Court Opinion

ID: 9792125
Source: CourtListenerOpinion
Date Created: 2023-08-31 02:23:26.893818+00
Date Added: 2024-06-11T07:37:40.641832
License: Public Domain

TRAYNOR, J.
— I dissent.
The opinion of the District Court of Appeal in this case by Presiding Justice Peters, modified in part, sets forth the reasons that lead me to conclude that the judgment should be reversed:
“Where a partnership has been adjudicated a bankrupt the individual assets of the general partners may be drawn into the administration of the bankrupt estate, and any surplus remaining after paying individual creditors is applicable to the partnership debts. (Section 5g of the Bankruptcy Act, 11 U.S.C.A., § 23g; Francis v. McNeal, 228 U.S. 695 [33 S.Ct. 701, 57 L.Ed. 1029, L.R.A. 1915E, 706] ; 6 Remington on Bankruptcy (4th Ed.), p. 499, 505.) ”
“The 1938 amendment added to section 5 of the Bankruptcy Act, paragraph j, reads as follows: ‘The discharge of a partnership shall not discharge the individual general partners thereof from the partnership debts. ’ (11 U.S.C.A., § 23j.) The amendatory act contained the following provision: ‘ Except as otherwise provided in this amendatory Act, the provisions of this amendatory Act shall govern proceedings so far as practicable in cases pending when it takes effect. ’ (52 Stats., p. 940; see, In re Wm. Akers, Jr. Co., Inc., 31 F.Supp. 900)) In view of this provision section 5j (11 U.S.C.A., §23j) governs the interpretation of the discharge herein.
“Prior to the enactment of section 5j there was some doubt as to whether a discharge of the partnership only had the effect of discharging the individual liability of the partners for the partnership debts. (Myers v. International Trust Co., supra [273 U.S. 380, 47 S.Ct. 372, 71 L.Ed. 692] ; 7 Remington on Bankruptcy, (5th Ed.) p. 863; 8 C.J.S. 1546, § 580; 37 Harv.L.Rev. 614.) The 1938 provision removed this doubt.”
*209“The Act, prior to the 1938 amendment, provided only two methods whereby a bankrupt could secure a discharge— the discharge granted following full administration in bankruptcy, and a discharge upon confirmation of a composition of creditors. (Welles-Kahn Co. v. Klein, supra.) Under the 1938 amendment a discharge may be secured upon confirmation of an arrangement. The right of a partner to secure a discharge from individual liability to partnership creditors where the bankrupt is a partnership is similarly limited. The individual assets of a partner may be drawn into the bankruptcy administration. The Act makes no provision whereby one whose assets are subject to the jurisdiction of the court in a bankruptcy proceeding may secure a discharge from liability to creditors of the bankrupt in any other way. (See In re Northampton Portland Cement Co., 185 P.542.)”
In the present case, the alleged discharge of the liability of the partners for partnership debts did not follow from full administration in bankruptcy. The majority opinion concludes, however, that although there was no composition or arrangement plaintiff was bound by the referee’s order discharging defendants from liability for partnership debts. At the date of the order the bankruptcy act provided: “The receiver or trustee may, with the approval of the court, compromise any controversy arising in the administration of the estate upon such terms as he may deem for the best interest of the estate.” (11 U.S.C.A., § 50.) Even if it be assumed that the alleged dispute as to whether or not liquidation of the individual assets of defendants would yield any surplus for partnership creditors could be made the subject of a “compromise of controversy” under this section, the bankruptcy court had no jurisdiction to discharge the individual liability of the partners to partnership creditors in proceedings brought to compromise a controversy arising in the administration of the estate of the bankrupt partnership. (Hamilton-Brown Shoe Co. v. Ben L. Berwald Shoe Co., 10 F.2d 275.) The power of the "trustee of a bankrupt partnership to seize and administer the assets of the individual partners does not give the trustee power to control the claims of creditors against the partners individually. The creditor’s right to an in personam judgment against the partner is not the property of the partnership or a right that can be enforced by the partnership trustee. (First Nat. Bank of Herkimer v. Poland Union, 109F.2d 54.)
