Court Opinion

ID: 9629183
Source: CourtListenerOpinion
Date Created: 2023-08-22 09:38:49.257108+00
Date Added: 2024-06-11T18:07:16.693848
License: Public Domain

ELLETT, Justice
(dissenting):
I dissent. This case can be determined upon a basis not related to the rules of a bankruptcy proceeding, to wit, upon a third party creditor beneficiary contract. It was decided in the court below upon a motion for summary judgment, and in order for the ruling to stand, the defendant had to be entitled to judgment as a matter, of law. In my opinion the law is against the defendant on the issue raised, to wit, whether bankruptcy discharged a debt of another corporation.
On September 10, 1965, Standard Gil-sonite Company entered into a written agreement with the defendant, Mesa Petroleum Company, whereby Mesa took over all the assets (except certain specified funds) of Standard and promised to pay all debts of Standard set forth in Exhibit “A” attached to the agreement. The debt of Mojave in the amount of $20,000 was listed on the document attached.
If we assume that the opinion of the court is correct1 in holding that the claim of Mojave was barred by the Chapter XI proceeding of Standard, that is not to say that this defendant can take refuge behind the bankruptcy of Standard. A discharge in 'bankruptcy does not remove from a bankrupt the moral obligation to pay the debt. It simply takes the right to sue away from the creditor. The obligation on the part of the discharged debtor to pay is a sufficient consideration to support a definite promise made by him to pay that debt, and the old creditor can sue on the new promise as made.2
In this case the suit against Mesa is not based upon the old promise made by Standard. It is upon a new promise made by Mesa to pay a debt which Standard owed to-the plaintiff, a debt which Standard never did pretend that it did not owe. Its books always showed the debt to be a liability owing to Mojave. It is only Mesa which claims that Standard did not owe the debt,, ergo Mesa did not owe it.
Even if Standard did not owe the debt,, still it could have made Mojave a donee beneficiary by requiring Mesa to pay Mojave in return for taking the assets of Standard. Whether Standard owed Mojave or not is of no concern to Mesa.
The law in this regard is succinctly stated in 4 Corbin on Contracts, § 818, where the cases are collected. It says:
*247Observe further that the promisee may-have many good defenses in a suit brought against him by the third party that would not be operative in a suit against the promisor by the third party. The contract may have been made by the promisee for the purpose of settling some ill-founded claim of the third party; * * * The duty owed by the promisee to the third party may have become barred by statute of limitations or in bankruptcy; such a bar will not avail the promisor. * * *
Enough is stated here to convince me that Mesa should not be relieved of its promise to pay Mojave. However, since this is a dissent, I will point out what I consider to be other defects in the reasoning of the main opinion.
I cannot agree with the main opinion holding that the claim of Mojave was barred even as to Standard. Standard filed its petition under Chapter XI of the Bankruptcy Act, which chapter affects only the unsecured creditors of a debtor. An arrangement with the unsecured creditors was proposed on May 25, 1962, and was confirmed by an order signed August 13, 1962. The arrangement made no provision for the secured debts but did list that of Mojave in Schedule “B” as a secured debt.
Standard was advised by its counsel that it would have to deal with the secured creditors separately and individually and would have to resolve those secured debts as best it could. In his deposition, said counsel stated that the intention was to compromise and settle the secured claims and not to list them in the arrangement proceedings. Pursuant to the advice of counsel, Standard did make separate agreements with Mojave, Field Services, and Tennessee Gas. Thereafter settlements were made with all save Mojave.
At the time of filing its petition, Standard’s books of account showed a debt owing to Mojave in the amount of $26,000, some $18,325.82 of which was secured by a second mortgage on mining equipment, on certain automobiles, and on its office furniture and fixtures. The debt was payable at the rate of $20 per ton of ore mined.
Sometime in June, Standard and Mesa entered into a new agreement whereby Standard promised to sign a new note for $20,000, to give a chattel mortgage to secure the note, and to pay it off at the rate of $2,000 per year in place of the original debt. Mojave released its second mortgage, but Standard never did sign a note nor give a chattel mortgage for the substituted debt. Thereafter Standard carried the debt on its books at $20,000.
I would think that the unsecured part of the debt was covered by the confirmation. While no unsecured debt of Mojave was listed, still Mojave knew of the proceedings and, therefore, would be bound to the extent of the unsecured portion of the debt.
*248The main- opinion says that the case of Zavelo v. Reeves 3 applies to regular bankruptcies only. The language of the case, is clear:
