*1 WOODRUFF HEISER et al. April 5, 1946. Decided Argued March
No. 496. *2 Meyberg Leonard Rupert J. argued B. Turnbull - cause and-filed a brief petitioner. argued Louis A. Fischl respondents. cause for With him on the brief were H. A. Ledbetter and Thos. W. Champion. Mr. Chief by Stone, the Court Justice
Opinion
Mr.
Black.
announced
Justice
objections to the
proceeding
is a
This
based
claim
of petitioner’s
allowance
acquired
money
objected to allow-
Respondents
bankruptcy.
-before
rele-
that, so far as here
ground
of the claim on
ance
is, by
by fraud,
procured
vant,
in which
complaint
in the
the suit
allegations
perjured
testimony
rendered,
by perjured
judgment was
alleged to have been converted
property
to the value of
the defendant.
the claim. On
disallowed
The referee
court, sitting in bank-
the district
the referee’s certificate
claim, sustaining petitioner’s conten-
allowed the
ruptcy,
fraud in
procurement
tion
the issue of
*3
litigated and decided
previously
had been
judgment
in which the petitioner
favor
proceedings
petitioner’s
both,
parties,
had been
trustee, or
or his
and
judicata.
was therefore
and
Court,
the Tenth Circuit reversed.
of
for
Appeals
The
decisions in
Relying upon our
Geist, 89, it held that 316 U. adjudications validity of go prior behind the could questions previ- decide for itself and the cause of action litigated decided, and whether ously meritorious, and judgment was entered which the on rejected be- should the claim whether by claimant’s fraud. judgment procured a based on cause accordingly remanded cause to Appeals The Court objections on the proceedings for further the district court certiorari, 326 granted claim. We to allowance raises the questions which 715, upon petition a re-adjudicate whether judgment against which a of action on merits of a cause a claim in bankrupt, proved bankruptcy, was may disregard adjudication and previous entered a be- parties tween the procured was not by fraud. adjudicated the bankrupt, was on as such
Woodruff, voluntary petition July 5, on 1939. Petitioner, proceed- ing (a) (1) Bankruptcy Act, § U. S. C. (a),-which provides that a fixed liability, evidenced provable is a claim bankruptcy, filed his of claim in proof default judgment against for sum, Woodruff including accrued costs, $278,000. interest than more The suit which the procured was filed the United States District Court the Southern District of Cali- in July, Judgment fornia was entered for petitioner . 20, 1939, on March on proof taken of service of summons 31, January on and of Woodruff’s default given by the petitioner. evidence diversity The suit was based on of citizenship, and the action was in cause of substance that Woodruff procured property petitioner, had consisting rough sapphires, opals zircons, of a stated $164,000, value of pretenses false and false representations, the details of material, are not now had thereafter converted use. to his own them 29,1939, shortly March after the
On was ren- filed motion in dered, Woodruff the trial court to set it motion, so it was based upon aside. far.as the alleged the defendant to serve Woodruff failure with.process, was *4 But the denied June court, on stipulation of hearing directed that parties, be held determine gems of the convérted and provided the value that at the hearing competent “such evidence party as either desire be received” and considered the court “in present by determining property” the actual value of which the the. alleged by was converted defendants. plaintiff provided court’s order further should in the amount by adjudged be reduced which the value of gems exceeded actual value .as found at the hear- ing. After hearing a contested at which evidence, oral documentary, and received, the trial court made a stating minute order that the court found that the values of the converted property were those in the com- plaint, give and declined to further consideration to the judgment. motion to set aside the appeal No was taken from the no review was had of the minute order denial motion to set the aside. August 23,1939, on application of Jackson,
On the trus- bankrupt’s tee of the estate, which certain sup- creditors ported, the referee bankruptcy authorized and directed the trustee “to take such legal steps as proper necessary vacate, under the law to set aside and to avoid” the judgment, and authorized him to retain coun- sel the Southern District of California for that purpose. This was followed motion on behalf of the bankrupt’s trustee, and the bankrupt, in the district court for that district, aside to set on the grounds, among others, proper that no service process had been made defendant, on the complaint did not state a action, cause of that “a fraud practiced upon the above entitled court with respect to the entry of said judgment”, and that the trustee the bankrupt “have prevented from presenting said upon defense any trial of the merits by reason of fraud, accident, surprise neglect and excusable as is more particularly shown by the affidavits” which the motion was made. The affi- davit of the trustee in support of the motion stated that was “based upon fictitious values and was obtained by methods amount to a constructive fraud upon the other creditors your affiant, repre- sentative of said creditors”. Counter affidavits peti- *5 attorney tioner and his the suit which the judgment was rendered denied allegations the of fraud.
