KATCHEN v. LANDY
Legal provision: Bankruptcy Code, Bankruptcy Act or Rules, or Bankruptcy Reform Act of 1978
Argument of Fred M. Winner
Chief Justice Earl Warren: Number, 28 Louis Katchen versus Hyman D. Landy, Trustee in bankruptcy.
Mr. Fred M. Winner: Mr. Chief Justice --
Chief Justice Earl Warren: Mr. Winner?
Mr. Fred M. Winner: – and may it please the Court.
We are here today on a very narrow question.
It is a question having to do with the summary jurisdiction of the referee in bankruptcy and involved in the question is the problem of whether the Seventh Amendment prevents the exercise of summary jurisdiction by a referee in bankruptcy where if a plenary action were filed a jury trial would be available.
We are before the Court on a question as to which there is difference of opinion among the circuits as to the extent of the summary jurisdiction which a referee in bankruptcy has or attempts to exercise.
The Tenth Circuit probably goes farther than any other circuit in its recognition of summary jurisdiction and it holds if I correctly understand the most recent decision of the Tenth Circuit that summary -- that in an instance where a creditor files a claim in a bankruptcy estate and where the trustee seeks to assert a preference by way of counterclaim back against that creditor, the Tenth Circuit apparently go host that the summary jurisdiction does exist if the counterclaim is either compulsory or permissive or would be under the Federal Rules of Civil Procedure if a preference or one or two other things are involved and if the matter is not wholly unrelated to the claim initially filed by the creditor.
Justice Potter Stewart: Mr. Winner that what you just said is what you draw from most recent decision of the Tenth Circuit?
Mr. Fred M. Winner: Yes sir.
Justice Potter Stewart: And you're referring to a decision in this very case --
Mr. Fred M. Winner: Yes sir in the Katchen case, yes sir.
I read the Katchen case to modify an earlier decision of the Tenth Circuit in Interstate, but I believe or I hope I have correctly summarized Katchen as decided by the Tenth Circuit.
I think that perhaps the problem can be best illustrated by a very brief recitation of the facts here.
Here a corporation was formed in April 1960 which had the name of Katchen's Bonus Corner Incorporated.
Contemporaneously with the formation of the corporation, Louis Katchen, the principle stockholder borrowed $40,000.00 from the American National Bank.
Now in fact, the note was signed by Katchen's Bonus Corner Incorporated and Louis Katchen was the accommodation maker.
A few months later, $10,000.00 was borrowed from the North Denver Bank.
Not very long thereafter, they had a disastrous fire which was uninsured.
Within four months of the date of bankruptcy, the corporation caused first $15,000.00 and later an additional of $10,000.00 to be paid on the American National Bank loan on which Louis Katchen was an accommodation maker and did also cause to be paid in full the note to the North Denver Bank on which Katchen was an accommodation maker.
Subsequent to that and prior to bankruptcy, but all within the four months, Katchen paid personally an additional $5,000.00 on the American National Bank note.
Following bankruptcy, Katchen filed a claim as a creditor of the bankrupt corporation for the last $5,000.00 I have mentioned, that is the $5,000.00 which he paid personally on the note and he filed a claim for approximately $4,500.00 worth of rent said to be due him by the corporation on real property he personally owned.
The trustee then asserted four counterclaims.
The four counterclaims were these; the first two involved the payments, the payments which had been made by the corporation on the American National Bank note.
The third one involved the payment made by the corporation on the North Denver Bank note and the fourth one involved a claim which -- in which the trustee said that Louis Katchen had failed to subscribe for his initial capital stock.
The Tenth Circuit held that the claim on the failure to subscribe for the capital stock was wholly unrelated to Katchen's claims and therefore, the trustee could not exercise summary jurisdiction over it.
But the Tenth Circuit held that the referee could exercise summary jurisdiction as to the three payments made by corporate funds on the notes.
It is undisputed that Katchen objected to the summary jurisdiction at the first available opportunity and as I have said the question we have here today is, can a referee in bankruptcy exercise that summary jurisdiction?
Now as we view it, the various circuits which have passed on the question and some of them saying they can exercise of just compulsory counterclaims some on permissive and some on -- or some on both permissive and counterclaim, an attempt seems to go all from a slightly different tension --
Justice Potter Stewart: Do the Federal Rules of Civil Procedure applied in the proceedings before referee in bankruptcy?
Mr. Fred M. Winner: I think not sir.
In their full extent that's what I mean.
