Bohack Corp. v. Borden, Inc.

• Decision Date: 07 February 1978
• Docket Number: Civ. No. 77 C 2265 and 74 B 933.
• Citation: 450 F. Supp. 367
• Parties: In the Matter of The Bohack Corporation, Debtor-in-Possession. The BOHACK CORPORATION, Plaintiff-Appellee, v. BORDEN, INC., Defendant-Appellant.
• Court: U.S. District Court — Eastern District of New York

450 F. Supp. 367

In the Matter of The Bohack Corporation, Debtor-in-Possession The BOHACK CORPORATION, Plaintiff-Appellee, v. BORDEN, INC., Defendant-Appellant.

Civ. Nos. 77 C 2265 and 74 B 933.

United States District Court, E. D. New York.

February 7, 1978.

COPYRIGHT MATERIAL OMITTED

Plunkett, Wetzel & Jaffe, New York City, for defendant-appellant; George E. Pataki, New York City, of counsel.

Shaw & Levine, Garden City, N. Y., for debtor-in-possession and plaintiff-appellee; J. Stanley Shaw, Jesse R. Levine, and William M. Rifkin, New York City, of counsel.

Memorandum of Decision and Order

MISHLER, Chief Judge.

The instant appeal presents a variety of interesting questions relating to the scope of the Bankruptcy Act's stay provisions and their interplay with section 68 of the Act, 11 U.S.C. § 108. Borden appeals from Bankruptcy Judge C. Albert Parente's October 14, 1977 order enjoining further prosecution of its counterclaim asserted against the debtor-in-possession, Bohack, in a plenary anti-trust action now pending before the United States District Court for the Eastern District of Pennsylvania. The essential facts are not in dispute.

Bohack, on July 30, 1974, filed a petition for arrangement with the bankruptcy court of this district pursuant to Chapter XI of the Bankruptcy Act. The petition was granted by order of the same date, and Bohack was continued as debtor-in-possession. 11 U.S.C. § 742. In conformance with section 314 of the Act, 11 U.S.C. § 714,¹ and Rule 11-44, Rules Bankr.Proc.,² the bankruptcy court's order included a provision expressly staying the initiation or continuation of all suits and claims against the debtor.³ In compliance with the schedule subsequently drawn, Borden, on November 13, 1974, filed a proof of claim for $451,198.86 representing goods sold and delivered prior to the initiation of proceedings in arrangement.

Some two years later, Bohack, together with several other firms, filed suit in this court charging Borden and numerous other named defendants with violations of the anti-trust laws. Borden interposed its answer on December 30, 1976, and counterclaimed for the $451,198.86 originally sought under the proof of claim. On March 18, 1977, the action was transferred to the United States District Court for the Eastern District of Pennsylvania for consolidated pre-trial proceedings by the judicial panel on multi-district litigation.

By notice of motion dated March 31, 1977, Bohack moved in the Pennsylvania action for an order dismissing Borden's counterclaim, arguing that the district court, by virtue of the Rule 11-44 stay, was without subject matter jurisdiction. In the alternative, Bohack argued that the debt underlying Borden's claim was not mutual, and thus, could not be asserted as a set-off pursuant to Section 68 of the Act, 11 U.S.C. § 108. Borden opposed, but the court granted the motion holding that Borden's separate debt could not be set-off against the joint claim of Bohack and the others. Borden, however, successfully moved for reconsideration, and the matter was submitted on papers.

While the issue remained sub judice, Bohack filed suit in the bankruptcy court seeking an order enjoining the continued prosecution of the counterclaim. Thoroughly briefed and argued, the matter was ultimately decided in Bohack's favor. Judge Parente, anchoring his ruling on precepts of exclusive jurisdiction, reasoned that the district court's concurrent consideration of the claim would unnecessarily fractionalize the arrangement proceedings. With the filing of the proof of claim, Judge Parente ruled, Borden surrendered to the bankruptcy court's summary jurisdiction and the controlling principles of the Bankruptcy Act. It was bound by the automatic stay embodied in Rule 11-44 and the court's separate restraining order, Judge Parente found, and was estopped from asserting the claim before the district court.⁴ It is from this ruling that Borden appeals.

Appellant maintains that the bankruptcy court's section 314 restraining order and Rule 11-44 stay must fall to the command of section 68 which expressly permits a creditor, faced with a claim by the debtor, to set-off any mutual debt. The section's permissive nature, appellant argues, constitutes an exception to the bankruptcy court's exclusive jurisdiction. A creditor is not, appellant urges, required to choose between alternative methods of recovery. Thus, the filing of a proof of claim does not operate to estop the creditor from counterclaiming for the same relief in a plenary action initiated by the debtor-in-possession. To hold otherwise, appellant argues, would strip section 68 of its intended meaning.

