Ayres v. Cone

RINER, District Judge. This was an appeal from an order made by the District Court for the District of South Dakota directing the referee in bankruptcy to allow a claim, the validity of which had been passed upon and allowed by the District Court in the proceedings wherein the appellant was adjudicated a bankrupt. — 779 — On the 3d of March, 1904, a petition in involuntary bankruptcy was filed by F. S. Cone and W. H. Dryden, copartners under the firm name of Cone & Dryden, A. S. Chambers, and A. R. Priest, against W. J. Gentle, in which it was alleged that Gentle owed debts to the amount of $1,000 and more, and that the petitioners were creditors of Gentle, having provable claims amounting in the aggregate, in excess of securities held by them, to $500 and more. The petition then averred that $500 of the sum claimed by Cone & Dryden to be due to them was for money loaned or advanced by them to Gentle, and that the sum of $5,361 was an indebtedness growing out of a real estate transaction between Cone & Dryden and Gentle, the petition setting out the facts in relation thereto. It was further averred that Gentle was insolvent, and had within four months next preceding the date of the filing of the petition committed an act of bankruptcy, in that, on the 13th day of January, 1904, he conveyed, transferred, concealed, and removed a stock of goods belonging to him, consisting of groceries, fixtures, book accounts, and other property, to one B. C. Mathews, who represented a portion of the creditors, and that Mathews took possession of the stock of goods, and was selling and disposing of the same for the purpose of paying a portion of the creditors of Gentle, with intent to prefer such creditors over other creditors. On the 11th of March, 1904, Gentle filed an answer to the petition in bankruptcy, in which he denied that he had committed the acts of bankruptcy alleged in the petition; denied that he was insolvent, and alleged that he should not be declared a bankrupt for any cause in the petition alleged; denied that he was indebted to Cone & Dryden, or either of them, in the sum of $500; denied all liability to Cone & Dryden by reason of the real estate transaction set out in the petition, because of certain other alleged transactions between Cone & Dryden and himself, which he sets out at length in his answer. To this answer the petitioning creditors filed a replication, and the matter came on for hearing before the District Judge upon the petition, answer, replication, and evidence, as shown by the stipulation of the parties found in the record, resulting in an order, entered on the 28th of March, declaring Gentle a bankrupt, and referring the matter to the referee to take such further proceedings therein as are required by the provisions of the bankruptcy act. Cone & Dryden presented their claims for the sum of $5,361 and for the sum of $500 to the referee for allowance. The allowance of each was objected to by the bankrupt, he filing written objections thereto, setting out substantially the matters theretofore averred in his answer to the petition. Four other creditors, not parties to the petition, attempted to join in the objections filed by the bankrupt to the allowance of these claims, by filing with the referee the following paper, indorsed “Objections”: “In the Matter of W. J. Gentle, Bankrupt. In Bankruptcy. “The undersigned, creditors of the said W. J. Gentle, bankrupt, whose claims have been duly proved and allowed in said matter, do hereby unite — 780 — in the objections to the claim of F. S. Cone and W. H. Dryden, copartners under the firm name of Cone & Dryden, filed herein on the 2d day of May, 1904, and hereby adopt the objections of the said bankrupt, hereto attached. “Anthony Kelly & Co., “Andrew Kuehn Co., “Jewett Bros. & Jewett, “Manchester Biscuit Co., “By Bailey & Voorhees, “Their Attorneys.” The referee, after hearing argument upon the objections, held that the proceedings had in the District Court when Gentle was declared a bankrupt were not res judicata or conclusive upon him as to the validity of the claim of Cone & Dryden, and decided that he would hear further proof. As we understand the record, the referee did not reject the claim, neither did he allow it, but decided only that the proceedings in the District Court when Gentle was adjudicated a bankrupt were not conclusive upon him. This, we think, was the full extent of his ruling. From this finding, upon the petition of Cone & Dryden, the matter was certified to the District Judge by the referee, who, after argument, made the order here complained of. This case presents the single question whether a petitioning creditor in an involuntary bankruptcy proceeding, whose claim has been adjudged valid by the court, on the application for an adjudication, in which proceedings its validity was in issue, can be required to establish it again before the referee at the suggestion of the bankrupt and other creditors, not parties to the petition. The District Court held that he could not, and in this conclusion we concur. In the proceedings had before the District Court at the time the adjudication was made, the bankrupt