Source: https://www.legalcrystal.com/case/103486/baker-vs-gold-seal-liquors-inc
Timestamp: 2018-03-20 23:14:09
Document Index: 263355826

Matched Legal Cases: ['§ 77', '§ 77', '§ 205', '§ 77', '§ 205', '§ 68', '§ 108', '§ 205', '§ 77', '§ 77', '§ 77', '§ 77', '§ 68', '§ 77', '§ 205', '§ 68', '§ 108', '§ 77', '§ 77', '§ 77', '§ 77', '§ 205', '§ 101', '§ 501', '§ 77', '§ 68', '§ 108', '§ 77', '§ 68', '§ 77', '§ 77', '§ 68', '§ 77', '§ 68', '§ 77', '§ 205', '§ 77', '§ 68']

Baker Vs Gold Seal Liquors Inc - Citation 103486 - Court Judgment | LegalCrystal
Baker Vs. Gold Seal Liquors, Inc. - Court Judgment
LegalCrystal Citation legalcrystal.com/103486
Case Number 417 U.S. 467
Respondent Gold Seal Liquors, Inc.
baker v. gold seal liquors, inc. - 417 u.s. 467 (1974) u.s. supreme court baker v. gold seal liquors, inc., 417 u.s. 467 (1974) baker v. gold seal liquors, inc. no. 73-804 argued april 23, 1974 decided june 17, 1974 417 u.s. 467 certiorari to the united states court of appeals for the seventh circuit syllabus petitioners, trustees of a railroad in a § 77 reorganization proceeding, brought suit for freight charges against respondent shipper, and respondent counterclaimed for cargo loss and damage. the district court granted petitioners' motion for summary judgment for entry of one judgment on their claim and another on the counterclaim, but set off one judgment against the other, resulting in a net judgment against.....
Baker v. Gold Seal Liquors, Inc. - 417 U.S. 467 (1974)
U.S. Supreme Court Baker v. Gold Seal Liquors, Inc., 417 U.S. 467 (1974)
No. 73-804
Held: The Court of Appeals erred in allowing the setoff, since it thereby granted a preference to the claim of one creditor that happened to owe freight charges over other creditors that did not, and thus interfered with the Reorganization Court's duty under § 77e, 11 U.S.C. § 205(e), to approve a "fair and equitable plan" that duly recognizes the rights of each class of creditors and stockholders and does not discriminate unfairly in favor of any class. Pp. 417 U. S. 468 -474.
DOUGLAS, J., wrote the opinion of the Court, in which BURGER, C.J., and BRENNAN, MARSHALL, WHITE, and BLACKMUN, JJ., joined. STEWART, J., filed an opinion concurring in the result, in which POWELL, J., joined, post, p. 417 U. S. 474 . REHNQUIST, J., filed a dissenting opinion, post, p. 417 U. S. 478 .
The Penn-Central Transportation Co. is in bankruptcy reorganization under § 77 of the Bankruptcy Act, 11
Page 417 U. S. 468
U.S. C § 205. Petitioners are its trustees authorized to collect its assets, one of which is a claim for freight charges against respondent owed the bankrupt debtor. The claim on which this suit was brought was $8,256.61, and the amount is undisputed. Respondent filed a counterclaim for $19,319.42 for loss and damage to shipments over the debtor's lines. Its amount is also not disputed.
Ordinarily, where a court has primary jurisdiction over the parties and over the subject matter, the power to resolve the amount of the claim and the counterclaim is
Page 417 U. S. 469
clear. Indeed, under the Federal Rules of Civil Procedure, the counterclaim may be compulsory. Rule 13(a). [ Footnote 1 ] That is the procedure under § 68 of the Bankruptcy Act, 11 U.S.C. § 108. [ Footnote 2 ]
Page 417 U. S. 470
The problem of the bankruptcy Reorganization Court is somewhat different. Liquidation is not the objective. Rather, the aim is by financial restructuring to put back into operation a going concern. [ Footnote 3 ] That entails two basic considerations:
Page 417 U. S. 471
First is the collection of amounts owed the bankrupt to keep its cash inflow sufficient for operating purposes, at least at the survival levels. The second is to design a plan [ Footnote 4 ] which creditors [ Footnote 5 ] and other claimants will approve, which will pass scrutiny of the Interstate Commerce Commission, which will meet the fair and equitable standards required by the Act for court approval, and which will preserve an ongoing railroad in the public interest. [ Footnote 6 ]
Section 77a gives the Reorganization Court "exclusive jurisdiction of the debtor and its property wherever located." [ Footnote 7 ] 11 U.S.C. § 205(a). In furtherance of its
Page 417 U. S. 472
long-range responsibilities the Reorganization Court enjoined secured creditors from selling collateral to reduce their claims. [ Footnote 8 ] It then went on to bar enforcement of liens against the debtor, taking possession of its property, or obtaining judgments against the debtor, except for specified purposes. [ Footnote 9 ] One court seized upon the last provision in the order which says
"that suits or claims for damages caused by the operation of trains, buses, or
Page 417 U. S. 473
other means of transportation may be filed and prosecuted to judgment in any Court of competent jurisdiction,"
to adjudicate the merits of a counterclaim, but declined to allow the setoff. [ Footnote 10 ] But proof of the claim against the debtor is a distinct preliminary stage to a determination of what priority, if any, the claim that is proved receives in a reorganization plan.
