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In re Bohack Corp.

decided: May 7, 1979.

IN THE MATTER OF THE BOHACK CORPORATION, DEBTOR-IN-POSSESSION; THE BOHACK CORPORATION, PLAINTIFF-APPELLEE,
v.
BORDEN, INC., DEFENDANT-APPELLANT



Appeal from decision of district court in a Chapter XI proceeding affirming bankruptcy court's order restraining and enjoining a creditor from continuing the prosecution of its counterclaim in an antitrust litigation brought by the debtor-in-possession. Reversed and remanded with instructions.

Before Oakes, Circuit Judge, Blumenfeld*fn* and Mehrtens,*fn** District Judges.

Author: Mehrtens

In this case we are confronted with the delicate task of reconciling two provisions of the bankruptcy law which appear to be at cross-purposes with each other. One provision*fn1 is designed to protect the interests of debtors, the other*fn2 is intended to safeguard the rights of creditors. In an effort to harmonize these seemingly discordant segments of the law, we reverse and remand with instructions.

FACTS

The Bohack Corporation (Bohack) filed a petition for an arrangement with the bankruptcy court pursuant to Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 Et seq., on July 30, 1974. The petition was granted by order of the same date, and Bohack was continued as debtor-in-possession. 11 U.S.C. § 742. In conformance with § 314 of the Act, 11 U.S.C. § 714*fn3 and Rule 11-44, Federal Rules of Bankruptcy Procedure, the bankruptcy court's order included a provision expressly staying the initiation or continuation of all suits and claims against the debtor.*fn4 The appellant, Borden, Inc., on November 13, 1974, filed a proof of claim for $451,198.86 representing goods sold and delivered prior to the initiation of the proceedings in arrangement.

Some two years later, Bohack, together with various other plaintiffs, filed suit in the United States District Court for the Eastern District of New York charging Borden and other major sugar refiners with violations of the Sherman Antitrust Act. Borden answered the complaint and interposed a counterclaim for the $451,198.86 originally sought under the proof of claim. Borden did not at any time during the course of this proceeding seek to obtain relief from the stay imposed by the bankruptcy court's order and Rule 11-44. On March 18, 1977, the action was transferred to the United States District Court for the Eastern District of Pennsylvania for consolidated pre-trial proceedings by the judicial panel on multi-district litigation.

Bohack moved in the antitrust action for an order dismissing Borden's counterclaim, arguing that the district court, by virtue of the Rule 11-44 stay, was without subject matter jurisdiction. In the alternative, Bohack argued that the debt underlying Borden's claim was not mutual, and thus could not be asserted as a setoff pursuant to § 68 of the Act. Borden opposed, but the court decided the motion in favor of Bohack, Borden, however, successfully moved for reconsideration.

While the issue remained Sub judice, Bohack filed suit in the bankruptcy court seeking an order enjoining the continued prosecution of the counterclaim. The bankruptcy judge, anchoring his ruling on precepts of exclusive jurisdiction pursuant to § 311 of the Bankruptcy Act, reasoned that the antitrust court's concurrent consideration of the claim would unnecessarily fractionalize the arrangement proceeding. With the filing of the proof of claim, the court ruled, Borden consented to the bankruptcy court's exclusive, summary jurisdiction and was bound by the automatic stay embodied in Rule 11-44 and the court's separate restraining order. The bankruptcy judge further found that Borden was estopped from asserting the claim before the antitrust court.

On the basis of the bankruptcy court's decision, the district judge in the antitrust matter entered an order dismissing the counterclaim without prejudice to any rights Borden might have to appeal from the bankruptcy court's order.

The district judge below affirmed the bankruptcy court but did not rely on exclusive jurisdiction as the legal basis of his decision. The district court's ruling was primarily based upon his determination that § 68 of the Act, which permits a creditor to set off mutual debts with a debtor, is permissive in nature and subject to the discretion of the court. The district judge concluded that the bankruptcy court could, in an appropriate exercise of discretion, defer or deny a setoff on equitable grounds. He then went on to analyze the equities involved in permitting Borden's counterclaim to be interposed in the antitrust action to examine whether the denial of the counterclaim by the bankruptcy judge had been an abuse of discretion. In a thoughtful and comprehensive decision, the district judge cited the potential for delays in the antitrust litigation and the potential for complication of that already complex lawsuit and concluded that there had been no such abuse.

Borden appeals from the decision of the district court affirming the bankruptcy court's order restraining and enjoining Borden from continuing the prosecution of its counterclaim in the antitrust litigation.

EXCLUSIVE JURISDICTION

Bohack relies primarily on the exclusive jurisdiction approach adopted by the bankruptcy court. Section 311 of the Bankruptcy Act, 11 U.S.C. § 711, provides:

Where not inconsistent with the provisions of this chapter, the (bankruptcy) court . . . shall . . . have exclusive jurisdiction of the debtor and his property, wherever located.

Section 311 contemplates the centralization of all matters affecting the debtor into one tribunal. Fidelity Mortgage Investors v. Camelia Builders, Inc., 550 F.2d 47 (2nd Cir. 1976). The intent and design of Chapter XI makes the need for exclusive jurisdiction compelling. Unlike ordinary bankruptcy, where liquidation is the object, the purpose of an arrangement is to revive a moribund business, not to bury it. See Susquehanna Chemical Corp. v. Producers Bank and Trust Co., 174 F.2d 783 (3rd Cir. 1949). In order to achieve this goal without interference, the bankruptcy court's action must be swift and its jurisdiction unfettered.

Accordingly, the bankruptcy court herein held that it had exclusive, summary jurisdiction over Borden's counterclaim and further found that Borden consented to such jurisdiction by filing its claim.*fn5 The judge did not discuss the merits of Borden's counterclaim, nor indicate whether or not the ...


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