Salitan v. Magnus

• Decision Date: 30 June 1960
• Docket Number: No. A--267,A--267
• Parties: Samuel S. SALITAN et al., Plaintiffs-Appellants, v. Finn H. MAGNUS and Elsie A. Magnus, Defendants-Respondents.
• Court: New Jersey Superior Court — Appellate Division

Page 323

62 N.J.Super. 323

162 A.2d 883

Samuel S. SALITAN et al., Plaintiffs-Appellants, v. Finn H. MAGNUS and Elsie A. Magnus, Defendants-Respondents.

No. A--267.

Superior Court of New Jersey

Appellate Division.

Argued May 9, 1960.

Decided June 30, 1960.

Harry A. Margolis, Newark, argued the cause for plaintiffs-appellants (Max L. Rosenstein, Newark, attorney).

Israel B. Greene, Newark, argued the cause for defendants-respondents (Israel B. Greene & Robert S. Banks, Newark, on the brief). Before Judges GOLDMANN, FREUND and HANEMAN.

The opinion of the court was delivered by

FREUND, J.A.D.

This is a suit by a creditor of a bankrupt corporation against two persons who had undertaken to guarantee the bankrupt's debt to the creditor. They are sued on their individual contract of guaranty. The two individuals sued are the president and secretary, as well as the principal shareholders, of the bankrupt corporation. The Law Division granted defendants' motion for summary judgment after it was determined in a letter opinion that 'plaintiffs' claim here is barred by force and effect of Res judicata' and that in any case 'the defendants are not * * * indebted to plaintiffs under the said agreement (of guaranty).' Plaintiffs appeal.

Plaintiffs, a limited partnership, are factors doing business as Credit Industrial Company. On February 27, 1953 plaintiffs entered into a contract with the Magnus Harmonica Corporation whereby plaintiffs agreed to lend the corporation moneys to be secured by an assignment to them of the corporation's accounts receivable. Other moneys were loaned to the corporation secured by chattel mortgages on the corporate property. In order to induce the creditor to enter this transaction, defendants Finn H. Magnus and Elsie A. Magnus executed a 'direct and unconditional' guaranty by which they made themselves liable for 'the due payment of all * * * obligations which (the corporation) may at any time owe to (plaintiffs), however created.' The agreement recited that the guaranty 'may be enforced without requiring (plaintiffs) first to resort to any other right, remedy or security * * *.'

The corporation filed a voluntary petition for reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C.A. §§ 501--676 (1946), on December 15, 1955. On June 25, 1956 the Federal District Court for the District of New Jersey entered an order adjudging the debtor bankrupt and directing that bankruptcy proceedings be undertaken. During the period in which the corporation was attempting to reorganize, the accounts receivable were being collected by its trustee in reorganization and part of the moneys was turned over to the plaintiffs. On January 2, 1956 plaintiffs commenced this action against the defendants individually in the Superior Court, Law Division. Defendants secured an order from the United States District Court restraining the further prosecution of this suit until the further order of that court. Plaintiffs appealed to the United States Court of Appeals for the Third Circuit to vacate the restraint on the state court suit. Pending the disposition of the appeal, the Circuit Court of Appeals granted plaintiffs' motion for a stay of the District Court injunction. In re Magnus Harmonica Corp., 233 F.2d 803 (1956). On the main appeal, the Court of Appeals noted that a federal court, under 28 U.S.C.A. § 2283 (1952), may enjoin proceedings in a state court only in limited instances, one of them being 'where necessary in aid of its jurisdiction.' 237 F.2d 867, 868 (1956). The court held that the jurisdiction of the bankruptcy court, which had full control over the assets of the bankrupt, was unaffected by what went on outside the bankruptcy court in litigation between one of the bankrupt's creditors and a party independently liable on one of its contracts. 237 F.2d, at page 869. The instant suit was thus permitted to proceed.

Defendants then moved in the Law Division for leave to make the trustee a third-party defendant so as to claim a right of exoneration in the event they were individually compelled as guarantors to pay plaintiffs' claims. Plaintiffs opposed on the ground that such proceedings would delay their suit and inject into the case issues not before the court. The Law Division denied defendants' motion. This court affirmed. 48 N.J.Super. 168, 137 A.2d 73 (App.Div.1957). The Supreme Court granted defendants' petition for certification, 26 N.J. 303, 139 A.2d 589 (1958), and subsequently affirmed. 28 N.J. 20, 145 A.2d 10 (1958). The Supreme Court affirmed, however, without prejudice to defendants' right to file a third-party complaint against the trustee, on condition that the two actions would be severed and that there be no delay of plaintiffs' case. 28 N.J., at page 30, 145 A.2d at page 15. At the pretrial conference, the Law Division directed a severance of the two actions.

