Source: https://caselaw.findlaw.com/us-supreme-court/237/447.html
Timestamp: 2019-04-25 17:08:09+00:00

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[237 U.S. 447, 448] Messrs. Arthur L. Jackson and Henry H. Dinneen for plaintiff in error.
Messrs. Lewis W. Lake and Thomas G. Hayes for defendent in error.
The Federal question, which is the basis of jurisdiction here, arises upon the plea of res judicata to which a demurrer was sustained in the Maryland court of original jurisdiction, which judgment was affirmed by the court of appeals. This presents a Federal question because the plea of former judgment in a Federal court adjudicating a right of Federal origin asserts a right which, if denied, made the case reviewable here under 709, Revised Statutes, 237, Judicial Code [36 Stat. at L. 1156, chap. 231, Comp. Stat. 1913, 1214]. Deposit Bank v. Frankfort, 191 U.S. 499 , 48 L. ed. 276, 24 Sup. Ct. Rep. 154.
From this plea, it appears that the plaintiff, trading as Charles De Witt & Company, was adjudicated a bankrupt in the United States district court of Maryland, on the 8th day of February, 910; that in the list of creditors, plaintiff listed the Glass Company as a creditor in the sum of $ 790.03 (which claim was upon a [237 U.S. 447, 450] promissory note); that proof was duly made of this claim against the plaintiff, in the bankruptcy proceedings; and that among the unliquidated assets reported to the bankruptcy court by the plaintiff was a chose in action against the Glass Company, listed as a claim of De Witt's against the defendant, of unliquidated damages for commissions and breach of contract, in the sum of $940. (The testimony showed that this was the same claim sued upon in the Maryland state court so far as the demand for $800 damages is concerned.) The plea shows that afterwards, on the 26th day of March, 1910, the plaintiff filed a petition in the United States district court, setting out that he had submitted a composition to his creditors whereby they were to accept 20 cents on each dollar of their respective claims in full settlement of their demands against him and his bankrupt estate; further, that a majority in amount of said creditors had agreed to accept the terms of the composition agreement, wherefore he prayed that the same be ratified by the court; that the Glass Company did not agree in writing, pursuant to the provisions of the bankruptcy act, or otherwise, to accept said settlement, but as a majority in amount of said creditors did accept the same, it was ratified by the Federal court, and there was allowed to the defendant the sum of $158.01, as a dividend on its claim of $ 790.03; that no debit was made against the Glass Company by reason of the alleged claim of De Witt against it for the sum of $940.
As it was the effect of the judgment of the state court to deny this plea of res judicata, it will be necessary to consider somewhat the nature of the proceeding. [237 U.S. 447, 452] Compositions in bankruptcy are provided for by the bankruptcy act of 1898 [30 Stat. at L. 544, chap. 541, Comp. Stat. 1913, 9585]. By 12 of the act, the bankrupt is permitted to offer a composition after he has been examined in open court or at a meeting of his creditors, and after he has filed in court a schedule of his property and a list of his creditors. Since the amendment of 1910 [36 Stat. at L. 838, chap. 412, Comp. Stat. 1913, 9586] the offer may be made either before or after adjudication. In order that the composition be effectual, it must be accepted in writing by a majority in number of all the creditors, and the consideration to be paid by the bankrupt to his creditors, and the money necessary to pay debts having priority, and the cost of proceeding, must be deposited in a place to be designated by, or subject to the order of, the judge. The judge shall confirm the composition if satisfied that it is for the best interests of the creditors, that the bankrupt has not been guilty of any of the acts nor failed to perform any of the duties which would be a bar to his discharge, and that the offer and acceptance are in good faith and have not been made or procured by the means prohibited in the act. Upon confirmation of the composition, the consideration is distributed as the judge shall direct, and the case dismissed. Whenever the composition is not confirmed, the estate shall be administered as otherwise provided in the bankruptcy act.
Under 70f of the act, it is provided that, upon the confirmation of a composition offered by a bankrupt, the title to his property shall thereupon revest in him. By 21g of the act it is also provided that a certified copy of the order of confirmation shall constitute evidence of the revesting of the title, and when recorded, shall impart the same notice that a deed from the trustee to the bankrupt, if recorded, would impart. The order of confirmation becomes in effect a discharge, and is pleaded in bar with like effect. It operates to discharge the bankrupt from all debts, other than those agreed to be paid by the terms of the composition and those not affected by a discharge. [237 U.S. 447, 453] It is thus apparent that, although the composition is provided for by the bankruptcy act, it is in some respects outside of the act, for it is provided that, if the composition is not confirmed, the estate shall be administered in bankruptcy, as in the act provided.
