Respondents Brief — Conway v. Stone

— Z Zz NOV 26 1941

IN THE

Supreme Court of the United States

Ocroser Term, 1941

Y

No. 725

In re JAMES CONWAY, trading as Conway Negligees,

Conway Beach Togs and Weehawken Knitting Mills,

Petitioner,

GERALD D. STONE, Trustee, and COMMERCIAL FAC-

TORS CORPORATION,

Respondents.

BRIEF OF RESPONDENTS ON PETITION FOR WRIT

OF CERTIORARI TO THE UNITED STATES CIRCUIT

COURT OF APPEALS FOR THE THIRD CIRCUIT.

FRANK L. WEIL,

60 E. 42nd Street,

New York, N. Y.,

COLE & MORRILL,

45 Church Street,

Paterson, N. J.,

Attorneys for Respondents.

Arthur W. Cross, Inc., Law Printers, 71-73 Clinton Street, Newark, N. J.

ARONA NA GF NE IS FR PORE TR ? : nor . -

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SUBJECT INDEX.

ames: OP: CAO saa Ss eee S exe eeeee ns

ere rere ree eT ree

STATEMENTS OF THE CASE.........cccccccccscscces

, i. ee Pee rere ery Pere gree es Pe ree eee

I. Neither insolvency in the bankruptcy sense

nor an act of bankruptcy is a condition prece-

dent to adjudication of a debtor under Sec.

376 of Chapter XI of the Bankruptcy Act....

i; re Ro ina cen eee seas

B. Decisions and Analogous Legislation.....

(a) Extensions and compositions........

(b) Corporate reorganizations ..........

(c) Relief for farmers..................

(d) Railroad reorganizations ...........

Nnonrananow w

(e) Miscellaneous provisions ...........

II. The failure to examine the debtor at the first

meeting of creditors had no bearing on the re-

sult reached after hearing under Sec. 376.... 8

i NN nn ody gids als SAS RRA Od oO 11

: eee RII CSTR RM SSL Bily RY ee ORE ee GREE RE SF AA TRO ee aay SN ane

enemas HAPTER LDL LS RL OLN GLEE HES EO a

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TABLE OF CITATIONS.

Cases

Campbell vs. Allegheny Corporation, 75 F. (2) 947..

Clinton, Im Re, 41. FP. (2) 749... 00... ccc cccccccceces

Collins vs. Welsh, 75 F. (2) 894..........cceeeeees

Continental &c. Bank vs. Chicago &c. Co., 294 U.S.

aos ea eda haces hed wea ee Aki seaeesaee4

BE 0s EA AWEN RA SAARC a eS hea N REALS CE SEC EES Vins

Fox West Coast Theatres, In Re, 88 F. (2) 212....

Johnson vs. Zerbst, Oe Rs Ae cs

Landquist, In Re, 70 F. (2) 929..........cecceeees

Louisville Joint Stock Bank vs. Radford, 295 U. 8.

GREER RRS ee eee ee ee toa ree yee

Minnich vs. Gardner, 292 U.S. 48........... cee eeee

National Ref. Co. vs. Pennsylvania Petroleum Co., 66

3 | Ee OE rey anne fae er ee eae

New Rochelle Coal and Lumber Co., 77 F. (2) 881...

Pierce vs. Somerset Railway, 171 U.S. 641......... 11

I UR, OO RD RA civ ssp ccaccnecswsant 5

United States vs. Atkinson, 297 U. 8S. 157.......... 10

Wall vs. Parrot Silver & Copper Co., 244 U. S. 407.. 11

Weat Co. va. Dea, 174 U. SB. S00... cc ccc ccc sncees 8

Bankruptcy Act.

ee ee Obit be be Ueat Ree en nee Ree 4

I ED GUN SD sic cic sae en vecses eeicns cas 4

Cuapter XI:

SE aires hake ak Os ce casa nes Mew rseye as 4

SE EE. Wi ced ac ahes Lhe eed wakab oae ue eect 8

PE ME CEE. caveat cacenencesen sche aev eae 3

ND gn \ wena eerste ern — Se Bian ge etch ay

SERGI LE NERY GT Be BRE LE PR ERIE: SINS IC Nis aD a ee RE ARR E any wail

Questions Presented.

