Bradford v. Fahey

• Decision Date: 02 April 1935
• Docket Number: No. 3778,3797.,3778
• Citation: 76 F.2d 628
• Parties: BRADFORD v. FAHEY et al. (two cases).
• Court: U.S. Court of Appeals — Fourth Circuit

76 F.2d 628 (1935)

BRADFORD v. FAHEY et al. (two cases).^*

Nos. 3778, 3797.

Circuit Court of Appeals, Fourth Circuit.

April 2, 1935.

Morton P. Fisher and Allan H. Fisher, both of Baltimore, Md. (A. Freeborn Brown, of Bel Air, Md., on the brief), for appellant.

Wade B. Hampton, of Washington, D. C., and Clarence E. Martin, of Martinsburg, W. Va. (Robinson & Fahey, of Bel Air, Md., on the brief), for appellees Michael W. Fahey, assignee, and Potomac Joint Stock Land Bank of Alexandria.

Herbert Levy, of Baltimore, Md. (Morris Rosenberg, of Baltimore, Md., on the brief), for appellees John D. and Annie McC. Worthington.

Edwin A. Krauthoff, of Chicago, Ill., amicus curiæ.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

PARKER, Circuit Judge.

This is an appeal in bankruptcy proceedings from an order denying the prayer of a petition, which was filed under subsection (s) of section 75 of the Bankruptcy Act, as added by Act June 28, 1934 (11 USCA § 203 (s), and which asked that the court enjoin further prosecution of proceedings which had been commenced in the circuit court of Harford county, Md., to foreclose a mortgage on the farm of petitioner. The mortgage resisted the petition on two grounds: (1) That the court of bankruptcy could not interfere with the state court's jurisdiction, which had attached in the proceedings to foreclose the mortgage; and (2) that subsection (s) (7) of section 75 of the Bankruptcy Act, as added in 1934 (11 USCA § 203 (s) (7), was unconstitutional and therefore furnished no basis upon which the ultimate relief sought might be granted. The District Judge held against the mortgagee on the first ground, but sustained the second and denied the petition because in his opinion the subsection of the Bankruptcy Act under which the petition was filed was violative of the "due process" clause of the Fifth Amendment. The petitioner has appealed.

There is no dispute as to the facts, which may be briefly stated as follows: On February 6, 1926, the petitioner William W. Bradford, Jr., a farmer of Harford county, Md., executed a mortgage on 145 acres of land to the Potomac Joint Stock Land Bank of Alexandria to secure a debt of $20,000. On April 16, 1934, there was due on the mortgage debt a balance of amortization payments in excess of $1,000 and certain insurance premiums which the mortgagee had advanced; and on that date the mortgagee, acting under the terms of the mortgage, declared the whole debt, amounting to $19,497.23, to be due, and assigned the mortgage to Michael W. Fahey for the purpose of foreclosure. Fahey proceeded to advertise and sell the mortgaged property under the power contained in the mortgage, docketing the foreclosure proceedings in the circuit court of Harford county, Md., in accordance with the provisions of the Maryland law. The sale was held on June 18, 1934, when John D. Worthington and wife became the last and highest bidders for the property at the price of $21,500 and deposited $2,150 with the assignee to be applied on the purchase price. On June 19th, Fahey reported the sale to the clerk of the court, and the usual order nisi was entered requiring notice to be given that the sale would be confirmed unless cause to the contrary should be shown on or before the 19th day of July. Exceptions to the sale were filed by the petitioner Bradford, but these have not been passed on because of the proceedings taken in this cause.

On July 17th, two days before the order nisi was returnable, Bradford filed his petition in the court below under section 75 of the Bankruptcy Act, alleging that he was a farmer, that he was unable to meet his debts as they matured, and that he desired to effect a composition or extension of his debts as provided by that section. The proceedings in the state court were stayed pursuant to the prayer of the petition, and the case was set for hearing on September 6th. In the meantime answers were filed by Fahey and the Worthingtons and the land bank was made a party. Letters were sent to the various creditors offering a composition, but on the morning of the hearing petitioner was notified that his offer would be refused by the land bank, and, as the debt owing to it was more than the other indebtedness of petitioner, there resulted a failure to obtain such an acceptance of the offer of composition as was required by the section. Petitioner thereupon amended his petition and asked to be adjudicated a bankrupt and granted relief pursuant to subsection (s) of the section and that the foreclosure proceedings in the state court be permanently enjoined. At this time it was formally and definitely stated by counsel for petitioner that he would elect to purchase the property embraced in the land bank's mortgage pursuant to the terms prescribed in subsection (s) and by counsel for the mortgagee that it did and would object thereto. The court approved the petition as properly filed and passed an order adjudicating Bradford a bankrupt, but, being of opinion that paragraph 7 of subsection (s) was unconstitutional, refused to stay proceedings in the state court. The matter complained of on this appeal is this refusal to stay proceedings.

