MUELLER v. ELBA OIL CO ET AL (1942)

Plaintiff, as the assignee for collection of the MacClatchie Manufacturing Company of California, brought this action against the Elba Oil Company and its four general partners to recover from them the sum of $362.23, the purchase price of certain goods sold the partnership. General partners Frank Raiter and Louis Oleari defended the action on the ground that the debt was a partnership debt; that the partnership was adjudicated a bankrupt; that these two defendants paid $7,500 to the trustee in bankruptcy in full settlement, discharge and compromise of all their liability to creditors of the copartnership and as a composition of creditors of the copartnership; that the court made an order discharging these two defendants from any and all liability to creditors of the copartnership individually and as copartners. It is further alleged that the copartnership was discharged in bankruptcy. From a judgment determining that Raiter and Oleari had been discharged from liability for this debt plaintiff prosecutes this appeal.

The cause was tried upon an agreed statement of facts. It therein appears that in October of 1937 the Elba Oil Company, a limited partnership with four general partners including Raiter and Oleari, became indebted to the MacClatchie Manufacturing Company of California for the purchase price of certain materials. This debt was unsecured and has never been paid. On December 31, 1937, an involuntary petition in bankruptcy was filed against the partnership, and on January 4, 1938, the partnership was adjudicated a bankrupt, and one Russell B. Seymour became the trustee for the bankrupt. The debt owing to plaintiff's assignor was duly scheduled as an unsecured partnership debt, and thereafter the notice to creditors and other notices were properly sent to this creditor. Although its debt had thus been duly scheduled, the MacClatchie Company filed no claim in the bankruptcy proceeding.

On April 4, 1938, the trustee filed a petition to marshal the individual assets of the partners, in which he prayed that they be directed to file forthwith a schedule of their assets and liabilities. He averred in the petition, on information and belief, that the purported limited partners, naming them, were in fact general partners. The record shows two orders to show cause, directed to both general and limited partners, issued by the referee in April, 1938. A third order to show cause, dated December 19, 1938, was directed to the four general partners only, including Raiter and Oleari. Apparently no hearings were ever held on any of these orders to show cause.

On June 28, 1938, a bank wrote a letter to Seymour as trustee, on behalf of Raiter and Oleari, enclosing a cashier's check for $7,500, and offering to compromise Raiter's and Oleari's liability for the partnership debts. The letter stated that the check should be used for effecting “a composition of creditors of said Elba Oil Company.” The letter containing this offer expressly stated that it was subject to the following conditions: (1) All secured creditors must accept their security in full discharge; (2) that all unsecured creditors and costs and fees of the bankruptcy proceeding should be paid from the $7,500; and (3) that each creditor of the partnership should execute a full release of Raiter and Oleari “of and from any and all individual liability to each of said creditors.”

On January 30, 1939, the trustee filed with the referee a “petition to compromise controversy.” This petition recites that the trustee had filed a petition to marshal the assets of the individual partners; that on December 19, 1938, an order to show cause had been issued on the petition directed to the four general partners, which order was set for hearing on January 26, 1939. While the proceeding to marshal the assets of the individual partners was pending, the petition continues, many conferences were held between the trustee and counsel for Raiter and Oleari. The trustee recommended that if the sum of $7,500 was paid to the trustee in full settlement and discharge of the individual liability of Raiter and Oleari to the creditors of the bankrupt, he, the trustee, would present to the court a petition “to compromise the controversy.”

On June 28, 1938, the petition proceeds, the trustee received the cashier's check for $7,500; that thereafter numerous conferences were had between the trustee and attorneys for “various creditors of the estate” and a basis of compromise arrived at “between all of the parties to the litigation hereinabove set forth,” which petitioner believes is for the best interest of the estate; that it is doubtful whether the estate could realize any greater sum from any order directing Raiter and Oleari to turn over their assets to the trustee, and that there is “also some doubt as to the ability” of the trustee “to prevail in the said proceeding to marshal the assets of the said Frank E. Raiter and Louis G. Oleari.” The prayer is for an order authorizing the trustee to compromise the controversy and “completely releasing and discharging the said Frank E. Raiter and Louis G. Oleari of and from any and all individual liabilities to each and every one of the creditors who have filed claims in the above entitled bankrupt estate.”

