Petition for Writ of Certiorari — Gibraltor Amusements, Ltd. v. Wurlitzer Co. (No. 429)

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PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE SECOND

CIRCUIT

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Pdeast Hired Stree

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Counsel for Patthiouer

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INDEX

Page

Citation to opinions below ...............0.. cece eee 1

ed sae Wen adbeees 2

Sa aca dewdes'es 2

cane ke ews 2

hoe sige Fee tips a eg, 3

Hensome Tor gramting the writ ...................... 6

ee ars ar hs way wn wie 10

Opinion of Court of Appeals (Appendix A)......... la

Opinion of District Court (Appendix B) ............. 3a

CITATIONS

Burnet v. Guggenheim, 288 U.S. 280 ..0..0........00. 8

Canute Steamship Co, v. Pittsburgh & West Virginia

ee eg Ee OE oc oaks ch cew dwesbnvuces 6,10

Chicago, M. & St. PLR. Co. v. Minneapolis Assoe., 247

ag ee ee ee leg Ge ws 7

Labor Board v. Deena Artware, Inc., 361 U.S. 398 200.0007

Meck vy. Centre County Banking Co., 268 U.S. 426 2... 6

Owl Fumigating Corp. v. California Cyanide Co., 30 F.

ee ean ei k kg yc dvne 7

Schenley Distillers Corp. v. United States, 326 U.S. 482 7

Nw y

IN THE

Suprene Court of the United States

OcTOBER TERM, 196]

GIBRALTOR AMUSEMENTS, Lrp., Petitioner,

V.

THE Weruirzrek COMPANY AND WURLITZER

ACCEPTANCE ConRPORATION, Respondents.

——

PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE SECOND

CIRCUIT

Petitioner prays that a writ of certiorari issue to

review the judgment of the United States Court of

Appeals for the Seeond Circuit, entered in the above-

entitled proceeding on May 24, 1961.

CITATION TO OPINIONS BELOW

The opinion 6f the Court of Appeals rendered on

May 24. 1961, is reported at 291 F. 2d 22 and is re-

printed as Appendix A hereto. The opinion of the

Distriet Court for the Eastern District of New York

)

—

(Bartels, J.) is reported at 187 F. Supp. 931 and is re-

printed as Appendix B hereto.

JURISDICTION

The judgment of the Court of Appeals was entered

on May 24, 1961. On August 16, 1961, Mr. Justice

Frankfurter signed an order exten?’iug the time for

filing this petition for writ of certiorari to and includ-

ing September 21, 1961. The jurisdiction of this Court

is invoked under 28 U.S.C. § 1254(1).

QUESTION PRESENTED

Whether, under Seetion 59(b) of the Bankruptey

Act, a petitioning ereditor’s wholly owned: subsidiary,

te which the parent creditor has assigned certain claims

against the debtor prior to the filing of the bankruptey

petition, can be counted as one of the three petitioning

creditors essential to the maintenance of an involun-

tary petition in bankruptcy.

STATUTE INVOLVED

Section 59(b) of the Bankruptey Act, 11 U.S.C.A.

9

§ 95(b), entitled** Who may file and dismiss petitions”’,

reads as follows: ,

“Three or more ereditors who have provable claims

liquidated as to amount and not contingent as to lia-

bility against any person which amount in the ag-

gregate in excess of the value of seeurities heid by

them, if any, to £500 or over, or, if all of the creditors

of such person ate less than twelve in number, then

one or more of such creditors whose claim or claims

equal such amount, may file a petition to have him ad-

judged a bankrupt.”

a)

o

STATEMENT OF THE CASE

The petitioner, Gibraltor Amusements, Ltd., is the

alleged bankrupt in this proceeding.

