Chauncey v. Dyke Bros.

• Decision Date: 28 November 1902
• Docket Number: 1,672.
• Citation: 119 F. 1
• Parties: CHAUNCEY et al. v. DYKE BROS. et al.
• Court: U.S. Court of Appeals — Eighth Circuit

119 F. 1

CHAUNCEY et al. v. DYKE BROS. et al.

No. 1,672.

United States Court of Appeals, Eighth Circuit.

November 28, 1902

Sanborn Circuit Judge, dissenting.

Homer C. Mechem and Edgar E. Bryant, for appellants.

F. A Youmans and Ira D. Oglesby, for appellees.

Joe P Matthews was adjudicated a bankrupt by the district court of the United States for the Western district of Arkansas, and in the course of such proceeding A. A. McDonald, one of the appellees, was appointed trustee of his estate. At the time of the adjudication the bankrupt owned lot 7, in block 530, in Reserve addition to the city of Fort Smith, Ark., which property was subject to a deed of trust or mortgage held by Elihu Chauncey, Charles Chauncey, and William L. Savage, as trustees, to secure a note of $4,000, dated April 28, 1899, and due April 28, 1904, to which note 10 semiannual interest coupons were attached, each coupon representing six months' interest on the loan. At the time of the adjudication, or shortly thereafter, certain mechanics' liens had been or were filed against the mortgaged property for materials supplied in the erection of a building thereon. One of such liens was filed by Dyke Bros., one of the appellees, another by J. M. Tenney & Co., another by the appellees, and another by H. I. Goddard, the remaining appellee. On May 4, 1900, McDonald, as trustee of the bankrupt's estate, filed a petition setting forth the incumbrances that existed upon the property, and praying for an order that he, as owner of the equity of redemption in the property, might be authorized to sell it free and clear of all liens; the proceeds received at such sale to stand in lieu of the property, and to be distributed according to the various priorities of the lien claimants as they might thereafter be determined. He also prayed that the owner of the debt secured by the deed of trust might be restrained from selling the mortgaged property in pursuance of the power of sale contained in the mortgage. After such a petition had been filed, and the parties affected thereby had been served with notice of the same, and cited to appear and show cause why the order prayed for should not be granted, they appeared before the referee in bankruptcy; whereupon the trustees in the deed of trust, namely, the present appellants, entered into an agreement with the various holders of mechanics' liens, to wit, the present appellees, to the effect that they would file with the referee in bankruptcy their respective interventions, setting up their respective claims to priority of payment, and that no injunction should be issued against the owner of the deed of trust, and that no sale of the property should be made until the rights and priorities of the respective parties had been definitely settled and determined by the referee upon said interventions. Thereupon a hearing at considerable length was had before the referee, who decided that the lien of the mortgage or deed of trust was superior to that of the mechanics' liens which had been filed against the property, and directed that the property be sold free and clear of all liens and incumbrances by the trustee in bankruptcy. The case was then certified into the district court, and, upon a hearing before that tribunal, the action of the referee, directing that the property be sold free and clear of all liens and incumbrances, was approved. The district court decided, however, that the claim of Dyke Bros. was entitled to priority and should be paid in full; that the sum of $3,000 should next be paid to the owner of the deed of trust; and that the claims of J. M. Tenney & Co. and H. I. Goddard, the appellees, be next paid. The trustees in the deed of trust excepted to this order of the district court, and have brought the case to this court by appeal.

Before CALDWELL, SANBORN, and THAYER, Circuit Judges.

THAYER Circuit Judge, after stating the case as above, .

