Garner, Matter of, 75-4067

• Citation: 556 F.2d 772
• Decision Date: 29 July 1977
• Docket Number: No. 75-4067,75-4067
• Parties: In the Matter of Ernest Fredrick GARNER, Bankrupt. GENERAL FINANCE CORPORATION, Appellant, v. Ernest Fredrick GARNER, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 772

556 F.2d 772

In the Matter of Ernest Fredrick GARNER, Bankrupt.

GENERAL FINANCE CORPORATION, Appellant, v. Ernest Fredrick GARNER, Appellee.

No. 75-4067.

United States Court of Appeals, Fifth Circuit.

July 29, 1977.

James A. Elkins, Jr., Columbus, Ga., for appellant.

Michael P. Fox, Columbus, Ga., for appellee.

Appeal from the United States District Court for the Middle District of Georgia.

Before AINSWORTH and MORGAN, Circuit Judges, and LYNNE, District Judge. ^*

LEWIS R. MORGAN, Circuit Judge:

This appeal presents questions about the disclosure requirements of the federal Truth-in-Lending Act, ¹ about the powers of a bankruptcy judge under Chapter XIII (the Wage Earner provisions) of the Bankruptcy Act, ² and about the interface between these two statutory schemes.

I. FACTS

In 1974, appellee Ernest Garner purchased a car from Cantrell's Auto Sales in Columbus, Georgia. Garner signed a conditional sales contract granting the seller a security interest in the car. The contract required Garner to make 30 monthly payments of $86.19 each for a total of $2,585.70. In the same document, Cantrell's Auto Sales assigned the contract to appellant General Finance Corp.

The record indicates that Garner made 11 monthly payments on the car. On February 11, 1975, after Garner made the payment that was due for that month, he filed in the Middle District of Georgia a petition for relief under Chapter XIII of the Bankruptcy Act. Garner proposed to pay his creditors all that he owed them through the extension mechanism provided by Chapter XIII. ³ Garner's plan called for a monthly payment to General Finance in the amount of $47.88.

General Finance rejected the plan. ⁴ It filed a reclamation petition seeking possession of the car. ⁵ Garner answered the petition, alleging inter alia that the conditional sales contract violated the federal Truth-in-Lending Act. The bankruptcy judge agreed with Garner that the contract violated the Truth-in-Lending Act. The court concluded that Garner was entitled to a statutory penalty of $1,000.00 ⁶ and to an attorney's fee of $150.00. ⁷ The court, however, did not order General Finance to pay the penalty directly:

The proof of claim filed by General Finance Corporation is in the amount of.$1,637.61. We shall apply the $1,000.00 to this claim and allow the claim in the amount of $637.61. This would appear preferable to requiring General Finance Corporation to pay the sum of $1,000.00 to the debtor and increasing the payments under the plan to General Finance Corp. to $86.19 per month. The Chapter XIII Trustee should be instructed to pay to General Finance Corp. the sum of $47.88 per month as proposed in the original plan until General Finance Corporation has received the total of $637.61.

Record at 29.

General Finance appealed to the district court. That court upheld the bankruptcy judge's conclusion that the conditional sales contract was violative of the Truth-in- Lending Act. ⁸ The court also approved the remedy fashioned by the bankruptcy judge:

(O)n the surface it might appear that the effect of this reduction in monthly payments is a forcing of the wage earner plan upon a secured creditor. However, in actuality this is not so because, as a practical matter, being paid the amount of $47.88 per month to be credited against the indebtedness of $637.61 General Finance Corporation will have its total indebtedness paid in approximately the same time in which the originally claimed indebtedness would have been paid if the contract payment had been made each month, and they, therefore, are not adversely affected by the plan.

Record at 88.

General Finance raises two issues here. First, it challenges the conclusion that the contract violated the Truth-in-Lending Act. Second, it contends that the reduction in the monthly payments "materially and adversely" affected it,

entitling it to possession of the collateral. II.

JURISDICTION OF THE BANKRUPTCY COURT OVER A

TRUTH-IN-LENDING COUNTERCLAIM

General Finance did not raise to the bankruptcy judge or to the district court and does not raise here any objection to the jurisdiction of the bankruptcy judge to hear Garner's Truth-in-Lending counterclaim to the reclamation petition. The Truth-in-Lending Act prohibits any set-off of its statutory penalty against a contractual obligation owed the creditor unless the Truth-in-Lending claim first is adjudicated before a court of competent jurisdiction. 15 U.S.C. § 1640(h). Moreover, to the extent that the subject matter jurisdiction of the bankruptcy court is at stake, we must make our own jurisdictional inquiry despite the parties' willingness to have the Truth-in-Lending issue heard by that court. See, e. g., Clark v. Paul Gray, Inc., 306 U.S. 583, 588, 59 S.Ct. 744, 83 L.Ed. 1001 (1939).

