Supplemental Brief — Texas v. Donoghue

Supreme Court of the United States

* OCTOBER TERM, 1937

No. 28

STATE OF TEXAS anpd J. C. CLOPTON ND

BULLOCK HYDE, RECEIVERS, ETC.,

Petitioners,

* U8.

DAVID DONOGHUE, TRUSTEE OF TRINITY

REFINING COMPANY, DEBTOR.

Respondent.

ON WRIT OF CERTIORARI TO THE UNITED STATES CIR-

CUIT COURT OF APPEALS FOR THE FIFTH CIRCUIT.

Supplemental Brief of

- David Donoghue, Trustee, under Order to Liquidate.

To the Honorable the Chief Justice and the Associate ‘

Justices of the Supreme Court of the

United States:

DAVID DONOGHUE, Trustee, appointed under

date of October 14, 1937, pursuant to an order to

liquidate.entered under date of september 24, 1937,.

— respect shows:

is.

STATEMENT

The statements found in the briefs of petitioners

and former respondent in ‘this cause in the main: set

out the nature of the controversy. However, it is

desired -to emphasize two factors, which this re-

spondent believes have an important bearing on the

issues in controversy:

(1) The alleged illegal oil was in the actual

possession of Trinity Refining Company, Debtor,

at the time of the filing of its petition for corporate

reorganization under the provisions of Section 77B

of the Bankruptcy Act. The Trustee then appointed

took possession of the oil and it has been continu-

ously in the possession. of the Trustee since that -

time.

- (2) On the 24th day of mere 1937, upon

- motion of H. U. Everett, D. K. Hutchcraft and How-

ard Hall, Secured Creditors Committee, Trinity Re-

fining Company, the Honorable District Court for

the Northern District of Texas at Fort Worth, upon

hearing, found that no proper plan for reorganizing

the corporation had been accepted within the requi-

site period of time; that the corporation was insol-

vent; and ordered the estate of the debtor corpora-

tion liquidated by directing the Trustee to liquidate

the estate in pursuance of the provisions of Section

77B (c) (8) and Section 77B (k) of the Bankruptcy "

Act of the United States as amended; that the case

en

be referred to a Referee and that a Trustee be ap-

pointed at a meeting of creditors to be called for that

purpose in conformance with Section 44 of the Bank-

ruptcy Act. . |

On the 14th day of October, 1937, at a qeeting

of creditors, called by the Referee to whom the mat-

- ter was referred, a Trustee was appointed, in con-

formance with Section 44 of the Bankruptcy Act,

the Honorable David Donoghue, this respondent, be-

ing so appointed, who thereafter qualified and who —

has fied in this cause his motion suggesting to this

Court his appointment as Trustee under the order of

liquidatiomaforesaid in the place and stead of the

former respondent in this cause.

CONTENTIONS OF PETITIONERS: .

Petitioners in their brief make their argument

under seven different points, which all may be re-

duced to the following propositions, viz:

(1) That Artiéle 6066a of the Revised Statutes

of 1925 of Texas is a lawful exercise of the police

power of the State of Texas and under the terms of

that article the mere circumstance of the overpro-.

duction of oil automatically results in a forfeiture

with complete divestment of title out of the owner

of the lease into the State of Texas; that, according-

ly, title to the oil here in controversy passed to the ~

, State of Texas at the time such oil (allegedly). was

a |

sail

produced in violation of the rules of the Railroad

Commission of Texas.

(2) That the District Court and the Circuit

Court erred in declining to grant permission to the

State of Texas to take proceedings for the confisca-

tion of alleged illegal oil in a Texas State court of

competent jurisdiction seeking confiscation of such.

oil, since the State of Texas acquired title to such .

oil prior to the filing of the petition under 77B, and

since the claim of the State of Texas is unenforce-

oe able in the Bankruptcy Court.

CONTENTIONS OF THIS RESPONDENT

This respondent hereby adopts for. all purposes

the brief heretofore filed by the former respondent.

However, it is desired to supplement the authorities

-fiied in the former brief in that it is this respondent’s

opinion that the Honorable Trial J udge properly

refused the State of Texas permission to proceed in

the State courts with reference to the allegedly ille-

gal oil and that the validity of the order of refusal is ©

sustained by the following propositions:

I.