With this general view of the nature and effect of composition proceedings, we come to a consideration of 68a of the bankruptcy act, under which it is claimed the set-off was adjudicated in the bankruptcy court by reason of the proceedings we have already set forth. Section 68a of the bankruptcy act of 1898 provides that 'in all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid.' The object of this provision is to permit, as its terms declare, the statement of the account between the bankrupt and the creditor, with a view to the application of the [237 U.S. 447, 455] doctrine of set-off between mutual debts and credits. The provision is permissive rather than mandatory, and does not enlarge the doctrine of set- off, and cannot be invoked in cases where the general principles of set- off would not justify it. Black, Bankr. 544; Re Kyte, 182 Fed. 166. The matter is placed within the control of the bankruptcy court, which exercises its discretion in these cases upon the general principles of equity. Hitchcock v. Rollo, 3 Biss. 276, Fed. Cas. No. 6,535. The section was taken almost literally from 20 of the act of 1867 [14 Stat. at L. 526, chap. 176]. In Sawyer v. Hoag, 17 Wall. 610, 21 L. ed. 731, in considering that section of the act of 1867, this court said: 'This section was not intended to enlarge the doctrine of set-off or to enable a party to make a set-off in cases where the principles of legal or equitable set-off did not previously authorize it.' While the operation of this privilege of set-off has the effect to pay one creditor more than another, it is a provision based upon the generally recognized right of mutual debtors, which has been enacted as part of the bankruptcy act, and when relied upon should be enforced by the court. New York County Nat. Bank v. Massey, 192 U.S. 138 , 48 L. ed. 380, 24 Sup. Ct. Rep. 199.
It hence appears that the object of this section was to give the district court the right to apply the established principles of set-off to mutual credits, when its action was invoked for that purpose.
The language of the act indicates the necessity of action by the court, for the statute provides that 'the account shall be stated' and the one debt set off against the other, and the balance only allowed to be paid. This statute recognizes the nature of set-off, as established in common law and equitable procedure.
'By the civil law, where there are cross claims between a plaintiff and defendant which are so connected with each other that the establishment of one can legitimately defeat, reduce, or modify the other, the defendant is always entitled to insist that his own claim shall be liti- [237 U.S. 447, 456] gated with that of the plaintiff; that both shall be disposed of by one sentence; and that the plaintiff's recovery shall be limited to what he shall be entitled to, if anything, as the result of adjusting both claims and striking a balance, if necessary, between them; and he does this by bringing a cross action (reconventio). Mutual debts do not, indeed, properly constitute cross claims by the civil law, for they extinguish each other ipso jure, and the party alone in whose favor the balance is has a claim which can be enforced by action, and his claim is only to the extent of such balance. Therefore a defendant who, at common law, would have recourse to a statutory set-off, would not, by the civil law, bring a cross action, but he would plead payment (compensatio). Nor is a defendant who has a genuine cross claim bound to assert it by a cross action; he may assert it by a wholly separate and independent action. How, then, does a cross action differ from one which is not a cross action, and which nevertheless is brought by a defendant against a plaintiff? It is conceived that the essential difference is in the judgment. If a defendant wishes to have his own claim and the plaintiff's disposed of by one sentence, in the manner before stated, he brings a cross action. If he wishes to have his own claim disposed of by a separate sentence, and without any reference to the plaintiff's claim, he brings a separate action. In the latter case he may, of course, choose his own time for suing, and his own court, and may prosecute his action slowly or speedily, as he sees fit, and without any reference to the plaintiff's action; but in the former case, as he wishes to have his action and the plaintiff's disposed of together, he must comply with the conditions necessary for that purpose.' Langdell, Eq. Pl. 118.
In the present case, the Glass Company made no attempt to invoke the action of the district court in the bankruptcy proceedings. If it had the right to do so, [237 U.S. 447, 457] it did not seek the action of the bankruptcy court to state the account or make the settlement. and we have been unable to find any case, and none is called to our attention, in which it is held that simply because of the bankruptcy proceedings and the filing of the schedule and proofs of debt the set-off is automatically made between parties holding mutual credits. On the other hand, as the section indicates, and so far as we know, all the authorities hold, this section is not self-executing, but its benefit is to be had upon the action of the district court only when it is properly invoked, and that court has the primary duty of determining for itself whether there are 'mutual debts or credits' that should be set off one against the other according to the true intent and meaning of the bankruptcy act.
