41 243 Baker v. Gold Seal Liquors, Inc 8212 804

• Decision Date: 17 June 1974
• Docket Number: No. 73,73
• Citation: 94 S.Ct. 2504,417 U.S. 467,41 L.Ed.2d 243
• Parties: . 41 L.Ed.2d 243 George P. BAKER et al., Petitioners, v. GOLD SEAL LIQUORS, INC. —804
• Court: U.S. Supreme Court

417 U.S. 467

94 S.Ct. 2504.

41 L.Ed.2d 243

George P. BAKER et al., Petitioners,

v GOLD SEAL LIQUORS, INC.

No. 73—804.

Argued April 23, 1974.

Decided June 17, 1974.

Syllabus

Petitioners, trustees of a railroad in a § 77 reorganization proceeding, brought suit for freight charges against respondent shipper, and respondent counterclaimed for cargo loss and damage. The District Court granted petitioners' motion for summary judgment for entry of one judgment on their claim and another on the counterclaim, but set off one judgment against the other, resulting in a net judgment against petitioners for some $11,000. The Court of Appeals affirmed. Held: The Court of Appeals erred in allowing the setoff, since it thereby granted a preference to the claim of one creditor that happened to owe freight charges over other creditors that did not, and thus interfered with the Reorganization Court's duty under § 77e, 11 U.S.C. § 205(e), to approve a 'fair and equitable plan' that duly recognizes the rights of each class of creditors and stockholders and does not discriminate unfairly in favor of any class. Pp. 468—474.

7 Cir., 484 F.2d 950, reversed.

Paul R. Duke, Philadelphia, Pa., for petitioners.

Theodore J. Herst, Chicago, Ill., for respondent.

Opinion of the Court by Mr. Justice DOUGLAS, announced by Mr. Justice WHITE.

The Penn-Central Transportation Co. is in bankruptcy reorganization under § 77 of the Bankruptcy Act, 11 U.S.C. § 205. Petitioners are its trustees authorized to collect its assets, one of which is a claim for freight charges against respondent owed the bankrupt debtor. The claim on which this suit was brought was $8,256.61 and the amount is undisputed. Respondent filed a counterclaim for $19,319.42 for loss and damage to shipments over the debtor's lines. Its amount is also not disputed.

The trustees filed a motion for summary judgment asking the District Court to enter one judgment covering the amount of freight charges admittedly due and another for the amount claimed by respondent.

Previously the Reorganization Court in the Third Circuit had prohibited the various bank creditors from offsetting their claims against the trustees of the debtor. 315 F.Supp. 1281. Prior to the decision of the instant case that bank setoff case was affirmed by the Court of Appeals, 453 F.2d 520. Also prior to the ruling of the Court of Appeals in the instant case the Reorganization Court prohibited some shippers from setting off freight loss and damage claims against amounts owed for transportation claims. That order, 339 F.Supp. 603, was affirmed by the Court of Appeals, 477 F.2d 841, and by this Court, sub nom., United States Steel Corp. v. Trustees of Penn Central Transp. Co., 414 U.S. 885, 94 S.Ct. 231, 38 L.Ed.2d 137.

The District Court in the instant case granted the trustees' motion for summary judgment but set off one judgment against the other, which resulted in a net judgment in favor of respondent against the trustees in the amount of $11,017.01. The Court of Appeals affirmed, 484 F.2d 950, and we granted certiorari to resolve the conflict.

We reverse.

Ordinarily where a court has primary jurisdiction over the parties and over the subject matter, the power to resolve the amount of the claim and the counterclaim is clear. Indeed, under the Federal Rules of Civil Procedure the counterclaim may be compulsory. Rule 13(a).¹ That is the procedure under § 68 of the Bankruptcy Act, 11 U.S.C. § 108.² The problem of the bankruptcy Reorganization Court is somewhat different. Liquidation is not the objective. Rather, the aim is by financial restructuring to put back into operation a going concern.³ That entails two basic considerations:

First is the collection of amounts owed the bankrupt to keep its cash inflow sufficient for operating purposes, at least at the survival levels. The second is to design a plan⁴ which creditors⁵ and other claimants will approve, which will pass scrutiny of the Interstate Commerce Commission, which will meet the fair-and-equitable standards required by the Act for court approval, and which will preserve an ongoing railroad in the public interest.⁶

Section 77a gives the Reorganization Court 'exclusive jurisdiction of the debtor and its property wherever located.'⁷ 11 U.S.C. § 205(a). In furtherance of its long-range responsibilities the Reorganization Court enjoined secured creditors from selling collateral to reduce their claims. ⁸ It then went on to bar enforcement of liens against the debtor, taking possession of its property, or obtaining judgments against the debtor, except for specified purposes.⁹ One court seized upon the last provision in the order which says 'that suits or claims for damages caused by the operation of trains, buses, or

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^8. The order provided in part: 'All persons, firms and corporations, holding collateral heretofore pledged by the Debtor as security for its notes or obligations or holding for the account of the Debtor deposit balances or credits be and each of them hereby are (sic) restrained and enjoined from selling, converting or otherwise disposing of such collateral, deposit balances or other credits, or any part thereof, or from offsetting the same, or any (sic) thereof, against any obligation of the Debtor, until further order of this Court.'

