Court Opinion

ID: 6833295
Source: CourtListenerOpinion
Date Created: 2022-07-23 19:58:39.88022+00
Date Added: 2024-06-11T16:04:37.336649
License: Public Domain

ANDERSON, Circuit Judge
(dissenting). The appellant’s seventh assignment of error is that the court below erred “in disallowing and rejecting your petitioner’s claim at a time when there was no composition pending and no adjudication had taken place.” The appellant thus asserts that the question presented is purely moot; the brief urges this point. Without this contention of the appellant itself, this case seems to me plainly to fall within the well-settled rule that a court will not decide moot questions. See Alejandrino v. Quezon (June 7, 1926), 46 S. Ct. 600, 70 L. Ed. —, opinion by Chief Justice Taft; Public Utility Commission v. Campania, 249 U. S. 425, 39 S. Ct. 332, 63 L. Ed. 687, and cases cited. So far is this doctrine carried that, even when it does not appear on the record that the case is moot, this may be shown by extrinsic evidence. Heitmuller v. Stokes, 256 U. S. 359, 362, 41 S. Ct. 522, 65 L. Ed. 990; Mills v. Green, 159 U. S. 651, 653, 16 S. Ct. 132, 40 L. Ed. 293. Such cases are dismissed, generally without costs to either party.
How an appellant that only admits, but claims that its appeal involves only a moot question, can be allowed to prevail (with costs against the appellees), I cannot understand. The composition is dead; there is no adjudication. The mandate, in the usual form, to the court below for further proceedings not inconsistent with the opinion, is left to operate in vacuo. There are no proceedings in the bankruptcy court involving appellant’s right to have a claim allowed against Harris for composition, or against his estate in bankruptcy. There may never be such proceedings. Does the present decision require the bankruptcy court to allow the claim, if there be adjudication ?
But, if we assume future adjudication, it is at least doubtful whether, at a meeting called to consider composition without adjudication, any court can deal with tie validity of a disputed claim against a real bankrupt esTtate. The rights of creditors at a meeting called to consider composition without adjudication are quite different from their rights after adjudication.
Composition is in essence a trade between the debtor and his .creditors. Cf. Nassau Smelting, etc., Co. v. Brightwood & Co., 265 U. S. 269, 44 S. Ct. 506, 68 L. Ed. 1013; Id. (C. C. A.) 286 F. 72; In re Lane (D. C.) 125 F. 772; Cumberland Glass Co. v. De Witt, 237 U. S. 447, 35 S. Ct. 636, 59 L. Ed. 1042.
At a meeting called to consider such-proposed trade, scheduled creditors may prove in order to vote; failing to prove, they get the full benefit of the offer, if accepted by the requisite number. Nassau Co. v. Brightwood & Co. (C. C. A.) 286 F. 76; In re Harvey (D. C.) 144 F. 901; In re Atlantic Construction Co. (D. C.) 228 F. 571.
If content with the offer in composition, creditors may safely ignore the meeting. They examine the debtor, so as to know how to vote. They contest claims, lest an undesired trade be forced upon them by claimants having no legal voting rights. But composition is not, as is straight bankruptcy, a competitive struggle for the largest available share of an estate belonging in its entirety to the prevailing competitors. But, after adju*388dication, the interest of every creditor is adverse to that of every other creditor. They contest for a right in a bankrupt’s estate, not for a right to vote on a composition; they must seasonably prove, or forego sharing in the estate.
In practice, claims allowed in composition proceedings without adjudication (abandoned or unconfirmed) are, in the absence of petitions to re-examine, treated as valid in subsequent real bankruptcy. But the rights of creditors, and of a trustee representing all creditors, are substantially different, after adjudication, from those obtaining in composition before adjudication. The trustee presents appeals from the allowance of claims. Foreman v. Burleigh, 109 F. 313, 48 C. C. A. 376; Chatfield v. O’Dwyer, 101 F. 797, 42 C. C. A. 30; 8 Remington on Bankruptcy (3d Ed.) § 3634; Gen. Orders in Bankruptcy XXI, par. 6, providing for re-examination of any claim filed against the bankrupt’s estate; 2 Remington, §§ 1036, 1037. There are other differences which need not now be detailed.
