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Clinton Trust Co. v. John H. Elliott Leather Co.

December 9, 1942


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

Author: Clark

Before SWAN, AUGUSTUS N. HAND, and CLARK, Circuit Judges.

CLARK, Circuit Judge.

The question which the parties have raised on appeal before us is to the status of debts incurred by a corporation after confirmation of a plan for its reorganization in proceedings under former § 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, but before the debtor's total default in carrying out the plan some four and a half years later. A bankruptcy referee sitting as special master ruled that, in view of the court's retention of jurisdiction of the proceedings until the plan was complied with these debts were entitled to priority as "expenses of administration" upon liquidation of the debtor's assets; but the district court declined so to hold and ruled that they had no priority over the older debts of the corporation. While the issue is a narrow one, yet its resolution requires a general consideration of the status of a reorganized corporation and of the debts incurred by it.

The debtor herein, Michel, Maksik & Feldman, Inc., petitioned or reorganization in August, 1935. The court issued various orders continuing the corporation in the management of its estate as a "debtor in possession" and "subject to the control of this court" until further order of the court. Thereafter, a plan of reorganization was submitted which in its final form provided for a 30% shrinkage of the claims of old creditors and payment of the 70% balance in installments ranging over a period of four years. In the event of default in the payment of any installment, a creditors' committee, designated under the plan, was authorized "to require the Debtor to immediately liquidate its assets under the supervision of the Committee or, at the Committee's option, pursuant to the supervision of the United States District Court for the Southern District of New York in the Debtor proceedings now pending." The final paragraphs stated that "the plan of reorganization will be carried out by revesting in the Debtor all of the assets of the Debtor, and will be consummated in the proceedings now pending for the reorganization of said Debtor corporation under Section 77B of the Bankruptcy Act," and that "the Court shall retain jurisdiction over the Debtor and its assets until full payment of creditors' claims above provided for shall have been made."

In January, 1935, the court confirmed the plan. In so doing it restated the provisions as to consummation of the plan thus:

"6. That all of the assets, property and effects of the Debtor, whether now in existence or hereafter acquired by it, shall be deemed to be the property of the said Debtor free and clear of all claims of its creditors, and all such creditors, as well as any other persons holding or asserting claims against the Debtor, be and each of them is forever barred from making or asserting any claim against the Debtor, or against the property, assets and effects of the Debtor, except for the amounts set forth in the annexed schedules. * * *

"8. That this Court retains Jurisdiction over the Debtor and its assets, property and effects until full compliance with this decree has been made. Upon such compliance having been made, the Debtor shall be entitled to apply to this Court for an order terminating this proceeding and containing such other provisions by way of injunction or otherwise as may be appropriate."

Immediately after the entry of this order, the creditors' committee moved for its resettlement on the ground that the order did not fully carry out the provisions of the plan for retention of jurisdiction until final payment of all the claims, which might be some four years later. The court, however, accepted the views of the debtor's counsel that patagraph 8 of the order did just that, and denied the motion.

After confirmation of the plan the debtor carried on its business, subject only to the passive supervision of the creditors' committee, and new liabilities were incurred without consent of the court. Default first occurred in the payment of the installments due on th old compromised debts in June, 1938, after somewhat more than half of each claim had been satisfied. No payments were thereafter made; but the creditors' committee, as authorized by the plan, extended the dates for payments from time to time, and certain of the old creditors executed a "subordination agreement" agreeing to subordinate their claims to those of creditors thereafter extending credit to the debtor. On May 22, 1940, however, the committee decided that the debtor was hopelessly involved, and undertook its liquidation.

In August, 1940, after most of the assets had been reduced to cash, the committee decided to, and did, petition the court to "retake jurisdiction" in order to decide upon a proper distribution of the debtor's funds, and determine respective priorities among various classes of creditors. The prayer of the petition was for an order to the debtor, its stockholders, and all its creditors to show cause why the court "should not resume full jurisdiction of this case pursuant to Section 77B of the National Bankruptcy Act and such other provisions of the National Bankruptcy Act as may be proper and pertain to the situation." Attached as an exhibit to the petition was a "consent" of the debtor that the court "take jurisdiction of its assets and affairs"; neither the "consent" nor the show cause order is included in the record, however.From the recitals in the order granting the petition on October 15, 1940, it appears, also, that the debtor "joined in the request of the creditors' committee," that notice was given to the creditors and all parties in interest, that certain creditors did appear, and that no opposition was interposed on behalf of any of the parties in interest to the granting of the relief set forth in the order.

The order itself is a lengthy document in several paragraphs. The court first found it had jurisdiction to grant the relief; then it did "hereby resume full jurisdiction of the proceedings herein and all of the assets of the debtor"; next it directed the debtor under the supervision of the creditors' committee to reduce all remaining assets to cash; and finally it referred the proceedings to a bankruptcy referee as a special master to set a time for the filing of claims not already filed and determine priorities and allowances and "any and all matters that may at any time arise in connection with the liquidation" of the debtor's assets. It also provided that the orders of the master might be brought before the court on petitions for review within ten days after their signing, but otherwise should be deemed orders of the court and final and binding upon all parties in interest. It directed the master to report, upon the debtor's compliance with the terms of the order, the fact of such compliance, "with his recommendations that the court discharge the debtor and terminate the proceedings." Finally it provided for retention of jurisdiction by the court for the determination of "any matter that may be presented to it in the premises," and stayed all interference with the debtor's assets by all creditors or any other persons.

Thereafter, in July, 1941, the matter came on for a hearing before the master, who in the following October entered an order finding that the creditors who had extended credit after the issuance of the confirmation order were entitled to priority over the compromised claims of the old creditors. Several creditors filed petitions for review - not printed in the record - upon which the district court reversed the referee's finding, ruled against the asserted priority, and referred the matter back for reclassification of the claims, determination of the effect of the subordination agreement, and any other questions properly affecting these issues.

The appeals before us were brought by othe creditors who were adversely affected by the district court's decision. One of these appellants, the Collector of Internal Revenue, claims priority for unpaid income taxes - if not as expenses of administration, then under the Bankruptcy Act, § 64, sub. a(4), 11 U.S.C.A.§ 104, sub. a(4). The other appellants simply seek priority for their claims as expenses of administration, contending that the confirmation order did not close the court's administration of the estate, in view of the provisions of the plan, reenforced by the order, for the court's retention of jurisdiction over the debtor and its assets until all the old compromised debts should be fully paid. On the other hand, appellees, representing old creditors, argue that the provision in the plan "revesting in the Debtor all of the assets of the Debtor" and the corresponding provision in the confirmation order ...

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