First Nat. Bank v. Conway Road Estates Co.

• Decision Date: 14 February 1938
• Docket Number: No. 11016.,11016.
• Citation: 94 F.2d 736
• Parties: FIRST NAT. BANK OF WELLSTON v. CONWAY ROAD ESTATES CO.
• Court: U.S. Court of Appeals — Eighth Circuit

94 F.2d 736 (1938)

FIRST NAT. BANK OF WELLSTON v. CONWAY ROAD ESTATES CO.^*

No. 11016.

Circuit Court of Appeals, Eighth Circuit.

February 14, 1938.

Staunton E. Boudreau, of St. Louis, Mo. (John B. Kramer, of St. Louis, Mo., on the brief), for appellant.

J. L. London, of St. Louis, Mo., for appellee.

Before GARDNER, SANBORN, and THOMAS, Circuit Judges.

THOMAS, Circuit Judge.

This is a proceeding under section 77B of the National Bankruptcy Act. 11 U.S. C.A. § 207. The question presented is whether the District Court properly overruled a motion to dissolve a temporary injunction restraining the foreclosure sale of land in which the debtor claimed an equitable interest.

The appellant bank holds a note made by one Wood and secured by a trust deed conveying certain lots in St. Louis county, Mo. For default in payment foreclosure was begun and the lots were advertised to be sold on April 25, 1936. On April 24 the appellee, hereinafter called the debtor, filed its voluntary petition for reorganization in the District Court claiming an equitable interest in the lots as a part of its property and asking that the sale be enjoined. An order was entered approving the petition as properly filed, continuing the debtor in possession of its property and restraining the foreclosure proceeding. The appellant bank intervened and asked that the injunction be dissolved. The debtor answered and without denying the averments of the petition of intervention asked that the validity of the bank's lien be adjudicated. Thereupon the bank moved for a judgment of dissolution upon the facts appearing upon the face of the pleadings. The appeal is from the order overruling this motion.

Before considering the contentions of appellant it will be convenient to clear away some of the obstructions interposed by the debtor. It is first claimed the motion to dissolve the injunction is premature because the court should first hear testimony and adjudicate the rights of the bank in the property. The debtor asked in its answer to the petition of intervention that it be decreed that the bank has no right, title or interest in or to any part of the property. The bank at every step denied the jurisdiction of the court. It is too well settled to require discussion that the bankruptcy court does not have jurisdiction to determine an adverse claim to property in a summary proceeding against objection of the claimant when the bankrupt has neither the legal title nor possession. Taubel-Scott-Kitz-miller Co. v. Fox, 264 U.S. 426, 44 S.Ct. 396, 68 L.Ed. 770; Harrison v. Chamberlin, 271 U.S. 191, 46 S.Ct. 467, 70 L.Ed. 897; Engebretson v. Marcell, 8 Cir., 84 F.2d 315; In re Patten Paper Co., 7 Cir., 86 F.2d 761, 765; In re Chicago & N. W. Ry. Co., Debtor, 7 Cir., 86 F.2d 508.

It is further claimed that appellant's motion to dissolve the injunction had the effect of a demurrer; that it admitted all facts recited in the debtor's petition for reorganization and that none other may be considered. This contention is not sound and would require a wrong approach to the problem to be solved. The motion was in the nature of a motion for a summary judgment upon the pleadings, "consisting of debtor's petition, the intervening petition * * * and debtor's answer to the intervening petition. * * *" The rule is that such a judgment must be sustained by the undisputed facts appearing in all the pleadings. National Surety Corporation v. Ellison, 8 Cir., 88 F.2d 399, 402; Klink v. Chicago, R. I. & P. Ry. Co., 8 Cir., 219 F. 457; Kimber v. Gunnell Gold Mining & Milling Co., 8 Cir., 126 F. 137. Such a judgment cannot rest upon disputed facts. Consolidated Indemnity & Ins. Co. v. Alliance Casualty Co., 2 Cir., 68 F.2d 21. The master recommended that the motion be considered only as a demurrer to the debtor's petition, and the lower court apparently adopted his view. This was error.

Other contentions of appellee can more appropriately be considered in connection with the main issues.

The arguments of appellant to sustain its claim of alleged error may be summarized in two propositions:

(1) The court was without authority to enjoin the foreclosure sale because the debtor neither actually nor constructively owned the mortgaged property.

(2) The injunction should have been dissolved because the undisputed facts showed that the debtor's petition for reorganization, including the application for injunction, was not filed in good faith as required by section 77B (a) of the Bankruptcy Act, 11 U.S.C.A. § 207(a).