Justice Potter Stewart: Yes, that's what I meant to my question --
Mr. Fred M. Winner: In their full scope I think not.
Justice Potter Stewart: So then when we talk about permissive and compulsory counterclaims you mean claims which would be if this were an ordinary civil action in the District Court?
Mr. Fred M. Winner: Yes sir.
The Interstate case out of the Tenth Circuit specifically made reference to Rules 13 (a) and (b) the permissive and the compulsory counterclaim rules under the Federal Rules of Civil Procedure and the seem to key it into that.
But I don't understand exactly how it keys in other than its -- the circuit did do it.
Justice Potter Stewart: It did apply that test?
Mr. Fred M. Winner: Yes sir, they applied that test.
Justice Potter Stewart: Which maybe perfectly proper not by analogy but by definition the Federal Rules of Civil Procedure do not in full force and in -- apply the action before the referee in bankruptcy?
Mr. Fred M. Winner: I believe that is correct, Your Honor, I think clearly it is.
I think that all of the circuits in arriving at their -- in arriving at their results have fundamentally relied upon the decision of this Court in Alexander against Hillman and they read Alexander against Hillman in the way that I just simply cannot read it.
Alexander against Hillman was not a bankruptcy matter.
Alexander against Hillman was an equity receivership.
In Alexander against Hillman after the receivership was started to wind up the affairs of the corporation, some of the corporate officers filed a claim in the receivership.
The receiver filed equitable counterclaims against the corporate officer and this Court held that equity having assumed jurisdiction it would certainly exercise jurisdiction as to all equitable matters and the matter came up primarily as a question of venue.
It said that venue had been consented to and it held that in an equity receivership as to equitable counterclaims, the Court did have jurisdiction.
But there are these distinctions between Alexander against Hillman and the summary jurisdiction which is attempted to be exercised by a bankruptcy referee.
First is the most obvious distinction.
An equitable receivership is not bankruptcy.
Second is the second most obvious distinction.
In Alexander against Hillman, the jurisdiction was exercised as to equitable counterclaims, but in the case today before the Court, the counterclaims are not equitable, they are legal.
They are counterclaims for money had and received.
And if the plenary action had been filed and clearly it could have been, a jury could have been demanded.
The next distinction as I mentioned is that Alexander against Hillman, as we understand the case, involved only and completely the equitable issues coupled with the venue problem.
That I think is a distinction which cannot be said to exist here.
Here we have, as I have said, then counterclaims involving legal issues as to which a jury trial could be demanded.
And we think that has been settled and settled by this Court and I make mention of Schoenthal versus Irving Trust, this in an opinion written by Mr. Justice Butler in 1932.
There, there was a plenary action filed to recover a preference.
Here clearly, a plenary action could have been filed.
There the case was assigned in the District Court to the equity side of the court.
A demand was made for a jury.
This Court held as to an identical type of preference that the preference claim was an action for money had and received that it was error to hear the case on the equity side of the Court and that the defendant was entitled to a jury.
We cannot distinguish that case.
The only thing that can be done as we see it to get around that case is to say that Alexander against Hillman overruled it, but Alexander against Hillman was written only three years after the Schoenthal case.
It was again written by Mr. Justice Butler and makes no mention of the Schoenthal case.
We submit that Alexander against Hillman does not stand in anyway for the propositions for which it has been cited by the circuits.
As is pointed out in Daniel against Guaranty Trust once more written in 1932, this time by Mr. Justice McReynolds.
There the strict question of preference was not involved.
Guaranty Trust within the bankruptcy proceeding had filed a reclamation of certain bonds and the trustee filed a counterclaim against Guaranty Trust and in that counterclaim asked to recover money which the trustee said Guaranty Trust had received after the bankruptcy adjudication.
This Court there pointed out that to put upon a creditor almost, well, this isn't the Court's language of course, but to put on upon a creditor almost the problem of Russian roulette, when you file a claim in a bankruptcy, the Court would be completely unfair that the argument which is made in some of the circuit court opinions that anybody who files a lawsuit is subjected to the hazard of a counterclaim that that argument does not apply.
Sure, you're always subjected to the hazards of a counterclaim, but you're subjected to the hazards of a counterclaim in a court where all of the orderly processes of the court should apply.
And to say that a creditor who by exercising is very, very lawful right of seeking to recover his portion of a debt out of a bankruptcy estate must then subject himself to the risk of a counterclaim based upon a preference without the protections of a full trial in a plenary action is to make the filing of a claim in a bankruptcy estate a matter of serious risk.
