Grand Boulevard Inv. Co. v. Strauss

• Court: U.S. Court of Appeals — Eighth Circuit
• Writing for the Court: STONE, WOODROUGH, and BOOTH, Circuit
• Citation: Grand Boulevard Inv. Co. v. Strauss, 78 F.2d 180 (8th Cir. 1935)
• Decision Date: 15 July 1935
• Docket Number: No. 10291.,10291.
• Parties: GRAND BOULEVARD INV. CO. v. STRAUSS et al. and fifteen other cases.

78 F.2d 180 (1935)

GRAND BOULEVARD INV. CO. v. STRAUSS et al. and fifteen other cases.

No. 10291.

Circuit Court of Appeals, Eighth Circuit.

July 15, 1935.

Jacob M. Lashly and Arthur V. Lashly, both of St. Louis, Mo., for appellant.

Ben L. Shifrin, Perry Post Taylor, and Taylor, Mayer & Shifrin, all of St. Louis, Mo., for appellees.

Before STONE, WOODROUGH, and BOOTH, Circuit Judges.

BOOTH, Circuit Judge.

This is an appeal from an order made in a debtor proceeding under section 77B of the Bankruptcy Act (11 USCA § 207) relating to reorganization of corporations. The order denied the petition of the debtor for the placing of itself in possession of its property or for the appointment of a trustee to take charge and possession of the property.

The initial petition of the debtor under said section for proposing a plan of reorganization and for proceeding under said section had been filed and approved by the court about a week prior to the filing of the petition here in controversy.

It appears from the record that the debtor was the owner of an apartment house upon which there was a mortgage securing a large amount of outstanding bonds.

About two years before the filing by the debtor of its initial petition under the said section of the Bankruptcy Act, there was default under the mortgage and the debtor turned over possession of the mortgaged property to the trustees under the mortgage in accordance with the provisions of the mortgage reading as follows:

"* * * In the event of default in the prompt payment of the principal or interest or income tax payments or any part thereof maturing September 1, 1940, without any notice whatsoever, the Mortgagor covenants, at any time or times, upon demand of the Trustees forthwith to surrender to them, and the Trustees shall be entitled to take actual possession of the mortgaged property, as for condition broken, and in their discretion may, with or without force and with or without process of law, and before or after declaring the principal of any or all of said bonds immediately due, and without any action on the part of any bondholder, enter upon, take and maintain possession of all or any part of said mortgaged property, and hold, manage and operate it and collect the rents therefrom and lease the same in such parcels and for such periods and on such terms as they may see fit. * * *

"Upon the payment in full of whatever may be due for principal or interest on bonds due by lapse of time and not by such declaration, or to be payable for any other purpose, before any sale of the mortgaged property or the entry of any order, judgment or decree for the sale thereof in a judicial proceeding for the foreclosure of the lien hereof, the Trustees, after making such provisions as to them may seem advisable for the payment of the next semi-annual installment of interest and the next installment of principal on said bonds, may restore to the Mortgagor the possession of said property and at the same time submit to the Mortgagor a detailed statement of all receipts, disbursements and charges in connection with their management of the mortgaged property, and said mortgaged property shall thenceforth be subject to this Indenture as if such entry had not been made.

"Section 2. The power of entry and the powers incidental thereto as herein provided for, may be exercised as often as occasion therefor shall arise, and their exercise shall not suspend or modify any other right or remedy hereunder."

The trustees are still in possession of the mortgaged property and have commenced in the state court foreclosure proceedings which, however, have been stayed by that court.

The petition here in controversy was heard upon notice; evidence was taken; but, as above stated, the petition was denied.

The ground on which the petition was denied, while not directly stated in the order itself, appears quite plainly from the memorandum filed in connection with the order. It was, that there was lack of power in the court under sections 77A and 77B (11 USCA §§ 206, 207) to require the turning over of possession from the trustees under the mortgage either to the debtor or to a trustee appointed by the court; in other words, lack of jurisdiction in the court under said sections, inasmuch as there was a mortgagee in possession after condition broken and the possession had continued for more than four months before the filing of the initial petition by the debtor under said section 77B.

The discussion in its memorandum as to the amendment to section 74 of the Bankruptcy Act (11 USCA § 202), and the effect of the lack of a similar amendment to section 77B, clearly indicate that the trial court held the view that it had no authority to make the order prayed for in the petition here in controversy; and not that the court exercised its discretion in the matter.

Any alleged uncertainty in the matter is based upon the fact that the order made by the trial court used the word "overruled" instead of the word "dismissed."

The sole issue presented to this court upon the present appeal is whether the trial court had power to grant the petition here in controversy.

The constitutionality of section 77B is not seriously questioned, and indeed could not well be in view of the decision of the Supreme Court in the case of Continental Ill. Nat. B. & T. Co. v. C., R. I. & P. R. Co., 55 S. Ct. 595, 605, 79 L. Ed. 1110 (called for short the Rock Island Case). The historical development of the several Bankruptcy Acts of the United States and the purpose and scope of section 77 (11 USCA § 205) are set forth at length in the opinion of the court in the case cited, and the court sums up its conclusion on the question of constitutionality as follows: "It follows, from what has now been said, that section 77, in its general scope and aim, is within the power conferred by the bankruptcy clause of the Constitution article 1, § 8, cl. 4; and we so hold."

While that case was concerned with section 77 of the Bankruptcy Act, we think what was said in the opinion relative to the constitutionality of that section is also applicable to section 77B.

The Supreme Court in the case cited also considered the question: "Under section 77 does the bankruptcy court have authority to enjoin the sale of the collateral here in question if a sale would so hinder, obstruct and delay the preparation and consummation of a plan of reorganization as probably to prevent it?" and in its consideration said: "The power to issue an injunction when necessary to prevent the defeat or impairment of its jurisdiction is, therefore, inherent in a court of bankruptcy, as it is in a duly established court of equity. Section 262 of the Judicial Code (28 USCA § 377), which authorizes the United States courts `to issue all writs not specifically provided for by statute, which may be necessary for the exercise of their respective jurisdictions' recognizes and declares the principle."

And further:

"Moreover, by section 2 (15) of the Bankruptcy Act (U. S. C. title 11, § 11, 11 USCA § 11 (15), courts of bankruptcy are invested with such authority in equity as will enable them to exercise original jurisdiction in bankruptcy proceedings, including the power to `make such orders, issue such process, and enter such judgments in addition to those specifically provided for as may be necessary for the enforcement of the provisions of this act (title).' It may be that in an ordinary bankruptcy proceeding the issue of an injunction in the circumstances here presented would not be sustained. As to that it is not necessary to express an opinion. But a proceeding under section 77 (11 USCA § 205) is not an ordinary proceeding in bankruptcy. It is a special proceeding which seeks only to bring about a reorganization, if a satisfactory plan to that end can be devised. And to prevent the attainment of that object is to defeat the very end the accomplishment of which was the sole aim of the section, and thereby to render its provisions futile.

"The bankruptcy court, in granting the injunction, was well within its power, either as a virtual court of equity, or under the broad provisions of section 2 (15) of the Bankruptcy Act, 11 USCA § 11 (15), or of section 262 of the Judicial Code U. S. C. title 28, § 384 (28 USCA § 377). * * *

"A claim that injurious consequences will result to the pledgee or the mortgagee may not, of course, be disregarded by the district court; but it presents a question addressed not to the power of the court but to its discretion — a matter not subject to the interference of an appellate court unless such discretion be improvidently exercised."

The court further said: "* * * The equity in the collateral remaining in the railroad company is property; and over this property, wherever located, the federal district court is given exclusive jurisdiction by the precise language of section 77, just quoted. As a necessary consequence of that jurisdiction, the court must have the power to preserve and safeguard the property for the benefit of the trust estate so far as that is compatible with the rights of the pledgees. Jurisdiction over the property wherever located carries with it jurisdiction to enjoin, in a proper case, interferences with the property."

In the case at bar, as in the Rock Island Case, it is claimed that the sale of the encumbered property under the mortgage or pledge would seriously interfere with the formation and carrying out of a plan of reorganization. This issue was one addressed to the discretion of the trial court and was so held in the case cited.

The question of interference with private contractual rights was also discussed and disposed of in the Rock Island Case. See, also, Straton v. New, 283 U. S. 318, 321, 51 S. Ct. 465, 75 L. Ed. 1060.

It is true that in the case at bar there is involved the question of the rights of a mortgagee in possession for more than four months after condition broken, and this precise question was...