The first question which confronts us in this case is one of jurisdiction. The appellants urge, and such is the fact, that they did not present their claim, which was secured by a mortgage or deed of trust, for allowance against the bankrupt's estate; that the trustee in bankruptcy did not dispute the existence of the mortgage indebtedness; that the only real controversy which was tried and determined was that between the mortgagee and the mechanics' lien holders concerning their respective priorities; and that, as this was a controversy in which the bankrupt's estate was in no wise interested, the bankrupt court had no jurisdiction to determine it, and that the power to determine it could not be conferred by consent. It will be conceded that the authority to try the issue which arose between the lien claimants, and to determine their respective priorities, could only be exercised by the bankrupt court in virtue of the fact that by the proceeding in bankruptcy it had acquired the custody of the res to which the controversy related. The bankrupt court had no right to assume jurisdiction of a controversy between third parties, in which the trustee was not concerned, and decide whose claim was paramount in equity, merely because the claimants happened to be creditors of the bankrupt estate, or merely because the liens affected a part of the bankrupt's property. The bankrupt act confers no such authority. But if, in the exercise of its customary jurisdiction, the bankrupt court obtained the lawful custody of the res to which the liens related or of a fund realized from its sale, then the duty which was thereby devolved upon it, of distributing the fund among those to whom it rightfully belonged, did empower it to determine the relative priorities of the conflicting claims to the fund. A court which has lawfully acquired the custody of property or money must of necessity dispose of the same according to law; and when conflicting claims are preferred, it is not bound to require the claimants to litigate their claims in some other forum, and to adopt the judgment of that tribunal, although it may do so, but it is at liberty to dispose of such controversies according to its own ideas of right and justice. This is one of those incidental powers which may be exercised by any court of record in the absence of an express prohibition. The jurisdictional question, therefore, resolves itself into an inquiry whether the bankrupt court acquired the lawful custody of the fund which was realized by the sale of the mortgaged property. The trustee in bankruptcy clearly had the power, acting under the directions of the bankrupt court, to sell the bankrupt's equity of redemption in the mortgaged property. He would doubtless have discharged his full duty by praying for authority to sell simply the bankrupt's equity of redemption. He saw fit, however, to ask for authority to sell the property free and clear of all liens, and in response to such an application the mortgagees and the lien claimants appeared, and, without objecting to such order, agreed to submit their respective claims to the arbitrament and decision of the referee, and they further agreed that the sale as prayed for should be postponed until the priorities had been determined. It is obvious that there was no need of submitting and no propriety in submitting this question to the decision of the bankrupt court, unless it was for the purpose of laying the foundation for a proper distribution of the fund realized at the sale of the mortgaged property, after it had been sold free of all liens and incumbrances. Therefore the action that was taken by the appellants in this respect can be regarded in no other light than as a waiver of all objections on their part to a sale of the property free from incumbrances by the trustee in bankruptcy, and as a consent, voluntarily given, that such a sale might be made. It will not be presumed that the appellants and the appellees entered into a stipulation with intent to cast upon the bankrupt court the trial of a moot question, the decision whereof would be extrajudicial and binding upon no one. It must be presumed, on the contrary, that the parties entered into the stipulation aforesaid in good faith, with the understanding that the mortgaged property should be sold free of liens, and that the fund should be divided as the referee or the bankrupt court, after hearing the interventions, might direct. We are constrained to hold, therefore, that the parties in effect agreed that the property in question might be sold free and clear of all liens and incumbrances. This, we think, is the necessary construction which must be placed on the stipulation that was entered into before the referee. Such being the effect of the stipulation, it follows that in a controversy between a purchaser at said sale and these appellants the appellants would be estopped by their own acts from denying that the sale operated to discharge the lien of the mortgage and to transfer it to the fund realized at the sale, and we are of opinion that they cannot in this proceeding challenge the validity of the sale or deny that the proceeds of the sale came into the lawful custody of the trustee in bankruptcy and became subject to the disposition and control of the bankrupt court. The latter court, as we have already remarked, had the power to order the sale of the bankrupt's equity of redemption. The provision that at the sale the property should be sold free of all existing liens was a provision which the appellants consented might be added to the terms of the proposed sale either for their own advantage or convenience; and, even if it should be conceded that under the present bankrupt act the bankrupt court had no power to prescribe this condition without the consent of the lienors, yet, having given such consent and taken part in a long...