Helms v. Holmes

• Decision Date: 15 June 1942
• Docket Number: No. 4911.,4911.
• Citation: 129 F.2d 263,141 ALR 1367
• Parties: HELMS et al. v. HOLMES.
• Court: U.S. Court of Appeals — Fourth Circuit

141 ALR 1367, 129 F.2d 263 (1942)

HELMS et al. v. HOLMES.

No. 4911.

Circuit Court of Appeals, Fourth Circuit.

June 15, 1942.

Jesse F. Milliken, of Monroe, N. C., for appellants.

W. C. Davis, of Charlotte, N. C., for appellee.

Before SOPER and DOBIE, Circuit Judges, and PAUL, District Judge.

DOBIE, Circuit Judge.

On March 24, 1931, the appellee, M. C. Holmes, filed a voluntary petition in bankruptcy in the District Court of the United States for the Western District of North Carolina. He secured a discharge in the usual form on October 8, 1931, from all debts set up in the Schedule of Liabilities. At the time the bankruptcy petition was filed, Holmes and his wife, as joint obligors, were indebted to the appellant, H. K. Helms, in the sum of $2,570.10. This debt was secured by a deed of trust on certain real estate in Union County, North Carolina.

Holmes had specifically listed this indebtedness in his Schedule of Liabilities, but Helms filed no claim for his debt in the bankruptcy proceedings. When the bankruptcy court heard the cause, the equity in the property which secured the deed of trust was waived by the trustee in bankruptcy. Helms thereupon foreclosed the deed of trust. On March 21, 1932, five months after Holmes had obtained his discharge in bankruptcy, a sale of the property secured by the deed of trust was made by the Trustee to Helms for $1,500.

On April 2, 1934, Helms instituted a civil action in the Superior Court of Union County, North Carolina, against Holmes and his wife on the original indebtedness of $2,570.10, less a credit of $1,454.65, the net proceeds derived from the sale of the property to Helms. Personal service of the summons, together with a copy of the complaint, was duly made upon both Holmes and his wife on April 10, 1934, by the Sheriff of Union County. No answer was filed by either of the defendants and after the time for the filing of an answer had expired, judgment was duly entered by default on June 11, 1934, against both Holmes and his wife.

On March 22, 1940, a transcript of this judgment was duly docketed in Mecklenburg County, North Carolina, where Holmes and his wife then resided and where Holmes had acquired property subsequent to his discharge in bankruptcy. Thereafter, in October, 1941, execution was issued on the original default judgment out of the Superior Court of Union County directing the appellant, G. Mack Riley, Sheriff of Mecklenburg County, to levy on any property found in his county belonging to Holmes or his wife, and to sell the same to satisfy the judgment. Holmes thereupon brought this action in the United States District Court for the Western District of North Carolina, for the purpose of enjoining the execution of this writ by Sheriff Riley.

Upon the institution of the action, a temporary restraining order was issued, and this order was made permanent by the court below on January 27, 1942, after a hearing on the agreed statement of facts and the testimony of Holmes. From this final restraining order, Helms has duly taken an appeal to this Court.

It is obvious that the Superior Court of Union County had jurisdiction of both the subject matter and the parties in the action brought by Helms against Holmes and his wife. Nor is there any allegation or evidence of fraud, accident, or surprise. The default judgment, therefore, was validly obtained in due course and remained on the docket of the Union County Court from June 11, 1934, until execution was issued in October, 1941.

While admitting these facts, Holmes, nevertheless, vigorously contends that he ignored the summons served upon him and his wife, and failed to consult a lawyer or answer the complaint because he thought the discharge in bankruptcy operated as an automatic defense to any subsequent action brought against him by a creditor on a claim which came within the discharge in the bankruptcy proceeding. Of course, Mrs. Holmes remained liable as joint obligor on the original debt, since a discharge in bankruptcy is personal to the party to whom it is granted and does not inure to the benefit of the co-debtor. Moyer v. Dewey, 103 U.S. 301, 26 L.Ed. 394. Under North Carolina law, however (with certain exceptions not here applicable), in an action instituted against a married woman, her husband must be made a party defendant. North Carolina Consolidated Statutes, § 454. This was a further reason why Holmes failed to plead his discharge, for he thought he was a mere nominal party defendant and that the action by Helms was, in reality, one against his wife alone, in an effort to secure a judgment against her.

It is a matter of Hornbook learning that a defendant in an action at law who has a valid defense to a suit which is fully cognizable in a court of law and within its jurisdiction, and which he has an adequate opportunity to interpose, is chargeable with gross negligence if he fails to set up this defense, in the absence of fraud, accident or surprise. Moreover, he cannot later seek relief in equity against the enforcement of the judgment in that action, on the same grounds which constituted his original defense.

As applied to the instant case, it is patently clear that Holmes' discharge in bankruptcy constituted a complete and adequate remedy at law in the nature of an affirmative defense. Accordingly, under the rules of pleading in the United States Courts, as well as in the Courts of all the States, it was incumbent upon Holmes to plead this defense if he desired to avail himself of it. Federal Rule of Civil Procedure 8(c), 28 U.S.C.A. following section 723c; Paschall v. Bullock, 80 N.C. 329.

It must be remembered that a discharge in bankruptcy is neither a payment nor an extinguishment of debts. It is simply a bar to their enforcement by legal proceedings. Robinson v. Exchange National Bank of Tulsa, Oklahoma, D.C., 28 F.Supp. 244; Citizens' Loan Association v. Boston & Maine Railroad, 196 Mass. 528, 82 N.E. 696, 14 L.R.A.,N.S., 1025, 124 Am.St.Rep. 584, 13 Ann.Cas. 365. And no court, other than the bankruptcy court, is bound to take judicial notice of the discharge, unless it is pleaded as a release. Collins v. McWalters, 35 Misc. 648, 72 N. Y.S. 203. Nor is a creditor guilty of contempt of the bankruptcy court in suing on the old debt in the state court, even though he has notice of the debtor's discharge. In re Weisberg, D.C., 253 F. 833, 834.

Holmes' erroneous belief that the effect of the bankruptcy proceedings was to absolve him, ipso facto, from all future liability for his debts covered by the discharge, is contrary to the express rule of the Federal Courts: "The discharge in bankruptcy * * * did not automatically relieve him from even the provable debts previously owed by him and duly scheduled." In re Weisberg, D.C., 253 F. 833, 834.

Thus, the bankrupt is merely given a personal defense which is waived if he chooses not to avail himself of it. This rule that a failure so to plead operates in law as a waiver of the defense has been uniformly followed by State and Federal Courts alike. Remington on Bankruptcy, Fifth Edition, §§ 3459, 3499; First National Bank v. Pothuisje, 217 Ind. 1, 25 N.E.2d 436, 130 A.L.R. 1238; Rice v. Chapman, 234 App.Div. 279, 255 N.Y.S. 35; Smith v. Cook, 71 Ga. 705. As was stated in an early Federal case:

"Boardway, when sued, might have appeared in the City Court and there pleaded his discharge in bankruptcy and defeated the suit, assuming the facts to have been as stated; but this he did not do. This court has no power to interfere with the enforcement of that judgment. If, after bankruptcy proceedings are ended, a creditor sues the bankrupt on a claim which has been discharged, he may appear and plead and prove his discharge, and it will be a complete defense. If he does not appear, but allows judgment by default, the court in bankruptcy is powerless to grant any relief. Italics ours. The remedy of Boardway, if any, is under section 1268 of the New York Code of Civil Procedure. That section provides:

"`At any time after one year has elapsed, since a bankrupt was discharged from his debts, pursuant to the acts of Congress relating to bankruptcy, he may apply, upon proof of his discharge * * * for an order, directing the judgment to be canceled and discharged of record. If it appears upon the hearing that he has been discharged from the payment of that judgment or the debt upon which such judgment was recovered, an order must be made directing said judgment be canceled and discharged of record.'" In re Boardway, D.C., 248 F. 364, 365.

We are unaware of a similar applicable statute in North Carolina. Cf. Paschall v. Bullock, 80 N.C. 329. And in the absence of such an enactment, a defendant who fails to plead his discharge in bankruptcy in an action on a debt so discharged cannot have a subsequent default judgment vacated. Tune v. Vaughan, 170 Ark. 971, 281 S.W. 906; cf. Bell v. Cunningham, 81 N.C. 83. Finally, execution may be levied on the property of a bankrupt acquired after his discharge on a default judgment on a discharged debt. Garner v. Hartsfield Loan & Savings Association, 49 Ga.App. 199, 174 S.E. 647. For a State Court is bound to take notice of a discharge only when properly and seasonably pleaded by the bankrupt. In re Devereaux, D.C., 76 F.2d 522, certiorari denied Devereaux v. Belsey, 296 U.S. 589, 56 S.Ct. 100, 80 L.Ed. 416.

We are not unmindful of a recent line of Federal cases alleviating the harsh rule of In re Boardway. The trend is aptly illustrated by Holmes v. Rowe, 9 Cir., 97 F.2d 537, 539:

"A review of the decisions discloses that a Federal District Court, once having obtained jurisdiction of a controversy, and having rendered a decision in the matter, has complete power to protect the judgment or decree which it has rendered, and may go so far as to enjoin an action entertained in the state court by a litigant, involving the same subject-matter, when such action may in any way interfere with, or nullify...