^9. 'All persons and all firms and corporations, whatsoever and wheresoever situated, located or domiciled, hereby are restrained and enjoined from interfering with, seizing, converting, appropriating, attaching, garnisheeing, levying upon, or enforcing liens upon, or in any manner whatsoever disturbing any portion of the assets, goods, money, deposit balances, credits, choses in action, interests, railroads, properties or premises belonging to, or in the possession of the Debtor as owner, lessee or otherwise, or from taking possession of or from entering upon, or in any way interfering with the same, or any part thereof, or from interfering in any manner with the operation of said railroads, properties or premises or the carrying on of its business by the Debtor under the order of this Court and from commencing or continuing any proceeding against the Debtor, whether for obtaining or for the enforcement of any judgment or decree or for any other purpose, provided that suits or claims for damages caused by the operation of trains, buses, or other means of transportation may be filed and prosecuted to judgment in any Court of competent jurisdiction. . . .' other means of transportation may be filed and prosecuted to judgment in any Court of competent jurisdiction,' to adjudicate the merits of a counterclaim, but declined to allow the setoff.¹⁰ But proof of the claim against the debtor is a distinct preliminary stage to a determination of what priority, if any, the claim that is proved receives in a reorganization plan.

There is a hierarchy of claims, the owner of the equity coming last. Wages owing workers running the trains have a high current priority. Secured creditors have by law a priority in the hierarchy. Unsecured creditors usually are pooled together. They may receive new securities, perhaps stock. Allowance of a setoff that reduces all or part of the debtor's claim against them is a form of priority. The guiding principle governing priorities is stated in § 77l(1), 11 U.S.C. § 205(e)(1): the Reorganization Court shall approve a plan if it 'is fair and equitable, affords due recognition to the rights of each class of creditors and stockholders, does not discriminate unfairly in favor of any class of creditors or stockholders, and will conform to the requirements of the law of the land regarding the participation of the various classes of creditors and stockholders.'

The term 'fair and equitable' has a long history going back at least to Northern Pacific R. Co. v. Boyd, 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931, and Kansas City Terminal R. Co. v. Central Union Trust Co., 271 U.S. 445, 46 S.Ct. 549, 70 L.Ed. 1028, whose fixed principle has been carried over into § 77e by our decisions.¹¹ The plan is by the terms of § 77 a product of the Interstate Commerce Commission and the Reorganization Court working cooperatively together, New Haven Inclusion Cases, 399 U.S. 392, 431, 90 S.Ct. 2054, 2078, 26 L.Ed.2d 691. The public interest, as well as the interests of creditors and stockholders, is at issue.¹² RFC v. Denver & R.G.W.R. Co., 328 U.S. 495, 535, 66 S.Ct. 1282, 1303, 90 L.Ed. 1400.

The allowance or disallowance of setoff may seem but a minor part of the architectural problem. But to the extent that it is allowed, it grants a preference to the claim of one creditor over the others by the happenstance that it owes freight charges that the others do not. That is a form of discrimination to which the policy of § 77 is opposed. As a general rule of administration for § 77 Reorganization Courts, the setoff should not be allowed.¹³

Reversed.

Mr. Justice STEWART, with whom Mr. Justice POWELL joins, concurring in the result.

The Court concludes that since the allowance of a setoff in a § 77 reorganization would grant 'a preference to the claim of one creditor over the others by the happenstance that it owes freight charges that the others do not,' such setoffs should be disallowed '(a)s a general rule of administration.' Ante, at this page. While I agree that the District Court should not have permitted a setoff in this case, I think that the broad rule adopted by the Court is unnecessary to reach this result, and I prefer to rest my conclusion on a narrower ground.

While judicial setoffs are specifically authorized in straight bankruptcy cases, § 68 of the Bankruptcy Act, 11 U.S.C. § 108, no express approval of them appears in the statute governing § 77 reorganizations.¹ In Lowden v. North-western National Bank & Trust Co., 298 U.S. 160, 56 S.Ct. 696, 80 L.Ed. 1114 (1936), this Court stated that the approval of setoffs in § 68 did not control in railroad reorganizations but 'governs, if at...