appeared and answered, and in his answer not only put in issue the question of bankruptcy, but set out in detail the transactions out of which the alleged indebtedness of petitioners arose, and attempted to show that by reason of these and other transactions he owed no part of the claim for $5,361. Under the issues as framed by the parties, if his defense to this claim was good to the extent of one dollar, it was good as to the entire amount. The defense to the $500 claim of Cone & Dryden was based upon and in connection with the grocery business, which he alleged entered into the real estate transactions set out in the pleadings, and was by the answer made to depend upon the real estate transactions and the transfer of the stock of goods; hence, if the District Court had found that his defense to the $5,361 was good, it must necessarily have, found that the defense to the $500 item was good, for, under the issues as made by the pleadings, the validity of both of these claims, necessarily united by reason of the incidents out of which they grew, was involved. In an adjudication in involuntary bankruptcy there is involved not only the question whether or not the petitioning creditors represent claims to the extent of $500 or upwards, but also the question whether or not the bankrupt owes debts to the extent of $1,000 or more. The answer in this case put in issue all of these questions. It is therein alleged: — 781 — “That practically the whole of the remaining indebtedness referred to in the petition herein as being the indebtedness of the said W. J. Gentle owing to other creditors not uniting in said petition is in truth and in fact the indebtedness of the said Cone & Dryden, incurred by the said W. J. Gentle as their agent in the operation and management of the said grocery store.” Under these issues, the court, in determining the question whether or not Gentle should be declared a bankrupt, necessarily-had to determine whether or not the allegations of the answer were true. If they were true, then the indebtedness claimed by the petitioning creditors did not aggregate $500, and the bankrupt did not owe $1,000 provable in bankruptcy, for the debts thus alleged to have been created were in fact the debts of the petitioning creditors. The court, therefore, in making the adjudication, had to find that the bankrupt owed the petitioning creditors the sum of $5,361, for, as we have already seen under the issues, he owed the whole of it or he owed none of it. It must be conceded, we think, that if there had been a judgment in the case reciting that, the issues herein coming on to be heard upon the pleadings and evidence, the court found that the defendant owed the petitioning creditors’ the sums of $5,361 and $500, the judgment thereon would have concluded the bankrupt as to the amount he owed the petitioning creditors. Gould v. Railway Co., 91 U. S. 526, 23 L. Ed. 416; Miller v. Covert, 1 Wend. 487; Roberts v. Heim, 27 Ala. 678; Robinson v. Howard, 5 Cal. 428; Aurora City v. West, 7 Wall. 99, 19 L. Ed. 42; Goodrich v. City of Chicago, 5 Wall. 573, 18 L. Ed. 511. We do not think that the bankruptcy act contemplates that in a case where, upon issues involving the validity of the petitioning creditors’ claim in the proceedings for an adjudication, the question has been fully heard and determined in favor of the validity of the claim, the bankrupt shall thereafter be allowed, when these same creditors present their claims for mere formal proof before the referee, to file the same answer and demand that the same issue shall again be tried before the referee and finally before the same judge who heard the application of the petitioning creditors for an adjudication, and this is precisely what is sought to be done in this case. In In re Eallon, Fed. Cas. No. 4,628, Judge Blatchford said: “So long as the adjudication of bankruptcy stands unrevoked, all inquiry as to the existence or validity of the debt claimed to be due to the petitioning creditor in the involuntary proceedings is precluded. The debt due to such creditor was established for the purpose of the adjudication, and neither the debt nor the adjudication can be attacked on a motion of this kind by a creditor who claims an adverse interest to the assignee in bankruptcy.” In In re Ulfelder Clothing Co. (D. C.) 98 Fed. 409, the identical question now before the court was passed upon by Judge De Haven. In that case the petitioning creditor alleged that the corporation was indebted to her in the sum of $2,000, evidenced by a promissory note. The answer, in addition to putting in issue the allegations of the petition in relation to insolvency, also contained a denial that the petitioner was a creditor of the corporation in any sum or amount whatever. The case there, as here, was heard upon the — 782 — issues made by the pleadings and upon evidence, and the court found the allegations of the petition to be true, entered an order of adjudication, and sent the case to a referee. The petitioning creditor presented her claim to the referee for allowance. Objection was made to the allowance of the claim, for the same reasons set up in the answer at the time the