Court Opinion

ID: 9451156
Source: CourtListenerOpinion
Date Created: 2023-08-04 17:08:03.291265+00
Date Added: 2024-06-11T17:32:35.473086
License: Public Domain

BARNES, Circuit Judge
(dissenting).
I respectfully disagree and dissent.
Appellants insist that the Bankruptcy Act expressly directs that the appropriate schedules of the alleged bankrupt only be submitted after it is determined that the respondent is in fact a bankrupt within the meaning of the Act. Appellants cite as authority for this proposition the provisions of 11 U.S.C. § 25(a)(8) and (9).
Section 25(a)(8) reads in pertinent part as follows:
“a. The bankrupt shall * * * (8) prepare, make oath to, and file in court within five days after adjudication, if an involuntary bankrupt, * * * a schedule of his property, showing the amount and kind of property, the location thereof and its money value, in detail; and a list of all his creditors * *
Paragraph (9) of section 25, sub. a reads in pertinent part as follows:
“(9) [The bankrupt shall] file in triplicate with the court at least five days prior to the first meeting of his creditors a statement of his affairs * * *»
Appellants note, with regard to paragraph 9, that a first meeting of creditors cannot be held less than ten days after adjudication.
On the basis of these two statutory provisions, appellants assert that the referee improperly ordered them to submit appropriate schedules prior to adjudication. Appellants contend that until they are adjudged bankrupt no invasion of the privacy of their business affairs is warranted.
I cannot agree with appellants’ construction of the Act, based as it is upon extractions from the Act of certain provisions to the exclusion of others which are of direct relevance. In particular, appellants disregard the express language of 11 U.S.C. § 21(d), which notes the importance of discovery procedures prior to adjudication in assisting in the just determination of whether in fact one is a bankrupt. This provision reads as follows:
“(d) Whenever a person against whom a petition has been filed alleging the commission of the second, third, or fifth act of bankruptcy takes issue with and denies the allegation of his insolvency or his inability to pay his debts as they mature, he shall appeal in court on the hearing, and prior thereto if ordered by the court, with his books, papers, and accounts, and submit to an examination and give testimony as to all matters tending to establish solvency or insolvency or ability or inability to pay his debts as they mature and, in case of his failure so to do, the burden of proving solvency or ability to pay his debts as they mature shall rest upon him.” (Emphasis added.)
This provision vests in the bankruptcy court the power, in its discretion, to order the production of relevant documents prior to adjudication. The policy behind the provision is consistent with the general well-reasoned policy of the federal courts to encourage liberal use of pretrial discovery procedures. As noted by the court in In re Robert T. Cochran & Co., 44 F.2d 417 (S.D.N.Y.1930):
“The petitioning creditors will be at a serious disadvantage unless in advance of the trial they have information as to the financial condition which the alleged bankrupt expects to prove.”
The legislative history of section 3(d) (11 U.S.C. § 21(d)) reinforces appellees’ assertion that the bankruptcy court can compel submission of relevant documents prior to adjudication. The pertinent statement of the House Judiciary Committee, 75th Cong. 1st Sess., on H.R. 6439 (subsequently amended, reintroduced and reported as H.R. 8046), p. 7, was quoted in In re Shulund, 210 F.Supp. *781195, 198-199 (D.Mont.1962), a case dealing with the identical questions presented by this appeal:
“In all cases where the question of insolvency is involved, the courts should have the discretion to require to be filed in advance of the trial, either by a jury or by the court, a verified list in detail showing the debtor’s admitted assets and liabilities and to make provisions for the inspection of the books, accounts, and papers of the alleged bankrupt by the petitioning creditors in advance of the trial, as in equity rule No. LYIII. This would greatly shorten the length of the trial, especially before a jury, and avoid the present system where, in a complicated case, testimony must necessarily be taken at the trial upon many immaterial matters before the real facts can be ascertained as to the details of the debtor’s financial condition. Creditors usually do not and cannot be expected to have a full and comprehensive knowledge of the bankrupt’s affairs. The effect would be that at the trial the court or jury, upon the question of insolvency, would have immediately before it all admitted assets and liabilities, leaving only to be determined the question of values.” (Emphasis added partly by district court and partly by the undersigned.)
Contrary to appellants’ position, I find nothing in section 3(d) which conflicts in any manner with the provisions cited by appellants for the proposition that the pertinent statements must be filed after adjudication. Sections 7a (8) and (9) address themselves to an entirely different issue from that dealt with in section 3(d). The provisions cited by appellants state only that the pertinent statements must be- filed within the stated time so as to facilitate the administration of the bankrupt estate after adjudication. Section 3(d), on the other hand, seeks to facilitate the proceedings by discovering whether there should be an adjudication of bankrupcty in futuro. The referee is aided in this determination by being able, if he so wishes, to compel the production of relevant data, including lists of assets and liabilities, if not “schedules and forms.” I think this distinction in what must be prepared — a “list” plus “inspection,” visa-vis a “schedule and/or forms” — is a distinction without a difference; based at best on form and not substance. I believe the referee in the matter at bar acted well within his authority in making his order of September 10, 1963, requiring the appellants to file their schedules of assets and liabilities and statements of affairs prior to adjudication.
The second question raised by appellants relates to the propriety of a contempt penalty for failure to comply with the referee’s order. It is not required to be answered by the majority opinion. It should be answered, in my view of the case. Appellees cite section 41 of the Bankruptcy Act (11 U.S.C. § 69) as authority for the district court holding that the alleged bankrupt was in contempt for failure to produce pertinent schedules as ordered. This contempt provision of the Bankruptcy Act states that “a person shall not, in proceedings before a referee, * * * (3) neglect to produce, after having been ordered to do so, any pertinent document * * In the absence of any conflicting statutory matter, I agree that section 41 authorizes a contempt citation for failure to comply with the referee’s direction to produce documents.
Appellants urge, however, that appellees, in citing the general contempt provisions of section 41, fail to consider the specific statutory provision concerning production of documents prior to adjudication (section 3(d)), the same provision which appellees rely upon as authorization for pre-adjudication discovery procedures. As noted above, section 3(d) expressly states that a failure to produce pertinent schedules, as directed by the referee, shall result in the transfer of the burden of proof to the alleged *782bankrupt on the question of solvency. The section provides:
“[I]n case of his [the alleged bankrupt] failure so to do [to produce the requested documents], the burden of proving solvency or ability to pay his debts as they mature shall rest upon him.”
The case of In re Shulund, supra, considered the relationship of section 3 (d) to the general penalty provisions of Rule 37 of the Federal Rules of Civil Procedure. That court ruled that section 3 (d) imposed an explicit sanction which must take precedence over the broad power of the bankruptcy court to hold a party in contempt for failure to comply with a lawful order. The court stated:
“In view of the express provisions of section 3, sub. d, the sanctions imposed by Rule 37, F.R.C.P. to enforce compliance with discovery procedures are not applicable. The Federal Rules of Civil Procedure must give way when they, or portions thereof, are inconsistent with express provisions of the Bankruptcy Act.” 210 F.Supp. at 199.
I cannot agree with the district court’s disposition in Shulund to read multiple penalty provisions as mutually exclusive sanctions. I must readily concede that section 3(d) expressly addresses itself to the specific consequences that attach to an alleged bankrupt’s refusal to comply with an order to produce documents. And it is a consequence that could not be created by an order punishing for contempt. This provision is indeed more precise in its application to the facts at hand than is the general contempt authorization contained in 11 U.S.C. § 69. But no reason is stated by appellants, nor by the district court in Shulund, why the sanctions imposed by both cannot be applied. Section 3(d) clearly compels a shift of the burden of proof on the question of solvency to the alleged bankrupt who refuses to comply with the production order. But section 3(d) does not state that this is the sole penalty to be imposed on a party who refuses to heed an order of a district court. Nor does the contempt provision of 11 U.S.C. § 69 carve out an exception from its otherwise plenary application for the situation to which section 3(d) is addressed.
The referee in bankruptcy in the present controversy decreed that certain documents were necessary to facilitate the determination of whether respondent was in fact a statutory bankrupt. This disregard of the order of a duly-authorized arm of the judiciary offends the dignity of our judicial system and interferes with the expeditious resolution of matters pending in our overly-crowded courts. In the face of such an affront, I conclude that a contempt citation is a penalty available to the district court in the proper exercise of its discretionary powers. Moreover, as indicated above, the availability of this sanction in no way impedes the operation of section 3(d) which, by statutory mandate, shifts the burden of proof on the question of solvency to the noncomplying alleged bankrupt.
To my mind, the order of the district court should be affirmed.