In re Cutler & John
| Decision Date | 07 January 1916 |
| Citation | 228 F. 771 |
| Parties | In re CUTLER & JOHN. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Small McLean, Bragaw & Rodman, of Washington, N.C., for petitioner.
Daniel & Warren, of Washington, N.C., for trustee.
The facts essential to the decision of the question presented by the certificate of the referee and the admissions of counsel are:
(1) Bankrupts executed to Sebron Cox, May 30, 1914, a mortgage on their property, to secure the payment of a debt of $1,000.
(2) On October 15, 1914, they executed a mortgage on the same property to the Bank of Washington to secure a debt of $1,000.
(3) On January 6, 1914, they executed to the Bank of Washington another mortgage on the same property to secure the payment of a debt of $2,000. All of the mortgages were duly recorded more than four months prior to June 19, 1915.
(4) Within four months prior to June 19, 1915, said bankrupts executed to W. B. Rodman, Jr., a deed of trust or assignment of the same property, directing a sale thereof, and, from the proceeds, the payment of the mortgages in the order of their priority and the balance to their general creditors. The assignee took possession of the property-- a stock of goods-- and made an inventory thereof. He notified the creditors that he would proceed to advertise the property for sale, either publicly or privately, as should appear to the best interest of all parties concerned.
On June 19, 1915, certain unsecured creditors filed a petition asking that they be adjudged bankrupt, assigning as an act of bankruptcy the execution of the deed of assignment to W. B Rodman, Jr. Pursuant to the prayer of petitioning creditors, the said Cutler & John were adjudged bankrupts, and at the first meeting of the creditors L. C. Warren, Esq., was duly elected and qualified as trustee. Upon demand of the trustee, the assignee surrendered the property to him, and, pursuant to an order of the bankrupt court, he sold said property for the sum of $3,100. He has collected, on account of choses in action due the bankrupts, $12.58. The mortgagees asserted their claim to the proceeds of the property, by virtue of the mortgages held by them, as hereinbefore set forth. There is no controversy in regard to the validity or the amount of the debts, or the mortgages executed for their security. The referee was of the opinion that the cost incurred in the proceeding in bankruptcy, including commissions, to the trustee, and the allowance to counsel for petitioning creditors, aggregating $342.09, should be paid from the proceeds of the property, and the balance paid to the mortgage creditors, in the order of their priority. To this ruling the Bank of Washington duly excepted and filed petition for review. This is another of the numerous cases in which the general creditors and the trustee overestimate the value of the property of bankrupts upon which there are valid liens.
The execution of the deed of assignment to W. B. Rodman, Jr., the assignors being insolvent, was an act of bankruptcy. Bankr. Act, Sec. 3, subsec. 4. They made no objection to the adjudication. This, however, did not affect or impose any liability upon the property of the mortgage creditors. The execution of the deed of assignment did not have such effect. The surrender of possession to the trustee, by Mr. Rodman, as assignee, did not affect the rights of the mortgagees. He was not entitled to hold it against the trustee. While, as a general proposition, it is true that, by the adjudication in bankruptcy and the election and qualification of the trustee, all of the property of the bankrupt is brought within the control and jurisdiction of the bankrupt court, it is equally true that liens, mortgages, etc., valid under the state laws and the bankrupt law, are preserved in their integrity. Bankr. Act, Sec. 67d (Comp. St. 1913, Sec. 9651).
When the property of a bankrupt is subject to valid liens or mortgages, the trustee is entitled to pursue one of two courses: He may, if in his judgment the equity in the property is of value and will yield any benefit to the estate for the unsecured creditors, take possession of the property and bring it to sale free of the mortgage lien, in which event the lien will attach to the proceeds in his hands, and the lien on the property be discharged; or he may sell the equity of redemption. He will exercise his best judgment with the approval of the bankrupt court. In neither case can he, without the assent of the lien creditor, reduce the value of the security by attaching to the proceeds of the property liability for the cost of administration in bankruptcy. The correct rule, as I apprehend, in such cases, is stated by Judge Hook in In...
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