A creditor whose claim was included in the schedule is entitled
to share in a composition offered by a bankrupt and duly accepted
by the required majority, although his clam was not proved within a
year after adjudication. P.
265 U. S.
270.
286 F. 72 reversed.
Certiorari to an order of the circuit court of appeals which
affirmed an order of the district court limiting the deposit to be
made in satisfaction of a composition in bankruptcy to the amount
required for claims proven within the year following
adjudication.
MR. JUSTICE BRANDEIS delivered the opinion of the Court.
On November 19, 1920, the Brightwood Foundry Company was
adjudged a bankrupt by the District Court of Massachusetts. On
February 12, 1921, it made an offer of composition to its
creditors. On February 25, 1921, the meeting to consider the offer
was held. [
Footnote 1] The list
of
Page 265 U. S. 270
creditors provided for in § 7(8) of the Bankruptcy Act (July 1,
1898, c. 541, 30 Stat. 544, 548), had been filed by the bankrupt on
February 16, 1921. Among those scheduled was the Nassau Smelting
& Refining Works, with a claim of $11,354.40. It had due notice
of all proceedings, but failed to present its claim for proof until
more than a year after the adjudication. No order was made either
allowing or disallowing it. On March 27, 1922, more than a year
after the meeting to consider the offer in composition, the
bankrupt filed a petition in which it alleged that the offer had
been accepted by the requisite majority of creditors, and that many
who had been duly scheduled failed to prove their claims within the
year after adjudication as provided by § 5n. It prayed for an order
that only such sum be deposited as would be required to pay, in
composition, claims seasonably proved. After due hearing, the
prayer of the bankrupt was granted. Objection had been made by the
Nassau Works, and it filed a petition to revise under § 24b. The
order was affirmed by the circuit court of appeals, Circuit Judge
Anderson dissenting, 286 F. 72, and a petition for a writ of
certiorari was granted, 261 U.S. 612. The question for decision is
whether the deposit must include the amount required to pay
creditors who were named in the schedule but failed to prove their
claims within one year after the adjudication. In other words, are
such creditors entitled to the benefit of the composition?
The Bankruptcy Act provides, in § 5n, that "claims shall not be
proved against a bankrupt estate subsequent to one year after the
adjudication;" in § 12a, that
"a bankrupt may offer, either before or after adjudication,
terms of composition to his creditors after . . . he has . . .
filed in court . . . the list of his creditors required to be filed
by bankrupts,"
and that "action upon the petition for adjudication shall be
delayed until
Page 265 U. S. 271
it shall be determined whether such composition shall be
confirmed;" in § 12b, that the application for the confirmation of
a composition may not be filed in the court until
"it has been accepted in writing by a majority in number of all
creditors whose claims have been allowed, which number must
represent a majority in amount of such claims, and the
consideration to be paid by the bankrupt to his creditors, . . .
have been deposited in such place as shall be designated by and
subject to the order of the judge;"
and in § 12e that, "upon the confirmation of a composition, the
consideration shall be distributed as the judge shall direct, and
the case dismissed." [
Footnote
2]
Composition is a settlement by the bankrupt with his creditors.
In a measure, the composition supersedes, and is outside of, the
bankruptcy proceedings.
Cumberland Glass Co. v. DeWitt,
237 U. S. 447,
237 U. S. 454.
It originates in a voluntary offer by the bankrupt, and results, in
the main, from voluntary acceptance by his creditors. It cannot be
confirmed unless there has been such acceptance by the requisite
majority. When confirmed, the bankrupt is discharged from all debts
"other than those agreed to be paid by the terms of the composition
and not affected by a discharge." § 14c. Thus, the composition
binds creditors with scheduled claims, although they do not prove.
It may be effected before the adjudication. [
Footnote 3] Where the assets have passed to the
trustee pursuant to the adjudication, they are revested in the
bankrupt.
Page 265 U. S. 272
There is no provision in the act which declares, in terms, that
the offer extends only to those who prove their claims. Why should
proof, within the year, of the existence of the debt be required
where, by including the claim in the schedule, it has been admitted
by the bankrupt? Obviously, § 5n does not operate to exclude any
creditor from the benefits of the composition where the offer is
made before there is an adjudication. [
Footnote 4] Section 5n would also have no application in a
great majority of composition cases in which there has been an
adjudication. For the offer is ordinarily made in order to enable
the debtor to resume his business. In the normal case, the bankrupt
is impelled by vital interests not only to make the offer promptly,
but to expedite confirmation. Interruption incident to delay
necessarily impairs the value of a business as a going concern.
