Heiser v. Woodruff, 496

• Citation: 66 S.Ct. 853,327 U.S. 726,90 L.Ed. 970
• Decision Date: 22 April 1946
• Docket Number: No. 496,496
• Parties: HEISER v. WOODRUFF et al
• Court: United States Supreme Court

327 U.S. 726

66 S.Ct. 853

90 L.Ed. 970

HEISER

v WOODRUFF et al.

No. 496.

Argued March 5, 1946.

Decided April 22, 1946.

Rehearing Denied May 27, 1946.

See 328 U.S. 879, 66 S.Ct. 1335 Messrs.Rupert B. Turnbull and Leonard J. Meyberg, both of Los Angeles, Cal., for petitioner.

Mr. Louis A. Fisckl, of Ardmore, Okl., for respondents.

[Argument of Counsel from page 727 intentionally omitted] Mr. Chief Justice STONE delivered the opinion of the Court.

This is a proceeding in bankruptcy on objections to the allowance of petitioner's claim in bankruptcy based upon a money judgment acquired against the bankrupt before the bankruptcy. Respondents objected to allowance of the claim on the ground that, so far as here relevant, the judgment was procured by fraud, that is, by perjured allegations in the complaint in the suit in which the judgment was rendered, and by perjured testimony as to the value of property alleged to have been converted by the defendant.

The referee in bankruptcy disallowed the claim. On the referee's certificate the district court, sitting in bankruptcy, allowed the claim, sustaining petitioner's contention that the issue of fraud in procurement of the judgment had been previously litigated and decided in petitioner's favor in proceedings in which the petitioner and the bankrupt or his trustee, or both, had been parties, and was therefore res judicata.

The Court of Appeals for the Tenth Circuit reversed. 150 F.2d 869. Relying upon our decisions in Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281, and Prudence Realization Corporation v. Geist, 316 U.S. 89, 62 S.Ct. 978, 86 L.Ed. 1293, it held that the court of bankruptcy could go behind the prior adjudications of the validity of the judgment and decide for itself the questions previously litigated and decided, whether the cause of action on which the judgment was entered was meritorious, and whether the claim in bankruptcy should be r jected because based on a judgment procured by claimant's fraud. The Court of Appeals accordingly remanded the cause to the district court for further proceedings on the objections to allowance of the claim. We granted certiorari, 66 S.Ct. 271, upon a petition which raises the questions whether the bankruptcy court may re-adjudicate the merits of a cause of action on which a judgment against the bankrupt, proved as a claim in bankruptcy, was entered and may disregard a previous adjudication between the parties that the judgment was not procured by fraud.

Woodruff, the bankrupt, was adjudicated as such on his voluntary petition on July 5, 1939. Petitioner, proceeding under § 63, sub. a(1), of the Bankruptcy Act, 11 U.S.C. § 103, sub. a(1), 11 U.S.C.A. § 103, sub. a(1), which provides that a fixed liability, evidenced by a judgment, is a provable claim in bankruptcy, filed his proof of claim in the bankruptcy court upon a default judgment against Woodruff for the sum, including accrued interest and costs, of more than $278,000. The suit in which the judgment was procured was filed in the United States District Court for the Southern District of California in July, 1935. Judgment was entered for petitioner on March 20, 1939, on proof taken of service of summons on January 31, 1939, and of Woodward's default and on evidence given by the petitioner.

The suit was based on diversity of citizenship, and the cause of action alleged was in substance that Woodruff had procured property of petitioner, consisting of rough sapphires, opals and zircons, of a stated value of $164,000, by false pretenses and false representations, the details of which are not now material, and had thereafter converted them to his own use.

On March 29, 1939, shortly after the judgment was rendered, Woodruff filed a motion in the trial court to set it aside. The motion, so far as it was based upon the alleged failure to serve the defendant Woodruff with process, was denied on June 8, 1939. But the court, on stipulation of the parties, directed that a hearing be held to determine the value of the converted gems and provided that at the hearing 'such competent evidence as either party desires to present be received' and considered by the court 'in determining the actual value of the property' which the plaintiff alleged was converted by defendants. The Court's order further provided that the judgment should be reduced in the amount by which the adjudged value of the gems exceeded the actual value as found at the hearing. After a contested hearing at which evidence, oral and documentary, was received, the trial court made a minute order stating that the court found that the values of the converted property were those alleged in the complaint, and declined to give further consideration to the motion to set aside the judgment. No appeal was taken from the judgment, and no review was had of the minute order or of the denial of the motion to set the judgment aside.