(1) Inasmuch as the oil in controversy was ad-

mittedly in the actual possession of the-debtor at

the time of the filing of the petition under Section

77B it follows that such right of possession wes

—5— eae

immediately vested in the Trustee, and the Bank-

ruptcy Court having taken possession of such prop-

erty through its officer, the Trustee, thereby

acquired such jurisdiction of the oil in question as

to render the Bankruptcy Court fully competent

to hear and determine all questions of title, posses-

sion and control of such oil.

(2) Since no judgment of forfeiture had been

obtained by the State of Texas as against the oil in

question at the time of the filing of the voluntary

petition under 77B, and no such judgment has as yet

been obtained by the State, full title to the oil in

controversy was vested in the debtor at the time

such petition was filed, and thereupon passed to

the Trustee, who at this time retains full title, to

the exclusion of any element of title 1 in the State |

of Texas. |

(3) Inasmuch as the Trustee in bankruptcy has

both title and possession to the oil in question, any

claim of the State of Texas in or to suclr oil, can

only be asserted in the proceedings pending in bank-

ruptcy. — |

(4 The claim asserted by the State of Texas

against the oil is an attempt to assert a penalty and

since such a claim is not cognizable in bankruptcy,

‘the oil in controversy remains an asset in bank-

ruptcy, subject to distribution to those creditors

having provable claims under the provisions of the

Bankruptcy Act. /

—_f—

(5) ‘Upon the entry of an order to liquidate the

estate of a debtor under Section 77B (c) (8) and

77B (k) of the Bankruptcy Act, the proceeding be- -

comes comparable to general bankruptcy and is one

for the primary benefit of the. creditors of the

debtor.

| I.

PROPOSITION NO. 1 RESTATED

Inasmuch as the oil in controversy was admittedly

in the actual possession’ of the debtor at the time

of filing of the petition under 77B it follows that

such right of possession was immediately vested in

the Trustee, and the Bankruptcy Court having taken»

possession of such property through its officer, the

Trustee, thereby acquired such jurisdiction of the |

oil in question as to render the Bankruptcy Court

fully competent.to hear and determine all questions

of title, possession and control of such oil.

STATEMENT, AUTHORITIES ‘AND ARGUMENT

Statement

It is uncontroverted that the oil in question, at

the time the petition under Section 77B was filed,

was in the actual possession of debtor, and is now

in the possession of the Trustee appointed in the

malities

proceedings in bankruptcy. (Petitianer’s Brief,

pages3,4&5). :

Authorities -

Baldwin, Ex Parte, 291 U. S. 610, 615, 54

S. Ct. 551, 78 L. Ed. .1020;

Board of Trade vs. Johnson, 264 U. S. 1, 11,

44 §. Ct. 232, 68 L. Ed. 533;

Herbert vs. Crawford, 228 U. S. 204, 205, 33

S. Ct. 484, 57 L. Ed.:800; - 3

Isaacs vs. Hobbs Tire & Timber Co., 282 U:

S. 734, 737, 738, 51S. Ct. 270, 75 L. Ed. 645.

Murphy vs. Hofmann, 211 U. S. 562, 568, 569,

— 28S. Ct. 141, 53 L. Ed. 327.

Wabash Refining Co. vs. Adelbert College, 208 -

U. S. 38, 54, 28 S. Ct. 182, 52 L. Ed. 379.

Argument

_ It. was early established by this Court that a_

Federal District Court sitting in bankruptcy not

only possesses the power directly granted by the

Bankruptcy Act, but in addition possesses such nec-

essary equitable powers as. may be necessary to

carry into effect the provisions of that Act. As a

‘corollary of that rule it has long been recognized

that when a Bankruptcy Court acquires possession

of property. through its officers it thereby obtains

such jurisdiction over the property as to render it

- competent to pass on all questions of title, possession

and control. This proposition was established in

alii

1909 by this Court in an opinion written by Mr.

Justice Moody, who said: ;

. “But where the property in dispute is in the :

‘actual possession of the court of bankruptcy,

there comes into play another principle, not

- peculiar to courts of bankruptcy, but applicable

to all courts, Federal or state. Where a.-court |

of competent jurisdiction has taken property

into its possession, through its officers, the

property is thereby withdrawn from the juris-

diction of all other courts. The court, having

possession of the property, has an ancillary

jurisdiction. to hear and dete*nine all questions

respecting the title, possession, or control of the

property.” (Italics ours). Murphy vs. Hof-

man, 211 U. S. 562, 568, 569, 28 S. Ct. 141, 53

L. Ed. 327.

The same proposition was affirmed by a an n opinion

of this Court by Mr.-Justice Roberts, who said:

