CHAPTER XLV.

NATURE AND EFFECT OF COMPOSITION.

Synopsis of Chapter.

2345. Composition Simply Different Method of Administering Estate and Realizing on Same for Creditors.

§ 2346. Effect of Composition, in General.

§ 2347. Composition Restores Estate to Debtor.

§ 2348. Pendency of Petition for Confirmation Suspends Sale and Distribution of Assets.

§ 2349. Confirmation of Composition in Effect a Discharge.

§ 2350. Release of Debts Is by Operation of Law and Not by Consent.

§ 23502. Revival of Debt in Composition Cases.

§ 2351. Claims "Provable," Though Not Actually "Proved," Discharged.

§ 2352. But Must Be "Duly Scheduled."

§ 2353. "Duly Scheduled"-As to Time-Different in Composition from What It Is in Discharge.

§ 2354. Right to Composition and Effect of Composition, Distinct.

§ 23544. Compositions before Bankruptcy.

§ 23542. Constitutionality of Compositions before Adjudication.

§ 2345. Composition Simply Different Method of Administering Estate and Realizing on Same for Creditors. We have thus far been considering the usual course of administration of a bankrupt estate. have traced it from the beginning through its different steps, ending with the distribution of the assets and the winding up of the case. Sometimes, however, the bankruptcy case does not take this course. It is possible for a bankrupt to lift the estate out of the bankruptcy court and to resume the charge and ownership of it, freed from the claims of his creditors. This is accomplished by the bankrupt making a "composition" with his creditors.

Compare, remarks, U. S. ex rel. Adler v. Hammond, 4 A. B. R. 738 (C. C. A. Tenn.): "The law prescribes that after he has been adjudged a bankrupt, has been examined, and has filed a schedule of his property and a list of his creditors, two methods of procedure are open, each of which is designed to accomplish the ends intended by the act. One of these is by the tendering of a certain sum to his creditors by the debtor in lieu of the amount which might ultimately be gathered from the assets and their acceptance thereof. Obviously this amount is contemplated as a sum which will be the equivalent of the assets which would be obtained by the other and more tedious course, for the creditors have the right to reject it. If they accept it, their object is satisfied, and it only remains to execute the purpose toward the bankrupt. This is done by the confirmation of the composition by the court, which is required to see that the nonassenting creditors are not wronged thereby; and the law declares that the confirmation shall have the effect to release or discharge the bankrupt. If this course is not pursued, or proves abortive, the proceeding advances by the other method. The assets in specie are turned over to the trustee, who collects and converts them into money, and that is distributed to the creditors,

who then get that which they would have reached by the former course, more or less, as it may turn out. Then, because the record does not show any formal declaration of the right of the bankrupt to be released, it is provided that he may obtain an order declaring that right. It is to be noted that the court is charged with the same duty whether it is sitting to determine whether a composition should be confirmed as where it is considering the propriety of a formal discharge, namely, to ascertain whether the conditions which the law prescribes have been complied with. This general survey may conduce somewhat to a clearer apprehension of the significance and essential character of the provisions with which we have to deal. The act provides an appeal from a judgment which grants or denies a discharge."

In re Fox, 6 A. B..R. 529 (Ref. Ohio, affirmed by D. C.): "The true theory is that the confirmation of a composition, whilst operating on the one hand to discharge the bankrupts from their obligations and to revest them with the title to the estate, operates on the other hand to substitute the funds on deposit in the place of the estate, the only change being that the substituted fund is thereupon to be distributed as the judge may specially direct rather than in accordance with the usual procedure in the disbursement of the dividends."

Composition is treated, even in the Act, as in some respects outside of bankruptcy.1

* * *

In re Lane, 11 A. B. R. 137, 125 Fed. 772 (D. C. Mass.): "Section 12 (e) provides, whenever a composition is not confirmed the estate shall be administered in bankruptcy as herein provided.' Composition is thus treated, even in the act, as in some respects outside of bankruptcy."

This statutory composition is quite different from a settlement and dismissal of the proceedings.

2346. Effect of Composition, in General.-A composition restores the estate to the bankrupt, frees him from all his debts provable and dischargeable in bankruptcy, and distributes among his creditors the amount the bankrupt is required thereby to pay for the ransom of his estate. The money deposited takes the place of the estate.2

§ 2347. Composition Restores Estate to Debtor.-The composition. restores the estate to the debtor and revests in him the title thereto.3

1. Bankr. Act, § 12 (e): "Upon the confirmation of a composition, the consideration shall be distributed as the judge shall direct, and the case dismissed. Whenever a composition is not confirmed, the estate shall be administered in bankruptcy as herein provided."

2. Bracklee Co. v. O'Connor, 24 A. B. R. 499 (N. Y. Sup. Ct.).

3. Bankr. Act, § 70 (f): "Upon the confirmation of a composition offered by a bankrupt, the title to his property shall thereupon revest in him." Impliedly and obiter, In re Becker, 15 A. B. R. 231, 139 Fed. 366 (D. C. Pa.).

