In re Skorcz

• Decision Date: 16 November 1933
• Docket Number: No. 4899.,4899.
• Citation: 67 F.2d 187
• Parties: In re SKORCZ. TRUSTEES SYSTEM REINCO CO. v. SKORCZ.
• Court: U.S. Court of Appeals — Seventh Circuit

67 F.2d 187 (1933)

In re SKORCZ TRUSTEES SYSTEM REINCO CO. v. SKORCZ.

No. 4899.

Circuit Court of Appeals, Seventh Circuit.

June 24, 1933.

Rehearing Denied November 16, 1933.

Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.

Walter Hamilton, of Chicago, Ill., for appellant.

John C. Melaniphy, of Chicago, Ill., for appellee.

SPARKS, Circuit Judge (after stating the facts as above).

Appellant contends that the court erred in entering the restraining order because: (1) The note, assignment of wages, and notice of such assignment, under the law of Illinois, created a lien on the wages of bankrupt after adjudication, when and as such wages were earned, and that lien was not dischargeable in bankruptcy; (2) the wages included in the restraining order constituted no part of bankrupt's estate, and appellant had instituted no suit of any kind for their recovery prior to the issuance of the order, nor had it made any threat to collect the same; (3) the circuit court of Cook county had assumed jurisdiction of the subject matter of the restraining order and of the parties prior to the issuance of the order, and the district court had no authority under the bankruptcy act to issue it.

It is not denied that the decisions of the Supreme Court of Illinois hold that an assignment of future wages made more than four months prior to adjudication in bankruptcy to secure any indebtedness creates a lien on such wages. Mallin v. Wenham, 209 Ill. 252, 70 N. E. 564, 65 L. R. A. 602, 101 Am. St. Rep. 233; Monarch Discount Co. v. Chesapeake & Ohio Ry. Co., 285 Ill. 233, 120 N. E. 743. If this doctrine is to be considered as controlling this court in the instant case, then of course appellant's first contention is correct; but appellee on the other hand contends: (1) That the decisions of the state courts are not binding on the federal courts in the determination of what is property under the Bankruptcy Act; and (2) that the decisions of the Illinois court are contrary to the weight of reason and authority of federal and other state courts which hold that wages to be earned in the future are not property upon which a lien may attach.

Future wages are conditional in their nature, being dependent upon performance of the services to be rendered. It follows therefore that an assignment given against such wages cannot create a legal lien since there is no property in being at the time the assignment is given. The lien must therefore be an equitable one which cannot attach until the property comes into being. If in the meantime the debt has been discharged by the action in bankruptcy, the lien falls. Appellant argues that this court is precluded from holding thus by reason of the Illinois decisions to the contrary which it asserts are binding upon this court. Those decisions constitute a local definition of principles applying to a situation which is not limited to this state, but which has arisen in many of the states. The decisions do not depend upon statutory law, but upon the local interpretation of general law. Further, since bankruptcy is itself an equitable proceeding as is the interpretation of an equitable lien, we think this court is not bound by the decisions of the state court under the principles laid down in Swift v. Tyson, 16 Pet. 1, 18, 10 L. Ed. 865,¹ and Guffey v. Smith, 237 U. S. 101, 114, 35 S. Ct. 526, 59 L. Ed. 856.²

While we find no case in which the Supreme Court has passed on the specific question involved in the instant case, nevertheless it has in several cases laid down certain broad principles regarding the interpretation of the Bankruptcy Act which we think control our decision here. In Board of Trade v. Johnson, 264 U. S. 1, 44 S. Ct. 232, 234, 68 L. Ed. 533, it said,

"Of course, where the Bankrupt Law deals with property rights which are regulated by the state law, the federal courts in bankruptcy will follow the state courts; but when the language of Congress indicates a policy requiring a broader construction of the statute than the state decisions would give it, federal courts cannot be concluded by them. Board of Trade v. Weston, 156 C. C. A. 112, 243 F. 332."

In the Weston Case just cited, the court said,

"Now, it would be strange if the dominant grant to Congress to legislate upon bankruptcy and insolvency, and which, when exercised, supersedes state legislation respecting these matters, should nevertheless be subordinate to the right of each state to determine what is or shall be property, subject to the terms of the Bankruptcy Act."

In Williams v. U. S. Fidelity & Guaranty Co., 236 U. S. 549, 35 S. Ct. 289, 290, 59 L. Ed. 713, the court said,

"It is the purpose of the Bankrupt Act 11 USCA to convert the assets of the bankrupt into cash for distribution among creditors, and then to relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities. * * * And nothing is better settled than that statutes should be sensibly construed, with a view to effectuating the legislative intent."

In Re Voorhees (D. C.) 41 F.(2d) 81, 85, an Ohio statute as to assignment of wages was held not controlling in bankruptcy proceedings, and the court said,

"It seems to us that any state law which attempted to create a lien upon such property or earnings so as to be effective and operative after the discharge of the bankrupt would be construed by the federal courts to be ineffective for that purpose. * * * It seems to us that the purpose of the Bankruptcy Act is plain, and that any device, whether an assignment, * * * or what not, would be ineffectual against its purpose to give the bankrupt a new start."

The weight of authority supports appellee's contention that wages to be earned in the future are not property upon which a lien may attach prior to their existence.³ A different rule, however, was enunciated in Mallin v. Wenham, 209 Ill. 252, 70 N. E. 564, 65 L. R. A. 602, 101 Am. St. Rep. 233, and Citizens' Loan Ass'n v. Boston & M. Ry. Co., 196 Mass. 528, 82 N. E. 696, 14 L. R. A. (N. S.) 1025, 124 Am. St. Rep. 584, 13 Ann. Cas. 365. With the rule and the reasoning therein announced we are not in accord. This being true we hold that appellant, at the time of the adjudication in bankruptcy, had no lien upon the bankrupt's wages which had not at that time been earned, nor upon such wages as and when they were earned.

It may be conceded, as contended by appellant, that the wages included in the restraining order constituted no part of the bankrupt's estate at the time of the adjudication. That estate, and none other, the court was bound to administer; but it does not follow from this admission that the bankruptcy court is not interested in the protection of the bankrupt's subsequent estate. Indeed, quite the converse is true, and constitutes the primary purpose of the bankruptcy enactment. That the bankruptcy court has plenary power to award that protection by injunction we think there can be no doubt, otherwise the effect of the Bankruptcy Act oftentimes might be destroyed. 11 USCA § 11, subd. 15; Seaboard Small Loan Corp. v. Ottinger, supra; In re Fellows (D. C.) 43 F. (2d) 122; In re Voorhees, supra; In re Swofford Bros. (D. C.) 180 F. 549; In re Home...