In re C. W. BARTLESON CO. (District Court, S. D. Florida. August 14, 1917.) No. 1527. 1. BANKRUPTCY 95-REFERENCE TO MASTER. While in involuntary proceedings the question of bankruptcy must, 2. BANKRUPTCY 95-REFEREE IN BANKRUPTCY AS MASTER-QUALIFICATION. 3. BANKRUPTCY 95-REFERENCE TO MASTER-SHOWING AND NOTICE. Bankruptcy proceedings being governed by the practice in equity, refer- In Bankruptcy. In the matter of the C. W. Bartleson Company, Haley & Heintz, of Jacksonville, Fla., for petitioning creditors. CALL, District Judge. This cause comes on to be heard upon the The first order refers the issues made by the petition for involun- The motion to vacate said orders sets out four grounds: (1) That For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes be appointed such special master. (4) That said orders of reference were made without notice to the bankrupt. [1] The first two grounds were argued together, and the case of King v. Bank of Whiting, 179 Fed. 694, 103 C. C. A. 240, was cited and relied on to sustain the bankrupt's position. There can be no question but what the question of bankruptcy vel non must, under the provisions of section 18, subd. "d," of the Bankruptcy Act, be decided by the District Judge. The referee as such has no jurisdiction to make such decision; and under the circumstances of the case of King v. Bank of Whiting, supra, the question of the jurisdiction of the court should have been first decided, before proceeding to take testimony on or hear the issues made on the question of bankruptcy. This was a petition to revise the order of the District Judge refusing the bankrupt this orderly procedure. The court emphasizes this view, when it says, on page 696: "Orderly procedure required, as we believe, its determination by the District Judge as a condition precedent to inquiry upon the other issues of fact raised by the pleadings. Direct hearing of the testimony upon an issue of such nature would seem desirable; but if that course is impracticable, reference to a ministerial officer to take and report such testimony cannot rightly extend the hearing as well to the subordinate issues, not open to inquiry until jurisdiction to proceed therein is ascertained and found by the District Judge." The court uses this language, following the above, as follows: "The court can confer no authority upon the referee (as master or otherwise) to decide these issues, nor to rule thereon either finally or temporarily." But I cannot believe that this last sentence quoted was intended to be taken literally without reference to the context, but when read with the context means that until the determination of the question of jurisdiction the District Judge could not refer the other issues made by the pleadings. The question of jurisdiction must first be decided. Unless such was the meaning of the court, then this decision would hold that, no matter what the condition of the business before the court, the judge must sit and hear the witnesses in every involuntary bankruptcy, and this view is contrary to the language of this particular case, and the cases of In re Lacov, 134 Fed. 237, 67 C. C. A. 19, and Clark et al. v. American Manufacturing & Enameling Co. et al., 101 Fed. 962, 42 C. C. A. 120. References to masters to take testimony and report same with findings of fact and law are recognized by equity rule 59, and no one would claim that by such reference the chancellor abdicated the duty to decide the questions involved. As said by the court in Re Lacov, supra: "This method of taking testimony is the usual one in courts of equity, and the act does not provide that all the testimony shall be taken in the presence of and hearing of the judge." Unquestionably it is much better and more satisfactory to the judge, if the dockets of the court would permit of the judge hearing the witnesses in all cases triable before him; but I apprehend that there are few, if any, districts where the same can be done, and certainly not in this district. Therefore such references are necessary and usual to dispatch the business before the court, and are not inhibited by the Bankruptcy Act. [2] The third ground of the motion is based on the idea that the master appointed, being the referee in bankruptcy, is interested in having the bankrupt adjudicated a bankrupt, because in that event he would be entitled to fees as referee in addition to his fees as such master. The universal procedure in cases of this kind is for the testimony of witnesses appearing before the master to be taken stenographically, and, unless waived by the parties in interest signed, by such witness after being transcribed into longhand, and this testimony, together with the exhibits, if any, filed by the parties, reported to the court, together with the findings of fact and law by the master; his findings of fact and law being merely advisory to the court. The testimony is what the judge makes his findings and judgment on. Therefore the third ground of the motion appeals with little force to me. The pride of opinion and desire to have his findings approved by the judge upon his consideration of the evidence and the law would more than counteract any tendency to find the involuntary petition sustained because of any probable fees the referee might thereafter earn. There is no such interest as would disqualify the referee to be appointed master in bankruptcy cases. [3] I come now to the fourth ground of the motion. These references were made without notice to and without the consent of the bankrupt. Rule 59 (198 Fed. xxxv, 115 C. C. A. xxxv) provides: "Save in matters of accounting a reference to a master shall be the exception, not the rule, and shall be made only upon a showing that some exceptional condition requires it." Rule 46 (198 Fed. xxxi, 115 C. C. A. xxxi) requires: "In all trials in equity the testimony of witnesses shall be taken orally in open court except as otherwise provided by statute or these rules." Rule 47 (198 Fed. xxxi, 115 C. C. A. xxxi): "The court ** for good and exceptional causes for departing from the general rule to be shown by affidavit may permit the deposition of named witnesses * to be taken before an examiner or other named officer, upon notice and terms specified in the order." Bankruptcy proceedings being governed by the practice in equity, it seems to me that an appointment of a master in a bankruptcy case to take testimony and make report of his findings, etc., should only be made upon notice and the showing required by rule 59. The late equity rules adopted by the Supreme Court were framed with this in view, that the judge would sit and hear the witnesses, and, as before. said, where this is possible, it is much the most satisfactory way. But rules 59, 46, and 47 recognize that conditions may be exceptional, and such a rule cause delay rather than expedition, as was intended and provided for the appointment of masters, commissioners, and examiners. In the instant case no showing was made before the order of reference was made, and no notice given to the bankrupt. For this reason the motion to vacate said orders should be granted. It has been the usual course in this district that such orders should be made, and parties have heretofore acquiesced in the same; but that is no reason why an unauthorized practice should be continued. An order granting the motion to vacate the orders of reference will be entered. In re LA JOLLA LUMBER & MILL CO. (District Court, S. D. California, S. D. June 18, 1917.) No. 2608. 