Court Opinion

ID: 9418286
Source: CourtListenerOpinion
Date Created: 2023-08-02 22:18:54.930252+00
Date Added: 2024-06-11T17:21:59.852979
License: Public Domain

Mr. Chief Justice White,
with whom. concurred
Mr. Justice Hughes, Mr. Justice Lamar and Mr. Justice McReynolds, dissenting.
I am unable to conclude that the plaintiff in error, the *460Glass Company, was not secured the right by the Bankrupt Law of the United States to set off a claim held by it against the claim which was sued on by De Witt, the defendant in error, who was plaintiff below. These are the undisputed facts: De Witt, a jobber in glass, thinking' that the Glass Company for the purpose of making the profit itself, had wrongfully induced a person with whom he had a contract for the sale of a lot of glass bottles not to comply with the sale, thereby causing him a loss of a profit of $800, determined not to pay the Glass Company for merchandise which he had bought from it or to buy from it merchandise and not pay for it in order thus to be in a position to set off his claim in damages against the purchase price and thereby make himself whole. De Witt was declared an involuntary bankrupt. The Glass Company was stated in the schedules as a creditor on a note for $790.03 which it is established was the purchase price of merchandise bought from the company. There was scheduled as an asset of the bankrupt estate an unliquidated claim against the Glass Company for damages, commissions and breach of contract stated as amounting to $940. De Witt proposed a composition of twenty cents on the dollar which was sanctioned by the requisite vote of creditors, the Glass Company voting in the negative, and the composition, after being approved by the court, was carried out. In doing so De Witt without liquidating the surrendered claim against the Glass Company -for damages or attempting to have it set off against the claim of that company, paid the twenty, per cent, upon the face value of the claim. Thereupon deeming that by the composition he had been reinvested with full ownership of the claim for damages, De Witt brought this suit against the Glass Company to liquidate and enforce the same.The suit originally included an alleged sum for commissions, etc., but the demand was reduced before judgment to the asserted right to liquidate and recover the damages *461alleged to have been occasioned by the cause previously stated. And it is to the judgment of the court below allowing the amount of damages claimed against the company without' any deduction whatever for the contract price of the goods admitted to be due in the bankruptcy proceedings that this writ of error is prosecuted.
I am admonished that it may be that my view is obscured by what seems to me the wrongful result which the judgment below accomplishes, that is, allowing De Witt as a result of the bankruptcy to hold on to and enforce as against the Glass Company his surrendered claim for damages while at the same time treating the bankruptcy as having relieved him of the duty of paying for the goods bought; that is to say, not confining him to doing that which he contemplated when he refused to pay for the goods, to set off his alleged claim for damages against the price, but permitting him to obtain the goods of the company practically without paying for them and at the same time to recover the full amount of his damage claim.
The views which control my j udgment in the case are covered by two general propositions which I state separately.
(a) Did the bankrupt law confer upon the Glass Company the right to have the scheduled claim against it for damages when liquidated set off against the debt which it proved for the price of the goods by it sold? That the comprehensive provisions of §§ 68a and b of the bankrupt law relating to set-offs and counter claims are coincident with the scope of the act and therefore give the power to the bankruptcy court to determine whether or not the right of set-off exists as between all and any claims required to be surrendered as assets of the estate on the one hand and all debts proved against the estate on the other is, I submit, self-evident, for to hold to the contrary would deprive the bankruptcy court of authority to exert its powers over matters to which its jurisdiction in the nature of things *462must extend. It is equally indisputable, as long since settled by this court, that in exerting its powers when occasion requires it as between all or any of the items of the active or passive side of the bankrupt estate it is the duty of the court of bankruptcy not merely to determine the right of set-off by strict common law principles, but to govern the subject by the broad doctrines of set-off as administered by courts of equity. Sawyer v. Hoag, 17 Wall. 610. It is also clear that in order to additionally accomplish the public purposes just stated the bankrupt act in some respects narrows the operation of set-off since it prevents it from automatically operating by subjecting it in every, case to judicial control. Under these principles there is no reason for doubting that the proved claim of the Glass .Company against the bankrupt estate was subject under the law to be set off against the scheduled claim held by the estate against .the Glass Company whenever the latter claim was so liquidated as to enable the set-off to be made and that the duty of accomplishing this essential result by the terms of the statute primarily rested ppon the bankruptcy court. I say the terms of the státute since it in express words commands that the set-off- for which it provides shall be accomplished to the end that a distribution shall .be made not upon the original élaíms, but upon the balances resulting from carrying out the commands of the statute as to set-off. This being true, the question at once arises :
(b) Was the effect of the composition to prevent the set-pff or to relieve the duty concerning it expressly commanded by the statute?