Bankr. Act, § 21 (g): "A certified copy of an order confirming a composition shall constitute evidence of the reverting of the title of his property in the bankrupt, and if recorded shall impart the same notice that a deed from the trustee to the bankrupt if recorded would impart."

McDonald v. Taylor & Co., 26 A. B. R. 635, 144 App. Div. N. Y. 329, which was a suit to recover securities held by a creditor who participated in composition proceedings.

Bracklee Co. v. O'Connor, 24 A. B. R. 499 (N. Y. Sup. Ct.), quoted in this same section.

Stone v. Jenkins, 4 A. B. R. 568, 176 Mass. 544: "The only question which has been argued before us is the right of the plaintiff to maintain the action after he was discharged as trustee and the estate was closed up and settled. ** When the right of action accrued, Morris had been adjudged bankrupt, and upon the appointment of the plaintiff as trustee the right of action vested in him, and suit was properly brought in his own name. When the offer of composition was confirmed, and the order made discharging the trustee, and closing up the estate, the property in the trustee's hands, including choses in action belonging to the bankrupt estate, vested, by force of the statute, in Morris. Bankr. Act, 1898, § 70."

In re Rider, 3 A. B. R. 179, 96 Fed. 808 (D. C. N. Y.): "The effect of a composition is to supersede the bankruptcy proceedings and reinvest the bankrupt with all his property free from the claims of creditors."

Gordon v. Mech. & Traders Ins. Co., 22 A. B. R. 649, 120 La. Ann. 441, 45 So. 384: "The creditors made a composition with the debtor which was confirmed by the court. The effect of this was to place matters quoad the property covered by the policy as if it had never been tendered to the creditors."

Suits begun by the trustee, which the bankrupt might have instituted had there been no bankruptcy, are not abated by the confirmation of the composition, but the title to the right of action revests in the bankrupt.*

Stone, as Trustee, v. Jenkins, 4 A. B. R. 568, 176 Mass. 544, 57 N. E. 1001: "We have, therefore, a case in which the right of action was in the trustee when the suit was begun, but has become vested during the pendency of the action in the bankrupt. In such a case it would seem to follow, either that the trustee should be allowed, with the consent of the bankrupt, to prosecute the action for his benefit, or the bankrupt should be allowed to come in and prosecute it in the name of the trustee on such terms as the court might deem reasonable; or the suit should be amended so that the action should proceed thenceforward in the bankrupt's name. If neither one of these things was done, there would seem to be no good reason why a dis continuance should not be ordered. Cutts v. Parsons, 2 Mass. 440. But it would serve no useful purpose to compel the plaintiff to discontinue, and to oblige the bankrupt to bring an action in his own name, and such a rule might enable the defendant, under some circumstances, though not, perhaps, in this case, to interpose as a defense the statute of limitations, or some technical matter which he could not otherwise have availed of. In Mayhew v. Pentecost, 129 Mass. 332, it was held that an action to recover a debt due before his bankruptcy might be brought by the bankrupt after the bankruptcy, with the consent and for the benefit of the assignee in bankruptcy. E converso, we do not see why an action duly brought by an assignee or trustee in bankruptcy may not be maintained in his name, with his consent, by the bankrupt, for his benefit, after the cause of action has become vested in him, or may not be so maintained by the assignee or trustee with the consent of the bankrupt."

The debtor re-takes his estate, not necessarily in the same condition as when he parted with it, but with whatever changes may have occurred in the meanwhile.

Thus, it as been held that he succeeds to all property rights which the

4. Obiter, In re Becker Bros., 15 A.

B. R. 231 (D. C. Pa.).

receiver or trustee had acquired in the meantime, as, for example, a lease made by the trustee in the meantime.

Bracklee Co. v. O'Connor, 24 A. B. R. 499 (N. Y. Sup. Ct.): "These sections clearly provide for the revesting of title to all his property in the bankrupt upon the confirmation of the composition agreement without any further act by the trustee or by the court. The defendant, however, claims that this does not transfer any rights to the contract which was made by the trustee and never was part of the bankrupt's property, and that all rights originally accruing to the trustee remain the trustee's until his discharge. I do not think that the Bankruptcy Law is open to this construction. An examination of the various sections, it seems to me, discloses an intent to vest title in the trustee upon his appointment to all the bankrupt's property, except property exempted or not transferable by the bankrupt, but only for the purpose of distribution to the creditors; and since before the confirmation of the composition the bankrupt must deposit subject to the order of the judge 'the consideration to be paid by the bankrupt to his creditors, and the money necessary to pay all debts which have priority and the cost of the proceedings' (§ 12[b]), the amount so deposited takes the place of the bankrupt's estate and the entire estate, its accretions and proceeds revest in the bankrupt. By force of the confirmation of the composition the bankrupt obtains title not only to the dredge which was previously his but to all the rights under the contract for the lease of the dredge. The whole intent of the composition is to place in the bankrupt's hands all the assets which the trustee has held for the benefit of the creditors and which form part of the bankrupt's estate, whether they belonged orignally to the bankrupt or accrued to the trustee. It is quite immaterial whether the trustee has or has not been discharged, for, by the deposit of the consideration for the composition and the confirmation of the composition, he has ceased to have any control of the bankrupt's estate and even his fees are to be paid out of the amount deposited and not out of the estate."

§ 2348. Pendency of Petition for Confirmation Suspends Sale and Distribution of Assets.-The pendency of the petition for confirmation of a composition undoubtedly suspends all proceedings for the sale or distribution of the assets, since the very object of a composition is to restore the estate to its original owner.

However, it has been held, in one case, that if the confirmation proceedings are unreasonably delayed, or the bankrupt is failing to make the requisite deposit, it may not be improper to order sale and distribution of the assets.5 Nevertheless, the better practice would be first to dismiss the petition for confirmation of the composition. If the neglect would not warrant a dismissal of the petition for want of prosecution, it would not warrant a disregard of it.

The Amendment of 1910, permitting compositions before adjudication. in bankruptcy, specifically provides that action upon the petition for adjudication shall be delayed until it shall be determined whether a composition shall be confirmed.

5. In re Fisher & Co., 14 A. B. R. 366, 135 Fed. 223 (D. C. N. J.).

6. Bankr. Act, § 12 (a), as amended in 1910: * * In compositions before adjudication. * action

And the court at all times has jurisdiction to determine the ownership of property in its custody and claimed adverselyбa

Indeed, an adverse claimant is entitled to have the bankruptcy court pass upon his rights, and such responsibility can not be shifted by turning the property over to the bankrupt upon confirmation of the composition.7

§ 2349. Confirmation of Composition in Effect a Discharge. The confirmation of a composition is in effect a discharge.8

*

In re Friend, 13 A. B. R. 597, 134 Fed. 778 (C. C. A. Ills.): "By virtue of § 14 (c) a, * * a judgment confirming a composition is a judgment granting a discharge."

U. S. ex rel Adler v. Hammond, 4 A. B. R. 736, 104 Fed. 862 (C. C. A. Tenn.): "The one 'discharge' is the equivalent of the other for the purposes of the act, and both are covered by the same section of the act (14), which relates solely to that subject. Moreover, it is to be observed that in both methods, the procedure is under the control of the judge. In the case of a composition, the nonassenting creditors are given the opportunity to contest the confirmation which is to operate as a discharge. It is against that consequence that the contest is directed. It is made because the nonassenting creditors are not satisfied that their claims shall be discharged by the payment of the amount tendered. Questions as important perhaps as any that may occur in bankruptcy proceedings may arise upon the hearing. If the composition is confirmed, the contesting creditors are cut off from any further consideration of the fact unless they can appeal. And so of the bankrupt; whichever way the decision goes, it is the end of that endeavor of the debtor and the creditors to close the matter." Ross v. Saunders, 5 A. B. R. 350, 105 Fed. 915 (C. C. A. Mass.): "It is true that under the present act the action on the composition, if confirmed, operates to discharge the bankrupt from all his debts except those otherwise specified; and in this particular the statute is unlike the earlier ones. Therefore it may well be said that now the confirming or the refusing to confirm a composition constitutes a 'judgment granting or denying a discharge,' as the case may be, and that either comes within the general letter of the provision for appeals."

In re Ullman, 24 A. B. R. 755, 180 Fed. 944 (D. C. N. Y.): "A composition is at once a settlement and a discharge."

In re Jersey Island Packing Co., 18 A. B. R. 417, 152 Fed. 839 (D. C. Calif.): "As long as the order confirming the composition stands, it must have the effect given it by subdivision 'c,' § 14, of the Bankruptcy Act, viz., the dis

upon the petition for adjudication shall be delayed until it shall be determined whether such composition shall be confirmed."

6a. In re J. C. Winship Co., 9 A. B. R. 641, 120 Fed. 93 (C. C. A. Ills.). See post, § 2398.

7. In re Cadenas & Coe, 24 A. B. R. 135, 178 Fed. 158 (D. C. N. Y.), quoted at § 2398.

8. Bankr. Act, § 14 (c): "The confirmation of a composition shall discharge the bankrupt from his debts, other than those agreed to be paid by the terms of the composition and those not affected by a discharge."

In re Rider, 3 A. B. R. 178, 90 Fed.

808 (D. C. N. Y.); Mandell & Co., V. Levy, 14 A. B. R. 549, 47 Misc. Rep. N. Y. 147; In re Eisenberg, 16 A. B. R. 777 (D. C. N. Y.); [1867] In re Becket, Fed. Cases No. 1,210; [1867] In re Merriman, Fed. Cases No. 9,479, 18 N. B. Reg. 411; Brondway Trust Co. v. Manheim, 14 A. B. R. 122, 45 Misc. Rep. N. Y. 415; Wilot v. Mudge, 103 U. S. 217; inferentially, In re Jersey Island Packing Co., 18 A. B. R. 417, 152 Fed. 839 (D. C. Calif.); Abbott v. Anderson, 31 A. B. R. 877, Ills. (App. Ct.): In re Wilkins, 27 A. B. R. 235, 191 Fed. 94 (D. C. N. Y.).