In re Wickwire Spencer Steel Co.

• Decision Date: 14 October 1935
• Docket Number: No. 21880.,21880.
• Citation: 12 F. Supp. 528
• Parties: In re WICKWIRE SPENCER STEEL CO.
• Court: U.S. District Court — Western District of New York

12 F. Supp. 528

In re WICKWIRE SPENCER STEEL CO.

No. 21880.

District Court, W. D. New York.

October 14, 1935.

Larkin, Rathbone & Perry, of New York City, and Frederick, Smith, Donald & Farley (Henry E. Kelley and Franklin Benkard, both of New York City, and Malcolm McDonald, of counsel), for reorganization committee.

Abram M. Frumberg, John K. White, and David M. Palley, all of New York City, for petitioning creditors.

Jacob J. Lesser, of New York City, and Alfred F. Ritter, of Brooklyn, N. Y., for stockholders' protective committee.

Kenefick, Cooke, Mitchell, Bass & Letchworth, of Buffalo, N. Y. (Thomas R. Wheeler, of Buffalo, N. Y., and S. O. Levinson, of Chicago, Ill., of counsel), for certain creditors.

KNIGHT, District Judge.

This is a proceeding for a reorganization of Wickwire Spencer Steel Company under provisions of section 77B of the Bankruptcy Act (11 USCA § 207). The petition, introductory to these proceedings, was approved by this court on July 30, 1934, and thereafter permanent trustees of such company were named.

A motion is now made by a petitioning creditor for an order adjudging the debtor insolvent and determining that the stockholders have no equity in the assets of the debtor company.

Prior to the commencement of the proceedings for a reorganization, the property of the debtor company had been in the hands of receivers appointed by this court on October 21, 1927, in an equity action instituted by the American Steamship Company against Wickwire Spencer Steel Company. Final decree in such suit was entered on August 2, 1930, and, among other things, it confirmed the report of the special master, which found that the assets of this debtor corporation, as of August 31, 1929, were of the value of $18,000,000, and that its liabilities were $26,329,815.64. The decision of the District Judge, dated August 4, 1930, American S. S. Co. v. Wickwire Spencer Steel Co. (D. C.) 42 F.(2d) 886, 891, was affirmed by the Circuit Court of Appeals, May 4, 1931, 49 F.(2d) 766.

To support the petitioner's claim that the debtor company is insolvent, the petitioner offered the record in the equity suit aforesaid. It also offered evidence to show liabilities incurred and assets of the debtor obtained since the date of such decree, together with the improvements and additions of quick assets and charges in value of current assets and investments. Based upon the aforesaid decree, the evidence shows that the liabilities of the debtor as of July 30, 1934, including interest, were $31,401,836.44, and that the value of debtor's assets based upon such decree and the aforesaid evidence was $15,846,349.58 at such date of appointment of permanent trustees. The actual debts of the debtor without interest were $19,233,840.00, as computed on the basis aforesaid.

Two specific objections to a finding herein of the insolvency of debtor are made on behalf of the stockholders' committee. These objections are: (1) That the finding of insolvency in the equity suit aforesaid is not res adjudicata in this proceeding; and (2) that interest accruing on claims during the period of receivership should not be included as part of the liabilities.

The rule by which we determine whether a judgment or decree is res adjudicata as to some matter in issue in a subsequent action is clearly laid down by many text-writers and innumerable decisions of the courts. The doctrine of res adjudicata has existed in jurisprudence for ages. It was always known to the common law. It is based on the theory that the end to a trial and a final decision therein must be conclusive as to the parties thereto for all time so that property and personal rights may be stabilized. It is obvious that such a principle is unassailable.

The doctrine of res adjudicata is applicable, however, only under a certain state of facts. The judgment or decree must have been rendered by a court of competent jurisdiction, acting within its jurisdiction, and the matter in issue must be the same and must be material to the finding of the judgment or decree claimed to be res adjudicata.

"It is not denied, as a general rule, that a fact which has been directly tried, and decided by a court of competent jurisdiction, cannot be contested again between the same parties, in the same or any other court." Hopkins v. Lee, 6 Wheat. 109, 113, 5 L. Ed. 218.

"The general principle announced in numerous cases is that a right, question, or fact distinctly put in issue, and directly determined by a court of competent jurisdiction, * * * cannot be disputed in a subsequent suit between the same parties or their privies." Southern Pacific R. Co. v. United States, 168 U. S. 1, 48, 18 S. Ct. 18, 27, 42 L. Ed. 355.

