Ogden v. Gilt Edge Consol. Mines Co.

TRIEBER, District Judge

(after stating the facts as above). [1] On behalf of the respondents it is claimed that a petition to revise cannot be maintained in this action, but that the proper remedy was by appeal. The ground upon which this claim is based is that an adjudication in bankruptcy can only be reviewed upon appeal. Section 25al, Bankruptcy Act. But this is not a proceeding to review the adjudication, but the action of the District Court refusing to permit the petitioners to intervene for the purpose of making, a defense, the officers of the corporation fraudulently refusing to do so. Section 24b of the Bankruptcy Act gives the Circuit Courts of Appeal jurisdiction to revise in mailer of law the proceedings of courts of bankruptcy. We are of the opinion that an order of the bankruptcy court, granting or refusing to grant leave to a party to intervene for the purpose of contesting file grounds upon which an adjudication in an involuntary bankruptcy proceeding is sought, may be reviewed by the Circuit Court of Appeals on a petition to revise. This is clearly a proceeding in bankruptcy, as distinguished from a controversy arising in bankruptcy proceedings. A very able opinion on the distinction between proceeding in bankruptcy and controversies arising in bankruptcy proceedings will be found in Thompson v. Mauzy, 174 Fed. 611, 98 C. C. A. 457 (4th Ct.).

[2] The only cases in which an appeal can be taken in bankruptcy proceedings are those mentioned in section 25a of the Bankruptcy Act. Morehouse v. Pacific Hardware Co., 177 Fed. 337, 100 C. C. A. 647. This petition does not state any facts which brings it within either of the three causes mentioned there.

[8] The objection that the verification is insufficient is too technical and cannot be sustained. The answer was signed by the petitioners and, as certified by the notary public, they swore to it before him. This is all that is necessary. The petition for leave to> intervene states:

‘'Thai, the said company has filed no answer or appeared in connection with the said bankruptcy proceedings, and that your petitioners claim an interest as stockholders In said company, and pray leave to contest said petition in bankmptcy and deny the insolvency of the said company, and to submit the (liiesiiou of tlie solvency thereof to a jury, as more fully appears by the annexed proposed answer, which is hereby made a part of this petition.”

The allegations in the proposed answer are set out in the statement of facts herein and need not be repeated. The petition to intervene was not heard until January 9, 1915, and was then denied by tlie court. On the same day the petitioners filed a motion for leave to amend the proposed answer and intervention “by alleging in greater detail and with certainty the facts constituting fraud on the part of the directors and of the corporation in failing to defend against the petition in bankruptcy herein, and in filing an answer in behalf of the alleged bankrupt admitting its insolvency and consenting to its being adjudged a bankrupt” which was by the court denied. The answer on behalf of the corporation was filed on September 1, 1914, but entered nunc pro tunc as of August 21, 1914. It contained an admission of all the allegations of the petition for the involuntary proceeding and a consent that it be adjudicated a bankrupt.

[4j Bankruptcy proceedings are in the nature of proceedings in equity, and bankruptcy courts administer tlie law according to the spirit of equity. Bardes v. Hawarden Bank, 178 U. S. 524, 535, 20 Sup. Ct. 1000, 44 L. Ed. 1175; Lockman v. Lang, 132 Fed. 1, 6, 65 C. C. A. 621; Id., 128 Fed. 279, 62 C. C. A. 550, 555; In re Broadway Savings Trust Co., 152 Fed. 152, 81 C. C. A. 58.

[5] That stockholders of a corporation may, in equity, either sue for or defend on behalf of the corporation, if the directors fraudulently fail to do so, or where they are the beneficiaries of the action, is a well-recognized principle of equity jurisprudence. Hawes v. Oakland, 104 U. S. 450, 26 L. Ed. 827; Bronson v. La Crosse R. Co., 2 Wall. 283, 17 L. Ed. 725; In re Swofford Brothers D. G. Co. (D. C.) 180 Fed. 549, 553.

[0-8] Equity rule 27, formerly 94 (198 Fed. xxv, 115 C. C. A. xxv), which requires certain preliminary steps to be taken by the stockholder before.bringing his suit, will be dispensed with when the interests of the directors are antagonistic to those of the corporation, where this fact is shown by the pleadings. Delaware & Hudson Co. v. Albany & Susquehanna R. R. Co., 213 U. S. 435, 29 Sup. Ct. 540, 53 L. Ed. 862. The allegations in the petition for leave to intervene, and the proposed answer made a part thereof, clearly show such a condition of affairs as to justify stockholders to intervene and defend on behalf of the corporation, when the directors, charged with the protection of the corporate property, are adversely interested, and not only refuse to defend, but confess judgment, as is alleged in the proposed answer, and as is shown by the record to have been done. If the allegations in the proposed answer were not specific enough in charging fraud against the directors, a motion to make more specific would have been proper. But, in any event, when the petition for leave to intervene was denied upon that ground it was the duty of the court to permit an amendment when requested by the parties. It is well settled that in equity proceedings the parties are entitled to a reasonable time to amend their pleadings. A refusal to grant such leave is error. Files v. Brown, 124 Fed. 133, 142, 59 C. C. A. 403, 412; In re Broadway Savings Trust Company, supra.

The petition to revise is granted, and the order of the District Court, denying leave to petitioners to intervene and leave to amend the proposed answer, will be set aside, and the District Court directed to proceed in conformity with the views set forth in this opinion.