“We are of the view that the referee’s order of February *21020, 1939, by which he purported to discharge Eaiter and Oleari from individual liability for partnership debts was void on its face for the reason that as an order confirming a composition under section 12 of the Bankruptcy Act it was required to be made by the judge, and could not validly be made by a referee.”
“In the case herein, while proceedings to bring the assets of the partners into the bankruptcy were pending, Eaiter and Oleari offered $7,500 to be applied in part payment of the partnership creditors on condition that they be released and discharged in full from individual liability to such creditors. The plan was essentially one for a composition. A composition of creditors is a ‘proceeding, voluntary on both sides, by which the debtor, of his own motion, offers to pay his creditors a certain percentage of their claims in exchange for a release from his liabilities. ’ (6 Am.Jur. 776, § 416.) The offer of composition may be of a lump sum, as in the ease herein. (In re Bichmore Shoe Co., 263 F. 926.)
“A composition when confirmed operates as a discharge in bankruptcy. ‘The confirmation of a composition shall discharge the bankrupt from his debts, other than those agreed to be paid by the terms of the composition and those not affected by a discharge.’ (11 U.S.C.A. 32(c), see cases cited p. 133, par. 631; for similar provision as to arrangements under the 1938 amendments see 11 U.S.C.A. § 771; Myers v. International Trust Co., 273 U.S. 380 (47 S.Ct. 372, 71 L.Ed. 692).) Before confirmation of the composition is sought it is required that it be accepted in writing by a majority in number of all creditors whose claims have been allowed, which number must represent a majority in amount of claims. (11 U.S.C.A., §30, § 202.) Since a composition when confirmed is binding on creditors who do not assent, it is settled that there must be strict compliance with the statutory requirements. (In re Palmer, 2 F.Supp. 275, 277; In re Frear, 120 F. 978; 8 C.J.S. 1689.)
“Prior to the. 1938 amendments to the Bankruptcy Act, compositions were provided for by sections 12 and 74. (11 U.S.C.A., § 30, § 202.) Under the 1938 amendments these sections were superseded by provision for ‘arrangements.’ (52 Stats. 840, enacting clause and chap. XI at p. 905; 11 U.S.C.A., § 701, et seq.) The new procedure includes compositions in the term ‘arrangements.’ This is plain from the definition, as follows: ‘ “Arrangement” shall mean any plan of a debtor for the settlement, satisfaction, or extension *211of the time of payment of his unsecured debts, upon any terms.’ (11 U.S.C.A., §706.) An arrangement is not required to be confirmed by the judge. Under the 1938 amendments referees are invested with jurisdiction, subject to review by the judge, to ‘confirm or refuse to confirm arrangements or wage-earner plans, or set aside the confirmation of arrangement or wage-earner plans and reinstate the proceeding or cases.’ (11 U.S.C.A., § 66; see, also, 11 U.S.C.A., §§ 761-772, providing for confirmation by the ‘court,’ but not requiring confirmation by the ‘judge.’)
“These sections are not applicable to this proceeding. The 1938 amendments expressly provide that sections 12, 73 and 74, as amended, ‘shall continue in full force and effect with respect to proceedings pending under those sections upon the effective date of this amendatory Act.’ (52 Stats, p. 916; 11 U.S.C.A., § 799(3).) The composition in the present case is referable to section 12. A composition under section 74 is initiated by the filing of a petition or answer in which the debtor states that he desires to effect a composition. Upon the judge’s approving the petition the composition proceeding goes forward with a meeting of creditors and other formalities. (11 U.S.C.A., § 202.) Such procedure was not followed in the present case. A composition under section 12 originates in an ‘offer of composition.’ (11 U.S.C.A., §30; Nassau Sm. & Ref. Works v. Brightwood Bronze F. Co., 265 U.S. 269, 271 (44 S.Ct. 506, 68 L.Ed. 1013); Myers v. International Trust Co., 273 U.S. 380 [47 S.Ct. 372, 71 L.Ed. 692]; 8 C.J.S. 1688.) The offer in the present case was made ‘on or about June 28, 1938,’ according to the agreed statement of facts. The 1938 amendments were approved on June 22, 1938, and by terms of the amendatory act went into effect three months later, that is, on September 22, 1938. (52 Stats., p. 940.)