Justice Byron R. White: Well Mr. Winner, this is not a strange in the bankruptcy act, how about a set-off?
Mr. Fred M. Winner: Set-off is specifically covered I think, Your Honor.
Justice Byron R. White: Well I grant you it is specifically covered --
Mr. Fred M. Winner: Preferences as in the same claim--
Justice Byron R. White: I know I'm just saying the Bankruptcy Act does [Inaudible] subject creditor who risk with the set-off without any kind of a trial you're talking about?
Mr. Fred M. Winner: That I cannot question but the Bankruptcy Act does not do that--
Justice Byron R. White: Under the extent -- under the extent that a set-off would be involved here -- into that order.
Mr. Fred M. Winner: If it had been a set-off, yes, but that isn't the contention here.
Justice Byron R. White: Well I know because the amount claimed by the creditor is larger than his claim as applied?
Mr. Fred M. Winner: Yes, but here is something that think Your Honor --
Justice Byron R. White: Was that set-off in the rise for preference?
Mr. Fred M. Winner: Sir?
I didn't hear you sir.
Justice Byron R. White: Do you think the trustee could make the claim with a set-off and a preference?
Mr. Fred M. Winner: I doubt it.
Justice Byron R. White: Because that preference has to be determined first?
Mr. Fred M. Winner: Yes sir.
Let me --
Justice Byron R. White: Can he base it on a debt owed by the creditor of the bank?
Mr. Fred M. Winner: Yes.
Justice Byron R. White: Certainly he can.
Mr. Fred M. Winner: Certainly he can.
Justice Byron R. White: And before that you have to find -- you have to adjudicate the debt [Inaudible] in a summary proceeding?
Mr. Fred M. Winner: Let me point out, Your Honor --
Justice Byron R. White: Normally a jury trial would be --
Mr. Fred M. Winner: More important, Your Honor -- there's something I think Your Honor is overlooking.
Your Honor is, I think inherent in what Your Honor says is the thought that the determination of a preference is a part of a bankruptcy proceedings.
Now if that is what Your Honor is saying, Your Honor is in complete disagreement with Schoenthal versus Irving Trust which I have mentioned before and which expressly holds that, and this happens to be a quote “Suits to recover preferences constitute no part of the proceedings in bankruptcy but concerned controversies arising out of it.”
Now if the determination of a preference constitutes no part of the bank -- of the bankruptcy proceeding that concerns controversies arising out of it, I submit Your Honor, that you cannot deprive them of a constitutional right to a jury trial simply at the whim of the trustee by electing to counterclaim within the bankruptcy proceeding and the exercise of summary jurisdiction or electing to proceed by plenary action and most assuredly --
Justice William J. Brennan: Mr. Winner, the trustee or suitor could recover the preference in the state court?
Mr. Fred M. Winner: Under the present statute yes sir.
Justice William J. Brennan: Would they have a constitutional right to a jury trial in the state court?
Mr. Fred M. Winner: Mr. Justice Brennan, I have been dreading that question like the question [Inaudible] [Attempt to Laughter] Under Parker against Clinton which was decided by the Supreme Court of Colorado, the Supreme Court of Colorado held many years ago that there is no constitutional right to a jury trial in Colorado.
Colorado lawyers are aware of that case.
Let me add that I think if I correctly read many of the recent decisions of the Supreme Court of the United States that since the first 10 amendments are becoming rapidly or totally incorporated into the Fourteenth Amendment, I suggest that perhaps this Court has effectively overruled Parker against Clinton.
And so that --
Justice William J. Brennan: Has there ever been any suggestions yet in the Seventh Amendment?
Mr. Fred M. Winner: No sir, I've been saving –
Justice William J. Brennan: -- of the defendant –
Mr. Fred M. Winner: I've been saving that one and nobody has suggested that yet but I think that is probably the logical conclusion which must follow --
Justice William J. Brennan: Do we have to decide that in this case?
Mr. Fred M. Winner: No sir, I couldn't get that into this case.
I couldn't think of a way to do it.
But I do think we have in this case a very squarely whether you can deprive the man of a constitutional right to a jury trial and I suggest this.
I suggest that it is most difficult to interpret the bankruptcy statute and the bankruptcy proceedings in a way that would deprive a man of a right to a jury trial under these circumstances and still adhere to the decision of this Court in Dairy Queen which of course came up long after the Schoenthal the Dan – and the Daniel cases.
