Source: https://openjurist.org/524/f2d/301/law-research-service-inc-v-crook
Timestamp: 2018-06-25 18:02:07
Document Index: 453557395

Matched Legal Cases: ['§ 17', '§ 302', '§ 371', '§ 12', '§ 368', '§ 369', '§ 2', '§ 355', '§ 306', '§ 2', '§ 25', '§ 2']

524 F2d 301 Law Research Service Inc v. Crook | OpenJurist
524 F. 2d 301 - Law Research Service Inc v. Crook
524 F2d 301 Law Research Service Inc v. Crook
524 F.2d 301
In the Matter of LAW RESEARCH SERVICE, INC., Appellant,
John Herbert CROOK, Appellee.
No. 435, Docket 74-2073.
I. The Facts and the Proceedings Below
In a supplemental brief filed on this appeal, LRS raised for the first time the question of the jurisdiction of the bankruptcy judge to determine the validity of Claim No. 502.14 It cited as authority Judge Werker's opinion in Law Research Service, Inc. v. Hemba, supra, 384 F.Supp. 729, where a post-confirmation order of Bankruptcy Judge Herzog invalidating a secured claim against LRS was vacated for want of jurisdiction of the bankruptcy court.
We note preliminarily that LRS' jurisdictional argument is largely misdirected15 as regards the point about which it is most concerned, namely, the overruling of its contention that the assignment constituted a complete settlement of the Texas action so that, even if the assignment is valid, Crook is entitled only to the amount assigned plus interest. LRS has not argued, and could not reasonably argue, that, if the assignment was valid, it did not make Crook a secured creditor with respect to the sum assigned; its argument concerning the interpretation of the agreement is that Crook could have no more. Acceptance of this argument would have required the bankruptcy judge to modify his order of December 9, 1971, which permitted Crook to pursue his claim for $94,900 on the ground of nondischargeability under § 17a(2), and to foreclose that remedy if the secured claim were allowed. This was clearly within the jurisdiction of the bankruptcy court. In addition to the general provision of § 302 which makes Chapters I to VII applicable in Chapter XI proceedings insofar as they are not inconsistent with the provisions thereof, § 371 expressly states that "the confirmation of an arrangement shall discharge a debtor from all his unsecured debts and liabilities provided for by the arrangement, except as provided for in the arrangement or the order confirming the arrangement, but excluding such debts as, under section 17 of this Act, are not dischargeable." It does not matter in this regard that a creditor also seeks to participate in the arrangement proceeding; such participation does not affect the nondischargeability of the debt. See Friend v. Talcott, 228 U.S. 27, 39, 33 S.Ct. 505, 508, 57 L.Ed. 718 (1913) (In a case involving a composition under former §§ 12 and 13, where it was argued that a creditor had to elect his remedy as between participating in the composition or pursuing his allegedly nondischargeable debt procured by fraud, the Court said: "Section 17 enumerates the debts not affected by a discharge; that is, those exempted from its operation. It is apparent that the exemptions do not rest upon any theory of the exclusion of the creditor from the bankrupt act, or of deprivation of right to participate in the distribution, but solely on the ground that, although such rights are enjoyed, an exemption from the effect of the discharge is superadded."); North American Factors Corp. v. Motty Eitingon, Inc., 105 N.Y.S.2d 250, 254-55 (Sup.Ct.) (where creditor participated in arrangement, "the right to sue for the alleged fraud survived the arrangement procedure.", aff'd, 279 App.Div. 719, 108 N.Y.S.2d 338 (1st Dept. 1951) (per curiam), aff'd, 304 N.Y. 901, 110 N.E.2d 733 (1953); 9 Collier, Bankruptcy P 9.32(7), at 399 (14th ed. 1972).
In his opinion in Hemba, Judge Werker held that the bankruptcy court lacked jurisdiction to determine the Hembas' secured claim as assignees of a part of the settlement after confirmation of the arrangement. He found that none of the statutory provisions of Chapter XI could be a basis for jurisdiction over the Hembas' claim. The plan did not retain jurisdiction under § 368 and, since the Hembas never filed a claim, secured or unsecured, in the arrangement proceeding but had been brought into it by LRS' motion to determine the validity of liens, their claim could not be said to be "affected by" the plan of arrangement for jurisdictional purposes under § 369. While it appeared that the Hembas had consented to the jurisdiction of the bankruptcy court for the determination of their secured claim, § 2a(7), Judge Werker found any such consent unavailing for jurisdictional purposes since the court's jurisdiction, however derived, is limited to the adjudication of controversies having some proper relation to the business with which the bankruptcy court is entrusted. In the case before him, the judge said, the proper subject matter over which the jurisdiction of the bankruptcy court was invoked was the claims of unsecured creditors, claims to be satisfied by means of a plan of arrangement. While in some cases successful objection to secured claims might benefit unsecured creditors, on the facts here "there is no basis for any distribution to creditors in the event debtor succeeds upon its claims, and thus, no way a determination of the claims could contribute to effectuation of debtor's plan of arrangement." 384 F.Supp. at 735. Therefore, since the enforceability of this secured claim "is an issue having no proper relation to the business with which that Court was entrusted . . ., any consent to more extensive jurisdiction that might be inferred from the Hembas' actions below is of no effect." Id. at 734.
In a later decision, Law Research Services, Claim of Bengert, supra note 1, Judge Werker reached a different result with respect to jurisdiction. Unlike the Hembas, but like Crook, Bengert did file a secured claim. The judge began his reasoning by noting that the filing of a secured claim "represents, in effect, the filing of an unsecured claim with respect to so much of the debt as is not covered by claimant's security interest", see 3 Collier, Bankruptcy P 57.07(3.3), at 181-82; 9 id. P 7.10(2), at 55; id. P 7.05(4); id. P 8.01(3); United States v. National Furniture Co., 348 F.2d 390, 392-93 (8 Cir. 1963); William H. Wise Co. v. Rand McNally & Co., 195 F.Supp. 621, 624 n. 1 (S.D.N.Y.1961). In ordinary bankruptcy this empowers the bankruptcy court to determine the validity of the claim for security and to allow as an unsecured claim the excess of the claim over the value of the property subject to a valid security interest, which would be zero if the security interest were invalid. Subject to the limitation of § 355,16 the same may properly be done in a Chapter XI proceeding, even after confirmation and without a reservation of jurisdiction in the plan, despite the provisions of §§ 306(1) and 307(1) limiting the effect of Chapter XI proceedings to unsecured debts, see SEC v. United States Realty & Improvement Co., 310 U.S. 434, 452, 60 S.Ct. 1044, 84 L.Ed. 1293 (1940); 9 Collier, Bankruptcy P 7.05(4), at 29 (14th ed. 1972). If the bankruptcy court thus has jurisdiction to invalidate a claim to a secured interest in a Chapter XI proceeding under these circumstances, it would follow, although, in view of his holding against the validity of Bengert's lien, Judge Werker did not have to reach the issue, that it has jurisdiction to validate such a claim, since any other conclusion would waste the time of courts and litigants. In Mr. Justice Holmes' pithy phrase, "Jurisdiction is authority to decide the case either way." The Fair v. Kohler Die & Specialty Co., 228 U.S. 22, 25, 33 S.Ct. 410, 411, 57 L.Ed. 716 (1913).
Despite the contrary view taken in Hemba, supra, 384 F.Supp. at 733-34, we could dispose of the jurisdictional point in this case on the basis of consent.18 Section 2a(7) provides:
We have given this clause a broad reading.23 In re Koch, 116 F.2d 243 (2 Cir. 1940), cert. denied sub nom. Hirson v. Koch, 313 U.S. 565, 61 S.Ct. 941, 85 L.Ed. 1524 (1941); In re White Plains Ice Service, Inc., 109 F.2d 913 (2 Cir. 1940). Once the Chapter XI proceedings of LRS began creditors holding assignments of its claim or judgment against Western Union could not simply require payment by Western Union without leave of the bankruptcy court any more than the conditional vendor in White Plains Ice Service, Inc. could repossess without similar leave. See also Murphy v. John Hofman Co., 211 U.S. 562, 569, 29 S.Ct. 154, 53 L.Ed. 327 (1909). Once possession of the property constituting the security has passed into the hands of the bankruptcy court, even secured creditors may assert their claims against it only in or by leave of that court. 3 Collier, Bankruptcy P 57.07(3.3), at 182-83 (14th ed. 1974). And that court could not properly grant leave for payment without satisfying itself, in a summary proceeding, of the validity and amount of the creditor's interest. Presumably no one would have challenged the power of the bankruptcy court to pass on the validity of Crook's secured claim prior to confirmation of LRS' arrangement. It is clear beyond cavil, to return again to a familiar theme in ordinary bankruptcy with respect to the determination of controversies under § 2a(7), that "(i)f the property or fund is in the possession of the court, . . . controversies with respect thereto are clearly within its jurisdiction." 1 Id. P 2.46, at 276-78. It would be a distorted reading of the statute to think that confirmation necessarily changed all this, left the bankruptcy court powerless to discharge duties it had properly assumed with respect to the fund for secured creditors under the Western Union settlement agreement, and remitted the debtor and its secured creditors to a series of time-consuming plenary proceedings.
That decision was followed by Judge Mathes in a Chapter XI case, In re Kessler, 90 F.Supp. 1012 (S.D.Cal.1950). Although there the plan as well as the amended order of confirmation had provided for retention of jurisdiction, the judge considered that to be immaterial, 90 F.Supp. at 1015. It is true that in Kessler the plan provided that any sums resulting from sale of the mortgaged property should pass to the unsecured creditors if the mortgage were held invalid, whereas under LRS' arrangement invalidation of secured claims will not increase the awards to unsecured creditors but will augment the property of LRS, since, absent express provision to the contrary, any money left after distribution required by a plan of arrangement reverts to the debtor. See Advisory Committee's Note, Chapter XI, Rule 11-35, in U.S.C.A. Bankruptcy Rules and Official Bankruptcy Forms, at 243 (1974). But, with all respect to the contrary view taken in Hemba, 384 F.Supp. at 735, we fail to see how this avoids the principle so forcefully stated by Judge Hand that a bankruptcy court, having taken possession of property, cannot properly hand it to one of two conflicting claimants without determining who is entitled to receive it.
We do not find In re Oceana International, Inc., 376 F.Supp. 956 (S.D.N.Y.1974), on which Judge Werker heavily relied in Hemba, to be to the contrary. Although the facts in that case were complicated, what was involved was the court's refusal to sanction an attempt by a debtor, after confirmation of an arrangement in a second Chapter XI proceeding, to utilize summary procedure for the recovery of assets that had been sold by a bank mortgagee, with court approval, during an intervening ordinary bankruptcy that had superseded an earlier aborted Chapter XI proceeding. The bank had objected to the jurisdiction of the court to determine the issues raised by summary procedure and it was clear that no argument with respect to consent could be made out. Moreover, the property in question was in no sense in the possession of the court in the second Chapter XI proceeding. The debtor acknowledged "that its proceeding against the Bank was plenary, normally involving all the attributes of a court trial", 376 F.Supp. at 959, but sought to escape this on various grounds so plainly untenable that extended discussion was scarcely required. Any comfort obtainable by LRS from this opinion comes from isolated passages in which Judge Weinfeld may have said more than was needed to support his manifestly correct rejection of the debtor's position and which have no bearing on the completely different facts presented here.
III. The Validity of the Assignment
Our task, however, is not to pass on the equities, save as these may bear on meaning, but to construe the agreement. Crook contends that the interpretation of the agreement by the bankruptcy judge was a finding of fact protected by the "unless clearly erroneous" rule, 2A Collier, Bankruptcy P 39.28, at 1532-33 (14th ed. 1974), particularly after affirmance by a district judge, id. § 25.30, at 1024. Although statements to that effect can doubtless be found in the books, see the cases collected in 5A Moore, Federal Practice P 52.03(1), at 2634-35 n. 26 (2d ed. 1974), we continue to abide by Judge L. Hand's observation that, whatever a finding of meaning may be called, "such a finding is assailable as an ordinary finding of fact is not; for appellate courts have untrammelled power to interpret written documents." Eddy v. Prudence Bonds Corp., 165 F.2d 157, 163 (2 Cir. 1947), cert. denied, 333 U.S. 845, 68 S.Ct. 664, 92 L.Ed. 1128 (1948). See Cordovan Associates, Inc. v. Dayton Rubber Co., 290 F.2d 858, 860 (6 Cir. 1961); Standard Title Ins. Co. v. United Pacific Ins. Co., 364 F.2d 287, 289 (8 Cir. 1966); Emor, Inc. v. Cyprus Mines Corp., 467 F.2d 770, 773 (3 Cir. 1972); Motor Carriers Council of St. Louis, Inc. v. Teamsters Local No. 600, 486 F.2d 650, 653 (8 Cir. 1973); Teamsters Local No. 688 v. Crown Cork & Seal Co., Inc., 488 F.2d 738, 740 (8 Cir. 1973); Stamicarbon, N. V. v. American Cyanamid Co., 506 F.2d 532, 537 (2 Cir. 1974). Even on that basis, however, we find the interpretation given to the agreement below to be entirely proper. The "whereas" clause stated that the defendants in the Texas action "are desirous of adjourning the trial" until the date stated; the assignment was given to procure this. While paragraph 2 says that "plaintiff may proceed to the trial . . . as if this Agreement had not been executed," as pointed out before, it does not say that the assignment was thereupon voided language that Hoppenfeld, an experienced attorney, could readily have drafted. The failure of the agreement to say in ipsissimis verbis that Crook may have the benefit both of the assignment and of the action if prompt payment was not made is not forceful. The agreement clearly does permit Crook to continue his suit if the agreed amount was not paid by the stipulated date, and it was unnecessary for it to say that the assignment remained valid since, by virtue of the agreement's silence on this point and the failure of the assignment itself to mention conditions or dates, that would necessarily be the case. The language was thus of a "conditional settlement," as Crook's counsel calls it. Crook agreed to abandon his claim if a specific condition was met; that conditions not having been met, LRS cannot require a general release upon a belated offer to pay the specified sum plus interest. Against all this there was only the inconclusive testimony of Weiner. With respect to such testimony the "unless clearly erroneous" rule does have a role to play, and we certainly cannot say that the bankruptcy judge's evident failure to credit that testimony was clearly erroneous. Whether the amount realized by Crook from the assignment should be credited against any recovery he may make against LRS if he should prevail on his allegedly undischarged claim is not now before us and may never be.