On August 23, 1939, on application of Jackson, the trustee of the bankrupt's estate, which certain creditors supported, the referee in bankruptcy authorized and directed the trustee 'to take such legal steps as may be proper and necessary under the law to vacate, set aside, and to avoid' the judgment, and authorized him to retain counsel in the Southern District of California for that purpose. This was followed by a motion on behalf of the bankrupt's trustee, and the bankrupt, in the district court for that district, to set aside the judgment on the grounds, among others, that no proper service of process had been made on the defendant, that the complaint did not state a cause of action, that 'a fraud was practiced upon the above entitled court with respect to the entry of said judgment', and that the trustee and the bankrupt 'have been prevented from presenting said defense upon any trial of the merits by reason of fraud, accident, surprise and excusable neglect as is more particularly shown by the affidavits' upon whic the motion was made. The affidavit of the trustee in support of the motion stated that the judgment was 'based upon fictitious values and was obtained by methods which amount to a constructive fraud upon the other creditors and your affiant, as representative of said creditors.' Counter affidavits by peti- tioner and his attorney in the suit in which the judgment was rendered denied the allegations of fraud.

The district court denied the motion, and the Court of Appeals for the Ninth Circuit affirmed. Jackson v. Heiser, 111 F.2d 310, 313. It overruled all the alleged grounds for setting aside the judgment, holding that the service of process was valid and that in any case the defendant had appeared in the suit by entering into the stipulation for trial of the issue of value of the property alleged to have been converted and participating in the hearing on that issue. It also held that the charge of fraud was denied and unsupported by proof, adding 'that ground of appellants' motion appears to have been abandoned.' There was no review of this decision.

The court below, in rejecting petitioner's plea of res judicata, and in directing inquiry into the merits of the original cause of action and into the allegation of fraud in procurement of the judgment, rested its decision upon the ground that the bankrupt's trustee had failed to place before the California district court any contention or proof that petitioner's testimony, particularly as to the value of the converted property, was perjured, that the bankrupt was not indebted to petitioner, or that the allegations of the complaint were untrue. The court, relying on Pepper v. Litton, supra, also held that the bankruptcy court, being a court having equity powers, was not bound by the principles of res judicata as to issues which were not pressed before the California district court, and that the authority of the bankruptcy court as a court of equity included the power to inquire into the validity of the claim upon which the judgment, presented as a claim against the estate, was based.

We need not consider whether, apart from the requirements of the full faith and credit clause of the Constitution, the rule of res judicata applied in the federal courts, in diversity of citizenship cases, under the doctrine of Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188, 114 A.L.R. 1487; cf. Guaranty Trust Co. v. York, 326 U.S. 99, 65 S.Ct. 1464; Holmberg et al. v. Armbrecht, 66 S.Ct. 582, can be other than that of the state in which the federal court sits. For nothing decided in Erie R. Co. v. Tompkins, supra, requires a court of bankruptcy, in applying the statutes of the United States governing the liquidation of bankrupts' estates, to adopt local rules of law in determining what claims are provable, or to be allowed, or how the bankrupt's estate is to be distributed among claimants. Cf. Board of Com'rs v. United States, 308 U.S. 343, 60 S.Ct. 285, 84 L.Ed. 313; Deitrick v. Greaney, 309 U.S. 190, 60 S.Ct. 480, 84 L.Ed. 694; D'Oench, Duhme & Co. v. Federal Deposit Ins. Corporation, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956; Helvering v. Stuart, 317 U.S. 154, 161, 162, 63 S.Ct. 140, 144, 145, 87 L.Ed. 154; Sola Electric Co. v. Jefferson Co., 317 U.S. 173, 176, 63 S.Ct. 172, 87 L.Ed. 165; Wragg v. Federal Land Bank, 317 U.S. 325, 328, 63 S.Ct. 273, 275, 87 L.Ed. 300; Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838. In passing upon and rejecting or allowing the proof of claim in this case the court of bankruptcy proceeds—not without appropriate regard for rights acquired under state law—under federal statutes which govern the proof and allowance of claims based on judgments. In determining what judgments are provable and what objections may be made to their proof, and in determining the extent to which the inequitable conduct of a claimant in acquiring or asserting his claim in bankruptcy, requires its rejection or its subordination to other claims which, in othe respects...