Case Name: In the Matter of GIBRALTOR AMUSEMENTS, LTD., Bankrupt-Appellant, and The Wurlitzer Company and Wurlitzer Acceptance Corporation, Petitioning Creditors, Appellees
Court: United States Court of Appeals for the Second Circuit
Jurisdiction: United States
Decision Date: 1961-05-24
Citations: 291 F.2d 22
Docket Number: No. 319, Docket 26812
Parties: In the Matter of GIBRALTOR AMUSEMENTS, LTD., Bankrupt-Appellant, and The Wurlitzer Company and Wurlitzer Acceptance Corporation, Petitioning Creditors, Appellees.
Judges: 
Reporter: Federal Reporter 2d Series
Volume: 291
Pages: 22–29

Head Matter:
In the Matter of GIBRALTOR AMUSEMENTS, LTD., Bankrupt-Appellant, and The Wurlitzer Company and Wurlitzer Acceptance Corporation, Petitioning Creditors, Appellees.
No. 319, Docket 26812.
United States Court of Appeals Second Circuit.
Argued March 22, 1961.
Decided May 24, 1961.
George Becker, New York City, for bankrupt-appellant.
Edward R. Neaher, New York City (Chadbourne, Parke, Whiteside & Wolff, New York City and Charles J. Prentiss, New York City, on the brief), for Wurlitzer Co. and Wurlitzer Acceptance Corp., appellees.
Before MOORE, FRIENDLY and SMITH, Circuit Judges.

Opinion:
J. JOSEPH SMITH, Circuit Judge.
Gibraltor Amusements, Ltd., the alleged bankrupt, is the operator of numerous "Juke Box" routes on Long Island. The Wurlitzer Company, principal creditor of the alleged bankrupt for a sum exceeding $1,000,000, filed an involuntary petition in bankruptcy against Gibraltor in March of 1960. The petition alleged insolvency, numerous acts of bankruptcy and that the debtor had fewer than twelve creditors. Gibraltar's answer denied the claimed indebtedness, challenged Wurlitzer's standing on the ground that it had been the recipient of preferential payments and denied there were fewer than a dozen creditors. Bankruptcy Act, § 59, subs, b, d, 11 U.S.C.A. § 95, subs, b, d. In support of its last cited contention, Gibraltor submitted a list of its creditors on the date of the petition. To counter this, Wurlitzer subsequently moved to amend its petition — which motion was granted. The bankruptcy court also granted leave to Wurlitzer Acceptance Corporation (WAC), William F. Wadsworth and Joseph Rae to file as intervening creditors.
After a hearing, Referee Castellano decided all of the issues against the bankrupt. He held that the alleged debts and acts of bankruptcy had been amply proven, that Wurlitzer's petition was not a sham or a fraud on the court and that Wurlitzer, although secured for the larger portion of its claims, was an unsecured creditor for a sum far in excess of $500. Without deciding that certain installment payments made to Wurlitzer were preferential, the referee ruled that a preferred creditor has a "provable" claim so as to satisfy the requirements of § 59 sub. b, even though the claim is not "allowable" unless the preference is surrendered. Winkleman v. Ogami, 9 Cir., 1941, 123 F.2d 78. Cf. In re Automatic Typewriter & Service Co., 2 Cir., 1921, 271 F. 1. Finally, Referee Castellano found that Rae, Wadsworth and WAC all qualified as petitioning creditors and duly adjudged Gibraltor a bankrupt. On a Petition for Review to the District Court for the Eastern District of New York, Judge Bartels upheld the referee's findings in all particulars save the Rae petition. As to that, the court held that Rae's claim was "contingent as to liability," [187 F.Supp. 937] thereby disqualifying him as a petitioner. Because three petitioning creditors still remained, however, the court confirmed the adjudication of bankruptcy.
On appeal to this court, appellant has renewed all of his contentions below. There is absolutely no merit in most of them. The referee's various factual findings as to Gibraltor's insolvency, Wurlitzer's partially unsecured status and the existence of the Wadsworth debt are amply supported by the record; they surely are not "clearly erroneous" as they must be to warrant reversal. Margolis v. Nazareth Fair Grounds & Farmers Market, Inc., 2 Cir., 1957, 249 F.2d 221; Stim v. Simon, 2 Cir., 1960, 284 F.2d 58; In re Tabibian, 2 Cir., 289 F.2d 793. The only substantial question raised is the standing of WAC as a separate petitioning creditor.
Wurlitzer Acceptance Corporation is a wholly owned subsidiary of the Wurlitzer Company. It was incorporated in 1957 and its business has been the financing of sales of the parent's products. Although WAC appears to have dealt solely in the commercial paper of Wurlitzer, it has obtained its own bank financing — on the strength of its own credit. It has been a separate corporate taxpayer for the purposes of the Federal income tax. The evidence indicates that both parent and subsidiary have scrupulously honored the separate corporate form of the latter. WAC's claim is for almost $17,000 on two notes guaranteed by Gibraltor. The notes had been purchased from Wurlitzer long before the filing of the petition; there is absolutely no evidence of attempted subversion of the Bankruptcy Act.
