In re Potts

• Decision Date: 06 June 1944
• Docket Number: No. 9700.,9700.
• Citation: 142 F.2d 883
• Parties: In re POTTS. POTTS v. POTTS.
• Court: U.S. Court of Appeals — Sixth Circuit

142 F.2d 883 (1944)

In re POTTS POTTS v. POTTS.

No. 9700.

Circuit Court of Appeals, Sixth Circuit.

June 6, 1944.

COPYRIGHT MATERIAL OMITTED

J. A. Edge, of Lexington, Ky., for appellant.

A. B. Thomason, of Lexington, Ky., for appellee.

Before SIMONS, HAMILTON, and MARTIN, Circuit Judges.

HAMILTON, Circuit Judge.

The debtor, Mary Potts, and Herbert H. Potts, appellee, were married in 1899 and lived together as husband and wife until 1935. On March 28, 1935, in a judgment divorcing them in the Fayette Circuit Court at Lexington, Kentucky, it was decreed that each party restore to the other any property not disposed of at the commencement of the action which either party may have obtained either directly or indirectly from or through the other during marriage, and on account of the marriage relationship.

On January 1, 1937, Herbert H. Potts recovered in the Fayette Circuit Court a judgment for $5,439.19 against the debtor, Mary Potts, being the value of the property which the court decreed the debtor had acquired from her husband during their married life and which had not been disposed of by her at the commencement of the divorce action.

The debtor commenced these proceedings under Chapter XI, sec. 322 of the Bankruptcy Act, 11 U.S.C.A. 722, for the primary purpose of obtaining relief from the foregoing judgment which was included in her schedule. She listed as her assets an unliquidated claim of $22,000 against Herbert H. Potts and also improved real estate located in Lexington, Kentucky, valued in the schedule at $8,000. The debtor's arrangement proposition was to collect the debt owed her by her former husband and apply it on the principal of her indebtedness and to pay the balance, if any, at the rate of $55 per month, the latter sum to be realized from the rental of the real estate owned by her.

On November 4, 1941, Herbert H. Potts filed an execution claim which he asserted was secured by a lien on the real estate which the debtor had scheduled. On November 24, 1941, debtor demurred to the claim, moved to expunge it and without waiving her demurrer or motion, set up a counterclaim and set-off aggregating $80,256 which she claimed was allowable under sec. 68 of the Bankruptcy Act, 11 U.S. C.A. § 108. The claimant, Herbert H. Potts, appeared and resisted the counterclaim.

On May 5, 1942, the Referee disallowed the set-off and counterclaim on the ground that the items therein stated were matters included in the original action in the state court in which claimant obtained his judgment. The Referee also overruled the demurrer and motion to expunge and allowed claimant's claim in full as secured, the security being an execution lien on the property described in the debtor's schedule.

The debtor reviewed the Referee's order and the court, on December 21, 1942, set the order aside on the ground that the debtor's proceeding related solely to relief from unsecured debts and that the lien claim was in no way affected by the proceedings. In re Potts, D. C., 47 F.Supp. 990. The debtor on March 22, 1943, filed an amended petition and sought relief under both Chapters XI and XII of the Bankruptcy Act, 11 U.S.C.A. §§ 701 et seq., 801 et seq. She stated in her amended petition that the real estate owned by her had a fair market value in excess of $10,000 and that her former husband, Herbert H. Potts, had obtained an execution lien on the property by reason of a judgment he had theretofore obtained against her in the Fayette Circuit Court and that on December 14, 1942, Herbert H. Potts had instituted an equitable action in the Fayette Circuit Court seeking to foreclose the lien. The debtor further stated that she had filed an answer and counterclaim to said action, the counterclaim consisting of the same items she had set out in her set-off and counterclaim in these proceedings and an additional sum for alimony.

The debtor prayed that the claimant, Herbert H. Potts, be enjoined from the further prosecution of his action in the state court and that if this could not be done, that the present proceeding be stayed until her counterclaim in the state court was adjudicated.

On June 11, 1943, Herbert H. Potts, claimant, filed an application for the appointment of a trustee to take charge of the real estate owned by the debtor in which he stated that the debtor had permitted tax liens to accumulate against the property and that she was collecting rents therefrom without accounting to creditors. The debtor filed a response and stated that she had not wilfully or intentionally failed or refused to pay all taxes due on the property as they matured but she did not deny owing them.

