Cumberland Glass Manufacturing Co. v. De Witt & Co.

237 U.S. 447, 35 S. Ct. 636, 59 L. Ed. 1042, 1915 U.S. LEXIS 1353

• Court: Supreme Court of the United States
• Decided: May 10, 1915
• Docket: 191
• Status: Published

Opinions

Me. Justice Day

delivered the opinion of the court.

Defendant in error, Charles De Witt, trading as Charles De Witt & Company, plaintiff in the court below and hereinafter spoken of as the plaintiff, brought his action in the Superior Court of Baltimore City, Maryland, to recover of the Cumberland Glass' Manufacturing Company, hereinafter called the Glass Company, upon the ground that De Witt, having entered into a written contract with the Mallard Distilling Company of New York to supply them with certain lettered flasks, the Glass Company, with knowledge of that contract, by and through the medium of their agents, did visit the Mallard Distilling Company, and maliciously and without just cause, with the intent to injure the plaintiff and., to derive a benefit for itself, did cause, induce, and procure . the said Mallard Distilling Company to rescind, break and violate its contract with the plaintiff. Pleas were interposed, and a trial was had in the Superior Court, resulting in a verdict and judgment in favor of the plaintiff, which judgment was affirmed in the Court of Appeals of the State of Maryland (120 Maryland, 381), and the case was brought here.

Summing up the defenses made in the state court, the Maryland Court of Appeals said (120 Maryland, 386) “The defendant interposed three pleas — first that it did not commit the wrong alleged; secondly, limitations; thirdly res judicata, based upon certain proceedings had in the United States District Court for Maryland, and particularly set out in the pleas.”

The Federal question, which is the basis-of jurisdiction here, arises upon the plea of res judicata to which a demurrer was sustained in the Maryland court of original jurisdiction which judgment was affirmed by the Court of Appeals. This presents a Federal question because the plea of former judgment in a Federal court adjudicating a right of Federal origin, asserts a right which if denied made the case reviewable here under § 709, Revised Statutes, § 237, Judicial Code. Deposit Bank v. Frankfort, 191 U. S. 499.

From this plea, it appears that the plaintiff, trading as Charles De Witt and Company, was adjudicated a bankrupt in the United States* District Court of Maryland, on the eighth day of February, 1910; that in the list of creditors, plaintiff listed the Glass Company as a creditor in the sum of $790.03 (which claim was upon a promissory-note); that proof was duly made of this claim against the plaintiff, in the bankruptcy proceeding; and that among the unliquidated assets reported to the bankruptcy court by the plaintiff was a chose in action against the Glass Company, listed as a claim of De Witt’s against the defendant, of unliquidated damages for commissions and breach of contract, in the sum of $940. (The testimony showed that this was the same claim sued upon in the Maryland state court so far as the demand for $800 damages is concerned.) The plea shows that afterwards, on the twenty-sixth day of March, 1910, the plaintiff filed a petition in the United States District Court, setting out that he had submitted a composition to his creditors whereby they were to accept twenty cents on each dollar of their respective claims in full settlement of their demands against him and his bankrupt estate; further, that a majority in amount of said creditors had agreed to accept the terms of the composition agreement, wherefore he prayed that the same be ratified by the court; that the Glass Company did not agree in .writing, pursuant to the provisions of the Bankruptcy Act, or otherwise, to accept said settlement, but as a majority in amount of said creditors did accept the same, it was ratified by the Federal court, and there was allowed to the defendant the sum of $158.01, as a dividend on its claim of $790.03; that no debit was 'made against the Glass Company by reason of the alleged claim of De Witt against it for the sum of $940.

