Court Opinion

ID: 8876536
Source: CourtListenerOpinion
Date Created: 2022-11-26 19:14:25.137677+00
Date Added: 2024-06-11T17:06:23.495734
License: Public Domain

FRIENDLY, Circuit Judge
(concurring) :
I cannot agree that a practice of handling the business of a group of corporations so as to impede or even prevent completely accurate ascertainment of their respective assets and liabilities in their subsequent bankruptcy justifies failure to make every reasonable endeavor to reach the best possible approximation in order to do justice to a creditor who had relied on the credit of one— especially to a creditor who was ignorant of the loose manner in which corporate affairs were being conducted. Equality among creditors who have lawfully bargained for different treatment is not equity but its opposite, and the argument for equality has a specially hollow ring when made by the United States whose priority over other creditors will necessarily be enhanced by having the assets of all these corporations thrown into hotchpot.
Neither of the precedents relied on goes so far. Judge Parker’s opinion in Stone v. Eacho, 127 F.2d 284 (4 Cir.), rehearing denied 128 F.2d 16, cert. denied 317 U.S. 635, 63 S.Ct. 54 (1942), upholding consolidation of the bankrupt estates of a Virginia corporation and its Delaware parent, stressed that the Virginia corporation carried on “no separate corporate activity of any sort,” 127 F.2d at 286, and demonstrated in detail that no creditor could possibly have done business with it in reliance on its credit —a demonstration not at all made in this case. The court rested its conclusion that all creditors should be treated in the same way on the lack of any “showing that business was done under that [Virginia] charter or that any of the creditors knew anything about it or relied on it in any way,” id. at 287-288 — this in contrast with a hypothetical case “where the subsidiary has been allowed to transact business as an independent corporation and credit has been extended to it as such on the faith of its ownership of the assets in its possession.” When a petition for rehearing urged that some creditors may actually have relied on the credit of the Virginia corporation, the court placed its denial, 128 F.2d 16, on the basis that if any creditors could prove such reliance— an extraordinarily unlikely possibility on the facts — they would be sufficiently protected by the statement in the original opinion that their claims should be heard in the consolidated proceedings, a reservation conspicuously lacking here. In Soviero v. Franklin Nat’l Bank, 328 F.2d 446 (2 Cir. 1964), the sole objectant was a bank which was proved to have regarded the subsidiaries and the parent as one. Indeed, although the argument and the opinion seem to have taken a wider range, examination of the record indicates the only adverse consequence of consolidation even on the bank was its bearing on the bank’s having secured repayment of a note of one such subsidiary endorsed by the parent through the latter's depositing a cheek in the subsidiary’s bank account after the parent’s petition was filed, thereby triggering a set-off that would have been unavailable if the parent had retained the funds. In contrast Commerce Trust Co. v. Woodbury, 77 F.2d 478 (8 Cir.), cert. denied, 296 U.S. 614, 56 S.Ct. 134, 80 L.Ed. 435 (1935), held that a court of equity will protect the rights of a creditor who relied on the credit of a subsidiary although the subsidiary was “[merely] an agency or department of the [parent].” While such considerations would have to yield to practicalities if even an approach to a proper accounting within the corporate group was impossible or prohibitively expensive, the situation here was not that aggravated.
I nevertheless join for affirmance on the ground of insufficient proof by Chemical that it or the bondholders for whom it is trustee relied on the separate credit of the mortgagor, Seatrade Corporation. Apparently their main reliance was on what they considered a valid mortgage of the ship and on Kulukundis’ guarantee. While the mortgage indenture itself is some evidence that the bondholders were relying on the named mortgagor if, for one reason or another, the mortgaged property did not adequately *849secure the debt, the Government’s proof of long continued intermingling of the affairs of the various Kulukundis companies required the Chemical to come forward with at least something more.