Marks v. Brucker

• Decision Date: 20 November 1970
• Docket Number: No. 23827.,23827.
• Parties: Robert B. MARKS, Bankrupt-Appellant, v. Milton BRUCKER, Creditor-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

434 F.2d 897 (1970)

Robert B. MARKS, Bankrupt-Appellant, v. Milton BRUCKER, Creditor-Appellee.

No. 23827.

United States Court of Appeals, Ninth Circuit.

November 20, 1970.

Barry V. Freeman (argued), of Bernfeld & Cohen, Los Angeles, Cal., for bankrupt-appellant.

Stephen Chrystie (argued), of Buchalter, Nemer, Fields & Savitch, Los Angeles, Cal., for creditor-appellee.

Before CHAMBERS and DUNIWAY, Circuit Judges, and THOMPSON,^* District Judge.

THOMPSON, District Judge:

On May 21, 1965, Brucker sued Marks and Marks' wife in a state court for $127,195.21 due on a guaranty. On June 15, 1965, Marks filed a petition in bankruptcy. On August 26, 1965, Brucker filed his proof of claim in bankruptcy for the same amount, attaching a copy of the state court complaint as an exhibit. On October 25, 1965, Marks was granted a discharge in bankruptcy. In the meantime, the prosecution of the state court action continued against Marks et ux. The bankruptcy trustee did not become a party to the action. On July 25, 1966, a settlement agreement was executed and on April 18, 1967, the state action was dismissed with prejudice. On April 11, 1968, the bankrupt, Robert B. Marks, filed a written objection to three different creditors' claims filed against the bankrupt estate, one being the Brucker claim, on the ground "that said claim has heretofore been released, pursuant to the terms of a written agreement of the parties." The Agreement and Release which preceded the dismissal with prejudice of the state court action was entered into between Milton Brucker and his wife "the plaintiffs" and Robert B. Marks and his wife "the defendants." It purported to be a mutual release of all claims by each party against the other and specifically a settlement of the pending lawsuit in consideration of payment by defendants to plaintiffs of the sum of $1,500. The Trustee was not a party to the agreement and the pending bankruptcy and earlier discharge in bankruptcy were not mentioned.

After a hearing before the bankruptcy Referee limited to the foregoing stipulated facts, the Referee overruled the objections to the claim. The District Court, on petition for review, sustained the Referee. The jurisdiction of this Court on appeal is founded on Section 24 of the Bankruptcy Act (11 U.S.C. § 47).

On oral argument, the Court raised the question of whether the bankrupt Marks had standing to object to Brucker's claim before the Referee and if not, whether he is an aggrieved person who can sustain the jurisdiction of this Court on appeal. Supplemental briefs have been filed.

We decide the threshold question in favor of Appellant. A bankrupt normally has no interest in the estate in bankruptcy and cannot do as Appellant has done here. Skelton v. Clements, 408 F. 2d 353 (9th Cir. 1969); Klein v. Rancho Montana de Oro, Inc., 263 F.2d 764 (9th Cir. 1959). "The Bankrupt, while unhappy, was not aggrieved." Manda v. Sinclair, 278 F.2d 629 (5th Cir. 1960). A bankrupt, having obtained his discharge, has normally neither a direct nor an indirect interest in the allowance of disallowance of claims asserted against the assets comprising the estate. But there are exceptions.

"The right of the bankrupt to object to an allowance is considered to be confined to exceptional cases. As a rule, since the bankrupt is insolvent, he is said to have no interest in the manner of distribution of the assets among his creditors. His right to object to a claim is therefore generally restricted to cases in which there is no trustee who otherwise would be the proper person to object, or where in the event of disallowance there would be a surplus left for the bankrupt, particularly where the claim objected to is the only claim on record, or where the bankrupt is entitled to assert an exemption." 3 Collier on Bankruptcy, 14th Ed., § 57.17, p. 252.

Sometimes, through fortuitous happenings, an estate in bankruptcy becomes solvent or will be rendered solvent, with a surplus over for the bankrupt, if certain claims are disallowed. In that situation, the bankrupt does have an interest and may be aggrieved by an adverse ruling. In re Community Neighbors, Inc., 287 F.2d 542 (7th Cir. 1961); In re Woodmar Realty Corp., 241 F.2d 768, 771 (7th Cir. 1957).