On Mareh 18, 1960, an involuntary petition in bank-

ruptey was filed by the respondent Wurlitzer Company

asa sole creditor, alleging less than twelve creditors of

the bankrupt.’ The bankrupt filed an answer on March

29, 1960, denving inter ala that there were less than

twelve creditors, An amended involuntary petition

was then filed by the Wurlitzer Company on May 5,

1960. again alleging less than twelve creditors. There-

upon one William F. Wadsworth and the Wurlitzer

Acceptance Corporation (WAC) were granted leave

to iutervene and join as petitioning ereditors. The

amended answer, filed on May 10, 1960, reiterated the

denial of the allegation as to twelve ereditors and as-

serted (R. 19a) that ‘*Wurlitzer Acceptanee Corpo-

ration, an intervening ereditor, is a wholly owned sub-

sidiary of the petitioning creditor and as— such

does not qualify as an independent, separate petition-

ing creditor.”

The matter was then referred to a Referee in Bank-

rupteyv. The trial before the Referee was narrowed by

concessions to the sole issue ‘tof whether a sufficient

number of qualified ereditors have joined in the peti-

tion for involuntary bankruptey, at least three quali-

fied creditors being required as the record disclosed

that the alleged bankrupt had twelve creditors or more

on March 18, 1960.°°) R. 21a.

'N. 2a. The record references herein are to Volume 1 of the

certified reeord, consisting of the appendix to petitioner's brief

in the Court of Appeals.

4

The Referee, upon the conclusion of the trial, made

the following pertinent findings and conclusions:

(1) WAC, the intervening creditor, is a Delaware

corporation and a wholly owned subsidiary of Wur-

litzer. R. 23a. ‘*It was organized in 1957 for the pri-

mary purpose of financing sales of Wurlitzer products.

It finances all sales generated by the retail music stores

owned and operated by the parent company, as well as

sales made by Wurlitzer dealers, distributors and op-

erators. It is a distinct legal entity separate and apart

from its pareat corporation. It acquired the notes and

security long prior to the bankruptcy.’’ R. 23a.

(2) More than $1,000,000 was owed by the bankrupt

to Wurlitzer, the indebtedness being in the form of de-

faulted promissory notes secured by conditional sales

contracts. Wurlitzer had acquired these notes and

contracts as a holder in due course and they constituted

valid and subsisting liens against the bankrupt and its

property. R. 22a.

(3) Two of the aforesaid promissory notes had been

acquired by WAC in the regular course of its business

by assignment from Wurlitzer. One note had been so

acquired on October 31, 1958, and the other on May

28, 1958; on the date of filing the bankruptcy petition

(March 18, 1960) these notes were in default in the

respective amounts of $5,261 and $4,785. R. 24a. On

May 15, 1959, the bankrupt had executed and delivered

a written guaranty of payment to Wurlitzer of certain

obligations, including the notes in question. The Ref-

eree concluded that this guaranty ‘‘expressly extended

not only to Wurlitzer but to its ‘suecessors and assigns’

and thus included WAC” and that upon the assignment

of the two notes to WAC the latter ‘‘became entitled

to the benefit of the alleged bankrupt’s guaranty.”

R. 24a-25a.

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(4) Finding that the assignment by Wurlitzer te

WAC of the two notes without recourse “was sufficient

to transfer title to WAC™ and give the latter a right of

action against the bankrupt, the Referee concluded that

“WAC is a creditor of the alleged bankrupf, and in

every respect qualified to act as a petitioning creditor

herein.’ R, 25a.

The Referee, having found that Warlitzer, WAC

and two individuals qualified as petitioning creditors

aud that the total number of creditors was more than

twelve, held that the petitioning creditors were en-

titled to an order adjudging the petitioner herein te

be a bankrupt. R. 28a. An order to that effeet was

duly entered. R. 29a-30a.

