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In re Brown.

March 10, 1941

IN RE BROWN.


Appeal from the District Court of the United States for the Northern District of New York.

Author: Hand

Before L. HAND, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

The question to be determined on this appeal is whether Frank J. Cregg, Jr., or Frank T. Sheridan, received a majority in number and amount of the votes of the creditors of the bankrupt Julian S. Brown and was therefore the duly elected trustee. An order of the referee approving the appointment of Cregg was sustained by the district court on review. We think that it was right and should be affirmed.

The referee reported that twenty-one claims, totaling about $166,000, were voted in favor of Cregg, and nine, totaling about $139,000, were voted in favor of Sheridan, He accordingly declared that Cregg was elected trustee. In reaching this conclusion the referee allowed at $50,000 claim No. 11, which had been filed by Weisberg and Oberdorfer for $98,553. The claim had been valued at $50,000 in the proceeding for the adjudication of Brown as a bankrupt, and this valuation was sustained in our decision affirming the order of adjudication, reported sub nomine Syracuse Engineering Co. v. Haight, 2 Cir., 110 F.2d 468, 470.The correctness of the referee's allowance of the claim of Weisberg and Oberdorfer at $50,000 is the chief matter on which the validity of Cregg's election depends.

The referee held that the decision in the adjudication proceeding fixing the claim of Weisberg and Oberdorfer at $50,000 was res judicata. He accordingly declined in the present proceeding to receive evidence that the claim was fraudulent or was overvalued, or that the pending action in the state court, in which the amont was being litigated, was a bar to allowing it for voting purposes.

The most important point raised on this appeal is whether the referee was right in holding that he was bound by the valuation of certain claims tried by the court in the adjudication proceeding. In this connection we shall first consider the allowance of the claim of Weisberg and Oberdorfer at $50,000 which is typical of rulings upon various other claims. The appellant Haight, as receiver of Salt Springs National Bank of Syracuse, intervened in the adjudication proceeding and litigated the validity and amount of the Weisberg and Oberdorfer claim with the petitioning creditors, contending that it was invalid and should not be counted to prove Brown's insolvency. The petitioning creditors prevailed, the claim was valued at $50,000 by the District Court, and that valuation, as we have already said, was sustained by this court on the appeal above mentioned.

Doubtless the prior decision was not res judicata for the reason that the controversies were not in all respects identical, yet we think it worked an estoppel by judgment which justified the court below in valuing the claim at the amount fixed in the adjudication proceeding. We hold that such an estoppel existed at least between the petitioning creditors and the appellant bank, who were parties both to the adjudication proceeding and the proceeding now before us on appeal. Troxell v. Delaware, L. & W.R. Co., 227 U.S. 434, 33 S. Ct. 274, 57 L. Ed. 586; Virginia-Carolina Chemical Co. v. Kirven, 215 U.S. 252, 257, 30 S. Ct. 78, 54 L. Ed. 179; Sutton v. Wentworth, 1 Cir., 247 F.493, 501. The bank had full opportunity to litigate the validity of the Weisberg and Oberdorfer claim in the proceeding for adjudication, did litigate it in that proceeding both before the District Court and the Circuit Court of Appeals and, thereupon, this court approved the value of the Weisberg and Oberdorfer claim at $50,000. The petitioning creditors have an interest in the recognition of the claim at its former valuation since a valuation of it at a lesser amount, or an invalidation of it altogether, might have prevented the election of Cregg for whom they voted as trustee. The appellant was not in a position to attack the amount allowed by the referee in the proceeding for adjudication after once litigating the question there. The only persons who might have complained of the recognition of the claim of $50,000 would be either Weisberg ans Oberdorfer or other creditors who had not participated in the proceeding for adjudication. None of these creditors have appealed. Weisberg and Oberdorfer accepted the liquidation of their claim in the sum of at least $50,000 by voting it for that amount.

The petition for adjudication to some extent resembled a class suit in which the petitioners were acting on behalf of all creditors in determining the liabilities of the bankrupt. We see no objection to regarding the valuation of $50,000 arrived at in the face of the appellant's opposition as binding not only on the appellant and the petitioning creditors, but also on the appellant and Weisberg and Oberdorfer when the latter filed proof of their claim and, when voting it at $50,000, argued that a valuation for at least that sum was res judicata. Cf. Myers v. International Trust Co., 263 U.S. 64, 44 S. Ct. 86, 68 L. Ed. 165; Gratiot County State Bank v. Johnson, 249 U.S. 246, 39 S. Ct. 263, 63 L. Ed. 587.

