Katchen v. Landy, 28

• Decision Date: 17 January 1966
• Docket Number: No. 28,28
• Parties: Louis KATCHEN, Petitioner, v. Hyman D. LANDY, Trustee in Bankruptcy, etc
• Court: U.S. Supreme Court

382 U.S. 323

86 S.Ct. 467

15 L.Ed.2d 391

Louis KATCHEN, Petitioner,

v Hyman D. LANDY, Trustee in Bankruptcy, etc.

No. 28.

Argued Nov. 8, 1965.

Decided Jan. 17, 1966.

[Syllabus from pages 323-324 intentionally omitted] Fred M. Winner, Denver, Colo., for petitioner.

George Louis Creamer, Denver, Colo., for respondent.

Mr. Justice WHITE delivered the opinion of the Court.

The disputed issue here is whether a bankruptcy court has summary jurisdiction to order the surrender of voidable preferences asserted and proved by the trustee in response to a claim filed by the creditor who received the preferences. The Court of Appeals held that the bankruptcy court had such summary jurisdiction. 336 F.2d 535. We affirm.

The corporate bankrupt began business on April 21, 1960, and borrowed $50,000 from two local banks. Petitioner, then an officer of the company, was an accommodation maker on the two corporate notes delivered to the banks. After the corporate bankrupt in this case suffered a disastrous fire, its funds and collections were placed in a 'trust account' under the sole control of petitioner. From this account petitioner made two payments on one of the company notes on which he was an accommodation maker and one payment on the other. Bankruptcy followed within four months of these payments. Petitioner filed two claims in the proceeding, one for rent due him from the bankrupt and one for a payment on one of the notes made from his personal funds. The trustee responded with a petition asserting that the payments from the trust fund to the banks were voidable preferences and demanding judgment for the amount of the preferences along with the amount of an unpaid stock subscription owed to the corporation by petitioner. Petitioner's objection to the summary jurisdiction of the referee was overruled, and judgment was rendered for the trustee on both the preferences and the stock subscription. Petitioner's claims were to be allowed only when and if the judgment was satisfied. The District Court sustained the referee. A divided Court of Appeals, sitting en banc, after reconsidering Inter-State National Bank of Kansas City v. Luther, 221 F.2d 382 (C.A.10th Cir. 1955), cert. dismissed under Rule 60, 350 U.S. 944, 76 S.Ct. 297, 100 L.Ed. 823, adhered to its pronouncements in that case, affirmed the judgment for the amount of the voidable preferences but reversed the judgment for the amount of the stock subscription. The trustee did not seek review here of the adverse decision on the stock subscription. We granted certiorari on the creditor's petition because of the diversity of views among the Courts of Appeals on the issue involved¹ and the importance of the question in the administration of the bankruptcy laws. 380 U.S. 971, 85 S.Ct. 1328, 14 L.Ed.2d 268.

The crux of the dispute here concerns the mode of procedure for trying out the preference issue. The bank- ruptcy courts are expressly invested by statute with original jurisdiction to conduct proceedings under the Bankruptcy Act.² These courts are essentially courts of equity, Local Loan Co. v. Hunt, 292 U.S. 234, 240, 54 S.Ct. 695, 697, 78 L.Ed. 1230; Pepper v. Litton, 308 U.S. 295, 304, 60 S.Ct. 238, 244, 84 L.Ed. 281, and they characteristically proceed in summary fashion to deal with the assets of the bankrupt they are administering. The bankruptcy courts 'have summary jurisdiction to adjudicate controversies relating to property over which they have actual or constructive possession.' Thompson v. Magnolia Petroleum Co., 309 U.S. 478, 481, 60 S.Ct. 628, 630, 84 L.Ed. 876; Cline v. Kaplan, 323 U.S. 97, 98—99, 65 S.Ct. 155, 156, 89 L.Ed. 97; May v. Henderson, 268 U.S. 111, 115—116, 45 S.Ct. 456, 458, 69 L.Ed. 870; Taubel-Scott-Kitzmiller Co. v. Fox, 264 U.S. 426, 432—434, 44 S.Ct. 396, 398, 68 L.Ed. 770. They also deal in a summary way with 'matters of an administrative character, including questions between the bankrupt and his creditors, which are presented in the ordinary course of the administration of the bankrupt's estate.' Taylor v. Voss, 271 U.S. 176, 181, 46 S.Ct. 461, 463, 70 L.Ed. 889; U.S. Fidelity & Guaranty Co. v. Bray, 225 U.S. 205, 218, 32 S.Ct. 620, 625, 56 L.Ed. 1055. This is elementary bankruptcy law which petitioner does not dispute.

