Skubinsky v. Bodek

BRADFORD, District Judge. This is a petition for the review of an order of the District Court of the United States for the Eastern District of Pennsylvania, made November 12, 1908, granting a special reference with power to the referee “to take testimony, summon and require the attendance of witnesses, and demand the production of such books, papers, documents and other articles as may be required in the investigation of the matters pertaining to the business and conduct of the alleged bankrupt aforesaid, and all other persons with whom he may have transacted business, or in connection with whom he may have committed unlawful acts.” The respondents in the petition for review filed a petition in involuntary bankruptcy against Fritz Sku-binsky November 3, 1908, alleging, among other things, that he was insolvent; that he had transferred, concealed and removed, and permitted to be concealed and removed a large portion of his personal property with intent to hinder, delay and defraud his creditors; and that while insolvent he had transferred a sum of money to certain of his creditors, named in the petition, with the intent to prefer them over his other creditors. On the filing of the petition in bankruptcy it was ordered that Skubinsky should appear in the court below November 18, 1908, and show cause why the prayer of the petition should not he granted, and further that a copy of the petition together with a subpoena should he served on him. A* subpoena, returnable November 18, 1.908, together with a copy of the petition, was duly served November 6, 1908. W. Bodek was on the day of filing the petition appointed receiver of the assets and effects of Skubinsky and authorized and directed to cause an inventory and appraisement of such assets and effects as may come into his possession to be made and to apply to the court “for leave to take such action as to the administration of the estate as may seem meet and proper,” and it was ordered that the alleged bankrupt should “forthwith turn over and deliver to the said receiver all books, papers, deeds and documents bearing upon or relating to his business and affairs.” The receiver presented November 12, 1908, a petition on which the order complained of was granted, setting forth: “That he is the receiver in the above entitled case, and has duly qualified. That your petitioner is informed, believes and expects to he able to prove that within the last week preceding: the filing of the petition in bankruptcy in this matter, the alleged bankrupt' above named and numerous other persons acting-in collusion with him, were guilty of removing and concealing properly and assets of the said alleged bankrupt. That it is essential for the interests of this estate that an investigation be commenced immediately for the purpose of discovering what disposition has been made of the assets which were in the possession of the alleged bankrupt immediately before the filing of the petition in bankruptcy, aud of attempting to regain for the interest of this estate assets which have been unlawfully and fraudulently concealed and removed. Petitioner represents that the delay inch tour to an adjudication and the calling of a meeting of creditors before a referee upon the usual notice would render practically impossible the proper investigation of the fraudulent acts which have been committed in and about the various attempts which have been made to remove and conceal the assets which lawfully belong to this estate.” [334] It appears from the record that the order complained of was granted before Skubinsky made answer to the petition in involuntary bankruptcy, or in any manner raised an issue, either of law or of fact, with respect to its averments, and six days before the time fixed for the showing of cause why the prayer of that petition should not be granted, and thirteen days before Skubinsky was adjudicated a bankrupt. There are three assignments of error, each of them challenging the legality of the order of special reference. The last reads as follows: “That the learned judge of the. District Court erred in granting the special reference before the adjudication of the alleged bankrupt and before his estate was in process of administration.” Section 21a of the bankruptcy act (Act July 1, 1898, c. 541, 30 Stat. 553 [U. S. Comp. St. 1901, p. 3430]), as amended February 5, 1903 (Act Feb. 5, 1903, c. 487, § 7, 33 Stat. 798 [U. S. Comp. St. Supp. 1907, p. 1038]), provides, among other things, as follows: “A court of bankruptcy may, upon application of any officer, bankrupt, or creditor, by order require any designated person, including the bankrupt and his wife, to appear in court, or before a referee or the judge of any state court, to be examined concerning the acts, conduct or property of the bankrupt whose estate is in process of administration under this act.” The authority conferred by this section to grant a reference for the purpose of throwing light on “the acts, conduct or property of the bankrupt” is limited to the case of one “whose estate is in process of administration under this act.” While by virtue of section 1 of the act the term “bankrupt” may include a person against whom an involuntary petition has been filed as well as one who has been adjudged a bankrupt, section 21 contains the significant and unambiguous words “bankrupt whose estate is in process of administration under this act.” We do not think that the appointment and qualification of the receiver and his exercise of official functions before the adjudication of Skubinsky as a bankrupt and, indeed, before the return of the rule to show cause or the presentation of any issue of law or fact in the case, can be tortured into process of administration of his estate under the act. It did not appear when the order of special reference was made that he ever would be adjudged a bankrupt. The appointment of receivers in bankruptcy can be justified only where it shall be found “absolutely necessary, for the preservation'of estates, to take charge of the property of bankrupts aft,er the filing of the petition and until it is dismissed or the trustee is qualified.” Such a receivership certainty up to the time of an adjudication is purely a .precautionary measure. Until after an adjudication the function of a receivership is not administrative of the estate in bankruptcy, but solely preservative. And this is equally true whether receivers in bankruptcy are or are not authorized by the court to conduct the business of alleged bankrupts for limited periods. While such authority can be conferred upon receivers only “if necessary in the best interests of the estates,” the granting of such authority and action thereunder prior to an adjudication of bankruptcy can in no legitimate sense be deemed process of administration of the estate under the act. [335] It doubtless is true that a receiver may be authorized by the court, even before an adjudication, to collect and secure possession of moneys and other property belonging to the alleged bankrupt; but such action on the part of the receiver before an adjudication does not constitute or involve “process of administration under this act.” It is simply gaining control of the estate which is to be subjected to the process of administration if an adjudication of bankruptcy shall be made. If the appointment of a receiver before adjudication per se constitutes process of administration and no adjudication be made the remarkable result is presented of a process of administration, and consequently a partial administration, in bankruptcy, of the estate of the alleged bankrupt where absolutely no beneficial object or purpose of the bankruptcy act can by any possibility be effected. The special reference before adjudication to inquire into “matters pertaining to the business and conduct of the alleged bankrupt,” was premature, inquisitorial and not to be tolerated. Common fairness requires that the alleged bankrupt before being subjected to such a proceeding and before any order can properly be made in that behalf, should have the opportunity to make defense to the petition seeking his adjudication as a bankrupt. We are not aware of any provision in the bankruptcy act when fairly construed which justifies the order of special reference now before us. The order must, therefore, be reversed, with costs, and it is so ordered.