Inter-State National Bank of Kansas City v. Luther

Decision Date29 April 1955
Docket NumberNo. 4816.,4816.
PartiesThe INTER-STATE NATIONAL BANK OF KANSAS CITY, Appellant, v. Frank LUTHER, Trustee, Appellee. Matter of GARDEN GRAIN & SEED COMPANY, Inc., Bankrupt.
CourtU.S. Court of Appeals — Tenth Circuit



Frank H. Terrell, Kansas City, Mo. (Guy A. Magruder, Jr., Kansas City, Mo., and James A. Williams, Dodge City, Kan., on the brief), for appellant.

Malcom Miller, Wichita, Kan., for appellee.

Before PHILLIPS, Chief Judge, and BRATTON, HUXMAN, MURRAH and PICKETT, Circuit Judges.

MURRAH, Circuit Judge.

This appeal involves the claim of the Inter-State National Bank of Kansas City in the matter of the Garden City Grain and Seed Company, a bankrupt, in the District Court of Kansas. For background see Central States Corp. v. Luther, 10 Cir., 215 F.2d 38; First National Bank in Wichita v. Luther, 10 Cir., 217 F.2d 262; and Luther v. United States, 10 Cir., ___ F.2d ___.

After entering its formal appearance, the Bank filed a proof of claim based on a $50,000.00 promissory note of the bankrupt dated October 31, 1951, due December 31, 1951, and collateralized by its warehouse receipt for 62,000 bushels of Number 2 yellow milo grain. It was affirmatively alleged that no part of the debt had been paid and that there were no offsets or counterclaims. The court was requested to convert the security into money, credit the amount upon the claim, and allow the balance, if any, as a common claim against the estate.

The trustee answered, admitting the execution of the note and the pledge of the warehouse receipt, but specifically denying the validity of such receipt as security for the note; and denying the right of the claimant to recover on the note because within four months of bankruptcy the claimant had obtained a $150,000.00 voidable preference through the payment to it of one promissory note in the amount of $100,000.00 and another for $50,000.00. It then alleged that unless the preference was returned to the trustee to become a part of the assets of the bankrupt estate, the claim should be disallowed as being without equity, and as being claimed by one coming into a court of equity with unclean hands.

In an "Action to Recover", the trustee alleged substantially the same facts and prayed for an order requiring the claimant Bank to pay into court the sum of $151,180.55 (principal and interest), and that in such event, the Bank's claim be allowed as a common claim in the amount of $50,000.00, plus interest. The trustee also filed an "Action in the Nature of an Interpleader" in which he joined all claimants to the liquidated inventory of milo, including the claimant Bank, and prayed for a deraignment of their interest therein. And, timely notice of the hearing on the interpleader was sent to all creditors joined therein, including the Bank.

On November 24, 1952, the referee commenced hearings on all the claims joined in the interpleader action. The purpose of these hearings was to determine the allowability, rank and priority of the asserted claims against the grain account. The Bank's attorney of record appeared and participated in these proceedings, in the course of which he stated that he did not think it would be necessary to introduce evidence on its claim, the trustee having admitted relevant facts in his pleadings; and that he would like to defer hearing on the same until other related claims had been heard. But with respect to the "counterclaim", the Bank's attorney objected to the court's summary jurisdiction, expressly stating that he did not wish to submit the counterclaim on the pleadings, stipulate the facts with reference thereto, or in any manner consent to summary jurisdiction over such counterclaim.

The Bank's claim was thereupon formally continued until February 5, 1953. Thereafter, and before the case came on for hearing, the Bank filed its formal objection to the summary jurisdiction of the bankruptcy court over the trustee's "Action to Recover" on the grounds that it would deprive it of trial by jury, and offered to enter its general appearance in a plenary action instituted by the trustee, and to join with the trustee in a request for the immediate trial on the claims as soon as the pleadings were closed. In a further reply to the trustee's answer and "Action to Recover", the Bank renewed its objection to summary jurisdiction of the court over any and all claims for affirmative relief asserted against it by the trustee. It admitted the execution and receipt of the payment of the two notes alleged in the trustee's answer, but denied any and all other allegations.

