Court Opinion

ID: 9447976
Source: CourtListenerOpinion
Date Created: 2023-08-03 23:19:07.936665+00
Date Added: 2024-06-11T17:31:14.964060
License: Public Domain

FRIENDLY, Circuit Judge
(dissenting).
With some regret as regards this particular bankrupt, I respectfully dissent from the conclusion that Wurlitzer and its wholly owned subsidiary, Wurlitzer Acceptance Corporation (WAC), may be regarded as two separate creditors for the purpose of § 59, sub. b of the Bankruptcy Act, 11 U.S.C.A. § 95, sub. b.
Assuming as I do that WAC had sufficient independence of its parent to be regarded as a separate corporation under state law in contract or tort litigation, Bartle v. Home Owners Co-Op, Inc., 1955, 309 N.Y. 103, 127 N.E.2d 832, or under federal law for income tax purposes, it does not follow that it is a creditor separate from its parent under § 59, sub. b. It is too often forgotten that whether a subsidiary corporation is to be deemed a separate entity “cannot be asked, or answered, in vacuo,” Latty, The Corporate Entity as a Solvent of Legal Problems, 34 Mich.L.Rev. 597, 603 (1936); the issue in each case must be resolved by reference to the policy of the applicable statutory or common law rule. See, e. g., Hart Steel Co. v. Railroad Supply Co., 1917, 244 U.S. 294, 37 S.Ct. 506, 61 L.Ed. 1148; Chicago, etc., Ry. Co. v. Minneapolis Civic & Commerce Ass’n, 1918, 247 U.S. 490, 38 S.Ct. 553, 62 L.Ed. 1229. Although my brothers recognize that the requirement of three petitioning creditors in the Bankruptcy Act of 1898 (save where the bankrupt had less than twelve creditors) was a compromise by Congress between the divergent provisions of earlier statutes, that bland statement scarcely conveys the flavor. “In law also the emphasis makes the song,” Bethlehem Steel Co. v. New York State Labor Relations Board, 1947, 330 U.S. 767, 780, 67 S.Ct. 1026, 1033, 91 L.Ed. 1234.
The first three bankruptcy acts, all repealed after relatively short periods, permitted a single creditor to initiate involuntary proceedings if his claim met the prescribed minimum.1 Widespread sentiment against the 1867 Act, which not only allowed a single creditor to institute involuntary proceedings but provided for numerous acts of bankruptcy and, in the absence of creditor consent, denied a discharge from debts to a bankrupt who could not pay fifty cents on the dollar, MacLachlan, Bankruptcy (1956), p. 11, caused Congress to amend it in 1874, 18 Stat. 178, 181. In addition to making discharges less difficult to obtain and narrowing the acts of bankruptcy, the amendment provided that an involuntary petition could be filed only by one fourth of the total number of creditors with aggregate claims amounting to one third *27of the dollar amount of the total debts. Still the statute was too harsh for debtor sentiment, and it was repealed in 1878, see 3 Collier on Bankruptcy, p. 548.
The impulse for a new bankruptcy law came from the 200,000 business failures in the United States between the 1878 repeal of the 1867 Bankruptcy Act and 1898. Hardship had been particularly acute in the West, where a great land boom had raged from 1883 to 1889, followed by a sharp collapse. Southern and Western Populists began a crusade for at least a temporary voluntary bankruptcy law to relieve the large numbers of honest debtors from oppressive burdens and give them a fresh start in life. See Representative Sparkman of Florida, 31 Cong.Rec. 1850.
Although Eastern congressmen were willing to concede that voluntary bankruptcy was a good idea see Representative Parker (N.J.), 31 Cong.Rec. 1852, many of them were unwilling to enact a voluntary bill without accompanying involuntary features designed to insure an equitable distribution of a bankrupt’s assets among his creditors, and, to that end, to abolish preferences. This the Populists opposed. They argued there was no need to infringe on state rights by creating a federal remedy for the collection of debts: state laws were adequate for the purpose. Bankruptcy was viewed as a stigma difficult to erase; it was one thing to allow a hopelessly burdened debtor to choose this disagreeable alternative as preferable to eternal debt but quite another to permit blood-thirsty creditors, with only their own interests at heart, to plunge an unwilling debtor into disgrace — the more so since in many cases the debtor reasonably might hope that the upturn in his fortunes was just around the corner, and bankruptcy would deprive him of the right to keep his business alive in the meantime. See 31 Cong.Rec. 1793 (Underwood, Ala.), 1838 (Settle, Ky.), 1863 (Linney, N. C.), 2313 (Sen. Stewart, Nev.). This position was summed up by Representative Lewis of Georgia, 31 Cong.Rec. 1908: “Voluntary bankruptcy is the means of the redemption of the unsuccessful and fallen debt- or. Involuntary bankruptcy is a weapon in the hands of the creditor to press collections of debt harshly, to intimidate, and to destroy.”2 Thus the Populists denounced the bankruptcy bill as an “engine of oppression” (Sparkman, Fla., 31 Cong.Rec. 1851), “intended to bind hand and foot the debtors of this country and place them in the vise-like grip of the greedy cormorants of the country” (Henry, Tex., 31 Cong.Rec. 1803), and even tied the issue to the silver question, haranguing the “conspiracy of gold and monopoly” (Sen. Stewart, Nev., 31 Cong.Rec. 2359-60).3 Easterners countered that a properly restricted involuntary bankruptcy law was a benefit not only to creditors but to debtors as well. In the absence of such a law creditors become nervous; whenever the debtor’s assets seem less than his liabilities, they are likely to grab them precipitously, thereby forcing the debtor to the wall, lest other creditors beat them to the draw and they get nothing. 31 Cong.Rec. 1789 (Henderson, Iowa), 1852 (Parker, N. J.).
