Seedman v. Friedman

• Decision Date: 27 November 1942
• Docket Number: No. 33.,33.
• Citation: 132 F.2d 290
• Parties: SEEDMAN v. FRIEDMAN.
• Court: U.S. Court of Appeals — Second Circuit

132 F.2d 290 (1942)

SEEDMAN v. FRIEDMAN.

No. 33.

Circuit Court of Appeals, Second Circuit.

November 27, 1942.

COPYRIGHT MATERIAL OMITTED

Eugene L. Bondy, of New York City (Bondy & Schloss, of New York City, on the brief), for claimant.

Philip A. Friedman, of New York City (Hartman, Sheridan & Tekulsky, of New York City, on the brief), for trustee.

Before SWAN, AUGUSTUS N. HAND, and CLARK, Circuit Judges.

CLARK, Circuit Judge.

This appeal raises the questions whether or not a contract for sale of its assets made by a debtor in arrangement proceedings after confirmation of the arrangement was nullified by a later order of the court vacating the confirmation order and adjudicating the debtor a bankrupt or was for other reasons unenforceable. The referee and the district court have both ruled that under the circumstances here present the contract fell with the arrangement, and have thus rejected claimant's contention that he is entitled to damages which have a preferred status under Bankruptcy Act, § 64, sub. b, 11 U.S.C.A. § 104, sub. b.

Humpty Dumpty Auto Stores, Inc., filed its petition for an arrangement in January, 1940. The bankruptcy court permitted it to continue its business, subject to the court's active supervision and control, until a plan of reorganization could be formulated by the creditors and approved by the court. In April, 1940, the creditors finally agreed upon a plan which provided for an initial down payment from earmarked bank deposits to certain priority claimants, listed in Schedules A and B annexed to the plan, and for deferred monthly payments to both the priority claimants and the general unsecured claimants, listed in Schedules C and D. The plan named a creditors' committee, which was empowered to dissolve the debtor corporation and liquidate the corporate assets upon a default in the provisions of the arrangement or whenever in its discretion it seemed wise to discontinue the business. The plan also provided that this committee should supervise the debtor's conduct of the business, and that the court should "retain jurisdiction over the debtor and its property" until certain certificates of stock and instruments and records should be delivered and "until the initial payment upon the debts included in Class 3 and Class 4 of Article 1 i.e., those listed in Schedules C and D is made." The referee confirmed the plan on June 5, 1940. The order of confirmation provided that "the court shall retain jurisdiction of the within proceeding until all payments provided for in Schedules A and B above referred to and the first distribution in Schedules C and D above referred to shall have been made and paid."

From the date of the filing of the petition for an arrangement until confirmation of the plan the debtor sustained continuous financial losses. And when the court issued the confirmation order there was a default in the deferred payments due under the plan on June 1. Nine days after the issuance of the confirmation order the creditors' committee decided that the business should be liquidated. After considering various bids the debtor and the committee made a contract with claimant on June 27 for the sale of the debtor's merchandise and fixtures. Since the contract was subject to the Bulk Sales Act, N.Y. Personal Property Law, Consol.Laws N.Y. c. 41, § 44, claimant sent a notice of the terms of the sale — to be closed July 19 — to all the creditors of the debtor. On July 13, upon receipt of a petition of a creditor not a member of the creditors' committee, the referee issued an order to all interested persons to show cause why the confirmation order should not be set aside, the debtor adjudged a bankrupt, and such other and further relief granted as might be appropriate. This order included a stay of the proposed bulk sale until further action by the court. The creditor in his petition had called attention to the sale and had suggested that the price was inadequate; but he had relied for relief primarily upon an allegation that fraud had been practiced upon the court in the procurement of the confirmation order, inasmuch as the creditors' committee, and therefore the debtor, knew at the time the order was issued that the debtor was in default in its obligations under the plan.

