Continental Casualty Company v. White, 7875.

• Decision Date: 20 July 1959
• Docket Number: No. 7875.,7875.
• Citation: 269 F.2d 213
• Parties: CONTINENTAL CASUALTY COMPANY, Appellant, v. P. B. WHITE, Trustee in Bankruptcy for Mechanical Engineering Corporation, Bankrupt, Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

269 F.2d 213 (1959)

CONTINENTAL CASUALTY COMPANY, Appellant, v. P. B. WHITE, Trustee in Bankruptcy for Mechanical Engineering Corporation, Bankrupt, Appellee.

No. 7875.

United States Court of Appeals Fourth Circuit.

Argued June 12, 1959.

Decided July 20, 1959.

Spencer G. Gill, Jr., Norfolk, Va. (Rixey & Rixey, Norfolk, Va., on brief), for appellant.

William C. Worthington, Norfolk, Va. (Worthington, White & Harper, Norfolk, Va., on brief), for appellee.

Before SOBELOFF, Chief Judge, and SOPER and HAYNSWORTH, Circuit Judges.

SOBELOFF, Chief Judge.

The question presented in this case is whether a bankruptcy court may, within its summary jurisdiction, adjudicate a cross-claim brought by a trustee in bankruptcy to recover a voidable preference from a creditor who has filed a claim against the bankrupt estate. The District Court affirmed the Referee in Bankruptcy in his refusal to grant the creditor's motion to dismiss the cross-claim. The issue here concerns only the jurisdiction of the bankruptcy court, and not the merits of the cross-claim.

The facts are not in dispute, having been stipulated by the parties.¹ Continental Casualty Company ("Continental"), the appellant, was surety for the Mechanical Engineering Corporation ("Mechanical"), now the bankrupt, on approximately fifteen construction contracts. Because of financial difficulties, Mechanical found itself unable to complete these projects. A trust indenture was executed, by the terms of which Mechanical assigned all the monies due or to become due it under the construction contracts to a designated trustee for the benefit of Continental; and Continental agreed to provide the necessary funds for Mechanical to complete the work.

Bankruptcy proceedings were begun on January 17, 1959. On the preceding day the indenture trustee, as authorized by the trust agreement, had turned over to Continental the balance in the trust fund, $32,275.48, thereby reducing to $428,275.48 Continental's claim for payments made as surety to complete the construction contracts. Continental filed its claim for the latter amount as an unsecured creditor. The Trustee in Bankruptcy objected to Continental's claim and filed a cross-claim for the $32,418.04, contending that its payment to Continental on the eve of bankruptcy was a voidable preference. Continental moved to dismiss the cross-claim, asserting that the bankruptcy court had no jurisdiction in the matter, but the Referee denied the motion and ordered that Continental's claim should not be allowed unless it surrenders the preference to the Trustee in Bankruptcy pursuant to the provisions of Section 57, sub. g of the Bankruptcy Act, 11 U.S.C.A. § 93, sub. g.

The law is well settled in this Circuit that a creditor who voluntarily files a claim in bankruptcy submits to the summary jurisdiction of the court in respect to a counterclaim asserted by the trustee which arises out of the same transaction as the claim itself, and the court of bankruptcy has power not only to adjudicate the counterclaim but also to enter an affirmative judgment against the creditor. Florance v. Kresge, 4 Cir., 1938, 93 F.2d 784; Columbia Foundry Co. v. Lochner, 4 Cir., 1950, 179 F.2d 630, 14 A.L.R.2d 1349. In accord: In re Solar Manufacturing Corporation, 3 Cir., 1952, 200 F.2d 327; In re Nathan, D.C.S.D.Cal. 1951, 98 F.Supp. 686. Cf. Alexander v. Hillman, 1935, 296 U.S. 222, 56 S.Ct. 204, 80 L.Ed. 192, an equity case.

In the Kresge case, a lessor filed a claim for rentals collected by the bankrupt, as his rental agent. Under the contract between them the bankrupt was to receive certain commissions based on a percentage of the rents collected, and the Trustee in Bankruptcy filed a counterclaim for these commissions. On appeal it was held that the bankruptcy court had summary jurisdiction to adjudicate the counterclaim since it arose out of the same contract as the claim. A similar result was reached in the Lochner case, where the creditor had filed a claim for the balance due on equipment sold and delivered to the bankrupt, and the counterclaim was for damages sustained by the bankrupt as a result of latent defects in these articles. Jurisdiction in the bankruptcy court was held to exist since the "counterclaim relates to the very subject matter of the claim itself." 179 F.2d 633.

In the instant case, however, Continental contends that the claim and counterclaim arise out of different transactions. Counsel apparently argues that Continental was surety on fifteen different construction contracts, and that the preference money received by Continental (the $32,814.04) emanated from some of the contracts, while the money it expended (the $428,275.48) was for the completion of others of this group of contracts. Not only has Continental failed to present any evidence indicating which contracts the various monies represent, but its contention misconceives the nature of the transaction.

While it is true that Continental undertook to bond separately each construction contract, the trust indenture related to all the contracts. Under its terms, Continental was to advance money on all the contracts and, likewise, was to...