Pepper v. Litton
Supreme
Court of the
308
Facts: Litton was the sole shareholder
of Dixie Splint Coal Company. Pepper
sued the company for royalties he was due on a lease. Before this case came up, Litton made the
company confess a judgment, pay him claims for back salary, and then declare
bankruptcy. The district court
disallowed Litton’s claim, but the Court of Appeals reversed, saying that the previous
judgment was res judicata.
Issue: Did the bankruptcy court
have the power to disallow Litton’s judgment against the company of which he
was the sole shareholder?
Rule: Bankruptcy courts sit in
equity and can set aside deals that don’t have the hallmarks of an “arms-length
bargain”.
Analysis: Basically, the Court says
that you can’t hide behind a one-man corporation to avoid being liable to
creditors.
Conclusion: The Supreme Court reverses
the Court of Appeals and reinstates the decision of the district court.