It is settled, however, that a discharge, while releasing the bankrupt' from legal liability to pay a debt that was provable in the bankruptcy, leaves him under a moral obligation that is sufficient to support a new promise to pay the debt. And in reason, as well as by the greater weight of authority, the date of the new promise is immaterial. The theory is that the discharge destroys the remedy, but not the indebtedness; that, generally speaking, it relates to the inception of the proceedings, and the transfer of the bankrupt’s estate for the benefit of' creditors takes effect as of thé same time; that the bankrupt becomes a free man from the time to which the discharge relates, and is as competent to bind himself by a promise to pay an antecedent obligation, which otherwise would not be actionable because of the discharge, as he is to enter into any new engagement. And so, under other bankrupt acts, it has been commonly held that a promise to pay a provable debt, notwithstanding the discharge, is as effectual when made after the filing of the petition and before the discharge as if made after the discharge.
The reasoning therein 'stated applies to Chapter XI proceedings .as well as to ordinary bankruptcies. Where.is the line of cleavage between debts and assets belonging to the bankruptcy court and those belonging to the petitioner in a Chapter XI proceeding? If that line is at the time of filing the petition, then the creditors will be listed and will receive -notice of future proceedings. They should vote either .to approve or reject the proposed arrangement; In fact, a creditor without knowledge who is omitted from the arrangement is not bound by the confirmation thereof.4 To hold all unsecured debts incurred after the petition has been filed but before confirmation to be barred might make it impossible for a debtor to raise the necessary funds to offer his creditors in his proposed arrangement. His earnings after the filing of 'his petition should be his, so that he could carry out his proposed. plans; and if the earnings are his, his new debts incurred in making this money likewise should be his, and his alone.
The question involved is discussed in 3 Collier on Bankruptcy, § 63.04, as follows:
The firmly established géneral rule is that the provability of a claim depends upon its status at the time the petition is filed. The general rule, however, is-now subject to certain statutory qualifications. The Act. of 1938 provides in *249§ 63b that “in the interval after the filing of an- involuntary petition and before the appointment of a receiver or the adjudication, whichever first oc..curs, a claim arising in favor of-a creditor by reason of property transferred or • services rendered to the bankrupt for . the benefit of the estate shall be provable to the extent .of the value of such property or services.” ' This new -provision ■derogates from the general principle that claims accruing after bankruptcy follow their own and special rules of allowance and do not constitute provable claims within the provisions of §§ 57, 63. Likewise, the Act of 1938 makes provable “contingent debts and contingent contractual liabilities” and expands the prov- ' .ability' of claims for anticipatory breach •of executory contracts. But aside from such specifically provided exceptions the principle prevails that “the filing of the petition is the 'crucial time in nearly all matters arising in bankruptcy proceed- ' ings, provided adjudication follows.” \ * * *
What this seems to say is that creditors may not share in assets under a plan when the obligation is incurred after the petition is filed unless the debt is incurred by the bankrupt so as to bring assets into the ■estate for further distribution among' the •creditors. It does not say that the debt' is discharged. It simply says that the •creditor may participate.
In this matter nothing was brought into the bankrupt’s estate because, as the opinion of the court points out, the second mortgage had become practically worthless.
None of the'cases relied upon in the prevailing opinion, as I interpret them, support the conclusions drawn therein. Let us examine them:
In Frey v. Frankel, 361 F.2d 437 (10 Cir. 1966), a corporation filed a' petition pursuant to Chápter XI of ' the Bankruptcy Act. Frey, the’former'president and chief stockholder of the corporation, undertook to raise funds with which to finance an arrangement. During'preliminary' discussions between Frey and’ Frankel, they decided that a change in ownership of the controlling stock would be required and that the plan to be - submitted would provide that Frey shoujd • be given an option to purchase one third of the new stock, and in addition he would have a five-year contract'of employment at a salary of $2,000 per month. The creditors would not approve the proposed plan. Thereafter Frey submitted a different plan, which was approved by the creditors, wherein Frankel was to be chief managing officer and Frey was given no right to purchase: the stock nor to have a five-year contract. This plan was confirmed by the court, and the charter of the corporation was amended to provide for the -issuance of the new stock.
Frey and Frankel fell out, and this action resulted, - wherein • Frey- claimed damages *250for not getting a five-year contract of employment at $2,000 per month; for rescission and so forth; and for his share of the stock. Since neither Frey’s option to purchase nor his employment agreement was included in the plan, he had no rights under that plan, and what the court held in effect in the case was that when the order of confirmation became final, the rights of the parties were fixed as of its entry. There was no holding that a debt of the corporation incurred subsequent to the filing of a petition was discharged. The corporation was the debtor in the proceedings, and all that the holding in this case amounts to was that Frey never got any rights because they were not stated in the arrangement.