The term "fair and equitable" has a long history going back at least to Northern Pacific R. Co. v. Boyd, 228 U. S. 482 , and Kansas City Terminal R. Co. v. Central Union Trust Co., 271 U. S. 445 , whose fixed principle has been carried over into § 77e by our decisions. [ Footnote 11 ] The plan
Page 417 U. S. 474
is, by the terms of § 77, a product of the Interstate Commerce Commission and the Reorganization Court working cooperatively together, New Haven Inclusion Cases, 399 U. S. 392 , 399 U. S. 431 . The public interest, as well as the interests of creditors and stockholders, is at issue. [ Footnote 12 ] RFC v. Denver & R. G. W. R. Co., 328 U. S. 495 , 328 U. S. 535 .
The allowance or disallowance of setoff may seem but a minor part of the architectural problem. But to the extent that it is allowed, it grants a preference to the claim of one creditor over the others by the happenstance that it owes freight charges that the others do not. That is a form of discrimination to which the policy of § 77 is opposed. As a general rule of administration for § 77 Reorganization Courts, the setoff should not be allowed. [ Footnote 13 ]
If a counterclaim is compulsory, the federal court will have ancillary jurisdiction over it even though ordinarily it would be a matter for a state court, e.g., Great Lakes Rubber Corp. v. Herbert Cooper Co., 286 F.2d 631. Under Rule 13(a)'s predecessor, this Court held that "transaction" is a word of flexible meaning which may comprehend a series of occurrences if they have logical connection, Moore v. New York Cotton Exchange, 270 U. S. 593 , and this is the rule generally followed by the lower courts in construing Rule 13(a), e.g., Great Lakes, supra; United Artists Corp. v. Masterpiece Productions, 221 F.2d 213, 216.
In a straight bankruptcy case, Cumberland Glass Co. v. De Witt, 237 U. S. 447 , the Court construed § 68 as "permissive, rather than mandatory," and as to which the bankruptcy court "exercises its discretion . . . upon the general principles of equity." Id. at 237 U. S. 455 . And see Susquehanna Chemical Corp. v. Producers Bank & Trust Co., 174 F.2d 783.
The dissent places mistaken reliance on subsection l of § 77 of the Bankruptcy Act, 11 U.S.C. § 205( l ), to argue that the setoff provision of § 68, 11 U.S.C. § 108, necessarily applies to all reorganization proceedings under § 77. No authority is cited for this novel construction of subsection l, and indeed the very wording of the subsection itself makes clear that it applies only when "consistent with the provisions" of § 77. We have long held that the distinctive purposes of § 77 may require different procedures than would be followed in ordinary bankruptcy. For example, in holding that, under § 77, the Reorganization Court had authority to enjoin the sale of collateral if it would hinder or obstruct the preparation of a reorganization plan, we stated:
Continental Bank v. Rock Island R. Co., 294 U. S. 648 , 294 U. S. 676 . And see New Haven Inclusion Cases, 399 U. S. 392 , 399 U. S. 420 .
Unsecured creditors have the priority they would have had "if a receiver in equity of the property of the debtor had been appointed by a Federal court on the day of the approval" of the bankruptcy petition, and shall be treated as a separate class or classes. 11 U.S.C. § 205(b). As to that, priority see Gregg v. Metropolitan Trust Co., 197 U. S. 183 . In St. Louis & S. F. R. Co. v. Spiller, 274 U. S. 304 , 274 U. S. 311 , the Court said:
New Haven Inclusion Cases, supra, at 399 U. S. 420 .
As MR. JUSTICE STEWART correctly notes, infra at 417 U. S. 476 , it is settled that "property" within the meaning of this section includes intangibles such as choses in action.
"All persons, firms and corporations, holding collateral heretofore pledged by the Debtor as security for its notes or obligations or holding for the account of the Debtor deposit balances or credits be and each of them hereby are [ sic ] restrained and enjoined from selling, converting or otherwise disposing of such collateral, deposit balances or other credits, or any part thereof, or from offsetting the same, or any [ sic ] thereof, against any obligation of the Debtor, until further order of this Court."
