Thomas v. Woods

• Decision Date: 11 September 1909
• Docket Number: 2,914.
• Citation: 173 F. 585
• Parties: THOMAS v. WOODS et al.
• Court: U.S. Court of Appeals — Eighth Circuit

173 F. 585

THOMAS v. WOODS et al.

No. 2,914.

United States Court of Appeals, Eighth Circuit.

September 11, 1909

[Copyrighted Material Omitted]

Inghram D. Hook (W. W. Hooper, on the brief), for appellant.

Denton Dunn (Charles Blood Smith, Henry D. Ashley, and William S Gilbert, on the brief), for appellees.

Before ADAMS, Circuit Judge, and RINER and AMIDON, District Judges.

AMIDON District Judge (after stating the facts as above).

At the outset we are confronted with the question which has become a part of nearly every bankruptcy cause in an appellate court namely: Should the review have been sought by appeal or petition? The confusion existing on this subject has been frequently confessed by the courts. In re McMahon, 147 F. 684, 77 C.C.A. 668; Coder v. Arts, 213 U.S. 223, 232, 29 Sup.Ct. 436, 53 L.Ed. 772. The classification of matters in bankruptcy as 'proceedings in bankruptcy' and 'controversies arising in bankruptcy proceedings' is vague and in actual application has bewildered the courts and the legal confession. It is quite manifest that, when the decision of a trial court in a 'bankruptcy proceeding' is brought under review in an appellate court, it presents a 'controversy,' and of necessity this is also a 'controversy arising in a bankruptcy proceeding. ' The phrases, therefore, upon which this classification is based, are tautological. Again, the bankruptcy act (Act July 1, 1898, c. 541, 30 Stat. 544 (U.S. Comp. St.

1901, p. 3418)) itself uses the phrase 'proceedings in bankruptcy' in a double sense. Section 23 provides as follows:

'The United States Circuit Court shall have jurisdiction of all controversies at law and in equity as distinguished from proceedings in bankruptcy between trustees as such, and adverse claimants, concerning the property acquired or claimed by the trustees,' etc.

Here the term 'proceedings in bankruptcy' embraces 'controversies arising in bankruptcy proceedings,' as well as 'bankruptcy proceedings proper,' and sets them both over against plenary suits between trustees and adverse claimants (instituted by bill or complaint, with subpoena or summons), touching rights or property not in the custody of the court. In section 24b, however, the term 'proceedings in bankruptcy,' as construed by the courts, has been given a narrower meaning, and has been set over against 'controversies arising in bankruptcy proceedings,' as used in section 24a. Here it has been thought to mean any of the administrative acts intervening between the filing of the petition and the granting of the discharge, as distinguished from those 'controversies arising in bankruptcy proceedings' on petition, which would have been the subject of plenary suits if the estate had not been in the custody of a court of bankruptcy. The confusion that has resulted from the attempt of the courts to apply this classification to actual litigation affords strong support for the decisions of this court that the methods of review provided by the bankruptcy act are not mutually exclusive but cumulative. In re McKenzie, 142 F. 383, 73 C.C.A. 483; Dodge v. Norlin, 133 F. 363, 66 C.C.A. 425; In re Holmes, 142 F. 391, 73 C.C.A. 491.