adjudication was made. The referee held that the validity of the claim could not be questioned either by the bankrupt or by any other.creditor. In disposing of the case, Judge De Haven said: “She was the petitioner in the proceeding to have the Henry Ulfelder Clothing Company adjudged bankrupt, and, the alleged fact having been put in issue by the answer to her petition, it was incumbent upon her to prove that she had a legal demand against that corporation for at least $500 in excess of securities held by her. Bankr. Act, July 1, 1898, c. 541, § 59, subd. ‘b,’ 30 Stat. 561 [U. S. Comp. St. 1901, p. 3445]. Without proof of this fact, the corporation and creditor who appeared in opposition to the petition for involuntary adjudication would have been entitled to a dismissal of the proceeding. In re Cornwall, 9 Blatchf. 114, Fed. Cas. No. 3,250; Bank v. Moore, 2 Bond, 170, Fed. Cas. No. 10,041; In re Skelley, 2 Biss. 260, Fed. Cas. No. 12,921. The question whether she was a creditor in that amount was therefore a material issue in that proceeding, and the decree therein undoubtedly establishes the fact that she was such creditor.” In that case the proof offered by the petitioning creditor before the referee and in the involuntary proceeding for an adjudication was. a promissory note upon which she claimed the bankrupt was liable. It having been determined upon the proceedings for adjudication that the note was executed by the corporation and delivered upon a sufficient consideration, the court held that the same question could not be again drawn into controversv in the same bankruptcy proceeding in which the decree of adjudication was given. The learned judge said: “The law certainly does not contemplate that the petitioning creditor shall be required to establish the validity of a particular claim against the- bankrupt more than once in the same proceeding, unless the court shall, upon some legal ground, grant a new trial of such issue.” Under the bankruptcy act, any creditor may voluntarily appear and join in the petition or be heard in opposition thereto, and those not appearing are, we think, in contemplation of law, represented by the bankrupt to the extent of being concluded as to all matters directly in issue and determined by the order of adjudication. In Candee v. Lord, 2 N. Y. 269, 51 Am. Dec. 294, it was argued that creditors, not parties to a suit affecting the title to the debtor’s property, were not in privity with the debtor, and therefore not es-topped by the judgment. The court, however, said: “We think otherwise. The law which gave the judgment debtor the unlimited right (when honestly exercised) to contract debts, to settle and adjust their amount, to secure and to pay them, made him to that extent the representative of all his creditors who should seek the satisfaction of their demands out of his property. So far, at least, they are in privity with, and claim under, their debtor.” In our judgment, there is neither reason nor authority for the contention that an adjudication in bankruptcy made upon issues — 783 — such as are presented by the pleadings in this case, and, as the record shows, upon the evidence in support thereof, offered by the respective parties, does not conclude the bankrupt as to the facts therein involved and passed upon by the court. Neither do we think that there is any merit in the contention, made in this case, that other creditors sought to interpose at the hearing before the referee: First, because the creditors presented no objection; they simply said, “We adopt the answer of the bankrupt.” The bankruptcy act makes no provision for such procedure. It authorizes any creditor to object to and contest the allowance of any claim, but he must file his own obj ections and make an issue. The act authorizes other creditors to join in a petition in involuntary bankruptcy, but they must enter a formal appearance, and then, by leave of court, may join by adopting the petition; but no such practice is authorized in respect to one creditor resisting the claim of another. Second, it is an all-sufficient answer that these creditors took no appeal from the action of the District Court. The appeal was taken by the trustee in bankruptcy, who resisted the allowance of the claim as the representative of the estate, and we think such intervening creditors ought not to be allowed to interpose and provoke a trial in their interest, and, after defeat, without incurring the risk of the costs of an appeal, to claim that they were represented by the trustee, and have the costs, if the appeal fails, taxed against the estate. This record, we think, shows that the defense which the creditors proposed to make to the allowance of the petitioners’ claim was a defense in favor of the bankrupt, which he had fully presented to the court, and which had been fully contested. In other words, the effort here is to have a new trial of the same issues between the petitioning creditors and the bankrupt. This, we think, cannot be done. The parties have had their day in court, and are not entitled to another. We see no reason for disturbing the order made by the District Court, and it is therefore affirmed.