"The doctrine of res judicata is that a fact which was actually in issue in a former suit, in which it was judicially passed upon and determined by a domestic court of competent jurisdiction, is conclusively settled by the judgment so far as concerns the parties to the action and their privies." Landon v. Clark (C. C. A.) 221 F. 841, 843.

Upon this subject of the application of the rule as to the effect of a prior adjudication, attention may well be given to Baker v. Cummings, 181 U. S. 117, 21 S. Ct. 578, 45 L. Ed. 776; Nalle v. Oyster, 230 U. S. 165, 33 S. Ct. 1043, 57 L. Ed. 1439; United Shoe Machinery Corporation v. U. S., 258 U. S. 451, 459, 42 S. Ct. 363, 66 L. Ed. 708; Irving National Bank v. Law (C. C. A.) 10 F.(2d) 721, 724; Hines v. Welch, 57 App. D. C. 371, 23 F.(2d) 979, 984.

We find no difficulty in learning what the rule is. The difficulties lie in applying it. It undoubtedly is the rule that the principle of res adjudicata cannot be invoked where the determination of some fact was found in the prior suit which was not essential or material to the determination on the issue being tried. All of the cases above cited make this exception clear.

"It applies * * * to every court which has proper cognisance of the subject-matter, so far as they profess to decide the particular matter in dispute." Hopkins v. Lee, 6 Wheat. 109, 114, 5 L. Ed. 218.

"In all cases, therefore, where it is sought to apply the estoppel of a judgment rendered upon one cause of action to matters arising in a suit upon a different cause of action, the inquiry must always be as to the point or question actually litigated and determined in the original action, not what might have been thus litigated and determined. Only upon such matters is the judgment conclusive in another action." Cromwell v. County of Sac, 94 U. S. 351, 353, 24 L. Ed. 195.

"It must appear, by the record of the prior suit, that the particular controversy sought to be concluded was necessarily tried and determined." Washington, etc., Packet Co. v. Sickles, 5 Wall. (72 U. S.) 580, 592, 18 L. Ed. 550.

"A prior judgment is not binding or conclusive in a subsequent action as to matters of fact or questions of law which were immaterial or unessential to the determination of the real issue in the prior action, even if put in issue, tried, and decided in such prior action." Smith v. Mosier (C. C.) 169 F. 430, 446.

In the suit in equity, it was decided that the debtor herein was then insolvent, and a value of its assets and a statement of its liabilities were set forth in the decree. The plain question for our decision is whether the finding of insolvency was a finding material and necessary to the determination of the issue on trial, or that it was a finding on an essential matter.

The American Steamship Company action against Wickwire Spencer Steel Company was brought on a creditors' bill alleging the inability of the defendant to meet its obligations as they matured, and that receivership was necessary to protect the interest of the creditors of the company. Later, the Guaranty Trust Company of New York and Chase National Bank brought actions to foreclose certain mortgages executed by the debtor, and these actions were consolidated with the receivership action. In the foreclosure suits the receivers in their answers denied the validity of mortgage liens relating to certain properties and submitted the question of priority of the mortgage liens to the court. The stockholders' committee intervened and answered attacking the validity of the trust mortgage for want of consideration, alleging conspiracy on the part of the directors of the debtor, and collusion in bringing about the appointment of receivers with the purpose of eliminating the stockholders and certain noteholders under a fictitious plan of reorganization. Any plan of reorganization must necessarily include some estimate or valuation of the assets and liabilities of the company proposed to be reorganized. A lengthy record of the proceeding before the special master is made up in a large part of details of values of the properties of the then defendant Wickwire Spencer Steel Company. A thorough appraisal of its properties was made. The master specifically found that this debtor was then insolvent. It is stated in the opinion by Judge Hazel: "The action being one to conserve the properties of an important industry with a view of reorganizing its affairs," etc. The intervening stockholders' committee excepted specifically to the findings of the master that the defendant "Wickwire Company is, and has been since October, 1927, insolvent, requiring reorganization of its capital structure." The stockholders' protective committee asks leave of the District Court to give rebutting evidence as to the value of the property owned by the defendant, the debtor herein. In confirming the report of the special master and denying leave so sought, Judge Hazel said: "Inasmuch as it has been decided that the stockholders have no equity in the assets of the company, I am constrained to rule that the court cannot adjudicate the fairness of any plan of reorganization either at this time or following the sale of the properties."

In the equity suit the contention, among others, made on behalf of the...