Thus, the composition is usually carried through within the year.
Creditors who have failed to prove their claims before confirmation
(from inadvertence or because of their doubt whether it was worth
the trouble and expense) are usually spurred to activity by notice
that money on deposit awaits their application. The cases are rare
in which a scheduled creditor who has had due notice fails to call,
within the year, for the money awaiting him.
Where the distribution is of the bankrupt estate, each creditor
has an interest in the claim which any other creditor may assert.
He is interested in limiting the amount of claims to be allowed,
because the greater the aggregate, the smaller (except where there
is a surplus) will be his dividend. Each creditor is interested
also in limiting the time within which others may prove, because
distribution cannot be made until the close of that period. But
where there is a composition, neither the amount
Page 265 U. S. 273
which a creditor receives, nor the time when he receives it, can
be affected by the amount of others' claims, or by the time of
proof, or by their failure to prove. [
Footnote 5] The rights of each creditor are fixed by the
terms of the debtor's offer, subject only to its confirmation and
the judge's order of distribution. Nor can the time of proof of
claims, as distinguished from their allowance, be of legitimate
interest to the bankrupt. [
Footnote
6] His rights also are fixed by the offer unless where the
legality or the amount of a claim is questioned. No reason is
suggested why Congress should have wished to bar creditors from
participation in the benefits of a composition merely because their
claims were not proved within a year of the adjudication. Failure
to prove within the year does not harm the bankrupt. Why should he
gain thereby? And why should the creditor be penalized by a total
loss of his claim?
The language of the act tends to support the contention that
proof within the year is not essential to participation in the
benefits of the composition. Section 5n declares that "claims shall
not be proved against a bankrupt estate subsequent to one year
after the adjudication." There is no "bankrupt estate" where there
is no adjudication, and even where there is an adjudication, the
proof made
Page 265 U. S. 274
is not against the "bankrupt estate" if a composition follows.
The claim is against funds deposited by the debtor pursuant to a
bargain with his creditors. Allowance of a claim is necessary to
qualify one as a voter on the question of acceptance. Hence,
provision for such allowance had to be made. Section 12a. But after
the composition has been confirmed, allowance of a claim is not
necessary for the purpose of establishing it as against the debtor,
who is then alone interested, if he has already admitted the
liability by including it in his schedule.
Compare Haley v.
Pope, 206 F. 266. Here, the offer was made within three months
of the adjudication. It confessedly extended to all scheduled
creditors who should prove within the year. No reason is shown why
it should be limited to these.
In re Atlantic Construction
Co., 228 F. 571;
In re Fox, 6 Am.Bank.Rep. 525.
Where the offer of composition is not made until after the
expiration of the year, the question may be different.
Reversed.
[
Footnote 1]
A voluntary assignment for the benefit of creditors had been
made September 10, 1920. The creditors elected a trustee in
bankruptcy at a special meeting held March 17, 1922, but he did not
qualify. The assignee under the voluntary assignment remained in
possession of the assets formerly belonging to the bankrupt.
[
Footnote 2]
The official form [No 61] of "application for confirmation of
composition" recites that, after the bankrupt "had filed in court .
. . a list of his creditors, as required by law, he offered terms
of composition to his creditors, . . . ," and "that the
consideration to be paid by the bankrupt to his creditors . . . has
been deposited," etc.
[
Footnote 3]
See Act June 25, 1910, c. 412, § 5, 36 Stat. 838,
839.
[
Footnote 4]
Judge Anderson states (p. 75): "In recent years ,more than
two-thirds of the composition cases in this district have been
without adjudication."
[
Footnote 5]
Prior to confirmation, he may have this remote interest in the
allowance, as distinguished from the proof, of the claims of
others. If he favors confirmation, he will be interested in having
allowed the claims of other friendly creditors whose acceptance is
needed to make up the requisite majority. If he opposes
confirmation, he will be interested in having claims of friendly
creditors disallowed and of having those of hostile creditors
allowed. He may also be interested in inquiring whether a claim
scheduled is fraudulent. This is equally true of cases where there
has been and where there has not been an adjudication.
[
Footnote 6]
He may conceivably be interested in having a claim allowed or
disallowed because of its effect upon the acceptance of his offer
by the requisite majority of creditors. Here also, this remoter
interest is the same whether there has been an adjudication or has
not.