Upon a petition for review filed by the bankrupt, the

District Court affirmed the order adjudging petitioncr

a bankrupt, except that it overruled the Referee's find-

ing and conclusion that one of the Individuals qualitied

as a petitioning creditor, R. 34a-43a. As a result,

the bankruptey adjudication was sustained on a

finding that there were three qualified petitioning

ereditors—the minimum number required to sustain an

involuntary petition in these circumstances. As to the

petitioner's objections to counting WAC as one of

those three, the District Court ruled that WAC was

qualified as a separate entity, there being no proof

that the parent Wuriitzer Company had emploved

WAC for an illegal purpose or as a front so as to justi-

fv piercing WAC's corporate veil. R. 39a-40a.

The Court of Appeals affirmed by a two-to-one vote,

Judge Friendly dissenting. The majority held that

WAC should be counted as an independent petitioning

creditor in the absence of any showing that Wurlitzer

had in some way used WAC to subvert the Bank-

6

ruptey Act. Judge Friendly wrote that it was con-

trary to the history and purpose of the Act to regard

a parent and a subsidiary as separate entities in count-

ing the requisite number of petitioning creditors in in-

voluntary proceedings, even in the absence of any proof

of fraud or intent to subvert the Act.

REASONS FOR GRANTING THE WRIT

The decision below raises an important, unresolved

and recurring problem in the administration of the

Bankruptey Act chat needs definitive resolution by this

Court.

Under Section 59(b) of the Bankruptey Act, 11

ULS.CLA. §95(b), where there are more than twelve

creditors of the debtor, ‘it is indispensable to the main-

tenance of the [involuntary] petition that the existence

of three petitioners holding provable claims be estab-

lished, if challenged.”? Canute Steamship Co. v. Pitts-

ourgh & West Virginia Coal Co., 263 U.S. 244, 248.

And see Meck v. Centre County Banking Co., 268 U.S.

426, 431, note 3. The problem here is whether a wholly

owned subsidiary of a petitioning creditor ean be

counted as one of the three necessary petitioners on the

basis of its purchase of certain claims against the

debtor from its parent corporation.

The majority of the Court sought to answer that

question affirmatively by relying upon the proof in

thix case that WAC, the wholly owned subsidiary, is

an entity separate and distinct from its parent Wurl-

itzer Company and upon the complete absence of any

indication that Wurlitzer had abused or disregarded

WAC's independence. In the absence of some show-

ing of a fraudulent subversion of the “rule of three”?

provision of the Bankruptey Act, said the court,

WAC's status as a petitioning creditor must be honored.

‘

But the bavie question remains whether, if it. be

assumed that WAC was independent of Wurlitzer and

acquired the claims from Wurlitzer in the normal

course Of its legitimate business, such related enter-

prises can be counted as two separate petitidning ered-

itors for purposes of Section 59(b) of the Bankruptey

Act. And the answer to that critical problem is not

to he found in the general provisions of contract or

tert law giving recognition to the independent status

of such parents and subsidiaries. See Qul Fumigating

Corp. Vv. California Cyanide Co., 30 F. 2d 812, 813 (CA.

3). Nor is it to be found in decisions refusing to

pierce the corporate distinctions of such related or-

vanizations in other statutory contexts. And by the

sume token, disregarding the corporate distinctions in

any setting other than Section 59(b) of the Bank-

ruptey Act brings no solution to this problem. As

stated in Schenley Distillers Corp. v. United States,

826 US, 482, 487: “While corporate entities may be

disregarded where they are made the implement for

avoiding a clear legislative purpose, they will not be

disregarded where those in control have deliberately

adopted the corporate form in order to secure its ad-

vantages and where no violence to the legislative pur-

pose is done by treating the corporate entity as a sep-

arate legal person.”’ [Emphasis added. ]?

The essence of the problem thus is whether treating

a wholly owncd independent subsidiary, that has pur-

chased a debt from its parent, as a creditor separate

from its parent creditor corporation does violenee to

2Some of the relevant considerations in determining whether

Separate entities constitute one economie enterprise are listed in

Lahor Board vy. Deena Artware, Inc., 361 US. 39%. 402-404. See

also Chicago, M. d& St. P. R. Co. vy. Minneapolis Assoc., 247 US.

