Shor v. McGregor, 9143.

• Decision Date: 15 January 1940
• Docket Number: No. 9143.,9143.
• Citation: 108 F.2d 421
• Parties: SHOR v. McGREGOR.
• Court: U.S. Court of Appeals — Fifth Circuit

108 F.2d 421 (1939)

SHOR v. McGREGOR.

No. 9143.

Circuit Court of Appeals, Fifth Circuit.

December 15, 1939.

Rehearing and Motion to Reform Judgment Denied January 15, 1940.

Wm. Andress, Jr., and McCombs & Andress, all of Dallas, Tex., for appellant.

Geo. A. Smoot, of Wichita Falls, Tex., for appellee.

Before SIBLEY, HUTCHESON, and HOLMES, Circuit Judges.

HOLMES, Circuit Judge.

This appeal is brought by the assignee of Nettie Young under an assignment for the benefit of creditors which resulted in the adjudication of the assignor as a bankrupt within four months from the date of the assignment. When the trustee in bankruptcy qualified, appellant turned over to the trustee all of the assets in his possession not claimed by him, but retained $455.60 as expenses incurred and compensation earned at the rate of 10% of the amount realized, as provided in the assignment.

On petition by the trustee for a summary order for appellant to account for and turn over this fund, he appeared and challenged the jurisdiction of the court to issue such an order, contending that he was an adverse claimant in possession, so that the funds in his hands could be reached only by a plenary suit. The order of the referee directing payment of the amount retained was sustained on review. On application to this court, the appeal was allowed on the ground stated in its opinion reported in Shor v. McGregor, 5 Cir., 105 F.2d 140, 141.

On subsequent proceedings, compensation of $75 and expenses amounting to $69 were allowed, so that the order as finally entered and appealed from directed appellant to turn over $311.60 to the trustee. Appellant does not question the propriety of these amounts other than to challenge the summary jurisdiction of the court. He contends, first, that the Bankruptcy Act, as amended, does not confer jurisdiction to issue a summary order such as the one here involved, and second, that if the act did confer such jurisdiction, it would violate the Fifth and Seventh Amendments to the Constitution of the United States.

As to the first proposition, Section 2, sub. a (21), 11 U.S.C.A. § 11, sub. a(21) provides that the courts shall have such jurisdiction in law and in equity as will enable them to exercise original jurisdiction to require assignees for the benefit of creditors to deliver up the property of the bankrupt in their possession, to account for the disposition thereof, and to re-examine and determine the propriety and reasonableness of disbursements made to himself for services and expenses.¹ The portion of the act upon which appellant places his main reliance is the concluding sentence which says that the court shall surcharge the assignee the amount of any disbursement determined to have been improper or excessive.

Section 2, sub. a(21) must be read in connection with Section 70, sub. a(8), 11 U.S.C.A. § 110, sub. a(8), where it is specifically provided that title to the property shall pass to the trustee and that the assignee shall be subject to the summary jurisdiction of the court.²

The contention of appellant that the summary jurisdiction of the bankruptcy court is exhausted by an audit of the account, and that charging back the amounts withheld as expenses and compensation is merely the preliminary step to a plenary suit necessary for its recovery, is fully answered by the provision of Section 70, sub. a(8). This is new legislation and places the assignee for the benefit of creditors on the same footing, as to compensation and expenses, as the attorney for the bankrupt under Section 60, sub. d, of the act, 11 U.S. C.A. § 96, sub. d, prior to the amendment of 1938. Under the latter section, the summary jurisdiction of the court is too well established to be questioned. Cf. In re Wood, 210 U. S. 246, 28 S.Ct. 621, 52 L.Ed. 1046.

The obvious purpose of the new legislation is to bring within the scope of the administrative proceedings the assets which were the property of the bankrupt when the estate reached that point or condition where the judicial bankruptcy power of the federal government would attach. Thus the test that the assignment amount to an act of bankruptcy. It is an effort to correct a condition under previous legislation whereby the bankrupt was allowed to continue to dispose of his property, either directly or through an assignee, during the period of necessary delay incident to the attachment of bankruptcy.³ To allow such assignments is an invitation to fraud of the most vicious sort, since the best assets, or the bulk of the estate, could be disposed of as compensation to the assignee. To invalidate them without adjudication as to their fairness, in some cases, would be grossly unjust. Under the present system, the justness of the determination of any question that may arise as to compensation or expenses depends upon the ability of the judicial officers charged with the administration of the act, an incident to any judicial or administrative proceeding.

The constitutional question raised by appellant does not go to the power of Congress to provide for the re-examination of the contractual provision for compensation and expenses in judicial proceedings, but proceeds upon the theory that the rights thus acquired may not be divested except on a trial in which the course of proceedings established by common law is adopted and followed, and that summary proceedings as conducted by bankruptcy courts do not meet these requirements.

Since this is new legislation, there are no authorities by which we may be guided; but a consideration of the nature of the summary jurisdiction of bankruptcy courts should not leave the matter in doubt. Proceedings in bankruptcy are primarily in rem.⁴ We need not trace the concept back to the period when the proceedings related to a trader whose bench (bank) had been broken (rupted) by his fellow traders because he was no longer able to fulfill his obligations and had absconded to avoid imprisonment for debt; or when the adjudication was the result of a criminal proceeding resulting in his incarceration. In Blackstone's day, a bankrupt was defined as a trader who secretes himself, or does certain other acts tending to defraud his creditors.⁵ The words, bankrupt and adjudication, now have statutory definitions, rooted in the history of the bankruptcy law as it existed prior to the adoption of our constitution.⁶ The administration, by summary or other proceedings,...