We have no means of knowing what the court would have held had it been asked to order a set-off of the bankrupt's claim for damages against the creditor's claim upon a promissory note. (See Libby v. Hopkins, 104 U.S. 303 , 26 L. ed. 769; Re Becker Bros. 139 Fed. 366; Palmer v. Day [237 U.S. 447, 1895] 2 Q. B. 618, 64 L. J. Q. B. N. S. 807, 15 Reports, 523, 44 Week. Rep. 14, 2 Manson, 386; and the discussion of the subject in Morgan v. Wordell, 178 Mass. 350, 55 L.R.A. 33, 59 N. E. 1037.) We need not, therefore, inquire what that court would have done had its action been properly invoked, nor whether the Glass Company could have refused the amount of the composition and applied to the district court for an order of set-off, nor what would be the right of the Glass Company had it refused to take the composition and undertaken to set off its debt when sued in this case. Indeed, the Glass Company in this suit denied and contested the validity of the plaintiff's claim. Nor need we discuss the right of the Glass Company to set off this claim had it tried to do so in the state court.
The question arose in that way in Wasey v. Whitcomb, 167 Mich. 58, 132 N. W. 572, in which a suit was brought by the trustee in bankruptcy to recover upon a claim in the [237 U.S. 447, 458] state court. This was also the situation in Wagner v. Burnham, 224 Pa. 586, 73 Atl. 990. In the English case of West v. Baker, L. R. 1 Exch. Div. 44, 45 L. J. Exch. N. S. 113, 34 L. T. N. S. 102, 24 Week. Rep. 277, the action was brought by one in whom, under a composition proceeding the court had by order vested the estate, such person having furnished the consideration to carry out the composition,-a proceeding authorized by 81 of the English bankruptcy act of 1869. It was held that in such action the effect of the order was to vest the property of the bankrupt in the plaintiff, subject to the right of set-off as to debts which would have been provable in bankruptcy. No such question arises here, as the plea in this case set up former adjudication in the Federal court, and no attempt was made to plead the right of set-off independently of such plea.
There is lacking in this case the first and most essential element of res judicata; namely, former judgment of a competent court, adjudicating the matter in controversy between the parties, yet res judicata in the bankruptcy court by the former proceedings was the sole contention of Federal right here put in issue.
As already said, it appears in this plea, that the Glass Company took the amount of the composition, 20 per cent of its full debt, after the composition had been carried by the majority of the creditors, and approved by the court. If, as is now contended, set-off had been automatically worked between these opposing claims, one would substantially have satisfied the other, and the Glass Company would be in no position to claim or receive the dividend that it did receive in the composition. It certainly cannot maintain these inconsistent positions. This point was adjudicated under the former bankruptcy act, which for this purpose is substantially the same as the present one, in the case of Hunt v. Holmes, decided in the district court of Massachusetts (16 Nat. Bankr. Rep. 101, Fed. Cas. No. 6,890), in which the opinion was by Judge [237 U.S. 447, 459] Lowell, then district judge. The learned judge ruled that a creditor who took his composition dividend after the composition was finally passed over his objections, making no attempt to have mutual claims adjusted and set off, thereby waived his claim of set-off; there being no evidence that he received the amount under protest or by mistake, or under any other circumstance which would entitle him to a rehearing or readjustment. In Re Ballance, 219 Fed. 537, where a creditor filed a petition to vacate a composition upon the ground of fraud, it was held that the petitioner, after a demurrer to his petition had been overruled, could not take the amount of the composition and also take the chance of proving the allegations of his petition to set aside the composition for fraud, but that he must make election as to which form of relief he would accept, and that he could not take his share of the composition as a partial payment, and proceed to recover upon the unpaid balance of his claim.
So, in this case, although the composition was carried, as the plea avers, against the objection of the Glass Company, it made no attempt to have the set-off adjudicated in the bankruptcy court, made no opposition to the confirmation of the composition, as was its right if it saw fit so to do, and took and holds its proportion of the composition offered, in the same manner as other creditors.
As the only Federal question is presented because of the alleged res judicata in the district court, and for the reasons stated that plea was not good, it follows that there is no error of a Federal nature in the judgment of the court of Maryland, and the same is affirmed.
