. The policy in question was

issued on October 25, 1971, and was delivered by the

writing agent to Brewer, the company president, at

the company offices in November 1971. The policy

apparently remained with the company papers at

least until the decedent’s death on February 2, 1972.

The decedent had not requested possession of the

policy.

A company check was submitted for the first year’s

premium with the application made late in 1971, as

above described. The company records do not show

how the expediture represented by the check was to be

handled for accounting purposes. It did not appear as

compensation for the decedent, no withholding was

paid on it, it was not entered as relating to any

accounts payable or receivable. The decedent filed no

income tax returns before his death. His widow filed

returns thereafter and the premium amount was not

reflected thereon. Thus it would appear that the

amount was not entered or charged on any particular

company account.

At about the same time that the policy was delivered

in November, some disagreement arose between the

decedent and Brewer. On December 6th the employ-

ment of the decedent was terminated, and a termina-

tion agreement was executed which purported to cover

the entire relationship. The policy however was not

a xs ea ox ee — .

SOP TA ES PRT CIO SLUR NUR RIE RE EE Si FO en tS ER TRY <2 25 we :

Vy 5 eS PONE OS AP IMT SN MAMI PND

eats oc Soe

mentioned specifically. The decedent was paid a lump

sum of $25,000 on termination presumably for all

claims.

Prior to his death the insured had prepared and

signed a letter dated January 21st addressed to the

Guarantee Life requesting that a $25,000 policy be

issued to him “to replace the $100,000 policy number

L4003597,” which he therein authorized the company

to cancel. This letter with decedent’s check for a

monthly premium was never sent to the company. The

insurance company was also directed in the letter to

refund premiums theretofore paid and unearned to

World Market Centers.

The jurisdiction of the trial court will be considered

first. As mentioned above, the Receiver asserts, as he

did in the trial court, that summary jurisdiction was

in the bankruptcy court by reason of the possession

of the policy. The trial court denied the Receiver’s

motion as to jurisdiction, and we agree with its posi-

tion. The policy itself is of no real consequence on this

problem as the carrier had begun the interpleader suit

seeking to deposit the proceeds with the court, and

such deposit was made. The action was commenced by

the insurance company. It was asserted that the trial

court had jurisdiction under the general jurisdictional

statutes. Rule 22, Fed.R.Civ.P., of course, provides for

the particular type of suit. Thus with the commence-

ment of the suit and the initial orders of the court, the

“property” was in the possession of the trial court. It

never was in the possession, actual or constructive,

of the company, the widow, or the Receiver. The fund

ieee |

was thus held by the court or the clerk, and against

which they could assert their claims. The initial hold-

ing was adverse to both claimants and it would not be

released until one of them asserted a superior right

as part of, and during the course of, the proceedings

contemplated. A similar adverse position was asserted

or represented by the insurance company at the time

it started the action, and by its commencement of

the action. See Dannel v. Wilson-Weesner-Wilkinson

Co., 109 F.2d 364 (6th Cir.); In re Herz Importing

Corp., 349 F.Supp. 1106 (S.D.N.Y.); Glens Falls

Insurance Co. v. Storm, 198 F.Supp. 450 (S.D. Calif.).

The nature of the possession by the insurance company

and by the clerk, and the relationship thereof to the

Receiver, was sufficient to vest jurisdiction in the trial

court as against the summary powers of the bank-

ruptecy court. This is consistent with Katchen v.

Landy, 382 U.S. 323, and Taubel-Scott-Kitzmiller Co.

v. Fox., 264 U.S. 426.

The trial court on the merits held that the widow

was entitled to the proceeds deposited in the inter-

pleader action. We agree with this conclusion. This

portion of the case is a fact question.

The application and the policy named the decedent

as the owner of the policy and his wife was named as

the beneficiary. No company interest appears thereon,

but, of course, a company check was used to pay the

initial premium. The time which elapsed between the

date of application and decedent’s termination was a

matter of months, and, as indicated, the company ac-

counts made no allocation of the expenditure.