Is proof of insolvency or of the commission of an act of

bankruptcy necessary before adjudging a debtor a bank-

rupt under Sec. 376(2) of Chapter XI of the Bankruptcy

Act?

Where a debtor under Chapter XI was not examined

pursuant to the directions of Sec. 336 at a first meeting of

creditors called under Sec. 334, does such failure to examine

per se nullify a subsequent order of adjudication entered

after hearing, under Sec. 376(2), where no objection to the

non-examination was made by the debtor either at the

meeting of creditors under Sec. 336, or at the hearing on

the question of adjudication under Sec. 376?

SPEDE TO, HEE CERT VITAL SIE

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Statement of the Case.

At the meeting of creditors held under Sec. 336, the

overwhelming majority of creditors in number and amount

affirmatively rejected the Plan of Arrangement. The Deb-

tor was not examined at this meeting, but he did not object

to this non-examination, nor did he request that he be

examined.

To the order to show cause which issued under Sec.

376(2), the Debtor filed an Answer and Petition (R. 2),

objecting to adjudication on the grounds that he was not

‘‘insolvent’’ and had not ‘‘committed an act of bank-

ruptey’’, and praying that the proceedings be dismissed.

A hearing was held, but at no time did the Debtor object to

adjudication on the ground that he was not examined at

the first meeting of creditors under Sec. 336. In fact, this

ground was not set forth in the Debtor’s Petition for Re-

view (R. 5), and it was first mentioned before the District

Court in oral argument in the review proceedings (R. 27).

The Referee’s order of adjudication was reversed by

the District Court in December, 1940 (R. 14), on the ground

that the Debtor had not been examined at the meeting of

creditors held under Sec. 336, with directions to proceed

further under Chapter XI. An appeal to the Circuit Court

of Appeals resulted in a reversal of the District Court.

After the mandate issued, the District Court, on August

11, 1941, entered an order reversing its prior order of De-

cember, 1940 and remanding the matter to the Referee for

further proceedings. The Referee, by order of August 19,

1941, restored the status quo ante, as of December, 1940.

The Debtor brought on before the District Court this last

TTT Ee IN TY AIR INE SPOT ELEN Og GEL TEE ET LONER IE AE TIN Res RN ET RE ta all

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order of the Referee, and on November 3, 1941 the District

Court affirmed the Referee. On November 7, 1941 all of the

assets of the Debtor were sold.

The requirement of conciseness forbids full comment

on the Petitioner’s financial picture (Brief, pp. 4-5). Suffice

it to say that inventory, merchandise and machinery total

$40,000.00—only in the opinion of the Debtor as stated in

his petition under Chapter XI. As to the cash asset of

$5,000.00, it represented money on deposit in a bank which

seized and applied it toward the bankrupt’s indebtedness

of $8,000.00.

The opinion of the Circuit Court is reported in 121 Fed.

(2) 972.

ARGUMENT.

Neither insolvency in the bankruptcy sense nor an

act of bankruptcy is a condition precedent to ad judica-

tion of a debtor under Sec. 376 of Chapter XI of the

Bankruptcy Act.

A. The Issue.

Sec. 376 (2) of the Bankruptcy Act, under which the

Referee entered the order of adjudication, pertinently

reads as follows:

“Tf an arrangement * * * is not accepted at

the meeting of creditors * * * the court shall* * *

(2) * * * enter an order, upon hearing after notice

* * * either adjudging the debtor a bankrupt * * *

a i i a

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or dismissing the proceedings under this chapter,

whichever in the opinion of the court may be in the

interest of the creditors.’’ (11 U. S. C. A., See. 771.)

Despite the clear grant of power to courts of bank-

ruptey to adjudicate under these circumstances alone, the

Debtor argued in his Answer and Petition (R. 2) and in

his Petition of Review (R. 5) that the court could not ad-

judicate him a bankrupt unless the elements of ‘‘in-

solvency’’ and ‘‘an act of bankruptcy’’ were present, as set

forth in Secs. 1 (19) and 3 of the Act which provides as

follows:

**See. 1 (19): A person shall be deemed insolvent

within the provisions of this Act whenever the ag-

gregate of his property * * * shall not at a fair

valuation be sufficient in amount to pay his debts;’’

(11 U.S. C. A., See. 1 (19).

“‘See. 3: a. Acts of bankruptcy by a person

shall consist of * * *

b. A petition may be filed against a

person within four months after the

commission of an act of bankruptey

7? © (1 U8. CA, Bee ae

Solvent, or not, the debtor was financially embarrassed :

**See. 323. A petition filed under this chapter

shall state that the debtor is insolvent or unable to

pay his debts as they mature,* * * (11 U.S.C. A,,

See. 723).

The question is whether the congressional power to

establish laws on bankruptcies (Article I, Sec. 8, Cl. 4,

United States Constitution) embraces the power to estab-

Pe ea es OREO OD DMC et ais eC RT S _— |

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lish laws governing the relationship between a financially

embarrassed debtor and his creditors. Or, stated in terms

of the case at bar, may Congress authorize courts of bank-

ruptcy to adjudge a person a bankrupt even if he is solvent

and has committed no act of bankruptey?

B. Decisions and Analogous Legislation.

(a) Extensions and compositions.

The immediate predecessor of Chapter XI was See. 74

of the Bankruptey Act (Mar. 3, 1933, Ch. 204, See. 1, 47

Stat. 1467, as amended June 7, 1934, Ch. 424, See. 2, 48 Stat.

922, 923;.May 15, 1935, Ch. 14, Sec. 2, 49 Stat. 246). Under

clause (a) a debtor had to allege insolvency or inability to

pay his matured debts, and if a plan wasn’t accepted by

creditors at their meeting, the court could adjudicate the

debtor a bankrupt under clause (1) without proof of in-

solvency or an act of bankruptcy.

The constitutionality of Sec. 74 was attacked on the

ground that it attempted to bring within the jurisdiction of

the federal bankruptcy courts the obligations and prop-

erty of persons not insolvent, in the case of In Re Land-

quist, 70 F. (2) 929, C. C. A. 7, 1934, cert. den. 293 U. S.

584. The court disposed of the contention by saying that

‘Inability to pay has always been recognized as a proper

cause of adjudication whether that inability were caused

by the lack of assets or a lack of liquidity of assets.’’ This

position was reaffirmed by the same court a year later, Jn

Re Sterba, 74 F. (2) 413, and was followed in Collins vs.

Welsh, 75 F. (2) 894, (C. C. A. 9, cert. den. 295 U. 8. 7 62).

a PPO Acotte

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(b) Corporate reorganizations.

There is a similar situation under Chapter X of the

Bankruptey Act governing corporate reorganizations. Sec.

130 (11 U.S. C. A., See. 530 (1) requires the petitioning cor-

poration to allege insolvency or inability to pay debts as

they mature, and if a plan is not accepted by creditors the

judge may dismiss the proceedings or adjudicate the cor-

poration a bankrupt under See. 236 (11 U. S. C. A., See.

636). The immediate predecessor of Chapter X was Sec.

77B of the Bankruptey Act (June 7, 1934, Ch. 424, See. 1, 48

Stat. 912; amended Aug. 20, 1935, Ch. 577, 49 Stat. 664;

Aug. 29, 1935, Ch. 809, 49 Stat. 965) where the provisions

were encompassed in Sec. 77B (a) and (c) (8).

