Edward A. Matto, Columbus, Ohio, William A. Wetzel, George E. Pataki, New York City, for defendant-appellant.

J. Stanley Shaw, Jesse I. Levine, William M. Rifkin, Garden City, N.Y., for plaintiff-appellee.

Before OAKES, Circuit Judge, BLUMENFELD* and MEHRTENS,** District Judges.

MEHRTENS, District Judge:

In this case we are confronted with the delicate task of reconciling two provisions of the bankruptcy law which appear to be at cross-purposes with each other. One provision1 is designed to protect the interests of debtors, the other2 is intended to safeguard the rights of creditors. In an effort to harmonize these seemingly discordant segments of the law, we reverse and remand with instructions.

FACTS

The Bohack Corporation (Bohack) filed a petition for an arrangement with the bankruptcy court pursuant to Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 Et seq., on July 30, 1974. The petition was granted by order of the same date, and Bohack was continued as debtor-in-possession. 11 U.S.C. § 742. In conformance with § 314 of the Act, 11 U.S.C. § 7143 and Rule 11-44, Federal Rules of Bankruptcy Procedure, the bankruptcy court's order included a provision expressly staying the initiation or continuation of all suits and claims against the debtor.4 The appellant, Borden, Inc., on November 13, 1974, filed a proof of claim for $451,198.86 representing goods sold and delivered prior to the initiation of the proceedings in arrangement.

Some two years later, Bohack, together with various other plaintiffs, filed suit in the United States District Court for the Eastern District of New York charging Borden and other major sugar refiners with violations of the Sherman Antitrust Act. Borden answered the complaint and interposed a counterclaim for the $451,198.86 originally sought under the proof of claim. Borden did not at any time during the course of this proceeding seek to obtain relief from the stay imposed by the bankruptcy court's order and Rule 11-44. On March 18, 1977, the action was transferred to the United States District Court for the Eastern District of Pennsylvania for consolidated pre-trial proceedings by the judicial panel on multi-district litigation.

Bohack moved in the antitrust action for an order dismissing Borden's counterclaim, arguing that the district court, by virtue of the Rule 11-44 stay, was without subject matter jurisdiction. In the alternative, Bohack argued that the debt underlying Borden's claim was not mutual, and thus could not be asserted as a setoff pursuant to § 68 of the Act. Borden opposed, but the court decided the motion in favor of Bohack, Borden, however, successfully moved for reconsideration.

While the issue remained Sub judice, Bohack filed suit in the bankruptcy court seeking an order enjoining the continued prosecution of the counterclaim. The bankruptcy judge, anchoring his ruling on precepts of exclusive jurisdiction pursuant to § 311 of the Bankruptcy Act, reasoned that the antitrust court's concurrent consideration of the claim would unnecessarily fractionalize the arrangement proceeding. With the filing of the proof of claim, the court ruled, Borden consented to the bankruptcy court's exclusive, summary jurisdiction and was bound by the automatic stay embodied in Rule 11-44 and the court's separate restraining order. The bankruptcy judge further found that Borden was estopped from asserting the claim before the antitrust court.

On the basis of the bankruptcy court's decision, the district judge in the antitrust matter entered an order dismissing the counterclaim without prejudice to any rights Borden might have to appeal from the bankruptcy court's order.

The district judge below affirmed the bankruptcy court but did not rely on exclusive jurisdiction as the legal basis of his decision. The district court's ruling was primarily based upon his determination that § 68 of the Act, which permits a creditor to set off mutual debts with a debtor, is permissive in nature and subject to the discretion of the court. The district judge concluded that the bankruptcy court could, in an appropriate exercise of discretion, defer or deny a setoff on equitable grounds. He then went on to analyze the equities involved in permitting Borden's counterclaim to be interposed in the antitrust action to examine whether the denial of the counterclaim by the bankruptcy judge had been an abuse of discretion. In a thoughtful and comprehensive decision, the district judge cited the potential for delays in the antitrust litigation and the potential for complication of that already complex lawsuit and concluded that there had been no such abuse.

Borden appeals from the decision of the district court affirming the bankruptcy court's order restraining and enjoining Borden from continuing the prosecution of its counterclaim in the antitrust litigation.