Further, "that under and by virtue of the provisions of § 68-a of said Federal Bankruptcy Act it was and became the duty of the referee in bankruptcy and the trustee in bankruptcy representing the bankrupt estate of said De Witt to investigate and determine the existence and validity of any claim asserted by said bankrupt against any creditor filing his claim against said estate; and thereupon to set off the claim of such bankrupt against his said creditor against the claim of said creditor against the bankrupt, and pay, or demand the payment to the bankrupt estate the difference between the accounts thus stated; that as the said referee, trustee and bankrupt De Witt, the latter the plaintiff herein, did not assert or claim, in said composition account,. that any portion of the aforesaid sum of $940 was justly due and owing by this defendant to the then.bankrupt estate of the said plaintiff, as claimed by said De Witt in his schedule of assets; that this defendant, being led to believe by the action of the said referee, trustee and bankrupt in remaining silent and ignoring said bankrupt’s alleged claim against tins defendant when it was their duty to have spoken and set out the same, if it was found by them or any of them to be due, against said defendant in said composition agreement, did not exercise its right to except to the ratification of said composition account, but suffered said composition account to be finally ratified and confirmed, and unwillingly accepted the settlement of twenty cents on the dollar made according to the tenor of said composition agreement; that this defendant received and accepted its dividend of twenty per cent, therefrom in satisfaction of all its claims against said De Witt and in exoneration by said De Witt from any and all claims which said De Witt at that time had or claimed to have, and this defendant says that the payment to it by said bankrupt of said dividend and its acceptance by this defendant operated. as a final settlement and adjustment, in a court of competent jurisdiction, of any and all claims which the parties to this suit then had, or claimed to have, against each other. Wherefore, this defendant says that the alleged cause of action set out in the plaintiff’s amended narr. is res judicata.”

As it was the effect of the judgment of the state court to deny this plea of res judicata, it will be necessary to consider somewhat the nature of the proceeding.

Compositions in bankruptcy are provided for by the Bankruptcy Act of 1898, c. 541,30 Stat. 544. By § 12 of the Act,.the bankrupt is permitted to .offer a composition after he has been examined in open court or at a meeting of his creditors, and after he has filed in court a schedule of his property and a list of his creditors. Since the Amendment of 1910 the. offer may be made either before or-after adjudication. In order that the composition be effectual, it must be accepted in writing by a majority in number of all the creditors, and the consideration to be paid by the bankrupt to his creditors and the money necessary to pay debts having priority and the cost of proceeding must be deposited in a place to be designated by, or subject to the order of, the judge. The judge shall confirm the composition if satisfied that it is for the best interests of the creditors, that the bankrupt has not been guilty of any of the acts nor failed to perform any of the duties which would be a bar to his discharge, and that the offer and acceptance are in good faith and have not been made or procured by the means prohibited in the Act. Upon confirmation of the composition, the consideration is distributed as the judge shall direct, and the case dismissed.. Whenever the composition is not confirmed, the estate shall be administered as otherwise provided in the Bankruptcy Act.

Under § 70-f of the Act, it is provided that, upon the confirmation of a composition offered by a bankrupt, the title to his property shall thereupon revest in him. By § 21-g of the Act it is also provided that a certified copy of the order of confirmation shall constitute evidence of the revesting of the title, and when recorded, shall impart the same notice that a deed from the trustee to the bankrupt if recorded would impart. The order of confirmation becomes in effect a discharge, and is pleaded in bar with like effect. It operates to discharge the bankrupt from all debts, other than those agreed to be paid by the terms of the composition and those not affected by a discharge. It is thus apparent that, although the composition is provided for by the Bankruptcy Act, it is in some respects outside of the Act, for it is provided that, if the composition is not confirmed, the estate shall be administered in bankruptcy, as in the Act provided.

The nature of composition proceedings is nowhere better stated than by Judge Lowell in In re Lane, 125 Fed. Rep. 772, 773, in which it is said:

“The case of composition is in some respects exceptional. It is a proceeding voluntary on both sides, by which the debtor of his own motion offers to pay his creditors a certain percentage of their claims in exchange for a release from his liabilities. The amount offered may be less or more than would be realized through distribution in bankruptcy by the trustee. The creditors may accept this offer or they may refuse it. For the purposes of the composition all the creditors are treated as a class, and the will of the majority is enforced upon the minority, provided the decision of the majority is approved by the court. Except for this coercion of the minority, the intervention of the court of bankruptcy would hardly be necessary. Section 12-e (30 Stat. 550 [U. S. Comp. St. 1901, p. 3427]) provides: 'Upon the confirmation of a composition, the consideration shall be distributed as the judge shall direct, and the case dismissed. Whenever a composition, is not confirmed, the estate shall be administered in bankruptcy as herein provided.’ Composition is thus treated, even in the act, as in some respects outside of bankruptcy. In the ordinary case of distribution by a trustee, the debtor’s whole property, save that which is exempt, is applicable to the payment of his debts and belongs to his creditors, and not to him, until their claims have been satisfied. After adjudication there is no voluntary offer to pay by the bankrupt, and no bargained release by the creditor. The creditor takes all his debtor’s property whether the debtor likes it or not. . . . The bankrupt’s rights of property arise only in the event of a payment of his creditors in full. If a creditor will not prove his claim, the bankrupt does not take that creditor’s share, but it goes to- swell the dividends of creditors more diligent. Section 66 of the act (30 Stat. 564 [U. S. Comp. St. 1901, p. 3448]) has the same purpose, and does not apply to composition. But if the composition is paid the creditors have no further claim upon the debtor or his property. In a composition the creditor gets, not his share of the bankrupt’s estate, but what he bargained for, and he has no right to claim more.”

