Court Opinion

ID: 2964716
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:30:01.872898+00
Date Added: 2024-06-11T11:37:25.546117
License: Public Domain

USCA1 Opinion

	

                            UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT
                                 ____________________

          No. 96-1395

                    PETITIONING CREDITORS OF MELON PRODUCE, INC.,

                                     Appellants,

                                          v.

                         JOSEPH BRAUNSTEIN, TRUSTEE, ET AL.,

                                      Appellees.

                                 ____________________

          No. 96-1406

                                 MELON PRODUCE, INC.,

                                Plaintiff - Appellant,

                                          v.

                                    PETER KARGER,

                                Defendant - Appellee.

                                 ____________________

                    APPEALS FROM THE UNITED STATES DISTRICT COURT

                          FOR THE DISTRICT OF MASSACHUSETTS

                   [Hon. Edward F. Harrington, U.S. District Judge]
                                               ___________________

                                 ____________________

                                        Before

                                Selya, Circuit Judge,
                                       _____________

                           Campbell, Senior Circuit Judge,
                                     ____________________

                          and Boyle,* Senior District Judge.
                                      _____________________

                                _____________________
                              
          ____________________

          *  Of the District of Rhode Island, sitting by designation.

               Richard  L. Blumenthal,  with  whom Peter  L. Zimmerman  and
               ______________________              ___________________
          Silverman & Kudisch, P.C. were on brief for appellants.
          _________________________
               Alan M. Spiro, with  whom Andrew D. Cummings and  Friedman &
               _____________             __________________      __________
          Atherton were on brief for appellee Peter Karger.
          ________

                                 ____________________

                                     May 8, 1997
                                 ____________________

                                         -2-

                    BOYLE,  Senior  District  Judge.   In  this  action,  a
                    BOYLE,  Senior  District  Judge.
                            _______________________

          Bankruptcy  Court  decision  allowed  the unsecured  claim  of  a

          creditor  who   had  obtained  a  preferential   transfer.    The

          petitioning  unsecured creditors appealed  to the  District Court

          the Bankruptcy Court's ruling that the unsecured creditor's claim

          should  neither  be  denied  nor  equitably  subordinated.    The

          District  Court  dismissed the  petitioning  unsecured creditor's

          appeal  for  failure to  prosecute.    The petitioning  unsecured

          creditors now claim  that the District Court  erred in dismissing

          their appeal.  We affirm the Bankruptcy Court's determination.

                                    I.  BACKGROUND
                                    I.  BACKGROUND

                    In August  1984, Karger, the unsecured creditor, loaned

          $632,000 to  A. Pellegrino  & Son,  Inc.  ("Pellegrino").   Melon

          Produce,  Inc.  ("Melon  Produce")  was  incorporated  to  secure

          Karger's  loans to Pellegrino, then in a proceeding under Chapter

          11  of the Bankruptcy Code.  Karger was Melon Produce's president

          and  sole shareholder.   The  Bankruptcy Court  approved Karger's

          loans, the  transfer of three shares of  stock in the New England

          Produce Center ("NEPC") and leasehold interests in three  bays at

          NEPC from Pellegrino to Melon Produce for the purpose of securing

          Karger's  loans, and Melon  Produce gave a  guaranty and security

          interest  to Karger which included all "instruments" and "all . .

          .  rights . . .  to the  payment of  money" including  a security

          interest  in "all such  assets hereinafter acquired."   The three

                                         -3-

          bays and the shares  of stock were  not included in the  security

          interests identified.   On February 27, 1987,  Melon Produce sold

          its three bays and shares of NEPC stock and paid Karger, its only

          secured creditor, $430,022.39 from the proceeds.

                    Within a year of the payment to  Karger, an involuntary

          proceeding  against   Melon  Produce  under  Chapter   7  of  the

          Bankruptcy Code was initiated  by three unsecured creditors.   On

          March  22, 1990,  Joseph Braunstein,  the  Chapter 7  Trustee for

          Melon Produce  ("Trustee"), brought  an action against  Karger in

          the  Bankruptcy  Court.   The  complaint  alleged a  preferential

          transfer  and a  fraudulent transfer  of property  of the  estate

          under  the  Bankruptcy  Code  and  a  fraudulent  transfer  under

          Massachusetts state law. 

                    The proceeding was transferred  to the District  Court.

