In re Nathan

Decision Date28 June 1951
Docket NumberNo. 48059.,48059.
Citation98 F. Supp. 686
CourtU.S. District Court — Southern District of California
PartiesIn re NATHAN.

Gendel & Raskoff, Los Angeles, Cal., for trustee.

Benno M. Brink, Referee in Bankruptcy, Los Angeles, Cal., Samuel A. Miller and Harry M. Fain, Los Angeles, Cal., for respondent A. D. Juilliard & Co., Inc.

MATHES, District Judge.

This proceeding is before the court upon petition of the trustee in bankruptcy to review the referee's order of April 27, 1950 permitting withdrawal of a creditor's claim upon the condition inter alia that the creditor submit to a plenary suit by the trustee in this district for the recovery of an alleged preference.

The facts leading to the order under review are these. A. D. Juilliard & Co., Inc., a Delaware corporation, regularly filed a verified claim against the bankrupt estate for $13,243.87 based upon certain promissory notes made by the bankrupt in favor of the creditor approximately one month prior to bankruptcy. The trustee filed objections to allowance of the claim, together with a counterclaim alleging that within four months next preceding filing of the petition in bankruptcy the creditor had received from the bankrupt voidable preferences amounting to $54,664.65, arising "out of the same transaction or occurrence that is the subject matter of the * * * claim * * *." Fed.Rules Civ.Proc. 13 (a), 28 U.S.C.A. The trustee prayed for judgment on this compulsory counterclaim against the creditor for the amount of the preference.

The creditor thereupon applied to the referee for an order permitting withdrawal of the claim. The referee, holding that a bankruptcy court, Bankruptcy Act § 1(9), 11 U.S.C.A. § 1(9), is without jurisdiction to award affirmative relief on the trustee's counterclaim, made the order under review permitting withdrawal of the claim upon conditions substantially the same as those imposed in In re Empire Coal Sales Corp., D.C.S.D.N.Y.1942, 45 F.Supp. 974, 976, affirmed sub nom Kleid v. Ruthbell Coal Co., 2 Cir., 1942, 131 F.2d 372, 373. As ground for reversal the trustee urges here that the order disregards the limitations imposed by Rule 41(a) (2) of the Federal Rules of Civil Procedure.

Historically, voluntary withdrawal of claims has been freely permitted in the absence of "some plain, legal prejudice" to the opposing party. Pullman's Palace Car Co. v. Central Transportation Co., 1898, 171 U.S. 138, 146, 18 S.Ct. 808, 43 L.Ed. 108; Ex parte Skinner & Eddy Corp., 1924, 265 U.S. 86, 93-94, 44 S.Ct. 446, 68 L.Ed. 912; cf. Bronx Brass Foundry, Inc. v. Irving Trust Co., 1936, 297 U.S. 230, 232, 56 S.Ct. 451, 80 L.Ed. 657. When the Federal Rules of Civil Procedure were made applicable to proceedings in bankruptcy, General Order 37, 11 U.S.C.A. following section 53, Rule 41 came into operation to limit by its terms the broad discretion previously exercised by the bankruptcy courts.

Rule 41(a) (2) provides in part that: "If a counterclaim has been pleaded * * * the action shall not be dismissed against * * * objection unless the counterclaim can remain pending for independent adjudication by the court." The reason of the rule is to prevent denial to a defendant of use of his counterclaim as a setoff, see United States v. Eckford, 1867, 6 Wall. 484, 73 U.S. 484, 488, 18 L.Ed. 920; Bankruptcy Act, § 68, 11 U.S.C.A. § 108, in those cases where jurisdiction is lacking to adjudicate the counterclaim independently of the opposing claim. Cf. Bronx Brass Foundry v. Irving Trust Co., supra, 297 U. S. at page 232, 56 S.Ct. 451, 80 L.Ed. 657.

The referee held in effect that the trustee's counterclaim at bar could not "remain pending for independent adjudication" solely because of want of jurisdiction in the bankruptcy court to render an affirmative judgment for recovery thereon, and that therefore the prohibition of the above quoted provision of Rule 41(a) (2) did not apply.

It seems clear that the referee erred in his interpretation of the force of the rule. If, as the referee held, the bankruptcy court was without jurisdiction to make an "independent adjudication" on the counterclaim, then the plain language of the rule forbade withdrawal of the claim over the trustee's objection. Kelso v. Maclaren, 8 Cir., 1941, 122 F.2d 867, 870; cf. In re Empire Coal Sales Corp., supra, 45 F.Supp. at page 976, affirmed sub nom. Kleid v. Ruthbell Coal Co., 131 F.2d 372.

Hence the correctness of the referee's order under review must turn upon the correctness of his holding that the bankruptcy court would be without jurisdiction to render an affirmative judgment in favor of the trustee on his counterclaim to recover the alleged preference.

It has been said that "a bankruptcy court is a court of equity at least in the sense that in the exercise of the jurisdiction conferred * * * by the act, it applies the principles and rules of equity jurisprudence." Pepper v. Litton, 1939, 308 U.S. 295, 304, 307, 60 S.Ct. 238, 244, 84 L. Ed. 281; Local Loan Co. v. Hunt, 1934, 292 U.S. 234, 240, 54 S.Ct. 695, 78 L.Ed. 1230; cf. Sprague v. Ticonic Bank, 1939, 307 U.S. 161, 59 S.Ct. 777, 83 L.Ed. 1184.

