Pepper v. Litton - 308 U.S. 295, 60 S. Ct. 238 (1939)

Rule:

Courts of bankruptcy are essentially courts of equity, their proceedings inherently proceedings in equity, and they apply the principles and rules of equity jurisprudence. Among the granted powers of the courts of bankruptcy are the allowance and disallowance of claims. 

Facts:

Litton was the controlling stockholder of Dixie Splint Coal Company. Litton made an alleged salary claim against the bankruptcy estate. The district court disallowed the claim, and the appeals court reversed.

Issue:

Did the bankruptcy court err in disallowing either as a secured or as a general or unsecured claim a judgment obtained by Litton on alleged salary claims?

Answer:

No

Conclusion:

Affirming the district court, the court held that the claim should be disallowed. Being a controlling stockholder, Litton’s claim was to be subject to strict scrutiny. The court explained that Litton had allowed the salary claims to lie dormant for years and sought to enforce them only when Dixie Splint was in financial difficulty. Thus, the court concluded that the district court was correct in disallowing Litton’s planned and fraudulent scheme to exclude his creditors.