In re Watman, Konopolsky & Bernstein

LEARNED HAND, District Judge (after stating the facts as above). Section 12b, Bankruptcy Act (Comp. St. § 9596), requires the offer to be accepted by a majority in number of those creditors “whose claims have been allowed.” In cases of composition before adjudication section 12a provides for an “allowance” of claims at a meeting called for that purpose. Thus claims may be “allowed” under section 57a, section 57c, and section 57d (section 9641), before adjudication. In the case at bar the petitioner did not “prove” his claims or have them “allowed,” and the first question is whether that is a condition upon his recovery, if the claim has been scheduled. ■ The order made a distinction between claims “scheduled, filed and allowed” and those “scheduled and allowed,” though it provides that both classes shall share. But no claim can be allowed under section 57d, which has not been “proved” under section 57a, and “allowance” presupposes filing under section 57c. Hence the word “allowed,” in the Schedule C, is not properly used. I cannot find any case on the question whether a claim must be “allowed” before it can share in a composition. The Official Forms (No. 63, Order for Distribution on Composition [89 Fed. lx, 32 C. C. A. [888] lxxxiv]) provides that there shall be paid “the several claims of general creditors which have been allowed, and appear upon a list of allowed claims, on the files in this court, which list is made a part of this order.” That certainly seems to require some allowance, and by that word I should normally understand allowance under section 57d. Moreover, courts have differed as to whether a creditor properly scheduled may share in a composition if he fails to prove his claim within a year after adjudication. Nassau, etc., Co. v. Brightwood, etc., Co., 286 Fed. 72 (C. C. A. 1); Re Atlantic, etc., Co. (D. C.) 228 Fed. 571; Re Lane (D. C.) 125 Fed. 772. It would seem to follow from those cases which exclude claims proved too late that proof was a condition on sharing If so, the failure to prove is a bar to the creditor’s right. There are, however, difficulties in such a ruling. If proof and allowance are necessary, still it would seem that the .creditor must at least have under section 57n a year after adjudication within which to prove. I do not see by what right the bankrupt takes this from him merely because the offer is made and confirmed within .the year. None of the cases suggest that. If so, then when there is no adjudication he may get his claim allowed at any time. Of course, it might be held that, having notice of the offer, the creditor must prove 'before confirmation. Form 63 does indeed indicate as much. But I cannot think that it is an absolute condition. If the creditor is content with the schedule and does not want to vote on acceptance, it would be the mere-est formality to require that he file a proof of claim., There is indeed a reason for limiting the right of acceptance to those who have proved, since the option between the offer and administration should be open only to those who, so far as can then be ascertained, will share in administration. But that reason does not determine who shall share in the offer. Those who have proved will have before them the offer, made to all, and the probable dividends in administration open to them and to those who will prove within a year. That is as far as it is necessary to go; nothing is served by the idle requirement of filing a proof of claim after acceptance. As I view it the offer is made to all creditors, certainly to all scheduled, and it makes no difference that it may be accepted by a smaller group. This, I understand, has been the uniform practice. It does not depend upon what view one takes of the applicability of section 57n. Hence I hold that the petitioner’s failure to prove did not bar him from the composition. However, the schedule did not extend the amount of his debt. I do not forget that as a creditor of the old firm he also appeared and with proper extension: The schedules distinguished between the two debts and it was clear that the first mention of ,his name was not intended to exhaust his claims. The schedules were clearly improper, for they did not conform with section 7a (8), being Comp. St. § 9591, by showing “the amounts due each” of the creditors. The offer should never have been confirmed until they had been amended'. Yet this was an irregularity of which it would be a gross injustice .to let the alleged bankrupts now take advantage. The offer read, it is true, to pay the dividend on “the claims of creditors allowed or to be allowed,” but [889] that counts for nothing, even if formal proof of claim be required, since the time has not expired. Hence the creditor may now get his dividend either by. a formal proof of claim, if that be essential, or merely by correction of the schedule in bankruptcy. Without meaning to hold that formal proof is necessary in such cases, the surest practice will be as follows: Allow the petitioner to file a proof of claim within 10 days; allow the alleged bankrupts 10 days in which to object. After the claim has been liquidated (if there be objection), amend the schedules in bankruptcy and Schedule C annexed to the order of confirmation, by inserting the amount as liquidated, nunc pro tunc. The petitioner may then enforce the order precisely as though he had been originally included. Had his claim been extended at a stated amount, the order might have concluded him, even though the notice did not reach him. As it is, however, hé was charged with notice only of the schedules, and those informed him that his claim was recognized. This could only mean recognized at its proper amount. Hence there was no sum at which the order could conclude him. Pro tanto the composition remained incomplete. It may now be completed. Settle order on notice.