The district court denied motion, the and the Court of Appeals for the Circuit affirmed. 111 2d 310. It Ninth F. alleged overruled all the the grounds setting aside judgment, holding that the service of was process valid in any that case appeared the defendant had in the suit entering stipulation into the for trial the issue of value of property par to have converted ticipating held that hearing on that issue. also the charge of fraud by proof, was denied and unsupported adding ground appellants’ “that to appears of motion have been this abandoned.” There was no of review decision. res
The court below, rejecting petitioner’s of plea judicata, in directing inquiry into the merits of the original allegation cause of action and into fraud of in procurement upon judgment, rested its decision ground bankrupt’s that place trustee had failed to before any proof the California district court contention or petitioner’s that testimony, particularly as of value property, converted perjured, was not indebted to petitioner, allegations or that of complaint were untrue. court, relying Litton, supra, also held bankruptcy court, being having a court equity powers, was not bound the prin- judicata res ciples of as to issues which were pressed court, before the California authority district of equity court as a court of included the power inquire validity into the of the claim presented estate, as a claim based.
We need not consider whether, apart require- from the ments the full faith and credit Constitu- clause judicata applied tion, courts, rule in the federal in diversity citizenship cases, the doctrine Tompkins, 64; Guaranty Erie R. Co. v. 304 U. S. cf. Trust York, Holmberg Armbrecht, 99; Co. v. can be other than that of the state in which the *6 For nothing federal court sits. decided in Erie R. Co. v. Tompkins, requires a supra, court of in bankruptcy, apply ing the statutes of the United governing liqui States bankrupts’ estates, dation of in adopt local rules of law determining what claims are provable, allowed, or to be or bankrupt’s how the among estate is to be distributed States, claimants. Board Cf. Comm’rs v. United 308 of U. 343; Greaney, D’Oench, S. Deitrick v. 190; 309 U. S. C., Duhme & Co. F. I. Helvering v. D. 315 447; U. S. v. Stuart, 154, U. 161-2; 317 S. Sola Electric Co. v. Jefferson Co., 173, Wragg Bank, 317 176; U. S. v. Federal Land 317 325, 328; States, U. S. Trust Co. v. United Clearfield U. 363. In passing upon S. rejecting allowing or proof of claim in this bankruptcy pro case court of ceeds—not without appropriate regard rights acquired state law—under federal which govern statutes claims, proof and allowance of judgments. based on determining judgments what are provable objec and what may tions be made to their in proof; determining inequitable extent to which the conduct of claimant acquiring asserting his claim bankruptcy, requires rejection its or its subordination which, to other claims other respects class, are of the same defining is applying federal, state, law. See Geist, Prudence Realization Corp. v. supra, 95, 96 and cited; Pelzer, cases cf. States v. United 402-03.