          On January  8, 1991,  the District  Court  granted the  Trustee's

          motion for entry of final judgment  as to Count I, the preference

          claim,  and the  Trustee's motion  for assessment  of prejudgment

          interest.   The  District  Court entered  final  judgment on  the

          merits,  awarding damages on Count I in the amount of $430,022.39

          plus  pre-judgment interest  in the  amount of  $29,838.39.   All

          other  counts were dismissed.   On September 29,  1992, the final

          judgment  was  upheld upon  appeal by  this Court.   In  re Melon
                                                               ____________

          Produce, Inc., 976 F.2d 71 (1st Cir. 1992).
          _____________

                    The  Trustee  and Karger  agreed  to  a Stipulation  of

          Settlement on  June  18, 1993.   The  Trustee had  filed a  post-

          judgment motion  to require  Karger to satisfy  the indebtedness,

                                         -4-

          and sought the appointment  of a Special Master for  the purposes

          of  taking  possession of  and selling  shares  of stock  held by

          Karger  in two  unrelated  corporations.   The  Trustee also  had

          brought an action seeking to set aside as a fraudulent conveyance

          the interest  of  Karger's wife,  Susan Karger,  in certain  real

          property held by her and Karger as tenants-by-the-entirety.  

                    The  stipulation stated  that Karger  had  asserted and

          represented  that  he  was  unable  financially  to  satisfy  the

          judgment  in full.   In  support of  this assertion,  Karger made

          certain   financial   disclosures  to   the   Trustee,  including

          submitting to a deposition  by the Trustee and producing  his tax

          returns and other work papers for review by the Trustee.   Karger

          offered  to pay  the  sum of  $400,000,  in satisfaction  of  the

          judgment and his and his  wife's obligations and indebtedness  to

          the Trustee.   Due to  the uncertainty with  respect to  Karger's

          financial  situation  and the  question  of  Karger's ability  to

          satisfy the judgment,  and given the uncertainty with  respect to

          the valuation  of Karger's  stock in the  unrelated corporations,

          the Trustee  agreed to  seek  the approval  of Karger's  $400,000

          offer from the Bankruptcy Court according to the following terms:

                      If  the  Settlement  Amount is  paid  [by
                      Karger] on or before the Settlement Date,
                      the  Trustee shall accept such payment in
                      satisfaction of Karger's obligations, and
                      the  Trustee shall mark  the judgment and
                      any  execution  therefor 'satisfied'  and
                      return same  to Karger.  . . .  If Karger
                      pays   the   Settlement  Amount   by  the
                      Settlement  Date,  the Trustee  shall not
                      object  to  the  allowance   of  Karger's
                      unsecured   claim   in   the  amount   of
                      $400,000. . . . If this settlement is not

                                         -5-

                      approved by the Bankruptcy Court or if an
                      appeal is  taken from an  order approving
                      this settlement and the order  is stayed,
                      then at the  sole option of  the Trustee,
                      the Trustee may  declare the  Stipulation
                      and    settlement    null    and    void.
                      Thereafter,  the  Trustee may  pursue his
                      rights   and  remedies   against  Karger,
                      including,  but  not   limited  to,   the
                      appointment of the Special Master to sell
                      the [corporate]  stock of Karger  and the
                      fraudulent   conveyance  action   against
                      Peter and Susan Karger.  

                    The petitioning unsecured creditors filed  an objection

          to the  Trustee's motion  to approve the  settlement stipulation,

          seeking the  denial of the Trustee's application  for approval of

          the  stipulation,   or,   in  the   alternative,  the   equitable

          subordination of  Karger's unsecured claim  to the claims  of the

          other  unsecured creditors.   On  July 22,  1993,  the Bankruptcy

          Court  heard  the  motion  and  approved  the  settlement.    The

          unsecured  creditors argued  that  the settlement  should not  be

          approved because  the settlement provided that  the Trustee would

          not object to Karger's unsecured claim of $400,000 and Karger was

          to pay  less than the full amount of the preference judgment. The

          trustee  advised the  Bankruptcy Court  that he  did not  wish to

          pursue   equitable  subordination  of   Karger's  $400,000  claim

          because, having succeeded on  the issue of preferential transfer,

          he  did  not want  to  go  through ".  .  .  another war."    The

          Bankruptcy Court  stated  that 11  U.S.C.    502(d)  permits  the

          petitioning unsecured creditors to object to the allowance of the

          claim stating that "[y]ou  could press that [claim  for equitable

          subordination] even if the trustee rolls over and plays dead" and

                                         -6-

          that they, the  objecting unsecured creditors,  "can come in  and

          ask for  equitable subordination."   The  context of  the court's

          statement is  clear that  objections to Karger's  unsecured claim

          could  be made  later "and we'll  have a  hearing on  that."  The

          petitioning  unsecured creditors  did  not appeal  the Bankruptcy

          Court's order  approving the settlement.   On September  2, 1993,

          Karger paid the $400,000 settlement to the Trustee.