EXCLUSIVE JURISDICTION

Bohack relies primarily on the exclusive jurisdiction approach adopted by the bankruptcy court. Section 311 of the Bankruptcy Act, 11 U.S.C. § 711, provides:

Where not inconsistent with the provisions of this chapter, the (bankruptcy) court . . . shall . . . have exclusive jurisdiction of the debtor and his property, wherever located.

Section 311 contemplates the centralization of all matters affecting the debtor into one tribunal. Fidelity Mortgage Investors v. Camelia Builders, Inc., 550 F.2d 47 (2nd Cir. 1976). The intent and design of Chapter XI makes the need for exclusive jurisdiction compelling. Unlike ordinary bankruptcy, where liquidation is the object, the purpose of an arrangement is to revive a moribund business, not to bury it. See Susquehanna Chemical Corp. v. Producers Bank and Trust Co., 174 F.2d 783 (3rd Cir. 1949). In order to achieve this goal without interference, the bankruptcy court's action must be swift and its jurisdiction unfettered.

Accordingly, the bankruptcy court herein held that it had exclusive, summary jurisdiction over Borden's counterclaim and further found that Borden consented to such jurisdiction by filing its claim.5 The judge did not discuss the merits of Borden's counterclaim, nor indicate whether or not the setoff might be preserved within the context of the arrangement proceeding.

Under the circumstances of this case we do not believe that assertion of exclusive jurisdiction would be correct without first considering the equities of Borden's § 68 claim. It is unquestioned that the Chapter XI court must be assured of its ability to exercise exclusive jurisdiction in appropriate cases. However, despite dogmatic assertions that "exclusive jurisdiction means exclusive jurisdiction," Fritz v. United States, 535 F.2d 1192 (9th Cir. 1976) the exercise of such jurisdiction is not mandatory. The bankruptcy court must have the discretion to determine, under the particular circumstances of each case, whether it or another court is the most efficacious and equitable forum for resolution of the controversy; otherwise it becomes imprisoned within its jurisdiction.

The boundaries of the bankruptcy court's jurisdiction have not been rigidly delineated by Congress. There is inherent flexibility in the language of § 311 which confers exclusive jurisdiction "where not inconsistent" with the provisions of the Bankruptcy Act. The Supreme Court has counseled that the exact scope of summary jurisdiction in bankruptcy is a matter to be determined after due consideration of the structure and purpose of the Bankruptcy Act as a whole, as well as the particular provisions of the Act brought into question. Katchen v. Landy, 382 U.S. 323, 328, 86 S. Ct. 467, 15 L. Ed. 2d 391 (1965). Accordingly, resolution of this controversy should not rest on the jurisdictional issue alone. The ramifications of Borden's alleged right of setoff must first be explored in order to determine the effect of an exercise of exclusive jurisdiction on the equities of the case.

THE DOCTRINE OF SETOFF

The doctrine of setoff has long occupied a favored position in our history of jurisprudence. It originated in the antiquity of Roman law and was later adopted into the English legal system. See Loyd, The Development of Setoff, 64 U.Pa.L.Rev. 541 (1916). It was incorporated into the English bankruptcy scheme in 1705 and became a recognized doctrine of American bankruptcy law with the passage of the Act of 1800. 4 Collier on Bankruptcy P 68.01 (14th Ed. 1975). Today, the doctrine of setoff is preserved in § 68 of the Act which provides as follows:

In all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid.

Although proceedings in bankruptcy are equitable in nature, the dominant impulse of § 68 is inequality among creditors. In re Applied Logic Corp., 576 F.2d 952 (2nd Cir. 1978). A setoff has the effect of paying one creditor more than another. Despite the preferential advantages bestowed upon certain creditors by virtue of § 68, setoffs are accepted and approved because they are based upon long-recognized rights of mutual debtors. Although § 68 is permissive rather than mandatory, the Supreme Court has held that when the statutory provision is relied upon by a creditor, it should be enforced by the court. Cumberland Glass Manufacturing Company v. DeWitt and Company, 237 U.S. 447, 455, 35 S. Ct. 636, 59 L. Ed. 1042 (1915).