It is true that a court is also a court of Hunt, equity, Loan Local Co. 234, 240, v. may equity powers exercise bankruptcy proceedings to claims, set aside fraudulent including a judg- fraudulent ment where the issue fraud previously has not been adjudicated. Litton, Pepper supra, v. In appro- acting upon equitable it cases, principles, also
priate of one creditor to those of others the claim subordinate a course conduct the consummation of prevent order to them, which, as to would be fraudulent the claimant Co., Standard Taylor v. Gas inequitable. otherwise Prudence supra; Realization 307; U. v. S. Sampsell, Geist, Surety Co. v. supra; American Corp. law or principle of no 269. But we are aware S. rejection by a federal sanctions the equity which judicata, which is founded salutary principle there recognized public policy generally appears when one litigation and that be some end to must heard, and the Con case, fully is present in court to may not later renew him, he is decided issue tested Traveling eourt. Baldwin another litigation Assn., 622, 525-6. Men’s 283 U. *7 Tompkins it was recognized by this Erie Co. v. R.
Before
clause,
credit
from the full faith and
that, apart
Court
recognized
will be
in one court
duly rendered
in federal
parties
judicata
in
between the same
a suit
res
Sac,
County
Case
351;
v.
94 U. S.
Cromwell
v.
court.
Phillips,
S.
Baltimore
Co. v.
S.
Beauregard,
688;
101
S.
U.
Comm’n, 281
Public Utilities
316; Grubb
v.
274 U. S.
Assn.,
Traveling
supra,
Men’s
Baldwin
470. See
v.
U. S.
Schendel,
R. Co. v.
Chicago, R. I. & P.
cf.
cited;
cases
and
Co.,
White
U. S.
County
Milwaukee
296
v.
611;
cases,
non-diversity
since
held
It has been
268, 272-3.
ap-
courts will
Tompkins, the federal
R. Co. v.
Erie
Sunshine Coal Co. v.
judicata.
of res
own rule
their
ply
Co.,
Irving Trust
Jackson v.
Adkins,
381, 403;
U.
310
S.
that ef-
required
has also
This Court
494,
U.
S.
plea
federal courts
given
both state
fect be
court.
bankruptcy
judicata
arising from decrees of a
County Dist. v.
Gottlieb,
Chicot
165;
Stoll v.
that where the
Bank,
well settled
And it is
County v. the issue was decided put in issue and fraud was bankrupt they and those trustee, represent whom proof. After them, claim failure of two or who bankrupt in one of which the proceedings, trustee, sought, which the and his other of free, prove judgment were to was based on fraud- alleged, values, and both of which ulently fictitious against them, principles judi- the decision was cata revival of the in the preclude litigation bank- ruptcy court.
Pepper
Litton, supra, lends
support
v.
no
a different
since
Undoubtedly,
view.
Act
Bankruptcy
authorizes
proof
of claim
on
such
proof
based
may
assailed in
ground
be
on
the purported judgment
is not a
because of want
jurisdiction
the court
which rendered it over the per
parties
subject
or the
suit,
sons
matter of the
or be
cause it was procured
party.
fraud
Pepper
of a
v.
Litton, supra, 306;
Thompson,
Chandler v.
Thus the Court the state court Litton, supra, judicata Smith v. was not res as matters later ruled Upon assump this court and this Court. assuming salary tion, validity under also the debt *12 lying held, equitable principles, judgment, the Litton this Court on judgment competition with that Litton was not free to assert his in acquired judgment other he in breach of the creditors because had fiduciary obligation bankrupt controlling which a stockholder creditors, personal other himself a ad owes to the not to secure for vantage Taylor by way security priority v. or them. Cf. over Co., Standard Gas S. 307. U. Pepper peti- support decision in v. Litton thus affords no inapplicable judicata tioner’s contention is that the doctrine of set aside it could be upon judgment or claim which in the bank- creditors of other to those or subordinated by respondents that asserted except proceeding, ruptcy per- a fraud procured by had been judgment that having issue, That debtor. judgment petrated in which in the court decided litigated and twice brought by proceedings in rendered, by bankrupt, bankruptcy and trustee in in the bank- relitigated not now be bankrupt alone, may ruptcy court. Reversed. Douglas dis- and Me. Justice
Me. Justice Black senting. for the reasons stated would affirm the
We
Ap-
writing for the Circuit Court
Judge Bratton
by
peals.