                    The  petitioning  unsecured  creditors  then  filed  an

          objection to Karger's claim in Bankruptcy Court.  On November 26,

          1993,  the petitioning  unsecured  creditors filed  a Motion  for

          Summary  Judgment  in  Bankruptcy  Court,  arguing that  Karger's

          unsecured  claim should be denied pursuant to 11 U.S.C.   502(d),

          or,  in the alternative, that  Karger's claim should be equitably

          subordinated pursuant  to  11 U.S.C.     510(c).   The  creditors

          argued that the claim should be disallowed because Section 502(d)

          states that "the  court shall  disallow any claim  of any  entity

          from which  property is recoverable  . . . unless  such entity or

          transferee has paid the amount, or turned over any such property,

          for  which such entity or  transferee is liable."   The unsecured

          creditors  argued  that   Karger's  unsecured  claim   should  be

          disallowed   because  the  full amount  of  the judgment  against

          Karger was in fact not paid.  11 U.S.C.   502(d).

                    The unsecured creditors also argued that Karger's claim

          should be  subordinated to their  unsecured claims.   This action

          would increase the dividend to the unsecured creditors other than

                                         -7-

          Karger.  Section 510(c) authorizes the Bankruptcy Court to  apply

          equitable subordination principles to claims.

                    On December  28, 1993, the Bankruptcy  Court denied the

          Motion  for  Summary  Judgment  and  entered  an  order  allowing

          Karger's unsecured  claim in the amount  of $400,000.  See  In re
                                                                 ___  _____

          Melon Produce,  162 B.R. 386  (Bankr. D. Mass. 1993).   The Court
          _____________

          found that  the petitioning  unsecured creditors' Section  502(d)

          argument  failed on  the grounds  that Karger  had paid  the full

          amount of  the $400,000  settlement, that the  Bankruptcy Court's

          order  approving  the  settlement  stipulation had  adjusted  the

          amount of  the preference downward,  and that "to  rule otherwise

          would deprive the settlement  of its essential vitality."   As to

          the petitioning unsecured creditors' Section 510(c) argument, the

          Court found that "[t]he claims are primarily  derivative from the

          same  facts set forth in the Trustee's complaint seeking to avoid

          a  fraudulent transfer.  While the Trustee did not seek equitable

          subordination of  Karger's claim . . . he might well have done so

          based  upon the  facts of the  matter, and res  judicata bars all

          available  grounds for  recovery,  regardless of  whether or  not

          asserted."   The Bankruptcy Court  cited this court's  opinion in

          Bezanson v.  Bayside Enterprises,  Inc. (In re  Medomak Canning),
          ________     ___________________________________________________

          922  F.2d 895 (1st Cir.  1990), and concluded  that "the previous

          settlement  precludes the [petitioning  unsecured creditors] from

          raising the issues of equitable subordination at this time."  

                    The  petitioning unsecured  creditors then  appealed to

          the District Court from the denial of Summary Judgment.  On April

                                         -8-

          7,  1994,  the District  Court  affirmed  the Bankruptcy  Court's

          ruling on the issues relating to the effect of the failure to pay

          the full amount of the judgment against Karger  and  "remanded to

          the  Bankruptcy  Court  the  issue of  whether  [the  petitioning

          unsecured  creditors] should  be  allowed to  object to  Karger's

          claim on equitable subordination grounds."

                    On  July  5,  1995,   the  Bankruptcy  Court  issued  a

          Memorandum  Decision,  in which  it  ruled  that the  petitioning

          unsecured  creditors  were  precluded   by  the  settlement  from

          objecting to  Karger's unsecured  claim.   In  its Decision,  the

          Bankruptcy  Court  resolved  the  uncertainties  created  by  its

          utterance of July 22, 1993 and its published decision of December

          28, 1993.   The Court  stated that its  initial pronouncement  on

          July 22, 1993, which stated  that 11 U.S.C.   502(a) permits  the

          petitioning unsecured creditors to object to the allowance of the

          claim and that the petitioning unsecured  creditors could ask for

          a hearing  on the  equitable subordination issue,  was in  error.