BRE his creas,

2:5

(The Receiver in his brief, as the proof also indi-

cates, states:)

“When the policy was issued by Guaranty

Reserve Insurance Company, it was delivered by

Davis to Brewer, at the corporate offices. WMC

agreed that Hardin could keep the portion of the

$100,000 coverage for personal coverage, pro-

vided he reimbursed the company for the propor-

tionate premium cost. Otherwise, Hardin was

instructed, and agreed, to transfer the policy

ownership and beneficiary to WMC. Although...

had repeated conversations with Hardin, he de-

clined to keep any amount of the policy as per-

sonal coverage.”

“Thus it appears at the time of his death the decedent

had made no selection of the amount he wanted to

keep. He had delayed doing so, and the separation also

intervened.” Thus the position of the Receiver ap-

parently is that no selection was made as could have

been. However, the consequences of this inaction, con-

sidered with decedent’s unsent letter to the insurance

company, would indicate he had the entire amount as

personal coverage until he chose a lesser amount.

The decedent certainly had a fiduciary duty to the

company. Wilshire Oil Co. of Texas v. Riffe, 406 F.2d

1061 (10th Cir.); Lawson v. Haynes, 170 F.2d 741

(10th Cir.). In view of the way the transaction was

handled we agree with the trial court that no breach

of duty was shown sufficient to imply that the policy

or proceeds were held in trust. The proof of the

Receiver is for the most part negative, in that no

entries were made as compensation, or debt or any-

thing else. But again in view of the time which

elapsed, and the internal problems, it does not ap-

pear unreasonable for the expenditure to remain

unallocated on the company books. The suggested

explanation of the existence of a buy-back agreement

covering company stock with the wives of the officers

as offered by the Receiver was completely disbelieved

and rejected by the trial court. The corporate pres-

ident had signed the check, and the payment obviously

was made by the company, but whether for, or how

much for the corporate benefit was to be determined

as shown by the quotation from appellant’s brief

appearing above. There was no failure to disclose. The

record shows that each of two cerporate officers owned

fifty per cent of the stock when Hardin was hired, and

he acquired his stock by option with the company.

The trial court started with what was evidenced on

the face of the application and of the policy. The

Receiver’s evidence was not persuasive to overcome

such indicia of ownership or right to the proceeds.

The position of the decedent with the company, with

the knowledge of all concerned, together with the fact

the policy had been delivered to Brewer and was

among the company records was not enough. The

widow did not have the burden of proof initially nor

did it pass to her. The trial court was required to

balance the claims and indicia of ownership of the two

defendants, and this it did.

As the conclusion of the trial court indicates, the

decedent’s ownership continued until his death and he

had not then designated a lesser amount to be retained

ei p Sin Mtcomkieabal aa, 2k cles aoa Ean ade CET ce Pe Te cst oe ee

ELAM Re SE EG ine

personally or an amount for the company. The

Receiver apparently makes no claim here that the

company should be reimbursed for premiums advanced

in view of the “selection” made by the decedent.

The trial court determined the facts, and we cannot

say that it was in error.

AFFIRMED.

ERA 2 FS, 5 SIS RE ARTE IN AAS PEIN EA AIT ES IS RE ORS BETES EOE METS, IEEE

és

wee Beans. |

APPENDIX B

[FILED JUNE 25, 1974

REX B. HAWKS, CLERK, U.S. DISTRICT

COURT BY VERA EDDLMAN, Deputy.]

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF OKLAHOMA

Case No. 72-795-D Civil

GUARANTEE RESERVE LIFE

INSURANCE, COMPANY,

Plaintiff,

—vs—

JUNE D. HARDIN and

WORLD MARKET CENTERS, INC.,

Defendants.

MEMORANDUM OPINION

Plaintiff has interplead $100,000.00, the benefits of

a life insurance policy it issued on the life of Milton

Hardin (Hardin) as the insured. Hardin was the

named owner of the policy. His wife, Defendant June

D. Hardin, was the named beneficiary. Hardin became

an employee, director and officer of World Market

Centers, Inc. (WMC) in March, 1971. On October 26,

1971 the above policy was issued by Plaintiff. The

first year premium was paid by WMC. The policy was

brokered to Plaintiff by Harlan Thayne Davis

(Davis), an insurance agent who served WMC. The

policy when issued was delivered by the broker to the

President of WMC and it thereafter remained in

company possession. On December 6, 1971 Hardin

terminated from WMC. Hardin and WMC entered

into a written termination agreement. The agreement

made no mention of said policy of insurance. On

February 8, 1972 Hardin died. Defendant June D.

