In the Matter of Crofoot, Nielsen & Co., Alleged Bankrupt.continental Automobile Leasing Systems, Inc., Appellant, v. Crofoot, Nielsen & Co., and Nathan Yorke, Assignee for Benefit of Creditors, Appellees, 313 F.2d 170 (7th Cir. 1963)

The District Court affirmed an order of the Referee dismissing Continental's involuntary petition in bankruptcy. Continental has appealed.

Crofoot, Nielsen & Co. made a general assignment for the benefit of creditors and on August 30, 1961, Continental, through its secretary-treasurer Healy, filed, as a single creditor,¹  the involuntary petition against Crofoot. The Referee conducted a hearing on Crofoot's motion to dismiss the petition, alleging more than twelve creditors, Continental's answer, and affidavits of both parties. He concluded that there was no genuine issue of fact, and dismissed Continental's petition. No notice was given Crofoot's creditors before dismissal. The District Court affirmed the dismissal order, and this appeal followed.

The question is whether the District Court erred in affirming the order dismissing the petition without notice to Crofoot's other creditors.² 

11 U.S.C.A. § 95, sub. b (Supp.1961) provides that if all the creditors are less than twelve, a single creditor may file the involuntary petition. If "* * * less than three creditors have joined as petitioners therein, and the answer avers the existence of a large number * * * thereupon the court shall cause all such creditors to be notified * * * and shall delay the hearing * * * for a reasonable time, to the end that the parties in interest shall have an opportunity to be heard." 11 U.S.C.A. § 95, sub. d. But if a single creditor files a petition with knowledge that the allegation (less than twelve creditors) is false, the petition will be dismissed as a fraudulent attempt to confer jurisdiction upon the court where none exists and intervention "presumably" will be denied. 3 Collier on Bankruptcy 601-02 (14th ed. 1961). Navison Shoe Co. v. Lane Shoe Co., 36 F.2d 454 (1st Cir. 1929), Matter of Security Motor Co., 51 F. Supp. 559 (W.D. Mo. 1943), and In re Gibraltar Amusements, Ltd., 187 F. Supp. 931 (E. D.N.Y.1960) are cited to Collier's prophecy.

The Referee's conclusion was based on findings that Continental's petition alleged there were less than twelve Crofoot creditors; that Crofoot's affidavit listed more than a hundred creditors; that the number was not questioned by Continental; and that Continental's attorney was informed the day before the petition was filed that there were more than twelve creditors.

The Referee expressly stated there was no finding of fraud. The basis of his decision to dismiss appears to have been the "uncontroverted" list showing there were in excess of twelve creditors.

On review, the District Court did not expressly find fraud. It found that petitioner's attorney was told by bankrupt's attorney there were in excess of twelve creditors; and that Continental made no showing of the basis for its allegation, on information and belief, of "less than twelve." It concluded that petitioner and its attorney had no reason to believe there were less than twelve creditors.

The only finding relating to the implication of fraud by the District Court is that of the Referee regarding the conversation between the attorneys the day before the petition was filed. But when the Referee's order was entered, Continental's attorney, by affidavit, had raised an issue on what was said between the attorneys. In a somewhat disconnected connected hearing, the Referee heard testimony and statements of the attorneys, and expressly found, orally, that there was no fraud.³  The District Court had before it only the record of that proceeding.

We decide that there was not a sufficient hearing of the issue raised before the Referee; that there are not sufficient findings of fact upon which to support a conclusion that Continental's attorney knew the allegation "less than twelve" was false; and that there is no conclusion to justify dismissing the petition as a fraudulent attempt to confer bankruptcy jurisdiction on the court where none exists. 3 Collier on Bankruptcy 601-02 (14th ed. 1961).

If there was no fraud in filing of the petition, 11 U.S.C.A. § 95, sub. d required notice to other creditors. In re Plymouth Cordage Co., 135 Fed. 1000, 1007 (8th Cir. 1905), 3 Collier on Bankruptcy 601-02 (14th ed. 1961). If there was fraud⁴  notice was not required. This is a vital point on which a clearcut finding and conclusion must be made.

The judgment is reversed, and the cause remanded for further proceedings.

SWYGERT, Circuit Judge (dissenting.)

The verified petition for adjudication in bankruptcy filed by Continental against Crofoot contained the following allegation:

"Your petitioner, upon information and belief, states that the creditors of the Alleged Bankrupt are less than twelve (12) in number."

In the course of an examination before the referee, counsel for Continental admitted that the attorney for Crofoot had told him the day before the petition was filed that the alleged bankrupt had more than twelve creditors. He has also admitted that except for the information received from Crofoot's attorney the only basis for the allegation that on "information and belief" there were fewer than twelve creditors was a statement by his client that it had knowledge of only two additional creditors and that it "in no way knew or had cause to know as a fact that there were in excess of twelve qualified creditors of the alleged bankrupt."

The motion to dismiss the petition and for summary judgment by Crofoot was based on the ground that on the date of filing the involuntary petition the creditors of the alleged bankrupt were more than twelve in number, and that the petitioning creditor knew or had reasonable cause to knew that the said creditors were more than twelve in number. The motion was supported by affidavits. Attached to one affidavit was a list containing more than one hundred (100) persons, firms and corporations, all of whom were creditors of the alleged bankrupt when the petition was filed.

While it is true that the referee, in announcing his decision to grant the motion to dismiss stated that it was not based "on the ground of fraud or recklessly false allegations, but merely on the absence of any countervailing affidavit to that of H. Edward Koch, listing creditors who obviously are more than twelve," he prefaced the foregoing statement by saying, "I cannot find, from reading the pleadings and the affidavits that there was fraud on the part of the petitioning creditor beyond all peradventure." More importantly, the referee in his formal findings mentioned neither the existence nor absence of fraud.

The trial judge, in affirming the referee's order of dismissal, recognized the complete absence of any evidence offsetting the clear inference that petitioning creditor had reason to believe that there were more than twelve creditors when it filed the petition.¹ 

It would appear that this Court is holding that in the absence of a finding of fraud the referee is without authority to dismiss the petition. I do not think a formal finding either of fraud (at least one "beyond all peradventure"), or of reckless indifference is required. Navison Shoe Co. v. Lane Shoe Co., 36 F.2d 454 (1st Cir. 1929), clearly supports the decision of the trial judge.² 

Here, the petitioning creditor made the verified averment that "upon information and belief" there were less than twelve creditors despite the fact that the only affirmative information on the subject made available to it was to the contrary.

The decisions of the referee and trial judge are being reversed because their rulings failed (charitably perhaps) to include a formal finding that this was a fraudulent attempt to confer bankruptcy jurisdiction. In light of the facts, I do not think such ritualistic formality was necessary. I would affirm the District Court's order of dismissal.