The same attack was made and again the statute was

held constitutional in Campbell vs. Allegheny Corporation,

75 F. (2) 947, (C. C. A. 4, cert. den. 296 U. S. 581). The

court said that, ‘‘All phases of the relationship between a

debtor financially embarrassed and his creditors are

brought under the control of Congress by the constitu-

tional grant of power; and the fact that a particular mode

has hitherto been employed in dealing with this relationship

is not to be taken as a measure of the power over it.’’ The

same result was reached in New Rochelle Coal and Lumber

Co., 77 F. (2) 881, C. C. A. 2.

(c) Relief for farmers.

An analogous situation arose under the Farm Bank-

ruptey Act, Sec. 75 of the Bankruptcy Act (11 U. 8. C. A.,

See. 203). In Dallas Joint Stock Land Bank vs. Davis, 83

F. (2) 322, (C. C. A. 5), the court said: ‘‘The authority of

SLOT RM BES MN ap eo OA thet AINE, gar aT a TET — |

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Congress to make uniform laws on the subject of bank-

ruptcy is a broad one. It extends to and authorizes not

merely ordinary bankruptcy laws, as they were understood

and in existence at the time of the adoption of the Con-

stitution, but insolvency laws in general.’’ And to the

same effect is Louisville Joint Stock Bank vs. Radford, 295

U. S. 555.

(d) Railroad reorganizations.

Prior to Sec. 77 of the Bankruptcy Act (11 U.S. C. A.,

Sec. 205) a railroad could not be adjudged a voluntary or

involuntary bankrupt (Sec. 4 (a) and (b) of the Bankruptcy

Act). Under Sec. 77 the Congress authorized the bank-

ruptcy courts to deal with railroads unable to pay matured

debts, and this legislation, more nove) than the legislative

provisions involved in the case at bar, was held constitu-

tional in Continental Illinois National Bank and Trust Co.

vs. Chicago &c. Co., 295 U.S. 648.

(e) Miscellaneous provisions.

There are similar provisions in Real Property Arrange-

ments under Chapter XII of the Bankruptcy Act (11 U.S.

C. A., Sec. 801) in Sees. 423, 481 and 482, and in Wage

Earners’ Plans under Chapter XIII of the Act (11 U. S.

C. A., Sec. 1002) in Secs. 623 and 626.

Even under Chapter XI, a person merely unable to pay

his matured debts may be adjudged a bankrupt if he fails

to provide an indemnity bond (Sec. 327), or if he fails to

carry out a confirmed arrangement (Sec. 376).

When our Debtor filed his petition under Chapter XI,

the jurisdiction and powers of the bankruptcy court were

PR NINE TTR

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the same as if he had filed a voluntary petition for ad-

judication, Sec. 312 (2). If he had filed such a voluntary

petition, the court could have adjudged him a bankrupt

without any proof of insolvency or of an act of bankruptcy.

Re Fox West Coast Theatres, 88 F. (2) 212 (C. C.

A. 9);

In Re Clinton, 41 F. (2) 749 (S. D. Cal.).

If an involuntary petition in bankruptcy is filed against

a person under Sec. 4 (b) of the Bankruptcy Act, alleging

as the act of bankruptcy a general assignment for creditors

(Sec. 3 (a) (4), or the appointment of a general receiver

(Sec. 3 (a) (5) ), adjudication cannot be resisted by a

debtor on the basis of his solvency.

West Co. vs. Lea, 174 U.S. 590;

National Ref. Co. vs. Pennsylvania Petroleum Co.,

66 F. (2) 914 (Cert. den. 291 U. S. 667).

IT.

The failure to examine the debtor at the first meet-

ing of creditors had no bearing on the result reached

after hearing under Sec. 376.

