Isberg v. Butler Bros.

HICKS, Circuit Judge. The question for decision is, whether confirmation of a composition in bankruptcy bars a later confirmation of composition within six years. The District Judge thought it did. We cannot accept this view. The matter is of primary impression. Congress for the first time provided for composition in bankruptcy by the amendment of June 22, 1874 (18 Stat. 178), to the Bankruptcy Act of 1867 (14 Stat. 517). Neither that act nor any amendment thereto limited the number of compositions a bankrupt might obtain within any given period, nor does the present act expressly do so. The applicable portion thereof is section 12d (11 USCA § 30 (d), to wit, that “the judge shall confirm a composition if satisfied that (1) it is for the best interests of the creditors; (2) the bankrupt has not been guilty of any of the acts or failed to perform any of the duties which would be a bar to Ms discharge; and (3) the offer and its acceptance are in good faith.” This paragraph originated with the act, and Congress has never disturbed it. It is not difficult to determino what “acts” and “duties” were referred to in clause (2). They are those acts and duties found in clauses (1) and (2) of section 14b of the original act.1 Section 14b has been amended from timo to time until it now stands as printed in the margin.2 By its provisions, [456] a discharge is- denied if the bankrupt has committed any of the offenses or failed to perform any of the duties specified in its numbered clauses. See Bluthenthal v. Jones, 208 U. S. 64, 65, 28 S. Ct. 192, 52 L. Ed. 390; In re Jacobs, 241 P. 620, 624 (C. C. A. 6). Section 12d (2) denies composition upon the same grounds; that is, if the bankrupt has been guilty of any of the acts or failed to perform any of the duties specified in section 14b, as it now stands, which would be a bar to, his discharge. If appellant is denied confirmation of. the composition he has. made with his creditors, it can only be because he is guilty of the offense of applying for such an order within six years after he “has been granted a discharge in bankruptcy.” See clause (5) of section 14b. But he has not “been granted a discharge in bankruptcy” within that period, unless the confirmation of a composition is tantamount thereto. The argument is that section 14c. of the act 3 renders a composition equivalent to a discharge within the meaning of the term “discharge” as found in section 12d, (2) and section 14b, (5). The difficulty, however, is, that Congress has failed to declare aptly and definitely any such intention or effect. The matter could hardly have escaped attention when clause (5) was added to section 14b in 1903, or when clause (5) was amended in 1926. If the argument is sound, it follows that appellant is denied a composition because he is guilty of committing an offense not explicitly denounced, and having no firmer basis than judicial construction. We do not think such a result is justified by any legislative policy of which we are aware. The word “guilty” used in clause (2) of paragraph (d), § 12 denotes intentional wrongdoing. See Firestone v. Harvey, 174 F. 574, 577 (C. C. A. 6); In re Rosenthal, ,231 F. 449, 450 (C. C. A. 2); Gilpin v. Merchants’ Natl. Bank, 165 F. 607, 20 L. R. A. (N. S.) 1023 ( C. C. A. 3). Before the bankrupt should be charged with fraudulent misconduct and penalized therefor, the statute which authorizes the penalty should be free from the necessity of interpretation. If it is ambiguous, the bankrupt might proceed upon one conception of his rights and the courts upon another, or different courts might entertain divergent views. In any event, we do not think the legislative declaration that “the confirmation of a composition shall discharge the bankrupt from his debts * * * ” was intended to mean that such confirmation is in all respects the equivalent of a “discharge in bankruptcy” in the contemplation of either section 12d (2) or section 14b (5). It is similar to a discharge in that, in effect, it operates to discharge the bankrupt from certain debts (See. 14e; see, also, Cumberland Glass Co. v. DeWitt, 237 U. S. 447, 452, 35 S. Ct. 636, 59 L. Ed. 1042; and Nassau Smelting & R. Works v. Brightwood B. Fdry. Co., 265 U. S. 269, 271, 44 S. Ct. 506, 68 L. Ed. 1013), but this is only one characteristic. Composition has many attributes peculiar to itself. As pointed out in the Nassau Case, supra, it is a settlement by the bankrupt with his creditors; it in a measure supersedes and is outside of the bankruptcy proceedings. See Greenbaum v. U. S., 280 F. 474, 477 (C. C. A. 6). It follows a voluntary offer by the bankrupt and its acceptance by a majority of creditors representing a majority in amount of claims, and, unless it is so accepted, it cannot \ be confirmed at all. It partakes of the nature of a contract. See Myers v. International Trust Co., 273 U. S. 380, 383, 47 S. Ct. 372, 71 L. Ed. 692; In re Lane (D. C.) 125 F. 772, 773. Upon its confirmation, settlement immediately follows, and,the ease is dismissed. It cannot be confirmed at all unless the judge is satisfied that confirmation is for the best interests of creditors and in good faith. Bankr. Act § 12d (1) (3), 11 USCA § 30 (d) (1) (3). The procedure under it is both speedy and inexpensive, and is designed to prevent injury incident to delay. Section 12a was amended in 1910 (11 USCA § 30 (a) to provide for composition before adjudication. See Phelan v. Parsons, 23 F.