In re GRAHAM & SONS et al. GRAHAM & SONS v. YORE (two cases), 252 F. 93

ALSCHULER, Circuit Judge (after stating the facts as above). 1. It is contended for the creditors objecting to the composition offer that this court cannot take jurisdiction of the controversy either on petition to review and revise or on appeal, and much discussion is presented on behalf of both sides respecting the right of review and mode of appellate, procedure. We are abundantly satisfied that such is the native of die order denying and dismissing the petition to confirm the composition offer that any party aggrieved thereat may properly seek relief in a court of review.

In evident doubt as to which of the two methods of appellate pro - cedure provided for in, bankruptcy matters is applicable, both have been invoked, and appeal from the order and petition to review and revise are both pending.

Section 25a of the Bankruptcy Act (Act July 1, 1898, c. 541, 30 Stat. 553 [Comp. St. 1916, § 9609]) provides for appeals in cases:

(1) From a judgment adjudging or refusing to adjudge defendant a bankrupt; (2) from a judgment granting or denying a discharge; and (3) from a judgment allowing or rejecting a debt or claim of $500 or over.

Section 24a (section 9608) confers appellate jurisdiction in controversies arising in bankruptcy proceedings as to which there would be appellate jurisdiction in other cases; and

section 24b (section 9608) gives Circuit Courts of Appeals jurisdiction “either interlocutory or final, to superintend and revise in matter of law the proceedings of the several inferior courts of bankruptcy.” In Re Friend, 134 Fed. 778, 67 C. C. A. 500, this court considered a petition to review and revise an order of the District Court confirming a composition. The decision turned upon whether petition to review and revise was proper in such case.

It was held to. be improper there because under the law confirmation of the composition discharged the bankrupt from his debts (section 14c [section 9598]), and that appeal was the proper procedure where the order attacked discharged the bankrupt. The question of procedure was again before us in Re McVoy Hardware Co., 200 Fed. 949, 119 C. C. A. 337, which was an appeal from an order of the District Court declining to confirm a proposed composition on the ground that it was unfair to the creditors.

It was held that where, as in that case, the proposed composition was rejected upon grounds which did not or could not determine the question of the right of the bankrupt to a discharge, the question of the bankrupt's discharge was not involved in the order, and that such an order was not within the purview of the statute granting the right of appeal, and the appeal was accordingly dismissed. We see no reason to depart from tire principles declared and applied in these cases.

In the case at bar the order dismissing the petition for confirmation was predicated wholly upon the proposition of law that the proposed offer was not a composition within the meaning of the Bankruptcy Act, and it in no manner involved the question of the right of the bankrupts to be discharged. Under these circumstances we conclude that what is here involved is a matter of law arising in the bankruptcy proceedings, and is reviewable in this court upon petition to review and revise, and not on appeal. 2.

From the report itself it appears that the issue heard by Referee or Special Master Wean was the one made by the court’s order of March 8th, which had to do only with the sufficiency of the specifications of objection to the composition, and bankrupts’ motion to' strike out and dismiss them.

That nothing else was then involved or heard is further apparent from this language of the .report: “The real question to be determined by tbe court is the sufficiency or insufficiency of the specification of objections as to matters of law and form, whether on its face it sets forth grounds of law or of fact in legal form sufficient to defeat the confirmation of the proposed composition and to apprise the parties and the court of what the proponents of the composition have to meet.” Bankrupts’ exceptions and motion which were the subject-matter of the order of March 8th were equivalent to a demurrer by bankrupts to the specifications of objection which had'been filed to the composition offer and petition to confirm it; and the hearing under the reference of March 8th was a consideration of that demurrer, and the opinion and report of the referee or special master a recommendation to the court as to the manner of its disposition.

The order of the court following the report is predicated, directly upon it, and does not purport to be any broader in its scope than the recommendations of the report itself.

But the report (as well as the court’s order predicated on it) goes beyond finding, as it does, “that the specification as a whole is sufficient.” It makes further finding and recommendation that the offer of composition be not approved, and that the petition to confirm be dismissed — a conclusion which, if warranted, might ordinarily be readied, not upon a finding of the legal sufficiency of the specifications of objection to the proposed offer, but upon a hearing of the merits of the specifications of objection.

The first specification of the objection to the confirmation of the composition offer is that the composition is not for the best interests of the creditors. This is amplified by voluminous allegations of facts and conclusions; some of the facts appearing of record in the cause, and others not.

When the court entered its order predicated upon the report, it amounted to an overruling of the demurrer to this specification, as well as to the other specifications, and so far. as concerns the exceptions and motion to- strike out the specifications, which were the subject-matter of the order of reference of March 8th and of the hearing "which resulted in the order, the situation was as though the exceptions and motion to strike had never been filed; and ordinarily the original objections and the specifications thereof would have stood for hearing, just as they did under the order of February 28th.

Upon those objections and their specifications the objecting creditors, as well as the proponents of the composition offer, were entitled to a hearing, and to the judgment of the judge upon the merits.

Section 12c of the Bankruptcy Act (section 9596) requires the date and place to he fixed for the hearing of applications for compositions and objections thereto, and

section XXXII of the Supreme Court’s General Orders in Bankruptcy (89 Fed. xiii, 32 C. C. xxxi) makes provision for the appearance of creditors opposing application, and for filing specifications of objection. Such provisions imply, of course, the ac - cording of reasonable opportunity to all concerned for having objections beard and passed upon.