Hardin, as the named beneficiary, claims the policy

benefits. WMC took bankruptcy on October 17, 1972

and its Trustee in Bankruptcy claims the policy bene-

fits through the imposition of a constructive trust.

WMC had a general and apparently unofficial plan

for “key-man insurance’, i.e., life insurance covering

three of its key officers. One was the President, Jim

Brewer (Brewer), who owned one-half of the com-

pany, the other was Joseph Stephens (Stephens), who

owned the other half of the company. The third

official was Hardin who had become a Director,

Secretary-Treasurer and Comptroller of the company.

It appears that under this general plan WMC would

pay the premiums for the key-man insurance and a

part of the insurance was to be owned by and payable

to the company as beneficiary and a part was to be

owned by the insured and payable to the families of

each of said company officials as beneficiaries of the

policies.. There were no written official Board of

1In explanation of why his wife was the beneficiary of some life insur-

ance, Brewer testified that he and Stephens had an agreement that

some life insurance was to name their wives as beneficiaries on the

basis that if one died his wife would receive the insurance benefits and

would then deliver the company stock of her deceased husband to the

company or other owner at no cost to the company or surviving owner.

The Court does not believe this testimony for there was nothing pro-

duced in writnig to support such an agreement between Brewer and

Stephens and it is unbelievable that prudent business men or even

ROE te a Sea a ca

DHHR COoORPY

Director Resolutions or Minutes in this connection. It

seems that the owners of the company merely agreed

on the plan as controlling Board Members. The initial

efforts to get $1,000,000.00 in life insurance for each

Brewer and Stephens and $500,000.00 for Hardin

failed. The applications were rejected. It was then

agreed that an effort would be made by Davis to obtain

insurance for them in $100,000.00 increments. Davis

prepared and handled the several applications. Insur-

ance was obtained for Brewer but apparently none

for Stephens. It appears that Stephens left the

company around this time. The Insurance obtained

for Brewer was payable to his wife and family as

beneficiaries. Several applications, at least three in

number, were sent in by the broker for Hardin. In

one (to Constitutional Life Insurance Company) the

company was the owner and named beneficiary. In the

application to Investors Life Insurance Company,

June D. Hardin was the named beneficiary. In the

application to the Plaintiff, Hardin was shown as the

owner and his wife, Defendant June D. Hardin, was

the named beneficiary. This was the only application

less would have such an agreement, understanding or arrangement in

which their wives and possibly their heirs would be vitally involved

without reducing the same to an enforceable written contract. In

addition, no insurance was even obtained on Stephens, he left the

company and notwithstanding these facts apparently Brewer took no

steps to eliminate his wife as a beneficiary of some of his life insurance,

the premiums of which the company paid as in the case of Hardin.

It was brought to the Court’s attention that Defendant June D.

Hardin and her husband while he was an officer of the company

personally guaranteed a company obligation which has resulted in a

$30,000.00 judgment against her but there is no evidence before the

Court that Plaintiff's insurance policy involved herein was either applied

for or issued because of or as a result of this personal guaranty.

on Hardin which resulted in the issuance of a policy.

Davis delivered this policy when issued to Brewer, the

President of the Company, and said policy by refer-

ence to the attached Application showed Hardin to be

the owner and his wife, Defendant June D. Hardin,

as the beneficiary. Davis testified that he advised

Brewer of such ownership and beneficiary when he

delivered the policy. After Hardin terminated, some

contacts were made between he and Davis about

Hardin replacing the policy with a lesser amount of

insurance. Apparently this would apply to future

years as the premium had been paid for the first year.

However nothing ever developed here. Sometime after

termination, the company attempted to get Hardin to

assign the policy to it, but this did not occur. The

evidence reveals that Hardin was complaining about

a $90.00 airplane ticket which he had paid for a trip

which he claimed was for company business and which

WMC refused to reimburse on the basis the trip was

not on company business. Thus, when Hardin died he

was the named owner and his wife was the named

beneficiary of the policy. The premium for the first

year, during which period Hardin died, had been paid

by the company and the policy had been delivered to

and was kept by the company at all times. Hardin or

his representative, as he died before his return for

1971 was due, did not report such premium as income

to him for tax purposes for 1971. Brewer, as above-

stated, had life insurance in which his wife was the

named beneficiary with the premiums therefor having

been paid by the company.

