Katchen v. Landy

• Decision Date: 09 September 1964
• Docket Number: No. 7483.,7483.
• Parties: Louis KATCHEN and Howard M. Katchen, Appellants, v. Hyman D. LANDY, Trustee in Bankruptcy, Appellee. In the Matter of KATCHEN'S BONUS CORNER, INC., Bankrupt.
• Court: U.S. Court of Appeals — Tenth Circuit

336 F.2d 535 (1964)

Louis KATCHEN and Howard M. Katchen, Appellants, v. Hyman D. LANDY, Trustee in Bankruptcy, Appellee.

In the Matter of KATCHEN'S BONUS CORNER, INC., Bankrupt.

No. 7483.

United States Court of Appeals Tenth Circuit.

September 9, 1964.

Warren Martin, of Winner, Berge & Martin, Denver, Colo., for appellants.

Solomon Girsh, of Girsh & Rottman, Denver, Colo. (Robert B. Rottman, Denver, Colo., with him on brief), for appellee.

Before MURRAH, Chief Judge, and PHILLIPS, PICKETT, LEWIS, BREITENSTEIN, HILL and SETH, Circuit Judges.

MURRAH, Chief Judge.

This appeal involves the bankruptcy court's summary jurisdiction of four counterclaims, three of which seek to recover voidable preferences, and one to recover from the claimant the purchase price of subscribed organizational stock of the bankrupt corporation. This latter claim does not appear to arise out of the same transaction on which the claim is based. The trial Court upheld the bankruptcy court's assumed summary jurisdiction of all the counterclaims on authority of Inter-State National Bank of Kansas City v. Luther, Trustee, 221 F.2d 382, cert. granted 350 U.S. 810, 76 S.Ct. 77, 100 L.Ed. 726, cert. dismissed by stipulation of parties, Id., 944, 76 S.Ct. 297, 100 L.Ed. 823.

In Inter-State, we upheld the power of the bankruptcy court to entertain a counterclaim to fully adjudicate and recover a § 57, sub. g preference, whether such counterclaim is compulsory under Rule 13(a) or permissive under Rule 13(b), F.R.Civ.P. A majority of the court en banc took the view that the filing of a claim in bankruptcy operates to invoke the bankruptcy court's exclusive jurisdiction under § 2, sub. a(2), to sift the circumstances surrounding any claim and allow or disallow it, according to equitable precepts. And, more specifically, the filing of the claim in bankruptcy operates to invoke the court's concurrent jurisdiction with the state courts under § 60, sub. b, to fully adjudicate and recover any voidable preference. See: Inter-State, supra, 221 F.2d p. 389. We were furthermore of the opinion that the right to plenary suit being procedural, may be waived, i. e., see: O'Dell v. United States (10 CA), 326 F.2d 451, and having voluntarily invoked the summary jurisdiction of the bankruptcy court, the claimant could not thereafter limit the exercise of that jurisdiction over the subject matter by objection thereto. See: Inter-State, supra, 221 F.2d p. 388; and Continental Casualty Co. v. White, 4 Cir., 269 F.2d 213, 216. Cf.: United Artists Corporation v. Masterpiece Productions, 2 Cir., 221 F.2d 213.

Appellants concede that the three preferential counterclaims are ruled by Inter-State, supra, and candidly say that insofar as that case sustains summary jurisdiction to grant affirmative relief on a counterclaim over the objection of the claimant, it is an unwarranted extension of jurisdiction by implied consent and should now be overruled. We heard this case en banc, to re-examine Inter-State in the light of the claims made for it here and because it presents an important question of bankruptcy administration, as to which there is a difference of opinion on this court and elsewhere.

Since Inter-State, other Circuits have considered the question of summary jurisdiction of counterclaims based upon consent implied by the filing of claims. Soon after Inter-State, the Seventh Circuit concurred in the view that the filing of a claim in the bankruptcy court gave consent to be sued on counterclaims arising out of the same transaction, but was of the view that such filing did not constitute implied consent to be sued "on an alleged cause of action arising out of a different subject matter." In Re Majestic Radio & Television Corporation, 227 F.2d 152, 156. The Fourth Circuit has also concurred in the view that the filing of a claim gave consent to the exercise of summary jurisdiction over a compulsory counterclaim, but had no occasion to decide whether the filing of a claim gave the court jurisdiction of an unrelated and permissive counterclaim. See: Continental Casualty Co. v. White, supra. The Ninth Circuit has upheld the jurisdiction of the bankruptcy court over a counterclaim, but agreed with the Seventh Circuit that the filing of a claim did not give consent to summary jurisdiction of a counterclaim not arising from the same transaction on which the claim was based. See: Peters v. Lines, 275 F.2d 919.