I am unable to conclude that the plaintiff in error, the [237 U.S. 447, 460] Glass Company, was not secured the right by the bankrupt law of the United States to set off a claim held by it against the claim which was sued on by De Witt, the defendant in error, who was plaintiff below. These are the undisputed facts: De Witt, a jobber in glass, thinking that the Glass Company, for the purpose of making the profit itself, had wrongfully induced a person with whom he had a contract for the sale of a lot of glass bottles not to comply with the sale, thereby causing him a loss of a profit of $800, determined not to pay the Glass Company for merchandise which he had bought from it, or to buy from it merchandise and not pay for it, in order thus to be in a position to set off his claim in damages against the purchase price, and thereby make himself whole. De Witt was declared an involuntary bankrupt. The Glass Company was stated in the schedules as a creditor on a note for $790.03 which, it is established, was the purchase price of merchandise bought from the company. There was scheduled as an asset of the bankrupt estate an unliquidated claim against the Glass Company for damages, commissions, and breach of contract stated as amounting to $940. De Witt proposed a composition of 20 cents on the dollar which was sanctioned by the requisite vote of creditors, the Glass Company voting in the negative, and the composition, after being approved by the court, was carried out. In doing so De Witt, without liquidating the surrendered claim against the Glass Company for damages, or attempting to have it set off against the claim of that company, paid the 20 per cent upon the face value of the claim. Thereupon, deeming that by the composition he had been reinvested with full ownership of the claim for damages, De Witt brought this suit against the Glass Company to liquidate and enforce the same. The suit originally included an alleged sum for commissions, etc., but the demand was reduced before judgment to the asserted right to liquidate and recover the damages [237 U.S. 447, 461] alleged to have been occasioned by the cause previously stated. And it is to the judgment of the court below, allowing the amount of damages claimed against the company without any deduction whatever for the contract price of the goods admitted to be due in the bankruptcy proceedings, that this writ of error is prosecuted.
I am admonished that it may be that my view is obscured by what seems to me the wrongful result which the judgment below accomplishes; that is, allowing De Witt, as a result of the bankruptcy, to hold on to and enforce as against the Glass Company his surrendered claim for damages while at the same time treating the bankruptcy as having relieved him of the duty of paying for the goods bought; that is to say, not confining him to doing that which he contemplated when he refused to pay for the goods, to set off his alleged claim for damages against the price, but permitting him to obtain the goods of the company practically without paying for them, and at the same time to recover the full amount of his damage claim.
The views which control my judgment in the case are covered by two general propositions which I state separately.
(b) Was the effect of the composition to prevent the set-off, or to relieve of the duty concerning it expressly commanded by the statute?
The only theory upon which this question can be answered in the affirmative must be the conception that a composition completely terminates bankruptcy, and that therefore whatever rights or duties arose from the bankrupt law which were not fully executed when the composition took place passed out of existence, and therefore the [237 U.S. 447, 463] rights granted by the composition have no ancestral relation to the prior bankruptcy proceedings. But to say this is to misconceive the nature of composition proceedings, which, as this court has long since pointed out, are but a part of bankruptcy, and a means not for destroying the express command of the bankrupt law, but for giving effect to its provisions and rendering them more efficacious for accomplishing the just ends which they have in view. Wilmot v. Mudge, 103 U.S. 217 , 26 L. ed. 536. This being true, what is the situation? The bankrupt estate had a scheduled claim against the Glass Company which was unliquidated, and the Glass Company had a proved claim against the estate which was liquidated. The bankrupt proposed by composition to have the assets turned over to him on paying a percentage on the claims due by the estate. By the very terms of the bankrupt act the duty was to set off the one against the other so that only the balance between them would be due on the one side or the other. But, as the claim held by the estate was unliquidated, and this could not be done without liquidation, it follows either that the acceptance of the composition and turning over the estate without liquidation was an abandonment of the unliquidated claim, or that it was transferred to the bankrupt subject to the duty to set off whenever, as a result of a liquidation following the composition, the condition arose which made it possible to obey the express command of the statute. One or the other of these conclusions, I submit, is absolutely required by the plain terms of the statute unless it is to be recognized that the bankrupt law provides that a bankrupt may discharge himself by bankruptcy from all that he owes one of his creditors, and yet, by operation of that statute, retain and after the bankruptcy enforce in his own right all the claims he had against such creditor. But the subject does not depend for its solution upon original reasoning, since it is well demonstrated by authority. [237 U.S. 447, 464] Certain is it that the provisions as to composition which were first enacted by Congress in 1874 ( 17, chap. 390, 18 Stat. at L. 182) as an amendment to the existing bankruptcy act were in substance taken from the English bankrupt act of 1869. Re Scott, 15 Nat. Bankr. Reg. 73, Fed. Cas. No. 12,519.
