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In re Federal Facilities Realty Trust

March 15, 1955


Author: Lindley

Before DUFFY, Chief Judge and MAJOR and LINDLEY, Circuit Judges.

LINDLEY, Circuit Judge.

Darrow, an undischarged trustee of both debtors, Federal Facilities Realty Trust and National Realty Trust, hereafter referred to as Federal and National, appeals from an order of the District Court, sitting in bankruptcy in reorganization of the debtors, denying him the right to present a petition to have the court subject a part of an amount heretofore ordered paid to Kulp and Johnson, employees of Darrow while he was active as trusted, to his claim to some forty-three thousand dollars and expenses incurred.

In his petition Darrow recited that he had been appointed trustee of both estates in 1935, and had served as such until August 10, 1943, when a successor trustee was appointed; that he has never been discharged and that his final trustee's account is still pending before the court. Among other facts, as he averred, are the following: Jacob Kulp and Myrtle Johnson were employed by him as fiduciary employees and agents from 1935 until the cessation of his active duties in 1943. Myrtle Johnson has died and has been succeeded in the proceedings by her Administrator, Edythe Johnson. Her estate is insolvent. Subsequent to Darrow's resignation, in the course of administration, certain surcharge demands were made against him on account of the acts of his two employees, with the result that the District Court ordered him to repay to the estate some forty-three thousand dollars. Upon appeal this Court reversed, 184 F.2d 1. However, the Supreme Court, in Mosser v. Darrow, 341 U.S. 267, 71 S. Ct. 680, 95 L. Ed. 927, reinstated the judgment of the District Court. Neither this court nor the Supreme Court found that Darrow had been guilty of any acts on his own part resulting in the loss to the two estates represented by the surcharge, or that he had profited in any way from the wrongful acts of his employees. After reinstatement of the judgment, Darrow paid the forty-three thousand dollars. This amount, according to his petition, thereby became due him from his employees because they had wrongfully diverted funds from the estates to themselves to that extent, for which he had been charged simply because he was responsible for the actions of his employees. Inasmuch as the Court had entered an order allowing Kulp and Johnson some $101,500 in cash and $150,000 in securities as a balance due them, Darrow sought by his petition to reach $43,000 of this fund, plus his expenses, on the theory that, inasmuch as he had been compelled to pay because of the wrongful acts of his employees, he should be allocated those sums from the funds ordered paid Kulp and Johnson. His contention, as set forth in his petition, was that, in equity, the rights of Kulp and Johnson in the sum of money to be paid to them should be subordinated to his claim. This relief, he claimed, he was entitled to as an equitable lien or garnishment of the funds in the estates ordered paid to Kulp and Johnson before they reached his faithless employees. This was, in essence, the substance of Darrow's claim.

One referee held that Darrow had the right to be heard. The District Judge reversed this order and re-referred the petition to another referee as Special Master, who thought it was "pure nonsense." The latter's recommendation that petitioner be denied the right to be heard was approved by the court. This appeal followed. Later in the proceedings, after the appeal had been taken, a supersedeas was allowed by one Judge and, later, denied by another. Darrow has appealed likewise from this order. The two appeals are now before us for disposition.

In the meantime the reorganization proceeding remains in status quo in the District Court. The plan has been confirmed, but there has been no final decree on its consummation as contemplated by Sec. 228 of the Bankruptcy Act, Title 11 U.S.C.A. § 628. Among the matters yet to be considered on final decree under that section are the discharge of the trustee "if any", making such provisions by way of injunction or otherwise, as may be equitable, and closing the estate. It is at this stage of the proceeding, before final decree, that we are asked to reverse the order denying Darrow's petition.