DISCUSSION

Antedating more sophisticated economic systems, the doctrine of set-off finds its origin in the antiquity of Roman law. Although not recognized during the early development of common law principles, it found its way into the English system first under notions of equity and later by statutory enactment in 1645. See Loyd, The Development of Set Off, 64 U.Pa.L.Rev. 541, 553-54 (1916). The right of set-off, however, did not long remain the privilege of only the financially solvent; it became part of the English bankruptcy scheme in 1705, and became a recognized doctrine of American bankruptcy law with the passage of the Act of 1800. See gen. 4 Collier on Bankruptcy ¶ 68.01 (14th Ed. 1975): 3 Remington on Bankruptcy § 1431 (1908).

Minor changes in 1841 and 1867 and an important revision in 1938 produced the current section 68, 11 U.S.C. § 108. It provides:

A. In all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid.

B. A set off or counterclaim shall not be allowed in favor of any debtor of the bankrupt which (1) is not provable against the estate and allowable under subdivision g of section 57 of this Act; or (2) was purchased by or transferred to him after the filing of the petition or within four months before such filing, with a view to such use and with knowledge or notice that such bankrupt was insolvent or had committed an act of bankruptcy.

The provision as it stands creates no new rights. Studley v. Boylston National Bank of Boston, 229 U.S. 523, 528, 33 S.Ct. 806, 808, 57 L.Ed. 1313 (1913). It neither enlarges the doctrine nor grants the right of set-off where legal or equitable principles did not previously authorize it. Cumberland Glass Mfg. Co. v. DeWitt, 237 U.S. 447, 455, 35 S.Ct. 636, 639, 35 S.Ct. 636 (1915). Best stated section 68 merely recognizes the existence of the doctrine and provides a method by which it can be enforced after an adjudication of bankruptcy. Studley v. Boylston National Bank of Boston, 229 U.S. at 528, 33 S.Ct. at 808.

Thus, despite the seemingly mandatory language of section 68, the provision has long been held to be but permissive in nature. Cumberland Glass Mfg. Co. v. DeWitt, 237 U.S. at 455, 35 S.Ct. at 639; In re Yale Express System, Inc., 251 F.Supp. 447, 449-50 (S.D.N.Y.1965) vacated on other grounds, 362 F.2d 111 (2d Cir. 1966). It is neither automatic nor self-executing. Lowden v. Northwestern National Bank & Trust Co., 11 F.Supp. 929, 934 (D.Minn. 1935), rev'd on other grounds, 84 F.2d 847 (8th Cir.), cert. denied, 299 U.S. 583, 57 S.Ct. 109, 81 L.Ed. 430 (1936). If benefit is to be derived from the section, it must be invoked at the proper time in the proper forum, and the mutual character of the debt must be clearly evidenced. Whether a set-off is ultimately allowed lies within the discretion of the court; it must weigh competing interests and be guided by equitable principles. See Lowden v. Northwestern National Bank & Trust Co., 298 U.S. 160, 164, 56 S.Ct. 696, 698, 80 L.Ed. 1114 (1936); Cumberland Glass Mfg. Co. v. DeWitt.

Drawn from its aged English counterpart, see 4 Anne, c. 17, § 11, section 68 was thought a means by which to adjust the rights and claims of adverse parties in ordinary bankruptcy for the purposes of liquidation and distribution. Lowden v. Northwestern National Bank & Trust Co., 298 U.S. at 164, 56 S.Ct. at 698; 3 Remington on Bankruptcy § 1434; see also, In re Yale Express System, Inc., 362 F.2d at 115-116. To the extent that the provision governs the course of Chapter XI proceedings, it is by analogy only and with due regard to the totality of circumstances surrounding the case. Lowden v. Northwestern National Bank & Trust Co., 298 U.S. at 164, 56 S.Ct. at 698. The caveat is clear; the general provisions of the Bankruptcy Act apply under Chapter XI only insofar as they are consistent. 11 U.S.C. § 702; Preferred Surfacing, Inc. v. Gwinnett Bank & Trust Co., 400 F.Supp. 280, 282 (N.D.Ga.1975). The rote application of ordinary bankruptcy principles to proceedings in reorganization or arrangement was never contemplated. For the latter's equitable nature demands flexibility.

As observed by Mr. Justice Cardozo in Lowden v. Northwestern National Bank & Trust Co., 298 U.S. at 163-65, 56 S.Ct. at 698:

A proceeding to reorganize is not a bankruptcy, though an amendment to the Bankruptcy Act creates and regulates the remedy. From the fact without more than such a proceeding has been initiated, one cannot know that it will be necessary to have recourse to § 68, 11 U.S.C.A. § 108, which was meant in its enactment to prescribe the rule of set-off upon a distribution of the assets. That stage of administration, or the analogous stage of a revision of the debts, may never be attained in a proceeding to reorganize, though a petition has been approved and trustees have been appointed. If a plan of reorganization is not proposed or accepted, or, being proposed and accepted, is not confirmed by the court within a reasonable time, the whole proceeding may be dismissed (citations omitted); the title to the estate thus reverting to the debtor. By that time there may even be ability to pay

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