Peters v. Lines

• Decision Date: 07 March 1960
• Docket Number: No. 16322.,16322.
• Citation: 275 F.2d 919
• Parties: S. A. PETERS and Timber, Inc., of California, Appellants, v. Kal W. LINES, Trustee in Bankruptcy of the Estate of Snow Camp Logging Co., Bankrupt, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

275 F.2d 919 (1960)

S. A. PETERS and Timber, Inc., of California, Appellants, v. Kal W. LINES, Trustee in Bankruptcy of the Estate of Snow Camp Logging Co., Bankrupt, Appellee.

No. 16322.

United States Court of Appeals Ninth Circuit.

March 7, 1960.

COPYRIGHT MATERIAL OMITTED

Charles M. Stark, L. W. Wrixon, Paul W. McComish, San Francisco, Cal., Huber & Goodwin, Eureka, Cal., Arthur Shapro, Shapro, Anixter & Aronson, Burlingame, Cal., for appellants.

Max H. Margolis, San Francisco, Cal., Frederick L. Hilger, Eureka, Cal., for appellee.

Before BARNES, JERTBERG and MERRILL, Circuit Judges.

JERTBERG, Circuit Judge.

Before us is an appeal from an order of the United States District Court confirming an order, judgment and decree entered by the referee in bankruptcy in these proceedings. The order, judgment and decree was entered against appellants and in favor of appellee in the sum of $674,627.47, upon the objections of the appellee to the proof of claim filed by appellants in the bankruptcy proceedings of Snow Camp Logging Co., a co-partnership. This relief was granted by the referee, and confirmed by the district court, upon the trustee's petition for an order disallowing the claim in question and for a judgment for affirmative relief. The opinion of the district court is reported in D.C.N.D.Cal.1958, 168 F.Supp. 420.

The district court has jurisdiction to review the order of the referee by virtue of Title 11 U.S.C.A. § 67, sub. c. The notice of appeal was timely filed, Title 11 U.S.C.A. § 48. This Court has jurisdiction to review the order of the district court under Title 11 U.S.C.A. § 47.

In order to place in proper focus the questions presented on this appeal, we will present a brief background leading up to the order, judgment and decree of the referee. On June 1, 1951, Clarence Vander Jack and Clarence C. Vander Jack, partners doing business as Snow Camp Logging Company (hereinafter collectively referred to as the bankrupt), as sellers, entered into a written agreement with S. A. Peters as buyer. Thereafter, pursuant to the terms of the contract, Peters assigned the agreement to Timber, Inc. of California, a California corporation, but under the terms of the contract Peters remained personally bound by the obligations of the contract. Peters and Timber, Inc. of California are hereinafter collectively referred to as the appellants.

By the terms of the contract bankrupt agreed to furnish, and appellants agreed to purchase all of the logs required by appellants in the operation of any or all of their mills in the Redwood Creek Ranch area. The price of all logs was fixed at the Arcata (California) price less $4 per thousand feet net delivered at mill. The contract contained the formula for determining the Arcata price. Payments for logs were to be made semi-monthly for all logs delivered during a semi-monthly period preceding each period. The term of the contract was for a period of ten years, with option on the part of appellants to renew for an additional ten-year term. Appellants agreed to commence construction of a gang type mill before August 1, 1951. Gang type logs were defined to be anything up to 32 inches on the butt end down to 8-inch tops. Appellants agreed to accept all logs up to 40 per cent defective. Paragraph 8 of said agreement provides:

"8. Sellers shall have the right to sell logs of any type to other buyers of logs until buyer comes into full production upon that type of log. In the event buyer ceases production upon any type of log or cuts back on production, sellers shall have the right to sell any of such logs as buyer does not require upon the open market and to other buyers."

Under other provisions appellants agreed to make available to bankrupt all information acquired by appellants concerning timber lands or interest therein in the Redwood Creek Ranch area, and granted bankrupt the first refusal upon any logs or timber purchase contemplated by appellants within that area. Bankrupt agreed that any additional timber holdings or contracts acquired by them in the same area would be under the terms of the agreement.

The recitals in the contract state that bankrupt was then engaged in logging and log sales operation upon the Redwood Creek Ranch and vicinity, and that appellants intend to operate three mills in the Redwood Creek Ranch area, the first to be a gang mill, the second a band or circular mill, and the third a veneer mill.