It is essential at the beginning that we establish Darrow's status. As related, he was reorganization trustee for both estates for a number of years. As such, of course, he was a party in interest in the administration of the estate, at all times subject to the court's orders. Later he was relieved of his active duties and a successor was appointed. However, he was not discharged but was compelled under the law, in due course, to file his final account. This has been filed and is still pending. At no time has there been any order divorcing him as a party in interest from the proceeding. He is still subject to the court's orders; his account may be approved; it may be disapproved. He is subject to further surcharges, if the evidence justifies their allowance. In other words, his right to be heard as an interested party in the administration of the estate, is still in existence and will be until the court shall have entered its final decree discharging him as provided by the Act. We think, upon these simple facts, that it cannot be said that he is not a party in interest and as such entitled to be heard on all matters relating to his accounting and as to his rights against the funds in the court's custody.Without regard to the reasoning of counsel on either side, it is our conclusion that until Darrow's account shall have been approved and he shall have been discharged, he is subject to the court's jurisdiction and is a party in interest who has a right to be heard upon anything affecting the res of the estates. It follows, in our opinion, that it was unnecessary for him to present a petition to intervene. As a party in interest he had a right to be heard without intervention. However, it is of no decisive importance, in our opinion, whether he was bound to file a petition for leave to intervene or whether he could have been heard upon his petition as a party in interest. The result, in either case, is the same, if he has shown a right to the relief prayed.

Before attempting to dispose of the appeals on their merits, it may be well to trace briefly the history of jurisdiction in bankruptcy. Among the express grants to the court by Section 2 of the last previous Act were: to allow, disallow and reconsider claims, reduce the estate to money and distribute it, and to "determine controversies in relation thereto." The Act further provided that nothing expressed in the jurisdictional section should be construed to deprive a court of bankruptcy of the power it would possess, were certain specific powers not therein enumerated. 11 U.S.C.A. § 11. These powers were retained and amplified in the present Act, 11 U.S.C.A. § 11, as well as in reorganization Section 77B, 11 U.S.C.A. § 207. In all reorganization proceedings the jurisdiction of the court, both prior to and after the approval of the petition, is the same as in a bankruptcy proceeding upon adjudication, 11 U.S.C.A. §§ 512 and 514.

The word "claims" includes all demands of whatsoever character against the debtor or its property, whether secured or unsecured, liquidated, unliquidated, fixed or contingent. "Debts" include all claims, and "creditors" include the holders of any and all claims. 11 U.S.C.A. § 506. Consequently, any claim which is recoverable either in law or equity is provable in bankruptcy. In re Jordan, D.C., 2 F. 319.

The jurisdiction, within the scope of statutory authority, is paramount, exclusive, complete and unlimited. Pepper v. Litton, 308 U.S. 295, 60 S. Ct. 238, 84 L. Ed. 281; Edelstein v. U.S., 8 Cir., 149 F. 636, 9 L.R.A.,N.S., 236, certiorari denied 205 U.S. 543, 27 S. Ct. 791, 51 L. Ed. 922; Beneficial Loan Co. v. Noble, 10 Cir., 129 F.2d 425. It includes the power to divide assets equitably among creditors and to determine controversies in relation thereto. Gochenour v. George & Francis Ball Foundation, D.C., 35 F.Supp. 508, affirmed, 7 Cir., 117 F.2d 259, certiorari denied 313 U.S. 566, 61 S. Ct. 942, 85 L. Ed. 1526; Story & Clark Piano Co. v. Holmes, 7 Cir., 251 F. 565.

In In re Chicago Railways Co., 7 Cir., 175 F.2d 282, certiorari denied People of State of Illinois v. Sullivan, 338 U.S. 850, 70 S. Ct. 94, 94 L. Ed. 521, we reiterated the truism that the court has power to dispose of all questions as to property in its custody, and to decide all controversies with regard thereto, and, in doing so, is endowed as a court of equity with full power to dispose of all issues raised in the course of the proceeding. This paramount and unlimited jurisdiction includes the allowance, rejection and reconsideration of claims, the reduction of the estate to money and its distribution, the determination of preferences and priorities to be accorded to claims presented for allowance and payment thereof in regular course, all controversies relating thereto, and the supervision and control of trustees and others who are employed to assist them. United States Fidelity & Guaranty Co. v. Bray, 225 U.S. 205, 32 S. Ct. 620, 56 L. Ed. 1055. See also U.S. v. Wood, 2 Cir., 290 F. 109, affirmed 263 U.S. 680, 44 S. Ct. 134, 68 L. Ed. 503; In re Missouri Gas & Electric Service Company, D.C., 11 F.Supp. 434. Furthermore, by express provision, the jurisdiction in reorganization includes all that a court of the United States would have had, if it had appointed a receiver in equity. Title 11 U.S.C.A. § 515.

