Perry v. Commerce Loan Company/Opinion of the Court

by Tom C. Clark

United States Supreme Court

383 U.S. 392

Warren W. PERRY, Petitioner,  v.  COMMERCE LOAN COMPANY.

 Argued: Jan. 26, 1966. --- Decided: March 7, 1966

Perry, a furnace operator employed by Moore Lead Company, filed a petition in the District Court under Chapter XIII of the Bankruptcy Act, 52 Stat. 930 (1938), as amended, 11 U.S.C. §§ 1001 1086, ^[1] requesting confirmation of his plan for an extension of time within which to pay his debts out of his future wages. In his plan he proposed to pay his debts of $1,412 in 28 equal monthly installments of $60 from his wages of $265 a month. On the hearing for confirmation of the plan, however, it appeared that Perry had previously filed a petition in straight bankruptcy and obtained a discharge therein in 1959, within six years of the filing of this proceeding. On motion of the respondent, Commerce Loan Company, the referee dismissed the plan on the ground that the previous bankruptcy was a bar thereto under the provisions of § 14(c) (5) of the Act. ^[2] On review the District Court upheld the dismissal. The Court of Appeals affirmed. 340 F.2d 588. We granted certiorari, 382 U.S. 889, 86 S.Ct. 187, 15 L.Ed.2d 148, in view of a conflict on the point among the courts of appeals. ^[3] We conclude that confirmations of wage-earner plans by way of extensions are not affected by § 14(c)(5), and, therefore, reverse the judgment below.

Although statutory relief for the financially distressed wage earner had been available to some extent as early as the Bankruptcy Act of 1867, 14 Stat. 517, Congress found in its study prior to the 1938 revision of the bankruptcy laws that there were no effective provisions for the complete repayment of the wage earner's debts suited to his problems. H.R.Rep.No.1409, 75th Cong., 1st Sess., 53 (1937). For example, compositions under § 12 of the 1898 Act, 30 Stat. 549, were available to the wage earner, but the relief afforded was unsatisfactory. Section 12 proceedings, which were primarily adaptable for use by business entities, were disproportionately expensive in view of the small sums ordinarily involved in wage-earner cases; they lacked flexibility;and they did not provide for jurisdiction of the court subsequent to confirmation. Other provisions of the Act had similar disadvantages. Faced with inadequate relief under the federal bankruptcy laws and often with little protection from creditors under state law, the only course usually open to the wage-earning debtor was straight bankruptcy. In such proceedings, everyone lost the creditors by receiving a mere fraction of their claims, the debtor by bearing thereafter the stigma of having been adjudged a bankrupt. In designing a remedy for the dilemma facing a debtor seeking to repay, rather than avoid, his obligations, the Congress settled upon the wage-earner extension-of-time procedures of Chapter XIII. The chapter gave-and was intended to give-to the wage earner a reasonable opportunity to arrange installment payments to be made out of his future earnings. Congress clearly intended to encourage wage earners to pay their debts in full, rather than to go into straight bankruptcy or composition, by offering two inducements: (1) avoidance of an adjudication of bankruptcy with its attendant stigma; and, at the same time, (2) temporary freedom during the extension from garnishments, attachments and other harassment by creditors. H.R.Rep.No.1409, 75th Cong., 1st Sess., at 52-55.

History demonstrates that extension plans under Chapter XIII are fulfilling the purposes intended. The records of the Administrative Office of the United States Courts show that over the past 20 years more than 20% of all proceedings filed under the Bankruptcy Act by wage earners have been for plans under Chapter XIII, the overwhelming majority of these being for extension plans. ^[4] Since many wage earners who go into bankruptcy do not proceed under Chapter XIII because they are unemployed (and consequently have no earnings to use for extension arrangements), have an inextricably large indebtedness, or are simply unaware of the existence of an alternative to straight bankruptcy, the 20% figure is even more significant. Moreover, large sums of money are annually returned to creditors under extension plans, the current rate being well over $26,000,000. As wage earners ordinarily have little or no assets available for distribution in straight bankruptcy, these sums represent settlements which the debtors would otherwise be unable to effect and the creditors unable to obtain. See Note, The Wage Earner Plan A Superior Alternative to Straight Bankruptcy, 9 Utah L.Rev. 730 (1965); Allgood, Operation of the Wage Earners' Plan in the Northern District of Alabama, 14 Rutgers L.Rev. 578 (1960).

In light of the proven advantages of extension plans, the Congress has re-expressed its legislative purpose in amendments to Chapter XIII adopted since the original enactment. A report to the House of Representatives expresses it in these words:

'(C)hapter XIII provides a highly desirable method for dealing with the financial difficulties of individuals. It creates an equitable and feasible way for the honest and conscientious debtor to pay off his debts rather than having them discharged in bankruptcy. The power of the court to change the amount and maturity of installment payments without affecting the aggregate amount of such payments makes chapter XIII particularly applicable to the present-day financial problems generated by heavy installment buying.' H.R.Rep.No.193, 86th Cong., 1st Sess., 2 (1959).