The only theory upon Which this question can be answered in the affirmative must be the conception that a composition completely terminates bankruptcy and that therefore whatever rights or duties arose from the bankrupt law which were not fully executed when the compositioii took place passed out of existence and therefore the *463rights granted by the composition have no .ancestral relation to the. prior bankruptcy proceedings. But to say this is to misconceive the nature of composition proceedings which, as this court has long since pointed out, are but a part of bankruptcy and a means not for destroying the express command of the bankrupt law, but for giving effect to its provisions and rendering them more efficacious for accomplishing the just ends which they have in view. Wilmot v. Mudge, 103 U. S. 217. This bqing true, what is the situation? The bankrupt estate had á scheduled claim against the Glass Company which was unliquidated and the Glass Company had a proved claim against, the estate which was liquidated. The bankrupt proposed by composition to have the assets turned over to him on paying a percentage on the claims due by the estate. By the very terms of the bankrupt act the duty was to set off the one against the other so that only the balance between them would be due on the one side or the other. But as the claim held by the estate was unliquidated and this could not be done without liquidation, it follows either that the acceptance of the composition and turning over the estate without liquidation was an abandonment of the unliquidated claim or that it was .transferred to the bankrupt subject to the duty to set off whenever as a result of a liquidation following the composition the condition arose which made it possible to obey the express command of the statute. One or the other of these conclusions, I submit, is absolutely required by the plain terms of the statute unless it is to be recognized that the bankrupt law provides that a bankrupt may discharge himself by bankruptcy from all that he owes one of his creditors and yet by operation of that statute retain and after the bankruptcy enforce in his own right all the claims he had against such creditor. But the subject does not depend for its solution upon original reasoning since it is well demonstrated by authority.
*464Certain is it that the provisions as to composition which were first enacted by Congress in 1874, (§ 17, ch. 390, 18 Stat. 178, 182) as an amendment to the existing bankruptcy act, were in substance taken from the English bankrupt act of 1869. In re Scott, Fed. Cas. No. 12,519.
In West v. Baker, 1 Ex. D. 44, the facts were these: West was adjudicated a bankrupt and a composition was accepted by his creditors and the bankruptcy wag-annulled;Under a provision of the bankrupt act on the approval of the composition the property was turned over to a trustee, presumably for his security as he had advanced the sum necessary to enable the bankrupt to pay to his creditors the amount offered in composition. This trustee then in the name of the bankrupt sued one Baker to recover an amount claimed to be due from Baker for work and labor done for him by West before the bankruptcy. By way of defense it was pleaded that before the adjudi-' cation in. bankruptcy West was indebted to Baker for debts and damages which were provable in bankruptcy against the bankrupt estate and which could have been set off in bankruptcy against, the claim of West and therefore the defendant, Baker, was entitled as a defense to the suit to set off his claim against the one which the trustee in the name of West sought in the suit to enforce. A demurrer to the plea was overruled, the views of the court being stated as follows:
“Kelly, C. B. . . . The whole estate of the bankrupt was undisposed of; and the Court has power under the 81st section, in the case of an adjudication being annulled, to order that the property of the debtor shall vest in such person as the Court may appoint, or, in default of such appointment, revert to the bankrupt. This latter has not been done; but the court has transferred the whole estate of the bankrupt to the plaintiff, no doubt in consideration of the plaintiff having guaranteed a dividend of 7s. 6d. in the pound. Does this transfer *465entitle the plaintiff to recover debts freed from the right of the debtor to set off such claims as the present? I think not; because in bankruptcy the debtor could have set off this very claim; and if the Court has transferred to ■the plaintiff all the authority itself had, that was to sue the defendant subject to the right to set off not only any specific sum, but any claim to unliquidated damages provable under bankruptcy. IÍ this were otherwise, much injustice would be done. I apprehend the substance of the clauses of the Act is, that what passed to the plaintiff was a right to receive debts, but ¡subject to the right to set off counter claims whether of specific sums or of unliquidated damages provable in bankruptcy..
“Cleasby, B. . . . The question is, whether the effect of the 28th section was to alter the status of the defendant because of the substitution of a scheme of settlement for the bankruptcy. Oh looking at the section the effect appears to be that, instead of the trustee dealing with the estate, the creditors shall be at liberty to accept a composition. This, though accompanied by .the annulling of the bankruptcy, does not take the matter out of the Bankruptcy Court, so as to prevent the geheral rules of bankruptcy applying, or alter the position of the parties except so far as it may be altered by the agreement they have come to to take the composition instead-of the estate.. By § 28 the provisions of a composition or general scheme made in pursuance of the Act may be enforced by the Court in a summary manner, and are to be binding on all the creditors so far as relates to any debts due to them and provable under.the Bankruptcy Act. That clearly shows that the Bankruptcy Court still retains the scheme under its control, and therefore it is subject to the ordinary rules of that court as to set-off.”
