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In re Railroad Supply Co.

June 20, 1935

IN RE RAILROAD SUPPLY CO.; J. HENRY SCHRODER BANKING CORPORATION ET AL.
v.
L. S. BRACH MFG. CORPORATION



Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division.

Author: Evans

Before EVANS, SPARKS and FITZHENRY, Circuit Judges.

This appeal assails the District Court's order which allowed one contestant's (Brach Mfg. Co.) claim and disallowed another's (J. Henry Schroder Banking Corporation) claim against the bankrupt estate of Railroad Supply Company. Both claims were based upon the same note. The court declined to adjudicate the rights of said claimants inter se in and to payments made on said note.*fn*

For convenience, L. S. Brach Manufacturing Corporation will be called Brach, and J. Henry Schroder Banking Corporation will be called Schroder.

EVANS, Circuit Judge.

The controversy arose out of an agreement which the parties executed in the hopes that bankrupt might, if additional time were given it, improve its financial prosition and ultimately meet its debts.

The Railroad Supply Company, the bankrupt, owed Brach $75,000 and interest of $4,562.50 on two $37,500 promisory notes due April 10, 1931. On April 9, 1931, Brach and Schroder, who was also a creditor of bankrupt to the extent of $162,162.49, executed a written agreement, which was carried out, whereby Brach agreed to transfer to Schroder, bankrupt's two notes and Schroder agreed to pay Brach $30,000 and to secure from the bankrupt two new demand notes, one for $30,000 payable to Schroder, and one for $49,562.50 payable to Brach, the latter note to be marked that it was subject to the agreement. The latter note is the basis of claim out of which the controversy arises.

Brach filed a claim on the $49,562.50 note payable to it, for principal and interest, a total of $51,191.95. On this note the following legend appears:

"This note is held subject to an agreement dated as of April 9, 1931, between J. Henry Schroder Banking Corporation, Franklin-Washington Trust Company, and L. S. Brach Manufacturing Corporation."

Schroder's claim in bankruptcy was upon the $30,000 note and for dividends to be paid in the bankruptcy proceedings upon the $49,562.50 note to Brach, until the total amount of dividends received by it on both notes equaled $30,000.

Schroder petitioned the court for an order directing the referee to apy dividends on the claim filed by Brach until its claim on the $30,000 note and interest had been paid in full. Brach filed its answer objecting to the petition on the ground that the conflict between it and Schroder was collateral to and not determinable in the bankruptcy proceedings. The trustee also objected to the Brach claim on the ground that the agreement between Brach and Schroder gave the latter preference in payments made thereon. This action of the trustee was uncalled for and outside the scope of his duties.

On May 18, the District Court entered an order which disallowed the claim of Schroder on the $49,562.50 note and allowed the claim of Brach on said note and provided that this determination was without prejudice to a subsequent suit between Brach and Schroder to determine their right to moneys paid as dividends on this claim.

We are satisfied that the decision of the District Court was right in so far as it allowed the claim against the estate of the bankrupt. But whether the real controversy, the contest between the two creditors as to which should receive the dividends up to $30,000, should be settled in this proceeding, or is collateral, is not entirely free from doubt.

Was it the court's duty to inquire into the nature of the agreement, of the existence of which it was fully apprised by the legend appearing upon the note, and to pass upon the rights under the agreement, or did it act properly in merely limiting its determination to deciding ...


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