'We think there can be no doubt * * * that a procedure by which a debtor who is financially involved and unable to meet his debts as they mature, over a period of time, works out of his involvement and pays his debts in full is good for his creditors and good for him.' S.Rep.No.179, 86th Cong., 1st Sess., 2 (1959), U.S.Code Cong. & Admin. News 1959, p. 1446.

It is with this underlying policy in mind that we turn to a consideration of the problem posed here, i.e., whether confirmation of an extension plan is barred by a discharge in bankruptcy obtained within the previous six years.

Chapter XIII requires the confirmation of a wage-earner extension plan if 'the debtor has not been guilty of any of the acts or failed to perform any of the duties which would be a bar to the discharge of the bankrupt * * *.' § 656(a) (3). And Chapter III commands that a discharge of a bankrupt shall be granted unless the court is satisfied that the bankrupt has 'within six years prior to the date of the filing of the petition in bankruptcy * * * been granted a discharge, or had a composition or an arrangement by way of composition or a wage earner's plan by way of composition confirmed under this Act * * *.' § 14(c)(5). The 'discharge' of a debtor under a wage-earner plan shall issue after compliance with the provisions of the confirmed plan, § 660, c. XIII, 11 U.S.C. § 1060. If at the expiration of three years from the date of confirmation of the plan the debtor has not completed his payments in accordance with his plan the court may, after notice and hearing, discharge the debts and liabilities dischargeable under the plan, provided the court is satisfied that the debtor's failure to make all of his payments 'was due to circumstances for which he could not be justly held accountable.' § 661, c. XIII, 11 U.S.C. § 1061. And finally, § 602, of Chapter XIII ^[5] declares that the provisions of Chapters I through VII of the Bankruptcy Act, insofar as they are not inconsistent or in conflict with the provisions of Chapter XIII, apply in proceedings thereunder.

We should note at the outset that in his present application for relief Perry did not file a straight, voluntary bankruptcy action in the District Court, nor 'a composition or an arrangement by way of composition or a wage earner's plan by way of composition.' He proposed to pay all his debts, secured and unsecured, and sought only an extension of time-28 months-in which to pay them in equal installments from his future wages. Ordinarily, a wage earner seeking to obtain the benefits of extension proceedings under Chapter XIII need only file a plan that meets the approval of the majority of his creditors, § 652, 11 U.S.C. § 1052, and is confirmed by the court; whereupon the plan becomes binding, § 657, 11 U.S.C. § 1057, and the appointed trustee commences collecting and disbursing to the creditors the periodic payments provided under the plan. Extension plans, therefore, differ materially from straight bankruptcy, arrangements under Chapters XI and XII, and wage-earner plans by way of composition, all of which contemplate only a partial payment of the wage earner's debts. Indeed, under an extension plan, the wage earner who makes the required payments will have paid his debts in full and will not need a discharge, even though the Act provides for a formal one. § 660.

In view of these considerations and the purposes of Chapter XIII as outlined above, we do not believe that the Congress intended to apply the six-year bar of § 14(c)(5) to the confirmation of wage-earner extension plans. The six-year bar was enacted 35 years prior to the adoption of Chapter XIII, 32 Stat. 797 (1903), at a time when no relief corresponding to extension plans existed under the Bankruptcy Act. The unmistakable purpose of the six-year provision was to prevent the creation of a class of habitual bankrupts-debtors who might repeatedly escape their obligations as frequently as they chose by going through repeated bankruptcy. See H.R.Rep.No.1698, 57th Cong., 1st Sess., 2 (1902); In re Thompson, D.C., 51 F.Supp. 12, 13 (1943). But an extension plan has no escape hatch for debtors, it is 'a method by which, without resorting to bankruptcy proceedings in the usual sense, a wage earner may meet the claims of creditors.' S.Rep.No.179, 86th Cong., 1st Sess., 2 (1959). To apply the six-year bar at the time of ruling on the confirmation of an extension plan would be both illogical and in head-on collision with the congressional purpose as announced in the adoption and design of extension plans under Chapter XIII. ^[6] Even if a literal reading of these provisions suggested the application of § 14(c)(5) to extension plans, we would have little hesitation in construing the Act to give effect to the clear policy underlying Chapter XIII. As was said in United States v. American Trucking Assns., 310 U.S. 534, 543, 60 S.Ct. 1059, 1063, 84 L.Ed. 1345 (1940):

'There is, of course, no more persuasive evidence of the purpose of a statute than the words by which the legislature undertook to give expression to its wishes. Often these words are sufficient in and of themselves to determine the purpose of the legislation. In such cases we have followed their plain meaning. When that meaning has led to absurd or futile results, however, this Court has looked beyond the words to the purpose of the act. Frequently, however, even when the plain meaning did not produce absurd results but merely an unreasonable one 'plainly at variance with the policy of the legislation as a whole' this Court has followed that purpose, rather than the literal words.'