But petitioner points out that if a creditor who has received a preference does not file a claim in the bankruptcy proceeding and holds the property he received under a substantial adverse claim, so that the property may not be deemed within the actual or constructive possession of the bankruptcy court, the trustee may recover the preference only by a plenary action under § 60 of the Act, 11 U.S.C. § 96 (1964 ed.), see Taubel-Scott- Kitzmiller Co. v. Fox, 264 U.S. 426, 44 S.Ct. 396; and in a plenary action in the federal courts the creditor could demand a jury trial, Schoenthal v. Irving Trust Co., 287 U.S. 92, 94—95, 53 S.Ct. 50, 51, 77 L.Ed. 185; Adams v. Champion, 294 U.S. 231, 234, 55 S.Ct. 399, 400, 79 L.Ed. 880; compare Buffum v. Peter Barceloux Co., 289 U.S. 227, 235—236, 53 S.Ct. 539, 542, 77 L.Ed. 1140. Petitioner contends the situation is the same when the creditor files a claim and the trustee not only objects to allowance of the claim but also demands surrender of the preference. This is so, petitioner argues, because the Bankruptcy Act does not confer summary jurisdiction on a bankruptcy court to order preferences surrendered and because, if it does, petitioner's rights under the Seventh Amendment of the Constitution are violated. We agree with neither contention.

With respect to the statutory question, it must be conceded that the Bankruptcy Act does not in express terms confer summary jurisdiction to order claimants to surrender preferences. But Congress has often left the exact scope of summary proceedings in bankruptcy undefined, and this Court has elsewhere recognized that in the absence of congressional definition this is a matter to be determined by decisions of this Court after due consideration of the structure and purpose of the Bankruptcy Act as a whole, as well as the particular provisions of the Act brought in question. Taubel-Scott-Kitzmiller Co. v. Fox, 264 U.S. 426, 431 and n. 7, 44 S.Ct. 396, 398.

When Congress enacted general revisions of the bankruptcy laws in 1898 and 1938, it gave 'special attention to the subject of making (the bankruptcy laws) inexpensive in (their) administration.' H.R.Rep. No. 1228, 54th Cong., 1st Sess., p. 2; H.R.Rep. No. 1409, 75th Cong., 1st Sess., p. 2; S.Rep. No. 1916, 75th Cong., 3d Sess., p. 2. Moreover, this Court has long recognized that a chief purpose of the bankruptcy laws is 'to secure a prompt and effectual administration and settlement of the estate of all bankrupts within a limited period,' Ex parte Christy, 3 How. 292, 312, 11 L.Ed. 603, and that provision for summary disposition, 'without regard to usual modes of trial attended by some necessary delay,' is one of the means chosen by Congress to effectuate that purpose, Bailey v. Glover, 21 Wall. 342, 346, 22 L.Ed. 636. See generally Wiswall v. Campbell, 93 U.S. 347, 350—351, 23 L.Ed. 923; United States Fidelity & Guaranty Co. v. Bray, 225 U.S. 205, 218, 32 S.Ct. 620, 625.

It is equally clear that the expressly granted power to 'allow,' 'disallow' and 'reconsider' claims, Bankruptcy Act, § 2, sub. a(2), 11 U.S.C. § 11, sub. a(2) (1964 ed.),³ which is of 'basic importance in the administration of a bankruptcy estate,' Gardner v. State of New Jersey, 329 U.S. 565, 573, 67 S.Ct. 467, 471, 91 L.Ed. 504, is to be exercised in summary proceedings and not by the slower and more expensive processes of a plenary suit. United States Fidelity & Guaranty Co. v. Bray, 225 U.S. 205, 218, 32 S.Ct. 620, 625; Wiswall v. Campbell, 93 U.S. 347, 350—351. This power to allow or to disallow claims includes 'full power to inquire into the validity of any alleged debt or obligation of the bankrupt upon which a demand or a claim against the estate is based. This is essential to the performance of the duties imposed upon it.' Lesser v. Gray, 236 U.S. 70, 74, 35 S.Ct. 227, 228, 59 L.Ed. 471. The trustee is enjoined to examine all claims and to present his objections, Bankruptcy Act, § 47, sub. a(8), 11 U.S.C. § 75, sub. a(8) (1964 ed.),⁴ and '(w)hen objections are made, (the court) is duty bound to pass on them,' Gardner v. State of New Jersey, 329 U.S. 565, 573, 67 S.Ct. 467, 471. 'The whole process of proof, allowance, and distribution is, shortly speaking, an adjudication of interests claimed in a res,' id., at 574, 67 S.Ct. at 472, and thus falls within the principle quoted above that bankruptcy courts have summary jurisdiction to adjudicate controversies relating to property within their possession. Further, the Act itself directs that '(o)bjections to claims shall be heard and determined as soon as the convenience of the court and the best interests of the estates and the claimants will permit,' Bankruptcy Act, § 57, sub. f, 11 U.S.C. § 93, sub. f (1964 ed.), and a committee report indicates that the provision means that '(o)bjections shall be heard and determined in a summary way,' H.R.Rep. No. 1674, 52d Cong., 1st Sess., p. 20.

Section 57 of the Act contains another important congressional directive around which much of this case turns. Subsection g forbids the allowance of a claim when the creditor has 'received of acquired preferences * * * void or voidable under this title' absent a surrender of any preference. Bankruptcy Act, § 57, sub. g, 11 U.S.C. § 93, sub. g (1964 ed.).⁵ Unavoidably and by the very terms of the Act, when a bankruptcy trustee presents a § 57, sub. g objection to a claim, the claim can neither be allowed nor disallowed until the preference matter is adjudicated. The objection under § 57, sub. g is, like other objections, part and parcel of the allowance process and is subject to summary adjudication by a bankruptcy court. This is the plain import of § 57 and finds support in...