In Ex parte Howard, National Bank, 2 Lowell, 487, S. C., Fed. Cas. No. 6764, without going into detail, the case was this: There was a bankruptcy and a composition, *466After the composition the bankrupt sought to enforce a claim which had passed to him in virtue of the composition and was confronted with an alleged right to set off as against such claim on his part, a claim against him which had been in the bankruptcy a claim against the estate." The court under these conditions in upholding the right to set-off directed attention to the provisions of the bankrupt law on the subject and to its command that only the balance should be paid and the inherent relation which that requirement of the act created between the claims scheduled in the bankruptcy on the one hand and proved on the other and the character which was affixed to them for the purpose of set-off even after a composition had been ordered. The court said:
“I have treated this as a case between an assignee and a creditor, because the bankrupt in a composition case stands, as to set-off, in the position of an assignee; if none has been appointed.” In other words, treating the allowance of the composition as having, so to speak, irrevocably stereotyped the rights of the parties in conformity with the bankrupt law and to the end that its purposes might be carried out, the bankrupt holding under the composition was treated for such purposes as but an assignee in bankruptcy and therefore so far as set-off was concerned as having no greater right under the composition than existed in the bankruptcy in favor of the estate at the time the composition was made.
These cases as well as the principles upon which they rest clearly make manifest the fact that it was not only within the power but it was the duty of the court below' as an inevitable result of the liquidation of the claim against the Glass Company which it made to treat the set-off as accomplished since that result was necessary to give vitality to the order of composition and to secure the right of set-off which inhered in the nature of the title given by the bankruptcy court to the bankrupt as the *467result of'the composition. From this conclusion it necessarily follows that the duty to enforce the set-off in-, tegrally inhered in the order and judgment which sanctioned the composition since otherwise the order would have embodied within itself a refusal to obey and give effect to the express command of the bankrupt law as to the nature and character of what could be transferred under the composition. And this consequence is obvious when it is borne in mind that the result of the composition was to recognize and fix the right of set-off although not denying the power to liquidate as a means of carrying out the established right of set-off. This being true, it is also true that the moment the court below liquidated the claim, in and by virtue of the order of composition the duty arose to give effect to -the right of set-off established by the order of composition in conformity with the express command of the bankrupt law. And this fully answers the suggestion that as the right to the set-off was not asserted eo nomine but the decree in composition was pleaded as res judicata, therefore there was no denial of the right of set-off even if secured as the result of the composition. Certainly it must be that the plea of the decree in composition as res judicata was a plea advancing the right which that decree necessarily seemed.
This in my judgment leaves it necessary only to consider the assertion that even although the right was seemed by the bankrupt law and even although that right was preserved by the composition and inhered in the very-nature of the title which the composition passed, it nevertheless does not here exist, because of what was done at the time the composition was adopted. This rests upon the theory that as the Glass Company took the dividend upon its claim and did not insist upon a liquidation of the claim in damages held by the bankrupt- estate, it therefore waived any right to futme set-off concerning said claim. I must confess I find difficulty *468in precisely grasping 4he proposition. The Glass Company disputed the claim in damages and the duty of liquidation was on the bankrupt or the bankrupt estate but not on the Glass Company, and if waiver or estoppel was the result of what was done, the waiver was not as to the right of the Glass Company, but as to the claim for damages and against the estatq which held it. Indeed, the tender to the Glass Company of the full percentage due on its claim without liquidating the claim for damages against it so as to accomplish a set-off, if waiver is to control, was a waiver by the bankrupt of a right to liquidate and assert his claim in the future. The proposition otherwise stated is this: If the composition is to be considered as having irrevocably excluded the right to set-off, then of course the consequences of the failure to ask for it must fall upon the one holding'the unliquidated claim and not be cast upon the one who had no duty or concern with that subject until the liquidation was accomplished, especially in view of the payment made of the percentage upon the amount proved, a payment which was only consistent with the theory that the unliquidated claim was abandoned. If on the other hand it be ‘ considered in consonance with the principles and authorities to which I have referred that the composition did not terminate the bankruptcy but that a liquidation for the purpose of set-off could thereafter be accomplished, then it clearly follows that the effect of the bankruptcy and of. the judgment of composition was to fix and secure that right and it cannot be held consistently with the statute that the composition proceedings taken conformably with the statute/were. a waiver of the right which those proceedings inevitably secured and made effective. •

For these reasons I dissent, and am authorized to say that

Mr. Justice Hughes, Mr. Justice Lamar, and Mr. Justice McReynolds concur in this dissent. ■