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In re Sherman Plastering Corp.

January 12, 1965


Author: Moore

Before LUMBARD, Chief Judge, and MOORE and SMITH, Circuit Judges.

MOORE, Circuit Judge:

The controversy now before us presents the not too unusual situation of further litigation arising out of an attempt to settle and avoid a dispute. The parties involved are the Perini Corporation (Perini), general contractor for the con struction of the Rochester, New York Courthouse, Sherman Plastering Corporation (Sherman), to which Perini had subcontracted the lathing and plastering work, and Preiss Trading Corporation (Preiss) which had made capital advances to Sherman and had received an assignment of $25,000 of Sherman's accounts receivable.

On February 28, 1963, Sherman and Perini fell into a dispute over their obligations under the subcontract. Sherman ceased to perform and threatened to remove its men and equipment from the job.

On March 15, 1963, Sherman filed a petition for an arrangement under Chapter XI of the Bankruptcy Act, and was authorized by the United States District Court for the Southern District of New York to manage its property as a "debtor in possession."

The initial meeting of creditors was held on April 11, 1963. Present were Sherman, Preiss, Perini, counsel for the unofficial creditors' committee, and various creditors. An official creditors' committee was elected.The dispute between Perini and Sherman concerning the subcontract then flared up. Sherman claimed that it would be forced to carry out its threat to abandon the Rochester project unless Perini paid additional sums claimed to be due; Perini responded that the removal of the Sherman employees and equipment would make a losing proposition out of what could be a profitable contract.

At the Referee's suggestion, Preiss, Perini and Sherman went into the Referee's chambers to try to settle their differences. The parties reached a settlement which was dictated to a stenographer. Under the agreement Perini was immediately to pay $5,000 to Sherman and $5,000 to Preiss. Sherman abandoned its threat to remove its men and equipment and instead allowed Perini to take over and complete the project. Perini was to retain the Sherman employees and equipment and to pay the cost of completion. Immediately after the close of the April 11, 1963 hearing, Perini paid the $10,000, $5,000 to Preiss and $5,000 to Sherman (debtor-in-possession). The agreement also provided that "at the end of the job, which is prospectively six weeks from date, the general contractor [Perini] will pay an additional $15,000 to the Preiss Trading Corporation and the balance if any which is due, being the difference between the actual cost of the job and the contract price, will be paid to the debtor-in-possession." The Referee heard the stipulation and thanked the parties.

As Preiss construes the agreement, Perini was absolutely obligated to pay Preiss an additional $15,000 on completion of the project and Preiss, in turn, was to cancel the balance of $20,000 due from Perini on its assigned accounts receivable. Perini claims that it was obligated to pay Preiss the additional sum provided there was a surplus of that amount between the cost of completion and the contract price, but agrees that Preiss was to cancel the balance of the assignment on receipt of $15,000 from Perini.

On July 2, 1963 Preiss made a formal written demand on Perini for payment of $15,000. On July 5th Perini wrote to the Referee stating that a dispute had arisen "regarding the liabilities for payment under the arrangement made * * *" at the hearing of April 11th and requesting that a "hearing of all parties concerned be scheduled as soon as possible in order to review the accounting pertaining to this contract at this time." On the same day, Perini wrote Preiss and denied liability under the agreement. This letter enclosed a copy of Perini's request to the Referee and stated that "should some sort of formal notice other than the attached letter be required to bring about such a hearing, [we] would have no objection to your filing this notice so that we may both be heard regarding the matter of your assignment."

Accordingly, on July 11th Perini was ordered to show cause on July 23rd why it should not be forced to complete the payments stipulated in the agreement. A hearing was held on the return date. Perini appeared and urged the merits of its position, i.e., that the payments had been contingent upon profitable completion. No jurisdictional objection was raised at this time by Perini. The Referee, however, on his own motion expressed some doubts as to his jurisdiction and gave Perini leave to file a formal answer to the demand for payment.

The hearing was adjourned to August 8, 1963 at which time Perini filed a formal answer denying liability and objecting to the jurisdiction of the Referee over the dispute in these summary proceedings. The Referee held that he had no jurisdiction and, without prejudice to the institution of a plenary suit, denied Preiss' application for an order directing Perini to pay $15,000 to Preiss.On review, this decision was upheld by the District Court. Preiss now appeals from this decision.

Perini claims that it interposed timely objections to jurisdiction and that it, therefore, never consented to the summary, personal or subject matter jurisdiction of the Referee.

An adverse claimant in bankruptcy proceedings generally is entitled to have his claim determined by a plenary suit rather than by summary proceedings. However, the referee has the power, pursuant to section 2, sub. a (7) of the Bankruptcy Act, to proceed summarily where the property in dispute is in the bankruptcy court's possession or where the objecting party has entered into a compromise valid under the Bankruptcy Act. Thompson v. Magnolia Petroleum Co., 309 U.S. 478, 60 S. Ct. 628, 84 L. Ed. 876 (1940). No distinction has been made between subject matter and personal jurisdiction where the party has subjected himself to the referee's jurisdiction through participation in a compromise. In re Hollingsworth & Whitney Co., 242 F. 753 (1st Cir. 1917); In re Oceanic Ship Scaling Co., 108 F. Supp. 7 (E.D.N.Y.1952).

The present case turns on the status of the agreement of April 11, 1963. If this agreement is a valid and enforceable compromise under the Bankruptcy Act, Perini's jurisdictional objections were not timely since ...

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