          With  the  benefit  of  the motions  for  summary  judgment,  the

          Bankruptcy  Court  had come  to  the opposite  conclusion  in its

          published decision of December  28, 1993.  In that  decision, the

          Bankruptcy Court  held the  petitioning unsecured creditors  were

          precluded from raising [the equitable subordination] issue, based

          primarily  upon this court's  opinion in  In re  Medomak Canning.
                                                    ______________________

          The Bankruptcy Court now  upheld the December 28, 1993  decision,

          holding that In re  Medomak Canning was controlling and  that the
                       ______________________

          petitioning unsecured  creditors were not entitled  to pursue the

                                         -9-

          equitable  subordination issue  further.   The  court then  cited

          Grella v.  Salem Five Cent Savings Bank, 42 F.3d 26, 30 (1st Cir.
          ______     ____________________________

          1994), without discussion.

                    On  July 14, 1995,  the petitioning unsecured creditors

          again  appealed  their  equitable  subordination  claim  to   the

          District  Court.  The Bankruptcy Court gave notice to the parties

          of the appeal timetable on July 17, 1995.  On  September 5, 1995,

          the record for the  case on appeal was assembled  and transmitted

          to the District Court.  Although the District Court did not issue

          a notice to the parties of the entry of the appeal on the docket,

          the petitioning  unsecured  creditors had  actual  knowledge  for

          several months of the docketing of the appeal.  Since the  filing

          of  the  appeal, the  petitioning  unsecured  creditors had  been

          monitoring the status of the proceeding on  the Court's computer-

          operated Pacer System.

                    The petitioning  unsecured creditors  did not  file and

          serve  a brief within fifteen days  after the entry of the appeal

          on  the District  Court docket,  as required  by Bankruptcy  Rule

          8009.  On February 27, 1996,  the District Court entered an order

          dismissing the  appeal for the petitioning  creditors' failure to

          prosecute the  appeal.  The petitioning  unsecured creditors then

          filed a notice of this appeal to this Court.

                                   II.  DISCUSSION
                                   II.  DISCUSSION

                                         -10-

                    Although this  appeal initially  presents the  issue of

          whether  actual as opposed to  record notice triggers  the 15 day

          period for the filing and service of an  appellant's brief in the

          District  Court, we choose to  forego that issue  and address the

          substantive  underlying issues.   While it  is true  that federal

          courts  of appeal generally do not  rule on issues not decided in

          the district court, we  do have discretion to address  issues not

          reached  by the district  court when the  question is essentially

          legal and the record is complete.  U.S. v. L.I. Kin-Hong, No. 97-
                                             ____    _____________

          1084,  slip op.  at  31  (1st  Cir.  Mar.  20,  1997)  (citations

          omitted).  Here,  the substantive underlying issues  are legal in

          nature and the record  is complete.  Furthermore, this  cause has

          already involved  the  attention  of this  court  on  an  earlier

          occasion.   We address  the substantive underlying  issues in the

          hope  that this litigation may sooner, rather than later, come to

          a conclusion.

                    A.  Disallowance of Claim
                    A.  Disallowance of Claim

                    The petitioning unsecured creditors argue that Karger's

          claim  should  be disallowed,  as  Karger  received a  judicially

          determined preferential transfer and has not paid the  amount for

          which he is liable because of the preferential transfer.  Section

          502(d) of the Bankruptcy Code governs the disallowance of claims.

          It reads as follows:

                    (d)  Notwithstanding  subsections (a)  and  (b) of
               this section, the court shall disallow any claim of any
               entity from which property is recoverable under section
               542,  543, 550,  or 553  of  this title  or  that is  a

                                         -11-

               transferee   of  a  transfer  avoidable  under  section
               522(f), 522(h), 544, 545,  547, 548, 549, or 724(a)  of
               this title,  unless such entity or  transferee has paid
               the amount, or turned over any such property, for which
               such  entity  or  transferee  is liable  under  section
               522(i), 542, 543, 550, or 553 of this title.  

