Court Opinion

ID: 9442306
Source: CourtListenerOpinion
Date Created: 2023-08-03 18:43:39.697068+00
Date Added: 2024-06-11T17:28:39.536234
License: Public Domain

CLARK, Circuit Judge,
dissenting.
Certain propositions are, I think, to be regarded as accepted, viz., that the debtor in possession under an arrangement proceeding, like any other trustee, must act to secure what property it can for the creditors; and this, under settled law, would include property described in an invalid conditional bill of sale. We may also properly add that the debtor will not be permitted to misuse this fiduciary position merely for its own ends to evade just obligations. Then we must note the fact, which I believe is here crucial, namely, as specifically found by the referee, that the assets were insufficient to pay the general creditors in full. Finally the referee’s statement that these assets had contributed nothing to the confirmation of the arrangement is clearly his own legal conclusion from the known facts, without other and separate basis in the evidence. We do know, of course, that the plan was offered before the debtor’s attack upon the conditional bill of sale; but that attack came, and the full hearing upon it was held, substantially prior to the confirmation of the plan.
Under these circumstances it was surely the clear duty of the debtor to secure this property for the general creditors and of the referee to see that it did so. Hence if the property did not figure in the formation of the plan, it should have been made to do so. In fact, In re Martin Custom Made Tires Corp., 2 Cir., 108 F.2d 172, required the setting aside of the security here. There the court pointed out that the validity of the security becomes of prime importance where some creditors must be satisfied with less than full payment, and on analogous facts held that the entire claim must be treated as unsecured where the security was void as to other creditors.
Of course in such cases the claimant may reassert his security if, after other creditors are satisfied, some of the secured property is left unaffected by the plan and some sum is still due him. That at best seems unlikely; when other creditors are paid, the claimant will be also. I refer to it merely to point out that the bankruptcy court has ample powers to see that avoidance of the security shall not result in a windfall for the debtor, but shall inure to the benefit of the general creditors, for whom it was intended. Here, however, the creditors have not been satisfied; and since the debtor in possession succeeds to the unchallenged right of the creditors to have the security cancelled, its petition should have been granted. See 8 Collier on Bankruptcy § 6.32, pp. 813-818, 14th Ed. 1941.
My brothers seemingly do not controvert these propositions, but are moved to overlook whatever error there may have been because of their view that the plan cannot now be reframed to include the property which should thus have been recovered. But this requires the commission of another error, namely, the sanctioning of the return of the property to the one who is not entitled by law to it while there remain unpaid general creditors. I do not believe this should be our course; rather we should remand the case to the referee to do what now can be done to carry out the applicable principles of law. For my part I am not convinced (a) that *586the legal conclusion that the property did not contribute to the confirmation is necessarily sound in view of the time elements stated above or (b) that in any event nothing can now be done to correct errors which may have occurred, in view of the broad equity powers of the bankruptcy court, including that to “reopen estates for cause shown.” Bankruptcy Act § 2, subd. a (8), 11 U.S.C.A. § 11, subd. a (8). It is to be noted that these parties now before us cannot have acquired any vested rights in the confirmation, since their interests have been continuously in litigation; and it is only the vendor, and certainly not the general -creditors, who can or will complain of any change in favor of the latter now. Indeed, I am not sure how far an appellate court, faced with what (I submit) is a plain error, should go outside the record to affirm for fear that the error may have caused other consequences which are undesirable; this may easily lead to action upon what may be only a guess as to the inclination of the imagined equities. But I need not speculate that far to support my own view that we ought to reverse and remand.