The opinion of the court was delivered by: KNIGHT
This is a proceeding for a reorganization of Wickwire Spencer Steel Company under provision of section 77B of the Bankruptcy Act (11 USCA § 207). The petition, introductory to these proceedings, was approved by this court on July 30, 1934, and thereafter permanent trustees of such company were named.
A motion is now made by a petitioning creditor for an order adjudging the debtor insolvent and determining that the stockholders have no equity in the assets of the debtor company.
Prior to the commencement of the proceedings for a reorganization, the property of the debtor company had been in the hands of receivers appointed by this court on October 21, 1927, in an equity action instituted by the American Steamship Company against Wickwire Spencer Steel Company. Final decree in such suit was entered on August 2, 1930, and, among other things, it confirmed the report of the special master, which found that the assets of this debtor corporation, as of August 31, 1929, were of the value of $18,000,000, and that its liabilities were $26,329,815.64. The decision of the District Judge, dated August 4, 1930, American S.S. Co. v. Wickwire Spencer Steel Co. (D.C.) 42 F.2d 886, 891, was affirmed by the Circuit Court of Appeals, May 4, 1931, 49 F.2d 766.
To support the petitioner's claim that the debtor company is insolvent, the petitioner offered the record in the equity suit aforesaid. It also offered evidence to show liabilities incurred and assets of the debtor obtained since the date of such decree, together with the improvements and additions of quick assets and charges in value of current assets and investments. Based upon the aforesaid decree, the evidence shows that the liabilities of the debtor as of July 30, 1934, including interest, were $31,401,836.44, and that the value of debtor's assets based upon such decree and the aforesaid evidence was $15,846,349.58 at such date of appointment of permanent trustees. The actual debts of the debtor without interest were $19,233,840.00, as computed on the basis aforesaid.
Two specific objections to a finding herein of the insolvency of debtor are made on behalf of the stockholders' committee. These objections are: (1) That the finding of insolvency in the equity suit aforesaid is not res adjudicata in this proceeding; and (2) that interest accruing on claims during the period of receivership should not be included as part of the liabilities.
The rule by which we determine whether a judgment or decree is res adjudicata as to some matter in issue in a subsequent action is clearly laid down by many text-writers and innumerable decisions of the courts. The doctrine of res adjudicata has existed in jurisprudence for ages. It was always known to the common law. It is based on the theory that the end to a trial and a final decision therein must be conclusive as to the parties thereto for all time so that property and personal rights may be stabilized. It is obvious that such a principle is unassailable.
The doctrine of res adjudicata is applicable, however, only under a certain state of facts. The judgment or decree must have been rendered by a court of competent jurisdiction, acting within its jurisdiction, and the matter in issue must be the same and must be material to the finding of the judgment or decree claimed to be res adjudicata.
"It is not denied, as a general rule, that a fact which has been directly tried, and decided by a court of competent jurisdiction, cannot be contested again between the same parties, in the same or any other court." Hopkins v. Lee, 6 Wheat. 109, 113, 5 L. Ed. 218.
"The general principle announced in numerous cases is that a right, question, or fact distinctly put in issue, and directly determined by a court of competent jurisdiction, * * * cannot be disputed in a subsequent suit between the same parties or their privies." Southern Pacific R. Co. v. United States, 168 U.S. 1, 48, 18 S. Ct. 18, 27, 42 L. Ed. 355.
"The doctrine of res judicata is that a fact which was actually in issue in a former suit, in which it was judicially passed upon and determined by a domestic court of competent jurisdiction, is conclusively settled by the judgment so far as concerns the parties to the action and their privies." Landon v. Clark (C.C.A.) 221 F. 841, 843.
Upon this subject of the application of the rule as to the effect of a prior adjudication, attention may well be given to Baker v. Cummings, 181 U.S. 117, 21 S. Ct. 578, 45 L. Ed. 776; Nalle v. Oyster, 230 U.S. 165, 33 S. Ct. 1043, 57 L. Ed. 1439; United Shoe Machinery Corporation v. U.S., 258 U.S. 451, 459, 42 S. Ct. 363, 66 L. Ed. 708; Irving National Bank v. Law (C.C.A.) 10 F.2d 721, 724; Hines v. Welch, 57 App. D.C. 371, 23 F.2d 979, 984.
We find no difficulty in learning what the rule is. The difficulties lie in applying it. It undoubtedly is the rule that the principle of res adjudicata cannot be invoked where the determination of some fact was found in the prior suit which was not essential or material to the determination on the issue being tried. All of the cases above cited make this exception clear.
"It applies * * * to every court which has proper cognisance of the subject-matter, so far as they profess to decide the particular matter in dispute." Hopkins ...