Court Opinion

ID: 9636728
Source: CourtListenerOpinion
Date Created: 2023-08-22 14:41:00.096241+00
Date Added: 2024-06-11T18:09:48.650118
License: Public Domain

MORTON, Circuit Judge
(dissenting).
I regret that I find myself in radical disagreement with my associates on the rather important bankruptcy question involved in this case.
The facts on this point may be briefly stated. Small, the plaintiff, filed an application for the patent in suit in August, 1929. Jn the following February (February 13, 1930) he filed a voluntary petition in bankruptcy. He scheduled no assets except exempt ones, nor did he ever disclose to his trustee his pending application for the patent. The bankruptcy proceeding and the application for the patent were pending contemporaneously, and from time to time action was taken by Small in each one; he had put a price of $10,000 on his invention and believed it was valuable; it was his only asset; he can hardly have honestly overlooked the application for the patent in his bankruptcy proceedings. The bankruptcy statute expressly provides that “the trustee * * * shall * * * be vested * * * with the title of the bankrupt * * * to all * * * interests in patents * * * and in applications for patents.”*
While there is before us no finding that the bankruptcy was fraudulent — the present case did not call for a finding on that point —there is strong prima facie evidence that such was the fact. The bankruptcy case was' disposed of as a no-asset case; the creditors got nothing; and Small received his discharge. The patent was issued.to him on 6 October 1931, and he now claims to be the owner of it subject to whatever rights the Coach & Car Equipment Corporation may have under the license from him. In December, 1937, the bankruptcy case was reopened by the referee on the allegation of newly discovered assets, i. e., the patent, and a new trustee was appointed.
My brethren hold that the case was not properly reopened because no application to reopen was made to the District Judge. For more than thirty-five years at least the practice in respect to reopening in this District has been in accord with-that followed in this case. In 1903 the soundness of this practice was challenged and it was expressly upheld by the Supreme Judicial Court of Massachusetts. Bilafsky v. Abraham, 183 Mass. 401, 67 N.E. 318. It was also considered and upheld in a careful opinion by referee Olmstead. In re Sonnabend, 18 A. B.R. 117. No doubt concerning it has since been raised as far as appears; it is much the more convenient way to deal with the question. I find myself in agreement with the views expressed by Knowlton, C. J., in the Bilafsky Case. The broad general order of reference which he there considered is still used in substantially the same form. In holding that a case had not been “closed” before the referee unless there had been an honest disclosure of facts, and that when it was made to appear that there were assets which by negligence or fraud had not been administered, the referee had the power to recall and set aside his closing order and to reopen the case, it seems to me that the Bilafsky decision is correct.
In view of the explicit provisions of the statute with reference to applications for *504patents owned by. bankrupts, it seems clear that the title to the application was transferred to Small’s estate by operation otf the Bankruptcy Act. An adjudication in bankruptcy resting on statute has little similarity to “voluntary assignments” referred to in the majority opinion. Of course the failure to schedule does not affect the passing of title under the act. When Small, without scheduling or informing his trustee of his pending application, went ahead and prosecuted the application, which then belonged to the estate, to a successful conclusion, the patent which he received also belonged to his estate; though issued in his name, it was held by him -as a bare trustee for the benefit of his estate. It seems to me entirely unimportant on this question whether there was then a qualified trustee in the bankruptcy proceeding; in most cases there is no trustee until some time after adjudication. Nor do I agree with observations in the opinion as to the duty of creditors to be diligent in searching for concealed assets of a bankrujpt under penalty of laches if they do not find them promptly. It is the duty of the bankrupt — and a very important one — to schedule his assets and, if any are inadvertently omitted from the schedule, to disclose them to his trustee. There are many decisions emphasizing this duty, and rightly so, because it is one of the main foundations of the bankruptcy system. To suggest that creditors who fail within six years to discover assets which have been fraudulently concealed — as the evidence here indicates —are barred by laches from asserting any claim to them in the bankruptcy proceedings is to make a shorter statute of limitations on this grave fraud on the court than prevails in Massachusetts on ordinary frauds. I may add that I do' not consider creditors of a bankrupt guilty of laches for not discovering, among the hundreds of thousands of patents annually issued, that one of them was issued to the bankrupt, nor have they any implied notice of that fact. \
The majority opinion leaves Small in complete ownership of the patent, subject only to a trust which he personally is to carry out to pay his creditors. With this disposition of the matter I am unable to agree. No decision is cited in support of such a revolutionary change in bankruptcy administration in favor of fraudulent or negligent bankrupts. The provisions of the statúte with reference to the reacquisition of title in an application for a patent by a bankrupt are explicit and controlling. The patent is the property .of the estate; and it ought to be administered like any property of a bankrupt, by the trustee for the benefit of the creditors, the surplus of the estate, if any, to be returned to the bankrupt.
It is suggested in the opinion that only two or three claims were proved, that the total amount is not large, and that the royalties which are apparently due exceed the amount of the claims proved. I am unable to see that this affects the matter. Indeed the fact' that a debtor went into bankruptcy possessed of property more than sufficient to pay his debts gives added emphasis to the indications of fraud in the bankruptcy proceedings. I think that the trustee should be permitted to intervene in the present case, which was instituted by Small himself, to approve or disapprove it as the interests of the estate may demand, to adopt and prosecute it, if so advised for the benefit of the estate, and to dispose of the equity in the patent above the assignment to the Coach & Car Equipment Corporation as the interests of the creditors or of the bankrupt may require.

 “(a) The trustee of the estate of a bankrupt, upon his appointment and qualification, and his successor or successors, if he shall have one or more, upon Ms or their appointment and qualification, shall in turn be vested by-operation of law with the title of the bankrupt, as of the date he was adjudged a bankrupt, except in so far as it is to property which is exempt, to all (1) documents relating to his property; (2) interests in patents, patent rights, copyrights, and trade-marks, and in applications for patents, copyrights, and trademarks: Provided, That- in case the trustee, witMn thirty days after appointment, does not notify the applicant for a patent, copyright, or trade-mark of his election to prosecute the application to allowance or rejection, the bankrupt may apply to the court for an order revesting him with the title thereto, which petition shall be granted, unless, for cause shown by the trustee, the court grants further time to the trustee for making such selection; and such applicant may, in any event, at any time petition the court to be revested with such title in case the trustee shall fail to prosecute such application with reasonable diligence; and the court, upon revesting the bankrupt with such title, shall direct the trustee to execute proper instruments of transfer to make the same effective in law and upon the records.” Bankr.Aet § 70, as amended, 11 U.S.O.A. § 110.