In Pepper v. Litton, 308 U.S. 295, at pages 304-305, 60 S. Ct. 238, at page 244, 84 L. Ed. 281, the Court said: "By virtue of § 2 a bankruptcy court is a court of equity at least in the sense that in the exercise of the jurisdiction conferred upon it by the act, it applies the principles and rules or equity jurisprudence. * * * The bankruptcy courts have exercised these equitable powers in passing on a wide range of problems arising out of the administration of bankrupt estates. They have been invoked to the end that fraud will not prevail, that substance will not give way to form, that technical considerations will not prevent substantial justice from being done. By reason of the express provisions of § 2 these equitable powers are to be exercised on the allowance of claims, a conclusion which is fortified by § 57, sub. k, 11 U.S.C.A. § 93, sub. k. For certainly if, as provided in the latter section, a claim which has been allowed may be later 'rejected in whole or in part, according to the equities of the case,' disallowance or subordination in light of equitable consideration may originally be made." "A bankruptcy court is a court of equity, § 2, 11 U.S.C. § 11, 11 U.S.C.A. § 11, and is guided by equitable doctrines and principles except in so far as they are inconsistent with the Act", Securities and Exchange Commission v. United States Realty & Improvement Co., 310 U.S. 434, at page 455, 60 S. Ct. 1044, 1053, 84 L. Ed. 1293, citing Bardes v. Hawarden First Nat. Bank, 178 U.S. 524, 534, 535, 20 S. Ct. 1000, 44 L. Ed. 1175; Continental Illinois Nat. Bank & Trust Co. v. Chicago, R.I. & P. Ry. Co., 294 U.S. 648, 675, 55 S. Ct. 595, 79 L. Ed. 1110; Wayne United Gas Co. v. Owens-Illinois Glass Co., 300 U.S. 131, 57 S. Ct. 382, 81 L. Ed. 557; Pepper v. Litton, 308 U.S. 295, 60 S. Ct. 238, 84 L. Ed. 281.

Applying the principles enunciated, it seems to us beyond question, that Darrow had a right to have his day in court. He appealed to a court of equity, acting within the jurisdiction granted by Act of Congress, to make him whole for the fault of his employees as a trustee of the estate, out of the funds still in the hands of the court, before they were paid over to those employees. He was not a stranger to the proceeding; he was one who had been entrusted with the duties of a trustee in reorganization and who had been succeeded by a successor, but whose liability to the estate or the estate's liability to him had not been adjudicated. His accounting with the estate remains to be completed. Before it is completed and while he is still under obligation to account, and the court under obligation to him to establish a fair accounting, he has asked a court of equity that it reimburse him for $43,000 and expenses which he has been compelled to pay, not because of his own dishonesty, but solely because of the faithlessness and misdoing of his employees. This reimbursement he seeks out of funds in the estates, about to be paid to those who caused his loss as trustee. Obviously, on his averments, he is entitled to be made whole, if possible, and, equally obviously, the court having jurisdiction of the employees, the trustee and the funds has a right to do equity in and about the same. We think his petition was clearly within the jurisdiction of the District Court and that he should have had a hearing upon the merits.

It is urged that he is protected by a right of action against the two employees in some other court, but we know of no rule that would relegate him to the expense and delay of another suit when the court has jurisdiction of the parties and the subject matter. Furthermore, it is obvious from his averments, at least one of the employees has died and her estate is insolvent. Consequently, any judgment obtained in any other court would be of no avail. Rather than relegating him to other tardy, expensive and uncertain remedies, we think the court should have ruled that he had a right as a party in interest to assert his equities against the funds of which the court has jurisdiction, in order to ...

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