The effect of the composition proceeding is to substitute composition for bankruptcy proceedings in a certain sense, and in a measure to supersede the latter proceeding, and to reinvest the bankrupt with all his property free from the claims of his creditors. True the composition proceedings arise from the bankruptcy proceedings, and this part of the statute is to be construed with the entire act. Wilmot v. Mudge, 103 U. S. 217. That the restoration of the e'state to the bankrupt restores to him his right of action upon choses in action there is no question. Stone v. Jenkins, 176 Massachusetts, 544.

With this general view of the nature and effect of composition proceedings, we-come to a consideration of § 68-a of the Bankruptcy Act, under which it is claimed the set-off was adjudicated in the bankruptcy court by reason of the proceedings we have already set forth. Section 68-a of the Bankruptcy Act of 1898 provides that “in all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall' be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid.” The object of this provision is to permit, as its terms declare, the statement of the account between the bankrupt and the creditor, with a view to the application of the doctrine of set-off between mutual debts and credits. The provision is permissive rather than mandatory, and does not enlarge the doctrine of set-off, and cannot be invoked in cases where the general principles of set-off would not justify it. Black on Bankruptcy, § 544; In re Kyte, 182 Fed. Rep. 166. The matter is placed within the control of the bankruptcy court, which exercises its discretion in these cases upon the general principles of equity. Hitchcock v. Rollo, Fed. Cas. 6,535. The section was taken almost literally from § 20 of the act of 1867. In Sawyer v. Hoag, 17 Wall. 610, in considering that section of the act of 1867, this-court said: “This section was not intended to enlarge the doctrine of set-off, or to enable a party to make a set-off in cases where the principles of legal or equitable set-off did not previously authorize it.” While the operation of this privilege of set-off has the effect to pay one creditor more than another, it is a provision based upon the generally recognized right of mutual debtors, which has been enacted as part of the Bankruptcy Act, and when relied upon should be enforced by the court. Bank v. Massey, 192 U. S. 138.

It hence appears that the object of this section was to give the District Court the right to apply the established principles of set-off to - mutual credits, when its action was invoked for that purpose.

The language of the act indicates the necessity of action by the court, for the statute provides that “the account shall be stated” and the one debt set off against the other and the balance only allowed to be paid. This statute recognizes the nature of set-off, as established in common law and equitable procedure.

“By the civil law, when there are cross-claims between a plaintiff and defendant which are so connected with each other that the establishment of one can legitimately defeat, reduce, or modify the other, the defendant is always entitled to insist that his own claim shall be litigated with that of the plaintiff; that both shall be disposed of by one sentence; and that the plaintiff’s recovery shall be limited to what he shall be entitled to, if anything, as the result of adjusting both claims and striking a balance, if necessary, between them; and he does this by bringing' a cross-action (reconventio). Mutual debts do not, indeed, properly constitute cross-claims by the civil law, for they extinguish each other ipso jure, and the party alone in whose favor the balance is, has a claim which can be enforced by action, and his claim is only to the extent of such balance. Therefore a defendant who, at common law,"would have recourse to a statutory set-off, would not, by the civil law, bring a cross-action, but he would plead payment (compensaiio). Nor is a’ defendant, who has a genuine cross-claim, bound to assert it by a cross-action; he may assert it by a wholly separate and independent action. How, then, does a cross-action differ from one which is not a cross-action, and which nevertheless is brought by a defendant against a plaintiff? It is conceived that the essential difference is in the judgment. If a defendant wishes to have his own claim and the plaintiff’s disposed of by one sentence, in the manner before stated, he brings a cross-action. If he wisítes to have his own claim disposed of by a separate sentence, and without any reference to the plaintiff’s claim, he brings a separate action. In the latter case he. may of course choose his own time for suing, and his own court, and may prosecute his action slowly or speedily, as he sees fit, and without any reference to the plaintiff’s action; but in the former case, as he wishes to have his action and the plaintiff’s disposed of together, he must comply with, the conditions necessary for that purpose.” Langdell, Equity Pleading, § 118.