Ecker v. Western Pacific R. Corp., 318 U. S. 448 , 318 U. S. 477 -483; Group of Investors v. Milwaukee R. Co., 318 U. S. 523 , 318 U. S. 539 -541; RFC v. Denver & R. G. W. R. Co., 328 U. S. 495 , 328 U. S. 516 -520. The same is true under § 101 et seq. (now c. X) of the Bankruptcy Act, 11 U.S.C. § 501 et seq. Consolidated Rock Products Co. v. Du Bois, 312 U. S. 510 .
And see New Haven Inclusion Cases, 399 U.S. at 399 U. S. 420 .
Lowden v. Northwestern National Bank & Trust Co., 298 U. S. 160 , is not to the contrary. The Court there refused to answer the certified question because it did not know the factual setting in which the question had been raised. Much law has been fashioned in the reorganization field since 1936, the date of that decision. The contours of plans have emerged which have given new meaning and insight into the statutory words "fair and equitable." The preference sought here shows no exceptional circumstances which in equity justify the discrimination.
The Court concludes that, since the allowance of a setoff in a § 77 reorganization would grant "a preference to the claim of one creditor over the others by the happenstance that it owes freight charges that the others do not," such setoffs should be disallowed "[a]s a general rule of administration." Ante this page. While I agree that the District Court should not have permitted a setoff in this case, I think that the broad rule adopted by
Page 417 U. S. 475
the Court is unnecessary to reach this result, and I prefer to rest my conclusion on a narrower ground.
While judicial setoffs are specifically authorized in straight bankruptcy cases, § 68 of the Bankruptcy Act, 11 U.S.C. § 108, no express approval of them appears in the statute governing § 77 reorganizations. [ Footnote 2/1 ] In Lowden v. Northwestern National Bank & Trust Co., 298 U. S. 160 (1936), this Court stated that the approval of setoffs in § 68 did not control in railroad reorganizations, but "governs, if at all, by indirection and analogy according to the circumstances. The rule to be accepted for the purpose of such a suit is that enforced by courts of equity, which differs from the rule in bankruptcy chiefly in its greater flexibility, the rule in bankruptcy being framed in adaptation to standardized conditions, and that, in equity varying with the needs of the occasion, though remaining constant, like the statute, in the absence of deflecting forces." Id. at 164-165. [ Footnote 2/2 ]
Page 417 U. S. 476
By announcing a doctrine barring judicial setoffs as a "general rule" the Court in the present case adopts a rationale inconsistent with Lowden, which quite clearly envisioned a case-by-case analysis of the propriety of each attempted setoff in the light of equitable considerations. Rather than replacing this principle with a new and wholly inconsistent rule to be applied in all cases involving judicial setoffs, I would rest this decision on the particular facts before us, which adequately distinguish this case from the situation in Lowden. [ Footnote 2/3 ]
Section 77a gives the Reorganization Court " exclusive jurisdiction of the debtor and its property wherever located. " (Emphasis added.) It has been commonly accepted in the federal courts that "property" within the meaning of this section includes intangibles such as choses in action. See 2 W. Collier, Bankruptcy 1123.05[4], p. 485 (1971), and cases there cited. It follows, therefore, that respondent's debt to the Penn Central fell within the "exclusive jurisdiction" of the Reorganization Court immediately upon the approval of the petition for reorganization. While such jurisdiction may not empower the Reorganization Court to enforce the cause of action, see id. at 489-490; In re Roman, 23 F.2d 556 (CA2 1928) (L. Hand, J.), it certainly does empower the
Page 417 U. S. 477
court to protect the "property" and to immunize it from diminution through setoff or counterclaim. To hold otherwise would be inconsistent with the function of the Reorganization Court to consolidate and protect the assets of the petitioning corporation. Callaway v. Benton, 336 U. S. 132 , 336 U. S. 147 (1949); Warren v. Palmer, 310 U. S. 132 , 310 U. S. 139 -141 (1940); Ex parte Baldwin, 291 U. S. 610 , 291 U. S. 615 (1934).
While the matter is not wholly free from doubt, I am persuaded that the Reorganization Court in this proceeding did, in fact, enjoin the allowance by any other court of judicial setoffs against any debts owed to the Penn Central. [ Footnote 2/4 ] On this basis, I join the judgment of the Court.