“By virtue of the express provision of the amendatory act above referred to, section 12 was applicable to the pending proceeding herein involved. Section 12 provides that ‘the judge shall confirm a composition.’ (11 U.S.C.A., § 30; In re Bloodworth-Stembridge Co., 178 F. 372; In re Everick Art Corp., 39 F.2d 765, 768.) When the act uses the term ‘court,’ the referee may be included, but when the term ‘judge’ is used the referee is excluded. (In re McMurray, 8 F.Supp. 449; 8 C.J.S. 976, 978; 2 Remington on Bankruptcy (5th Ed.) 92.) Section 1 of the act provides: ‘ “Judge” shall mean a judge of a court of bankruptcy, not including *212the referee. ’ (11 U.S.C.A., §1, subd. 16; subd. 20 under the section as amended in 1938.)
“The judge’s subsequent order of discharge does not operate as a release of the individual liability of the partners for the partnership debts. The discharge was of the partnership. It was provided therein that ‘Elba Oil Company, a copartnership composed of Joseph E. Barrett,' J. S. Lees, Louis Oleari and F. E. Baiter, be discharged from all debts and claims which are made provable by said Acts against its estate, and which existed on the 31st day of December, A. D. 1937, on which day the petition for adjudication was filed against it; excepting such debts as are by law excepted from the operation of a discharge in bankruptcy. ’ ”
“There appear to be other defects in- the proceeding viewed as a composition, in addition to the absence of confirmation by the judge. Where the offer of composition is made by partners of a partnership adjudicated bankrupt it should not be made until after the schedule of individual assets and liabilities as well as of partnership assets is on file. (In re Palmer, 2 F.Supp. 275, 277.) This is because the creditors in determining whether it is to their advantage to assent to an offer of composition should have full information as to assets available to satisfy their claims. Any surplus of individual assets after paying individual debts may be used to pay partnership claims. In the present case the offer was made while proceedings to compel the partners to file their schedules were still pending and before individual schedules had been filed.
“The notice to creditors was of a petition praying for discharge of the liability of the partners Baiter and Oleari to creditors who had filed claims, whereas the order of the referee entered on the petition discharges them from any and all liability which might exist against either of them as partners.
“The bankruptcy papers included hi the present record also show a failure to comply with the requirement that before confirmation is sought the composition must have been accepted in writing by a majority of the creditors. (11 U.S.C.A., § 30.) The apparent reason for these omissions will be discussed hereafter. It is not necessary to determine whether these irregularities singly or together would render the composition void as a discharge. It is clear that, where the act requires the judge to confirm a composition, confirmation by a referee, a subordinate official of the court, is of no *213legal effect. Such confirmation is void on its face as to creditors who did not participate in the composition. The composition is binding, however, as a common law composition, on those who participated in it. (In re Clarence A. Nachman Co., 6 F.2d 427; Paris Medicine Co. v. Lusby, 174 Ark. 749 (297 S.W. 1015) ; Welles-Kahn Co. v. Klein, 81 Fla. 524, 527 (88 So. 315); 8 C.J.S. 1688.)