On June 29, 1943, the Referee, pursuant to the provisions of Chapter XII, sec. 432 of the Bankruptcy Act, 11 U.S.C.A. § 832, appointed a trustee with authority to take charge of debtor's property, with the power to collect rents. On July 6, 1943, the debtor filed a petition to review this order.

On April 12, 1943, the debtor, pursuant to the provisions of section 426 of Chapter XII of the Bankruptcy Act, 11 U.S.C.A. § 826, executed a bond in the penal sum of $1,000, which was approved by the trustee, to indemnify the estate against any subsequent loss in the event of an entry of an order of adjudication. On July 26, 1943, the claimant, Herbert H. Potts, secured a judgment against the debtor in the Fayette Circuit Court for $5,439.19 with 6% interest thereon from January 1, 1937, in which judgment the court decreed a sale of all of the real estate of the debtor in satisfaction thereof. The judgment in the state court also dismissed the debtor's counterclaim. On August 13, 1943, the claimant, Herbert H. Potts, filed a new proof of claim in these proceedings based on the judgment of July 26, 1943. On August 20, 1943, the debtor filed a response to the new proof of claim and also plead in defense a counterclaim which contained the items disallowed in the state court judgment.

On August 2, 1943, the Referee issued a notice to creditors of a meeting to be held on August 13, 1943, for the purpose of accepting or rejecting the debtor's proposed arrangement and in the notice he advised the creditors the petition would be dismissed or the debtor adjudicated a bankrupt if the proposed arrangement was rejected. The debtor objected and insisted that the meeting be postponed until the claim of Herbert H. Potts was finally adjudicated and filed a petition to review the Referee's order.

On August 13, 1943, the Referee allowed the new claim of Herbert H. Potts and decreed to the claimant a superior lien on all of the real estate scheduled by the debtor and the debtor filed petition for review. On August 20, 1943, the Referee overruled the debtor's motion to strike Herbert H. Potts' claim and dismissed the debtor's counterclaim on the ground that the counterclaim was barred by the judgment in the state court and further found that the debtor was indebted on unsecured claims in the amount of $1,250, and on secured claims in the amount of $5,439.19 with interest thereon from January 1, 1937, until paid and also $453.50 for costs due the Circuit Clerk of Fayette County, Kentucky.

The Referee further found that the debtor had made no provision for the payment of costs and the expenses of administration and further had made no provision in her proposed arrangement for the payment of secured creditors and that it appeared that the debtor's secured creditors would not accept any arrangement proposed by her. The Referee concluded that the arrangement proposed by the debtor was unfair, lacked equity and therefore was not for the best interest of the creditors. The Referee dismissed the proceedings in so far as an arrangement was sought, and adjudged the debtor a bankrupt and directed that any further action in the proceedings be pursuant to the provisions of bankruptcy. The debtor filed petition for review of this order.

On September 25, 1943, the district court denied the debtor's petitions to review the Referee's orders of August 2, 1943, August 13, 1943, and August 20, 1943, and approved each of them and directed that the estate be administered in ordinary bankruptcy. From the court's order this appeal is prosecuted.

Appellant insists first, that the Bankruptcy Court lacked jurisdiction to adjudicate the debtor's counterclaim and set-off against the judgment creditor, and second, if the court had jurisdiction that the debtor was not estopped by the judgments of the state court.

Chapters I to VII of the Bankruptcy Act, consisting of sections 1-72, 11 U.S.C. A. §§ 1-112, dealing with ordinary bankruptcy proceedings, are made applicable specifically to proceedings under Chapters XI and XII where not inconsistent with or in conflict with the provisions of those Chapters, 11 U.S.C.A. §§ 702 and 802. Therefore, the right of the debtor to set-off or counterclaim against her judgment creditor is determinable under section 68 of the Bankruptcy Act, 11 U.S.C.A. § 108.

This section provides that 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 allowed or paid. It is settled law that parties interested in the estate may set off in reduction or extinguishment of the allowance of a provable claim, any debt or counterclaim which passes to the trustee and which the bankrupt or any of his creditors might have asserted against the claimant. The section is not self-executing and its benefit is to be had only on action of the Bankruptcy Court properly invoked. The statute does not enlarge the general doctrine of set-off or counterclaim. It only becomes operative when the case is brought within the general principles of set-off. The debt sought to be set off must ordinarily be a mutual one and must be of the same nature as the creditor's claim, and where the set-off of a debtor is sought in arrangement proceedings, the debtor must...