Litton v. Pepper, 4378

• Decision Date: 09 January 1939
• Docket Number: No. 4378,4392.,4378
• Citation: 100 F.2d 830
• Parties: LITTON v. PEPPER (two cases). In re DIXIE SPLINT COAL CO. (two cases).
• Court: U.S. Court of Appeals — Fourth Circuit

100 F.2d 830 (1939)

LITTON v. PEPPER (two cases). In re DIXIE SPLINT COAL CO. (two cases).

Nos. 4378, 4392.

Circuit Court of Appeals, Fourth Circuit.

January 9, 1939.

Henry Roberts, of Bristol, Va. (Ira M. Quillen, of Lebanon, Va., on the brief), for appellant.

M. M. Heuser, of Bristol, Va. (A. K. Morison, of Bristol, Va., on the brief), for appellee.

Before NORTHCOTT and SOPER, Circuit Judges, and WEBB, District Judge.

SOPER, Circuit Judge.

This appeal was taken from the action of the District Judge in disallowing the claim of a judgment creditor against the bankrupt estate, although the trustee in bankruptcy had previously endeavored to set aside the judgment in a proceeding in the courts of Virginia and had been met with an adverse decision which was affirmed by the Supreme Court of Appeals of the State.

The judgment was confessed in the Circuit Court for Russell County, Virginia, on July 1, 1931 for the sum of $33,468.89 on behalf of the Dixie Splint Coal Company, Inc., the bankrupt, by P. H. Smith, secretary-treasurer of the company, in favor of Scott Litton, its president and controlling stockholder. The claim was based on alleged arrearages of salary due Litton as president and similar arrearages due Smith as secretary-treasurer, and by him assigned to Litton. The circumstances relating to the accumulation of the arrearages and the questionable financial condition of the company at the time of the confession of judgment, culminating finally in bankruptcy, led the District Judge to the firm conviction that the claim was fraudulent from its inception and unworthy to share in the distribution of the assets of the estate.

The judgment was entered during the pendency of a suit against the corporation instituted in the Corporation Court of the City of Bristol, Virginia, by one A. P. Pepper, lessor of coal property to the corporation, to secure an accounting of royalties and rents due under the lease. This suit, which was continued in the name of Mrs. Pepper as executrix and sole devisee of the lessor after his death, finally resulted on February 19, 1934 in a decree for the plaintiff in the sum of $9,000. See Pepper v. Dixie Splint Coal Co., 165 Va. 179, 189, 181 S.E. 406.

On March 19, 1934 Litton caused an execution on his judgment to be levied on the personal property of the corporation; and the sheriff gave notice of a sale thereof to be held on June 14. On June 2 Mrs. Pepper caused an execution to be levied on her judgment. On June 13, 1934 she instituted a suit in the Circuit Court for Russell County to have the Litton judgment declared void as fraudulent and improperly entered. The sale under the Litton execution took place as advertised and resulted in the sale of the property to Litton for $3,200. In view of these conflicting claims, the sheriff brought suit by way of interpleader in the Circuit Court for Russell County to determine who was entitled to the proceeds of the sale, and Pepper, Litton and the Clinchfield Coal Corporation, a third judgment creditor, were made parties defendant. Litton admitted in his answer that the Clinchfield Coal Corporation had a first or paramount lien in the amount of $2153 on the property, but claimed that by reason of the levy upon his judgment, he had a superior lien to the lien of Pepper; and Pepper also admitted the priority of the Clinchfield lien, without prejudice to her rights and claims asserted in the suit previously brought by her to set aside and have declared void the Litton judgment.

On September 7, 1934 an adjudication in bankruptcy was had in a voluntary proceeding of the Coal Company; and on October 3, 1934 the trustee in bankruptcy filed a petition in the interpleader case and asked that the balance of $961 be paid over to him; and this was done, Litton and Pepper consenting. Pepper then petitioned the referee in bankruptcy to direct the trustee to intervene in the litigation instituted by her to set aside the judgment, and the referee acceded to action by the trustee, but ordered him to bring a new and independent suit in the State court to determine the validity of the judgment and the execution thereon. Accordingly, the trustee brought suit in the Circuit Court for Russell County and prayed the court to vacate and set aside the judgment and to quash the execution thereon on the ground that the judgment was void ab initio, because no power of attorney authorizing Smith to confess judgment had been executed by the corporation or filed in the court as required by Section 6130a of the Virginia Code. No charge was made as to the validity of Litton's claim against the corporation perhaps for the reason that P. H. Smith, who was the secretary-treasurer of the corporation and confessed judgment on its behalf, was also the trustee in bankruptcy.

The judge of the State court was of the opinion that the judgment was void in that it did not comply with the statutory procedure but held, nevertheless, that the trustee was estopped from challenging the validity of the judgment. The contention that the trustee was estopped by entering the interpleader...