1. BANKRUPTCY 3421⁄2-CLAIMS-REVIEW OF REFEREE'S RULINGS. On review of an order of the referee allowing a claim in part, error cannot be predicated on the sustaining of objections to questions, where the referee was not at the time informed concerning the evidence which it was proposed to elicit. 2. BANKRUPTCY 3421⁄2-CLAIMS-REVIEW OF REFEREE'S RULINGS. On review of an order of the referee allowing a claim, the referee's findings, sustained by evidence, will be upheld. 3. BANKRUPTCY 326-CLAIMS-SET-OFF AND COUNTERCLAIM. The liability of a creditor of a bankrupt corporation on an unpaid stock subscription is not a debt or liability which may be set off against the claim of the creditor, under Bankr. Act July 1, 1898, c. 541, § 68, 30 Stat. 565 (Comp. St. 1916, § 9652), providing that, in cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor, the ac count shall be stated and one debt set off against the other, as the stock subscription liability is a trust fund, and must be collected and distributed pro rata to all creditors, even though there is only one delinquent stockholder. 4. CORPORATIONS 351—LIABILITY OF DIRECTORS-FORM OF REMEDY. Under Civ. Code Cal. § 309, providing that the directors of corporations must not create debts beyond the subscribed capital stock, and that for a violation thereof the directors under whose administration it may have happened are in their individual capacity jointly and severally liable to the corporation and its creditors to the full amount of the debt contracted, the liability of a director can only be enforced by a bill in equity, wherein all the facts and parties are brought before the court. 5. BANKRUPTCY 326-CLAIMS-SET-Off and COUNTERCLAIM. Where the creditor of a bankrupt corporation was liable as director, under Civ. Code Cal. § 309, such liability was a trust fund for the benefit of all creditors ratably, and could not be set off against the creditor's claim.. 6. BANKRUPTCY 288(1)-COLLECTION OF ASSETS-FORM OF REMEDY. The liability of a creditor of a bankrupt corporation on his unpaid stock subscription and as director, under Civ. Code Cal. § 309, should be determined by a plenary action, in which all existing equities may be properly regarded. 7. ESTOPPEL SITION. ~68(4)—DEFENSES INCONSISTENT WITH PREVIOUS CLAIM OR PO A creditor of a bankrupt corporation, contending that his liability as a director in the corporation must be established in a plenary action, will be estopped from claiming that it should have been adjudicated upon the allowance of his claim. For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes 8. BANKRUPTCY 360-DIVIDENDS-WITHHOLDING PAYMENT. Where a creditor of a bankrupt corporation is liable on an unpaid stock subscription and as director in the corporation, the dividends on his claim will not be paid, pending an adjustment of his liability. In Bankruptcy. In the matter of the La Jolla Lumber & Mill Company, bankrupt. On review of an order of the referee allowing a claim in part. Order confirmed, and objections to the claim dismissed without prejudice. R. L. Horton, of Los Angeles, Cal., for one of the largest creditors. Johnson Puterbaugh, J. C. Hizar, and Chas. G. Briggs, all of San Diego, Cal., for trustee. Gibson, Dunn & Crutcher, of Los Angeles, Cal., and Ward, Ward & Ward, of San Diego, Cal., for claimant. TRIPPET, District Judge. B. B. Harlan presented a claim to the referee for allowance. The trustee objected to the allowance of the claim, and filed written specifications of his objections. The referee disallowed some of the items of the claim, but allowed the claim for the sum of $9,532.41. The matter comes before the court on a petition of the trustee to review the order of the referee allowing the claim. [1, 2] I will consider the specifications of error in the order in which they appear in the petition for review. The first assignment of error is that the referee erred in sustaining objections to certain questions. When the objections were made to questions, the referee was not informed concerning the evidence which the trustee proposed to elicit by asking said questions. The court, therefore, cannot determine that the referee erred in sustaining the objections. The alleged error to the effect that the claim was not sufficient in form is not well taken. No reason was pointed out in argument to the court why the claim was not sufficient in form. The claim that the burden of proof was on the trustee is immaterial. Concerning the question as to whether the claim is barred by the statute of limitations, the referee having decided that the evidence showed that the claim was not based on a stated account, and there being evidence to sustain it, the court will uphold the findings of the referee. The same is also true of the claim that the corporation was a "self-serving" corporation, whatever that may mean. There are two matters presented by this record that are worthy of particular comment: (1) Did the trustee have a right to plead as a setoff or counterclaim the alleged liability of the claimant for unpaid subscription to the capital stock of the company? (2) Did the trustee have a right to plead as a set-off or counterclaim the alleged liability of the claimant created by section 309, C. C., wherein it is provided that the debts of the corporation shall not exceed the subscribed capital stock of the corporation, and making the directors liable for violating said section? [3] The first proposition has been considered by the Supreme Court of the United States, and by other federal courts, and it has been uni For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes |