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In re Chicago & E.I. Ry. Co.

June 11, 1941


Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; John P. Barnes, Judge.

Author: Evans

Before EVANS, SPARKS, and MAJOR, Circuit Judges.

EVANS, Circuit Judge.

The District Court's refusal to recognize a state court judgment rendered after Sec. 77, Bankr. Act, 11 U.S.C.A. ยง 205, railroad reorganization proceedings were instituted against debtor, as a "proof" of claim, and ordering the claim sent back to the master for hearing on the merits, is the challenge of this appeal.

Appellant recovered a $60,000 personal injury judgment in the Illinois state court, and predicated his claim thereon in debtor's reorganization proceedings in the Federal court.

Debtor filed its petition for reorganization on April 18, 1933. Thereafter - but before appointment of a trustee, and while debtor was operating the road under order of the court - appellant, who was an engineer on another railroad, was seriously injured in a collision, which occurred on August 3, 1933. Two months later, September 15, 1933, Charles M. Thomson was appointed trustee of debtor, and later, on June 20, 1934, appellant sued Thomson as trustee of debtor in the Superior Court of Cook County, for damages based on his injury and the debtor's alleged negligence.

Because the history of the state court suit may have an important bearing on the disposition of this appeal, we outline the occurrences in the state court, as shown by the colloquy*fn1 of counsel before the master.

The state court action was originally brought against the trustee, who filed an answer denying that he was operating the road at the time of the accident. Then an "additional count" was filed, naming both the trustee and railroad as defendants, to which the railroad answered, and the trustee moved (on Nov. 13, 1934) to dismiss himself as a party, on the ground that the alleged tort was committed before his appointment, and he was therefore not liable. No order was ever entered on the trustee's motion to dismiss, but appellant filed (on January 24, 1935) an amended complaint naming only the railroad as defendant. The debtor, by its attorneys, filed an answer to the amended complaint. It was on this complaint and with these parties tht judgment was finally entered upon direction of the Illinois appellate court. Gourley v. Chicago & E. I. Ry. Co., 295 Ill.App. 160, 14 N.E.2d 842.

Appellant filed his claim in the reorganization proceedings, and it was referred to a special master (Mr. Boesel), who received the evidence and heard the attorneys and filed an extremely helpful, careful, and able report finding that the claim based on a judgment rendered by a state court after bankruptcy proceedings were begun, in an action wherein the trustee is not a party defendant, is not "proved" within the meaning of the bankruptcy act.

In upholding the master's report, the trial court said:

"The court agrees with the conclusions of the Master. Section 77, sub. J, of the Bankruptcy Act permits suits to be prosecuted in courts other than the bankruptcy court, but it does not authorize the rendition of judgments therein binding on the debtor's estate unless the estate is represented therein. The Trustee was not a party to the action in the Superior Court of Cook County and is not estopped to question the judgment of that court. The estate of the debtort has never had a hearing and is entitled to one."

The Issues: (1) Is an order made in a court of bankruptcy and holding a state court judgment insufficient to "prove" a claim and directing a re-reference of the claim for a determination of its merits, an appealable order?

(2) What is the effect of a state court judgment entered against the debtor after bankruptcy, on a claim that arose after reorganization proceedings had been instituted under Section 77 of the Bankruptcy Act, and wherein the trustee of the debtor's estate was not a party defendant? If disallowed as a valid judgment against debtor's estate may it be retried and modified in the court of bankruptcy?

(3) Did the District Court (impliedly) consent to the prosecution of the state court suit by authorizing the payment of the costs of such defense, and by its trustee continuing in active charge of debtor's defense, although not a nominal party thereto?

(4) What is the effect of the Section 77, sub. j, proviso?*fn2 Does it authorize the personal injury claimant to take out of bankruptcy cognizance all personal injury cases?

Appellee's position briefly stated is: (a) The U.S. District Court has exclusive jurisdiction of railroad debtors and of all property belonging to such debtors wherever located, after said debtors are adjudicated. (b) No other court may, without the District Court's consent, take jurisdiction of a suit against the debtor, or attach its property for burden its estate with a lien. (c) The instant suit was not authorized by the U.S. District Court and therefore the court wherein the judgment was entered was without jurisdiction of the action. Its judgment is a nullity. It is therefore argued by appellee that the judgment which appellant ...

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