In the meantime, proceedings were taking place before the referee in bankruptcy in the United States District Court. The plaintiffs, as creditors, were parties to these proceedings; the defendants, as individuals, were not. The assets of the bankrupt corporation were sold at public auction. By reason of the sale of assets and the collection of the accounts receivable, the trustee in bankruptcy obtained sufficient funds to pay the balances due to the plaintiffs in full. It appears that, by virtue of plaintiffs' participation in the bankruptcy proceeding, they either have been fully paid the amount of all claims which they had against the corporation when the reorganization petition was filed in 1955 and which they asserted against the guarantors in the original 1956 complaint, or those claims are no longer in issue. The narrow issue that remains, however, is the matter of interest that would have accrued on plaintiffs' claims but for the filing of the reorganization petition. Plaintiffs asserted in the bankruptcy court that they were entitled to interest from the date of the petition to the date the trustee actually paid their claims. Three federal tribunals have ruled against them on that contention. See 159 F.Supp. 778 (D.C.N.J.1958), and 262 F.2d 515 (3 Cir.1959), both affirming the decision of the referee in this respect. It is this post-petition interest, in the amount of $23,678.38, that plaintiffs seek to recover from the defendants individually under their direct and unconditional guaranty. As noted above, the Law Division judge determined that the claim is not a debt under the guaranty and is barred by Res judicata.

On this appeal plaintiffs argue essentially that Res judicata cannot apply because defendants were not parties or privies to the bankruptcy proceedings and subsequent federal litigation, and that post-petition interest was not allowed in those proceedings only as against the trustee in bankruptcy acting for the general creditors and not as against the trustee acting for the bankrupt corporation or its independent guarantors. Plaintiffs urge that it is most extraordinary for a creditor to be denied interest on a claim against a guarantor by reason of the voluntary and uncontrollable act of the debtor in instituting bankruptcy proceedings, when the whole purpose of the guaranty was to secure the creditor against that very event. The Magnuses agree that Res judicata in its technical signification does not apply, but contend that reason and justice and the doctrine of collateral estoppel must result in a ruling that plaintiffs are precluded from relitigating a matter already decided against them. They say that they are in effect sureties for the corporation and that an adjudication on the merits in an action between the creditor and the principal debtor is conclusive in favor of the surety in the creditor's subsequent action against him. Plaintiffs' reply brief argues that the principal debtor and the trustee in bankruptcy were completely different parties and that a judgment in favor of the latter acting for the creditors and not for the bankrupt-debtor does not not have a conclusive effect in favor of the debtor or its surety.

Before considering the effect of the federal litigation on the matter in controversy, a number of related points should be disposed of. The discharge of a bankrupt does not ordinarily alter the liability of its guarantor or surety. Bankruptcy Act, § 16, 11 U.S.C.A. § 34. The surety may, however, pay the creditor, become subrogated to his rights, and file a claim in the creditor's name against the bankrupt. Sec. 57, sub. i. 11 U.S.C.A. § 93, sub. i. A discharge is personal to the debtor and does not inure to the surety's benefit; hence the guarantor of the original obligation remains liable thereupon notwithstanding the debtor's discharge in bankruptcy. 8 C.J.S. Bankruptcy § 581(b)(1), pp. 1548--1549 (1938). The foregoing rules pertain to a discharge, and are not authority for automatically holding the guarantor liable on the original obligation where it has been determined that the bankrupt has fully satisfied that obligation or that it does not exist. It might be contrary to the spirit and purpose of the guaranty to deprive the guarantor of defenses and equities which the bankrupt could have availed himself of in the creditor's suit against him. Id., at p. 1548. In this regard we note parenthetically that, just as the bankruptcy court is one with equity powers, so also are the Law and Appellate Divisions of the Superior Court empowered to grant equitable relief. N.J.Const.1947, Art. VI, § 4, par. 4; § 5, par. 3.

The sharp distinction which plaintiffs seek to draw between the trustee in bankruptcy and the principal debtor who is the bankrupt is misleading. The trustee in bankruptcy is an officer of the court, charged with the duties and responsibilities of liquidation, distribution and administration of the bankrupt's estate, and he stands in a fiduciary relation to all creditors. In re Deena Woolen Mills, Inc., 114 F.Supp. 260, 267 (D.C.S.D.Me.1953). For some...