J. JOSEPH SMITH, Circuit Judge.
Gibraltor Amusements, Ltd., the alleged bankrupt, is the operator of numerous "Juke Box" routes on Long Island. The Wurlitzer Company, principal creditor of the alleged bankrupt for a sum exceeding $1,000,000, filed an involuntary petition in bankruptcy against Gibraltor in March of 1960. The petition alleged insolvency, numerous acts of bankruptcy and that the debtor had fewer than twelve creditors. Gibraltor's answer denied the claimed indebtedness, challenged Wurlitzer's standing on the ground that it had been the recipient of preferential payments and denied there
After a hearing, Referee Castellano decided all of the issues against the bankrupt. He held that the alleged debts and acts of bankruptcy had been amply proven, that Wurlitzer's petition was not a sham or a fraud on the court and that Wurlitzer, although secured for the larger portion of its claims, was an unsecured creditor for a sum far in excess of $500. Without deciding that certain installment payments made to Wurlitzer were preferential, the referee ruled that a preferred creditor has a "provable" claim so as to satisfy the requirements of § 59 sub. b, even though the claim is not "allowable" unless the preference is surrendered. Winkleman v. Ogami, 9 Cir., 1941, 123 F.2d 78. Cf. In re Automatic Typewriter & Service Co., 2 Cir., 1921, 271 F. 1. Finally, Referee Castellano found that Rae, Wadsworth and WAC all qualified as petitioning creditors and duly adjudged Gibraltor a bankrupt. On a Petition for Review to the District Court for the Eastern District of New York, Judge Bartels upheld the referee's findings in all particulars save the Rae petition. As to that, the court held that Rae's claim was "contingent as to liability," [187 F.Supp. 937] thereby disqualifying him as a petitioner. Because three petitioning creditors still remained, however, the court confirmed the adjudication of bankruptcy.
On appeal to this court, appellant has renewed all of his contentions below. There is absolutely no merit in most of them. The referee's various factual findings as to Gibraltor's insolvency, Wurlitzer's partially unsecured status and the existence of the Wadsworth debt are amply supported by the record; they surely are not "clearly erroneous" as they must be to warrant reversal. Margolis v. Nazareth Fair Grounds & Farmers Market, Inc., 2 Cir., 1957, 249 F.2d 221; Stim v. Simon, 2 Cir., 1960, 284 F.2d 58; In re Tabibian, 2 Cir., 289 F.2d 793. The only substantial question raised is the standing of WAC as a separate petitioning creditor.
Wurlitzer Acceptance Corporation is a wholly owned subsidiary of the Wurlitzer Company. It was incorporated in 1957 and its business has been the financing of sales of the parent's products. Although WAC appears to have dealt solely in the commercial paper of Wurlitzer, it has obtained its own bank financing — on the strength of its own credit. It has been a separate corporate taxpayer for the purposes of the Federal income tax. The evidence indicates that both parent and subsidiary have scrupulously honored the separate corporate form of the latter. WAC's claim is for almost $17,000 on two notes guaranteed by Gibraltor. The notes had been purchased from Wurlitzer long before the filing of the petition; there is absolutely no evidence of attempted subversion of the Bankruptcy Act.