Moreover, on the facts shown in the record, this is peculiarly a case in which the referee should require the strictest examination of the basis and validity of the claim of this appellant. The record fully justified the referee’s finding that this appellant “has tried hard to gain advantage over other creditors of this estate. It has vigorously urged the acceptance of a composition by which other creditors will receive a percentage on their claims, while it (the bank) holds Harris’ promise of payment in full.” It obtained this agreement for full payment when Harris was out of the jurisdiction, by preying on his fear of criminal prosecution. It kept the agreement secret, until it was exposed at an examination of the bankrupt in the composition proceedings promoted by the appellant. Its sworn proof of claim was false, and the matter should be referred to the United States attorney for appropriate action under section 29b (3) of the act (Comp. St. Ann. § 9613).’ The appellant’s scheme was to perpetuate a fraud upon the act and upon other creditors, intended to be specifically guarded against by the forty-first General Order in Bankruptcy, promulgated by the Supreme Court April 13, 1925 (267 U. S. 614), as follows:
“XLI.. Waiver of Bight to Share in Oom'position Deposits. Before confirming a composition the judge of the court shall require all creditors and other persons who may have waived their right to share in the distribution of the deposit made by the bankrupt, for claims, fees, or otherwise, to set forth in writing and under oath all agreements with respect thereto with the bankrupt, his attorney, or any other person, and shall also require an affidavit by the bankrupt that he has not directly or indirectly paid or promised any consideration to any attorney, trustee, receiver, creditor, or other person in connection with the composition proceedings, except as set forth in such affidavit or the offer of composition, and that he has no knowledge of any such payment or promise by any other party.” (Italics supplied.)
It is significant that, after more than a quarter of a century’s experience with the Bankruptcy Act, the Supreme Court has found it desirable to require such fraud on the act to be negatived, of record, as a condition precedent to the confirmation of a composition offer.
This General Order XLI also shows that Zavelo v. Reeves, 227 U. S. 625, 33 S. Ct. 365, 57 L. Ed. 676, Ann. Cas. 1914D, 664, is not to be construed as overruling or modifying the long-established principle that secret arrangements for advantage or preference of one creditor over the others are fraudulent. An open agreement for full payment, perhaps as a basis for credit for the funds in composition (227 U. S. 632, 33 S. Ct. 365), is all that was held good in Zavelo v. Reeves. In some quarters, this decision seems to have been misunderstood. But see In re Hawks, (D. C.) 204 F. 309; Crowder v. Allen-West Commission Co., 213 F. 177, 129 C. C. A. 521.
It seems to me to follow that when, on May 28, 1925, the facts relative to this attempted fraud by this appellant came before the referee, the referee’s sound course would have been to suspend all action as to proof of claims, report against the validity of the composition offer, thus remitting all parties in interest to their rights in regular bankruptcy, and that the District Court should have dismissed the ease as moot. No countenance should be given by this or any other court to such schemes of fraud on the act and upon other creditors as the appellant in this ease was engaged in.
I concur with the majority in the view that the court may not inflict penalties not authorized by the act. Undoubtedly the majority opinion in Keppel v. Tiffin Savings Bank, 197 U. S. 356, 25 S. Ct. 443, 49 L. Ed. 790, is, notwithstanding the powerful dissenting opinion of Mr. Justice Day, concurred in by three other justices, the rule binding upon us. But, on this record, it is not certain that, if the merits were properly before us, on a record entirely clear, the rule in the Keppel Case *389would be applicable. Apparently both the referee and the court below found that the new notes and the agreement for payment in full had, as a matter of fact, been received as full payment of the old notes by a present delivery to the bank’s attorney — that the alleged escrow was nothing but a cover. The record is not as explicit as might be desired; but it is far from clear that that decision was wrong.
At any rate, the whole problem of the conflicting rights of this bank and of other creditors should, if there be adjudication, be left for critical future examination — the referee probably exercising his power of suspending action on á disputed claim, and appointing, if necessary, a trustee to take appropriate action to protect the rights of all creditors and to .deal with the false proof of claim.
I think the appeal should be dismissed without prejudice; but, as the proceedings in both courts were due to the appellant’s pressing a question which it now admits was moot, costs should be allowed against the bank. Heitmuller v. Stokes, supra; United States v. Hamburg-American Co., 239 U. S. 466, 476, 39 S. Ct. 212, 60 L. Ed. 387.