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Gramil Weaving Corp. v. Raindeer Fabrics Inc.


decided: December 7, 1950.


Author: Swan

Before L. HAND, SWAN and FRANK, Circuit Judges.

SWAN, Circuit Judge.

This is an appeal by a judgment creditor of Raindeer Fabrics, Inc., debtor in possession, from an order of the district court confirming an order of the referee which dismissed on the merits a petition of the creditor that its secured and unsecured claim be determined pursuant to section 57, sub. h of the Act.*fn1 The principal contention upon the appeal is that the referee lacked jurisdiction to dismiss the claim on the merits.

The facts are somewhat involved. An involuntary petition in bankruptcy was filed against Raindeer Fabrics, Inc., on April 22, 1949 by a creditor other than the appellant. On May 18, 1949 the alleged bankrupt filed therein a petition for an arrangement with its unsecured creditors pursuant to Chapter XI of the Act.*fn2 Prior to the bankruptcy Gramil Weaving Corp., the appellant, had obtained in a New York court a judgment against Raindeer Fabrics, Inc. for $11,750.04 for goods sold and delivered to it. The following day, December 29, 1948 the judgment creditor caused an attachment in a suit brought by it in a Massachusetts court to be served on Newport Finishing Corporation which was in possession of part of the merchandise on the sale of which the attaching creditor's judgment was based. In the Massachusetts suit Newport Finishing Corporation set up a lien for storage charges and attorney's fees, and a New York partnership named Hilma Fabrics, as an adverse claimant, asserted that it had purchased the merchandise from Raindeer Fabrics, Inc. on December 10, 1948. Raindeer itself defaulted in the Massachusetts suit, but got from the New York court a stay of enforcement of the judgment obtained by the appellant. This stay was vacated on May 12, 1949 but in the meantime, the creditor which had filed the bankruptcy petition against Raindeer obtained from the bankruptcy court an ex parte stay of proceedings in the Massachusetts attachment suit. So matters stood when the appellant filed in the bankruptcy court its amended petition on December 14, 1949. This petition alleged the petitioner's judgment in New York and attachment in Massachusetts, asserted that the sale of the merchandise under attachment would not realize enough money to pay the judgment, and asked the referee in bankruptcy to ascertain the value of the security, either by sale under the attachment or by sale controlled by the bankruptcy court, and to permit the petitioner to object to the arrangement, if it shall so desire to do, with respect to its unsecured claim. Service of the amended petition was had upon the debtor, and service was attempted to be made upon Hilma Fabrics by serving a person in charge of the office of said partnership. Hilma Fabrics did not appear or answer. The debtor's answer denied that the petitioner was a secured creditor, and alleged that the debtor was insolvent on the date of the attachment.*fn3 At the hearings no evidence was presented with respect to the insolvency of the debtor but Raindeer's president, who was called as a witness by the petitioner, testified that on December 10, 1948 Raindeer sold the merchandise to Hilma Fabrics for $4,351.71 and had notified Newport Finishing Corporation to hold it subject to Hilma's order. This testimony was corroborated by invoices to Hilma and a letter to Newport Finishing Corporation. It also appeared that the debtor's schedules listed the account owed by Hilma, not the merchandise in Newport's possession, as assets. The referee found as a fact that the sale was made and the goods appropriated to Hilma on December 10, 1948 and as a conclusion of law that the petitioner was not a secured creditor. He dismissed the petition on the merits.

By statutory definiton, section 1(28),*fn4 a "secured creditor" is one "who has security for his debt upon the property of the bankrupt of a nature to be assignable under this Act. * * *" Hence it necessarily follows that the appellant was not a secured creditor if Raindeer had transferred its title by a valid sale prior to Gramil's attachment of the goods.*fn5 The bankruptcy court is specifically given jurisdiction to allow or disallow claims of creditors, section 2, sub. a(2),*fn6 and the enumeration of specific powers does not deprive it of any power it may otherwise possess, section 2, sub. b.*fn7 Section 57, sub. h,*fn8 quoted in full in the margin,*fn9 provides that "The value of securities held by secured creditors shall be determined * * * by agreement * * * or litigation, as the court may direct," and the amount of such value credited upon the claim. Since the court had jurisdiction of the subject matter under sections 2, sub. a(2) and 57, sub. h and acquired jurisdiction of the person by virtue of Gramil's petition, it necessarily had power to decide all issues raised. By invoking the court's jurisdiction Gramil not only consented to an initial determination of the validity of its claim, but it also submitted itself "to the court's jurisdiction in respect of all defenses that might be made" to the claim.*fn10 This latter submission necessarily included the defense that the claim was unsecured by reason of the fact that title had passed to Hilma before the goods were attached.*fn11 Although that defense was not pleaded in the debtor's answer, it was raised by the evidence.

It is suggested that the only defense the bankruptcy court could have considered was one interposed under section 67, sub. a.*fn12 Section 67, sub. a provides that a bankruptcy court shall have summary jurisdiction of any proceeding by the trustee or debtor to declare void liens against property of the bankrupt which have been obtained within four months of bankruptcy, in fraud of the Bankruptcy Act or during the debtor's insolvency. Appellant presupposes that section 67, sub. a, provides the exclusive mode of adjudicating the present claim and that the bankruptcy court must have invalidated the lien under that provision or not at all. This argument overlooks the fact that section 67, sub. a provides for summary jurisdiction in proceedings by the trustee or debtor, and that in the present case the proceeding was brought by the creditor itself. Having invoked the court's jurisdiction for the purpose of having his secured claim evaluated, we do not think that the creditor can be heard to say after decision has gone against him that the court did not have jurisdiction to decide all matters relative to evaluating the claim, including the question whether the alleged security was on property of the bankrupt.*fn13

That is not to say, however, that in the circumstances of the present case it was proper for the referee to decide the title question and dismiss the petition. Although the bankruptcy court has jurisdiction, it may, in the exercise of a proper discretion, decline to exercise it if the best interests of the estate and of all interested parties would be better served by permitting an issue to be litigated in a state court.*fn14 In the case at bar we think that the title controversy could best be litigated in the Massachusetts court, where the claims of Hilma Fabrics and Newport Finishing Corporation, as well as of Gramil and the debtor in possession, can be determined in a litigation which will bind them all. Moreover Gramil has suggested that under the Massachusetts law its attachment may reach the unpaid purchase price which Hilma owes the debtor in possession for the alleged sale. Although Raindeer defaulted in the Massachusetts suit, this will not preclude the debtor in possession. A debtor in possession is a fiduciary analogous to a trustee in bankruptcy.*fn15 Section 11, sub. b.*fn16 gives the bankruptcy court specific authority to direct a trustee to defend any pending suit, and we think that in the present case the court should direct the debtor in possession to do so. Furthermore, the appellant's petition asserted a claim as an unsecured creditor in so far as its judgment for $11,750.04 exceeded the value of its security by some $7,000. Under section 57, sub. e*fn17 the unsecured claim should be temporarily allowed.

The order is reversed and the cause remanded for further proceedings in conformity herewith.

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