On February 20, 1939, the referee made an order granting the trustee's petition to compromise, in which it is recited that it is in the best interests of the creditors of the bankrupt estate that the compromise petitioned for should be approved. The order directs the trustee to compromise the controversy by accepting the $7,500, and further provides that, upon the receipt of the $7,500 by the trustee, Raiter and Oleari “are fully and completely released and discharged from any and all claims, demands, liability, causes of action or judgments against them or either of them, as general partners of the above–named bankrupt.” It should be noted that this order purports to release Oleari and Raiter from the claims of all creditors, while the petition was limited to creditors who had filed claims.

On March 6, 1939, the judge of the Federal District Court made an order of discharge in bankruptcy by which it was provided that “Elba Oil Company, a copartnership composed of * * * Louis Oleari and F. E. Raiter be discharged from all debts and claims which are made provable by said Acts [bankruptcy laws] against its estate” which existed on the day the petition for adjudication of bankruptcy was filed, excepting such debts as are excepted by law from the operation of a discharge in bankruptcy. It is to be noted that the discharge is of the partnership. It does not provide for discharge of the individual liability of the partners for the partnership debts.

We are of the view that the referee's order of February 20, 1939, by which he purported to discharge Raiter and Oleari from individual liability for parnership debts was void on its face for the reason that as an order confirming a composition under § 12 of the Bankruptcy Act, 11 U.S.C.A. § 30, it was required to be made by the judge, and could not validly be made by a referee.

Where a partnership has been adjudicated a bankrupt the individual assets of the general partners may be drawn into the administration of the bankrupt estate, and any surplus remaining after paying individual creditors is applicable to the partnership debts. Section 5, sub. g, of the Bankruptcy Act, 11 U.S.C.A. § 23, sub. g; Francis v. McNeal, 3 Cir., 186 F. 481, 108 C.C.A. 459; 6 Remington on Bankruptcy [4th ed.] p. 499, 505. This results from the rule that a partner is individually liable for partnership debts.

In the case herein, while proceedings to bring the assets of the partners into the bankruptcy were pending, Raiter and Oleari offered $7,500 to be applied in part payment of the partnership creditors on condition that they be released and discharged in full from individual liability to such creditors. The plan was essentially one for a composition. A composition of creditors is a “proceeding, voluntary on both sides, by which the debtor, of his own motion, offers to pay his creditors a certain percentage of their claims in exchange for a release from his liabilities.” 6 Am. Jur. 776, § 416. The offer of composition may be of a lump sum, as in the case herein. In re Bickmore Shoe Co., D.C., 263 F. 926.

A composition when confirmed operates as a discharge in bankruptcy. “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.” 11 U.S.C.A. § 32, see cases cited p. 133, note 631; for similar provision as to arrangements under the 1938 amendments, see 11 U.S.C.A. § 771; Myers v. International Trust Co., 273 U.S. 380, 47 S.Ct. 372, 71 L.Ed. 692. Before confirmation of the composition is sought it is required that it be accepted in writing by a majority in number of all creditors whose claims have been allowed, which number must represent a majority in amount of claims. 11 U.S.C.A. §§ 30, 202. Since a composition when confirmed is binding on creditors who do not assent, it is settled that there must be strict compliance with the statutory requirements. In re Palmer, D.C., 2 F.Supp. 275, 277; In re Frear, D.C., 120 F. 978; 8 C.J.S., Bankruptcy, § 653, p. 1689.

Prior to the 1938 amendments to the Bankruptcy Act, compositions were provided for by §§ 12 and 74. 11 U.S.C.A. §§ 30, 202. Under the 1938 amendments these sections were superseded by provision for “arrangements.” 52 Stats. 840, enacting clause, and Chap. XI at p. 905, 11 U.S.C.A. § 701 et seq. The new procedure includes compositions in the term “arrangements.” This is plain from the definition, as follows: “ ‘Arrangement’ shall mean any plan of a debtor for the settlement, satisfaction, or extension of the time of payment of his unsecured debts, upon any terms.” 11 U.S.C.A. § 706. An arrangement is not required to be confirmed by the judge. Under the 1938 amendments referees are invested with jurisdiction, subject to review by the judge, to “confirm or refuse to confirm arrangements or wage–earner plans, or set aside the confirmation of arrangements or wage–earner plans and reinstate the proceedings or cases.” 11 U.S.C.A. § 66; see, also, 11 U.S.C.A. §§ 761–772, providing for confirmation by the “court,” but not requiring confirmation by the “judge.”

These sections are not applicable to this proceeding. The 1938 amendments expressly provide that §§ 12, 73 and 74, as amended, “shall continue in full force and effect with respect to proceedings pending under those sections upon the effective date of this amendatory Act.” 52 Stats. p. 916, 11 U.S.C.A. § 799(3). The composition in the present case is referable to § 12. A composition under § 74 is initiated by the filing of a petition or answer in which the debtor states that he desires to effect a composition. Upon the judge approving the petition the composition proceeding goes forward with a meeting of creditors and other formalities. 11 U.S.C.A. § 202. Such procedure was not followed in the present case. A composition under § 12 originates in an “offer of composition.” 11 U.S.C.A. § 30; Nassau Smelting & Refining Works v. Brightwood Bronze F. Co., 265 U.S. 269, 271, 44 S.Ct. 506, 68 L.Ed. 1013; Myers v. International Trust Co., 273 U.S. 380, 47 S.Ct. 372, 71 L.Ed. 692; 8 C.J.S., Bankruptcy, § 653, p. 1688. The offer in the present case was made “on or about June 28, 1938,” according to the agreed statement of facts. The 1938 amendments were approved on June 22, 1938, and by terms of the amendatory act went into effect three months later, that is, on September 22, 1938. 52 Stats. p. 940, 11 U.S.C.A. § 1 note.

By virtue of the express provision of the amendatory act above–referred to, § 12 was applicable to the pending proceeding herein involved. Section 12 provides that “the judge shall confirm a composition.” 11 U.S.C.A. § 30; In re Bloodworth–Stembridge Co., D.C., 178 F. 372; In re Everick Art Corp., 2 Cir., 39 F.2d 765, 768. When the act uses the term “court,” the referee may be included, but when the term “judge” is used the referee is excluded. In re McMurray, D.C., 8 F. Supp. 449; 8 C.J.S., Bankruptcy, §§ 268, 270, pp. 976, 978; 2 Remington on Bankruptcy, 5th Ed., 92. Section 1 of the act provides: “ ‘Judge’ shall mean a judge of a court of bankruptcy, not including the referee.” 11 U.S.C.A. § 1, subd. 16; subd. 20 under the section as amended in 1938.

The judge's subsequent order of discharge does not operate as a release of the individual liability of the partners for the partnership debts. The discharge was of the partnership. It was provided therein that “Elba Oil Company, a copartnership composed of Joseph E. Barrett, J. S. Lees, Louis Oleari and F. E. Raiter be discharged from all debts and claims which are made provable by said Acts against its estate, and which existed on the 31st day of December, A. D. 1937, on which day the petition for adjudication was filed against it; excepting such debts as are by law excepted from the operation of a discharge in bankruptcy.”

The 1938 amendment added to § 5 of the Bankruptcy Act, paragraph j, reads as follows: “The discharge of a partnership shall not discharge the individual general partners thereof from the partnership debts.” 11 U.S.C.A. § 23, sub. j. The amendatory act contained the following provision: “Except as otherwise provided in this amendatory Act, the provisions of this amendatory Act shall govern proceedings so far as practicable in cases pending when it takes effect.” 52 Stats., p. 940, 11 U.S.C.A. § 1 note; see, In re Wm. Akers, Jr., Co., Inc., D.C., 31 F.Supp. 900. In view of this provision section 5, sub. j, 11 U.S.C.A. § 23, sub. j, governs the interpretation of the discharge herein.

Prior to the enactment of § 5, sub. j, there was some doubt as to whether a discharge of the partnership only had the effect of discharging the individual liability of the partners for the partnership debts. Myers v International Trust Co., supra; 7 Remington on Bankruptcy, 5th Ed., p. 863; 8 C.J.S., Bankruptcy, § 580, p. 1546; 37 Harv. Law Rev. 614. The 1938 provision removed this doubt.

There appear to be other defects in the proceeding viewed as a composition, in addition to the absence of confirmation by the judge. Where the offer of composition is made by partners of a partnership adjudicated bankrupt it should not be made until after the schedule of individual assets and liabilities as well as of partnership assets is on file. In re Palmer, D.C., 2 F.Supp. 275, 277. This is because the creditors in determining whether it is to their advantage to assent to an offer of composition should have full information as to assets available to satisfy their claims. Any surplus of individual assets after paying individual debts may be used to pay partnership claims. In the present case the offer was made while proceedings to compel the partners to file their schedules were still pending and before individual schedules had been filed.

The notice to creditors was of a petition praying for discharge of the liability of the partners Raiter and Oleari to creditors who had filed claims, whereas the order of the referee entered on the petition discharges them from any and all liability which might exist against either of them as partners.

The bankruptcy papers included in the present record also show a failure to comply with the requirement that before confirmation is sought the composition must have been accepted in writing by a majority of the creditors. 11 U.S.C.A. § 30. The apparent reason for these omissions will be discussed hereafter. It is not necessary to determine whether these irregularities singly or together would render the composition void as a discharge. It is clear that, where the act requires the judge to confirm a composition, confirmation by a referee, a subordinate official of the court, is of no legal effect. Such confirmation is void on its face as to creditors who did not participate in the composition. The composition is binding, however, as a common law composition, on those who participated in it. In re Clarence A. Nachman Co., 2 Cir., 6 F.2d 427; Paris Medicine Co. v. Lusby, 174 Ark. 749, 297 S.W. 1015; Welles–Kahn Co. v. Klein, 81 Fla. 524, 527, 88 So. 315; 8 C.J.S., Bankruptcy, § 653, p. 1688.

The fact that plaintiff's assignor had not filed a claim in the bankruptcy proceeding does not bar it or its assignor from attacking the void order of confirmation. The offer of composition was made on June 28, 1938. The adjudication took place on January 4, 1938. Hence, the offer of composition was made within six months' period following adjudication of bankruptcy, in which claims are required to be filed. 11 U.S.C.A. § 93, sub. n; 44 U.S.Stats. 666, amending § 57 of the Bankruptcy Act. The claim of plaintiff's assignor was listed in the partnership schedules filed. An offer of composition should extend to all creditors whose claims are listed by the bankrupt. 8 C.J.S., Bankruptcy, §§ 654, 658, pp. 1689, 1692; 7 Rem., 4th Ed., pp. 196, 238; 8 Collier on Bankruptcy, 14th Ed., pp. 959, 1237, 1238; Nassau Smelting & Refining Works v. Brightwood Bronze F. Co., 265 U.S. 269, 44 S.Ct. 506, 68 L.Ed. 1013; In re Adamson, 2 Cir., 83 F.2d 211. Thus it has been held that where the bankrupt makes an offer of composition before the time to file claims has passed, creditors whose claims are scheduled by the bankrupt need not make proof of claims to share in the composition. Nassau Smelting & Refining Works v. Brightwood Bronze F. Co., supra.

It should be noted that the terms of the offer of composition here involved did not confine it to creditors who had filed claims, nor did the referee's order of approval so limit it. But the trustee's interpretation of the offer evidently was that payment should be made only to those who had proved claims, since he prayed in his petition that Raiter and Oleari be released from individual liability to creditors who had filed claims. In any event no payment was made to plaintiff's assignor, nor did it in any way participate in the composition proceedings. In the circumstances the void order of confirmation did not operate as to it to discharge the individual liability of the general partners Raiter and Oleari.

It appears that the failure to follow the procedure prescribed for a composition was due to the fact that the matter was handled as “a compromise of controversy.” The act provides: “The receiver or trustee may, with the approval of the court, compromise any controversy arising in the administration of the estate upon such terms as he may deem for the best interest of the estate.” 11 U.S.C.A. § 50; 2 Remington on Bankruptcy, 5th Ed., p. 717; 8 C.J.S., Bankruptcy, § 305, p. 1032. Since approval of the “court,” rather than of the “judge” is required, approval of a compromise may be given by the referee.

But that which is as a matter of law a composition may not be accomplished without complying with the statutory requirements under the guise of being a compromise of controversy. “This section [§ 27, 11 U.S.C.A. § 50] should not be confused with § 12 on compositions. It is intended to supply a summary and inexpensive way of settling questions arising in the administration of bankrupt estates. It is most often used in connection with contests on claims filed against the estate, or the contested collections of claims due the estate. It cannot, of course, be resorted to where the matter in controversy is the right to a discharge.” Gilbert's Collier on Bankruptcy, one vol., 4th Ed., p. 570.

A “compromise of controversy” implies a dispute to be settled. In the case herein the papers in the bankruptcy proceeding which have been made part of the record in the present case show a dispute as to whether certain persons who claimed to be limited partners were in fact general partners. But there is no intimation of any dispute as to the status of the four general partners, including Raiter and Oleari. The trustee's petitions described them as general partners and the stipulation of facts upon which the present action was heard so describes them.

The petition to compromise recites that it is doubtful that the estate can realize from marshaling of the individual assets of Raiter and Oleari a greater sum than they offered to pay, that is, $7,500, and that “there is also some doubt as to the ability of your Trustee to prevail in the said proceeding to marshal the assets of the said Frank E. Raiter and Louis G. Oleari.” However, as to general partners the authority of the trustee to marshal assets to the end of applying any surplus remaining after paying individual debts to partnership obligations exists as a matter of right, unless, perhaps, where it appears unlikely that any surplus above individual debts will result. It would seem, therefore, that on the record the only dispute which could exist was whether liquidation of the individual assets of Raiter and Oleari would yield any surplus for partnership creditors. In our view such a dispute may not be made the subject of a compromise of controversy which will result in discharge of general partners from individual liability to partnership creditors.

The Act, prior to the 1938 amendment, provided only two methods whereby a bankrupt could secure a discharge––the discharge granted following full administration in bankruptcy, and a discharge upon confirmation of a composition of creditors. Welles–Kahn Co. v. Klein, supra. Under the 1938 amendment a discharge may be secured upon confirmation of an arrangement. The right of a partner to secure a discharge from individual liability to partnership creditors where the bankrupt is a partnership is similarly limited. The individual assets of a partner may be drawn into the bankruptcy administration. The Act makes no provision whereby one whose assets are subject to the jurisdiction of the court in a bankruptcy proceeding may secure a discharge from liability to creditors of the bankrupt in any other way. See In re Northampton Portland Cement Co., D.C., 185 F. 542.

But for the fact that the court in the bankruptcy proceeding has jurisdiction of the individual assets of a partner where a partnership has been adjudicated bankrupt, it would be without jurisdiction to discharge a partner at all. This is made plain by the decision in Hamilton–Brown Shoe Co. v. Ben L. Berwald Shoe Co., 5 Cir., 10 F.2d 275, writ of certiorari denied by Supreme Court, 271 U.S. 671, 46 S.Ct. 485, 70 L.Ed. 1143. In that case a corporation was adjudicated bankrupt. Its president and chief stockholder made an offer to the trustee to pay unsecured creditors 55% of their claims on condition that the corporation and all its officers and directors be released from all liability growing out of operation of the bankrupt corporation. Suits were then pending in a state court by certain of the creditors against the officers and directors on claims of individual liability growing out of corporate transactions. The Circuit Court of Appeals held that the court in bankruptcy was without jurisdiction to discharge the officers and directors under the compromise of controversy provision or at all. The court reversed the decision of the district court approving the compromise. In re Ben L. Berwald Shoe Co., D.C., 1 F.2d 494. The circuit court was of the view that the court in bankruptcy was without right thus to cut off the individual liability, if any, of the officers and directors to creditors of the corporation. The court said [[[[10 F.2d 276]: “We cannot assume that these claims [the claims of the creditors against the officers and directors which were being asserted in the state court suits] are without substance, and with regard to them the trustee was not authorized to represent appellants. A simple illustration will demonstrate this: It would never be contended by any one that the trustee could compromise the claim of an individual creditor against a third person arising from his indorsement of the bankrupt's note. There is no difference in principle in the case here presented. Furthermore, none of the parties has submitted himself to the jurisdiction of the District Court with regard to these suits, and the District Court was without jurisdiction to bind appellants to the full extent of the compromise offered.”

That is, the trustee, with the approval of the court, may arrange for compromise of a dispute based on a claim of liability of a third person to the bankrupt, but he cannot arrange for a compromise of a liability of such third person to creditors of the bankrupt. He does not represent the creditors as to such liability.

To summarize––the court in bankruptcy was without jurisdiction to discharge the individual liability of Raiter and Oleari as general partners except following full administration in bankruptcy or upon composition proceedings which met the statutory requirements. The referee's order was void as a discharge of the individual liability of Raiter and Oleari. It was void as a composition of creditors under § 12 of the Act because it lacked confirmation by a judge. The provision for compromise of controversies does not authorize a discharge of the individual liability of a partner to partnership creditors.

The judgment is reversed.

I dissent. The respondents Raiter and Oleari, after having been thrown into involuntary bankruptcy, made an offer of composition with creditors whereby they paid $7,500 in cash in full settlement of all creditors' claims against them as individuals and as members of a copartnership; and after several months negotiations the offer and the money were accepted. The trustee to whom the composition money was paid petitioned the bankruptcy court for confirmation, and after a full hearing of which due notice was given the composition was confirmed by the referee; thereupon the money was distributed by the trustee to the creditors, and thereafter the judge of the bankruptcy court granted the discharge in bankruptcy.

Appellant's assignor was one of the creditors of the partnership and was duly scheduled as such, but refrained from proving its claim. Subsequent to the adjudication of bankruptcy and prior to the making of the offer for composition said creditor assigned its claim to appellant, and he brought this action thereon in the superior court against the bankrupt partnership and its individual members. Following the discharge in bankruptcy respondents filed an amended answer wherein they pleaded as a bar to the action the confirmation of the composition and the discharge in bankruptcy. The cause was tried on an agreed statement of facts, and judgment was given for defendants.

In that state of the record it seems clear to me that the reversal of the trial court's judgment not only constitutes a collateral attack upon the final orders and decrees of the bankruptcy court, but is based upon a hypertechnical analysis of the legal forms followed by the trustee and the referee in confirming the composition, for which forms these respondents were in no way responsible, and which reversal results in a manifest injustice to these respondents.

“A composition in bankruptcy is a settlement with creditors, partaking of the nature of a contract. It is a proceeding, voluntary on both sides, by which the debtor, of his own motion, offers to pay his creditors a certain percentage of their claims in exchange for a release from his liabilities; the amount offered may be less or more than would be realized through distribution in bankruptcy by the trustee, and the creditors may accept it or refuse it, though they are treated as a class and the will of the majority is enforced upon the minority provided the decision of the majority is approved by the court. The composition proceeding in a measure supersedes the proceedings in bankruptcy.” 6 Am.Jur., p. 776, citing numerous cases. The confirmation of a composition offered by a bankrupt discharges him from all of his debts and reinvests in him the title to his property. 6 Am.Jur., p. 777. Upon signing the order of composition the bankruptcy court loses jurisdiction except to set aside the composition within the time and for the reasons permitted by the statute, and “The discharge effected by confirmation of a composition can not be set aside or annulled by a state court, even for fraud that was not discovered within the statutory time. It enjoys the same immunity from collateral attack that is accorded to an order of discharge granted on application therefor.” 6 Am.Jur., p. 779. In this connection it should be here stated that nowhere in the bankruptcy proceedings nor in the trial of the present case was there any charge of fraud.

It is held that “A composition in a bankruptcy proceeding against a partnership discharges the partners as to their liability both as partners and as individuals for the firm debts.” 6 Am.Jur., p. 778. In the present case the offer of composition was made by respondents through a bank. It was in writing, and as follows: “Enclosed herewith is our cashier's check in the sum of $7500.00, dated June 28, 1938, numbered 7794 and payable to you as trustee of the estate of Elba Oil Company, bankrupt. This check is delivered to you for the sole and exclusive purpose of using the same and the proceeds thereof for effecting, completing, and paying a composition of creditors of said Elba Oil Company, No. 32287Y, of the District Court of the United States, Southern District, Central Division, according to the terms and conditions of offer heretofore made or hereafter to be made by our clients, Frank E. Raiter and Louis G. Oleari, as copartners of said Elba Oil Company. We are advised that the terms and conditions of said offer are or will be as follows: (1) that all secured creditors of said Elba Oil Company shall take and accept all properties described in their respective securities in full satisfaction and discharge of the debts secured thereby; (2) that all unsecured creditors and all trustees' fees, attorneys' fees, receivers' fees, costs, etc., shall be fully satisfied and paid out of said sum of $7500; and (3) that each creditor of said Elba Oil Company shall execute in writing a full and complete release and discharge of our clients, Frank E. Raiter and Louis G. Oleari, of and from any and all individual liability to each of said creditors. If you effect, complete, and obtain confirmation of a composition of creditors upon such terms and conditions, you are authorized to use the proceeds of said check for payment of said fees, costs, claims of unsecured creditors, etc., but for no other purpose, and in the event that you are unable to effect, complete, and obtain confirmation of such composition within three months from the date hereof, you shall return said sum of $7500.00 to us without deduction of any kind whatsoever. Until and unless said composition shall be so effected, completed, and confirmation thereof obtained, said sum of $7500 shall be and remain the property of the undersigned.” (Italics ours.)

In the trustee's petition for the confirmation of the composition it was alleged that the petitioner recommended that if the sum of $7,500 was paid over to the trustee “in full and complete settlement, release, and discharge of the individual liability of said Frank E. Raiter and Louis G. Oleari,” said trustee would petition for a confirmation thereof; that after receipt of said sum numerous conferences were had between the trustees, his attorneys and the attorneys for various creditors, and a basis of compromise was arrived at “between all of the parties to the litigation hereinabove set forth,” the basis of which was as follows: “That in consideration of an order being made and entered herein, wherein and whereby Frank E. Raiter and Louis G. Oleari are fully and completely released and discharged of and from any and all individual liabilities to each and every one of the creditors who have filed claims in the above entitled bankruptcy proceedings, being the Elba Oil Company, a copartnership, the said Frank E. Raiter and Louis G. Oleari will, through the Monterey County Trust and Savings Bank, pay to the Trustee herein the sum of $7500.00.” The trustee then went on to allege that he believed it was for the best interests of the creditors of the estate that the compromise be approved, for the reason that it was doubtful that the estate could realize any greater sum from any order that might be made directing them to turn over their assets to the trustee, and that the acceptance of the compromise would eliminate costly and long drawn out litigation and would redound to the benefit of the creditors of the estate. Thereafter the petition came on for hearing before the referee, and the composition was confirmed, the referee having recited in his order of confirmation “that all of the allegations and recitals of said petition were true.” The order of confirmation was dated February 20, 1939, and on March 6, 1939, the judge of the bankruptcy court granted the discharge of said copartnership and the individual members thereof “from all debts and claims which are made provable by said Acts [of bankruptcy] against its estate, and which existed on the 31st day of December, A.D. 1937, on which day the petition for adjudication was filed against it.” At no time during the bankruptcy proceedings nor subsequent to the granting of the discharge did the appellant or his assignor or any other creditor or person interested in the bankruptcy proceeding challenge the validity of or object to any of the proceedings which were being had therein, and as above stated no question of fraud has ever been raised. To the contrary, so far as the record herein shows, the respondents and the trustee acted honestly and in good faith and to the best interests of all parties concerned.

As will be noted from the majority opinion, the attack made upon the bankruptcy proceeding is founded mainly on two grounds: first, several technical errors or mistakes made, apparently inadvertently, by the trustee and the referee in the wording of the petitions, notices, and orders leading up to the confirmation of the composition; secondly, because the order confirming the composition was made by the referee and not by the judge of the bankruptcy court. It is my view that the errors or mistakes adverted to fall far short of being of such substantial character as to justify a state court in repudiating the bankruptcy proceeding. And for two reasons I disagree with the conclusion that the confirmation of the composition was void because the order was made by the referee. In the first place, the bankruptcy law was extensively revised in 1938, the amendments becoming effective in September, 1938. By section 38 of the 1938 law, 11 U.S.C.A. § 66, jurisdiction was expressly conferred on referees to confirm or refuse to confirm “arrangements” which superseded “compositions.” Here the petition for confirmation was filed in January, 1939; and the hearing was had and the composition confirmed in February, 1939. It is true that the 1938 law does not apply to composition proceedings which are pending on the effective date of said law; but I am not convinced that the exemption applies to the vast additional authority conferred upon referees by the new act. However, even assuming that it does, the discharge in bankruptcy, granted by the judge of the court approximately two weeks after the referee had confirmed the composition, in my opinion in itself operated not only as a confirmation of the composition, but also of all acts of the referee performed by him prior to the granting of the discharge. In other words, the act itself provides that upon the confirmation of a composition the consideration given by the bankrupt is distributed according to the direction of the judge and the case is dismissed. Sec. 12, sub. e, 11 U.S.C.A. § 30, sub. e; 6 Am.Jur., p. 779. The discharge in bankruptcy was therefore in effect a dismissal of the bankruptcy proceeding.

As stated in the majority opinion, the debt appellant sued upon was admittedly a partnership debt. It was scheduled as such, and thereafter the notice to creditors and the other notices were properly sent to this creditor; consequently the fact that he did not choose to prove his claim does not exempt him from the binding effect of the bankruptcy proceedings, for as held in the following cases a composition binds creditors with scheduled claims although they do not prove their claims. Nassau Smelting & Refining Works v. Brightwood Bronze F. Co., 265 U.S. 269, 44 S.Ct. 506, 68 L.Ed. 1013, 1015; Eastman Kodak Co. v. Southern Photo Materials Co., 273 U.S. 359, 47 S.Ct. 400, 71 L.Ed. 684. It has even been held that the bankruptcy court has the discretion to pass upon a composition offer although a claim has been omitted from the schedules. In re Spiller, D.C., 230 F. 490. Nor is appellant in a position to claim that he was denied the right to participate in the composition fund because he could have done so if he had proved his claim.

Even assuming, however, that as the majority opinion holds, the confirmation of the composition is void because the order was made by the referee rather than by the judge, appellant is in no better position to maintain his action against the partnership and its individual members because by virtue of the bankruptcy act “Whenever a composition is not confirmed, the estate shall be administered in bankruptcy as herein provided.” Sec. 12, sub. e. In other words, by virtue of the adjudication of involuntary bankruptcy the bankruptcy court through the trustee took possession of the estate of the involuntary bankrupts. It would follow, therefore, that if the composition is void the discharge in bankruptcy is likewise void, and the estate has not yet been administered and the involuntary bankrupts are still immune from actions brought by their creditors. Practically the same situation arose in the case of Joseph v. Rowell, 9 Cir., 108 F.2d 592. There it was claimed that an adjudication of bankruptcy was void because made by a referee instead of the court; also that an order confirming sale of property was void for the same reason. It was held in effect that even though the referee may have exceeded his authority in making the orders complained of, such fact did not divest the bankruptcy court of its jurisdiction over the debtor's property.

For the reasons stated the trial court's judgment in my opinion should be affirmed.

PETERS, Presiding Justice.

WARD, J., concurred.