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In re New York

decided.: June 5, 1952.


Before SWAN, Chief Judge, and AUGUSTUS N.HAND and FRANK, Circuit Judges.

Per Curiam.

Order affirmed on the opinion of the District Court, 105 F.Supp. 413.

FRANK, Circuit Judge (dissenting).

The district judge in his opinion, and my colleagues in adopting and affirming it, have, I think, overlooked the crucial issues which are these: Subdivision c(8) of § 77 - 11 U.S.C.A. § 205, sub. c(8) - requires that the "judge shall cause reasonable notice" to be given, "by publication or otherwise," to creditors "of the period in which claims may be filed," after which period, under sub. c(7), no claim not filed "may participate except on order for cause shown". Is it "reasonable" for the judge in a § 77 proceeding to direct the bankruptcy trustees to give no such notice, other than by publication, to a known creditor? If not, and if no other notice (so to file claims) is given such a known creditor, will the final decree in reorganization destroy the rights of such a creditor whose claim is not covered by the reorganization plan, simply because he has not filed, or sought to file, a claim? As I think the answer to both questions is "No," I would reverse in this case. See Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 70 S. Ct. 652, 94 L. Ed. 865, Smith v. Apple, 8 Cir., 6 F.2d 559, 564, and other cases discussed infra.

The debtor here was the former New Haven Railroad Company. Its reorganization proceedings took place in the United States District Court for the District of Connecticut. The claimant is the City of New York. Its claims consist of tax liens for assessments on some of the debtor's real property in New York City. Because of their nature, the railroad was never personally liable on these claims; they were enforceable only against the specific pieces of real estate assessed. In most instances, the City does not even know the names of the owners of the real estate assessed. For that reason, and because of the expense of collecting by judicial procedure the large number of such claims, the City, since there is no statute of limitations running against the liens, normally collects its due on the sale of the assessed property when the owner seeks to pass a clear title to the purchaser.

Here, the debtor and its reorganization trustees, knowing of the City's claims and, of course, knowing the City's address, never gave the City actual notice, by mail or word of mouth, that on January 4, 1936 the bankruptcy court had entered a bar order, Order No. 32, requiring all creditors to file their claims before May 1, 1936, or have them wiped out. The only notice of the bar order to the City was by newspaper publication which did not name the City and which never came to the City's attention. After the expiration of the period fixed in the bar order, the City (in some way not explained) heard of the pending reorganization proceedings, but never learned of the bar order. In 1936, 1940 and 1942 the trustees had dealings with the City concerning some of its tax lien claims which were then paid in full or (by compromise) in part - without the City filing any claim in, or appearing in, the reorganization proceedings, although those claims were of the same kind as the claims here in dispute. The trustees then never even hinted to the City of the making of the bar order or suggested that the City's remaining $134,000 of claims would be destroyed if the City did not, by leave of court, file claims in the proceedings.

1.Undeniably, there was a clear violation in these proceedings of the notice requirements of § 77, requirements designed for the protection of creditors. This chapter of non-compliance begins with a failure to comply with subdivision c(4) of § 77. That subdivision says that the judge shall direct "the * * * trustees * * * to * * * file with the court a list of all known * * * creditors of the debtor, and the * * * character of their debts, claims, and securities, and the last known post-office address or place of business of each * * * creditor." The judge never directed the filing of such a list.No list was ever filed containing the name of the City or referring to its claims, although the new railroad freely admits that the debtor and the trustees knew about them.

The new company argues, unreasonably I think, that, even if such a list had been prepared, the City's name would have been omitted and properly so because the debtor and the trustees had, from the beginning, disputed the validity of the City's claims. The error of the argument is that the statute clearly contemplates the inclusion in that list of doubtful or disputed claims, since it specifically immunizes the debtor or its trustees from any bad effects therefrom: "The contents of such lists shall not", says subdivision c(4), "constitute admissions * * * in a proceeding under this section or otherwise," But this argument does lead to a suspicion that the real reason behind the trustees' silence may just possibly have been that something would happen exactly like that which did happen here, i.e., the City, not receiving notice of the bar order, would not file claims; its unfiled claims would be bypassed in the reorganization plan; and the new company would then assert that, by the final decree, those claims were expunged.

The failure of the judge to direct the trustees to file a proper list containing the names and addresses of known creditors, and the failure of the trustees to file one, was followed by a further signal failure to comply with the statute, and led to the fact that the City was not properly notified, and did not learn, of the bar order: When the judge came to ordering notice to creditors of that bar order, he did not provide that notice by mail be given to all known creditors with known addresses (a class which included the City). Instead, he adopted the following classification: (1) notice by mail to be given all creditors who had entered appearances up to that date (whether or not their claims had been allowed or were considered "valid") and also to certain prominent indenture trustees whose liens were junior to the City's; (2) notice by publication to all other creditors, i.e., all non-appearing creditors - whether known or unknown.

