# Supplemental Brief — Texas v. Donoghue

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Supplemental Brief
- **Published:** January 1, 1937
- **Citation:** 302 U.S. 284

## Text

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
\

= |}:

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 |

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386010_0238%3A09. Public record. Not legal advice.