In the present ca ¡e, the Glass Company made no attempt to invoke the action of the District Court in the bankruptcy proceedings. If it had the right to do so, it did not seek the action of the bankruptcy court to state the account or make the settlement, and we have been unable to find any case, and none is called to our attention, in which it is held that simply because of the bankruptcy proceedings and the filing of the schedule and proofs of debt the set-off is automatically made between parties holding mutual credits. On the other hand, as the section indicates, and so far as we know, all the authorities hold, this section is not self-executing, but its benefit is to be had upon the action of the District Court, only when it is properly invoked, and that court has the primary duty of determining for itself whether there are “mutual debts or credits” that should be set off one against the other according to the true intent and meaning of the Bankruptcy Act.

We have no means of knowing what the court would have held had it been asked to order a set-off of the bankrupt’s claim for damages against the creditor’s claim upon a promissory note. (See Libby v. Hopkins, 104 U. S. 303; In re Becker Bros., 139 Fed. Rep. 366; Palmer v. Day, 2 Q. B. 618; and the discussion of the subject in Morgan v. Wordell, 178 Massachusetts, 350.) We need not, therefore, inquire .what that court would have done had its action been properly invoked, nor whether the Class Company could have refused the amount of the composition and applied to the District Court for an order of set-off, nor what would be the right of the Glass Company had it refused to take the composition and undertaken to set off its debt when sued in this case. Indeed, the Glass Company in this suit denied and contested the validity of the plaintiff’s claim. Nor need we discuss the right of the Glass Company to set off this claim had it tried to do so in the state court.

The question arose in that way in Wasey v. Whitcomb, 167 Michigan, 58, in which a suit was brought by the trustee in bankruptcy to recover upon a claim in the state court. This was also the situation in Wagner v. Burnham, 224 Pa. St. 586. In the English case of West v. Baker, 1 Law Reports, Exch. Div. 44, the action was brought by one in whom, under a composition proceeding the court had by order vested the estate, such person having furnished the consideration to carry out the composition, a proceeding authorized by § 81 of the English' Bankruptcy Act of 1869. It was held that in such action the effect of the order was to vest the property of the bankrupt in the plaintiff, subject to the right of set-off as to debts which would have been provable in bankruptcy. No such question arises here, as the plea in this case set up former adjudication in the Federal court, and no attempt was made to plead the right of set-off independently of such plea.

There is lacking in this case the first and most essential element of res judicata; namely, former judgment of á competent court, adjudicating the matter in controversy between the parties, yet res judicata in the bankruptcy court by the former proceedings was the sole contention of Federal right here put in issue.

As already said, it appears in this plea, that the Glass Company took the amount of the composition, twenty per cent, of its full debt, after the composition had been carried by the majority of the creditors, and approved by the court. If, as is now contended, set-off had been automatically worked between these opposing claims, one would substantially have satisfied the other, and the Glass Company would be in no position to claim or receive the dividend that it did receive in the composition. It certainly cannot maintain these inconsistent positions. This point was adjudicated under the former Bankruptcy Act, which for this purpose is substantially the same as the present one, in the case of Hunt v. Holmes, decided in the District Court of Massachusetts, 16 N. B. Rep. 101; S. C., Fed. Cas. 6890, in which the opinion was by Judge Lowell, then District Judge. The learned judge ruled that a creditor who took his composition dividend after the composition was finally passed over his objections, making no attempt to have mutual claims adjusted and set off, thereby waived his claim of set-off; there being no evidence that he received the amount under protest or by mistake or under any other circumstance which would entitle him to a re-hearing or readjustment. In In re Ballance, 219 Fed. Rep. 537, where a creditor filed a petition to vacate a composition upon the ground of fraud, it was held that the petitioner, after a demurrer to his petition had been overruled, could not take the amount of the composition and also take the chance of proving the allegations of his petition to set aside the composition for fraud, but that he must make election as to which form of relief he would accept, and that he could not take his share of the composition as a partial payment and proceed to recover upon the unpaid balance of his claim.

So, in this case, although the composition was carried, as the plea avers, against the objection of the Glass Company, it made no attempt to have the set-off'adjudicated in the bankruptcy court, made no opposition to the confirmation of the composition as was its right if it saw fit 'to do, and took and holds its proportion of the composition offered, in the same manner as other creditors.

As the only Federal question is presented because of the alleged res judicata in the District Court, and for the reasons stated that plea was not good, it follows that there is no error of a Federal nature in' the judgment of the Court of Maryland, and the same is

Affirmed.