          In  1992, this  court held  that Karger  was the  recipient of  a

          voidable transfer.  See In re Melon Produce, 976 F.2d at 76.
                              ___ ___________________

                    The  remaining  issue,  therefore, is  to  determine if

          Karger, as transferee,  has paid over the amount for  which he is

          liable under  11 U.S.C.    550.  Petitioning  unsecured creditors

          argue that Karger did not comply with the requirements of Section

          502(d) because  he did not pay the full amount of the judgment of

          $459,860.78 plus  interest but  rather settled the  claim against

          him by means of a payment of a lesser sum, $400,000.

                    The legal  query presented  appears to be  unique since

          the  parties have not cited nor have we found any authority which

          specifically addresses  the precise issue presented  here.  Thus,

          we are left to  the task of ascertaining the  legislative purpose

          and intent, if possible, from  the language employed by Congress.

          As we have stated previously, "'the task of interpretation begins

          with  the text of the statute itself, and statutory language must

          be accorded its  ordinary meaning.'"  In Re: Juraj J. Bajgar, 104
                                                ______________________

          F.3d  495, 497 (1st Cir. 1997), quoting Telematics Int'l, Inc. v.
                                                  ______________________

          NEMLC Leasing Corp., 967 F.2d 703, 706 (1st Cir. 1992).  Wherever
          ___________________

          possible, statutes  should be construed in  a commonsense manner,

          avoiding absurd  or counterintuitive  results.  U.S.  v. Carroll,
                                                          ____     _______

          105 F.3d 740, 744 (1st Cir. 1997) (citations omitted).  

                                         -12-

                    The language  of Section 502(d) of  the Bankruptcy Code

          is not complex.  A  proof of claim must be disallowed  unless the

          preference recipient  pays the amount  for which  he is  "liable"

          under  11 U.S.C.    550.   See 11  U.S.C.    502(d); Max Sugarman
                                                               ____________

          Funeral  Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1257 (1st
          ___________________    ________________

          Cir. 1991).   Once  the preference  recipient  complies with  the

          payment or  turnover order of the bankruptcy court, it may file a

          proof of claim.  See Sugarman,  926 F.2d at 1257; see also  In re
                           ___ ________                     ________  _____

          First Intern. Services Corp.,  37 B.R. 856, 860 (Bankr.  D. Conn.
          ____________________________

          1984)  ("Pursuant to  11 U.S.C. 502(d),  claims of  creditors who

          have  received  void or  voidable  transfers  must be  disallowed

          unless the creditor surrenders  the money or property transferred

          during the preference period.").

                    The key phrase in this inquiry is "the amount . . . for

          which  such entity  or transferee  is liable  . .  ."   11 U.S.C.

            502(d).  The difficulty  with application of the  term "liable"

          namely  is that there are two court actions which determined that

          the preference recipient is liable,  the judgment of the District

          Court  and  the  Order  of  the  Bankruptcy  Court  approving the

          settlement of the preference claim.

                    The  unsecured  creditors  argue that  the  legislative

          history  of  Section 502(d)  is relevant  to  this inquiry.   The

          ambiguity  is  not  clarified  by reference  to  the  legislative

          history.  In  part, that  history states: "Subsection  (d) . .  .

          requires  disallowance of a claim  of a transferee  of a voidable

          transfer in  toto if the  transferee had not  paid the amount  or
                   ________

                                         -13-

          turned over the property received as required under the  sections

          under which  the transferee's liability  arises."  H.R.  Rep. No.

          95-595, at 354 (1977), reprinted in 1978 U.S.C.C.A.N.  5787, 6310

          (emphasis added).  The petitioning unsecured creditors argue that

          the inclusion  of  the words  "in toto"  indicates that  Congress

          intended that a creditor  must relinquish the original preference

          amount, precluding any judicial adjustment of  this figure.  They

          also cite a  North Dakota Supreme Court case as  support for this

          proposition that  a creditor  must surrender all  sums previously
                                                       ___

          transferred.  See  North Dakota Public  Service Com'n v.  Central
                        ___  __________________________________     _______

          Sales  Grain, Inc.,  371 N.W.2d  767, 780  (N.D. 1985)  (emphasis
          __________________

          added).

