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In re Conway.

June 30, 1941


Appeal from the District Court of the United States for the District of New Jersey; Guy L. Fake, Judge.

Author: Clark

Before BIGGS, CLARK, and GOODRICH, Circuit Judges.

CLARK, Circuit Judge.

The court below reversed the referee in bankruptcy and from that reversal the creditors appeal to us. The ground of reversal is set forth in a paragraph of the learned district judge's order.*fn1 As there is no opinion, the question is nowhere else mentioned. The paragraph reads:

"Ordered, Adjudged and Decreed, that the hearing of the debtor held on October 8th, 1940, before Honorable Referee John Grimshaw, Jr., be and the same hereby is opened and reinstated for the purpose of examining the debtor , James Conway, in accordance with the provisions of Section 336 of the Chandler Act, Chapter XI. * * * " Appendix to appellant's brief, p. 26.

Appellee-debtor had filed a petition under Chapter XI of the Bankruptcy Act*fn2 praying for an arrangement with his creditors. At the first meeting of creditors, the majority in number and amount rejected the debtor's proposed arrangement. Acting pursuant to Section 376(2)*fn3 the referee after a proper hearing decided that the best interests of creditors would be served by adjudicating the debtor a bankrupt and entered the appropriate order. The debtor objected to the order, urging that an order of adjudication could not be entered until a finding of the debtor's insolvency was made. Such a finding was impossible since the debtor was solvent in the bankruptcy sense,*fn4 although he admitted his inability to pay his debts as they matured. The sole ground for the debtor's appeal from the referee's order was on the question of the necessity for a finding of insolvency. Yet, without reference to this ground of appeal the learned district judge vacated the referee's order because the debtor had not been examined.

The theory of the case as presented to the referee is based on a notion of bankruptcy that has been modified. The earlier United States statutes predicated the jurisdiction on acts of the bankrupt ensuing upon a technical financial condition. In the last decade the emphasis has been shifted from acts to conditions and from technicality to reality.*fn5 We, as well as our English brethren,*fn6 have come to realize the soundness of the civil law.*fn7 We are therefore using in parts of our bankruptcy Acts what the Code Napoleon calls the "cessation de paiements"*fn8 instead of the more difficult and less practical balance of assets over liabilities.*fn9 The new test first appears appropriately in the 1933 Act,*fn10 now Chapter XI. We say appropriately because the very purpose of this Act is to enable debtors to avoid the stigma of bankruptcy.*fn11 It is interesting to note that the Senator from our only civil law jurisdiction advocated this same change some fifty years ago. He said:

"* * * In the other class of failures arising chiefly in time of financial panic, or accident such as fire, wreck, etc., the suspension of payments may not arise from any inadequacy of assets but solely from inability to realize immediate cash. To destory a business house and wreck the fortune of an upright and able business man, under such circumstances where he has an abundance of assets to meet very obligation, would seem an act of wantonness such as ought not to be tolerated under an enlightened system of jurisprudence. * * * So, I think, as of the highest importance in a bankruptcy law, such provisions for reducing liabilities pro rata and for granting extensions of time of payments." Senator Ingalls of Louisiana, quoted in Warren, Bankruptcy in United States History p. 154.

It is not unreasonable to suppose that the distinguished Senator had knowledge of the laws of his own States and that the legislators thereof were similarly advised of the course of legislation in their own country of legal origin. At that very period, the French were discussing the establishment of their system of judicial liquidation. The introductory paragraph of a leading text writer on the subject, as translated, reads:

"We have already said that the law had become more lenient since 1889 for the merchant who was in a state of inability to meet his payments and who could not be accused of any serious negligence. The law of the 4th of March 1889 permitted him to avoid the more serious consequences of bankruptcy and placed himself simply in a state of judicial liquidation. That implies favorable treatment of insolvent debtors who because of unhappy circumstances only find themselves unable to meet their obligations." Translation, Bertrande, De La Faillite, Fourth Part, p. 237.*fn12

In upholding this beneficent change in the law, the courts have only to follow a precedent very ancient indeed.*fn13 In the memorandum relative to the Bankruptcy Act of 1933 submitted by the Honorable Solicitor General, many other authorities are set forth and analyzed.*fn14 This a priori view has found acceptance in the later cases. They are collected in Chapter 8, Provisions for the Relief of Debtors, 11 U.S.C.A. ยง 201 et seq., p. 962 et seq., and most of them are cited by the learned referee. The appellee's presonal disqualification might very well have been argued. His petition must be and is based on the very language of which he now complains.*fn15 Having asked for mercy, he can hardly be permitted to bite the hand from which it is dispensed. The ability to waive a constitutional provision intended for the protection of one's property rights is elementary.*fn16

We think the debtor is equally mistaken in his conception of the purpose of an examination. We do not stress the procedural point of whether an issue not before the referee may be raised in the district court. The rule is well-known.*fn17 It is especially emphasized in bankruptcy.*fn18 Even here it ceases to operate where prejudice can be shown.*fn19 It is exactly at this point that we part company with the appellee's counsel and the learned district judge. It is true that the statute is now mandatory when it used to be permissive.*fn20 That, of course, does not help the debtor unless he is given a right.Far from that being the fact, his burdens are made more onerous. The purpose of examinations under the bankruptcy act is conceded.*fn21 The permissive statute gave the examining official some discretion in refusing or acceding to a request.*fn22 The change to command removed the referee's discretion. It in no way altered the debtor's duty.*fn23 Here again the latter may be said to have waived his right even if he had one. He never requested any examination or made any other attempt to explain his financial affairs to his creditors. He cannot, therefore, be prejudiced by the withholding of a right he never had and, even if he had, clearly waived. By the same token, the failure to examine does not nullify the rejection of the creditors who felt they had all the information they needed and so did not ask for more.

The order of the district court is reversed and remanded for further proceedings in ...

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