Pepper v. Litton
Court of the
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.