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July 29, 1949

In re TATE-JONES & CO., Inc.

The opinion of the court was delivered by: GOURLEY

The matter before the Court arises out of a reorganization proceeding. The question for decision relates to the allowance or disallowance of petitions for reclamation.

Reclamation petitions were filed in behalf of five petitioners, namely Columbian Carbon Company, Fuller Brush Company, United States Vending Corporation, Eckhart Manufacturing Company and Auto Fender Manufacturing Company.

 In short, the petitioners seek to reclaim money, or the product of money, advanced to the debtor under circumstances which the petitioners assert raise a constructive trust. The petitions were consolidated for the purpose of hearing.

 History of Debtor Company

 The debtor company, a Pennsylvania corporation, for many years prior to February 2, 1948, was engaged in the business of industrial constructors and engineers. C. A. Barrett, one of the trustees and sole stockholder of the debtor corporation, became President January 10, 1943, and held that office until reorganization proceedings were begun in this court on September 9, 1948. Prior to February 2, 1948, the debtor company did not at any time engage in the business of buying, processing or selling steel sheets or steel plates. On February 2, 1948, the debtor did not have any steel on hand and was not equipped with adequate plant facilities to pickle, oil or otherwise process, steel. On February 2, 1948, Tate-Jones & Co., Inc., entered into a written partnership agreement with one E. Arthur Kerschbaumer for the purpose of engaging in the business of buying, processing and selling steel at a profit. This partnership conducted its business under the name of 'Tate-Jones & Co., Inc., Special Division.' It utilized the plant, office and administrative facilities of the debtor, one of the partners. It kept separate accounts and records of its transactions and it maintained a separate bank account at the Mellon National Bank and Trust Company, Pittsburgh, labeled 'Special Account.'

 The buying and selling of steel by Tate-Jones & Co., Inc., was not a special division except in that it was desired to keep the operations and expenses in separate accounts so as to determine the proportion of costs, commissions and other factors involved.

  The special account was to be maintained until the end of the year 1948, at which time it was to be incorporated in the regular records of Tate-Jones & Co., Inc.

 Purpose and Operation of Partnership

 The partnership was formed to purchase sheet steel from the mills, to reprocess the same and to sell the reprocessed sheets in the open market. Kerschbaumer was to loan the partnership an amount not to exceed $ 50,000.00, and was to receive interest at the rate of six percent (6%) for all money loaned, plus an additional allowance for each ton of sheet steel sold. It was further provided that at long as any amount of the advancement made by Kerschbaumer was unpaid, title to all sheet steel was to remain in his name until sold by Tate-Jones & Co., Inc. The proceeds of the sale of sheet steel were to be placed in a bank account in the name of Tate-Jones & Co., Inc., Special Account, and no moneys were to be disbursed therefrom except upon signatures of representatives of both partners. Said Partnership Agreement provided in full as set forth in Footnote One. *fn1"

 Steel was purchased in the open market by lots in odd sizes and according to various specifications, and assembled at the Beaver Falls plant of the company. From the steel they were able to secure, the Partnership attempted to fill the orders of the various customers, process the steel and make shipments.

 Shortly after the partnership was formed, the new firm began to purchase certain items of machinery and supplies to make possible the functioning of the enterprise. Out of the Special Division Account make ready equipment was purchased in the amount of $ 7581.00. From the general fund of the debtor $ 24,543.09 was paid for make ready equipment, and $ 20,304.06 for make ready labor.

 The expenditures were necessary in order for the Special Division of Tate-Jones & Co., Inc., to be put in operation.

 No part of the advancements made by the debtor was ever repaid to its general fund. Kerschbaumer was repaid out of the Special Division Account the $ 20,000.00 which he had loaned, and in addition thereto the amount of $ 8,624.85 for interest and expenses incurred in the securing and solicitation of orders.

 No salary or wage was paid or received by either of the partners.

 It is clear that the expenditure of $ 44,847.15 was made by the debtor as a partner in a new venture for the purpose of getting it into operation, and would be in the nature of a capital investment. Furthermore, $ 11,742.98 was expended by the debtor for costs and expenses incident to the processing of the sheet steel. The balance of the costs and expenses being paid out of the Special Division Account.

 No part of the expenditures made by the debtor out of its general funds passed through the special account. In addition, $ 1400.00 was transferred from the general fund of the debtor to the special account, and $ 6500.00 was transferred from the special account to the general fund of the debtor. Also, approximately $ 5,000.00 realized from the conducting of the partnership was deposited in the personal account of Barrett, or in one fund or the other of the debtor, to pay expenses incident to the business of the partnership.

 As a result of the foregoing, the original intent of the partners was not carried out since expenditures were made by the debtor out of its general fund, and a reference to the records of the Special Division could not have given a true or exact statement as to the success or failure of the Special Division.

 The total monies deposited and withdrawn from the Special Division Account are as set forth in Footnote Two. *fn2"

  History of Advancements

 It was intended by the partners that Kerschbaumer was to supervise all sales, and Roop of the debtor corporation was to supervise the processing of the sheet steel and the filling of customers' orders according to specifications.

 The partnership was formed since the debtor and Kerschbaumer realized that the sheet steel market was chaotic and extreme difficulty was being experienced by consumers in securing this product. Contacts existed through the members of the partnership to purchase the hot rolled sheet steel, and the venture was additionally favored since a profit of at least 100% in the sale after processing could be realized.

 Before and after the plant facilities of the debtor company were made ready for the business venture, orders were taken for sheet steel according to sizes and specifications from various customers, among whom were the five petitioning creditors. Between March 29, 1948, and May 11, 1948, the petitioning creditors placed certain orders with Tate-Jones & Company, Inc., Special Division.

 This being a new venture and funds being somewhat limited, it was decided between the partners that any customer who desired to purchase the processed steel would be required to deposit at least one-third of the purchase price when the order was accepted. Keeping in mind the limitations which existed in the market for this type of steel, it is readily apparent that the customers would offer no hesitancy in making the deposit to secure a firm commitment that the steel would be furnished. It was agreed that the deposit would be credited to the contract price when the steel was shipped.

 The deposits were required by the partnership for two purposes:

 (a) To secure the partnership from any financial loss as a result of the failure of the customer to take the sheet steel after it had been processed and sheared to specifications.

 (b) To aid in the creation of a fund to which access could be made to purchase the sheet steel in its raw form or as hot rolled sheet steel. Advancements were made by the claimants, and the amounts involved in the reclamation proceedings are: Columbian Carbon Company $ 32,224.24 Fuller Brush Company 4,800.00 Auto Fender Manufacturing Company 944.00 Eckhart Manufacturing Company 3,300.00 United States Vending Corporation 10,010.66 Total $ 51,278.90


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