Another case relied upon in the prevailing opinion is that of Wm. H. Wise & Company, Inc., v. Rand McNally & Company, 195 F.Supp. 621 (D.C.1961), There the plaintiff furnished material and engaged the defendant to print and bind 25,000 copies of a book for it. Wise filed for arrangement proceedings, and Rand McNally filed a proof of claim'for some $20,035.18 and stated that it held almost 14,000 copies of the book as security for the debt. Wise filed objections on the ground that the value of the security had not been evaluated. Finally, the parties stipulated that the value of the books held was $10,017.59, which was exactly one half of the amount of the debt due and owing. The other one half of the debt was allowed as an unsecured claim for which the defendant might share in the payments under the plan. Rand McNally ultimately sold some 2,000 copies of the book to a third person without notice to Wise. The question before the court was whether the defendant was liable for conversion of the books sold. The case is interesting if one cares to learn about liens and conversion, but I do not find any holding or even any discussion to the effect that a debt incurred subsequent to filing of a petition is barred by confirmation.
Another case relied upon by the main opinion is McAbee v. Isom, 116 F.2d 1001 (1940), (not 116 F. 1001 as cited). There a creditor filed her claim originally as a secured creditor. At the time, she had the real property of the debtor under attachment in an action pending in a state court. When a prior attachment defeated the security of the creditor, she moved to amend her claim to show it as being unsecured. This amendment was disallowed by the trial court. The Fifth Circuit Court of Appeals reversed and held that the amendment should have been permitted. The case does not hold that an unsecured debt acquired after the filing of a petition is barred by confirmation. It simply is not in point. The debt pre-dated the filing-of the petition and was, unknown to the creditor, unsecured all of the time.
*251The other case relied upon by the prevailing opinion is that of In re Berkshire Hardware Co., Inc., 39 F.Supp. 663 (D.C. 1941). There the law of the state required an employer to pay a percentage of its payroll into a state fund. The bankrupt was an employer and paid its contributions to April 1, 1939. On March 22, 1939, an involuntary petition in bankruptcy was filed against the employer, and on June 19 of that year it was adjudicated a bankrupt. A receiver was appointed and continued the business until July 11, 1939, when a trustee was appointed, who ran the business thereafter for a short time. The receiver and the trustee paid the contributions during the time they operated the business. The state filed a claim for contributions due from April 1, 1939, to June 19, when the receiver took over. This claim was filed after the filing of the petition and was for a debt incurred subsequent to said filing. The claim was disallowed by the referee. In discussing this matter the court held:
There is ample authority for the proposition that debts provable under section 63 of the Bankruptcy Act, 11 U.S.C.A. § 103, include only those existing at the time of the filing of the petition in bankruptcy. Zavelo v. Reeves, 227 U.S. 625, 33 S.Ct. 365, 57 L.Ed. 676, Ann.Cas. 1914D, 664; Williams v. United States Fidelity & Guaranty Co., 236 U.S. 549, 35 S.Ct. 289, 59 L.Ed. 713; In re Miller, D.C., 25 F.Supp. 336.
This rule has been modified by the provisions of section 63, sub. b of the Bankruptcy Act of 1938, 11 U.S.C.A. § 103, sub. b, known as the “Chandler Act.” This new section permits a claim, arising after the filing of an involuntary petition, to be proved if it arises by reason of property transferred or services rendered by the creditor to the bankrupt for the benefit of the estate. The claim of the Commonwealth of Massachusetts cannot be said to come within the scope of this section. The claim, therefore, is not provable as a debt.
If, however, as the Commonwealth contends, the Massachusetts Unemployment Compensation Law imposes a tax rather than creates a debt, a different situation is presented. The first question to be considered, therefore, is whether the “contributions” required by that law may be regarded as a tax.
That court held the claim to be allowable because it was a tax and not a debt. There a claim was filed, and was disallowed as a provable claim for debt. The court did not hold that the debt was discharged. It merely held that the claimant would not be allowed to share in the assets for distribution if the claim was based upon a debt which was incurred after the filing of the petition.
*252Defendant herein also attempts to raise the question of a lack of consideration for the debt which Standard owed in the first place. Since the suit is upon the promise of Mesa and not upon the promise of Standard, this would no more be a defense to this defendant than would bankruptcy.
I would reverse the trial court and remand the case for the entry of judgment in favor of plaintiff and against defendant for $20,000. I would also award costs to the appellant.

. Which I do not do.

. Zavelo v. Reeves, 227 U.S. 625, 33 S.Ct 365, 57 L.Ed. 676, 678 (1913).

. Id.

. 9 Am.Jur.2(3, Bankruptcy § 1331.