On page 7 of the Petitioner’s brief, he insinuates that the

subsequent examination under Sec. 336 produced a ma-

jority of acceptances of the plan of arrangement. His con-

clusion is based solely on the fact that acceptances followed

the examination in time. Naturally, the intervening con-

ferences, meetings of the Creditors’ Committee and the

like, are not reported in the Record, and therefore the

Record fails to disclose the true reason why the debtor was

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able to obtain additional acceptances. However, it is only

fair to this Court to point out that the examination under

Sec. 336, which is referred to by the Petitioner as being in-

fluential, as strictly copied from the transcript of the testi-

mony, discloses the following, in part:

**Q. Will you tell us about this plan, its feasi-

bility and fairness? * * * A. I will be glad to; we

are offering you twenty per cent in cash and three

notes of five per cent each, one payable August of

this year and two payable next year; as to feasi-

bility, we think enough of the plan to put up a bond,

to put up part payment on the first twenty per cent

of the $1,500.00, which was requested by the Com-

mittee.

Q. Anything else you have to say? A. No.

Q. Is there anything you want to say in connec-

tion with these proceedings that are now pending be-

fore the Court and the form of your application for

confirmation of the plan and acceptance of the plan?

A. No.

Q. Is there anything you want to say to explain

your plan further? A. The plan is self-explanatory.

Q. Is there anything further you want to say to

creditors so that they may better understand your

plan or have better knowledge with reference to ac-

ceptance or rejection? A. Not knowing what ques-

tions will be in the creditors’ minds, I cannot fore-

tell. If they will ask me questions I will be glad to

answer them.

Q. There is nothing that you think you have to

volunteer to assist them in understanding the situa-

tion better with reference to acceptance or rejection

of the plan? A. No.

Q. You say the plan is self-explanatory. A. I be-

lieve so.

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Q. Is this plan more self-explanatory than any

other plan you have had on file here? A. I think all

the plans are self-explanatory.’’

This portion of the examination, which continued

further but which might have terminated there, rather

forcefully indicates that the ery of the debtor for an op-

portunity to be examined under Sec. 336 is (ue creation of

a sham issue.

On page 8 of the brief, Petitioner argues that an ex-

amination at the first meeting of creditors under Sec, 336

would have enabled the Referee to determine how to act

under Sec. 376. The Petitioner overlooks the fact that a

hearing is to be held and was held under See. 376 (R. 9).

At that hearing the question was properly adjudication or

dismissal, and an examination under Sec. 336 could not

have been pointed toward these alternatives.

It is unquestioned that at the first meeting of creditors

under Sec. 334 the debtor failed to request an examination

and failed to object to his non-examination. At the hearing

under Sec. 376(2) the prior non-examination was not pre-

sented as an objection to adjudication. The sole grounds

relied on by the debtor were the fact that he was solvent,

and did not commit an act of bankruptcy (R. 2, 6, 9, 27).

Minnich vs. Gardner, 292 U.S. 48;

U. S. vs. Atkinson, 297 U.S. 157.

The debtor does not object to the adjudication on the

merits or on the ground that the Referee abused his discre-

tion. Rather is his objection founded on the alleged lack

of power of the Court to act under Sec. 376 because there

was no examination under Sec. 336. However, if the Court

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was powerless to adjudicate under Sec. 376, it was likewise

powerless to dismiss under the same Section, yet the Peti-

tioner asked the Court to exercise its power under Sec. 376

by praying for a dismissal (R. 2).

Petitioner’s argument under the Fifth Amendment of

the Constitution is without weight. The Circuit Court prop-

erly held that debtor could waive a constitutional provision

intended for protection of his property rights.

Johnson v. Zerbst, 304 U.S. 456;

Wall v. Parrot Silver & Copper Co., 244 U. 8. 407;

Pierce v. Somerset Railway, 171 U.S. 641.

Wherefore it is respectfully submitted that the petition

for a writ of certiorari be denied.

Respectfully submitted,

Frank L. WE,

Cote & Morrit1,

Attorneys for Respondents.