“Upon adjudigation, title to the bankrupt’s

| property rests in the trustee with actual or con-

- structive possession and is placed in the custody

of the bankruptcy court . It follows that the

bankruptcy court had exclusive jurisdiction to

deal with the property of the bankruptcy es-

tate ... When this jurisdiction has attached

the court’s jurisdiction cannot be affected by

actions brought in other courts... This is by

an. application of the well recognized rule that

when a court of competent jurisdiction takes

possession of property through its officers, this

ew the property from jurisdiction of all

=

other courts, which ‘though of concurrent juris-

diction ‘may not disturb that possession; and

that the court originally acquiring jurisdiction

is competent to hear and determine all questions

respecting title, possession and control. of the

’

property’.” (Italics ours). Isaacs vs. Hobbs Tire

and Timber Company, 282 U. S. 734, 737, 738,

51 S, Ct., 270, 75 L. Ed. 645. Gs

Other opihions by this court to the same effect

are as follows: Board of Trade vs. Johnson, 264 U.

S. 1, 11, 445. Ct., 232, 68 L. Ed. 533; Ex parte Bald-

win, 291.U. 8. 610, 615, 54 S. Ct., 551, 78 L. -Ed.

- 1020; Herbert vs. Crawford, 228 U. S. 204, 205, 33

S. Ct. 484, 57 L. Ed. 800; Wabash Refining Company

vs. Adelbert College, 208 U. S. 38, 54, 28S, Ct., 182,

52 L. Ed. 379. Ade

The order of the trial court denying the motion of

petitioners, that the oil in controversy be released |

from the bankruptcy proceedings for the purpose-

of enabling the State of Texas to proceed under Arti- —

cle 6066a, amounted to a judgment affirming the

jurisdiction of the Bankruptcy Court.to hear and

determine any question of title to the oil. Such posi-

tion is supported by the above authorities.

ines

Ill.

PROPOSITION NO. 2 RESTATED

Since no judgment of forfeiture had been obtained

by the State of Texas as against the oil in question

at the time of the filing of the voluntary petition

under 77B, and no such judgment has as yet been

. obtained by the State, full title to the oil in contro-

versy remained vested in the debtor until the date

such petition was filed, and thereupon passed. to

the Trustee, who at this time retains full title to

the exclusion of any element of title in the State of

Texas.

STATEMENT, AUTHORITIES AND ARGUMENT

Statement

e

On page 20 of petitioners’ brief it is argued that

tnlawful oil and unlawful products of oil become for-

feit oil immediately upon being produced in viola-

tion of the law, and that as a result title is auto-—

matically divested out of the owner of the lease at

the time of overproduction, and vested in ~ State

of Texas.

It is uncontroverted that the State of Texas has

not obtained a judgment of forfeiture in accord-

ance “, the provisions of Article '6066a, Section

~

\

-—li—

10, Revised Civil Statutes of Texas (Acts 1935, 44th

Leg., p. 624, Ch. 246), and that as a matter ‘of fact,

no proceedings have ever been instituted:in the State

Courts of Texas for the purpose of obtaining such a

forfeiture. (Petitioners’ Brief, p. 2).

Authorities ;

Article 6066a, See. 10, (a), ‘(b) & (c), R.

ie 5 emma

Berry vs. S. Maris, 76 N. JL. 301;

Clark vs. Protection Insurance Co., 1 Story,

134 Fed. Cas. 2832;

Craig vs. Kline, 96 Pa. St. 399, 3 Am. Rep.

636; —

_Darsp vs. People, 51 1, 386, 2 Am. R. 301;

-Heidretter vs. Elizabeth Ou Cloth Co., 6 Fed.

a a

The Kate ‘Heron, 6 Sawy. 109, 111 Fed. Cas.

7619;

Matlow vs. Missouri, 295 ™ Ss. 97, 79 L, Ed.

1327;

* Schenck vs. Peay, 21 Fed. Cas. 683; -

The Sterling (Cir. Ct., 5th Cir. 1933), 65 F.

(2d). 439; .

Strong vs.° United States, (Cir. Ct. of hee,

Ist Cir.), 46 F. (2d) ‘257, 259;

Terrozas vs. Donohue; 227 S. W. 206, Aff.

(1925), 275 S. W. 396; 115 Tex. 146;

United States vs. 1960 Bags of Coffee, 12 U.

S. (8 Cranch) 398, 3 L. Ed. 603;

United States vs. One Hundred‘Barrels, 2 Abb.

(U. S.) 314, 320; S. C. Fed. Cas. 15948;

~< oe

United States vs. One Hundred: Barrels Dis-

tilled Spirits, 14 Wall. 44, 20 L. Ed. 815;

United States vs. 66 Barrels of Whiskey, 25° F.

Cas. No. 15095, 1 Abb. 93; -

United States vs. Grundy, 3° Cranch’ (U. S.)

337, 2 L.-Ed. 459; |

United States vs. Mars, 12°U.S. (8 Cranch)

a 417, 3 L. Ed. 609; .

United States vs. Stowell, 133 U.S. 1, 1%, 33

L. Ed. 559;

United States vs. Three Hundred, Ete, 28.

Fed. Cas. 124.

Argument

This respondent cannot agree with petitioners’ .

arguments concerning title. At common law a for-

_ feiture does Hot operate until, by proper judgment

-in an action. instituted for that purpose, the rights

of the sovereignty have been established. United.

States vs. Grundy, 8 Cranch (U. S.) 387, 2 L. Ed.

‘ 459; United States vs. 66 Barrels of Whiskey, 25 F.

Cas. No. 15095, 1 Abb. 93; Strong vs. United States,

(Cir. Ct. of App: 1st Cir.) 46 F. (2d) 257; 259.

When a forfeiture i is declared by statute the com-

_-mon law rule as to the vesting of title may be dis-

pensed with, subject to certain limitations, the chief .

of which is that the owner must.be given notice, and

the opportunity to defend, enforce and protect his

_ rights before a. court of competent jurisdiction or

the due a clause of the constitution i is violated.

~& ;

" | “aided

Craig vs. Kline, 96 Pa. St. 399, 3 Am. Rep. 636;

_Darsp vs. People, 51 Ill. 386, 2 Am. R: 301; Berry

vs. S. Maris, 76 N. J. L. 801; Terrozas vs. Donohue,

227 S. W. 206, Aff. (1925), 275 S. W. 396, 115 _

146.

*On the sie ‘of the limitation referred to, this

court, during the past one hundred years, has estab-

lished definite rules concerning the time when title

passes under various types of forfeiture statutes, as

follows:

(a) If.the act in question is absolute, that is,

if it unqualifiedly provides that the commission of

the illegal act thereby forfeits the property involved,

the power of the sovereign to subject the property

to forfeiture as of the time of the illegal act, is rec-

ognized. However, the mere commission of:the ille-

_, gal act does not automatically divest the owner of

title. .No element of title is vested in the sovereign

until judgment of condemnation or of forfeiture is

entered whereupon . the title “obtained by the sov-

ereign will then be deemed. to ‘relate back and take °

effect as of the date of the illegal act.

For example, in the case of United States vs.

‘Stowell, 183 U.S. 1, i 33 L. Ed. 559, this court

said:

Q

“By the settled dasiate of this court Prony

ever a statute enacts that upon the commission —

of a.certain act specific property used in or con-

nected with that act shall be forfeited; the for-

co

feiture takes effect immediately upon the com-

mission of the act; the right to the property then

vests in the United States, although their title

is not perfected until judicial condemnation;

the forfeiture constitutes a statutory transfer

of the right to the Ynited States at the time the

offense is committed, and‘ the -condemnation,

when obtained, relates back to that time, and

“avoids all intermediate sales and alienations, -

even to ——— in good faith.” (Italics

ours).

Other cases to the same effect are: United States

vs. 1960 Bags of Coffee, 12 U. S. (8 Cranch) 398,

3 L. Ed. 603; United States vs. 100 Barrels Distilled

Spirits, 14 Wall. 44, 20 L. Ed. 815; Matlow vs. Mis-

souri, 295 U.S. 97, 79 L. Ed. 1827; The Sterling (Cir.

Ct. 5th Cir. 1933) 65 F. (2d) 489; Strong vs. United

States, (Cir.°Ct. 1st Cir. 1931), 46 F. (2d) 257,

261; Heidretter vs. Elizabeth Oii Cloth Co., 6 Fed.

141; Clark vs. Protection Insurance Co., 1 Story 134,

Fed. Cas. 2832; United States vs. Three Hundred,

EBtc., 28 Fed. Cas. 124.

