In re Diplomat Electric, Inc.

• Citation: 499 F.2d 342
• Decision Date: 05 September 1974
• Docket Number: No. 73-3027.,73-3027.
• Parties: In the Matter of DIPLOMAT ELECTRIC, INC., Bankrupt. William G. MILLER, Jr., Morris C. Tucker, Richard H. Roth and Henry J. Prominski, also known as, Miller, Tucker, Roth & Prominski, and Joseph A. Mc-Gowan, Appellants, V. V. Radionoff, Trustee in Bankruptcy, Intervenor-Appellant, v. WESTINGHOUSE ELECTRIC SUPPLY COMPANY, a division of Westinghouse Electric Corporation, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

499 F.2d 342 (1974)

In the Matter of DIPLOMAT ELECTRIC, INC., Bankrupt.

William G. MILLER, Jr., Morris C. Tucker, Richard H. Roth and Henry J. Prominski, also known as, Miller, Tucker, Roth & Prominski, and Joseph A. Mc-Gowan, Appellants, V. V. Radionoff, Trustee in Bankruptcy, Intervenor-Appellant, v. WESTINGHOUSE ELECTRIC SUPPLY COMPANY, a division of Westinghouse Electric Corporation, Appellee.

No. 73-3027.

United States Court of Appeals, Fifth Circuit.

August 12, 1974.

Rehearing Denied September 5, 1974.

COPYRIGHT MATERIAL OMITTED

Joseph A. McGowan, Miami, Fla., for Miller and others.

Henry J. Prominski, Pompano Beach, Fla., J. B. Booher, Fort Lauderdale, Fla., for Radionoff.

Eugene C. Heiman, Richard E. Reckson, Miami, Fla., for appellee.

George A. Buchmann, Jr., Robert Rust, U. S. Atty., Miami, Fla., for other interested parties.

Before BROWN, Chief Judge, and TUTTLE and SIMPSON, Circuit Judge.

SIMPSON, Circuit Judge:

We consider two separate appeals from an order of the district court affirming rulings of a referee in Bankruptcy. Appellee Westinghouse Electric Supply Company (WESCO), a division of Westinghouse Electric Corporation, was a creditor of the bankrupt Diplomat Electric Inc. (Diplomat). In 1965 Diplomat sued WESCO in an unrelated action for defamation and ultimately obtained judgment for $200,000 which we affirmed on appeal. Diplomat Electric, Inc. v. Westinghouse Electric Supply Co., 5 Cir. 1970, 430 F.2d 38.¹ The firm of Miller, Tucker, Roth & Prominski and Joseph A. McGowan were counsel of record for Diplomat at various stages in the defamation litigation. While that suit was pending WESCO sued Diplomat for unpaid contract debts and reduced its claims to final judgments aggregating roughly $163,000. Thereafter, Diplomat filed for bankruptcy.

The district court below affirmed the referee's determination that WESCO was entitled to set off its contractual judgment against its tort liability and pay Diplomat's Trustee in Bankruptcy the remaining difference under Sec. 68 of the Bankruptcy Act.² The Trustee appeals that determination as an abuse of the discretion vested in the district court pursuant to its equity jurisdiction. Counsel in the defamation suit also attack the validity of the set-off and, alternatively, the further finding that it should be superior to their asserted attorneys' charging lien on the $200,000 judgment. We find neither abuse of discretion nor error demonstrated in the lower court's disposition of the case, and affirm as to each appeal.

I

We set forth only so much of the involved procedural history of this case as is necessary to our disposition of the appeals before us.

In 1965 Diplomat retained the law firm of Miller, Tucker, Roth and Prominski (special counsel) to represent it in the defamation suit. The contract of employment was apparently oral. Under its terms special counsel were to receive as compensation 331/3% of any agreed settlement, 40% of any final judgment following a trial, and 50% of an award affirmed on appeal. The three judgments obtained by WESCO against Diplomat during the pendency of the defamation action were for materials furnished to Diplomat as electrical subcontractor on different construction jobs. Attorney McGowan joined special counsel for Diplomat in 1968 under a written employment contract, which provided for 50% of any proceeds of the defamation action to be paid to counsel as a contingent fee. At this time WESCO's claims for materials against Diplomat had been reduced to judgments, then outstanding and unpaid. Special counsel successfully prosecuted the defamation suit in district court and on appeal here, recovering, as related, a judgment for $200,000.

Shortly after this judgment in the district court for Diplomat, a voluntary petition in bankruptcy was filed in its behalf. Thereupon, WESCO filed a proof of claim with the referee with respect to its three judgments previously obtained against Diplomat. No mention of the defamation judgment was made in the proof of claim. Instead, in the place provided, paragraph 7 of the claim: "That there are no set-offs or counterclaims to the same (except . . . .)", WESCO's scrivener placed a period after the word "same", and left the remainder blank. WESCO, at that time, was in the process of perfecting its unsuccessful appeal from the $200,000 judgment. Diplomat's Bankruptcy Trustee having acquired the right to that judgment, was obliged to defend it in the court of appeals. To this end, and with the permission of the district court, he retained McGowan's services to represent him and Diplomat in the appeal.

