In re Naftalin & Co. (315 F. Supp. 463, 1970)

NEVILLE, District Judge.

February 10, 1970, three brokerage houses, Merrill Lynch, Pierce, Fenner & Smith of New York; Paine, Webber, Jackson & Curtis of New York; and Piper, Jaffray & Hopwood, Incorporated of Minneapolis filed a petition in bankruptcy alleging “provable claims * * * amounting in the aggregate to $500.00 * * * ” and seeking to have Naftalin & Co., Inc., a Minnesota corporation at one time engaged in the stock brokerage business, adjudged an involuntary bankrupt. February 18, 1970, eight days later, three other brokerage houses, H. S. Kipness & Co. of Chicago; Donaldson, Lufkin & Jenrette, Inc. of New York; and Francis I. duPont, of New York City filed a separate petition with similar allegations and seeking the same relief. Normally, under this court’s general order of August 5, 1964 entered pursuant to 11 U.S.C. § 45, the clerk of court automatically would have referred these cases to a Referee in Bankruptcy for his attention and determination. Naftalin & Co. however answered the petitions denying its insolvency and timely demanded a jury trial.

11 U.S.C. § 42 provides:

“(a) A person against whom an involuntary petition has been filed shall be entitled to have a trial by jury in respect to the question of his insolvency, except as herein otherwise provided, and of any act of bankruptcy alleged in such petition to have been committed, upon filing a written application therefor at or before the time within which an answer may be filed.” [Emphasis added.]

The local Bankruptcy Rules for the United States District Court for the District of Minnesota provide:

“In case a jury trial is demanded, as provided by Section 19 of the Bankruptcy Act, the clerk shall place the ease on the next jury trial calendar in the division in which the ease is pending, unless otherwise ordered by the judge.” [Rule 23]

Both groups of creditors have moved the court for a summary judgment under Rule 56 of the Federal Rules of Civil Procedure, asserting that there exists no material issue of fact as to Naftalin & Co.’s insolvency and that it committed an act of bankruptcy. They cite in support of their contention numerous previous admissions by Naftalin & Co. of its insolvency. Additionally, and preferably from the petitioner’s standpoint after the court has adjudicated Naftalin & Co. a bankrupt, the petitioning creditors request that the case be referred to the referee in bankruptcy for all further proceedings. To the contrary of its demand for a jury trial, the alleged bankrupt Naftalin & Co. has moved the court for a dismissal of both petitions asserting lack of this court’s jurisdiction.

In the orderly administration of justice all bankruptcy matters normally should be presented first to a referee in bankruptcy and issues of law and fact there determined. Consequently in this case if there be no genuine fact issue for determination by a jury, the court does not believe that it should determine ab initio Naftalin & Co.’s solvency or insolvency, nor should the court adjudicate it a bankrupt if insolvency is determined. A Referee has expertise in bankruptcy matters and should consider and determine cases in the first instance, subject of course to a review by this court when the appropriate steps have been taken to bring the same before the court. Consequently this court need not in the first instance pass on the issue of whether as a matter of law a summary judgment adjudicating bankruptcy may or should be entered pursuant to Rule 56 of the Federal Rules of Civil Procedure, but rather should confine itself solely to a determination of the more narrow issue as to whether or not under 11 U.S.C. § 42 there is a question present for determination by a jury; for if there is not, then this court should take no action and merely enter an order of reference to a Referee in Bankruptcy.

The controversy in the case at bar arises from certain transactions had between Naftalin «fe Co. and some 23 various firms of stock brokers, six of whom are petitioners herein, in late July and August 1969. Naftalin sold “short” certain securities — that is sold securities which it did not then own. It never delivered the stock it had ordered sold to cover the “short” sales and as a result defendant became what is know in the stock brokerage vernacular as a “fail.” Meantime, pursuant to requirements of law, the brokerage houses procured or “lent” stock to deliver to the purchasers to make good Naftalin & Co.’s sales. In the latter part of October, 1969, the various brokerage houses “bought in” Naftalin & Co., that is bought stock in the market on the stock exchanges to replace the stock which Naftalin & Co. had sold but failed to deliver. It is claimed that the total loss to the 23 brokerage houses approximates or exceeds $1,200,000.

On November 4, 1969 more than three months prior to the filing of the first involuntary petition herein the Securities and Exchange Commission commenced an action in this court — Securities and Exchange Commission v. Naftalin & Co., Inc., No. 4-69 Civ. 385 — as a result of which the Honorable Earl R. Larson, a judge of this court, on December 23, 1969 entered an order appointing a receiver to take charge of Naftalin