(b) « If the statute in question fails to establish

the time when the sovereign’s rights shall take ef-

fect or if the statute is so written as to admit of

doubt as to the effective time, then the common law

‘Tule will be followed and title will be deemed vested

_in'the sovereign as of the date of the judgment of

condemnation or of forfeiture.

For example, in the case of: United States vs. 1960

1

Bags of Coffee, 12 U.S. (8 Cranch), 398, 405, 3 L.

Ed. 602, this court said:

“Tf the phraseology : were such as, in the opin-

ion of the majority of the court, to admit: of

doubt, it w ujéd then be proper to resort to analo-

gy and the doctrine of forfeiture at common law,

to assist the mind in coming to a conclusion.”

Other cases to the same effect are: U nited States

vs. Mars, 12 U. S. (8 Cranch) 417, 3 L. Ed. 609;

United States vs: One Hundred Barrels, 2 Abb. (U.

S.) 314, 320, S. C. Fed Cas. 15948; The Kate Heron,

6 Sawy. 109, 111, Fed. Cas. 7619; _—— vs. 8. Peay,

21 Fed. Cas. 688. -

In the instant case, the State of ‘Penes has not

obtained a judgment of forfeiture and, accordingly,

under ‘either rule, title to the oil in controversy re-

-’ mains vested in Trinity Refining Company, or its

- lawful representatives. As a matter of fact, it seems

clear that Article 6066a (10) Revised Statutes of

- 1925 of Texas does not provide for an absolute for-

feiture, but instead specifically adopts the common

law ‘rule, with title vesting in the State of Texas,

only following judgment of forfeiture and sale as

under ordinary executions. This position is sub-

stantiated by the following provisions of the statute

in question: .

. Sep, 10, (x). All unlawful oil and unlawful ine .

ucts, regardless of the date of production or manu-

facture thereof, are hereby declared to be a nuisance

ail: ,

and shall be forfeited to the State as hereinafter

provided.”

“(b). When the Attorney General is advised from

any source of the presence and existence of unlaw-

ful oil and/or unlawful products, it shall be his duty.

to institute a suit in rem against such unlawful oil

and/or unlawful product and against all persons

owning, claiming or in possession thereof.”

“(c).... If, upon the trial of such suit the oil or

product in controversy is found to be unlawful oil

or unlawful products, then the court trying said

cause shall render judgment: forfeiting the same to

the. State of Texas and authorizing the issuance of

an order of sale directed to the sheriff or any con-

stable of the County where the oil or products are

located commanding such officer to seize and sell

said property in the same manner as personal prop-

erty is sold under execution.” (Italics ours).

In view: of the foregoing it is respectfully sub-

mitted. that title to the oil in question has never.

vested in the State of Texas under the provisions

of Article 6066a (10) of the Revised Statutes of

1925 of Texas, and that by the very language of the

statute quoted above (Section (c), no forfeiture

occurs until so decreed by a court of competent juris- -

diction and no title passes until seizure and sale by

the sheriff as under execution.

ee

Iv. |

PROPOSITIONS NOS. 3 AND 4 RESTATED

3. Inasmuch as the Trustee in bankruptcy has

both title and possession to the oil in question, any

~ claim of the State of Texas in or to such oil, can only

be asserted in the proceedings pending in bank-

ruptcy. - ee ‘ ‘

4, The disden asserted by the State of ‘Texas.

against the oil is an attempt to assert a penalty, and

since such a claim is not cognizable in bankruptcy,

the oil in controversy remains an asset in bank-

ruptcy, subject to distribution to those creditors

having provable claims under the provisions of the

_ Bankruptcy Act.

STATEMENT, AUTHORITIES AND ARGUMENT

»

Statement. _ re

While the position. is not clearly taken in any

_ particular instance which may be quoted, through-

- out petitioners’ brief it is apparent that petitioner

is of the opinion that it should be entitled to the ex--

traordinary relief for which it prays, largely by.

reason of the fact that it is a sovereign State, and

that the usual provisions of the Bankruptey Act

should not apply since their enforcement. would pre-

vent the State of Texas from obtaining the full pen-

AY

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= |}:

alties otherwise possible in'a proceeding in the State

Court.

Authorities Dealing

The Antelope, 10 Wheat, 66; =e

Commonwealth of Penn. vs. York Silk M fg.

Co., (Cir. Ct., 3rd Cir. 1911), 192 Fed. 81;

International Shoe Co. vs. Pinkus, 278 U. S.

- 261, 265, 73 L. Ed. 318, 320, 49 S. Ct. 108;

Matter of Abramson and Fichhandler, (Cir.

