Court Opinion

ID: 9450267
Source: CourtListenerOpinion
Date Created: 2023-08-04 16:40:48.526681+00
Date Added: 2024-06-11T17:32:13.924237
License: Public Domain

PHILLIPS, Circuit Judge, whom LEWIS and BREITENSTEIN, Circuit Judges,
join (concurring in part and' dissenting in part).
Where used herein the word “creditor”' refers to a general creditor, who asserts-a provable claim against a bankrupt’s-estate.
I start with the premise that a jury-trial cannot be had in a proceeding before-a referee in bankruptcy.
It is my opinion that the trustee cannot assei't in a counterclaim to a claim: filed by a creditor, a claim against the-creditor*, which, absent the filing of the-claim by the creditor, the trustee could, only have asserted in a plenary action in which the creditor would be entitled to a tx-ial by jux*y, unless the creditor had consented to the summary determination of the trustee’s claim by the referee; and further*, that the filing of a claim by the creditor does not constitute such a consent.
It will be observed that what I say is restricted to a trustee’s claim of a eharac-*541ter, which, if asserted in an ordinary-plenary action, the defendant thereto would be entitled to a jury trial. It is so restricted, because the claim asserted by the trustee in each of the several counterclaims here involved is of that character.
The reason for my conclusion may be simply stated. The right of a general creditor of the bankrupt to file a claim against the bankrupt estate, to have his claim determined, and, if allowed, to participate in the distribution of the bankrupt estate is a substantive and fundamental right. The privilege to exercise such a fundamental right may not be conditioned by a mere procedural rule on the surrender of another distinct and non-alternative fundamental right of the creditor. The other right here involved is a constitutional right of the creditor to have a claim asserted against him by the trustee, absent his consent to the summary disposition thereof by the referee, determined on a trial by jury in a plenary action. The creditor may not be compelled to choose between the exercise of two distinct and nonalternative fundamental rights by Rule 13 of the Federal Rules of Civil Procedure.
Moreover, I think what I have said is equally applicable where the trustee’s counterclaim is for the recovery of an alleged unlawful preference.
If it is established that the creditor has received or acquired an unlawful preference, his claim against the bankrupt estate must be disallowed in toto, unless he surrenders such preference to the trustee (11 U.S.C.A. § 93, sub. g). The nonsurrendered preference is a bar to the allowance of the claim. It may not be used as a setoff, either to reduce or extinguish the creditor’s claim, but only to bar its allowance in toto; and the creditor may not effect the surrender of the preference in whole or in part by crediting on his claim the amount or value of the preference. To permit the unlawful preference so to be used as a setoff or credit would, in effect,, give the creditors the benefit of the unlawful preference and result in his receiving more than his pro rata share in the assets of the bankrupt estate, to the-detriment of the other creditors.1 He must surrender his preference in its entirety, or forego the allowance of his claim. An exception has been recognized in certain cases, but only to the extent of crediting the dividend on his claim. It has been held where a creditor has been adjudged to surrender a preferential payment by a judgment of the bankruptcy court, which may be done when the creditor consents to a summary determination, and it is practical to ascertain the amount of the dividend to which the creditor will be entitled on his claim, the bankruptcy court may permit the creditor, if he is so advised, to prove his claim against the estate of the bankrupt, determine the amount of the dividend coming to the creditor, and by its final decree direct him to pay over the full amount of the preferential payment with interest, less the amount of his dividend.2 But in no case could the creditor have credited against the amount to be sur*542rendered as an unlawful preference more than the pro rata dividend he would be entitled to on his claim.
For the same reasons the claim of the creditor and the counterclaims of the "trustee here may not be treated as mutual debts and credits and one set off against "the other under 11 U.S.C.A. § 108.
My conclusion is that the claims here .asserted by the trustee for preferences Tiave none of the characteristics of a .-setoff.
Moreover, it is my opinion that the trustee may not set up as a defense to a 'claim of a creditor an alleged, but not judicially established claim that the creditor had received or acquired an unlawful preference, which he had not sur-xendered, and have the alleged claim of •an unlawful preference adjudicated by the referee in a summary proceeding; and then set up in an action to recover the unlawful preference the adjudication with respect thereto in the summary proceeding as res judicata. I do not think the trustee should be permitted to have his claim of an unlawful preference established in a summary proceeding, equitable in nature, and by the simple device of not praying for the recovery of the alleged preference, forever deprive "the creditor of his right to have the trustee’s claim determined on a jury trial in a plenary proceeding. Otherwise, the trustee could do indirectly that which Tie could not do directly and thereby ■deprive the creditor of a jury trial on the claim of an unlawful preference.
Of course, what I have said is restricted to cases where the creditor’s claim of right to retain what the trustee asserts he received or acquired as an unlawful preference is substantial and not merely colorable.3
A court of bankruptcy is in a strict sense a court of equity, except so far as is otherwise expressly provided in the Bankruptcy Act,4 and its proceedings are governed by rules of practice in equity.5
The right to a jury trial in a matter involving both legal and equitable claims may not be taken away by the prior determination of the equitable claim. In Dairy Queen v. Wood, 369 U.S. 469, 82 S.Ct. 894, 8 L.Ed.2d 44, the court said:
“The Federal Rules did not, however, purport to change the basic holding of Scott v. Neely [140 U.S. 106, 11 S.Ct. 712, 35 L.Ed. 358] that the right to trial by jury of legal claims must be preserved. Quite the contrary, Rule 38(a) expressly reaffirms that constitutional principle, declaring: ‘The right of trial by jury as declared by the Seventh Amendment to the Constitution or as given by a statute of the United States shall be preserved to the parties inviolate.’ Nonetheless, after the adoption of the Federal Rules, attempts were made indirectly to undercut that right by having federal courts in which cases involving both legal and equitable claims were filed decide the equitable claim first. The result of this procedure in those cases in which it was followed was that any issue common to both the legal and equitable claims was finally determined by the court and the party seeking trial by jury on the legal claim was deprived of that right as to these common issues. This procedure finally came before us in Beacon Theatres, Inc., v. Westover [359 U.S. 500, 79 S.Ct. 948, 3 L.Ed.2d 988], a case which, like this one, arose from the denial of a peti*543tion for mandamus to compel a district judge to vacate his order striking a demand for trial by jury.
“Our decision reversing that case not only emphasizes the responsibility of the Federal Courts of Appeals to grant mandamus where necessary to protect the constitutional right to trial by jury but also limits the issues open for determination here by defining the protection to which that right is entitled in cases involving both legal and equitable claims. The holding in Beacon Theatres was that where both legal and equitable issues are presented in a single case, ‘only under the most imperative circumstances, circumstances which in view of the flexible procedures of the Federal Rules we cannot now anticipate, can the right to a jury trial of legal issues be lost through prior determination of equitable claims.’ * * *»
See, also, Meeker v. Ambassador Oil Corp., 375 U.S. 160, 84 S.Ct. 273, 11 L.Ed.2d 261.
This does not leave the trustee without an adequate remedy. He may apply to the referee for an order staying the proceedings on the claim, in order that he may commence and prosecute a plenary action to recover the alleged unlawful preference and if he establishes such preference and obtains a judgment for its recovery and the creditor does not surrender it to the trustee, the trustee may then set up the unsurrendered unlawful preference as a bar to the creditor’s claim. That procedure has been approved by respectable authority.6
Instances of the converse of the situation here presented will arise, and in my opinion should be considered. The trustee who asserts a claim for an unlawful preference may believe it would be to his advantage to have such claim determined by a jury trial in a plenary action. Assume that situation exists, that the person against whom the trustee’s claim, is asserted has filed a claim as a creditor against the bankrupt estate and that the two claims are so related that if Rule-13 (a) of the Federal Rules of Civil Procedure is applicable, the trustee’s claim, is a compulsory counterclaim. May the-creditor by filing his claim, through the-operation of a procedural rule, deprive-the trustee of his substantive right to a. jury trial? I think the answer is obviously no.
What I have said in this opinion supplements my dissent in Inter-State National Bank of Kansas City v. Luther, 10 Cir., 221 F.2d 393, to which dissent I fully adhere.
Accordingly, I concur in the reversal of the referee’s order, with respect to the-counterclaim for the alleged unpaid stock subscription, and in all other respects-dissent.