But such a literal reading is not apparent in this case. Section 656(a)(3) does not, on its face, state that a court may confirm an extension plan only if the debtor is eligible for a discharge in bankruptcy. Rather, the language of the section speaks, ambiguously, of 'guilty' acts and unfulfilled duties. There is, of course, no unfulfilled duty involved in § 14(c)(5). Moreover, a prior bankruptcy is hardly a 'guilty' act within the usual meaning of that word, and its use as a reference to § 14(c)(5) is strained indeed. In fact, the legislative history of § 14(c) lends some support to a view that a prior discharge is not a 'guilty' act. In 1903, when the forerunners of subdivisions (3) through (6) were originally added to § 14(c), the House report stated:

This amendment also provides four additional grounds for refusing a discharge in bankruptcy: (1) Obtaining property on credit on materially false statements; (2) making a fraudulent transfer of property; (3) having been granted or denied a discharge in bankruptcy within six years, and (4) having refused to obey the lawful orders of the court or having refused to answer material questions approved by the court. No person who has been guilty of any of these fraudulent acts should be discharged, and a person who has refused to obey the order of the court ought not to be discharged, and it is quite clear that no person should have the benefit of the act as a voluntary bankrupt oftener than once in six years.' H.R.Rep.No. 1698, 57th Cong., 1st Sess., 2 (1902). (Italics added.)

This language might be construed to set apart acts which are criminal or reprehensible in nature and to consider a prior bankruptcy to be something other than a 'guilty' act. But we need not, and do not, go so far as to place this interpretation on the words 'guilty acts.' It suffices that we find in them sufficient ambiguity to impel recourse to the legislative purposes, outlined above, underlying § 14(c)(5). And while the identical language of § 656(a)(3) has been a part of the Bankruptcy Act since 1898, as a restriction to confirmation of compositions under what is now § 366(3), 52 Stat. 911, as amended, 11 U.S.C. § 766(3) and § 472(3), 52 Stat. 923, as amended, 11 U.S.C. § 872(3), there is no indication that its enactment in Chapter XIII was intended to bar confirmation of wage-earner extensions. Indeed, it would seem that the absence of any legislative history bearing on the adoption of this provision in Chapter XIII indicates that its inclusion was a legislative oversight, ^[7] at least insofar as it bears on wage-earners' extension plans.

This oversight is, of course, cured by the provisions of § 602, which further buttress our conclusion. That section directs that the provisions of Chapters I through VII, which include § 14(c)(5), are incorporated into Chapter XIII only 'insofar as they are not inconsistent or in conflict with the provisions of this chapter.' The rationale of § 14(c)(5)-the prevention of recurrent avoidance of debts-is so inconsistent with the aims of extension plans as to fall squarely within the exception of § 602.

It is claimed, however, that § 686(5) of Chapter XIII, 11 U.S.C. § 1086(5), indicates a contrary result. We think not. This provision, in setting the effective date of the chapter, provides that confirmations thereunder 'shall not be refused because of a discharge granted or a composition confirmed prior to the effective date of this amendatory Act.' It must be remembered that extension-plan relief of Chapter XIII was novel to the law of bankruptcy. However, both compositions and straight bankruptcies were old on the books. The Congress, we believe, was only making certain, insofar as extensions were concerned, that the old procedures would not affect the new. This would be consistent with the purpose of the Congress not to make § 14(c)(5) applicable to confirmations in extension-plan cases. Rather than making an illogical exemption from the six-year bar, given in cases where a discharge had been received before-but not after-the new Act, § 686(5) merely gave expansive effect to the congressional purpose by making it clear that the remedy afforded be available retroactively as well as prospectively.

We emphasize that our construction of the Act does not preclude application of § 14(c)(5) to confirmations of general arrangements under Chapter XI or to real property arrangements under Chapter XIII. It is true that restrictions identical in phrasing to § 656(a)(3) appear both in Chapter XI, § 366(3), and in Chapter XII, § 472(3). The relief afforded in those chapters, however, represents a wholly different statutory scheme from wage-earners' extensions, and the restrictive provisions are not therefore, in pari materia. Sections 366(3) and 472(3) neither impart to nor receive from § 656(a)(3) a meaningful effect. Nor does our construction imply an immunity from the six-year bar to those seeking confirmation of wage-earner compositions. A composition under Chapter XIII, unlike an extension, is closely akin to straight bankruptcy and to proceedings under Chapters XI and XII, for under such a plan the debtor is discharged from his debts and claims of the creditors are only partially paid. In re Jensen, 7 Cir., 200 F.2d 58 (1952), cert. denied, 345 U.S. 926, 73 S.Ct. 785, 97 L.Ed. 1357 (1953), but see In re Goldberg, 53 F.2d 454, 80 A.L.R. 399 (1931). It is both logical and consistent with the underlying purposes of § 14(c)(5) that confirmation of wage-earner compositions be barred by prior bankruptcy, since repeated use of such plans would in effect, provide an opportunity for abuse of the Act.