Ct. 2nd Cir. 1914), 210 Fed. 878;

Matter of Semon, (U.S. Dist. Ct. Conn. 1935),

11 F. Supp. 18;

_ - New York vs. Irving Trust Co., 288 U. S. 329,

333, 77 L. Ed. 815; .

New York vs. Jersawit, (1923), 263 U. S._

493, 68 L. Ed. .405; ~

United States vs. Bir mingham Trust Co. (Cir.

Ct. 5th Cir. 1919), 258 Fed. 562; -.

_ Wisconsin vs. Pelican, 127 U. S. 265.

- . | - Argument

Mr. Justice McReynolds delivered the opinion of

this Court in the case of New York vs. Irving Trust

Co., 288 U. S. 329, 333, 77 L. Ed. 815. In that opin-

ion it was held that a sovereign State, as any other

party, is bound by the Bankruptcy:Act. In that case _

the State of New York failed to file its claim for -

taxes within the time fixed by the Referee. As a-.

result its claim was disallowed. On appeal the State _

~~

of New York took the position that a requirement

that a state file its claim within a specified time

isan unconstitutional infringement of the State’s

sovereignty. Mr. Justice memayaeee | in the opinion |

said:

“The Federal government possesses supreme

power in respect to bankruptcies. International

Shoe Co. vs. Pinkus, 278 U. S. 261,265, 73 L.

Ed. 318, 320, 49 S. Ct. 108. If a state desires to

participate in the assets of a bankrupt, she

must submit to appropriate requirements hy

the controlling power; otherwise, orderly and

- expeditious proceedings would be impossible and

a fundamental purpose. of the Bankruptcy Act

would be frustrated. a

By virtue of the terms and provisions of the Bank-

ruptey Act, assets and property. of which the Trus-

tee has title and possession may only be administered

and distributed in conformance with the provisions

of the Act itself. The State of Texas has not brought

itself within any provision of the Bankruptcy Act

entitling it to the relief it seeks. The sole authority

advanced in support of petitioners’ position is a

State statute, which petitioner admits to be one of

penalty and forfeiture. The statute in question does

not eliminate even admittedly illegal oil from com- -

- merce, but has for its purpose a monetary penalty

in favor of the State. Should the State be permitted

to secure a forfeituré in a State court, in accerdance

with Article 6066a of the Revised Statutes of Texas -

and under petitioners customary procedure the oil |

onlin

in controversy would be sold to the highest bidder,

the State would pocket the money and in considera- .

tion of the purchase -price would legitimatize the oil

' by granting the buyer tenders enabling the buyer

to freely move the oil in intra-state commerce. Even

though the State is here ostensibly claiming the oil

itself such claim cannot conceivably constitute a

provable claim in bankruptcy as defined in Section

63. On the contrary the claim falls definitely within

that class denied by the terms of Section 57 (j) of

the Bankruptcy Act, which provides:

“Debts owing to the United States, a. state,

-a county, a district, or a municipality as a pen-

alty or forfeiture’ shall’ not be allowed, except

for the amount of the pecuniary loss sustained

by the act, transaction, or proceeding ouf of ©

_ which the penalty or forfeiture arose, with

- yeasonable and actual costs occasioned thereby,

and such interest as may have accrued thereon

according to law.”

_ Under this Section Federal courts, Sitting i in bank-

ruptcy, have not hesitated to disallow claims of the

Federal government for penalties as well as those

of the respective states. United States vs. Birming-

ham Trust Company, (Cir. Ct. 5th Cir. 1919), 258

Fed. 562; Matter of Semon, (U.S. Dist. Ct. Conn.

1935) 11 F. Supp. 18; New York vs. Jersawit,.

(1923) 263 U. S. 493, 68 L. Ed. 405; Common-

- wealth of Penn. vs. York Silk Mfg. Co., (Cir. Ct. 8rd

Cir. 1911) 192 Fed. 81; Matter of Abramson and: —

Fichhandler, —_ Ct. 2nd Cir. 1914), 210 Fed. 878.

nana eemieaeaeadion

re ee

»

- — ee

” .

=

Although petitioner admits in its brief that it is

seeking to enforce a penalty it may perhaps be ar-

- gued that the State of Texas is not seeking to es-

tablish a claim in bankruptcy and that Section 57

(j) does not for that reason apply. If this be true,

then the State of Texas is attempting to accomplish

indirectly what it cannot do directly, and its efforts

' for that reason should fail. Certainly to order the. .