The most recent case involving the precise point is from the Second Circuit where, apparently on authority of Inter-State, supra, it sustained summary jurisdiction of a counterclaim for the surrender of a preference without stating whether the counterclaim arose out of the same transaction. Judge Kaufman, speaking for that Court, reasoned that the filing of a claim in the bankruptcy court is analogous to the commencement of an action within the bankruptcy proceedings; that the Trustee's counterclaim was in the nature of an answer for affirmative relief by way of the surrender of a preference; and, that the claimant is deemed to have impliedly consented to the jurisdiction of the court toward complete relief. See: Nortex Trading Corporation v. Newfield, 311 F. 2d 163. And see also: In the Matter of Farrell Publishing Corporation, Bankrupt, D.C., 130 F.Supp. 449; and Collier On Bankruptcy, Vol. 2, §§ 23.085, 23.086.¹

Upon reconsideration of Inter-State, in the light of subsequent decisions and commentary, we have decided to adhere to its pronouncements. But, we decline to extend the summary jurisdiction of the court by implied consent to counterclaims which do not involve a preference, setoff, voidable lien, or a fraudulent transfer, and which are wholly unrelated to the creditor's claim. Claims of this nature are not within the Referee's summary jurisdiction, and a claimant does not consent to the exercise of the bankruptcy court's plenary jurisdiction by filing his claim in the bankruptcy proceedings. See: Collier On Bankruptcy, Vol. 2, § 23.15.

The appellants also deny that the counterclaims are based upon a preference, on the ground that the Trustee failed to sustain the burden of proving that the bankrupt was insolvent when the transfers giving rise to the preference claim were made. But, there can be no doubt that appellants knew, or had reason to believe, that the corporation of which they were the progenitors and central figures was insolvent when they caused it to make payments to the bank, on notes on which appellant-Louis Katchen was an accommodation maker. The proof here fully meets the test set forth in Moran Brothers, Inc. v. Yinger, 10 Cir., 323 F.2d 699.

The judgment of the bankruptcy court is affirmed on all the counterclaims except the Trustee's counterclaim for the purchase price of the subscription stock.

SETH, Circuit Judge (concurring):

I concur in the foregoing opinion of the court as expressed by Chief Judge Murrah, and would like to state some considerations which I consider important in examining the action of the trial court and the referee.

The record shows that the bankrupt corporation began business in April 1960 with the appellant as a vice president, director, and stockholder. His two sons and a third party were the other stockholders and directors. The referee found that the appellant agreed to pay $10,000.00 for the one thousand authorized shares of the company, that he caused the shares to be issued to himself, his two sons, and a third party. The two sons and the third party then pledged their shares to the appellant and such pledge was in effect when the bankruptcy proceedings commenced. He further found that none of the pledgors ever paid anything to the company or the appellant for the pledged shares. It appears that the shares that the two sons were to receive were to be in the form of a gift from the appellant. Appellant was a vice president and director until his resignation on October 30, 1960.

In April 1960 the bankrupt borrowed $40,000.00 from the American National Bank and gave a note upon which appellant asserts that he was an accommodation maker. In June 1960 the bankrupt borrowed $10,000.00 on a note from the North Denver Bank. This note bore the typewritten name of the bankrupt and the signature of the appellant and two other stockholders without further designation or description. Appellant claims he is not an accommodation maker or personally liable on this $10,000.00 note.

The bankrupt suffered in August 1960 a fire loss, and thereafter the collections of the bankrupt were placed in a so-called trust account in the name of and under the sole control of the appellant. The appellant paid on October 13, 1960, from corporate funds in this trust account the sum of $14,599.00 and on November 18, 1960, the sum of $10,137.50 on the $40,000.00 note given to the American National Bank above referred to. Appellant admitted these payments served to diminish his personal liability, and that he knew this when he made the payments. The appellant from this trust fund further paid in September 1960 the sum of $10,162.50 to the North Denver Bank on the note described above.

The appellant filed in the bankruptcy proceedings two claims, one in the amount of $4,625.00 for unpaid rent on the premises which he owned and which were occupied by the bankrupt, and the second claim in the amount of $5,000.00 representing a payment to the bank from claimant's personal funds as an accommodation maker on the note of the corporate bankrupt given to the American National Bank described above.

The referee found that the payment of the corporate funds from the trust account on the bank notes constituted a preference received by the appellant, and repayment of the total of such payments was ordered. The referee further ordered the appellant to pay the amount of $10,000.00 as an unpaid subscription for the corporate stock.

Against this background of business dealings, family relationships, and participation in the management of the...