Among the grants of jurisdiction expressly set forth in the Act are those to allow or disallow claims § 2, sub. a (2), to reject "in whole or in part according to the equities of the case" claims previously allowed § 57, sub. k, and "enter such judgments, in addition to those specifically provided for, as may be necessary for the enforcement of the provisions of this Act" § 2, sub. a (15). 11 U.S.C. A. §§ 11, sub. a (2), 93, sub. k, 11, sub. a (15); Pepper v. Litton, supra, 308 U.S. at page 304, 60 S.Ct. 238, 84 L.Ed. 281.

If a creditor's claim in bankruptcy may be analogized to a bill in equity in a plenary action prior to "union" of law and equity, see 48 Stat. 1064 (1934), 28 U.S.C.A. § 723c (1946); 28 U.S.C.A. § 2072 (1950); Fed.Rules Civ.Proc. rules 2, 38(a), 28 U.S. C.A., the applicable rule would be that a federal court of equity once acquiring jurisdiction normally retains that jurisdiction, even after dismissal of the original bill, to render judgment on a cross-bill or counterclaim arising out of the same transaction as the original bill. See Moore v. New York Cotton Exchange, 1926, 270 U. S. 593, 609, 46 S.Ct. 367, 70 L.Ed. 750; Kirby v. American Soda Fountain Co., 1904, 194 U.S. 141, 144, 24 S.Ct. 619, 48 L.Ed. 911; cf. Merchants Heat & L. Co. v. James B. Clow & Sons, 1907, 204 U.S. 286, 289-290, 27 S.Ct. 285, 51 L.Ed. 488.

But it was held that in order for jurisdiction to adjudicate a counterclaim arising out of the same transaction to rest upon jurisdiction to adjudicate the original bill in equity, "the counterclaim * * * must be an equitable claim, and not a legal one". American Mills Co. v. American Surety Co., 1922, 260 U.S. 360, 364, 43 S.Ct. 149, 151, 67 L.Ed. 306; Texas Co. v. Borne Scrymser Co., 4 Cir., 1933, 68 F.2d 104, 106; Cooling Tower Co. v. C. F. Braun & Co., 9 Cir., 1924, 1 F.2d 178, 179; Cleveland Engineering Co. v. Galion Dynamic Motor Truck Co., D.C.N.D. Ohio 1917, 243 F. 405, 407. Such counterclaims are logically ancillary to an original bill in equity, and are denominated "compulsory", Fed.R.Civ.P. 13(a), since omission to assert constitutes waiver. American Mills Co. v. American Surety Co., supra, 260 U.S. at page 364, 43 S.Ct. 149, 67 L. Ed. 306; Texas Co. v. Borne Scrymser Co., supra, 68 F.2d at page 106.

On the other hand, as to "permissive" counterclaims Fed.R.Civ.P. 13(b) — those not arising "out of the transaction or occurrence that is the subject matter of the opposing party's claim" Fed.R.Civ.P. 13 (a) — it was held that independent grounds of federal jurisdiction must exist. See Moore v. New York Cotton Exchange, supra, 270 U.S. at page 609, 46 S.Ct. 367, 70 L.Ed. 750; Lesnik v. Public Industrial Corp., 2 Cir., 1944, 144 F.2d 968, 976, n. 10; Celite Corporation v. Decalite Co., 9 Cir., 1938, 96 F.2d 242, 249, certiorari denied 1938, 305 U.S. 633, 59 S.Ct. 101, 83 L.Ed. 407.

So where a counterclaim for recovery of a preference is properly presented as an equitable claim, see Bankruptcy Act § 57, subs. d, k, g, 11 U.S.C.A. § 93, subs. d, k, g; Pepper v. Litton, supra, 308 U.S. at page 305, 60 S.Ct. 238, 84 L.Ed. 281; Larson v. First State Bank, 8 Cir., 1927, 21 F. 2d 936, 938; cf. Schoenthal v. Irving Trust Co., 1932, 287 U.S. 92, 95, 53 S.Ct. 50, 77 L.Ed. 185; Buffum v. Peter Barceloux Co., 1933, 289 U.S. 227, 235-236, 53 S.Ct. 539, 77 L.Ed. 1140, and such equitable counterclaim arises out of the same transaction as the claim, there is ample precedent for holding that "the counterclaim can remain pending for independent adjudication" by the bankruptcy court even after the claim has been withdrawn or dismissed, if the analogy to a bill in equity be true. See Moore v. New York Cotton Exchange, supra, 270 U.S. at pages 609-610, 46 S.Ct. 367, 70 L.Ed. 750; American Mills Co. v. American Surety Co., supra, 260 U.S. at page 365, 43 S.Ct. 149, 67 L. Ed. 306; Columbia Foundry v. Lochner, 4 Cir., 1950, 179 F.2d 630, 635, 14 A.L.R. 2d 1349.

The referee was of the view that the bankruptcy court, exercising as it does summary jurisdiction in disposing of claims and objections to claims, Bankruptcy Act § 57 subs. f, g, k, 11 U.S.C.A. § 93 subs. f, g, k; U. S. Fidelity & Guaranty Co. v. Bray, 1912, 225 U.S. 205, 217-218, 32 S.Ct. 620, 56 L.Ed. 1055, could not exercise that jurisdiction to render affirmative judgment upon the trustee's counterclaim to recover a preference, in the absence of consent on the part of the claimant, MacDonald v. Plymouth County Trust Co., 1932, 286 U.S. 263, 267-268, 52 S.Ct. 505, 76 L.Ed. 1093, the property not being in the actual or constructive possession of the trustee, see Taubel-Scott-Kitzmiller Co. v. Fox, 1924, 264 U.S. 426, 44 S.Ct. 396, 68 L.Ed. 770.

It is settled of course that absent "consent of the defendant" within the meaning of the statute, Bankruptcy Act § 23 sub. b, 11 U.S.C.A. § 46, sub....

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