                    This opinion considered  a state insolvency  proceeding

          brought against a grain warehouseman.   The court concluded  that

          the claim of a creditor should be denied because the creditor had

          received a vaculator machine1 as a  preferential transfer and had

          not  returned it.  The creditor  claimed that he had "since" paid

          for  the machine (apparently after  the record was  closed in the

          proceedings  below).   The court stated  that the  creditor could

          bring an appropriate motion for  relief after its mandate issued.

          Although there is an  obvious difference between the return  of a

                              
          ____________________

          1   Although the term  'vaculator' is used  sometimes to describe
          surgical devices for the removal of fluid from the human body and
          the  like, in  this  context a  'vaculator  machine' describes  a
          system used to extract  grain from containers and transfer  it to
          other storage facilities.  See Bunge Corp. v. American Commercial
                                     ___ ___________    ___________________
          Barge Line Co., 630  F.2d 1236, 1241 (7th Cir.  1980); Mercantile
          ______________                                         __________
          National  Bank of Chicago v.  Quest, 303 F.  Supp. 926, 928 (N.D.
          _________________________     _____
          Ind. 1969).  

                                         -14-

          tangible piece of  machinery which Section  502(d) would seem  to

          require (although we  do not  now determine that  issue) and  the

          payment of all or part of a monetary sum, there is nothing in the

          court's opinion  which supports the contention  that an unsecured

          creditor  may file  a  claim only  if  the judgment  against  the

          creditor for a preferential transfer of money is paid in full.

                    The legislative history thus  becomes pertinent to  our

          analysis, even  if it does not  pinpoint a specific result.   The

          unsecured creditors place emphasis  upon the use of the  term "in

          toto" in the  House of Representatives  historical record.   What

          the unsecured creditors have overlooked is the fact that the term

          "in  toto" refers to  the unsecured claim  of the recipient  of a

          preferential  transfer and not, as they would have it, the amount

          for which  the  transferee is  liable.   Thus,  this  legislative

          history does not clarify the purpose of Congress.

                    We  must ask,  how  would Congress  have answered  this

          question?  Guided by the actual language used, we may look to the

          practical  effect of  the arguments made.   See Dames  & Moore v.
                                                      ___ ______________

          Regan, 453 U.S.  654, 673-74 (1981);  Chapman v. Houston  Welfare
          _____                                 _______    ________________

          Rights Org.,  441 U.S. 600, 616 (1979).  There is guidance in the
          ___________

          cogent language used by  the Bankruptcy Court that to  accept the

          unsecured   creditors'   contentions   would  rob   post-judgment

          settlements of  their  "essential vitality."    See In  re  Melon
                                                          ___ _____________

          Produce, 162  B.R. at  388.   It is an  unfortunate axiom  that a
          _______

          judgment  does  not always  guarantee  collection.   Indeed,  the

          easiest  judgment to  obtain is  usually one  that will  never be

                                         -15-

          paid.  The  circumstances of the  settlement with Karger  suggest

          that  collection of the full amount could have been an impossible

          task and  could have involved  the estate  in lengthy,  expensive

          litigation to the detriment of the unsecured creditors. 

                    Thus a  construction of the statute  which requires the

          last penny to be paid could cause the unsecured  creditors to, in

          effect, submit  to an all-or-nothing situation.   The petitioning

          unsecured  creditors' argument would preclude half or any part of

          the loaf from being satisfactory, thereby preventing the bankrupt

          estate from  being at  least  partially nourished.   The  purpose

          ought to be  to encourage  the collection of  the largest  amount

          possible  to provide  a  dividend or  a  better dividend  to  the

          unsecured creditors.

                    Experience  suggests that  few unsecured  creditors can

          expect satisfaction  of their claims  in whole or  in substantial

          part.  More  than two decades ago it was  reported that unsecured

          creditors  in business bankruptcies  receive an average  of 8% of

          the  amounts  proved  and  allowed, while  general  creditors  in

          personal bankruptcies  receive an average of 7%  of their allowed

          claims.  See David Stanley & Marjorie Girth, Bankruptcy: Problem,
                   ___                                 ____________________

          Process, Reform 130  (1971).   There is nothing  to signify  that
          _______________

          there  has been any recent  substantial improvement in the extent

          of  the recoveries  of unsecured  creditors.   The Administrative

          Office  of the U.S. Courts  reports a higher  average dividend in

          Chapter  11 reorganization cases - 32% - but that figure includes

          both the  amounts  actually paid  and  the amounts  that  debtors

                                         -16-

          promised  to pay after the  reorganization case was  closed.  See
                                                                        ___

          Admin. Office of  the U.S. Cts., Tables  of Bankruptcy Statistics

          A-32 (1978).  However, the latter may be merely paper obligations

          which may be  discounted again  in a recurrence  of the  debtor's

          financial difficulties.  See id.   Despite the lack of any recent
                                   ___ ___

          empirical  studies, certainly it is safe to expect that in almost

          every bankruptcy unsecured creditors are likely to receive only a

          small percentage of their legitimate claims.