Shortly after our affirmance of the defamation judgment, WESCO filed before the referee in Bankruptcy its "Petition to Confirm Off Set and to Resolve Conflicting Claims", asserting therein the right to offset the $200,000 judgment against it by the approximately $163,000 Diplomat owed to WESCO on the three judgments arising from the supplying of electrical materials. The referee first ordered WESCO and its surety on supersedeas bond covering the appeal from the defamation judgment, Fidelity & Deposit Co. of Maryland (Fidelity) to pay the amount of the judgment to the Trustee. Therefore, by an order of May 20, 1971, the referee denied WESCO's Petition to Confirm Off Set and further denied WESCO's later filed motion to amend the proof of claim to include the asserted right of set-off. By order of June 15, 1971, the referee granted special counsel a charging lien against the defamation judgment and declined to find—in view of his previous determination that no right of set-off existed—whether or not that charging lien would be a superior lien to a valid set-off.

WESCO petitioned the district court for review of the referee's denial of set-off. The district court by its order of August 19, 1971, remanded the case to the referee for further factual findings. The district court held that WESCO had demonstrated a right to set-off valid on its face and that it was up to the Bankruptcy Trustee to allege and prove any affirmative defenses to that right. Apparently in issue was the absence of proof as to whether WESCO's insurer, Liberty Mutual Insurance Co. (Liberty Mutual)—which had furnished the defense to the defamation action—had paid to WESCO the amount of the Diplomat judgment against WESCO. The court made no determination that proof of payment would in fact constitute a valid affirmative defense, but found only that the proof was not demonstrated on the record before it.

Following further proceedings before him, the referee entered his final order on December 26, 1972. He found the existence of proof that Liberty Mutual had paid WESCO for its liability in the defamation action, but concluded that such payment was not an affirmative defense to a valid right of set-off. He then determined that WESCO did have a right of set-off and, finally, that it was superior to the charging lien of special counsel. This left counsel with the right to a lien only upon the net amount remaining after set-off, approximately $37,000. On petition for review this order was affirmed by the district court on June 14, 1973. The trustee and special counsel have each appealed therefrom to this court.

II

One question common to both appeals is the propriety of setting off under Sec. 68 of the Bankruptcy Act (note 2, supra) a debt arising from tort liability against a credit based on breach of contract. While all parties are aware that Sec. 68 does not distinguish between contractual and tortious debts, they recognize that courts have so distinguished them on occasion. The district court expressed its view in its memorandum opinion and order on the petition for review:

"Although the language of Sec. 68 seems mandatory, the cases uniformly hold that the right to a set-off is discretionary. See, e. g. First National Bank of Portland v. Dudley, 231 F.2d 396 (9th Cir. 1956). The principles and rules of equity jurisprudence guide the Court in the exercise of this discretion. Under the circumstances, the Court shares the opinion held by Collier that `the better view would seem to be that under Sec. 68 tort claims may be set off against contract, or vice versa\' so long as the claim asserted against the estate is provable under Sec. 63, as is WESCO\'s debt claim. 4 Collier on Bankruptcy, Sec. 68.04 at 879 (14th ed. 1969)".

Neither appellant disputes that the right of set-off is governed by the discretion of the court and that the judgments in question were both claims provable in bankruptcy under Sec. 63 of the Act. Appellants' argument then rests, as it must, on the assertion that the court abused its discretion under the facts of this case.

We review the lower court's exercise of discretion mindful that it should not be disturbed in the absence of clear abuse. See, for example, Godfrey v. Powell, 5 Cir. 1947, 159 F.2d 330; Williamson v. Williams, 4 Cir. 1943, 137 F.2d 298. It is difficult to discern how a district judge's choice between conflicting views on a particular point of law could ever be such an abuse, since there is authority for whichever side he takes. Appellants suggest that, in the case of intentional torts such an abuse obtains, and cite in support thereof only one applicable case. Brunswick Corp. v. Clements, 6 Cir. 1970, 424 F.2d 673. We do not find Brunswick controlling³ and reject appellants' claim of discretionary abuse.

In Brunswick the plaintiff had sold the bankrupt, Olympic Lanes, Inc., bowling lanes and pinsetters on conditional sales contracts. Olympic defaulted on its payments to Brunswick and the latter brought replevin to recover its property. In the meantime, Brunswick moved into Olympic's facilities and began running the business. In the replevin action Olympic conceded that it had defaulted in its obligation to pay, but counterclaimed for damages arising out of the conversion of personal property by Brunswick in the course of the take over. Olympic prevailed on the...