Columbia Foundry Co. v. Lochner

• Decision Date: 04 January 1950
• Docket Number: No. 5992.,5992.
• Parties: COLUMBIA FOUNDRY CO. v. LOCHNER.
• Court: U.S. Court of Appeals — Fourth Circuit

14 ALR 2d 1349, 179 F.2d 630 (1950)

COLUMBIA FOUNDRY CO. v. LOCHNER.

No. 5992.

United States Court of Appeals, Fourth Circuit.

Argued November 17, 1949.

Decided January 4, 1950.

Richard W. Emory, Baltimore, Md., and Andre W. Brewster, Baltimore, Md. (Venable, Baetjer & Howard, Baltimore, Md., on the brief), for appellant.

Irving B. Grandberg, Baltimore, Md., for appellee.

Before PARKER, Chief Judge, and SOPER and DOBIE, Circuit Judges.

SOPER, Circuit Judge.

The question to be decided in this case is whether the District Court, sitting in bankruptcy, has jurisdiction to enter an affirmative judgment in favor of the trustee in bankruptcy upon a counterclaim filed by him against a non-resident creditor who has filed a claim against the estate of the bankrupt. It is settled that in an equity receivership to wind up the business of a corporation and distribute its assets amongst the creditors and stockholders, where non-resident officers of the corporation, who were not parties to the original suit, come in as creditors and claim part of the assets, the court has jurisdiction to entertain a counterclaim against them for assets of the corporation alleged to have been fraudulently converted by them to their own use; and in such a case the court has jurisdiction not only of the subject matter but also of the person, and may grant affirmative relief against the claimants although no process has been issued against them.

This rule was laid down in Alexander v. Hillman, 296 U.S. 222, 56 S.Ct. 204, 80 L.Ed. 192, notwithstanding the provision of Section 51 of the Judicial Code, 28 U.S. C.A. § 112.¹ The court said:

"Respondents appropriately presented their claims and became entitled to adjudication without petition for intervention, any formal pleading or commencement of suit. Unquestionably, they submitted themselves to the court's jurisdiction in respect of all defense that might be made by the receivers and of all objections that other claimants might interpose to the validity, amounts, or priorities of their claims. And they put themselves in position, should their interest warrant, to challenge the receivers' acts and the demands of others claiming as creditors." 296 U.S. pages 238-239, 56 S.Ct. page 209.

* * * * * *

"The rule contained in section 51, Judicial Code, 28 U.S.C., § 112 28 U.S.C.A. § 112, that is invoked by respondents here declares: `No civil suit shall be brought in any district court against any person by any original process or proceeding in any other district than that whereof he is an inhabitant.' The section applies only where a suit is `brought * * * by any original process or proceeding.' No attempt was made to summon respondents into court. That provision does not affect the general jurisdiction of District Courts, but merely confers a personal privilege that may be waived. General Investment Co. v. Lake Shore & M. S. Ry. Co., 260 U.S. 261, 272, 43 S.Ct. 106, 67 L.Ed. 244; Lee v. Chesapeake & Ohio Ry. Co., 260 U.S. 653, 655, 43 S.Ct. 230, 67 L.Ed. 443. By presenting their claims respondents subjected themselves to all the consequences that attach to an appearance, section 51 to the contrary notwithstanding. See General Electric Co. v. Marvel Bare Metals Co., 287 U.S. 430, 435, 53 S.Ct. 202, 77 L.Ed. 408." 296 U.S. pages 240-241, 56 S.Ct. page 210.

This court in Florance v. Kresge, 4 Cir., 93 F.2d 784, following the principle laid down in Alexander v. Hillman, supra, upheld the jurisdiction of a court of bankruptcy to entertain a counterclaim and to render an affirmative judgment against a creditor who had filed an unsecured claim against the estate, and had also filed an intervening petition in which claim was made for rent collected by the trustee under a contract between the creditor and the bankrupt as a real estate agent.