(2d) 7, 9 (C. C. A. 1). A discharge cannot precede ad [457] judication. Composition is advantageous to the creditor because it permits Mm to bargain, and assures him that he will get what he bargains for. Myers v. Trust Co., supra; In re Joseph (C. C.) 24 F. 137. It is an advantage to the bankrupt, in that upon confirmation he is revested with the title to Ms property and takes it into Ms own control. In re Frischknecht, 223 F. 417 (C. C. A. 2); Phelan v. Parsons, supra. The procedure under it differs from the ordinary procedure in bankruptcy to the extent that, under given circumstances (section 12a), the progress of the case may be halted and delayed, but if composition fails the administration of the estate proceeds in bankruptcy to a discharge. There are other striking differences which the statute makes obvious, but which it will serve no good purpose to particularize. Upon full consideration, we cannot say, until there shall be more explicit legislative pronouncement, that Congress has intended to deny a bankrupt and Ms creditors the privilege of more than one beneficial good faith settlement within any six-year period. The reason for such a denial is not apparent. It has been uniformly held that the bankrupt is entitled to a liberal construction of the act in his favor. See In re Jacobs, 241 F. 620, 624 (C. C. A. 6). There is nothing to indicate that Congress ever considered such settlements as a public evil or that it was ever confronted with the particular question. Judged by 'the reported decisions, this is its first appearance in the courts. It is urged upon us that it was the intention of Congress to circumvent fraud; that is, to prevent a bankrupt who cannot get a discharge, from securing its equivalent through composition. This argument does not convince. The statute amply forestalls any such attempt by the provision that the judge must be satisfied that (section 12d (3) the offer and its acceptance are in good faith. Appellee relies upon the eases of Rosenberg v. Borofsky, 295 F. 500 (C. C. A. 1), and the District Court cases, In re Radley, 252 F. 205, and In re Massell, 285 F. 577. The question in those eases was whether an application for a discharge rather than a confirmation of composition was properly denied when a composition had been confirmed within six years. Although these questions are somewhat analogous, they are not identical with the question here. Our attention has been called to United States v. Hammond, 104 F. 862 (C. C. A. . 6), wherein it was hold that under section 25, Bankr. Act 1898, allowing appeals from a judgment granting or denying a discharge, an appeal lies from a refusal to confirm a composition. There the court said that a “discharge” was the equivalent of a composition for the “purposes of the Act”; but it was dealing with section 25 as it was then, (1900) written and not with section 12d (2) or section 14b as it now stands, or with the question for decision here. The order of the District Court is reversed, and the case remanded for further proceedings consistent herewith. Footnotes [1] Section 14b: “The judge shall hear the application for a discharge, and such proofs and pleas as may be made in opposition thereto by parties in interest, at such time as will give parties in interest a reasonable -opportunity to be fully heard, and investigate the merits of the application and discharge the applicant unless he. has (1) committed an offense punishable by Imprisonment as herein provided; or (2) with fraudulent intent to conceal his true financial condition and in contemplation of bankruptcy, destroyed, concealed, or failed to keep books of account or records from which his true condition might be ascertained.” SO Stat. 550. [2] Section 14b: “The judge shall hear the application for a discharge and such proofs and pleas as may be made in -opposition thereto by' the trustee or other parties in interest, at such time as will give the trustee or parties in interest a reasonable opportunity to be fully heard, and investigate the merits of the application and discharge the applicant unless he has (1) committed an offense punishable by imprisonment as herein provided; or (2) destroyed, mutilated, falsified, concealed, or failed to keep books of account, or records, from which his financial condition and business transactions might be ascertained; unless the court deem such failure or acts to- have been justified, under all the circumstances of the case; or (3) obtained money or property on credit, or obtained an extension or renewal of credit, by making or publishing, or causing to be made or published, in any manner whatsoever, a materially false statement in writing respecting his financial condition; or (4) at any time subsequent to the first day of the twelve month. [456] immediately preceding tlie filing of the petition, transferred, removed, destroyed, or concealed or permitted to be removed, destroyed, or concealed any of his property, with intent to hinder, delay, or defraud his creditors; or (5) has been granted a discharge in bankruptcy within six years; or (6) in the course of proceedings in bankruptcy, refused to obey any lawful order of or to answer any material question approved by the court; or (7) has failed to explain satisfactorily any losses of assets or deficiency pi assets to meet his liabilities: Provided, That if, upon the hearing of an objection to a discharge, the objector shall show to the satisfaction of the court that there are reasonable grounds for believing that the bankrupt has committed any of the acts which, under this paragraph (b), would prevent his discharge in bankruptcy, then the burden of proving that he has not committed any of such acts shall be upon the bankrupt; And provided further, That the trustee shall not interpose objections to a bankrupt’s discharge until he shall be authorized so to do by the creditors at a meeting of creditors called for that purpose on the application of any creditor." 11 USCA § 32(b). [3] Section 14c: "The confirmation of a composition shall discharge the bankrupt from his debts, other than those agreed to be paid by the terms of the composition and those not affected by a discharge." n USCA § 32(c).