Pepper v. Litton

308 U.S. 295 (1939)


Pepper (P) sued the Dixie-Splint Coal Company and Litton (D) for royalties due under a lease. While the suit was pending, Litton (D), the sole shareholder of Dixie-Splint, caused Dixie-Splint to confess judgment to him on claims of overdue back salary. Execution was issued, but no return was made thereon, D waiting 'quietly until the outcome of the P suit was definitely known.' P obtained judgment, and then D caused an execution sale for the judgment then caused Dixie-Splint to file a voluntary petition in bankruptcy. D filed a claim in bankruptcy based on the portion of the judgment not satisfied by the proceeds of the execution sale. The District Court disallowed D's claim. The lower court ruled that D had no intention to sell the assets and even had the local sheriff cooperate in advertising the property for sale. D’s next step in the 'planned and fraudulent scheme' was the formation by D of 'another of his one-man corporations,' Dixie Beaver Coal Company, to which D transferred the property he had acquired at the execution sale at a valuation of $20,135.36 to be paid for in stock of the new company. The court ruled that all of these steps were taken solely for the purpose of avoiding payment to P. P sued in Virginia state court to have the D judgment declared void. The trustee then moved in state court to set aside the judgment and quash the execution on the ground that the judgment was void and had not been confessed as required under Virginia law. The court ruled that P and the trustee were stopped for challenging the judgment. The court of appeals affirmed. The bankruptcy court held it could consider the validity of the judgment. It held that it was not an honest debt and refused to enforce the judgment. D appealed. The Court of appeals reversed holding that the decision in the state court was res judicata. P appealed.