There is not the slightest indication in this record that a surplus is even a remote possibility, and here we are not dealing with a debtor in possession but with an adjudicated bankrupt for whose estate a trustee has been appointed. Nevertheless, we believe we should entertain the appeal on the merits because the objection to the standing of the bankrupt was not made before the Referee or in the District Court. In his supplemental brief, the bankrupt asks, as alternative relief, that the case be remanded for amendment of the objection to the Brucker claim and additional proof to rectify the deficiency in the record, that is, to show that he is directly aggrieved by allowance of the Brucker claim. Thus is posed the question of whether absence of facts in the record establishing capacity to object to claims and to appeal is a defect procedural in kind which can be waived, or is it a jurisdictional deficiency. And Bankrupt's claim that he can adequately supplement the record to establish that a surplus will exist if this claim is disallowed highlights the injustice that may result if the deficiency is permitted to be pressed for the first time on appeal.

The Federal Rules of Civil Procedure are applicable in bankruptcy proceedings to the extent they are not inconsistent with the Bankruptcy Act or the General Orders (General Order 37).

To permit the bankrupt to object to claims is not inconsistent with the Bankruptcy Act and is consistent with the policy expressed in General Order 21(6) which permits the "trustee or any creditor or the bankrupt or the debtor" to petition for reconsideration of an allowed claim. (Emphasis supplied.) Cf. American Anthracite & Bituminous Coal Corp. v. Leonardo Arrivabene, S.A., 280 F.2d 119 (2nd Cir. 1960). The Arrivabene case is distinguishable because it involved a Chapter XI arrangement rather than straight bankruptcy, but the discussion is persuasive.

Turning to the Federal Rules of Civil Procedure, Rule 9(a)¹ establishes the policy that the defense of lack of capacity or authority to sue or be sued must be specially averred else it is waived (F.R.Civ.P. 12g). Young v. Pattridge, 40 F.R.D. 376 (D.C.N.D.Miss.1966).

When the capacity or standing of a person to sue or be sued or to object or otherwise participate as a party in interest in a bankruptcy proceedings depends upon averment and proof of facts which might be proved if the claimed deficiency were called to the attention of the bankruptcy court, and no such objection is there made, the objection is ordinarily waived and cannot be raised or relied upon for the first time on appeal. Biggs v. Mays, 125 F.2d 693 (8th Cir. 1942);² Jones v. Clower, 22 F.2d 104, 106 (5th Cir. 1927).³ Accordingly, we hold that there is no jurisdictional defect in the record and that the possible defense of absence of standing of the bankrupt to object to the claim has been waived by failure to raise it below.

Turning to the merits, we affirm the judgment of the District Court to the effect that the mutual release and dismissal with prejudice of the state court action did not, as a matter of law, discharge the claim against the bankrupt's estate. It is the prime contention of the bankrupt that discharge of the claim in bankruptcy is the required result in these circumstances, that is, that there cannot in law be a viable claim against the bankruptcy estate if the cause of action against the bankrupt on which the claim is based has been satisfied, released or discharged. The creditor, Appellee, argues that the adjudication in bankruptcy creates a separate juridical entity in these circumstances, that is, the estate in bankruptcy, which cannot be directly affected by the bankrupt's dealings and transactions after adjudication.

Brucker's in personam action was pending before bankruptcy and was settled after bankruptcy without intervention by the trustee. It is clear that in these circumstances, the rights and liabilities of the estate in bankruptcy are separate and distinct from the personal rights and liabilities of the bankrupt.

"The law is well settled that the trustee may, subject to the court\'s order, `exercise his own judgment with reference to defending a suit against the bankrupt at the time of the bankruptcy proceeding, and it is not necessarily his duty in such matters to follow the wishes of a majority in number and amount of the creditors.\' The trustee is not bound to intervene unless so ordered by the bankruptcy court; otherwise he may or may not decide to defend, depending upon the circumstances. When in doubt, however, he should report at a meeting of creditors for instructions. A trustee cannot be compelled by a plaintiff to intervene; and although a plaintiff may obtain leave of the bankruptcy court to make the trustee a party, he cannot be compelled to make any active defense unless so directed by the bankruptcy court." Collier on Bankruptcy, Vol. 1, § 11.09, p. 1168.

"Where the suit is one in personam against the bankrupt, which the bankruptcy court has not stayed, the court often will not order the trustee or receiver to defend such a suit since the estate will not be affected." Collier on Bankruptcy, Vol. 1, § 11.09, p. 1172.

"Accordingly, the lower federal court cases must be looked to, and from them it appears that the weight of authority is that an in personam judgment obtained in a suit pending at the time the bankruptcy proceedings were instituted does not bind a trustee in bankruptcy as to the validity of the claim where he was not made a party to the suit nor directed by the bankruptcy court to defend it." Collier on Bankruptcy, Vol. 1, § 11.09, p. 1179.

"In spite of the reservation in Riehle v. Margolies, 279 U.S. 218, 219, in the note

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