Trustee to turn over to petitioner valuable assets,

title and possessidn to which is held by the Trustee,

for the purpose of enabling the State to enforce a

penalty does as much violence to the letter and spirit

of Section 57 (j) as would the action of a Bank-

_ ruptcy Court in allowing a claim for penalties and

_ directing payment by the Trustee before all lien and

administration claims..

. Not only is the position of the State of Texas in

‘direct conflict with Section 57 (j) of the Bankruptcy

Act,-but it also violates the proposition first stated

by Chief Justice Marshall i in The Antelope, 10 Wheat.

66: |

“The Court of -another country cannot exe-

cute the penalty laws of andther.”

In the case of Wisconsin vs. Pelican, 127 U. S.

265, this Court directly held that the Federal courts

~~ have no power to execute the penal laws of the indi-

vidual states.

- ¥.

PROPOSITION NO. 5 RESTATED >

Upon the entry of an order to liquidate the estate

of a debtor under Section 77B (c) (8) and 77B (k)

of the Bankruptcy Act, the proceeding becomes com-

parable to general bankruptcy and is one for the

primary benefit of the creditors of the debtor.

STATEMENT, AUTHORITIES AND ARGUMENT

Statement

The proceeding in bankruptcy-in this cause was

initiated by a petition for reorganization of a cor-

poration filed. under the provisions of Section 77B

of the Bankruptcy Act by Trinity Refining Com-

pany. A Trustee was appointed and the adminis- —

tration of the property and assets of the debtor

carried on under the provisions of the Act. On Sep-

tember 24, 1937, an order was entered by the Honor-

able District Court for the Northern District of

Texas at Fort Worth,;upon hearing, in which the

. debtor was found to bp nslven and its estate and

property directed to Be liquidated under the pro-

visions of Section T71B (c) (8) and 77B. (k) of the

Bankruptcy Act. In pursuance ‘of that order the

matter was referred to a Referee, a meeting of cred-

itors was called under tHe provisions of Section 44,

and a Trustee was appointed by the creditors as

a |

therein provided on the 14th day of October, A. ‘D.,

1937.

Authorities _

Bankruptcy- Act of 1898, as amended, Sec-

tions 44; 57 (j); 64; 77B: 77B (c) (8);

* and 17B (ae ;

In re: Chez Marianne, 15 F. Sup. 327.

. Argument

Section 77B of the Bankruptcy Act (11 U.S. C.

A. 207) was enacted primarily for the benefit of

distressed corporations in that it seeks to give a.

distressed debtor corporation the opportunity to re-

organize its capital structure and thus preserve the

going concern value of its assets. Creditors are

protected in that they are given a voice in the plan |

of reorganization and the whole procedure takes

place under the direction and control of Federal

courts, sitting in bankruptcy. :

Section 77B (c) (8) of the Bankruptcy Act ates

provision, however, for the liquidation of a debtor

corporation when the possibility of a reorganization

for its benefit no longer exists. By the terms of this

section the court may direct a liquidation of assets

‘and property of the debtor concern provided it is

found to be insolvent and the possibility of equity.

or benefit to the debtor corporation no longer exists.

—24—

_ When an order for liquidation is entered the pro-

ceeding is no longer one for the benefit of the debtor

corporation, but the liquidation as directed is for

‘the primary benefit of its creditors: Section 77B (k)

provides the manner of liquidation under Section 77B

and, upon the finding of insolvency required by Sec-

tion 77B (k) (8), a Trustee. is to be appointed as

| provided i in Section 44. Certain sections of the Act

- theretofore inapplicable become applicable upon

liquidation, and the proceeding thereafter becomes

‘one primarily and wholly for the liquidation and

distribution of the assets and property of the debtor

corporation to its creditors in a manner comparable

to general bankruptcy.

The effect of an order to liquidate in a proceeding

under 77B is discussed in an opinion by Judge Kffox,

of the Southern District of New York, in the 0 of

In re: Chez Marianne, 15 F. Supp. 327, in which he

said: —

_—

. “When a einelinn instituted under Section

77B (11 U.S. C. A. 207) turns out to have ‘been

abortive, and is relegated to the practice long

familiar i in ordinary bankruptcy, the theory of

creditor control of the estate becomes operative,

and creditors, pursuancé to Section 44 (11 U. S.

C. A. 72), are entitled to choose the Trustee who

will administer the assets.”

