Galbraith v. Vallely

Background

On August 15, 1917, Conrad C. Reiswig executed a trust deed for the benefit of creditors and assigned his stock to John P. Galbraith, the assignee. The stock was sold, and on December 22, 1917 Reiswig was adjudged a bankrupt. Vallely became the trustee in bankruptcy. Galbraith filed an account claiming the right to retain certain fees and disbursements and paid the remaining money to the trustee. The trustee asked the bankruptcy referee, by a summary proceeding, to order Galbraith to pay over $1,474.10 that Galbraith had retained.

Reasoning

Galbraith objected, saying he was an adverse claimant and that a summary proceeding could not decide the dispute. The referee found, following Louisville Trust Co. v. Comingor, that Galbraith was indeed an adverse claimant and discharged the summary order. The District Court reversed that decision, and the Circuit Court of Appeals affirmed the reversal. The Supreme Court reviewed the case and agreed with the referee and the Comingor rule. The Court held that when an assignee asserts rights to expenses and compensation earned under an assignment made before bankruptcy, those claims cannot be resolved in a summary bankruptcy proceeding and must be decided in a full judicial proceeding suitable to resolve the merits.

Real world impact

The decision protects assignees who claim fees and disbursements before bankruptcy by requiring ordinary court proceedings rather than quick summary orders enforced by contempt. The Court declined to adopt the quicker summary route, despite its potential speed and economy, and reversed the lower courts’ orders here.