Although General Finance's failure to object at any point to the bankruptcy judge's exercise of jurisdiction does not absolve us of the obligation to inquire into the basis of the jurisdiction, the silence does settle the jurisdictional question here. Because the Truth-in-Lending claim arose as a controversy connected to the Chapter XIII proceeding in that it was interposed against General Finance's reclamation petition and served to challenge the amount of General Finance's claim, jurisdiction over the Truth-in-Lending claim fell to the bankruptcy judge by virtue of General Finance's consent.

Before going further, we note the observation of one commentator in this area:

The fact that a federal court dealing with a matter of bankruptcy . . . may acquire jurisdiction over the subject matter of a controversy by consent probably produces a mild shock upon a first encounter with §§ 2a(7) and 23b (the jurisdictional grants in the Bankruptcy Act). Both sections speak in terms of the power of the court based upon consent by an adverse party. It is not surprising, however, to discover that these sections present almost unparalleled difficulties of jurisdictional analysis and raise problems of as fundamental import as do the so-called 'grand clauses' of the Constitution.

Ferguson, The Consensual Basis of Subject-Matter Jurisdiction in Matters of Bankruptcy: Fact and Fiction, 14 Rutgers L.Rev. 491, 495 (1960). Resolution of the jurisdictional issue in the instant case does not require a full-blown treatment of all of these "almost unparalleled difficulties," and our discussion below should not be taken as an attempt at the definitive. We have attempted to clear only the straight path to an answer here, and we have left the many side paths and thickets for other days.

Section 2 of the Bankruptcy Act, the basic jurisdictional provision, grants sweeping powers to the courts of bankruptcy. "Courts of bankruptcy" are defined in section 1 of the Act as the federal district courts, and "court" is defined there to mean "the judge or the referee of the court of bankruptcy." 11 U.S.C. § 1. The most sweeping of the section 2 jurisdictional grants is section 2(a)(7):

(a) The courts of the United States hereinbefore defined as courts of bankruptcy are hereby created courts of bankruptcy and are hereby invested within their respective territorial limits as now established or as they may be hereafter changed, with such jurisdiction at law and in equity as will enable them to exercise original jurisdiction in proceedings under this title, in vacation, in chambers, and during their respective terms, as they are now or may be hereafter held, to

(7) Cause the estates of bankrupts to be collected, reduced to money, and distributed, and determine controversies in relation thereto, except as herein otherwise provided . . . and where in a controversy arising in a proceeding under this title an adverse party does not interpose objection to the summary jurisdiction of the court of bankruptcy, by answer or motion filed before the expiration of the time prescribed by law or rule of court or fixed or extended by order of court for the filing of an answer to the petition, motion or other pleading to which he is adverse, he shall be deemed to have consented to such jurisdiction . . . .

11 U.S.C. § 11(a)(7) (emphasis added). Were section 2 the only section of the Act touching jurisdiction, the courts of bankruptcy would be empowered to hear many controversies that, absent bankruptcy, would be cognizable only in state courts, and in fact, prior to 1898, the Bankruptcy Act was so structured. See Schumacher v. Beeler, 293 U.S. 367, 371-72, 55 S.Ct. 230, 79 L.Ed. 433 (1934). In 1898, Congress enacted section 23 of the Act:

(a) The United States district courts shall have jurisdiction of all controversies at law and in equity, as distinguished from proceedings under this title, between receivers and trustees as such and adverse claimants, concerning the property acquired or claimed by the receivers or trustees, in the same manner and to the same extent as though such proceedings had not been instituted and such controversies had been between the bankrupts and such adverse claimants.

(b) Suits by the receiver and the trustee shall be brought or prosecuted only in the courts where the bankrupt might have brought or prosecuted them if proceedings under this title had not been instituted, unless by consent of the defendant except as provided in sections 96, 107, and 110 of this title.

11 U.S.C. § 46. The Schumacher Court analyzed section 23 this way:

In enacting § 23, it was clearly the intent of the Congress that the federal courts should not have the unrestricted jurisdiction of suits between trustees in bankruptcy and adverse claimants which these courts had exercised under the broad provisions of § 2 of the Act of 1867. The purpose was to leave such controversies to be heard and determined for the most part in the state courts 'to the greater economy and convenience of litigants and witnesses.' But no reason appeared for a denial of jurisdiction to the federal court if the defendant, the adverse claimant, consented to be sued in that cou...