“The fact that plaintiff’s assignor had not filed a claim in the bankruptcy proceeding does not bar it or its assignor from attacking the void order of confirmation. The offer of composition was made on June 28, 1938. The adjudication took place on January 4, 1938. Hence, the offer of composition was made within six months’ period following adjudication of bankruptcy, in which claims are required to be filed. (11 U.S.C.A., §93n; 44 U.S. Stats. 666, amending §57 of the Bankruptcy Act.) The claim of plaintiff’s assignor was listed in the partnership schedules filed. An offer of composition should extend to all creditors whose claims are listed by the bankrupt. (8 C.J.S. 1689, 1692; 7 Rem. (4th Ed.) pp. 196, 238; 8 Collier on Bankruptcy (14th Ed.), pp. 959,1237, 1238; Nassau Smelting & Refining Works v. Brightwood Bronze F. Co., 265 U.S. 269 (44 S.Ct. 506, 68 L.Ed. 1013); In re Adamson, 83 F.2d 211.) Thus it has been held that where the bankrupt makes an offer of composition before the time to file claims has passed, creditors whose claims are scheduled by the bankrupt need not make proof of claims to share in the composition. (Nassau Smelting & Refining Works, supra.)
“It should be noted that the terms of the offer of composition here involved did not confine it to creditors who had filed claims, nor did the referee’s order of approval so limit it. But the trustee’s interpretation of the offer evidently was that payment should be made only to those who had proved claims, since he prayed in his petition that Baiter and Oleari be released from invidual liability to creditors who had filed claims. In any event, no payment was made to plaintiff’s assignor, nor did it in any way participate in the composition proceedings. In the circumstances the void order of confirmation did not operate as to it to discharge the individual liability of the general partners Baiter and Oleari.
“It appears that the failure to follow the procedure prescribed for a composition was due to the fact that the matter was handled as a ‘compromise of controversy.’ The act provides: ‘The receiver or trustee may, with the approval of *214the court, compromise any controversy arising in the administration of the estate upon such terms as he may deem for the best interest of the estate.' (11 U.S.C.A., § 50; 2 Remington on Bankruptcy (5th Ed.) p. 717; 8 C.J.S. 1032.) Since approval of the ‘court,’ rather than of the ‘judge’ is required, approval of a compromise may be given by the referee.
“But that which is as a matter of law a composition may not be accomplished without complying with the statutory requirements under the guise of being a compromise of controversy. ‘This section (§27, 11 U.S.C.A., §50) should not, be confused with section 12 on compositions. It is intended to supply a summary and inexpensive way of settling questions arising in the administration of bankrupt estates. It is most often used in connection with contests on claims filed against the estate, or the contested collections of claims due the estate. It cannot, of course, be resorted to where the matter in controversy is the right to a discharge.’ (Gilbert’s Collier on Bankruptcy (one vol., 4th Ed.); p. 570.)
“A ‘compromise of controversy’ implies a dispute to be settled. In the case herein the papers in the bankruptcy proceeding which have been made part of the record in the present case show a dispute as to whether certain persons who claimed to be limited partners were in fact general partners. But there is no intimation of any dispute as to the status of the four general partners, including Raiter and Oleari. The trustee’s petitions described them as general partners and the stipulation of facts upon which the present action was heard so describes them.
“The petition to compromise recites that it is doubtful that the estate can realize from marshaling of the individual assets of Raiter and Oleari a greater sum than they offered to pay, that is, $7,500, and that ‘there is also some doubt as to the ability of your Trustee to prevail in the said proceeding to marshal the assets of the said Frank E. Raiter and Louis G. Oleari. ’ However, as to general partners the authority of the trustee to marshal assets to the end of applying any surplus remaining after paying individual debts to partnership obligations exists as a matter of right, unless, perhaps, where it appears unlikely that any surplus above individual debts will result. It would seem, therefore, that on the record the only dispute which could exist was whether liquidation of the individual assets of Raiter and Oleari would yield any surplus for partnership creditors. In our view such a dispute may not be made the subject of a com*215promise of controversy which will result in discharge of general partners from individual liability to partnership creditors.”
“To summarize — the court in bankruptcy was without jurisdiction to discharge the individual liability of Baiter and Oleari as general partners except following full administration in bankruptcy or upon composition proceedings which met the statutory requirements. The referee’s order was void as a discharge of the individual liability of Baiter and Oleari. It was void as a composition of creditors under section 12 of the Act because it lacked confirmation by a judge. The provision for compromise of controversies does not authorize a discharge of the individual liability of a partner to partnership creditors.”
Edmonds, J., and Carter, J., concurred.