                    The  estate is  protected against  manipulation because

          settlements must  be approved  by  the Bankruptcy  Court after  a

          consideration of  the circumstances of the  settlement.  Approval

          is a  discretionary  function  and  may be  reviewed  for  abuse.

          Hence, a small settlement which results in a substantial dividend

          to the preferential transferee is not likely to pass muster.

                    Finally,  this result  is consistent  with the  overall

          purpose of  Section 502, which  was not  "to punish, but  to give

          creditors  an option  to keep  their transfers  (and hope  for no

          action  by the trustee) or to surrender their transfers and their

          advantages and  share equally with other creditors."   Tidwell v.
                                                                 _______

          Atlanta Gas  Light Co. (In re Georgia  Steel, Inc.), 38 B.R. 829,
          ___________________________________________________

          839 (Bankr. M.D. Ga. 1984).    Karger chose the latter option and

          paid $400,000 to the Trustee.  If faced with the option of paying

          the full amount  of the judgment in order to file his claim as an

          unsecured  creditor  (apart  from  whether  or  not  he  had  the

          wherewithal to do so), the result might well  have been a lengthy

          and only partially  successful or even an unsuccessful  effort to

                                         -17-

          obtain  satisfaction of  the  judgment  in  full.   The  expenses

          incurred to collect the  judgment in full or  in part could  have

          diminished the return to the  estate to less than $400,000.   The

          practical  effect of  the position  advocated by  the petitioning

          unsecured creditors compels us to conclude that  Congress did not

          intend that unsecured creditors be denied their claims, if having

          received a preferential transfer, they do  not satisfy a judgment

          arising  out of  the  transfer in  full and  with  interest.   We

          believe that Congress intended some play in the joints and that a

          court-approved  settlement  of  such  a  judgment  satisfies  the

          requirement that  the preferential  transferee has paid  that for

          which  he  is liable.   We  therefore  agree with  the Bankruptcy

          Court.  We  hold that  pursuant to Section  550(a)(1) Karger  was

          liable  for the sum of $400,000 and therefore his unsecured claim

          was properly allowed.  

                    B.  Equitable Subordination
                    B.  Equitable Subordination

                    The ultimate  ruling of  the Bankruptcy Court  was that

          the  unsecured creditors  were  barred  by  the approval  of  the

          settlement between Karger and the Trustee.  Bankruptcy Court Rule

          9019 requires notice to interested parties prior to approval of a

          settlement.   See 11 U.S.C. Part IX,  Rule 9019(a).  The rule was
                        ___

          complied  with  since  the petitioning  unsecured  creditors  had

          notice  of and  did in  fact appear  and object  to  the proposed

          settlement.   The  unsecured creditors  vigorously pressed  their

          argument that Karger's unsecured  claim should be subordinated to

                                         -18-

          their  unsecured  claims.    The Bankruptcy  Court  approved  the

          settlement which included a provision that "the Trustee shall not

          object to the allowance of Karger's unsecured claim in the amount

          of  $400,000."  The unsecured  creditors did not  appeal from the

          approval  of the  settlement  agreement between  the Trustee  and

          Karger.     Although  the   Bankruptcy  Judge  stated   that  the

          petitioning unsecured creditors could ask for  a later hearing on

          the equitable subordination issue, this statement was in error.

                    Counsel should not take such a prediction by a judge as

          gospel, but should act  diligently to protect the record  and his

          or her client's right to appeal.  See Morrissey v. Nat'l Maritime
                                            ___ _________    ______________

          Union of America, 544 F.2d 19, 32 (2d Cir. 1976) ("While  counsel
          ________________

          seeks to  excuse [the failure to  make an offer of  proof] on the

          basis of  the judge's statement on  the telephone . .  . this did

          not  relieve counsel  of  his  duty  to  protect  the  record.").

