Atlanta Flooring & Insulation Co. v. Russell

• Decision Date: 30 January 1945
• Docket Number: No. 11110.,11110.
• Citation: 146 F.2d 884
• Court: U.S. Court of Appeals — Fifth Circuit
• Parties: ATLANTA FLOORING & INSULATION CO., Inc., et al. v. RUSSELL.

146 F.2d 884 (1945)

ATLANTA FLOORING & INSULATION CO., Inc., et al. v. RUSSELL.

No. 11110.

Circuit Court of Appeals, Fifth Circuit.

January 30, 1945.

William A. Fuller, Clifford R. Wheeless, and Oliver C. Hancock, all of Atlanta, Ga., for appellants.

Benton E. Gaines and Jos. J. Fine, both of Atlanta, Ga., for appellees.

Before HOLMES, WALLER, and LEE, Circuit Judges.

HOLMES, Circuit Judge.

On this and the preceding appeal, we were given very narrow issues to decide, and in each the record contained only the facts necessary to determine the specific issue presented. In deference to the petition for rehearing, we shall attempt to clarify our opinion.

Summary jurisdiction may not be exercised to determine adverse claims to property not in the actual or constructive possession of the bankrupt at the time the petition in bankruptcy was filed, whether the adverse claimant asserts the absolute title thereto or merely a lien thereon.¹ The mere assertion of an adverse claim is not sufficient. The bankruptcy court has jurisdiction to inquire into the claim for the purpose of ascertaining whether the summary remedy is an appropriate one.²

In the absence of a substantial adverse claim, the bankruptcy court has summary jurisdiction to determine controversies relating to property of the bankrupt at the time the petition in bankruptcy was filed.³ A claim is to be deemed substantial if there are probable facts or circumstances sufficient to support a reasonable legal hypothesis upon which it should be allowed; it is held to be colorable if the contention in support of it is so plainly without merit as to amount to a mere pretense. If found to be merely colorable, the court may then proceed to adjudicate the merits summarily, but if found to be substantial, it must decline to determine the merits and dismiss the summary proceeding.⁴ A state court that is enforcing a lien upon specific property when the debtor becomes a bankrupt is entitled to proceed without interference from the bankruptcy court.⁵

The court below at least had summary jurisdiction to inquire into its jurisdiction, and this it failed to do sufficiently. To be more specific, the bankruptcy court has summary jurisdiction to inquire into the character of the suit in the state court in order to determine (1) whether the same was in part superseded by the adjudication in bankruptcy, (2) the nature and amount of the claims propounded therein, (3) the character of the alleged liens therein sought to be enforced, (4) whether said claims are real or merely colorable, (5) the value of the bankrupt's estate in the custody of the state court, (6) which, if any, of such liens were invalidated by bankruptcy, (7) what equity, if any, will probably remain for the benefit of the bankrupt's general creditors after satisfaction of liens not invalidated by bankruptcy, plus costs incurred in the state court, (8) whether simple-contract creditors were entitled to intervene and, if they did so, whether under the law of Georgia a contingent lien on the property possessed by the state-court receiver was created for their benefit, as well as for the benefit of the judgment creditor as held in Straton v. New, 283 U.S. 318, 51 S.Ct. 465, 75 L.Ed. 1060, (9) whether the intervening lienors, under the law of Georgia, are entitled to a lien on the fund by reason of the creditor's suit and, if so, the date or dates on which the lien or liens attached, and (10) any other fact or facts bearing upon the character of the proceeding in the state court or upon the title or possession of the bankrupt's property, and any liens thereon, at the time the petition in bankruptcy was filed. These facts are relevant, if for no other reason, in order to enable the court to determine whether or not to direct its receiver or trustee to intervene in the creditor's suit to protect the interests of the bankrupt estate.

The best evidence of the nature of the proceeding in the state court is the creditor's bill or petition, but it is not fully set forth in the record. It appears from excerpts therefrom that the bill was filed by a judgment creditor on behalf of itself and all other creditors "similarly or dissimilarly" situated. We are not sufficiently advised as to the claims of those "dissimilarly situated." The bill alleged that the defendant was insolvent, and prayed that a receiver be appointed to take over, operate, and sell the defendant's business and entire assets; that all lienholders be required to intervene and be enjoined from foreclosing or changing their liens; that all other creditors be required to intervene and be restrained from prosecuting separate actions; that the rights and remedies of all creditors be established, the assets marshaled, and all creditors paid according to their rank.