It is thus apparent that this proceeding a be-

come one for the Yiquidation of the assets and prbop-

Ps

\

2 —25— .

erty of the debtor corporation, Trinity Refining

Company, and for the distribution of the proceeds

from such liquidation to those creditors entitled to

such distribution under the terms of the Bankruptcy

Act, giving due regard to creditors holding liens and

to the order of priority of payment provided by

Section 64 of the Bankruptcy Act. The State of

Texas has not in its asserted claim brought itself

within any class of creditor or party entitled, under

thesterms of the Bankruptcy Act; to any distribu-

tive interest in the estate of debtor corporation. On

the contrary the ulterior motive of petitioners is the

attempt to obtain a monetary recovery by way of »

penalty and such a claim is not cognizable in bank-_

ruptcy. If petitioners should be allowed to obtain

_ possession of the oil in controversy and should peti-

tioners in the State Court obtain judgment of for-

feiture, such judgment would result in the immedi-

ate sale of the illegal oil by the State to the highest

bidder: The State would_pocket the money and in

consideration of the purchase price paid for the oil,

the buyer, whaever he might be, would be granted

tenders sian him to freely move the oil in

question in intra-state commerce. Sinc¢ this pro-

ceeding is now a creditors proceeding, such result

would mean that the public at large would not be

benefited by such recovery since the oil, although

illegally produced, would eventually find its way into 7

commerce; the debtor would not be penalized since

it has been found to be insolvent and all of its assets ©

2

—

are to be distributed prorata to its creditors. The

final result would be the unjust enrichment of the: *

State of Texas at the expense of civil creditors; Who .

had no- part in the alleged unlawful act.

SUMMARY

It is respectfully submitted that the action taken

‘by petitioners in the final analysis is‘either in the

nature of an action in the Bankruptcy Court.to try

title or a prayer for the satisfaction of a claim. If

the motion as made by petitioners in the trial court

be considered one to try title tothe oil involved, then

the Bankruptcy Court had full authority. to hear

and determine such isSue and under the authorities

was correct in its implied holding that the aaaae

held title to the oil in question...

If on the other hand the motion filed by the State

of Texas in the trial court beConsidered as the re-

quest for the satisfaction 4f a claim, then the order

denying the relief sought was properly entered as

the judgment of the trial court for the reason that

‘the character of claim asserted by the State of Texas’

is not one provable in bankruptcy by virtue of the

provisions of Section 57 (j) of the Bankruptcy Act

and for the further reason that granting sueh. elief

would mean the enforcement by the Federal ‘Court,

sitting in bankruptcy, of a penal law. of the State of

Texas.

<

| firmed.

a

“WHEREFORE, premises ‘ considered, this® re- |

spondent respectfully prays to this Court that the

opinion of the Circuit Court of Appeals, which -is :

reported in 88 Fed. (2d) 48, be in all wate af-—

R. W. KELLOUGH, Tulsa, Oklahoma,

Attorney for Respondent.

H. T. McGown,

H. L. LOGAN, JR.,

Fort .Worth,: Texas,

Of. Counsel.”

B°

eee eee

—28—

Proof of Service of Copy

I, R. W. Kellough, do by these presents certify that

I did on the 16th day of October, 1937, serve a copy

of the foregoing upon William McCraw, Attorney

General of the State of Texas, and W. B. Harrell,

. W. KELLOUGH.

Subscribed and sworn: to before me this the Ib’

day of October, 1987.

Wns eneland tal

Notary Public in and for Tarrant

County, Texas.

~~

No. 28 ad

FILE COPY =. | “srmes"'

: . NOV 5 1937

e ; GHABLES ELMORE CAQPLEY

OLERK

h jue Sone Goa ited Sates

October Term, 1937.

ih

—

STATE OF TEXAS AND J. C. CLOPTON AND BULLOCK

HYDE, RECEIVERS, ETC., Petitioners,

—_— vs.

DAVID DONOGHUE, TRUSTEE OF TRINITY REFINING

_ COMPANY, DEBTOR, Respondent.

fi.

Appeals for the Fifth Circuit.

*.

Reply of Respondent to Supplemental and

Reply Brief for ,the Etats of Toye

.

iv ROBERT W. KELLOUGH,

H. T. McGOWN, Tulsa, Okiahoma, C

H. L. LOGAN, JR. - —Counsel for Respondent.

Fort Worth, Texas, _

of Counsel.

On Writ of Certiorari to the United States Circuit Court of |