For most purposes, the law deals with a corporation as an entity distinct from its shareholders. Traditionally courts will pierce the corporate veil "when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime." United States v. Milwaukee Refrigerator Transit Co., C.C.E.D.Wis.1905, 142 F. 247, 255; In re Belt-Modes, Inc., D.C. S.D.N.Y.1950, 88 F.Supp. 141; Rapid Transit Subway Construction Co. v. City of New York, 1932, 259 N.Y. 472, 182 N.E. 145. Although courts will sometimes disregard the separate entity where it has been used as a "front" or a "mere conduit" — the so-called alter ego doctrine — the present case with its complete absence of fraud and strict honoring of the corporate form as to assets and inter-corporate
Since ordinary principles of the law of corporations do not warrant the disregard of WAC's corporate identity here, it remains only to ascertain whether anything in the language or policy of the Bankruptcy Act demands such a result. Section 59, sub. b, 11 U.S.C.A. § 95, sub. b provides simply that "Three or more creditors who have provable claims liquidated as to amount and not contingent as to liability against any person * * * may file a petition to have him adjudged a bankrupt." "Creditor" is defined in § 1(11), 11 U.S.C.A. § 1(11) as follows: "`Creditor' shall include anyone who owns a debt, demand, or claim provable in bankruptcy * * *"
The aforecited language, far from being restrictive in its definition of the scope of permissible petitioners, is virtually all encompassing. The emergence of the wholly owned corporate subsidiary as a common business instrumentality is not a brand new phenomenon. While Congress has repeatedly added to and amended the Federal taxing laws to deal with problems posed by the multiple corporation means of doing business, it has not seen fit similarly to tinker with the Bankruptcy Act. The detailed ground rules for "counting creditors" laid down by § 59, sub. e, 11 U.S.C.A. § 95, sub. e indicate that the principal Congressional fear of abuse was not that a debtor would be too easily petitioned into bankruptcy — rather that through connivance with friendly creditors the insolvent debtor might be able unfairly to hamstring one or two large creditors. The courts have long evinced a disposition to honor the separate corporate entity in bankruptcy matters; Comstock v. Group of Institutional Investors, 1948, 335 U.S. 211, 68 S.Ct. 1454, 92 L.Ed. 1911; In re Belt-Modes, Inc., supra. If Congress meant to alter ordinary judicial rules governing corporations, it should have so provided specifically.
Whether the policy of the Act calls for a more narrow construction of qualified "creditors" is a closer question. The present requirement of three petitioning creditors, inserted in the Act of 1898, is a compromise between the quite liberal provision of the Act of 1841 and the restrictive requirements of the 1867 Act. 3 Collier on Bankruptcy 548. In the process of "counting to three," the courts have perhaps been overly liberal in allowing the holders of assigned claims to qualify as practitioners. See In re Bevins, 2 Cir., 1908, 165 F. 434, where the court allowed the petitions of two assignees who had taken claims for the specific purpose of making up the required statutory number. General Order 5(2), 11 U.S.C.A. following section 53, while recognizing assignees as petitioners, sets up a check against abuse of the assignment device by requiring an affidavit setting forth the particulars of the transfer.
FRIENDLY, Circuit Judge (dissenting).
With some regret as regards this particular bankrupt, I respectfully dissent from the conclusion that Wurlitzer and its wholly owned subsidiary, Wurlitzer Acceptance Corporation (WAC), may be regarded as two separate creditors for the purpose of § 59, sub. b of the Bankruptcy Act, 11 U.S.C.A. § 95, sub. b.
Assuming as I do that WAC had sufficient independence of its parent to be regarded as a separate corporation under state law in contract or tort litigation, Bartle v. Home Owners Co-Op, Inc., 1955, 309 N.Y. 103, 127 N.E.2d 832, or under federal law for income tax purposes, it does not follow that it is a creditor separate from its parent under § 59, sub. b. It is too often forgotten that whether a subsidiary corporation is to be deemed a separate entity "cannot be asked, or answered, in vacuo," Latty, The Corporate Entity as a Solvent of Legal Problems, 34 Mich.L.Rev. 597, 603 (1936); the issue in each case must be resolved by reference to the policy of the applicable statutory or common law rule. See, e. g., Hart Steel Co. v. Railroad Supply Co., 1917, 244 U.S. 294, 37 S.Ct. 506, 61 L.Ed. 1148; Chicago, etc., Ry. Co. v. Minneapolis Civic & Commerce Ass'n, 1918, 247 U.S. 490, 38 S.Ct. 553, 62 L.Ed. 1229. Although my brothers recognize that the requirement of three petitioning creditors in the Bankruptcy Act of 1898 (save where the bankrupt had less than twelve creditors) was a compromise by Congress between the divergent provisions of earlier statutes, that bland statement scarcely conveys the flavor. "In law also the emphasis makes the song," Bethlehem Steel Co. v. New York State Labor Relations Board, 1947, 330 U.S. 767, 780, 67 S.Ct. 1026, 1033, 91 L.Ed. 1234.