After hearing in which all of the notes and warehouse receipts mentioned in the pleadings were admitted in evidence and testimony taken concerning the solvency of the bankrupt at critical times, the referee made extensive findings of facts, reciting the execution of the notes and warehouse receipts substantially as pleaded and agreed. On the jurisdictional question, the court took the view that in the exercise of its equitable jurisdiction to allow and disallow claims, determine setoffs and counterclaims, and enter such judgments as were necessary to enforce the Act, it was empowered to hear and determine the trustee's counterclaim to the Bank's claim filed in the proceedings. In so holding, the referee proceeded upon the premise that when a creditor files his proof of claim, he invokes the jurisdiction of the court and consents to the adjudication of all proper defenses, setoffs and counterclaims that may be lawfully imposed by the trustee.

Having thus sustained its jurisdiction of the counterclaim and the preference issue, the referee proceeded to find in effect that the Bank secured the payment of the bankrupt's notes in the sum of $150,000.00 and interest within four months of bankruptcy with actual or constructive knowledge of insolvency; and that in so doing, the Bank received a voidable preference. It accordingly offset the claim for the unpaid note against the voided preference and decreed that the trustee recover from the Bank the difference of $100,333.33.

On petition to review, the trial court affirmed the referee on jurisdiction and facts, but, denying the setoff against the preference, it rendered judgment against the Bank for the full amount of the preference in the sum of $150,875.00 (principal plus interest from date of preference) with interest thereon from the date of the filing of the action to recover; and ordered that the Bank's claim be allowed as a common claim only after payment of the preference.

Everyone apparently concedes, as they must, that the bankruptcy court is without summary jurisdiction to adjudicate a controversy respecting property or chose in action held adversely to the bankrupt estate without the consent of the adverse claimant. And, see Central States Corp. v. Luther, supra; City and County of Denver v. Warner, 10 Cir., 169 F.2d 508. The narrow and perplexing question here is whether the entry of the Bank's appearance in the bankruptcy proceedings and the filing of its claim constituted requisite consent to the exercise of summary jurisdiction to adjudicate a preference and grant affirmative relief thereon.

While the trustee's affirmative pleadings are labeled "Action to Recover", they are in substance and effect an equitable counterclaim for an adjudication of a preference and a judgment for recovery of the same, the mode of procedure for which is governed by the Federal Rules of Civil Procedure, 28 U.S. C.A., and particularly Rule 13. See General Order of Bankruptcy Number 37, 11 U.S.C.A. following § 53.

Until recently, the trend of the decisions was undoubtedly opposed to summary jurisdiction by implied consent. The courts have continually gone back to Louisville Trust Co. v. Comingor, 184 U.S. 18, 22 S.Ct. 293, 46 L.Ed. 413, where the adverse claimant came into court in obedience to pre-emptory orders, and although he participated in the proceedings before the referee, he made formal protest to the exercise of summary jurisdiction before the final order was entered. On appeal, summary jurisdiction was denied on the grounds that the claimant, not having voluntarily come into court, did not consent to summary jurisdiction by participating in the proceedings before the referee. To the same effect see Pickens v. Roy, 187 U.S. 177, 23 S.Ct. 78, 47 L.Ed. 128; Galbraith v. Vallely, 256 U.S. 46, 41 S.Ct. 415, 65 L.Ed. 823. More recently it is held that by a petition for reclamation of specific property held by the trustee, the claimant did not subject himself to the summary jurisdiction of the bankruptcy court to enter a turn-over order "in respect of matters having no immediate relation to the claim which it had presented." Daniel v. Guaranty Trust Co. of New York, 285 U.S. 154, 52 S.Ct. 326, 328, 76 L.Ed. 675. Possession, either actual or constructive, was declared to be the touchstone of summary jurisdiction, and in the absence of voluntary acquiescence of the adverse claimant, the trustee's only remedy for the voidance of a preference or any other affirmative relief was in a plenary action. See In re Rathman, 8 Cir., 183 F. 913.

But there was some deflection along the way, see Moonblatt v. Kosmin, 3 Cir., 139 F.2d 412, and the Supreme Court granted certiorari in Cline v. Kaplan, 323 U.S. 97, 65 S.Ct. 155, 89 L.Ed 97, to resolve conflicting views on matters affecting bankruptcy administration. That case involved the question of consent to proceed summarily to enter a turn-over order. Beyond reiterating the rule of the Comingor case, all the court decided was that requisite consent to summary jurisdiction depended upon the facts of the particular case; and that participation in the summary proceedings in obedience to an order to show cause did not amount to consent, provided formal objection was made before entry of the final order. The decision was criticized...

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