          Counsel must not rely upon the judge to make the case  for him or

          her.   As observed in Marshak  v. Tonetti, "[j]udges from time to
                                _______     _______

          time will make mistakes.  Parties should not sit idly by, failing

          to  point out  relevant authority  and then  hope for  redress on

          appeal."  Marshak  v. Tonetti, 813  F.2d 13, 17 (1st  Cir. 1987).
                    _______     _______

          If the equitable subordination issue was to be considered at all,

          it  should have  been addressed  at the  time of  the settlement.

          Otherwise,  there  is  no  reason  for  a settlement,  since  the

          settling parties are  neither protected from further  unfavorable

          consequences  nor  allowed  to enjoy  the  safe  harbor of  their

          settlement arrangement.

                                         -19-

                    Furthermore,  the  principles of  res  judicata dictate

          that the petitioning unsecured  creditors should not be permitted

          to  bring this issue  on appeal.   "Under  res judicata,  a final

          judgment  on the  merits of  an action  precludes the  parties or

          their  privies from relitigating  issues that were  or could have

          been raised in  that action."  Allen v. McCurry,  449 U.S. 90, 94
                                         _____    _______

          (1980),  citing Cromwell  v.  County of  Sac,  94 U.S.  351,  352
                          ________      ______________

          (1876); see also Montana  v. United States, 440 U.S.  147 (1979).
                  ________ _______     _____________

          In this  case, the fate  of the petitioning  unsecured creditors'

          equitable subordination  claim is affected by the  fact that they

          were in privity with the Trustee.

                    In  In re  Medomak  Canning, this  court discussed  the
                        _______________________

          standard  by   which  the  relationship  between   a  trustee  in

          bankruptcy  and a  creditor should  be evaluated.   A  trustee in

          bankruptcy is a fiduciary  representing the estate and creditors.

          In re Medomak  Canning, 922 F.2d  at 901, citing  In re Thu  Viet
          ______________________                            _______________

          Dinh,  80 B.R. 819, 822 (Bankr.  S.D.Miss. 1987).  Privity may be
          ____

          established   by   identification   of  interests,   even   where

          representation  of  those interests  is  not authorized.    In re
                                                                      _____

          Medomak  Canning, 922 F.2d at 901, citing Meza v. General Battery
          ________________                          ____    _______________

          Corp., 908 F.2d 1262, 1267 (5th Cir. 1990).
          _____

                    Since the petitioning unsecured creditors had notice of

          the hearing  on  the approval  of the  settlement agreement,  and

          since they participated and argued the issue, and since the issue

          they now  press was considered although  incorrectly passed over,

          their  failure to  appeal thereafter  is  fatal to  their present

                                         -20-

          appeal.  The finality of court-approved settlements such as  this

          one is  important, especially to the  efficient administration of

          the estate and to reassure settling parties that the trustee will

          not  relitigate the settled claims.   See In  re Medomak Canning,
                                                ___ ______________________

          922 F.2d at 901. 

                    The Trustee is ordinarily the appropriate party to seek

          equitable  subordination on  behalf of  the estate  and unsecured

          creditors.  In re Medomak Canning, 922 F.2d at 902.  As unsecured
                      _____________________

          creditors, appellants could not  in these circumstances evade the

          responsibility of looking to the Trustee in the first instance as

          their fiduciary and representative to vindicate  their interests,

          including   even    their   interest   in    pursuing   equitable

          subordination.   Id.   In  this case,  the Trustee  chose  not to
                           __

          petition the court for  equitable subordination of Karger's claim

          and  that choice was approved  by the Bankruptcy  Court.  Because

          the Trustee  was acting for the  petitioning unsecured creditors,

          they  are  bound  by  the  Trustee's  actions.    The  principles

          enunciated  in  In   re  Medomak  Canning,  922   F.2d  895,  are
                          _________________________

          controlling.    Therefore, the  petitioning  unsecured creditors'

          equitable subordination claim is barred  by the principles of res

          judicata.

                                   III.  CONCLUSION
                                   III.  CONCLUSION

                                         -21-

                    We  affirm  the District  Court's  judgment  as to  the

          disallowance  of   Karger's  claim  and  the   dismissal  of  the

          petitioning unsecured creditors' appeal by the District Court.

                    Affirmed.  
                    ________

                                         -22-