In re Greenstreet, Inc., 10901.

Citation209 F.2d 660
Decision Date06 January 1954
Docket NumberNo. 10901.,10901.
PartiesIn re GREENSTREET, Inc. UNITED STATES v. KENNEDY.
CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)

Samuel D. Slade, Cornelius J. Peck, Attorneys, U. S. Department of Justice, Washington, D. C., Otto Kerner, Jr., U. S. Atty., Chicago, Ill., Warren E. Burger, Asst. Atty. Gen., Paul A. Sweeney, Attorneys, Department of Justice, Washington, D. C., for appellant.

Leonard Gesas, Michael Gesas, Urban A. Lavery, Chicago, Ill., for appellee.

Before DUFFY, LINDLEY and SWAIM, Circuit Judges.

LINDLEY, Circuit Judge.

Bankruptcy proceedings were instituted against the bankrupt herein on March 14, 1951. Almost immediately thereafter, the government filed a reclamation petition asserting title to certain property in the hands of the trustee, which it averred it had supplied to the bankrupt on contract for the purpose of having the latter manufacture therefrom army clothing. The petition prayed that the property, the "purchase price" of which was said to have been $302,500, and which, if completed in pursuance of the contract, would have been worth much more, be surrendered to the government in order that it might proceed to procure completion of the contract by other manufacturers. Inasmuch as it appeared that the Defense Department was badly in need of the material in order to satisfy the pressing needs of the military forces, the court, with the trustee's consent, directed that it be surrendered to the government, without prejudice, however, to the rights of the trustee or any other claimant therein. Later the government filed also a claim for damages for failure on the part of the bankrupt to complete the contract, in the amount of $68,279.72. In due course the trustee filed counterclaims asserting certain liens and unsecured money demands against the property and the government's general claim, which he asserts aggregated $155,593.49. Thus the government was asserting a demand for property presumably of the value of at least $302,000 and a claim for damages in the amount of $68,279.72, the money value of its total claim being, so far as we can ascertain, at least $370,000, whereas the trustee sought to set off against these demands, a total of some $150,000. The government objected to the court's entertainment of jurisdiction of the counterclaims upon the premise that it was immune from suit. The court held that it had jurisdiction and the government appeals from this interlocutory order.

At the threshold we are confronted with the trustee in bankruptcy's motion to dismiss. He insists that the order was not appealable. This issue presents a frequently recurring and often vexatious question of whether the order was entered in a proceeding in bankruptcy or in a controversy arising in a proceeding in bankruptcy. Under Section 24, sub. a of the Bankruptcy Act, 11 U.S. C.A. § 47, sub. a, we are vested with jurisdiction in appeals from orders "in proceedings in bankruptcy, either interlocutory or final, and in controversies arising in proceedings in bankruptcy, to review, affirm, revise or reverse, both in matters of law and in matters of fact". Consequently if the order was entered in the proceedings in bankruptcy, even though interlocutory, it is appealable, whereas, if entered in a controversy arising in bankruptcy, it is not.

We think that, under the facts related, there can be no question but that the order of which complaint is made was entered, at least in part, in the bankruptcy proceedings. As we have heretofore held, such proceedings cover questions arising between the bankrupt or his representative, the trustee, on the one hand and the creditors, as such, on the other, and other well known steps in bankruptcy proceedings, including "allowance and disallowance of claims and the like," all of which naturally occur in the settlement of the estate. In re Breyer Printing Company, 7 Cir., 216 F. 878, at page 880. See also In re Manufacturers Trading Corp., 6 Cir., 1952, 194 F.2d 948, 952-953; In re National Finance & Mortgage Corp., 9 Cir., 1939, 96 F.2d 74; Broders v. Lage, 8 Cir., 1928, 25 F.2d 288; 2 Collier on Bankruptcy (14th Ed.) Section 24.12. In the present case the government, in addition to seeking recovery of certain property, asserted a general claim against the estate. The trustee, whose duty it is to conserve the assets, objected to the allowance of each of these claims and sought to defeat them by counterclaims demanding substantial sums by way of set-off. The disposition of the issues arising upon the government's general claim and the trustee's counterclaim thereto had to do with the allowance and disallowance of claims, which is a part of the proceedings in bankruptcy. We conclude, therefore, that the order was entered in proceedings in bankruptcy and that, under the Act, the appeal was properly taken from the interlocutory order. As the government had a right to appeal from the order, inasmuch as it covered issues upon the government's general claim and the trustee's counterclaim, the validity of the entire order is before us. The motion to dismiss is denied.

