In re Dayton Coal & Iron Co., 1598

• Court: United States District Courts. 6th Circuit. Eastern District of Tennessee
• Citation: 291 F. 390
• Decision Date: 02 August 1922
• Docket Number: 1600.,1598
• Parties: In re DAYTON COAL & IRON CO., Limited.

291 F. 390

In re DAYTON COAL & IRON CO., Limited.

Nos. 1598, 1600.

United States District Court, E.D. Tennessee, Southern Division.

August 2, 1922

[291 F. 391]

Sizer, Chambliss & Chambliss, of Chattanooga, Tenn., and Joline, Larkin & Rathbone and J. M. Perry, all of New York City, for Trust Company and Scottish Banks.

Brown, Spurlock & Brown and J. M. Trimble, all of Chattanooga, Tenn., for trustee in bankruptcy.

Allison, Lynch & Phillips, of Chattanooga, Tenn., for Bank of Montreal and other creditors.

SANFORD, District Judge.

This is a petition to review an order of the referee adjudging that a certain mortgage or trust deed, executed by the Dayton Coal & Iron Co., Ltd., the bankrupt herein, to the Central Trust Co. of New York, securing certain debentures principally held by the Bank of Scotland and Commercial Bank of Scotland, Ltd., is not a valid lien on the property of the bankrupt.

The general situation presented is this:

The mortgage was executed by the Dayton Company, a British corporation, [291 F. 392] in October, 1902, and conveyed its real estate and other property in Tennessee and elsewhere to the Trust Company, as trustee, to secure an issue of debenture bonds.

After there had been default in the debentures authorizing the Trust Company to foreclose the mortgage, certain creditors of the Dayton Company filed a general creditors' bill against it in the Chancery Court of Rhea County, Tennessee, in which its manufacturing plant and principal properties were situated, for the purpose of winding up and administering its affairs; to which the Trust Company was made a defendant. In an amended bill to which the Scottish Banks were also made defendants, it was alleged, in general terms, that the Trust Company's claim to priority under its mortgage was illegal and invalid. Thereupon, the Dayton Company having been served with process and entered its appearance, on motion of the complainants the Chancery Court appointed a receiver, who was directed to take possession of all the properties of the Dayton Company and carry on its business. He immediately took possession of such properties, including the mortgaged property herein involved; and he and a co-receiver subsequently appointed thereafter administered the property under orders of the court. ^[1] The bill was sustained by the Chancery Court as a general creditors' bill, and creditors ordered to file their claims in the cause. Many creditors intervened and the Chancery Court continued to exercise complete jurisdiction in the administration of the affairs of the Company; the business of the Company being in part carried on, a portion of the property sold, taxes and insurance paid, and other general administrative orders made in the cause

In the meantime, five days after the appointment of the receiver in the Chancery Court, certain other creditors filed in this court an involuntary petition in bankruptcy, No. 1598, against the Dayton Company; and ten days later another involuntary petition in bankruptcy, No. 1600, was filed against it herein by other creditors. Two days later certain of these petitioning creditors, in my absence from the Division, applied to the referee in bankruptcy, under sections 2(3) and 38(3) of the Bankruptcy Act (Comp. St.§§ 9586, 9622), for the appointment of a receiver to take possession of the property of the Dayton Company. This application was resisted by the Dayton Company and the Chancery Court receivers and was denied by the referee on the ground that in view of the custody of the assets by the Chancery receivers it did not appear that there was an absolute necessity for the appointment of a receiver by the bankruptcy court. And no step was thereafter taken by the bankruptcy court to affirmatively assert its jurisdiction over the property of the Dayton Company or to obtain actual possession thereof until after an adjudication had been made in the bankruptcy causes, as hereinafter stated. Nor was any notice given to the Chancery Court, in the meantime, of the pendency of the bankruptcy proceedings.

Subsequently a trial in this court of the petition in bankruptcy in cause No. 1600 resulted in a judgment dismissing the petition. This [291 F. 393] judgment was, on writ of error, reversed by the Circuit Court of Appeals. James Supply Co. v. Dayton Co. (6th Cir.) 223 F. 991, 139 C.C.A. 367. And a further trial was then had in this court in the two bankruptcy causes, which were consolidated, resulting in a judgment adjudicating the Dayton Company a bankrupt, on the grounds that, being insolvent and because of its insolvency, a receiver had been put in charge of its property by the Chancery Court, and that, being insolvent, it had applied to the Chancery Court for a receiver of its property, as alleged in the two petitions, respectively.