'Kelly, C. B. . . . The whole estate of the bankrupt was undisposed of; and the court has power, under the 81st section, in the case of an adjudication being annulled, to order that the property of the debtor shall vest in such person as the court may sppoint, or, in default of such appointment, revert to the bankrupt. This latter has not been done; but the court has transferred the whole estate of the bankrupt to the plaintiff, no doubt, in consideration of the plaintiff having guaranteed a dividend of 7s. 6d. in the pound. Does this transfer [237 U.S. 447, 465] entitle the plaintiff to recover debts freed from the right of the debtor to set off such claims as the present? I think not; because in bankruptcy the debtor could have set off this very claim; and if the court has transferred to the plaintiff all the authority itself had, that was to sue the defendant subject to the right to set off not only any specific sum, but any claim to unliquidated damages provable under bankruptcy. If this were otherwise, much injustice would be done. I apprehend the substance of the clauses of the act is, that what passed to the plaintiff was a right to receive debts, but subject to the right to set off counterclaims whether of specific sums or of unliquidated damages provable in bankruptcy.
In other words, treating the allowance of the composition as having, so to speak, irrevocably stereotyped the rights of the parties in conformity with the bankrupt law, and to the end that its purposes might be carried out, the bankrupt holding under the composition was treated for such purposes as but an assignee in bankrupt cy, and therefore, so far as set-off was concerned, as having no greater right under the composition than existed in the bankruptcy in favor of the estate at the time the composition was made.
These cases, as well as the principles upon which they rest, clearly make manifest the fact that it was not only within the power, but it was the duty, of the court below, as an inevitable result of the liquidation of the claim against the Glass Company which it made, to treat the set-off as accomplished, since that result was necessary to give vitality to the order of composition and to secure the right of set-off which inhered in the nature of the title given by the bankruptcy court to the bankrupt as the [237 U.S. 447, 467] result of the composition. From this conclusion it necessarily follows that the duty to enforce the set-off integrally inhered in the order and judgment which sanctioned the composition, since otherwise the order would have embodied within itself a refusal to obey and give effect to the express command of the bankrupt law as to the nature and character of what could be transferred under the composition. And this consequence is obvious when it is borne in mind that the result of the composition was to recognize and fix the right of set-off although not denying the power to liquidate as a means of carrying out the established right of set-off. This being true, it is also true that the moment the court below liquidated the claim, in and by virtue of the order of composition the duty arose to give effect to the right of set-off established by the order of composition in conformity with the express command of the bankrupt law. And this fully answers the suggestion that as the right to the set-off was not asserted eo nomine, but the decree in composition was pleaded as res judicata, therefore there was no denial of the right of set-off even if secured as the result of the composition. Certainly it must be that the plea of the decree in composition as res judicata was a plea advancing the right which that decree necessarily secured.
This, in my judgment, leaves it necessary only to consider the assertion that even although the right was secured by the bankrupt law, and even although that right was preserved by the composition, and inhered in the very nature of the title which the composition passed, it nevertheless does not here exist because of what was done at the time the composition was adopted. This rests upon the theory that as the Glass Company took the dividend upon its claim, and did not insist upon a liquidation of the claim in damages held by the bankrupt estate, it therefore waived any right to future set-off concerning said claim. I must confess I find difficulty [237 U.S. 447, 468] in precisely grasping the proposition. The Glass Company disputed the claim in damages, and the duty of liquidation was on the bankrupt or the bankrupt estate, but not on the Glass Company, and if waiver or estoppel was the result of what was done, the waiver was not as to the right of the Glass Company, but as to the claim for damages, and against the estate which held it. Indeed, the tender to the Glass Company of the full percentage due on its claim without liquidating the claim for damages against it so as to accomplish a set-off, if waiver is to control, was a waiver by the bankrupt of a right to liquidate and assert his claim in the future. The proposition otherwise stated is this: If the composition is to be considered as having irrevocably excluded the right to set-off, then, of course, the consequences of the failure to ask for it must upon the amount proved,-a payment claim, and not be cast upon the one who had no duty or concern with that subject until the liquidation was accomplished; especially in view of the payment made of the percentage uplon the amount proved,-a payment which was only consistent with the theory that the unliquidated claim was abandoned. If, on the other hand, it be considered in consonance with the principles and authorities to which I have referred that the composition did not terminate the bankruptcy, but that a liquidation for the purpose of set-off could thereafter be accomplished, then it clearly follows that the effect of the bankruptcy and of the judgment of composition was to fix and secure that right, and it cannot be held, consistently with the statute, that the composition proceedings taken conformably with the statute were a waiver of the right which those proceedings inevitably secured and made effective.
For these reasons I dissent, and am authorized to say that Mr. Justice Hughes, Mr. Justice Lamar, and Mr. Justice McReynolds concur in this dissent.

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