For m6st purposes, the law deals with a corporation as an entity distinct from its shareholders. Traditionally courts will pierce the corporate veil "when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime." United States v. Milwaukee Refrigerator Transit Co., C.C.E.D.Wis.1905, 142 F. 247, 255; In re Belt-Modes, Inc., D.C.S.D.N.Y.1950, 88 F.Supp. 141; Rapid Transit Subway Construction Co. v. City of New York, 1932, 259 N.Y. 472, 182 N.E. 145. Although courts will sometimes disregard the separate entity where it has been used as a "front" or a "mere conduit" — the so-called alter ego doctrine — the present case with its complete absence of fraud and strict honoring of the corporate form as to assets and inter- •corporate transactions is not a proper -one for the invocation of that rule. See In re Belt-Modes, Inc., supra, 88 F.Supp. at page 144; Shamrock Oil & Gas Co. v. Ethridge, D.C.D.Colo.1958, 159 F.Supp. 693, 697; Western Electric Co. v. Cinema Supplies, 8 Cir., 1935, 80 F.2d 106, 108; 1 Fletcher Cyc. Corp., Perm.Ed. § 41, 43.
Since ordinary principles of the law of •corporations do not warrant the disregard of WAC's corporate identity here, it remains only to ascertain whether anything in the language or policy of the Bankruptcy Act demands such a result. Section 59, sub. b, 11 U.S.C.A. § 95, sub. b provides simply that "Three or more creditors who have provable claims liquidated as to amount and not contingent as to liability against any person may file a petition to have him adjudged a bankrupt." "Creditor" is defined in § 1(11), 11 U.S.C.A. § 1(11) as follows: " 'Creditor' shall include anyone who owns a debt, demand, or claim provable in bankruptcy "
The aforecited language, far from being restrictive in its definition of the scope of permissible petitioners, is virtually all encompassing. The emergence of the wholly owned corporate subsidiary as a common business instrumentality is not a brand new phenomenon. While Congress has repeatedly •added to and amended the Federal taxing laws to deal with problems posed by the multiple corporation means of doing business, it has not seen fit similarly to tinker with the Bankruptcy Act. The detailed ground rules for "counting creditors" laid down by § 59, sub. e, 11 U.S.C.A. § 95, sub. e indicate that the principal Congressional fear of abuse was not that a debtor would be too easily petitioned into bankruptcy — rather that through connivance with friendly creditors the insolvent debtor might be able unfairly to hamstring one or two large creditors. The courts have long evinced a disposition to honor the separate corporate entity in bankruptcy matters; Comstock v. Group of Institutional Investors, 1948, 335 U.S. 211, 68 S.Ct. 1454, 92 L.Ed. 1911; In re Belt-Modes, Inc., supra. If Congress meant to alter ordinary judicial rules governing corporations, it should have so provided specifically.
Whether the policy of the Act calls for a more narrow construction of qualified "creditors" is a closer question. The present requirement of three petitioning creditors, inserted in the Act of 1898, is a compromise between the quite liberal provision of the Act of 1841 and the restrictive requirements of the 1867 Act. 3 Collier on Bankruptcy 548. In the process of "counting to three," the courts have perhaps been overly liberal in allowing the holders of assigned claims to qualify as practitioners. See In re Bevins, 2 Cir., 1908, 165 F. 434, where the court allowed the petitions of two assignees who had taken claims for the specific purpose of making up the required statutory number. General Order 5(2), 11 U.S.C.A. following section 53, while recognizing assignees as petitioners, sets up a check against abuse of the assignment device by requiring an affidavit setting forth the particulars of the transfer.
It may be conceded to be highly questionable whether Congress meant to sanction traffic in claims merely for the purpose of creating a sufficient number of petitioning creditors. While such was the case in Bevins, and was there approved, no such machinations have been presented in the instant case. Even though WAC took the notes in the due course of business, without reference to any future bankruptcy proceeding, it is urged that the mere fact of "control" by Wurlitzer disqualifies the subsidiary's claim. This argument merely raises, in a slightly different guise, the question of the disregard of the subsidiary's separate entity. There has been no showing, however, that Wurlitzer has abused the distinct corporate form nor that it has used it fraudulently to subvert the Bankruptcy Act. Lacking such a showing, WAC's claim should be honored. Such an approach to this question is not a purely conceptual one; it must be kept in mind that protection of the separate creditors of WAC, who cannot reach the assets of Wurlitzer, can-only be accomplished by the recognition of the subsidiary as an independent legal entity.
Affirmed.
. Apparently Wurlitzer handled most of WAO's collections for it while it collected on its own notes. Such an arrangement was undoubtedly cheaper and more efficient and is not enough from which to infer an internal disregard of WAO's separate entity.
. "One corporation may be disregarded where the two are identical or indistinguishable in fact. Unless it is a mere instrumentality or agency or adjunct in that sense, or as a sham or is used in fraud, by the dominant corporation, it will not be disregarded; and it will not be disregarded unjustly." 1 Fletcher Oyc. Corp. 155.
. General Order 5(2) provides: "Petitioners in involuntary proceedings for adjudication, whose claims rest upon assignment or transfer from other persons, shall annex to one of the triplicate petitions all instruments of assignment or transfer, and an affidavit setting forth the true consideration paid for the assignment or transfer of such claims and stating that the petitioners are the bona fide holders and legal and beneficial owners thereof and whether or not they were purchased for the purpose of instituting bankruptcy proceedings."