In the meantime other proceedings had been had in the State courts in reference to the mortgage. The Trust Company appeared in the Chancery Court, answered the original and amended bills, and filed a cross-bill against the Dayton Company and the complainant creditors, seeking a foreclosure of the mortgage, in which the receivers were included as defendants. Subpoena to answer this cross-bill was served on the Dayton Company. Subsequently other creditors filed petitions in the nature of original creditors' bills against the Dayton Company, which were consolidated with the original bill. The original complainants then filed an amended and supplemental bill against the Dayton Company and the Trust Company, alleging that the mortgage was void for various specific reasons, and praying that it be declared null and void, to which the Trust Company and Scottish Banks filed an answer. Thereafter the Chancery Court entered an order permitting the various complainants in the consolidated complaint to make and interpose all defenses to the cross-bill of the Trust Company which the receivers could make, substituting such creditors to the rights of a defendant in lieu of the receivers, and permitting the receivers to have the benefit of any defenses so interposed by the defending creditors, which might inure to the benefit of all creditors of the Dayton Company. The complainant creditors then filed an answer to the cross-bill of the Trust Company 'on behalf of all the creditors' of the Dayton Company 'under the orders of the court in this cause. ' Later the attorneys for 'general creditors' and the solicitors for the Trust Company and Scottish Banks filed a stipulation agreeing that the validity of the mortgage should be determined by the court under the consolidated bills, and the cross-bill of the Trust Company, and that if the mortgage should be sustained, proper decree for foreclosure should be entered under the cross-bill.

After a hearing upon pleadings and proof the Chancery Court entered a decree that the mortgage was void, and annulling and setting the same aside. This decree was, on appeal, affirmed by the Tennessee Court of Civil Appeals. The case was later heard by the Supreme Court of Tennessee, upon certiorari. On the day of the hearing, the petitioning creditors in the bankruptcy cause No. 1600 filed a petition in the Supreme Court, setting forth that they had filed their bankruptcy petition in this court, which would again stand for trial at the next term of this court; and praying a stay of proceedings in the case.

Thereafter, before the adjudication in bankruptcy had been made, the Supreme Court announced its opinion, holding that as no adjudication in bankruptcy had been made by this court and it had not appointed [291 F. 394] any receiver of the property or made any order attempting to take or assert exclusive jurisdiction of the administration of the Company's property, but had refused to assert or claim such jurisdiction, it was the right and duty of that court to proceed to a determination of the questions before it; and, furthermore, that this question should have been made, if at all, by proper petition in the Chancery Court, seasonably invoking its action; and also holding, upon the merits, after full and detailed consideration of the authorities, that the decrees of the Chancery Court and Court of Civil Appeals adjudging the mortgage to be invalid and setting the same aside, were erroneous, and were 'reversed.' Morgan Bros. v. Coal & Iron Co., 134 Tenn., 228, 235-238, 282, 183 S.W. 1019, Ann. Cas. 1917E, 42. Subsequently, after a petition for rehearing had been denied, a decree was entered by the Supreme Court, as of the date on which its judgment had been announced, sustaining its jurisdiction, and adjudging: That the mortgage to the Trust Company was a valid mortgage upon the property therein described, except as to certain properties to which its lien did not attach; that the decrees of the Chancery Court and Court of Civil Appeals adjudging said mortgage invalid be reversed and the cross-bill of the Trust Company sustained; and that the cause be remanded to the Chancery Court for further proceedings in accordance with the decree and opinion of the court.

In the meantime, after the opinion of the Supreme Court had been announced, but before the decree was entered, the Dayton Company was, as heretofore stated, adjudicated a bankrupt in these consolidated bankruptcy proceedings; and these proceedings were referred to the referee. A trustee in bankruptcy was duly elected, who, by order of the referee, presented his petition to the Chancery Court, asking that all of the property of the Dayton Company be surrendered to him. Whereupon the Chancery Court, as a matter of comity, made an order directing its receiver to turn over to the trustee in bankruptcy all of the property of the bankrupt, including that which had been adjudged by the Supreme Court to be covered by the mortgage, and submitting all controverted questions to the bankruptcy court. All of the property in possession of the Chancery Court receiver, including the mortgaged...