On the merits of the order, the government concedes that a party sued by the United States may recoup damages arising out of the same transaction, or where authorized, set off other claims, so as to reduce or defeat the government's claim. That this is a correct conception of the law is apparent from United States v. United States Fidelity & Guaranty Co., 309 U.S. 506, at page 511, 60 S.Ct. 653, 84 L.Ed. 894; Bull v. United States, 295 U.S. 247, at page 262, 55 S.Ct. 695, 79 L.Ed. 1421; United States v. Ringgold, 8 Pet. 150, 163-164, 8 L.Ed. 899, though no affirmative judgment over and above the amount of its claim can be rendered against the United States, United States v. Shaw, 309 U.S. 495, 60 S.Ct. 659, 84 L.Ed. 888. The decision that the District Court had jurisdiction, then, is admittedly correct, in so far as it permitted the trustee to set off against the government's general claim in order to defeat it or reduce it, his counterclaim for breach of the contract on the part of the government. Under the Supreme Court's decisions, irrespective of any question of immunity of the sovereign from suit, by filing its general claim the government consented that anything growing out of the same transaction might be interposed by way of set-off to lessen or defeat its claim.

However, there remains the further question of whether the trustee may also, by way of set-off, reduce the property which the government has received without prejudice to and without adjudication of the trustee's rights. The government's position in this respect is that, though it intervened in the bankruptcy proceedings in order to obtain property to which it held legal title, it did not thereby consent, (1), that the trustee might set off as against the property's value any damages alleged to have been incurred by the bankrupt on account of the government's alleged breach in performing its part of the contract or, (2), that the bankrupt estate might assert liens arising under state law against that property, either in its own right or in behalf of employees claiming liens for labor or in any other respect. It insists that to allow any such set-off against the property in satisfaction of the trustee's demands violates the rule of immunity of the sovereign from suit and the subordinate rule forbidding perfection of liens against property of the United States. The trustee in bankruptcy, on the other hand, argues that, inasmuch as the property was in possession of the trustee and in the custody of the court, when the government invoked the jurisdiction of that court in order to recover it, it clothed the court with authority to entertain and allow the trustee's counterclaim of set-off against the property fund in order to satisfy the trustee's demand on both its general claim and its alleged liens.

The referee and the District Court held that the court had jurisdiction to entertain this counterclaim against the property, for two reasons: (1), inasmuch as the court had custody of the property, by filing the reclamation petition, the United States consented to the jurisdiction of the court to determine the rights of all parties in the property, and (2), the court had jurisdiction by virtue of the Tucker Act, 28 U.S.C.A. § 1346.

Apparently the trustee has abandoned his reliance on the Tucker Act. Clearly jurisdiction here cannot be based on its provisions, which restrict the jurisdiction of district courts over claims against the United States to those "not exceeding $10,000". Although that Act's category of permissible claims, namely, "for liquidated or unliquidated damages in cases not sounding in tort", may be broad enough to include actions such as this, the trustee asserts a right of set-off in excess of $155,000. This is clearly beyond the consent granted in that Act. 28 U.S.C.A. § 1346(a) (2).

Nor can consent to be sued be implied from the terms of the Bankruptcy Act. The trustee insists that the Act applies to the United States just as it does to any other person. But the United States, as a sovereign, is not bound by a statute which in its general terms would divest it of pre-existing rights or privileges. United States v. Wittek, 337 U.S. 346, 69 S.Ct. 1108, 93 L.Ed. 1406; United States v. United Mine Workers, 330 U.S. 258, 67 S.Ct. 677, 91 L.Ed. 884. Moreover, the Supreme Court has specifically held that the United States is not subject to the general provisions of the Bankruptcy Act unless specifically named therein. Guarantee Title & Trust Company v. Title Guaranty & Surety Company, 224 U.S. 152, 155, 32 S.Ct. 457, 56 L.Ed. 706; United States v. Herron, 87 U.S. 251, 260-264, 22 L.Ed. 275. The sovereign immunity from suit is a right and privilege which can be divested only by specific congressional enactment so providing. United States v. United States Fidelity & Guaranty Co., 309 U.S. 506, 60 S.Ct. 653, 84...

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