The theory upon which, the referee or special master, after holding the specifications of objection to be upon the whole sufficient, proceeded without further hearing to find and recommend that the petition to confirm the composition be denied and dismissed, as well as that upon which the court adopted such recommendation and entered an order accordingly, is not set forth in the report, except as inferentially it may be gathered from the discussion therein that the demurrer, by way of the exceptions and motion to dismiss the petition for confirmation, was carried back to the offer of composition itself, and sustained thereto upon the ground that the proposed composition offer was not a composition in contemplation of the Bankruptcy Act, and that upon its face the court had not the right, power, or discretion as a matter of law to confirm the composition proposed.

Such a course may be unobjectionable, where it conclusively appears as a matter of law that the original pleading (in this case the offer of composition and petition to confirm) would in no event and under no circumstances, and in no possible stale of the proof which might appear upon the hearing of the composition or objections thereto, warrant the court in confirming the offer.

This must have been, and evidently was, the view of the special master and of the court respecting this composition offer, and looking to the report it seems that the moving consideration for such conclusion is the assumption that the composition offer is upon its face nothing more or less than a general assignment of the property of the bankrupts for the benefit of their creditors, and is therefore under the Bankruptcy Act no offer of composition which the court has any lawful right to entertain.

This becomes, therefore, a determining factor in this controversy, for it is plain that the court did not by its action herein undertake to decide whether or not in fact the proposed composition was for the best interests of the creditors, as provided in

section 12d of the Bankruptcy Act (section 9596). That the making of a general assignment for the benefit of creditors is of itself

an act of bankruptcy, the Bankruptcy Act unequivocally declares.

Section 3a (section 9587). But does it follow of absolute necessity that, bankruptcy having intervened, a proposed composition which, without bankruptcy, would have been the equivalent of a general assignment for the benefit of creditors, vitiates per se such a composition offer? The statute, which is the sole source of authority for composition offers in bankruptcy, provides that “a bankrupt may offer, either before or after adjudication, terms of composition to his creditors,” etc.

Section 12a (section 9596). It does not undertake to prescribe the kind or character of offer which may be made, nor fix bonds or limitations of any sort. Any offer of composition is within the statute, and when made to the creditors should be disposed of as the statute further specifies.

Section 12d provides: “The judge shall confirm a composition if satisfied that (1) it is for the best interests of the creditors; (2) the bankrupt has not been guilty of any of the acts or failed to perform any of the duties which would be a bar to his discharge; and (3) the offer and its acceptance are in good faith and have not been made or procured except as herein provided, or by any means, promises, or acts herein forbidden.” The tests for confirmation thus fixed to be applied by the judge do not presuppose or exclude any particular kind or form of offer, but relate to any offer of composition; and whatever its form or kind, if the judge is satisfied that it meets the prescribed statutory tests, he confirms it, otherwise he rejects it.

From the fact that a general assignment made before bankruptcy is in itself

an act of bankruptcy, it by no means follows that a composition offer made after bankruptcy, though the substantial equivalent in its results to the creditors of a general assignment for the benefit of creditors, had it been carried out before bankruptcy, is therefore in law no offer of composition at all. An assignment for the benefit of creditors is the act of the debtor alone, without sanction of any court, and is such an admission of insolvency or of inability to pay that the statute has declared it to be

an act of bankruptcy. But, bankruptcy having intervened, the offer of composition, whatever it may be, must under the law first have the assent of a majority in number and amount of creditors and the confirmation of the judge, who shall be satisfied that it is for the best interests of the creditors. We see no necessary relation between the defeasibility through bankruptcy of a general assignment for benefit of creditors made before bankruptcy, and the validity of a composition offer after bankruptcy, whatever its terms may be.

That an offer of composition may on its face be suggestive of disadvantage to the creditors as compared with the bankruptcy proceedings does not per se stamp it with invalidity, nor make it proper for the court to reject it without opportunity for its consideration.

That a proposed composition would effect merely the transfer of the administration of the bankrupt estate from the bankruptcy court to the bankrupt himself or to a trustee outside of its jurisdiction, without affording any added advantage to the creditors, might furnish a valid and satisfactory reason for concluding that the composition offer is not for the creditors’ best interests and for rejecting it. It is within the range of possibility that this or any other offer of composition may have advantages and disadvantages to the creditors not apparent upon the face of the offer itself.

While, it might not be wholly proper to suggest such here as occur to us, yet whatever they may be, and however improbable that they have existence in fact, it is not necessary that they be set forth in the composition offer itself, in order that the judge may, as is his duty, investigate the merits of the oiler and of the objections thereto, and determine its advantage or disadvantage to the. creditors. The offer itself need be only what it purports to he, and that which the statute provides for — a statement of the proposed terms of composition.

The facts and circumstances which bear upon the advisability of confirming the offer are no part of the offer itself, hut are properly presentable at the hearing of the offer and of the objections thereto, for ivhieh the law makes provision; and it is for the judge then to determine under all the facts and circumstances then appearing, including the nature of the offer itself, whether he is satisfied that the composition “is for the best interests of the creditors.” But when in the decision of the preliminary motion to dismiss for legal insufficiency the objections to the confirmation of the offer, the court, though holding tlie objections sufficient in law, without further hearing dismissed the petition to confirm the composition offer on the ground that there was no lawful composition offer before the court, it deprived the parties of the hearing to which they werq entitled, and of the judgment of the. judge as to whether or not he was satisfied that the proposed composition was for the best: interests of the creditors, and respecting the other statutory propositions on which he is required to pass before confirming or rejecting the offer.

With the conclusion reached by the court that the specifications of objection are as a whole sufficient in law we concur, hut we disapprove the order in so far as it rejects without hearing the composition offer, and dismisses the petition to confirm it. The appeal is dismissed, and on the petition to review and revise the order of the District Court is reversed, with direction to proceed, in accordance with these views, speedily to hear and determine the petition to confirm the composition offer and the objections thereto. <£=»Foi other cases sec same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes