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In re Solar Manufacturing Corporation.

decided: December 3, 1952.


Author: Mclaughlin

Before GOODRICH, McLAUGHLIN and STALEY, Circuit Judges.

McLAUGHLIN, Circuit Judge.

In this Chapter X proceeding the district court denied appellant's motions to dismiss counterclaims of appellee, the sole remaining reorganization trustee, to an account and proofs of claim, both filed by appellant.

On December 14, 1948, the debtor, Solar Manufacturing Corporation, filed a voluntary petition under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., in the United States District Court for the District of New Jersey.Originally two trustees were appointed. They both served until June 28, 1951, when for reasons of economy one was eliminated. At this time most of the debtor's assets have been sold and dividends approximating 25% of claims have been paid or held for distribution on unsecured claims.

On August 1, 1945, the debtor entered into an indenture agreement with appellant, The Marine Midland Trust Company of New York, as trustee, pursuant to which 5% debenture bonds in the face amount of $1,500,000 were issued. $1,450,000 of these bonds remain outstanding. On May 2, 1947, appellant loaned the debtor $650,000, with the loan evidenced by the debtor's unsecured note. Between January 28, 1948, and June 30, 1948, the debtor repaid $275,000 of this loan. On October 27, 1948, the date on which the debtor filed a Chapter XI proceeding, 11 U.S.C.A. § 701 et seq. (later dismissed) in the United States District Court for the Southern District of New York, appellant, as a set-off against the amount due on the note, appropriated the $45,078 balance which the debtor had in its general bank account with appellant. In June, 1948, the debtor sold its Chicago plant for $450,000 and deposited that sum in its general bank account with appellant. Between September 3, 1947 and October 21, 1948, appellant financed $1,505,558 of debtor's accounts receivable, on which it allegedly made a profit of $7,963.

On March 11, 1949, appellant filed a proof of claim for about $5,000 for services and expenses as indenture trustee. On March 31, 1949, it filed another claim for $354,340 due on the note and for $13,985 based on alleged breaches of warranty and representations made on the sale to it of debtor's accounts receivable.

Appellant resigned as indenture trustee effective March 2, 1949. Upon petition of a committee representing debenture holders, the district court by order of October 13, 1949, required it to file an account as such trustee. That account was filed December 1, 1949. Thereafter the trustees filed their objection to appellant's claims, an answer and counterclaim to the account, and an answer and counterclaim to the claims. In substance the trustees alleged:

(1) That appellant accepted the $275,000 payments on the note and appropriated the $45,078 bank account while debtor was insolvent to appellant's knowledge, in violation of Section 67 of the Bankruptcy Act, 11 U.S.C.A. § 107, New Jersey Revised Statutes 14:14-2, N.J.S.A., and Section 15 of the Stock Corporation Law of New York, McKinney's Consol. Laws, c. 59.

(2) That appellant was derelict in its duties as indenture trustee in failing to earmark the $450,000 received from the sale of debtor's Chicago plant for the benefit of debenture holders, as provided by Article Five, Section 14 of the trust indenture.

(3) That appellant's financing of debtor's accounts receivable constituted loans secured by a pledge in violation of the negative pledge clause of Article Five, Section 12(b) of the trust indenture.

The answer and counterclaim to appellant's account prayed that appellant, as indenture trustee, account and be surcharged for $320,681 for the alleged preferences obtained on the repayment of the note; for the $450,000 which Marine allowed the debtor to deposit in its general bank account, and for the $7,963 profits it realized on financing the accounts receivable. Similar relief was sought in the answer and counterclaim to the claims of Marine. All of the above grounds were asserted by way of defenses to the claims and objections to the account. Appellant moved to dismiss the counterclaims and the court referred the motions to a referee as special master for hearings. The master held that the determination of the motions should await a "full and complete trial" of the issues. Appellant objected to the master's report. The district court, 102 F.Supp. 859, in reviewing the report, upheld the denial of appellant's motions and concluded that it had summary jurisdiction to determine the issues raised by the counterclaims. This appeal followed.

The first question which must be resolved is whether the bankruptcy court has summary jurisdiction over the subject matter of the counterclaims based on the alleged preferential payments to Marine of $275,000 on the note and the $45,078 bank balance which Marine appropriated.

Prior to Alexander v. Hillman, 1935, 296 U.S. 222, 56 S. Ct. 204, 80 L. Ed. 192, the pertinent law generally was that although a bankruptcy court could consider defenses to claims filed against the bankrupt estate and was empowered to set off any claims of the estate against the claimant up to the amount of the claim, it was without jurisdiction to render an affirmative judgment against the claimant, absent the latter's consent to jurisdiction.*fn1 In the Hillman opinion the Supreme Court held that former officers of a corporation in receivership who had filed claims with the equity receiver, but who had not been served with process, subjected themselves to the jurisdiction of the district court for the purposes of counterclaims based on their alleged misappropriations. The court noted that since the subject matter of the counterclaims, like the claims, was cognizable in equity the district court had jurisdiction to grant affirmative relief.

The reasoning of Hillman was thereafter applied to bankruptcy cases. In Florance v. Kresge, 4 Cir., 1938, 93 F.2d 784, it was decided that an unsecured creditor who had filed a proof of claim and a petition of intervention submitted himself to the jurisdiction of the court for purposes of a counterclaim which arose out of a contract between claimant and bankrupt and was asserted by the receivers and trustee. The court did not characterize the counterclaim as either equitable or legal, although it seems to have been the latter. The Fourth Circuit in Columbia Foundry Co. v. Lochner, 1950, 179 F.2d 630, 14 A.L.R.2d 1349, held that a corporation which had filed a proof of claim based on goods sold and ...

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