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In re Koncus

October 23, 1941

IN RE KONCUS ET AL.; KATZ
v.
KONCUS ET AL.



Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; William H. Holly, Judge.

Author: Major

Before EVANS, SPARKS, and MAJOR, Circuit Judges.

MAJOR, Circuit Judge.

This is an appeal from an order of the District Court entered August 9, 1940, denying appellant's motion to vacate an order of July 17, 1940, dismissing a proceeding under Section 74 of the Bankruptcy Act, 11 U.S.C.A. ยง 202.

On June 7, 1935, appellees, as debtors, filed a petition under said Act for an extension of time within which to pay their debts. A plan was proposed by the debtors in which it was represented that they were the owners of no property except an equity in certain described real estate, encumbered by a trust deed given to secure a bonded indebtedness, and that their only creditors were such bondholders. The plan was accepted by a majority of the creditors and confirmed by the court November 4, 1935. The following provisions were contained in the plan, as confirmed:

"The debtors further agree that in the event there is a default in the terms of this said extension, and said default continues for a period of ninety (90) days, then there shall be an immediate liquidation of this estate in this Court.

"It is Further Ordered that this Court retain jurisdiction of the debtors and their property during the period of extension in order to protect and preserve the estate and enforce the terms of the extension proposal."

On the date of confirmation the debtors filed with the court an affidavit which, after referring to their proposed extension plan, stated: "* * * that pursuant to the terms of said extension, the debtors have agreed that in the event of a default continued for ninety days, there shall be an immediate liquidation; these debtors, therefore, further agree that in the event of a liquidation they hereby and herein waive any and all claims for dower and homestead in and to the aforementioned premises." On the same date an affidavit was filed by William Koncus, one of the debtors, in which it was recited that he was a wage-earner, and, referring to the extension proposal, stated: "* * * he has agreed to an immediate liquidation if and when a default continues for ninety days. This affiant, therefore, says that he hereby and herein waives any claim that he might have not to be adjudicated a bankrupt and hereby consents to said adjudication, pursuant to the terms of said Plan of Extension as amended."

On April 11, 1940, A. Gillmer, one of the bondholders, filed his petition in the District Court alleging default in numerous particulars on the part of the debtors and praying for a liquidation of the estate as provided for in the order confirming the extension proposal. The petition also alleged waiver by the debtors of dower and homestead interest in the estate, and waiver by the debtor William Koncus of his rights as a wage-earner and his consent to adjudication and liquidation in the event of default. An answer was filed by the debtors to this petition which denied the various allegations concerning default and requested a dismissal of the petition. It will thus be observed that the only issue arising from the petition and answer was whether there had been default on the part of the debtors. Neither the petitioner nor the debtors requested a dismissal of the proceedings.

The matter was referred to a Special Master. The transcript contains nothing concerning the proceedings before the Special Master except that which is recited in his report filed with the court on June 26, 1940. It appears therefrom that a hearing was had and that the debtors were granted leave to amend their answer, although in what respect is not stated. The report states: "* * * Upon hearing, I found that the aforesaid petition of A. Gillmer for an order of liquidation and adjudication of the debtors could not be granted because said debtor, William Koncus, is a wage-earner, and I also ordered that the aforesaid proceeding be dismissed because of default of the debtors. * * * " The debtors were ordered to file a final report and certain requirements were made as to the payment of fees and costs. On July 17, 1940, the court approved the report of the Special Master, found compliance as to the payment of fees and costs, restored the debtors to the possession and control of the property involved, relinquished jurisdiction, closed the estate and terminated the proceeding. The hearing before the Special Master and the entry of the court's order approving the Special Master's report were without notice to appellant - in fact, so far as the record before us discloses, they were without notice to any of the bondholders except Gillmer.

It was this order of July 17, that appellant, by her motion filed August 1, sought to have vacated. On August 9, 1940, the court denied such motion and it is the action of the court in this respect which is assigned as error on this appeal.

Appellant argues that the court was without authority to dismiss and terminate the bankruptcy proceedings for two reasons: (1) that no notice was given to appellant as is required by Sections 58 and 59 of the Bankruptcy Act, Sections 94 and 95, U.S.C.A., 1938, and (2) that by the terms of the extension proposal and order confirming the same, the court was without jurisdiction to dismiss and had authority only to liquidate the estate in the event of default.

We are convinced that the second reason advanced by appellant must be accepted, and we therefore deem it unnecessary to discuss or decide the first one. A study of the provisions of Section 74, in connection with the confirmation order, leads us to the conclusion that the court was without authority to dismiss the proceeding. Paragraph (i) of the Act provides: "Upon its confirmation an extension proposal shall be binding upon the debtor and his unsecured and secured creditors affected thereby: * * * ." It would thus appear that an order of confirmation is conclusive upon the rights and interests of the parties to the same extent as any other judgment or decree. Paragraph (k) provides for the vacation of a confirmation order which has been procured by fraud, provided application is made by a party in interest within six months. Paragraph (j) provides: "* * * Upon the confirmation of an extension proposal the court may dismiss the proceeding or retain jurisdiction of the debtor and his property during the period of the extension in order to protect and preserve the estate and enforce the terms of the extension proposal." The court did not dismiss the proceeding upon confirmation, but in the language of the statute, retained jurisdiction "in order to protect and preserve the estate and enforce the terms of the extension proposal." It is evident that in dismissing the proceeding, the court was not protecting or preserving the estate and it is further evident that its dismissal was contrary to the terms of the extension proposal. As already pointed out, the proposal, as confirmed, provided that in the event of default continuing for a period of ninety days "* * * there shall be an immediate liquidation of this estate in this court. * * *" To hold that the court may dismiss a proceeding of this character contrary not only to the debtor's proposal as made and confirmed, but to the Statute as well, would seriously impair the efficacy of the Act. It would come near to constituting a fraud upon the creditors whose acceptance has been obtained by, and who have a right to rely upon, the debtor's proposal. A creditor would have no way of knowing whether the debtor was to be bound by his proposal or whether at some future time he could repudiate it by obtaining a dismissal of the proceeding.

In the instant situation one of the inducements offered the creditors by the debtor was that in case of default continuing for a period of ninety days there would be an immediate liquidation of the estate in the court where the proceeding had been instituted. That, no doubt, was one of the inducements which caused a majority of the creditors to accept the proposal. In fact, it might have been the controlling one. It is evident that all of the interested parties recognized the confirmation order as binding from the date of its entry, November 4, 1935, until the debtors were charged with default. The latter, ...


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