The hearing thus instituted resulted in a referee's order in four paragraphs, of which the first three vacated the order of confirmation of the plan, adjudicated the debtor a bankrupt, and directed the qualification of Abraham E. Friedman as trustee upon filing a $5,000 bond. The fourth paragraph ordered "that the proposed bulk sale to George J. Seedman be and the same is hereby permanently restrained and enjoined and that the said George J. Seedman and all other persons be and they are hereby restrained and enjoined from interfering in any way with any of the assets of the bankrupt." No reason for the order or any part of it is set forth. The referee's memorandum upon it is likewise quite vague, and says only that the creditor's application to vacate and set aside the arrangement should be granted, "both for the reason that the provisions of the statute with regard to arrangements were not complied with, and further under the provisions of Article XI of the amended Bankruptcy Act." From the evidence taken at the hearing, however, it appears that all parties concerned considered the issue one of fraud in obtaining confirmation of the plan.

Claimant filed no petition for review of this order, and one of the trustee's contentions is that it made the issues herein res judicata against claimant. Though the show-cause order of July 13, 1940, was not addressed to claimant by name, he filed an affidavit in opposition to the pleading, and, being subpoenaed as a witness, was examined by his counsel over the petitioning creditor's objection and upon the referee's decision to hear anyone "able to throw any light on the equities of the case." In general the evidence adduced concerned the financial backtrackings of the debtor up to the date of the issuance of the confirmation order. The petitioner made some attempt to show that the purchase price set in claimant's contract was a hard one for the creditors, but he proffered no evidence of fraud in its inception.

After the trustee had taken over, claimant submitted his bid of the contract price for acceptance. The trustee, however, auctioned off the assets to a stranger to the former proceedings at a price in excess of that offered by claimant, and the court confirmed that sale. The purchaser later assigned his bid to claimant at a profit. And claimant then filed his "Priority Claim" for damages for breach of the contract. The referee expunged the claim altogether on the grounds both that the injunction order was res judicata against the claim, and that, the arrangement having been set aside, everything dependent upon the powers it conferred likewise fell with it. On petition for review, the district court affirmed, adding, as new grounds for the nullification of the contract, that the court's consent was a prerequisite to its validity, since jurisdiction was retained after the confirmation order, that the supervening impossibility created by the injunction order excused the debtor's performance under the contract, and that the Bulk Sales Act automatically rendered the contract void when an injunction was obtained by a creditor. The court thought, however, that claimant might recover for benefits rendered to the debtor if any could be proved. It appeared that claimant, among other things, had managed the debtor's business without compensation from July 7, 1940, to July 27, 1940, in anticipation of the execution of the contract, and had made wage disbursements and paid for advertisements for the debtor during the same period. The court, therefore, referred back to the referee, and left entirely to his discretion, the question whether a claim based on these asserted benefits should be allowed. Both parties have appealed here.

There are thus before us six main points which have been pressed with reference to the expunged claim: (1) whether the contract of purchase was invalid because lacking the approval of the court under the jurisdiction it had retained after the confirmation order; (2) whether the setting aside of the confirmation order automatically avoided the contract entered into pursuant to the powers conferred by that order; (3) whether claimant had constructive knowledge of fraud in the procurement of the confirmation order, and therefore contracted subject to the setting aside of the confirmation order; (4) whether the injunction order precluded claimant's demand for damages under the doctrine of res judicata; (5) whether a supervening impossibility created by the injunction order excused the debtor's performance under the contract; and (6) whether the Bulk Sales Act invalidated the contract. These will be considered in order.

I. The trustee's contention is that the court's approval of the contract was a prerequisite to its validity, because the court retained jurisdiction after the confirmation of the plan, first by the terms of § 369(3) of the Bankruptcy Act, 11 U.S. C.A. § 769(3), and second by the explicit provision of the confirmation order itself.

Section 369(3) provides that "the court shall in any event retain jurisdiction until the final allowance or disallowance of all debts, affected by the arrangement * * * which * * * arise from the rejection of executory contracts by the debtor and are proved within such time as the court may direct." At the time the parties negotiated this contract the court had under consideration a petition filed by the debtor before the issuance of the confirmation order and seeking permission to reject a lease. But this situation does not fall within the terms of the statute, for the debt which might have arisen from the rejection of this executory contract would not have been one "affected by the arrangement." In this...