490, 501.

8

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the legislative purpose expressed in Section 59(b) of

the Bankruptcy Act. The majority below merely said

that if Congress meant Section 59(b) to alter the ordi-

nary judicial rules recognizing the separate status of

wholly owned subsidiaries ‘‘it should have so pro-

vided specifically.” But the presence or absence of

specific words may not be the solution to this type of

statutory problem, particularly since the legislative

words here permit conflicting interpretations. See

Burnet v. Guggenheim; 288 U.S. 280, 285.

The answer may well lie in Judge Friendly’s analysis

of the Congressional background of Section 99(b), an

analysis showing that this provision represented a

compromise ‘‘between those who wanted to give the

creditor an effective remedy to assure equal distribu-’

tion of a bankrupt’s assets and those who were deter-

mined to protect the debtor from the harassment of ill-

considered or oppressive involuntary petitions, inelud-

ing those by a single creditor interest.’’ On the basis

of his examination of the legislative record, Judge

Friendly concluded that the thrust of Seetion 59(b),

as a compromise of opposing forces, was ‘‘to require

three separate creditor interests, separate in reality

and not merely in form.”’

The issue is thus squarely joined in this case. On

the record there has been found no indieation that

WAC was other than an independently operated subsi-

diary or that it acquired its claims other than in the

normal course of its legitimate business. But neither

is there any question as to its being wholly owned by

Wurlitzer or as to its having acquired its creditor

status solely by purchase of debt elaims from Wurl-

itzer. These may be separate legal entities but there

is in fact but one ereditor interest. And the problem

]

is Inescapably raised in its purest form—whether Con-

gress meant to require three creditor entities or three

separate creditor interests,

If the majority’s view be adopted, anomolous re-

sults could follow, As Judge Friendly pointed out, a

single creditor corporation, for good business reasons,

could parece] out some of its debt claims to two or more

financing subsidiaries and thus insure its ability to

initiate an involuntary bankruptey proceeding should

there be more than twelve creditors. By so doing, the

ereditor corporation would in effect be creating three

creditors where originally there was only one. A single

ereditor interest could thus become dominant even

in the absenee of any intent to subvert the “rule of

three.” And the statutory policy of protecting the

possible desire of the twelve or more other creditor

interests (especially those having no preferences) to

have the business continue free of bankruptey proceed-

ines becomes subordinated to the wishes of this single

erediter interest. The “rule of three’? could aecord-

invly become meaningless.

The concentration of power thus placed in the hands

of a parent corporation that disposes of some of its

deht ¢laims to its subsidiaries—or even to unaffiliated

corporations —raises an increasingly important prob-

‘em in the administration of the Bankruptey Act. As

the creation and use of wholly owned financing subsid-

laries become more prevalent in the United States.

precisely the kind of problem posed by this case will

beeome more frequent in bankruptey proceedings. The

court below, perhaps the most experienced tribunal in

the country in bankruptey matters, has been unable

to provide a clear-cut solution, So significant a prob-

lem thus deserves the plenary consideration that only

this Court can give to it.

10

Certainly this issue is no less significant for certi-

orari purposes than the question which led to the grant

of certiorari in Canute Steamsh ip Co. v. Pittsburgh &

West Virginia Coal ( '0., 263 U.S. 244, the question there

being whether subsequent intervening creditors could

be counted in determining whether, under Section 59

(b), there was compliance with the ‘rule of three.”

CONCLUSION

For the foregoing reasons this petition for a writ of

certiorari to review the judgment of the Court of

Appeals for the Second Circuit should be granted.

Respectfully submitted,

EUGENE GRESSMAN

1730 K Street, N. W.

Washington 6, D. C.

GEORGE BECKER

4 East 43rd Street

New York 17, N. Y.

Counsel for Petitioner

September 21, 1961.