In response to these propositions the appellee contends: (1) That the debtor's claim to an equitable interest in the lots is property within the meaning of section 77B, and that, therefore, the court had authority to enjoin the foreclosure sale in furtherance of the debtor's reorganization; (2) that the petition was filed in good faith; and (3) that appellant being neither creditor nor stockholder of the debtor cannot raise the question of good faith because its intervention must be in subordination to and in recognition of the main proceeding.

Section 77B(c) (10), 11 U.S.C.A. § 207(c) (10) provides that the court "may, upon notice and for cause shown, enjoin or stay the commencement or continuance of any judicial proceeding to enforce any lien upon the estate until after final decree." For the purpose of this appeal we may assume without deciding that the debtor's interest in the property was shown by the facts alleged in its petition to be such that the bankruptcy court had jurisdiction to enjoin the foreclosure. All that the debtor had however, was a disputed claim to an equitable interest, a claim which could be adjudicated only in a plenary suit, and so far no such suit had been brought against the appellant. A debtor's right to an order restraining foreclosure under such circumstances is not very substantial at best, and when the order has been issued it should be dissolved promptly upon failure of the debtor to prosecute with diligence a plenary suit to establish the invalidity of the lien and the validity of the debtor's title. A bankruptcy court's power to enjoin must be exercised only in the furtherance of justice, and after consideration of all the pertinent circumstances. Foust v. Munson S. S. Lines, 299 U.S. 77, 83, 57 S.Ct. 90, 93, 81 L.Ed. 49. In the cited case the Supreme Court said: "Section 77B(c) (10), 11 U.S.C. A. § 207(c) (10) enlarging power conferred by section 11 11 U.S.C.A. § 29, broadly declares the judge `may enjoin or stay the commencement or continuation of suits against the debtor until after final decree.' The exclusive jurisdiction given the court over the debtor and his property, subdivision (a), 11 U.S.C.A. § 207(a), does not imply that the commencement or the carrying on of suits against the debtor must be enjoined or that all claims must be referred to a master for consideration and report. Subdivision (c) (11), 11 U.S.C.A. § 207(c) (11). See In re Prudence Bonds Corporation (C.C.A.) 75 F.2d 262, 263. The power to stay does not imply that it is to be, or appropriately may be, exerted without regard to the facts. The granting or withholding of injunction is left to the discretion of the court."

The vital question here is whether or not upon the undisputed facts the court abused his discretion in denying appellant's motion to dissolve the injunction.

We therefore turn to an examination of the circumstances which control the discretion of the District Court with respect to the right of the debtor to enjoin the foreclosure sale and the correlative right of the appellant to freedom from restraint. It has been the rule in equity receivership cases that the bill must be dismissed for want of equity if it is not filed in good faith as, for example, when its purpose is to hinder or delay creditors. Shapiro v. Wilgus, 287 U.S. 348, 53 S.Ct. 142, 77 L.Ed. 355, 85 A.L.R. 128; First National Bank v. Flershem, 290 U.S. 504, 54 S.Ct. 298, 78 L. Ed. 465, 90 A.L.R. 391; Harkin v. Brundage, 276 U.S. 36, 48 S.Ct. 268, 72 L.Ed. 457. Under section 77B(a) of the Bankruptcy Act the District Judge must dismiss the entire proceedings when want of good faith on the part of the debtor appears. Tennessee Publishing Co. v. American Bank, 299 U.S. 18, 22, 57 S.Ct. 85, 87, 81 L. Ed. 13.

In a reorganization proceeding under section 77B good faith means more than honesty of purpose. It also requires that there be a reasonable possibility of successful reorganization. Wright v. Vinton Branch Bank, 300 U.S. 440, 463, 57 S.Ct. 556, 562, 81 L.Ed. 736; Tennessee Publishing Co. v. American Bank, supra; In re Tennessee Publishing Co., 6 Cir., 81 F.2d 463; In re Loeb Apartments, 7 Cir., 89 F.2d 461; Manati Sugar Co. v. Mock, 2 Cir., 75 F.2d 284; O'Connor v. Mills, 8 Cir., 90 F. 2d 665; Provident Ins. Co. v. University Church, 9 Cir., 90 F.2d 992.

Whenever want of good faith appears the debtor's petition should be dismissed even though a plan of reorganization has not been submitted. The District Court was reversed for failure to dismiss in such a case in Provident Ins. Co. v. University Church, supra, in Re Wisun & Golub, 2 Cir., 84 F.2d 1, and in Re North Kenmore Corporation, 7 Cir., 81 F.2d 656. The judgment of the District Court dismissing the petition for want of good faith was affirmed in O'Connor v. Mills, supra; in Manati Sugar Co. v. Mock, supra; and in Re Grigs-by-Grunow Co., 7 Cir., 77 F.2d 200.

In Brockett v. Winkle Terra Cotta Co., 8 Cir., 81 F.2d 949, 953, Judge Van Valkenburgh, speaking for this court,...