The provisions of the statute with respect to involuntary bankruptcy were the resulting vector of these opposing forces, an attempt to make involuntary bankruptcy less unpalatable to the Populists by surrounding such proceedings *28with careful safeguards for the debtor. The original bill in the 55th Congress, S. 1035, provided for three petitioning creditors if the total were twelve, just as in the present law. But in other respects the bill was too harsh toward debtors to suit the Senate. Although the substituted bill passed by that body, which reduced the number of criminal offenses, the acts of bankruptcy, and the causes for denying a discharge, permitted an involuntary petition to be filed by “a creditor or creditors having debts against such a bankrupt to the amount of $500 or more,” as in the acts prior to 1874, the House Judiciary Committee substituted a bill more like that originally introduced in the Senate. This bill was bitterly debated in the House for more than 100 pages in the Record. Its proponents attempted to sugar-coat the pill by repeated reference to a number of safeguards inserted to protect debtors from oppressive use of the weapon of involuntary bankruptcy: to be insolvent one must have assets insufficient to pay his debts, not merely insufficient liquid funds to meet debts as they fall due; oppressive costs of proceedings under the 1867 act had been drastically pruned; petitioning creditors were required to post bonds to cover not only the costs of the proceedings but any damages that might result from a wrongful filing; widows, minors and the insane were protected ; the bankrupt could be taken into custody only if he showed signs of departing to avoid examination; he might not be required to travel over 100 miles to testify; criminal offenses and acts of bankruptcy were reduced; and three creditors must join if there were twelve or more in all. H.R.Rep. No. 65, 55th Cong., 2d Sess., 25-27 (1897). An attempt was made by Representative Livingston of Georgia to require “that no man can be placed in bankruptcy except on a petition signed by two-thirds of his creditors representing two-thirds of the indebtedness,” 31 Cong.Ree. 1791. But Representative Henderson, chairman of the Judiciary Committee, which reported the substitute bill, responded that the-present bill “goes far enough, if not too-far, in restraining creditors from moving, having to give bonds with sureties.”' Ibid. The House passed this version; a conference committee toned it down in several respects to make it more favorable to the debtor; and both houses enacted the conference bill.
Thus, the entire process that resulted in the enactment of the Act of 1898 was. a pitched battle between those who wanted to give the creditor an effective remedy to assure equal distribution of a bankrupt’s assets and those who were determined to protect the debtor from the harassment of ill-considered or oppressive involuntary petitions, including those by a single creditor interest. The requirement of three creditors was one of many provisions reflecting a compromise between the two opposing positions. It is not doing justice to this history to suggest that if Congress had meant to prevent a wholly owned subsidiary from being counted as a petitioning creditor separate from its parent, it should have explicitly said so.4 We must “remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning.” Cabell v. Markham, 2 Cir., 1945, 148 F.2d 737, 739, affirmed 1945, 326 U.S. 404, 66 S.Ct. 193, 190 L.Ed. 165. Here the purpose to require three separate creditor interests, separate in reality and not merely in legal form, is not difficult to. discern. With the temper of the 55th Congress on this subject, it would have-required a bold man to arise on the floor of the House of Representatives and ask that the bill be clarified to insure that a corporation with a financing subsidiary *29could be counted as two creditors if each unit held a claim against the debtor; it is hard to suppose the House managers would have imperiled the bill by sanctioning any such proposal and quite impossible to believe it would have been enacted. Yet, where the words permit either interpretation, our duty is to determine “which choice is it the more likely that Congress would have made.” Burnet v. Guggenheim, 1933, 288 U.S. 280, 285, 53 S.Ct. 369, 370, 77 L.Ed. 748.
Comstock v. Group of Institutional Investors, 1948, 335 U.S. 211, 68 S.Ct. 1454, 92 L.Ed. 1911, especially when read in the light of Taylor v. Standard Gas & Electric Co., 1939, 306 U.S. 307, 59 S.Ct. 543, 83 L.Ed. 669, does not support any view that a court of bankruptcy will regard parent and subsidiary as different entities semper et ubique; rather it held that on the facts the particular policy there applicable did not require that they be regarded as the same, as in the Taylor case to some extent the same policy had. Here we deal with a different policy— that only three distinct creditors may precipitate an involuntary bankruptcy of a debtor having more than twelve.5 I cannot believe it consistent with that policy to hold that a single creditor corporation may insure its ability to initiate an involuntary bankruptcy by the simple expedient of organizing two financing subsidiaries — perhaps with independent creditors — and seeing to it that claims against each debtor are parceled out in advance of bankruptcy.6 See In re Supreme Tool & Mfg. Co., D.C.E.D.Wis.1956, 147 F.Supp. 158. Whether a wholly owned subsidiary with independent creditors might be deemed separate from its parent in a ease where, as a result of its own financial difficulties, the subsidiary was in effect acting for its creditors rather than its stockholders, need not be now determined; no such case is presented here.