But in Dairy Queen, it was so clearly pointed out by this Court that the mandate of the rules, that the rules are not intended to in any way interfere with the – the right to a jury trial and it was so clearly pointed out that where both legal and equitable issues are present in the case, you can't deny a man of a right to a jury trial by simply deciding the equitable issues first.
Chief Justice Earl Warren: Mr. Creamer.
Argument of George Louis Creamer
Mr. George Louis Creamer: Mr. Chief Justice, if it please the Court.
Counsel has mentioned that the issues in this case are narrow and they are in the sense that factually it is uncomplicated narrow.
They are broad in a legal sense in that fundamentally, what is involved in the case seems to be the very foundation and fundamental of bankruptcy law and bankruptcy administration.
Mr. Winner has summarized it quite accurately.
I think the facts about which there is no dispute and thus the Court has doubtless noticed from a record that there is almost no factual problem presented by the record.
Three claims, two of them effectively the same were allowed two different payments to one bank.
And a third claim which was a similar payment to another bank were allowed as preferences; fourth, which was a stock matter was not permitted by the circuit.
Now, we certainly do have very clearly involved here of the problem of Alexander versus Hillman.
It is categorical.
Alexander versus Hillman came out from the Fourth Circuit.
It is a receivership case.
It is a receivership case which has this great cogency to bankruptcy we believe as a receivership case well might have or as any case might have of what the Court said which is cogent in Hillman applies to bankruptcy quite as much as it applies to the receivership situation.
All that had occurred was that there – was a receiver having the assets of an insolvent person in hand.
Other persons, who were debtors or might have been, made the application to share in the receivership assets.
It was held that having made application to the receiver to share in those assets claims with the receiver.
The receiver had a right to offset or to counterclaim on other claims that might be held against the particular persons making the claim and the Court simply said and I think we quote Hillman at 11 of the brief, of our brief.
Respondent's contention means that while they invoke in the Court's jurisdiction to establish their right to participate in distribution, they may deny its power to require them to account for what they misappropriated.
In behalf of creditors and stockholders, the receivers reasonably may insist that before taking out respondents made by the receivership of the Court be required to make restitution.
The requirement is in harmony with the rule generally followed by the courts of equity that having jurisdiction of the parties to controversies brought before them.
They will decide all matters in dispute and to create a complete relief.
Distribution may not be made without decisions of the counterclaims.
Nothing is marked there.
They are part of the subject matter of the main suit than recovery that all through there is belongs.
I think that is probably the essence of Hillman.
Now, the problem is, does that apply in bankruptcy?
Counsel says, that it is alleged and stated by the Court in other cases that there is a jury right with reference to the recovery of a preference.
What counsel that does not do is to draw the distinction of that such a case is a case in which there has not been a claim made in bankruptcy.
The case is not pending in bankruptcy upon a claim of the claimant.
It is one of those situations in which the trustee having such assets as would be assets of the bankrupt state may go out as a party into other parts and bring an ordinary action.
He might bring an action I presume in tort and might frequently do and such a tort action would not be an action in bankruptcy but a declaration that it was not, would not have anything to do with a claim made in bankruptcy.
There perhaps also is an off discussion of the issue by a reference to the summary jurisdiction in bankruptcy.
Bankruptcy is a kind of thing that is sui generis.
It is not legal jurisdiction, while legal jurisdiction it is an equitable jurisdiction.
Now the Court has said it applies basically equitable principles.
It is an extremely broad jurisdiction to meet a specific type of the recurrent and critical economic problem which obviously has its origins in constitutional power in exactly the same fashion the Seventh Amendment guarantee has and the power this Court has said is a --- rather plenary power vested in the Congress over the whole subject of bankruptcies and then the Court has defined subject to bankruptcies extremely broadly.
Now, the statute says specifically Section 2a-7 of the Act through 11a-7 U.S.C that the courts of the United States are hereby invested with such jurisdiction to pause the stage of the bankrupt to be collected, reduce the money distributed and determine controversies in relation thereto.
Now, what are the basic types of controversies?
Well, the essential controversy in bankruptcy is who gets the money that usually it's what occurs and the way you determine it is that the claimants file their claims.
Each claim filed in bankruptcy for every practical purpose is simply a lawsuit instituted against the trustee by the claimant asserting that he has the right to part of whatever is in the hands of or maybe garnered by of the trustee.
If this is a lawsuit and it is a controversy then we would submit that might other lawsuits it has a reverse and then adverse, and the Court trying to completely adjudicate it, must look at its reverse and must look at its odd versus wealth.