In respect to the filing of proofs of claim in bankruptcy, as consent to the jurisdiction of the court, Collier on Bankruptcy, 14th Ed., Vol. 4, Sec. 6820, pp. 788-790 says:

"It is clear that where the plaintiff's petition is of such a nature that he submits his cause to the bankruptcy court, and manifests a willingness that the court fully determine his rights therein, such as in a reclamation petition, he consents to the court's jurisdiction and cannot complain thereafter of the court's power to render a judgment against him upon a proper setoff or counterclaim asserted by the trustee. On the other hand, the mere filing of a proof of claim for allowance is not such a clear expression of consent. It has been held in some cases that such a claim, without more, does not constitute consent, and that a bankruptcy court may not render an affirmative judgment upon a set-off or counterclaim asserted by the trustee. It was said that a plenary suit was the only remedy, unless the trustee waived all right to the excess. In Florance v. Kresge, however, the court held that the filing of an unsecured claim amounted to a submission to the court's jurisdiction so as to permit an affirmative judgment upon a proper counterclaim asserted by the trustee and receivers. In the light of expeditious administration of bankrupt estates, and an avoidance of multiplicity of litigation, this decision has much to recommend it. It would further serve to reduce the operation of the `absurdity of making A pay B when B owes A.'

"One who files a proof of claim should be held to acquiesce in the adjudication of any proper set-off or counterclaim even to the extent of a judgment thereon, since as pointed out in the Kresge case, the claimant puts himself in a position, should his interests warrant, to challenge the receiver's or trustee's acts and the demands of others claiming as creditors. He should not be permitted to claim the benefits of such a position, and yet maintain a favored advantage as against the trustee or receiver, compelling that officer to resort to a plenary action to collect on a claim that is a proper subject of set-off or counterclaim." See also Collier on Bankruptcy, Vol. 2, Sec. 23.08, pp. 514 to 517.²

Columbia Foundry Company, the creditor in this case, is a Pennsylvania corporation not engaged in business in Maryland. In 1946 and 1947 it sold grey iron castings to Liberty Motors and Engineering Corporation, which was adjudicated a bankrupt in voluntary proceedings on May 10, 1948. The creditor, on June 1, 1948, filed by mail with the referee a proof of unsecured debt in the sum of $36,386.34 for the balance due on certain shipments of merchandise sold and delivered to the bankrupt. The claimant also executed a power of attorney to Baltimore attorneys to vote at the first meeting of creditors, and his power of attorney was also filed with the referee. The trustee in bankruptcy excepted to the claim on the ground that the bankrupt was not indebted as alleged, and that the castings described in the claim were defective. The trustee also asserted the counterclaim that the defects in the castings were latent and that the use of them in the bankrupt's business resulted in financial loss and damages to the bankrupt in excess of $100,000, and brought about its bankruptcy. The claimant moved that the trustee's exception be dismissed insofar as it asserted a counterclaim in excess of the claim, on the ground that the bankruptcy court lacked jurisdiction over the subject matter of the counterclaim and over the claimant since it is a Pennsylvania corporation and had not been served with process in the District of Maryland. The referee denied the motion to dismiss and on petition for review, was affirmed by the District Judge.

A case of this sort demonstrates the wisdom of the rule laid down in Florance v. Kresge, supra, and the improbability that Congress intended to restrict the use of counterclaims to defensive purposes only. Here the trustee is called upon to pay for goods sold to the bankrupt which, for the purposes of the argument, must be assumed to have been so defective as to cause the bankrupt a loss greatly in excess of the purchase price of the merchandise. The counterclaim relates to the very subject matter of the claim itself. It is conceded that the trustee may prove the counterclaim so as to defeat the claim and it follows that the creditor must produce the same evidence to save his claim as he would to defeat an affirmative judgment against him on the counterclaim. The inconvenience and expense of transporting witnesses and records from the claimant's home office to the bankruptcy court, which is stressed by the appellant, would be the same in either event; and this difficulty is unavoidable since it is essential that claims against an insolvent in bankruptcy as in an equity receivership must be handled by the court in charge of the debtor's estate. What then is the basis for the decisions upon which the appellant relies?

It seems clear that in adjusting the apparent conflict between Section 23, 11 U.S.C.A. § 46, and Section 68, 11 U.S. C.A. § 108, of the Bankruptcy Act, too much emphasis has heretofore been placed upon the requirement of Section 23 that suits by the trustee shall be brought only where the bankrupt might have brought them if bankruptcy had not occurred, that is, in the district whereof the defendant is an inhabitant, and too little weight has been given to the right of the trustee under Section 68 to avail himself of set offs and counterclaims where a creditor presents a claim against the estate. The purpose of Section 23 to protect a defendant from the expense and inconvenience of defending a suit by the trustee away from his home is clear, and this purpose can be served by compelling a trustee who desires to sue to bring the action in the defendant's district. In this way Section 23 can be given adequate scope, since it applies only when the trustee brings suit; and there is no good reason to extend it to the situation where the trustee himself is sued in effect in the bankruptcy court by a creditor who files a claim against the estate....