A preliminary question which arises is whether the appeal is not premature, as the right of petitioner to relief under paragraph 7 of subsection (s) of the act would arise only after there had been an appraisal of the property, an offer to purchase at the appraised price and a refusal on the part of the lienholder to accept this offer. But the answer to this is that the appeal is from the refusal to stay proceedings in the state court, and under the provisions of the act, if valid, these proceedings should be stayed while the appraisal and other proceedings preliminary to the right to relief under paragraph 7 are going forward, if the court has jurisdiction to stay such proceedings. Subsection (s) is not an independent statute but an amendment to section 75 as enacted by the Act of March 3, 1933. Under subsections (n) and (o) of that section (11 USCA § 203 (n, o), the property of the farmer wherever situate is subjected to the exclusive jurisdiction of the court of bankruptcy, and it is forbidden that proceedings for foreclosure of a mortgage thereon be instituted or maintained in any other court without the permission of the court of bankruptcy. Proceedings under subsection (s) are but a continuation of proceedings theretofore instituted under other provisions of the section; and the provisions for staying foreclosure in a state court are clearly applicable for the purpose of protecting the court's jurisdiction while such proceedings are going forward. A denial of the stay on the ground that paragraph 7 of subsection (s) was unconstitutional, after a petition had been filed asking relief under that subsection, was clearly appealable, therefore, irrespective of whether or not the proceedings had gone forward to the point where petitioner was entitled to the relief provided by that paragraph.

With this preliminary question out of the way, three questions are raised for our consideration by the appeal, viz.: (1) Whether subsection (s) of section 75 of the Bankruptcy Act, and particularly paragraph 7 thereof, is a constitutional exercise of the bankruptcy power of Congress; (2) whether a court of bankruptcy has jurisdiction under section 75 of the Bankruptcy Act to stay proceedings for foreclosure of a mortgage already pending in a state court where relief is asked under subsection (s) of the section; and (3) whether this jurisdiction may be exercised with respect to a foreclosure suit in Maryland, where there has been a sale of the mortgaged property under order of court but the sale has not been confirmed. We think that all of these questions must be answered in the affirmative.

The bankruptcy power of Congress is conferred by article 1, § 8, cl. 4 of the Constitution, which provides that Congress shall have power "to establish * * * uniform Laws on the subject of Bankruptcies throughout the United States." It is correlative to the clause of article 1, § 10, which provides that "no State shall * * * pass any * * * Law impairing the Obligation of Contracts." It was realized at the time of the adoption of the Constitution that uniform laws on the subject of bankruptcies were important in the development of interstate and foreign commerce, over which Congress was given control; and not only was Congress vested with the power to establish such uniform laws, but the states were expressly forbidden to exercise the power usually involved in bankruptcy laws, i. e. the power of impairing the obligation of contracts. The subject is dealt with in one sentence in that great commentary on the Constitution, the Federalist Papers (XLI), where it is said: "The power of establishing uniform laws of bankruptcy is so intimately connected with the regulation of commerce, and will prevent so many frauds where the parties or their property may lie, or be removed into different states, that the expediency of it seems not likely to be drawn in question."

What is a law on the subject of bankruptcies within the meaning of the Constitution has never received exact definition at the hands of the Supreme Court, but there can be no question, we think, but that the constitutional grant vests in Congress full power to deal with the relationship existing between debtors unable or unwilling to pay their debts and their creditors, and that we may safely say, without attempting to delimit the power, that any law must be held to be a law on the subject of bankruptcies, which provides for the surrender of the property of a debtor to a court, its control and administration by the court with the eventual application of the property or its value to the claims of creditors, and the discharge of the debtor from the remainder of his debts. As we said in the recent case of Campbell v. Alleghany Corporation (C. C. A. 4) 75 F.(2d) 947, which dealt with the...