. Irving Trust Co. v. Frimitt, D.C.N.Y., 1 F.Supp. 16, 17; Remington on Bankruptcy, Rev.Ed., 1957, Yol. 3, §§ 1455-1456; Rotan Grocery Co. v. West, 5 Cir., 246 F. 685; Walker v. Wilkinson, 5 Cir., 296 F. 850, 852.

. Page v. Rogers, 211 U.S. 575, 581, 29 S.Ct. 159, 162, 53 L.Ed. 332. In the opinion the court said:
“ * * * In view of the fact that this suit was brought in the bankruptcy court itself, and a final decree is to be entered by the judge of that court, it is entirely practicable to avoid the circuitous proceeding of compelling the defendant to pay into the bankruptcy court the full amount of the preference which he has received, and then to resort to the same court to obtain part of it back by way of dividend. The defendant may be permitted, if he shall be so advised, to prove his claim against the estate of the bankrupt, and the bankrupt court then may settle the amount of the dividend coming to him, and the final decree may direct him to pay over the full amount of his preference, with interest, less the amount of his dividend. * * * ”

. Here, the trustee did not assert and the referee did not find that the creditor’s claim of right to retain what the trustee asserted was an unlawful preference was merely colorable and not substantial.

. Young v. Higbee Co., 324 U.S. 204, 214, 65 S.Ct. 594, 89 L.Ed. 890; Securities and Exchange Comm’n v. United States Realty Co., 310 U.S. 434, 435, 60 S.Ct. 1044, 84 L.Ed. 1293; Continental Motors Corporation v. Morris, 10 Cir., 169 F.2d 315, 317; Rader v. Boyd, 10 Cir., 252 F.2d 585, 586.

. Pepper v. Litton, 308 U.S. 295, 304, 60 S.Ct. 238, 84 L.Ed. 281; Luther v. United States, 10 Cir., 225 F.2d 495, 498.

. B. F. Avery & Sons Co. v. Davis, 5 Cir., 192 F.2d 255; Triangle Electric Co. v. Foutch, 8 Cir., 40 F.2d 353, 357; In re Continental Producing Co., D.C.Cal., 261 F. 627, 629; In re G. L. Odell Const. Co., D.C.Colo., 119 F.Supp. 578, 581.