IN RE JONKER CORPORATION, In Bankruptcy No. M-13856.

• Decision Date: 25 November 1974
• Docket Number: In Bankruptcy No. M-13856.
• Citation: 385 F. Supp. 327
• Parties: In the Matter of JONKER CORPORATION.
• Court: U.S. District Court — District of Maryland

385 F. Supp. 327

In the Matter of JONKER CORPORATION.

In Bankruptcy No. M-13856.

United States District Court, D. Maryland.

November 7, 1974.

As Modified November 25, 1974.

George Beall, U. S. Atty., and Leonard M. Linton, Jr., Asst. U. S. Atty., Baltimore, Md., for United States.

Mitchell Stevan, Baltimore, Md., for S. David Rubenstein, Trustee.

OPINION AND ORDER

JAMES R. MILLER, Jr., District Judge.

This appeal by the Internal Revenue Service (IRS) of the United States from an order of the Referee in Bankruptcy arises from the adjudication of Jonker Corporation as a bankrupt. Following the adjudication of bankruptcy, the United States filed three proofs of claim. The first claim, filed March 6, 1970, and amended April 6, 1970, was a timely filed proof of claim for Internal Revenue taxes in the amount of $79,028.84. (Claim No. 122a). On March 8, 1971, the Department of Health, Education & Welfare (HEW) filed a second claim in the amount of $186.00 for overpayment on a lease of a machine from the bankrupt. On the same day, the Defense Supply Agency (DSA) filed the third claim in the amount of $3,042.00 for overpayment on a contract. The second and third claims of HEW and DSA were admittedly untimely filed.

Since the second and third claims of the United States were not timely filed, the Referee issued orders on March 8, 1971 (Papers Nos. 71 and 72) allowing the claims of HEW and DSA only as against the surplus, if any, remaining after payment in full to general creditors. The United States did not file a petition for review of the Referee's orders of March 8, 1971. In May, 1973, the Referee prepared an order of distribution, allowing pro rata distribution to priority creditors under 11 U.S.C. § 104(a)(4) at 86.749%. There was, therefore, no surplus in the bankruptcy estate against which the Referee-allotted distribution to HEW or DSA could be satisfied.

Prior to bankruptcy, Jonker Corporation (Jonker) had been performing a contract with the Department of the Army. After the adjudication of bankruptcy, it was determined that the Army held the sum of $34,494.93 as properly owing to the bankrupt under its contract. The Comptroller General ordered that the sum held by the Army should be distributed to the various federal agencies having claims against the bankrupt in the following order of priority: $186.00 to HEW, $3,042.00 to DSA, and the remaining balance of $31,266.93 to IRS. Those federal agencies received the money in accordance with the Comptroller General's instructions.

The Referee in Bankruptcy, however, determined that he was not bound by the distribution directed by the Comptroller General. On May 10, 1973 (Paper No. 96), the Referee passed an order holding that the sum of $34,494.93 owed by the Army to the bankrupt should be set off in its entirety against the tax claim only. Based on his aforementioned orders of March 8, 1971, the Referee concluded that the money should not be used to satisfy the untimely claims of HEW and DSA. The United States appeals from that action of the Referee.¹

A. The 10-day period for review of the Referee's orders

Under 11 U.S.C. § 67(c)² a 10-day period of limitations is established which is designed to fix a time for the finality of litigation over respective orders of a Referee. Hardesty v. Keightley, 361 F. 2d 751 (4th Cir. 1966). The IRS petition for review purports to challenge the May 10, 1973, order of the Referee and was timely filed on May 21, 1973.³

The Referee's order of May 10, 1973 (Paper No. 96), stated in part as follows:

"The court concludes that it is not bound by the distribution made by the General Accounting Office particularly in view of the prior proceedings herein and the orders of this court passed March 8, 1971 allowing the claims of the Department of Health, Education and Welfare and the United States Defense Supply Agency only against any surplus remaining after all claims timely filed herein have been paid in full." (Emphasis supplied).

No petition for review of the orders of March 8, 1971, had been filed up to that time, May 10, 1973, nor had the IRS or any other branch of the United States Government filed a petition for reconsideration by the Referee of those orders. The orders of March 8, 1971, had become final, 11 U.S.C. § 67(c). The Referee, in his order of May 10, 1973, without reconsidering, or being called upon to reconsider, his orders of March 8, 1971, simply accepted those orders as final and decided the question then pending before him by making the next logical step from the then established premise that the HEW and DSA claims were to be allowed only against any surplus remaining after all claims timely filed had been paid in full.