Allowance or disallowance of a setoff is a decision which ultimately rests in the sound discretion of the bankruptcy court. This circuit, however, has repeatedly favored the allowance of setoffs. In In re Applied Logic Corp., supra, a bank was permitted to exercise its right to set off a debt owed it by the bankrupt against deposits and certificates of deposit held by the bank. Judge Friendly commented therein that

(t)he rule allowing setoff, both before and after bankruptcy, is not one that courts are free to ignore when they think application would be "unjust." It is a rule that has been embodied in every bankruptcy act the nation has had, and creditors . . . have long acted in reliance upon it.

576 F.2d at 957-958.

In an earlier case Judge Friendly described an injunction against a setoff as "strong medicine." In the Matter of Lehigh and Hudson River Railway Company, 468 F.2d 430, 434 (2nd Cir. 1972). And see Tyler v. Marine Midland Trust Co. of New York, 128 F.2d 927 (2nd Cir. 1942). The policy of the Bankruptcy Act is to allow setoffs and counterclaims. Western Land Planning Company v. Midland National Bank, 434 F. Supp. 616 (E.D.Wis.1977). This court is reluctant to disturb this policy unless compelling circumstances require it. A decision disallowing a setoff must not be made cavalierly. The statutory remedy of set off should be enforced unless the court finds after due reflection that allowance would not be consistent with the provisions and purposes of the Bankruptcy Act as a whole.

SETOFFS IN ARRANGEMENT PROCEEDINGS

Bohack contends that § 68 is not to be accorded the same favor in an arrangement proceeding as would be appropriate in the context of an ordinary bankruptcy case. An unqualified right of setoff in a Chapter XI proceeding might conceivably defeat the purpose of the arrangement. A setoff could deprive the debtor of all or a large part of its current assets at a time when it needs them most. Susquehanna Chemical Corp. v. Producers Bank and Trust Co., supra. In support of its position, Bohack relies on Lowden v. Northwestern National Bank & Trust Co., 298 U.S. 160, 56 S. Ct. 696, 80 L. Ed. 1114 (1936) and Baker v. Gold Seal Liquors, Inc., 417 U.S. 467, 94 S. Ct. 2504, 41 L. Ed. 2d 243 (1974). Both cases involved railroad reorganizations pursuant to § 77 of the Bankruptcy Act, 11 U.S.C. § 205. Reorganizations and arrangements are somewhat analogous in that the objective of both proceedings is the rehabilitation of a faltering business.

In Lowden the Supreme Court indicated that principles of equity demand greater flexibility in railroad reorganizations than in ordinary bankruptcy and that the rigid rule of § 68 should not control:

. . . the trustees must have the power to gather in the assets and keep the business going. To exercise that power, they may find it necessary to sue, and the suit may turn upon the right of setoff . . . . In a suit for such a purpose, collateral to the main proceeding and initiated at a time when the outcome of that proceeding is still unknown and unknowable, § 68 of the statute does not control the disposition of the controversy Ex proprio vigore. It governs, if at all, by indirection and analogy according to the circumstances.

298 U.S. at 164, 56 S. Ct. at 698.

In Baker v. Gold Seal Liquors, Inc., supra, The Supreme Court recognized that the debtor in a reorganization must keep its precarious cash inflow sufficient for operating purposes in order to survive. Accordingly, the Court concluded that, as a general rule, setoffs should not be allowed in § 77 reorganizations.

The district judge herein adopted the reasoning of the foregoing Supreme Court decisions and, paraphrasing Lowden, held that to the extent that § 68 governs the course of Chapter XI proceedings, it is by analogy only, and with due regard to the totality of the circumstances surrounding the case. In our view, the district judge erred in his construction of the law. The applicability of § 68 in arrangement proceedings is determined by statute, not by analogy. Section 302 of the Act, 11 U.S.C. § 702, explicitly provides that specified portions of the Act, including § 68, are applicable in Chapter XI proceedings insofar as they are not inconsistent with or in conflict with the provisions of the chapter. To the contrary, no express approval of setoffs under § 68 appears in the statute governing § 77 reorganizations. Baker v. Gold Seal Liquors, Inc., supra 417 U.S. at 475, 94 S. Ct. 2504 (Mr. Justice Stewart, concurring).