The Oklahoma Supreme Court has defined a con-

BRE Siero, PERRIN A EE NEE SERA INES ANE HOC ING RB IMR A NS 5

lao To) on | oe ee ae I on te >

structive trust as being such as is, “raised by equity

in respect of property which has been acquired by

fraud, or where, though acquired without fraud, it is

against equity that it should be retained by him who

holds it.” Marshall v. Amos, 471 P. 2d 896 at 905

(Okl. 1970).

The burden of proof is on one who seeks to establish

a constructive trust. Johnson v. Rowe, P. 2d 955 (Okl.

1939).

In State of Ohio v. Four Seasons Nursing Centers

of Am., Inc., 465 F. 2d 25 (Tenth Cir. 1972), it was

held in regard to the evidence required to establish a

constructive trust as follows:

“... The quantum of evidence required by Okla-

homa for imposition of a constructive trust is

substantial. Mere preponderance of the evidence

is not sufficient to establish a constructive trust.

Rather, it must be established by evidence which

is clear, definite, unequivocal and satisfactory.

The evidence must lead to but one conclusion, or

leave no reasonable doubt as to the existence of

the constructive trust.”

The Court finds that the evidence does not establish

fraud on the part of Hardin. The evidence fails to

show that Hardin was guilty of fruad when the

application for Plaintiff’s policy was filled out and

sent to Plaintiff. Davis, who was the insurance broker

for WMC, testified to no fraud on the part of Hardin

in the manner in which the Hardin applications were

filled out nor did Brewer. The pattern of Hardin’s

wife being named as beneficiary therein followed the

PE RMR RELAY POT IE PIE PAF NI Git ARR EN MVE a

same pattern as for Brewer. This was also in keeping

with company policy where some insurance was to

name the company as beneficiary but some insurance

was to name the wife and family as beneficiaries.

Here again as to the applications for insurance, this

policy was followed by Davis on both Hardin and

Brewer. Though the Court is at a loss to understand

why the insurance policy was not dealt with by the

parties when they entered into the Hardin termination

agreement, there is no evidence of fraud on the part

of Hardin which brought about this void.

After termination, it appears that there was a

company request of Hardin for an assignment of the

policy to the company but he did not assign the same,

nor did he take for himself through the broker a

policy in a lesser amount. Apparently he either had

these matters under consideration, was not agreeable

to the assignment or was awaiting settlement of his

travel expense claim against the company which was

in dispute. But, the evidence does not establish fraud

on the part of Hardin either in the acquisition or

retention of the policy in which his wife was the

named beneficiary and for which the company paid

the first year’s premium at a time when he was a key

employee of the company.

Finding no fraud, the Court still should consider

under the circumstances if it is against equity that the

policy proceeds should be retained by or paid to June

D. Hardin, as named beneficiary of the policy.

In this connection, the Court finds and concludes

that WMC has failed to meet its burden of proof

ERY TEN WERE ta LEGA LIER U NN MS Ris abot erm 8 se

necessary to impose a constructive trust which as

stated above is an onerous burden — a burden requir-

ing evidence which is clear, definite, unequivocal and

satisfactory — evidence which must lead to but one

conclusion or leave no reasonable doubt as to the

existence of the constructive trust.

In view of Hardin being a key employee of the

company at the time the Application was forwarded,

in view of company policy, practice and pattern of

buying some life insurance on key employees in which

their wives and families were to be the beneficiaries,

in view of the insurance policy not being included or

mentioned in the termination agreement and in view

of the evidence of the discussions with the broker

after termination about Hardin taking a lesser policy,

the Court finds and concludes that WMC has failed to

establish the existence of facts necessary to impose a

constructive trust in its favor for the insurance bene-

fits by clear, definite, unequivocal and satisfactory

evidence and evidence which leads to but one con-

clusion or leaves no reasonable doubt as to the exist-

ence of the constructive trust.

Counsel for Defendant June D. Hardin will prepare

an appropriate judgment based on the foregoing,

submit the same to opposing counsel and then to the

Court for signature and entry herein.

Dated this 25th day of June, 1974.

/s/ Fred Daugherty

Fred Daugherty

United States District Judge

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.