The IRS cannot, by appealing the validity of the May 10, 1973 order, reopen the validity of the March 8, 1971 orders for to do so would circumvent 11 U.S.C. § 67(c) and render it a nullity.

This court's conclusion is not inconsistent with the result in In re Penco Corporation, 465 F.2d 693 (4th Cir. 1972). There the Referee had issued a turnover order on June 28, 1971, against Carmen Cosmetics as to which a petition for review had not been thereafter filed. On July 26, 1971, however, Carmen Cosmetics filed a motion with the Referee to set aside the order of June 28, 1971. The Referee entertained the motion, reopened, and reconsidered the matters decided in his order of June 28, 1971, ultimately decided that he had been correct initially, and denied the motion on August 23, 1971. Carmen Cosmetics then filed a petition for review by the District Court on September 1, 1971. The Fourth Circuit, in reversing the lower court which had held that the petition for review was untimely filed and really sought review of the order of June 28, 1971, held that ". . . the Referee definalized the turnover order of June 28, 1971 by putting `the basis of that earlier order again in issue' . . ." and that ". . . the ten-day period for seeking review of that order must be measured from August 23, the date of the Referee's refinalization of the original turnover order." 465 F.2d at 696.

The great difference between the situations in Penco and here is that in Penco the Referee reconsidered his prior order, thereby definalizing it, whereas here the Referee accepted his prior order as final without reconsideration and proceeded to make a related decision based upon his prior final order.

While this court holds that 11 U.S.C. § 67(c), under these circumstances, precludes the review in this proceeding of the validity of the orders of March 8, 1971, even if the court were to consider those orders on the merits, the orders would be held to be valid, 11 U.S.C. § 93(n); Wolverton v. Shell Oil Co., 442 F.2d 666 (9th Cir. 1971); Perry v. Certificate Holders of Thrift Savings, 320 F.2d 584 (9th Cir. 1963); 3 Collier's on Bankruptcy (14th ed.) ¶¶ 57.01 at 121, 57.10 at 189, 57.26 at 413, 57.272 at 424, and 57.30 at 434.

B. Set-Offs

The IRS argues that irrespective of the orders of March 8, 1971, 11 U.S.C. § 108 requires the set-off of mutual claims existing between the bankrupt estate and its debtor-creditor. That statute provides:

"108. Set-offs and counterclaims. — (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 § 93(g) of this title; 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."

While § 108 is couched in mandatory language, it has long been recognized that the privilege of set-off under § 108 is permissive, not mandatory. It is applied by courts of bankruptcy in the exercise of discretion, consistent with the general principles of equity and justice. Cumberland Glass Mfg. Co. v. DeWitt, 237 U.S. 447, 455, 35 S.Ct. 636, 59 L.Ed. 1042 (1915); Brunswick Corporation v. Clements, 424 F.2d 673 (6th Cir. 1970), cert. denied, 400 U.S. 1013, 91 S.Ct. 564, 27 L.Ed.2d 627 (1971); Tuscon House Construction Company v. Fulford, 378 F.2d 734 (9th Cir. 1967); The First National Bank of Portland v. Dudley, 231 F.2d 396 (9th Cir. 1956); In re Potts, 142 F.2d 883 (6th Cir. 1944), cert. denied, 324 U.S. 868, 65 S.Ct. 910, 89 L.Ed. 1423 (1945).

The government argues that the clear statutory language of § 108 does not require that claims entitled to set-off actually be proven. Instead, the government asserts that the provision requires only that such claims be "provable." While HEW and DSA did not prove their untimely filed claims, such claims, the government argues, satisfied the requirement of provability within the meaning of 11 U.S.C. § 108(b). Thus the claims of HEW and DSA were entitled to the sums allocated to them as a set-off by the Comptroller General.

In support of its argument, the government relies on only two cases, and this court could find no others. In Zorwitz v. Okin, 121 F.Supp. 56 (E.D.N.Y. 1954), the court held that a claim which was not filed in time for proof and allowance may still be used as a set-off. In United States v. Columbia Erection Corp., 134 F.Supp. 305 (W.D.Mo.1955), the court stated that a party may plead in set-off even where the time for filing a claim against the bankrupt has expired. In neither Zorwitz nor Columbia, however, was an order entered by the Referee allowing untimely filed claims against surplus only.

Failure to file and prove a provable claim within the time limitation of 11 U.S.C. § 93(n)⁴ may preclude the allowance of such claim. 1 Collier's on Bankruptcy (14th ed.) ¶ 1.14 at 89. Although such claim may not be...