The judge, in effect, substituted, as far as notice of the bar order was concerned, "appearing" creditors for "known" creditors. Section 77, sub. c(8), in contrast, requires that "reasonable notice of the period in which claims may be filed, * * * be given creditors * * *." It is not by accident that the provision for a list of "known" creditors, § 77, sub. c(4), precedes § 77, sub. c(8): Congress intended that the judge should cause appropriate notice to be given to all "known" creditors, and contemplated that such notice would be different from that given unknown creditors.

Subdivision c(8) does not, I think, sanction an arbitrary distinction, as regards such notice, between appearing and non-appearing creditors. Such a distinction is unreasonable. It runs exactly contrary to the giving of "reasonable" notice. For obviously it is not the "appearing" creditors who are most in need of notice of the bar order. Their appearances show they already have an active interest in the proceedings. It is precisely those known creditors who have not appeared - creditors like the city - who need the notice, prescribed by statute, of the deadline for filing claims.

2. It is most important, then, that notice by publication does not constitute "reasonable notice" in circumstances like these, where the creditors are known and can easily be notified by mail. This has been definitively settled by Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 70 S. Ct. 652, 657, 94 L. Ed. 865. There a New York statute provided for the cutting off of claims to a common trust fund after notice, by publication only, to beneficiaries about a proceeding brought by the trustee to settle accounts. It was held unconstitutional as to those beneficiaries whose names and addresses were known, and who could be easily notified by mail. Said the Supreme Court: "* * * when notice is a person's due, process which is a mere gesture is not due process. The means employed must be such as one desirous of actually informing the absentee might reasonably adopt to accomplish it. * * * It would be idle to pretend that publication alone as prescribed here, is a reliable means of acquainting interested parties of the fact that their rights are before the courts. It is not an accident that the greater number of cases reaching this Court on the question of adequacy of notice have been concerned with actions founded on process constructively served through local newspapers. Chance alone brings to the attention of even a local resident an advertisement in small type inserted in the back pages of a newspaper, and if he makes his home outside the area of the newspaper's normal circulation the odds that the information will never reach him are large indeed. The chance of actual notice is further reduced when as here the notice required does not even name those whose attention it is supposed to attract, and does not inform acquaintances who might call it to attention. In weighing its sufficiency on the basis of equivalence with actual notice we are unable to regard this as more than a feint.* * * Where the names and post office addresses of those affected by a proceeding are at hand, the reasons disappear for resort to means less likely than the mails to apprise them of its pendency.The trustee has on its books the names and addresses of the income beneficiaries represented by appellant, and we find no tenable ground for dispensing with a serious effort to inform them personally of the accounting, at least by ordinary mail to the record addresses."

The Mullane case summarized what the Supreme Court had been saying for a long time before. Hess v. Pawloski, 274 U.S. 352, 47 S. Ct. 632, 633, 71 L. Ed. 1091, upheld a non-resident motorist statute, providing for service on the non-resident by serving the registrar in the state where the accident occurred and notifying the non-resident motorist by registered mail, because "It is required that he (the non-resident) shall actually receive and receipt for notice of the service and a copy of the process." Cf. Wuchter v. Pizzutti, 276 U.S. 13, 48 S. Ct. 259, 72 L. Ed. 446 (where a non-resident motorist statute not providing for mail notification was held lacking in due process); International Shoe Co. v. State of Washington, 326 U.S. 310, 66 S. Ct. 154, 90 L. Ed. 95. See also 2 Moore, Federal Practice, par. 4.16 (2d ed. 1948). In McDonald v. Mabee, 243 U.S. 90, 37 S. Ct. 343, 61 L. Ed. 608 (holding that notice by publication was inadequate to secure jurisdiction over a defendant technically domiciled in Texas but who had actually gone elsewhere to establish residence, although in the same circumstances personal service at his Texas abode might have sufficed), Holmes, J., said: "great caution should be used not to let fiction deny the fair play that can be secured only by a pretty close adhesion to fact. * * * To dispense with personal service the substitute that is most likely to reach the defendant is the least that ought to be required if * * * justice is to be done." For constructive notice is a fiction.*fn1

3. Although the City did not receive reasonable notice of the bar order because the district judge neglected to comply with subdivisions c(4) and c(8), the judge now holds (with my colleagues' approval) that the City has lost its rights because it neglected to follow up constructive notice. The judge rests this harsh conclusion on the fact that the City learned, in an unexplained way, not of the bar order, mind you, but merely of the existence of the reorganization, in 1936 (as near as we can tell, after the end of the original period for filing claims but in time to apply to the court for late permission to file). However, without some specific statutory provision imputing knowledge of the bar order to anyone merely ...

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