Page 417 U. S. 478
I am unable to conclude, as does the dissent, post at 417 U. S. 479 -480, that subsection I of § 77 mandates allowance in § 77 reorganizations of all setoffs allowed by § 68 in straight bankruptcies. While the dissent's ingenious reading of the statute would provide an easy semantic solution to the problem presented in this case, I am impressed with the fact that neither this Court in Lowden v. Northwestern National Bank & Trust Co., 298 U. S. 160 (1936), nor, apparently, any other federal trial or appellate court has considered subsection l to have any bearing whatsoever on the setoff problem. In the absence of any showing based on legislative history that such was the intent of Congress, and particularly in the absence of any briefing or oral argument on the matter, I would not, therefore, give this less than pellucid provision the force ascribed to it by the dissenting opinion.
These statements of the Court concerning allowance of judicial setoffs in § 77 cases were, in a technical sense, dicta. The Lowden case came to the Court on questions certified by the Court of Appeals for the Eighth Circuit, and the Court dismissed the certificate without formally answering the questions because of the "defective form of the certificate. . . ." 298 U.S. at 298 U. S. 166 . The Court's reasoning as to the availability of setoffs, however, has been viewed as authoritative. See, e.g., In re Lehigh & Hudson River R. Co., 468 F.2d 430, 433 (CA2 1972); In re Yale Express System, 362 F.2d 111, 116-117 (CA2 1966); Susquehanna Chemical Corp. v. Producers Bank & Trust Co., 174 F.2d 783, 787 (CA3 1949). See also 4 W. Collier, Bankruptcy Ĺš 68.10 [2], pp. 898-900, n. 17 (1971).
"[T]he trustees must have the power to gather in the assets and keep the business going. To exercise that power, they may find it necessary to sue, and the suit may turn upon the right of set-off, as it does in the case at hand. In a suit for such a purpose, a suit collateral to the main proceeding and initiated at a time when the outcome of that proceeding
Page 417 U. S. 479
is still unknown and unknowable, § 68 of the statute does not control the disposition of the controversy ex proprio vigore. It governs, if at all, by indirection and analogy according to the circumstances. . . ."
Lowden v. Northwestern National Bank & Trust Co., 298 U. S. 160 , 298 U. S. 164 (1936).
Id. at 298 U. S. 166 .
The Court's opinion in Lowden, supra, makes no mention of subsection l of § 77 of the Bankruptcy Act, 11 U.S.C. § 205( l ), which provides in pertinent part as follows:
"(1) Jurisdiction of court, duties of debtor and rights of creditors same as in voluntary bankruptcy. "
"Sec. 73. Additional Jurisdiction. -- In addition to the jurisdiction exercised in voluntary and involuntary
Page 417 U. S. 480
proceedings to adjudge persons bankrupt, courts of bankruptcy shall exercise original jurisdiction in proceedings for the relief of debtors, as provided in sections 74, 75, and 77 of this Act."
"[T]he bankruptcy court does not have summary jurisdiction to enforce a chose in action against the bankrupt's obligor, even when the bankrupt's rights
Page 417 U. S. 481
seem clear. . . ."
"We have held that a court of bankruptcy has exclusive and nondelegable control over the administration of an estate in its possession. Thompson v. Magnolia Petroleum Co., 309 U. S. 478 (1940); Isaacs v.
Page 417 U. S. 482
Hobbs Tie % T. Co., 282 U. S. 734 (1931). There can be no question, however, that Congress did not give the bankruptcy court exclusive jurisdiction over all controversies that, in some way affect the debtor's estate."
Nothing could be more inconsistent with Lowden than the flat order of the Reorganization Court in this case, entered at the commencement of the reorganization proceedings, to the effect that no setoffs were to be allowed, unless it be that part of the Court's opinion in this case stating that, "[a]s a general rule of administration for § 77 Reorganization Courts, the setoff should not be allowed." Ante at 417 U. S. 474 . And it seems a sufficient answer to the Court's observation that the allowance of a setoff grants a preference, ante at 417 U. S. 473 , to say that the Bankruptcy Act's strictures against preferences apply with as much force to ordinary bankruptcies as to reorganizations, and yet § 68 of the Act specifically allows this type of "preference" in an ordinary bankruptcy proceeding.
It may be that, upon a proper showing to the District Court for the Northern District of Illinois, the trustees could have satisfied that court that the allowance of a setoff in this case would be inconsistent with higher priorities of the reorganization. But no such showing was made by the trustees, and they were content to rely on the ex parte order of the Reorganization Court, which made no pretense of considering matter on a case-by-case
Page 417 U. S. 483
basis. The District Court for the Northern District of Illinois was, therefore, in my opinion, justified in authorizing the setoff under the doctrine of Lowden, and the Court of Appeals for the Seventh Circuit was correct in affirming its judgment.