See, e. g., Law Research Service, Inc. v. Martin Lutz Appellate Printers, Inc., 498 F.2d 836 (2 Cir. 1974); Law Research Service, Inc. v. General Automation, Inc., 494 F.2d 202 (2 Cir. 1974); Law Research Service, Inc. v. Hemba, 384 F.Supp. 729 (S.D.N.Y.1974); Law Research Services, Inc., Claim of Bengert, 386 F.Supp. 749 (S.D.N.Y.1974); Law Research Service, Inc. v. United States Fidelity & Guaranty Co., No. 71 B 598 (S.D.N.Y., Feb. 21, 1975)
We express no opinion on the propriety of the order insofar as it granted a jury trial on both of these questions. For the view that the question of dischargeability is not one for the jury even if the underlying issues of liability and dischargeability are the same, see In re Swope, 466 F.2d 936 (7 Cir. 1972) (per curiam), cert. denied, 409 U.S. 1114, 93 S.Ct. 929, 34 L.Ed.2d 697 (1973); In re Palfy, 336 F.Supp. 1268 (N.D.Ohio 1972); In re Hinchey, 349 F.Supp. 116 (D.Or.1972); Countryman, The Dischargeability Law, 54 Am.Bankruptcy L.J. 1, 35, 36 (1971). Contrast 1A Collier, Bankruptcy P 17.28A(6) (14th ed. 1974), of which Bankruptcy Judge Herzog was one of the revision editors, acknowledging these authorities but developing a contrary argument similar to that in the judge's opinion here
LRS has followed a wavering and seemingly irresponsible course with respect to the summary jurisdiction of the bankruptcy court to determine the validity and amount of secured claims. Initially it invoked such jurisdiction by filing objections both where secured claims had been filed and where they had not. In this case it raised the jurisdictional objection only after the unfavorable decisions of the bankruptcy judge and the district court. In Hemba the creditors first objected to jurisdiction while LRS asserted it; later both parties altered their positions, see 384 F.Supp. at 731. In our view LRS's proposal of the Western Union settlement as the basis for the arrangement was an irrevocable consent to the jurisdiction of the bankruptcy court
The Hemba opinion, 384 F.Supp. at 734, quoted 1 Collier, Bankruptcy P 2.09, at 178 (14th ed. 1974), for the proposition that the bankruptcy court's jurisdiction "is not such as to enable (it) to entertain a plenary suit in equity to adjudicate controversies having no proper relation to the business with which it is entrusted," but we are unable to see the bearing of this general statement, and the opinion ignores other parts of the treatise which tend to support consent jurisdiction in this case. For instance, P 2.40(1.1), entitled "Implied Consent to Summary Jurisdiction", advocates a generous reading of the final clause of § 2a(7), and 2 id. P 23.08, which further develops this theme, notes generally that "(i)t is well settled that in all cases where a party is entitled to the determination of his rights in a plenary action, he may nevertheless consent to the exercise of summary jurisdiction by the bankruptcy court and in that manner have his rights adjudicated." It is true that where there is an entire lack of bankruptcy jurisdiction, consent is not operative, but the limited character of this principle is illustrated in the cases cited in id. n. 7. The cases cited in the Hemba opinion, 384 F.Supp. at 734, are likewise inapposite. For instance, in Smith v. Chase National Bank, 84 F.2d 608 (8 Cir. 1936), the bankruptcy court was held properly to have dismissed petitions of appellants, who were not creditors of the bankrupt and had no other claim of title or right to possession of the bankrupt's assets and the property in question was not in the custody of the court. In declining to assume jurisdiction over the controversy involving third parties, the court said that "(i)t would be difficult to imagine a controversy in which the court below would have less practical reason to be interested." Id. at 613. In Central Hanover Bank & Trust Co. v. Kelby, 133 F.2d 873 (2 Cir. 1943), the petitioner, trustee of a trust indenture which had its claim allowed, sought a declaration from the bankruptcy court of what disposition it ought to make of the dividends received on the claim it asserted, over the objection of the trustee in bankruptcy, who was concerned that the effort expended in obtaining such an order would unduly delay closing of the estate. There was, said Judge Clark in affirming denial of the petition, "no dispute which concerns the bankrupt estate." Id. at 875. And in Sylvan Beach v. Koch, 140 F.2d 852, 861 (8 Cir. 1941), the court acknowledged the general rule that it "has no jurisdiction to hear and determine controversies between adverse third parties which are not strictly and properly part of the proceedings in bankruptcy," but it also recited the rule that "(i)t has jurisdiction to adjudicate controversies relating to property of which it has actual or constructive possession."
Texas Consumer Finance Corp. v. First National City Bank, 365 F.Supp. 427, 429 n. 2 (S.D.N.Y.1973); In re Oceana Int'l, Inc., 376 F.Supp. 956, 959 (S.D.N.Y.1974); 9 Collier, Bankruptcy P 8.12, at 183-84 & n. 3, P 9.29(1), at 368-69 (14th ed. 1972)