Now, if it is such a claim then certainly counterclaims or set-offs must be ascertained to determine if there is a right fundamentally to receive anything out of the pool of the assets and if this is a type of matter applying rules of equitable cognizance as we suppose that it is and as the Court has stated repeatedly that it is, then necessarily, there must be an avoidance of circulative litigation in the matter and there must be avoidance or a determination of whatever is implicit in determining the claim.
But how do you determine if somebody has a right to draw money out of the pool without determining whether that person is of necessity required to contribute into the pool out of which money maybe drawn.
In the first instance, the statute says first; that the courts of the United States have the right to settle the estate of the bankrupt to collect, reduce the money distributed, and determine controversies in the relation thereto.
And the third Section 1668 I believe say that it is incumbent upon the Court also to make determinations of preferences, set-offs and all of the rest of the equitable claims that may derive.
Justice Byron R. White: Mr. Creamer, you have gone much farther than the Court of Appeals I take it that the bankruptcy of the Court jurisdiction over any kind of the claim whatsoever --
Mr. George Louis Creamer: No.
Justice Byron R. White: Well against the creditor who files a claim?
Mr. George Louis Creamer: Not any kind of whatsoever.
I think possibly a claim, the Court of Appeals used rather a broad category.
It withdrew from its Luther position and said that in the present circumstances it would hold to the rule that there might be an adjudication of set-offs equitable counterclaims and claims in the nature of preference or fraudulent allowances, yet stated of that it would not allow claims on a totally unrelated method.
Justice Byron R. White: Although your argument was under jurisdiction --
Mr. George Louis Creamer: I would tend to think logically, it might tend to do so.
I have rather a feeling and it is curious to express it so that that I [Attempt to Laughter] – I would emotionally like to make rule of the circuit as it has announced it because it doesn't seemed to me that the matter of – of the -- such questions as to stop payment are logically awfully much related but I don't think it would be no logical to permit the rule to those go far and of course Luther did permit it to go so far but the Tenth did not follow its own rule in Luther.
And though the current rule of Tenth is I think entirely concurred in by Sixth Circuit that is included in the Tenth, none of them have gone so far as Luther except the Tenth itself.
Justice Byron R. White: Mr. Creamer, I – I – doesn't the Bankruptcy Act provide that a claim may not be allowed if a creditor has received the preference?
Mr. George Louis Creamer: Yes.
Justice Byron R. White: Is – is one of the obligations of the Court or the referee and the Trustee to determine whether this received the preference before the claims about?
Mr. George Louis Creamer: He must do so.
It's absolutely required to determine it.
Justice Byron R. White: Is it the – was – was the dissent below suggesting that in order to disavow a claim based on the receiver of the preference, a trustee must file a plenary suit somewhere to have it determined?
Mr. George Louis Creamer: Yes, that seems to be implicit in Judge Philips' decision and in fact --
Justice Byron R. White: I was saying – I would think the same would be true of a setoff?
Mr. George Louis Creamer: I can see no reason why it wouldn't accept that it seems to be conceded every place that it's ever argued but the setoff whatever this maybe as though it were some kind of anything summarily determinable but you don't know what one is.
It just says, you can of course and it is I think – and submit suspect when anyone says, of course but you can of course determine a set-off whatever this is but you cannot plenarily determine the – the matter of a preference but it is rather like – like it's trying to undo omelets when you get into a state of this kind.
If you can't determine that there has not been a preference, you cannot allow the claim.
If you allow the claim then you are allowing something to be taken out under what I think Mr. Moore or Professor Moore, the editor of Collier has said, allows a terrible kind of logical dichotomy in that if you follow the opposite of this rule, you allow B to receive money from A when A in actuality owes money to B.
And this is the kind of thing that – that generally not to be allowed.
Now, Judge Philips in his decent indicates that there's a method of avoiding this and several other courts following similar reasoning have.
They have said that all of you need to do which I submit is another matter of the same kind of letter in generality which rapidly deteriorates into fattitude and its ponderosity as somebody wants it, but all that you must do is stay execution of rights on the claim or stay payment of the claim until you bring a plenary action.
But this, of course, hits at the very heart of what the problem is because it means that in every single case of bankruptcy and in a major bankruptcy, there maybe several hundred claims sometimes many thousands but several hundred is not unusual then you must go into a -- an investigation in plenary suit of all these matters in each claim holding the entire administration of bankruptcy in suspense until such time as you contemplate the entire plenary operation which effectively means that the entire bankrupt of the state must be dissipated and will be.