The present appeal, however, would have been proper under any interpretation of section 24 of the bankruptcy act. This proceeding was instituted by the trustee to have certain adverse claims and liens upon property belonging to the estate declared void and for a sale of the property free and clear of the same. It involves every attribute of a familiar suit in equity. It can be distinguished from such suit only by the fact that it was instituted by petition instead of bill, and the adverse parties were brought before the court by citation instead of subpoena. There are some cases which suggest that if such a proceeding is instituted by a petition, filed by the adverse claimant for the enforcement of his right, and the trustee is cited to answer such a petition, this constitutes 'a controversy in a bankruptcy proceeding,' which may be reviewed by appeal; but if the parties be reversed, and the trustee files a petition charging that the adverse claim or lien is void, and asking that the property be sold free and clear of it, and the adverse claimant is cited in to answer such a petition, this constitutes not a 'controversy,' but a 'proceeding in bankruptcy proper,' and can be reviewed as to matters of law only under section 24b. Morgan v. First National Bank, 145 F. 466, 76 C.C.A. 236; In re McMahon, 147 F. 684, 689, 77 C.C.A. 668. In our judgment such a distinction is wholly untenable. If enforced, it would deny to parties having adverse liens or claims upon property belonging to the estate the right to review the decision of the court of bankruptcy as to any matter of fact. The consequence of such a holding would be serious. Whether there would be any right of review on questions of fact would depend wholly upon whether the proceeding was instituted by the trustee or by the adverse claimant. In either case the right involved would be the same, and the issue tried would be the same. The only distinction would be that the parties would be reversed upon the record. Surely what constitutes a 'controversy,' within the meaning of section 24a, must be determined by nature of the right involved and the issue tried, and not by the accidental circumstance as to which party is actor and which defendant. Sound reason can be given why as to the purely administrative steps in a bankruptcy proceeding the decision of the trial court on questions of fact should be final. In re Friend, 134 F. 778, 67 C.C.A. 500. But no sound reason can be given why, in a controversy possessing every attribute of a suit in equity, an aggrieved party should not have the right of review as to questions of fact as well as of law in accordance with the established practice in equity. It ought not to be possible for the trustee to defeat such a right by being first to file a petition. Most of the confusion on this subject has arisen out of a misunderstanding of the decision in First National Bank v. Title & Trust Co., 198 U.S. 280, 25 Sup.Ct. 693, 49 L.Ed. 1051. In that case the trial court found as a fact that at the time the petition in bankruptcy was filed the property in dispute was in the possession, not of the bankrupt, but of an adverse claimant. The Supreme Court held that this finding defeated the jurisdiction of the trial court. The property had been converted into money, and the trial court by its decision ordered the money to be turned back to the parties who were in possession of the property. This is the point at which the decision of the Supreme Court has been misunderstood. It has been generally thought that the trial court, by its judgment disposing of the fund, passed upon the rights of the parties. This, however, was not the case. It would have been its duty to order the fund turned over to the party who had possession of the property, even if the court decided that it had no jurisdiction of the controversy. The Supreme Court places the decision of the trial court upon that ground, for it says, at page 291 of 198 U.S., page 696 of 25 Sup.Ct. (49 L.Ed. 1051):

'The sale in the circumstances did not change the situation. The proceeds stood in place of the property, and the other returning the proceeds was equivalent to an order returning the property. This it was proper to do, whether the court had held that it lacked jurisdiction, or ruled in favor of petitioners on the merits.'

As thus interpreted, the decision of the trial court never passed upon the merits of the controversy. The whole case as construed by the Supreme Court involved solely a question of jurisdiction. If that was its character, it presented simply a question of law which might be fully reviewed by petition. The Supreme Court has itself thus interpreted its decision in First National Bank v. Title & Trust Company in the recent case of Coder v. Arts, 213 U.S. 223, 29 Sup.Ct. 436, 53 L.Ed. 772. Speaking of its former decision, the court there says:

'In that case there was an attempt on the part of the trustee to invoke an adjudication as to the title to property which the District Court found not to be in the possession of the trustee, notwithstanding the petition of the trustee had averred possession, and it was held that when this fact appeared the District Court had no longer jurisdiction of the case, under the doctrine laid down in Bardes v. Bank, 178 U.S. 524, 20 Sup.Ct. 1000, 44 L.Ed. 1175, and ought to have dismissed the case.'

It is manifest that the Supreme Court, if the judgment in First National Bank v. Title & Trust Company had properly involved a decision as to the merits, would have decided that appeal was the proper method of bringing the question before the appellate court, for it sustained an appeal on a petition by a trustee to determine the rights of adverse claimants to property in the custody of the court in a later case reported in the same volume, namely, Whitney v. Wenman, 198 U.S. 539, 25 Sup.Ct. 778, 49 L.Ed. 1157.

We are of the opinion, therefore, that the case is properly before us on the appeal.

The objection of the appellant that the trial court was without jurisdiction of the property, because it was not situated in the district of Kansas, has no merit. Upon the filing of a petition in bankruptcy, all property held by or for the bankrupt is brought within the custody of the court of bankruptcy, and, upon adjudication, that court is vested with jurisdiction to determine all liens and interests affecting it. This jurisdiction is coextensive with the United States. In re Wood & Henderson, 210 U.S. 246, 28 Sup.Ct 621; 52 L.Ed. 1046; In re Granite City Bank, 137 F. 818, 70 C.C.A. 316; In re Muncie Pulp Co., 151 F. 732,...