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In re Richmond

decided: March 1, 1972.

IN THE MATTER OF THEODORE J. RICHMOND, DEBTOR. JEAN RICHMOND, APPELLANT
v.
UNITED STATES OF AMERICA; BERNARD L. BELSKY, RECEIVER; DONALD A. ROBINSON, TRUSTEE, APPELLEES



Biggs, Van Dusen and Hunter, Circuit Judges.

Author: Hunter

Opinion of the Court

HUNTER, Circuit Judge:

This appeal questions the jurisdiction of a Referee in Bankruptcy to determine the income tax liability of a Chapter XI debtor's spouse who had filed joint returns with the debtor. The District Court has held that such jurisdiction does not exist in this case. In re Richmond, 322 F. Supp. 888 (D.N.J. 1970). We affirm.

I. The Facts

The debtor in this case is Theodore J. Richmond, who between 1932 and 1967 built up a complex of twenty-six corporations engaged chiefly in public bus transportation. In August 1967, a joint petition for arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq., was filed by twenty of these corporations. The Chapter XI proceedings were eventually extended to the other six. In November 1967, the Securities and Exchange Commission was allowed to intervene, and in January 1968, the District Court granted the motion of the S.E.C. to dismiss the Chapter XI proceedings unless the petition was amended to bring the proceedings within the provisions of Chapter X of the Bankruptcy Act, 11 U.S.C. § 501 et seq. In re Manufacturers Credit Corporation, 278 F. Supp. 384 (D.N.J. 1968). Because "the protective provisions of Chapter X [would] better serve 'the public and private interests concerned including those of the debtor,'" we affirmed the District Court's order. Manufacturers Credit Corporation v. Securities and Exchange Commission, 395 F.2d 833, 843 (3d Cir. 1968).

In addition to the proceedings involving the debtor's corporations, the debtor also filed on September 7, 1967, a personal petition for arrangement under Chapter XI. It is in the matter of the personal Chapter XI proceeding that this appeal arises.

After we affirmed the District Court's order requiring Chapter X proceedings, nineteen of the corporations refiled under Chapter X. Seven refused. Appellee Donald A. Robinson, the Chapter X Trustee, subsequently petitioned to extend the Chapter X proceeding to the other seven corporations. The petition was opposed by the debtor's wife (appellant Jean Richmond) and daughters, who owned stock in several of the non-filing corporations.

Further controversy surrounded several savings accounts, totalling some $135,000, held in the name of Jean Richmond. Leonard I. Garth,*fn1 the Chapter XI Receiver for Theodore Richmond, asserted ownership to the bank accounts and other assets held by Jean Richmond, and the Referee ordered that no transfer or other disposition of the funds or assets be made until after determination of their ownership.

After negotiation among the parties, a compromise settlement was reached whereby Jean Richmond and the daughters agreed to assign their stock to the Chapter X Trustee and Jean Richmond agreed to convey $35,000 to the Chapter XI Receiver. In addition, Jean Richmond and the daughters would withdraw their opposition to the Chapter X Trustee's petition to extend the Chapter X proceedings to the seven corporations which had not refiled. The Chapter XI Receiver agreed to surrender any claim to the balance of the funds and assets held in the name of Jean Richmond. After notice to all creditors and a hearing, the Referee indicated his approval of the compromise on March 20, 1969.*fn2 The terms of the compromise have not been effected, however, because of circumstances to be discussed below.

Early in the course of the debtor's Chapter XI proceeding, the Government filed its claim for income taxes and interest for the years 1965 and 1966, for which years the debtor and his wife had filed joint returns. As finally amended on May 26, 1969, the Government's claim was in the amount of $418,869.73.

Within a few days after the above mentioned compromise had been approved by the Referee, the Government made a jeopardy assessment against Jean Richmond which had the effect of freezing the funds in the savings accounts in her name.*fn3 Because the funds were unavailable, Jean Richmond was unable to convey to the Chapter XI Receiver the $35,000 required by the compromise settlement.

The Government's claim was far greater than Jean Richmond's total assets. The Referee therefore adopted the following procedure: he would first determine the tax liability of the debtor, while holding in abeyance the question of ownership of the savings accounts as between Jean Richmond and the Chapter XI Receiver. The latter question would be avoided if the tax liability of the debtor were found to be less than the funds on deposit.*fn4

Hearings on the tax claim began on May 15, 1969. During the course of the hearings, the Government objected to the participation therein of counsel for Jean Richmond, but the objection was overruled by the Referee. By opinion dated August 4, 1969, the Referee determined that the Government had not proved its tax claims. The Referee did, however, reject certain interest deductions taken on the joint returns which totalled approximately $140,000 for the two tax years. After further controversy related to income averaging, the Referee by order dated October 15, 1969, allowed the tax claim to the extent of $62,083.10. A careful reading of the order shows that it did not purport to apply to Jean Richmond, although the Government and Jean Richmond were the only parties ...


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