. In the Act of 1800, 2 Stat. 19, the amount was $1,000; in the 1841 act, 5 Stat. 440, it was $500; in the 18C7 act, 14 Stat. 517, 536, $250.

. Seventy years earlier, in 1827, Martin Van Burén, denouncing an attempt to provide for voluntary and involuntary bankruptcy in a single statute, had said “It is an erroneous idea * * * that this bill can be made to serve God and mammon by combining two things totally at variance.” 3 Cong.Deb. 279.

. Some idea of the intensity of the feeling is conveyed by the remarks of Senator Stewart of Nevada against “this diabolical bill,” 31 Cong.Rec. 2312; “This bill comes from the class of men who are grinding the face of the poor * * * (2362). This is a bill which belongs to the Dark Ages. It belongs to the age of the Inquisition; it belongs to the age of witchcraft * * *. It is dictated by the same spirit that hung and killed and drew and quartered women for witchery” (2408).

. It should also be remembered that at common law a corporation could not hold stock in other corporations unless the power was expressly conferred; the extensive development of the use of subsidiaries apparently began witb the New Jersey Act of 1888, pp. 385, 445, conferring the power in general terms. See 1 Hornstein, Corporate Law and Practice, § 111.

. If my brothers’ reference to In re Bevins, 2 Cir., 1908, 165 F. 434 indicates a view that the decision in that case ought be reexamined, I wholeheartedly agree. However, it can stand without requiring an affirmance here.

. It could be said in such a case also that there was no evidence of abuse of the corporate form with a purpose fraudulently to subvert the Bankruptcy Act; bankruptcy of the debtor might have been the furthest thing from contemplation when the claims were placed and there may have been good business reasons for doing so.