The first three bankruptcy acts, all repealed after relatively short periods, permitted a single creditor to initiate involuntary proceedings if his claim met the prescribed minimum.
The impulse for a new bankruptcy law came from the 200,000 business failures in the United States between the 1878 repeal of the 1867 Bankruptcy Act and 1898. Hardship had been particularly acute in the West, where a great land boom had raged from 1883 to 1889, followed by a sharp collapse. Southern and Western Populists began a crusade for at least a temporary voluntary bankruptcy law to relieve the large numbers of honest debtors from oppressive burdens and give them a fresh start in life. See Representative Sparkman of Florida, 31 Cong.Rec. 1850.
Although Eastern congressmen were willing to concede that voluntary bankruptcy was a good idea see Representative Parker (N.J.), 31 Cong.Rec. 1852, many of them were unwilling to enact a voluntary bill without accompanying involuntary features designed to insure an equitable distribution of a bankrupt's assets among his creditors, and, to that end, to abolish preferences. This the Populists opposed. They argued there was no need to infringe on state rights by creating a federal remedy for the collection of debts: state laws were adequate for the purpose. Bankruptcy was viewed as a stigma difficult to erase; it was one thing to allow a hopelessly burdened debtor to choose this disagreeable alternative as preferable to eternal debt but quite another to permit blood-thirsty creditors, with only their own interests at heart, to plunge an unwilling debtor into disgrace — the more so since in many cases the debtor reasonably might hope that the upturn in his fortunes was just around the corner, and bankruptcy would deprive him of the right to keep his business alive in the meantime. See 31 Cong. Rec. 1793 (Underwood, Ala.), 1838 (Settle, Ky.), 1863 (Linney, N. C.), 2313 (Sen. Stewart, Nev.). This position was summed up by Representative Lewis of Georgia, 31 Cong.Rec. 1908: "Voluntary bankruptcy is the means of the redemption of the unsuccessful and fallen debtor. Involuntary bankruptcy is a weapon in the hands of the creditor to press collections of debt harshly, to intimidate, and to destroy."
The provisions of the statute with respect to involuntary bankruptcy were the resulting vector of these opposing forces, an attempt to make involuntary bankruptcy less unpalatable to the Populists by surrounding such proceedings
Thus, the entire process that resulted in the enactment of the Act of 1898 was a pitched battle between those who wanted to give the creditor an effective remedy to assure equal distribution of a bankrupt's assets and those who were determined to protect the debtor from the harassment of ill-considered or oppressive involuntary petitions, including those by a single creditor interest. The requirement of three creditors was one of many provisions reflecting a compromise between the two opposing positions. It is not doing justice to this history to suggest that if Congress had meant to prevent a wholly owned subsidiary from being counted as a petitioning creditor separate from its parent, it should have explicitly said so.
Comstock v. Group of Institutional Investors, 1948, 335 U.S. 211, 68 S.Ct. 1454, 92 L.Ed. 1911, especially when read in the light of Taylor v. Standard Gas & Electric Co., 1939, 306 U.S. 307, 59 S.Ct. 543, 83 L.Ed. 669, does not support any view that a court of bankruptcy will regard parent and subsidiary as different entities semper et ubique; rather it held that on the facts the particular policy there applicable did not require that they be regarded as the same, as in the Taylor case to some extent the same policy had. Here we deal with a different policy — that only three distinct creditors may precipitate an involuntary bankruptcy of a debtor having more than twelve.