And that the fundamental function restorative and distributive of bankruptcy has to be eliminated.
There – there is underlying all of this a notion that the summary jurisdiction is something sinister.
Well the summary jurisdiction isn't anything sinister at all.
The bankruptcy court is the course District Court or is in personnel identical with the District Court of the United States.
But this Court has pointed out frequently that it is merely because the United States judge is a judge in bankruptcy having the right to refer matters to referees and also having the right I presume to people.
Now the matter in bankruptcy for summary jurisdiction then is the basic jurisdiction of the bankruptcy court to administer a system of law which is sui generis highly emulative and palliative in its nature and intended primarily in the states as distinguished from England to be restorative in its effect and certainly having a tremendously significant basic economic function and modality of operation.
If it is necessary to say that every action where there maybe thought to be involved a claim for a preference must involve a plenary action in a -- another court then bankruptcy of itself must grind to a rather dreadful halt and that what is it is what I would submit is involved here.
It is really what most of the writers have stated.
Now the conclusions as to the Hillman application to the bankruptcy situation were drawn first in Florance against Kresge which was asserted which was reversed in Hillman.
And all that the Fourth Circuit said was, “We were mistaken in the receivership case according to the Supreme Court only a short while ago.
Therefore, we will take the opposite tax in bankruptcy and assume that there being the same economic and functional purpose accomplished, the Court means as essentially to follow the same rule and this has been done.
Now through the larger number of circuits the Fourth developed the rule most completely, the Second has followed it, the Third has followed it, the Eighth, Ninth and Tenth have all followed it.
Justice Byron R. White: Well then you would – do you or don't you reject the distinction between so-called related and unrelated counterclaims -- that permissive or compulsory counterclaim?
Mr. George Louis Creamer: Yet on the basis of permissive and compulsory counterclaim, I reject it entirely.
Justice Byron R. White: Why?
Mr. George Louis Creamer: Because I don't think it has any particular applicability.
Permissive and compulsory counterclaim is an argument that has been made by analogy to the classification of claims under Rule 13 and--
Justice Byron R. White: Well what's inconsistent between Rule 13 in the bankruptcy rule?
Mr. George Louis Creamer: There isn't anything inconsistent at all.
Justice Byron R. White: Well why wouldn't – well why wouldn't they apply that?
Mr. George Louis Creamer: Except but I don't think you need to import Rule 13 into the matter.
Justice Byron R. White: Doesn't the general order 37 say that the rules do apply where--
Mr. George Louis Creamer: Where they're applicable or where they can logically be made to fit in any of that.
Justice William J. Brennan: Nearest maybe something like that.
Mr. George Louis Creamer: I'm sorry.
Justice William J. Brennan: As near as maybe.
Mr. George Louis Creamer: As near as maybe right.
And there certainly is nothing wrong with arguing the logic of the matter.
And if one wants to take the logic of the matter where it goes, then I presume either a permissive or a compulsory counterclaim is allowable.
The Court has tried to be guarded; the Tenth Circuit has particularly done so maybe it's more guarded than it needs to be in these circumstances.
I think that it is clearly correct in what it has allowed perhaps it might have allowed more than it did.
But it certainly would seem to clear that once the party who is a claimant makes an election to come into a bankruptcy court and start a suit effectively against the trustee, then he must be prepared to defend against the trustee and that this is certainly a different situation from one in which he does not come into bankruptcy but the trustee as a suitor goes into a federal court or a state court to get an asset in the same manner which somebody else might have gotten one had the bankruptcy not occur.
In this regard, we -- we get into the problem of a jury question.
I think that the question Judge Brennan asked in Colorado certainly does have pertinence.
It is asserted that there is a right to the jury trial here.
And again right I guess is in the ethical, philosophical sense rather than a legal sense because it is in assertion of what – what the person asserting at things ought to be the case which is always one must predicate of a right.
But what the Constitution says relative to the matter is simply that the right to jury trial in actions at common law shall be preserved.
Now it doesn't go out guarded for a battle to create such a right where there isn't one.
And in the situation of accounting marshaling of assets and complex economic cost data of this type, the jury has not been thought to be in many cases indispensable and in others has been thought to be downright futile.
In any case Colorado under the authority a counsel cites has long recognized that there is no summary right to jury trial and that in a matter of accounting actions and the like probably there isn't any at all even when it is demanded.
