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In re Lenrick Sales Inc.

decided: February 15, 1967.


Hastie, Ganey and Seitz, Circuit Judges.

Author: Seitz


SEITZ, Circuit Judge.

This is an appeal by certain unsecured general creditors ("appellants") from an order of the District Court which dismissed their petition for a review of the order of the Referee in Bankruptcy appointing a Trustee in Bankruptcy of his own choosing.

Appellants are three unsecured general creditors with claims presented at the first meeting of creditors totaling about $44,000.00 out of about $118,000.00 of such claims. They, along with certain other creditors with claims of about $62,000.00, sought through representatives to vote at the first meeting of creditors for their own nominee as trustee. The right of such representatives to vote was denied by the Referee under circumstances now developed.

On February 23, 1966, after an unsuccessful attempt at an arrangement under Chapter XI, Lenrick Sales Inc. ("bankrupt") was adjudicated a bankrupt and one Aaron Cohen was appointed receiver by the court. The receiver proceeded to liquidate the assets. On March 21, 1966, the first meeting of creditors was held. Unfortunately, no stenographic record was made of the proceedings.*fn1 The Referee's contemporaneous notes of the meeting are so scanty as to be substantially useless. A predictable controversy ensued as to what there occurred. However, we confine ourselves to the record and the reasonable inferences therefrom.

We do know from the Referee's notes that the bankrupt was examined. We think it fair to infer that representatives of a majority of creditors in both number and amount were present and attempted to vote for their own nominee. However, by an order dated March 21, 1966, the Referee appointed Cohen as Trustee. The printed portion of the caption of the order reading "Order Approving Appointment of Trustee" is stricken. The words "Appointment of Trustee by Referee" remain. Moreover, the order contains a recital that "The Creditors * * * failed to appoint a trustee".

The next development of record occurred on March 31, 1966 when the appellants filed with the Referee their petition for review of the March 21 order. 11 U.S.C.A. § 67(c). It contained numerous challenges to the legality and propriety of the Referee's actions. On April 14, 1966, the Referee filed his "Certificate of Order For Review" with the District Court. It contained a memorandum by the Referee and his findings of fact and conclusions of law ("report"). This was presumably done pursuant to 11 U.S.C.A. § 67(a) (8). Appellants challenge the legality of the filing of findings and conclusions by the Referee after he had the petition for review in hand. In view of our ultimate disposition of this case, we find it unnecessary to decide whether the procedure was here proper. We do recognize that there is a division of authority on this point. But we cannot help but note the obviously undesirable implications of such a practice. Certainly a more appropriate procedure could be adopted as part of the administration of the Bankruptcy Act.

The Referee's findings and conclusions here purport to support the March 21 order of appointment on the ground that Cohen "was duly nominated and elected by the claims on file and voted for him, which represented the majority in number and amount of the valid claims filed and allowed * * *". This finding is diametrically opposed to the ground given in the Referee's own March 21 order.

How did the District Court evaluate the Referee's order and subsequent report? By order dated May 17, 1966, for the reason given in his attached memorandum and pursuant to General Order 47, the District Court "adopted" the Referee's report and dismissed the petition for review, apparently without briefs or argument. In its accompanying memorandum the court said:

"The Referee having rejected the proxies of the New York Credit Men's Adjustment Bureau, Inc., and the creditors present not agreeing on the selection of a Trustee, the Referee acted to protect the interests of all creditors by himself appointing the Trustee. The parties before the Referee were in disagreement to say the least. It is to be noticed that the Referee did not accept the vote electing Aaron Cohen as Trustee, but himself named him as Trustee."

The quotation shows that the trial court adopted the ground for the March 21 order which appeared in the order itself, i.e., failure of creditors to appoint. In so doing, despite the statement that the report was "in all respects adopted", he necessarily rejected the Referee's finding of fact that Cohen was elected Trustee.

Since fundamentally this appeal attacks the validity of the Referee's March 21 order, we look to see whether it is sustainable on this record on the ground recited in that order and the affirming court order, viz., that the creditors failed to appoint a trustee. In this discussion we shall assume that the Referee's conclusion was based on his finding that a majority of creditors both in number and amount failed to vote.

Although it is not clear that it was raised at the meeting, let us assume that one reason for the Referee's refusal to accept the votes of appellants and others was that they were based on powers of attorney which, when read with the soliciting letters, did not authorize their holder to use them to vote for the election of the trustee in bankruptcy. We deal with this "finding" because it was the only "rational" basis given by the lower court for its affirmance of the ...

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