Is this a true creditor's suit, a local statutory creditor's suit, a proceeding to enforce a lien upon specific property, an insolvency proceeding, an equity receivership, a special statutory receivership under local law, or a combination of two or more thereof? For a true creditor's bill, see Metcalf v. Barker, 187 U.S. 165, 23 S.Ct. 67, 47 L.Ed. 122. If it is an insolvency proceeding, the burden is on the appellants to show it.⁶ State insolvency laws are suspended only to the extent that they actually conflict with federal bankruptcy laws.⁷ If they conflict with the Federal Constitution, they are void to the extent of such conflict; for instance, if they provide for the debtor's discharge from the obligation of existing debts.⁸ The bankruptcy court has summary jurisdiction to inquire into the matter. Nearly all bankruptcy jurisdiction is summary; if plenary action by the trustee in bankruptcy against an outside party is necessary, it may be brought in another court.⁹

Is this an equity receivership within the meaning of Duparquet Huot & Moneuse Co. v. Evans, 297 U.S. 216, 56 S.Ct. 412, 80 L.Ed. 591, wherein the court distinguishes an equity receiver from a receiver in foreclosure? In that case the court said, at page 222 of 297 U.S., at page 415 of 56 S.Ct., 80 L.Ed. 591: "It is common learning that an equity receiver in suits to conserve the assets or divide them among creditors must yield to a trustee in bankruptcy. Gross v. Irving Trust Co., 289 U. S. 342, 53 S.Ct. 605, 77 L.Ed. 1243, 90 A. L.R. 1215." The quoted sentence is dictum and may be too broad, as the court cites Gross v. Irving Trust Co., wherein bankruptcy supervened within four months of institution of the suit in the state court in which receivers were appointed.¹⁰

Finally, do we have here a special statutory receivership under the Georgia law, wherein seizure by the receiver was equivalent to an attachment, as in Neely v. McGehee, 5 Cir., 2 F.2d 853, and Blair v. Brailey, supra? We need more facts to answer these questions; the correct answer may turn upon the proper construction of the plaintiff's petition; if it were before us in its entirety, we might determine its nature; but to expect courts to decide cases without sufficient facts may be likened to requiring the ancients to make brick without straw. Ex facto jus oritur. The opinion of this court in Carling v. Seymour Lumber Company¹¹ will illustrate how necessary it is for us to have additional facts, and it seems that they can be obtained only by the court below in the exercise of its summary jurisdiction.

In an appendix to appellee's petition for a rehearing, we are given some belated facts, which indicate that, in the present state of the record, there is no equity for unsecured creditors in the fund held by the state court. These facts are certified to by the appellee, and appended to his petition; but they may or may not be correct, and therefore we leave them to be presented to the court below in an orderly way, where issue may be taken thereon if desired. Some of these questions will become moot if the court below finds that there are no funds in the state court in excess of the amount needed to pay the judgment creditor and others similarly situated.

On the prior appeal, we held that the judgment creditor's suit in the state court was not superseded by the adjudication in bankruptcy.¹² On this appeal, the effort is to supersede said suit except as to the amount of the plaintiff's debt plus interest and costs. We are holding against this contention, because there are alleged to be a number of other liens on the property, the holders of which are proper, necessary, or indispensable parties to the proceeding to ascertain, marshal, and enforce liens thereon.

The state-court receiver is a ministerial officer, with no powers except those conferred by the order of his appointment and the practice of the court. He is an indifferent person between the parties, and has no title to or lien upon the property in his possession. He is appointed on behalf of all parties who may establish rights in the cause. His custody is that of the court; his right to retain possession is derived from the jurisdiction of the court, the correct exercise of which depends upon the claims of the plaintiff and interveners, and they assert no title to the property, only a lien thereon. One who has no title to property and no lien thereon does not have a substantial adverse claim as against the trustee in bankruptcy.

It must be conceded that the legal title to the res in controversy is in the trustee in bankruptcy, or will vest in him upon his appointment, which title is not affected by the prior possession of the state-court receiver;¹³ and that the original plaintiff in the state proceeding is an adverse claimant whose lien (whether inchoate, complete, or contingent) was not invalidated by the adjudication in bankruptcy: but what about the interveners? Some of them may be simple contract creditors, without a lien upon or an interest in the property, who were not entitled to a receiver in order that the property might be forthcoming to satisfy their demands.¹⁴

Some of the interveners may...