The gang type mill was constructed and put into operation by appellants. While there is some discussion in the record concerning intentions and plans relating to other types of mills, no mill except the gang mill was constructed.

It is clear from the record that the controversy between the parties relates only to the gang type mill and to gang type logs. Both parties appear to agree that the contract contemplated the operations of both parties in the Redwood Creek Ranch area, and accordingly obligated log production in that area only. Accepting that premise, it appears that the maximum timber of bankrupt initially obligated under the contract was between 250-300 million feet at the beginning of the contract. When deliveries by bankrupt ceased on October 21, 1953 about 100 million feet had been logged, of which about 40 per cent had been delivered to appellants.

It appears from the record that during the period the bankrupt was delivering logs to appellants from the Redwood Creek Ranch area bankrupt was also conducting logging operations in the Blue Lake and Snow Camp area. Neither party contends that the production of logs from these areas was obligated under the contract.

Both parties agreed that the custom in the logging industry in the area involved placed upon appellants the duty to keep clear the mill site dump or pond to which deliveries of logs were to be made by bankrupt and in condition to receive deliveries of logs to be made by bankrupt.

On December 14, 1953, Snow Camp Logging Company, a California corporation, as plaintiff, filed an action in the Superior Court of the State of California, in and for the County of Humboldt, against appellants. The complaint alleged assignment to the plaintiff by bankrupt of its rights to the contract above mentioned, and prayed for moneys due under and damages for the breach of said contract in the total sum of $1,045,493.39. Appellants filed their answer, admitting, by failure to deny, the making of the contract and bankrupt's assignment thereof to the plaintiff, but denying all other material allegations contained in the complaint. Appellants also filed a cross-complaint against plaintiff alleging breach of the contract by plaintiff and praying for damages for such breach in the amount of $900,000.

On February 14, 1955, the partnership filed its voluntary petition for an adjudication of bankruptcy, and was adjudged a bankrupt. On January 11, 1956 appellants filed with the trustee in bankruptcy their claim against the bankrupt (similar to the cross-complaint filed in the state court action) for damages by reason of the bankrupt's alleged breach of the agreement of June 1, 1951.

Thereafter, on October 3, 1956, the trustee in bankruptcy filed a petition for an order, under Section 57, sub. d of the Bankruptcy Act, disallowing the claim and for a judgment for affirmative relief (similar to the relief sought by the corporation in the state court action). On the same day the referee in bankruptcy issued an order to show cause directed to the appellants to show cause why the trustee's petition should not be granted, which order to show cause was returnable on November 7, 1956. On the return date appellants filed their motion for an order authorizing the withdrawal of their proof of claim and an affidavit in support thereof. Appellants likewise filed on the same day their return to the order to show cause, their motion to discharge the same, and their plea in abatement. The motion for withdrawal of proof of claim, the motion to discharge the order to show cause, and the plea in abatement were denied by the referee on November 7, 1956.

The trustee's petition for an order disallowing appellants' proof of claim and for a judgment for affirmative relief was then heard by the referee. During the course of such proceedings the referee restrained appellants from taking any further steps in the state court action and directed that all proceedings in connection with the trustee's petition for a judgment for affirmative relief (hereinafter referred to as the trustee's counterclaim) be litigated in the bankruptcy court. The hearing on the order to show cause extended for several weeks. On March 25, 1958, the referee entered his order, judgment and decree, rejecting the appellants' proof of claim, and granting the trustee's petition for affirmative relief against appellants in the sum above noted. Petition for review was then sought by appellants in the district court. After argument, the district court confirmed the referee's order, judgment and decree.

Appellants' statement of points on appeal asserts fourteen alleged errors on the part of the district court which are reflected in the following statement of questions presented on this appeal:

1. Did the bankruptcy court have summary jurisdiction not only to hear but to grant the trustee's petition for affirmative relief against appellants?

2. Where the subject matter of the trustee's said petition for affirmative relief against appellants (hereinafter for brevity referred to as his "counterclaim") was clearly involved in a state court proceeding which was at issue and ready to be tried before the bankruptcy proceedings in question were commenced, was the bankruptcy court bound by comity to refrain from enjoining and to permit the state court action to proceed without interference from the bankruptcy court?

3. Can a trustee in bankruptcy maintain a counterclaim against a creditor of the bankrupt for damages for breach of a contract, which contract had been...