Perlman v. 322 West Seventy-Second Street Co.

• Decision Date: 11 April 1942
• Docket Number: No. 220.,220.
• Citation: Perlman v. 322 West Seventy-Second Street Co., 127 F.2d 716 (2nd Cir. 1942)
• Parties: PERLMAN v. 322 WEST SEVENTY-SECOND STREET CO., Inc.
• Court: U.S. Court of Appeals — Second Circuit

127 F.2d 716 (1942)

PERLMAN v. 322 WEST SEVENTY-SECOND STREET CO., Inc.

No. 220.

Circuit Court of Appeals, Second Circuit.

April 11, 1942.

Samuel Masia, of New York City (Archibald Palmer, of New York City, on the brief), for bankrupt-appellant.

Herbert E. Kaufman, of New York City (Arthur L. Newman, II, of New York City, on the brief), for creditor-appellee.

Before L. HAND, CLARK, and FRANK, Circuit Judges.

CLARK, C. E., Circuit Judge.

The bankrupt Perlman filed his voluntary petition in bankruptcy on May 24, 1941. 322 West 72nd Street Co., Inc., was scheduled as a creditor. Subsequent to the formal adjudication of bankruptcy, this creditor moved to dismiss the bankruptcy proceedings, or to exclude from consideration its debt and any others similarly situated. As grounds for its motion, it relied on a prior proceeding, involving this bankrupt and the same creditor, which had been dismissed without action respecting a discharge.

The prior proceeding was also begun by a voluntary petition followed by a formal adjudication of bankruptcy. The bankrupt failed, however, to deposit the $15 indemnity required before the first creditors' meeting would be called by the referee. Thereupon the referee recommended that the estate be closed, and the district court did so. Subsequently the bankrupt asked for a reopening of the proceeding, at which time he tendered the indemnity. His motion was granted initially, but a motion to vacate was later made by the same creditor opposing the instant proceeding. The district court's denial of the motion to vacate was appealed from, and we held by a divided court — the writer hereof dissenting — that it was an abuse of discretion to reopen the proceeding, and we accordingly reversed the denial of the motion to vacate. In re Perlman, 2 Cir., 116 F.2d 49.

The bankrupt then filed a motion in this Court for "leave to apply to the District Court to reopen the proceedings * * * and there to present new additional facts herein set forth." Accompanying papers on this motion have not been made a part of the record herein, but we have taken judicial notice of them from our own files. They stated that the bankrupt had given his attorney a sufficient sum to cover the indemnity, that the attorney failed to make the deposit, that the attorney was subsequently disbarred, and that the bankrupt was unaware of the course of events. An answering affidavit disputed many of these facts and tended to show that the bankrupt had had, or should have had, some knowledge of the matters relied on prior to his motion to reopen. The court which heard the motion (somewhat differently constituted than that which heard the original appeal) denied the motion without comment. Shortly thereafter the bankrupt filed this new petition in the district court. When the nature of the prior proceeding was disclosed to the referee, and when it was shown that no new creditors were scheduled, he directed that this petition be dismissed. The district court denied a petition to review and confirmed the order of the referee, and the bankrupt appeals.

The substantial question is whether or not the prior closing of the estate is res judicata in the sense that no debts scheduled in the first proceeding can be discharged in the second proceeding. Under the Bankruptcy Act as it stood prior to the amendments of 1938, it was uniformly held that no discharge of the previously scheduled debts could be granted. Freshman v. Atkins, 269 U.S. 121, 123, 46 S.Ct. 41, 70 L.Ed. 193, and cases cited; In re Schwartz, 2 Cir., 89 F.2d 172. The rationale was that, since a bankrupt had to apply for a discharge within twelve months, or under certain circumstances, eighteen months, any disposition of the proceeding without a discharge meant that one had been denied. And if a discharge was denied, debts obviously could not be scheduled again. Section 14 was amended in 1938 to provide that a petition in bankruptcy filed by any person except a corporation is to be considered an application for a discharge. 11 U.S.C.A. § 32, sub. a. The court then has the duty to fix a time for filing objections to discharge, with notice given to all interested parties. If no objections are filed, the discharge is automatically granted.

In view of these changes, the former rationale loses some of its force and a reconsideration of the problem is justified. It can, of course, be argued simply that dismissal of the proceeding operates as denial of the application for a discharge. In re Brown, D.C.N.H., 35 F.Supp. 619. But it can also be argued that, since the burden of going forward may then properly rest on creditors, their failure to keep the proceedings open results in their loss of an opportunity to object, or that closing an unadministered estate simply restores the status quo. Reasons less purely formal would seem desirable to justify application of the doctrine of res judicata. We believe that they exist. The Supreme Court observed in Freshman v. Atkins, supra, that in voluntary proceedings the primary object of the bankrupt is to obtain a discharge. In this light, the least that can be expected of the bankrupt is that he carry the burden of seeing himself through. In many voluntary bankruptcies, creditors have nothing to gain from the liquidating process. To throw on them the burden of continuing the proceeding is to overstress the privilege granted the bankrupt. The House Report on the 1938 amendment indicates that the change is not to be read too strongly as a new privilege of the bankrupt. True, the report points out that the new wording saves a bankrupt from the misfortune of failure to get discharged through neglecting to apply in time. But it also notes that the new provision will "hasten the proceeding for discharge and prevent intentional delay by a fraudulent bankrupt until such time as creditors have...