It may be added that even if lack of mutuality were thought to preclude the court below from recognizing the prior decision as to the amount of the claim of Weisberg and Oberdorfer, there is a theory other than that of estoppel by judgment upon which the referee ought to have adopted the prior liquidation of their claim. 11 U.S.C.A. § 93 sub. e provides that claims of secured creditors "may be temporarily allowed to enable such creditors to participate in the proceedings at creditors' meetings held prior to the determination of the value of their securities * * * , but shall be thus temporarily allowed for such sums only as to the courts seem to be owing over and above the value of their securities * * * ". To obviate the relitigation of this claim, already before the court in two prior proceedings, the referee properly granted a temporary allowance based upon the earlier decision instead of delaying the election to await further testimony.

We do not question the correctness of the decision of the Seventh Circuit in Re Continental Engine Co., 234 F. 58, 60, where Judge Mack, adopting the views expressed in the dissenting opinion of Sanborn, J., in Ayres v. Cone, 8 Cir., 138 F. 778, held that the valuation of a claim in a proceeding for adjudication "cannot estop the trustee acting on behalf of all creditors or any noncontesting creditors from denying the validity and provability of [the] claim." Here the original valuation of the claim was not being relied on as conclusive if reconsidered under General Order 21(6) of the Supreme Court, 11 U.S.C.A. following section 53, but only as a basis for allowing the claim in the absence of any proceeding for reconsideration. While the value, though once determined, may still be subject to reconsideration for cause on the petition of the trustee, or a creditor, under 11 U.S.C.A. § 93 sub. k of the Bankruptcy Act, and General Order 21(6), we see no reason why the value estimated in the adjudication proceeding should not have been adopted at the time of the election of the trustee. The appellant offered before the referee to prove that the Weisberg and Oberdorfer claim was fraudulent, but it seemed to base its contention only on the fact that the proof of claim filed was for $98,553, after Judge Bryant had already estimated it in the adjudication proceeding at only $50,000. A further objection was made that the claim was pending in the state court. It had, however, already been liquidated at $50,000 in the adjudication proceeding and no facts were presented by petition, or under oath, justifying a reconsideration. We accordingly sustain the court below in overruling the objections precluding the proof offered and in allowing the claim at $50,000.

Claim No. 9 of First Trust & Deposit Co. was allowed by Judge Bryant in the former proceeding at $67,500 and interest. This allowance was expressly confirmed by this court on appeal. 110 F.2d at page 470. The claim was voted for Cregg at only $61,000, doubtless because the referee did not deem it important in view of the aggregate of the claims so voted to compute the interest up to the date of filing the petition. The objection that the claim was pending in the State Court was properly overruled because it had been already liquidated in the proceeding for the adjudication of bankruptcy. Claim No. 7 of First Trust & Deposit Co. allowed at $5,000 by Judge Bryant and by this court in that proceeding, was also voted for Cregg. These two claims, adjudicated by this court in the former proceeding at $67,500 and $5,000 respectively, should be counted in favor of Cregg at the total of at least $72,500. This claimant was a party to that proceeding and appellant contested its claim.

Claim 8 of First Trust & Deposit Co. was allowed at $1,108.50 and voted for Cregg. The doctrine of estoppel by judgment in the former proceeding may not apply to Claim 8 because it is not certain that it was passed on by this court. While it was allowed by the referee on the ground that it had been liquidated by Judge Bryant in the adjudication proceeding it is by no means certain that an estoppel by judgment existed in respect to a claim which had not been specifically allowed by this court on the former appeal. Probably it did not exist for the reason that the validity of the claim was not necessary to sustain the decision affirming the order of adjudication inasmuch as the claims we specifically allowed were in themselves sufficient to establish insolvency. We shall accordingly disregard Claim No. 8 in casting up the votes for Cregg.

Coming now to claims which this court did not refer to in the last appeal, we find that the following voted for Cregg, were duly established before the referee and ...


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