Now if the plenary action which is said to be the remedy were brought, the trustee would have a right to pursue it either in the federal courts or in the state court; it would then be asserted, I take it, that there is some kind of a state court right under the Seventh Amendment which would be very oblique to a jury trial in which the state court has stated the there isn't one even not derivative from bankruptcy and in an ordinary state matter or it would have to be asserted that if the referee had made this choice, something pejorative in here did in choosing to use the state court has the jurisdictional for him where – where he has an absolute right under the federal statute so to do and where the Congress had the right under the constitutional provision to allow him so to do.
And if that is the argument that would be made then you get that – that to be exact that there is a kind to be logic implicit in arguing that allowing the – the trustee to assert a counterclaim when he as himself sued, which counterclaim is merely the basis on which he might have started a suit is a detriment to the person who made an election to go in and sue the referee by filing -- I mean sue the trustee by filing a claim.
I – I may sound rather muddled.
I hope – hope not if – if that tends to some where that can be at the moment but my--
Justice Abe Fortas: May I ask you – may I ask you –
Mr. George Louis Creamer: Yes, Mr. Justice Fortas.
Justice Abe Fortas: In terms of Colorado law if the action had been brought not in the Bankruptcy Court, the action on the counterclaim, would the defendant had been entitled to the jury trial?
Mr. George Louis Creamer: In a Colorado state court?
Justice Abe Fortas: Yes.
Mr. George Louis Creamer: As a matter of absolute right?
Justice Abe Fortas: As a matter of the law?
Mr. George Louis Creamer: As a matter of procedure it would not be necessarily the case, no.
If it were construed to be primarily in the counting action, I would think not.
He might have been able under the rule or entitled under the rule to make a request or demand for a jury trial.
Justice Abe Fortas: And this is a--
Mr. George Louis Creamer: But then we thought to be an equitable counterclaim situation or an equitable accounting action, he might very well not --
Justice Abe Fortas: Well let's – let's take this – the trustee brings an action against Mr. Katchen to recover the $5000.00 or whatever it was paid to this bank –
Mr. George Louis Creamer: He could request –
Justice Abe Fortas: Would he – would he been – he could have?
Mr. George Louis Creamer: And he would probably have gotten it if they were no more than that involved.
Justice Abe Fortas: Yes, it seem to me that that was so.
So I want you to have here -- what you to have here whatever assumptive language one might choose to use, what you have here is a specific situation in which Mr. Katchen would have been entitled to a jury trial if the trustee had brought a plenary action instead of proceeding by a counterclaim?
Mr. George Louis Creamer: If he had requested one, yes.
Well of course but in Colorado he wouldn't have been constitutionally guaranteed that the – the existing rule would have allowed him to happen and the similar federal rule would probably have permitted him to have it if there were no complexity otherwise arising factually.
The essence of the case, I would submit, is much as counsel has submitted it.
The problem that exists is quite clearly the problem of how far the Hillman rule is to extend in matters of bankruptcy?
How far the rule of equity completely decided issues once submitted is to extend, and whether or not there is anything pejorative in the theory that once a claimant submits himself to the jurisdiction of the bankruptcy court by making a claim counterclaims maybe offset against him.
Now if there maybe a set-off and everyone agrees that there maybe that as I say whatever a set-off is, if there maybe a set-off of the claim then in logic and in law there can be no reason why there cannot be an adjudication of the totality of the counterclaim.
It has been said in fact sometimes that if there maybe a set-off and a setting off of the amount, then there is probably even a basis on which should argue that this constituted res judicata of all of the issues in the plenary suit if the plenary suit was brought.
No everybody --
Justice Byron R. White: Well do you have any case that indicates a set-off maybe predicated on a preference?
Mr. George Louis Creamer: Yes quite a number of the circuits do, they're all detailed.
Justice Byron R. White: All of the ones – all of the ones which would allow a preference that--
Mr. George Louis Creamer: Correct.
Justice Byron R. White: -- a counterclaim one of the preferences would this set-off--
Mr. George Louis Creamer: Would allow to set-off as well in some of those which would not allow some of them specific, as in the Fifth and Seventh said that there maybe a set-off but it's dicta language I think in the Fifth and Seventh.
They do comment that there maybe a set-off and then they comment that there may not be unrelated matters--
Justice Byron R. White: Well I take it that you would say that forever there's a preference a trustee may assert against the – against the claimant that the summary jurisdiction reaches the determination of that preference when it's asserted by the trustee no matter what the preference relates to.
Mr. George Louis Creamer: I think that's true.