It has been argued that extension plans do not completely avoid the possibility of adjusting the wage earner's debts. It is true that § 660 provides for discharge after compliance with the provisions of a Chapter XIII plan. While this section applies to wage-earner compositions as well as to extensions, a 'discharge' thereunder has a wholly different impact where an extension is involved. In the latter case a discharge is little more than a mere formality. It is also claimed that § 661 presents a somewhat more troublesome objection. That section as we have noted may allow a wage earner to obtain a release from all dischargeable debts if, after notice and hearing, the court is satisfied that the failure of the debtor to comply with the plan was due to circumstances for which he could not be held justly accountable. However, we see no serious problems in this section. First, experience has shown that almost all plans approved under the Act envision repayment within three years. The problem, therefore, is not likely to arise. Second, there are adequate provisions for notice and hearing prior to a discharge under § 661. Objecting creditors may raise § 14(c)(5) as a bar to relief if and when the debtor seeks such relief. A request for relief under § 661 would, in effect, constitute an attempt to transpose an extension plan into a composition, and a grant of relief thereunder would, at that time, be tantamount to a confirmation of a composition. The six-year bar would, therefore, be operative in such a situation. In view of this, as well as the power of the court to make certain that the provisions of the chapter are not abused, we see no reason to allow this section alone to destroy the beneficial purposes of enactment. ^[8]

For the foregoing reasons, we conclude that petitioner's plan should have been confirmed.

Reversed and remanded.

Mr. Justice HARLAN, dissenting.

Notes

1. All United States Code citations herein refer to the 1964 edition.
2. 52 Stat. 850 (1938), as amended, 11 U.S.C. § 32(c)(5):
3. Compare In re Schlageter, 319 F.2d 821 (C.A.3d Cir.1963), and Perry v. Commerce Loan Co., 340 F.2d 588, with Edins v. Helzberg's Diamond Shops, Inc., 315 F.2d 223 (C.A.10th Cir.1963), and In re Mahaley, 187 F.Supp. 229 (D.C.S.D.Cal.1960). See also In re Mayorga, 355 F.2d 89 (C.A.9th Cir.1966).
4. Chapter XIII also provides for wage-earner plans by way of composition. Compositions under that chapter, however, are almost insignificant in the operation of wage-earner plans because most creditors will not give the necessary approval. The latest published statistics show that 95% of the funds paid to creditors under Chapter XIII proceedings derive from extensions rather than compositions. Administrative Office of the United States Courts, Tables of Bankruptcy Statistics, Table F 11 (1964) (by computation).
5. 11 U.S.C. § 1002: 'The provisions of chapters 1-7 of this title shall, insofar as they are not inconsistent or in conflict with the provisions of this chapter, apply in proceedings under this chapter * * *.'
6. Such a collision undoubtedly affects the functioning of the Act. The Administrative Office of the United States Courts reports that a 'pronounced drop in Chapter XIII filings' has been noted in the districts in the Sixth Circuit as a result of the holding in Perry. Administrative Office of the United States Courts, Memorandum for the Committee on Bankruptcy Administration of the Judicial Conference of the United States, Report on the Use of Chapter XIII, p. 2 (June 22, 1965).
7. This is not the only example of drafting oversights in the Act. Although § 14(c)(5) was amended in 1938 to include a reference to wage-earner compositions, the provision in that section relating to confirmation of a composition was not deleted even though § 12 of the 1898 Act, 30 Stat. 549, under which such a composition might have been confirmed, was repealed in the same enactment.
8. We note that the National Bankruptcy Conference has proposed amendments to the Act which are intended to clarify the interrelationship of §§ 14(c)(5), 656(a)(3), and 661. The proposed clarification is in accord with our construction of the Act. See H.R. 20, 89th Cong., 1st Sess. (1965). The Judicial Conference, upon request of the Congress, has submitted its views approving the bill. Letter from the Director of the Administrative Office of the United States Courts to the Chairman of the Committee on the Judiciary, House of Representatives (September 29, 1965). See also Report of the Proceedings of the Judicial Conference of the United States, at 68 (September 22-23, 1965).