Me. Justice case. tion decision of this Rutledge.. Justice
Me.
necessary,
my judgment
in
it is
I concur
the result.
equitable
that
more than to rule
case,
in this
to do no
in
in
with
accordance
principles, applicable
rely,
respondents
cited
bankruptcy proceeding. Cases on which
ain
illustrating
which a court
extent to
in
v.
nature
to ascertain the
proved
a
look behind
exclusively
based,
upon
judgment is
are concerned
a claim
liability represented
question of
with the
the nature
represents
provable
“debt”
and dis-
is,
it
a
whether
Bankruptcy
chargeable
63 of the
bankruptcy under
17 and
Act.
§§
alimony
“debt” but in the
was held to be not a
Thus a decree for
duty,
provable
perform
and not
penalty
for failure to
nature
Markoe,
dischargeable
bankruptcy.
Wetmore
n 741 Litton, Pepper v. 295, prior and decisions, do require bankruptcy court, reexamination the the presented, circumstances now of the foundations If, which is basis of the claim issue. Litton, in Pepper as the Court declared reject power claims, previously court has to even when “in allowed, part whole or in ‘according equities to ” I (k), S. 11 § 308 U. at U. S. C. 93 see case/ 304/ find qualifying no reason for that rule in this case. necessarily comprehends court rejection ordering allowance or and of claims shall judicata. rule of not be by any rigid bound broad or 2 think, I That, ruling is essential of the case.1 On hand, prior adjudication very the other grounds alleged judg- for disallowing subordinating or
1 judicial passing “Allowance and disallowance are acts. ... equity, an allowance of claims the court sits as court of gives far-reaching powers surrounding any it ‘to sift the circumstances injustice claim to see that is or unfairness not done in administration bankrupt 295, [Pepper estate.’ 308 Mere 308.] equity may require reasons of sometimes claim be that accreditor’s totally either disallowed subordinated to claims of all or of Equities general weighed certain other creditors .... to be in con- may vary.in importance. They with nection the allowance of a claim may strong enough in extreme cases be to warrant disallowance abso- entirely. lutely equity may In other cases be satisfied a mere with postponement claim, relegation ‘subordination’ or of a and its to a general particular group.” rank inferior to that of all creditors or of a (14th ed.) Collier, Bankruptcy 3 185-186. See 3 1800- also id. at (a) provides: proof C. “A claim shall consist of a § oath, writing signed by creditor, setting statement forth claim; therefor; any and, so, consideration whether if what therefor; any and, so, pay- whether securities are held if what justly owing thereon; claim ments have been made is added.) (Emphasis from the to the creditor.” (14th Citing Collier, Bankruptcy it, The case has been so read. ed.) says: judicata, applied the bank “The doctrine of res to allowed, ruptcy deciding whether a claim disallowed should be subject subordinated, paramount equitable powers of bank is ruptcy prevent perpetration courts to of fraud and collusion.” claim, equitable prin- irrelevant to what
naent cannot be dispos- do may require the ciples prior also of And the same true ing of claim. adjudication adequate such an when failure to secure *14 set by proceedings afforded instituted to opportunity is Walker, Handlan v. modify judgment. Cf. aside administration, judicial 566. policies F. Sound court ren- affecting and the both bearing. dering judgment, may have similar had in the separate proceedings In this case the two District of California for the Southern District Court adequate opportunity than perhaps afforded more adjudication now raised issues These court, bankrupt, once once to trustee. to the proceedings adversely be terminated were allowed to in the other after adverse appeal, the one without case application for certiorari. appeal decision on and without Heiser, I equity 2d do not think Jackson v. F. 310. by the bank- opportunity a third to be afforded requires I agree ruptcy ground On this court.
should reversed. DISTRICT JUDGE. RICE, UNITED STATES v. 22, 1946. April Argued February 1946. Decided No.