I have to assert so because taking to gather Section 11 and Section 68, I don't see how you can separate--
Justice Byron R. White: If you are right then the permissive compulsory thing just won't work?
Mr. George Louis Creamer: I don't think it's a really logical basis for determining it.
It bothers me as an assertion of legal principle.
I think that the basic equitable right coupled with what is statutorily required to be done under the Bankruptcy Act is a much better basis for reaching the problem.
Justice Byron R. White: How about the – how about fraudulent liens and transfer and things like that?
Mr. George Louis Creamer: Fraudulent liens and transfer --
Justice Byron R. White: Which in Court of Appeals apparently would also let the assertiveness of the --
Mr. George Louis Creamer: It treats them exactly as it treats the preferences.
And I -- I would treat them the same way on a basis of feeling of propriety on the assumption that the same reasons underlying the reclamation of a set-off underlie the reclamation of a fraudulent transfer.
It is a marshaling in principle being applied to the distribution of assets and in order to apply marshaling you have to get back the assets improperly put out whether it was fraudulently so or simply by time preference.
Justice Byron R. White: So if a secured creditor asks to file a claim in bankruptcy which he may not do but what if he does and the trustee says, “Look your lien is no good against me.
You didn't file it on the right day or something else wrong with it.
And consequently, I want the property. You've taken – that you've taken possession of property now, I want it.”
Mr. George Louis Creamer: It might very well follow and would follow from the language of Tenth that that would be adjudicable.
I don't know just why the secured creditor in such circumstances would file but if he chose so to do, he is a litigant coming into Court and I presume, having opted for that choice would be under the necessity of taking whatever result is followed.
If there are no further questions, I think there is there that there would be more submission I can make on the question except that with counsel, I would concur that it is a pretty clear kind of problem which does require resolution.
We thank, Your Honors, for your attention.
Chief Justice Earl Warren: Mr. Winner.
Rebuttal of Fred M. Winner
Mr. Fred M. Winner: The Court please, Justice White's last question has been expressly answered by this Court. It was answered in Taubel-Scott-Kitzmiller versus Fox.
In that case --
Justice Hugo L. Black: Answered in what?
Mr. Fred M. Winner: Sir?
Justice Hugo L. Black: Answered in what?
Mr. Fred M. Winner: Taubel-Scott-Kitzmiller Company versus Fox.
It appears that -- the citation appears at the bottom of page 11 of our opening brief.
In that case, Justice Brandeis said that there the argument was advanced that since the bankruptcy court was empowered to order that a lien void is against the trustee should be preserved, that because of that, the argument was advanced, that there were some jurisdiction.
That argument was rejected and the opinion said the argument precedes upon a misapprehension of the nature and purpose of the clause in question.
It does not confer jurisdiction.
It confers substantive and adjective rights, which I think, it answers the question as to determining the – the power of a referee in bankruptcy to determine the validity of a lien.
Justice Byron R. White: Well, we're really talking about the District Judge?
Mr. Fred M. Winner: Here or --
Justice Byron R. White: Whatever you're talking about that district judge at summary jurisdiction that's not been created.
Mr. Fred M. Winner: Mr. Justice White, I think not.
I appreciate that one can appeal from the referee and bankruptcy to the district judge but one appeal from the referee and bankruptcy to the district judge and one does not get a trial de novo.
Justice William J. Brennan: He does not get a trial --
Mr. Fred M. Winner: No sir.
Justice William J. Brennan: Very limited reviews.
Mr. Fred M. Winner: Yes, sir a very limited review and my experience of trial before referees and bankruptcy and I mean no slurs but my experience is that they differ somewhat --
Justice Byron R. White: As some of us think –
Mr. Fred M. Winner: A big pardon, sir.
Justice Byron R. White: Their summary out there.
Mr. Fred M. Winner: They're -- they're indeed summary and I say in conclusion, I do not think that you can condition -- that you can impose upon a man who sees fit to file a lawful claim in a bankruptcy state the irrevocable and unavoidable penalty that if you filed this claim, by way of a club held over your head, you cannot have a plenary trial as to any claim for preference, which is asserted against you.
And if -- if you're foolish enough to file this claim -- if you're foolish enough to assert your legal rights, you as a conditioned founded into you, waive your right to a jury that we submit is not the law at least we hope it is not the law.
We think Alexander against Hillman does not so hold and we think that to so hold would require that Irving Trust be expressly overruled.
Chief Justice Earl Warren: We will adjourn.