U.S. Supreme Court
Pepper v. Litton, 308 U.S. 295 (1939)
Pepper v. Litton
Argued November 9, 10, 1939
Decided December 4, 1939
308 U.S. 295
1. The overruling by a state court of a motion made by the trustee of a bankrupt corporation to set aside a judgment against the corporation, where such motion was based exclusively upon the ground that the state practice governing confession of judgments was not followed in obtaining the judgment, and upon the ground that the agent purporting to act for the corporation in the matter was not authorized, does not bar the trustee, acting in the bankruptcy court on behalf of other creditors, from attacking the validity or priority of the claim underlying the judgment, matters which were not in issue and could not have been decided in the state court proceeding. P. 308 U. S. 302.
2. Courts of bankruptcy, in passing upon the validity and priority of claims, exercise equity powers, and have not only the power, but the duty, to disallow or subordinate claims if equity and fairness so require. That power and duty are especially clear where the claim seeking allowance accrues to the benefit of an officer, director, or stockholder of the bankrupt. P. 308 U. S. 303.
3. Merger of a claim in a judgment does not change its nature insofar as provability in bankruptcy is concerned; the court of bankruptcy may look behind the judgment to the essence of the liability. P. 308 U. S. 305.
4. A dominant and controlling stockholder has a fiduciary duty to creditors in dealing with the corporation and with them, and, when his transactions are challenged, must prove the good faith of the transactions and their inherent fairness from the viewpoint of the corporation and those interested therein. This obligation is enforceable by the trustee in bankruptcy of the corporation. P. 308 U. S. 306.
5. A dominant or controlling stockholder or group of stockholders are fiduciaries, as are directors. Their powers are powers in trust. P. 308 U. S. 306.
6. The dominant and controlling stockholder of a corporation, scheming to defraud one of its creditors, sued the corporation on accumulated unpaid salary claims, the amounts of which were fixed by himself, and which he sought to collect only when the corporation was in financial difficulties; caused the corporation to confess chanroblesvirtualawlibrary
judgment; used the judgment to delay the other creditor; levied on part of the corporate property and bought it in at sheriff's sale for much less than his judgment or the other claim; transferred the property to a second "one-man" corporation for six times what it cost him at the sale, payable in stock; caused the first corporation to go into voluntary bankruptcy for the sole purpose of avoiding payment of the other creditor's claim; bought up other debts, and presented his judgment as a claim, preferred in part, against the remaining assets of the bankrupt.
Held, that the judgment claim was properly disallowed by the court of bankruptcy either as a secured or as an unsecured claim. P. 308 U. S. 310.
7. The fact that the judgment lien was perfected more than four months preceding bankruptcy cannot affect the result. P. 308 U. S. 312.
100 F.2d 830, reversed.
Certiorari, 307 U.S. 620, to review the reversal of a judgment disallowing a claim in bankruptcy.