In re Forty-One Thirty-Six Wilcox Bldg. Corp., 6596

• Decision Date: 15 December 1938
• Docket Number: 6597.,No. 6596,6596
• Parties: In re FORTY-ONE THIRTY-SIX WILCOX BLDG. CORPORATION. CHICAGO TITLE & TRUST CO. v. HAIGHT et al.
• Court: U.S. Court of Appeals — Seventh Circuit

100 F.2d 588 (1938)

In re FORTY-ONE THIRTY-SIX WILCOX BLDG. CORPORATION.

CHICAGO TITLE & TRUST CO. v. HAIGHT et al.

Nos. 6596, 6597.

Circuit Court of Appeals, Seventh Circuit.

December 15, 1938.

Richard H. Hollen and George W. Ott, both of Chicago, Ill., for appellant.

Geo. I. Haight, Joseph Z. Willner, and Joseph J. Karlin, all of Chicago, Ill., for appellees.

Before MAJOR and TREANOR, Circuit Judges, and LINDLEY, District Judge.

MAJOR, Circuit Judge.

From an order entered February 25, 1938, allowing fees and expenses in a proceeding for corporate reorganization under Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, these appeals are brought, one allowed by this Court and one by the District Court, and here consolidated.

A voluntary petition was filed June 13, 1935, in which a reorganization was sought, alleging inter alia that the debtor was a corporation. Respondent was the trustee under a trust deed in the nature of a mortgage and as such trustee, was the complainant in a proceeding pending in the Superior Court of Cook County, Illinois, for the foreclosure of the mortgage lien. The trust deed constituted a first lien on the real estate and the rents, issues and profits thereof involved in this proceeding, and secured the payment of outstanding bonds aggregating $95,000 with accrued interest thereon from September 20, 1930. The real estate was also subject to the lien of a junior trust deed in the nature of a mortgage securing payment of notes aggregating $15,000, with accrued interest thereon from some time in 1930. A suit is also pending in the State Court for the foreclosure of the lien of this mortgage. The property involved consists of land on which is located an apartment building and constitutes the sole asset of the debtor.

At the time of the filing of the petition, the real estate was in possession of a receiver appointed by the State Court, in both foreclosure suits with authority to sequester the rents, issues and profits.

Respondent was brought into the proceedings below by personal notice. It denied the jurisdiction of the District Court to take possession of the real estate or to restrain the prosecution of the foreclosure proceedings, or otherwise to proceed under the petition for reorganization. The District Court, after a hearing of the issues raised by respondent's answer, decided the same adversely to respondent and entered its order therein, (1) adjudging the petition for the corporation reorganization of the debtor as properly filed, (2) appointing Arthur P. Murphy temporary trustee of the debtor, (3) directing the receiver appointed in the State Court foreclosure proceedings to deliver up possession of the real estate to the temporary trustee, and (4) enjoining the respondent from further prosecution of the foreclosure proceedings.

Upon the allowance of an appeal to respondent, the District Court stayed further proceedings upon the filing of a bond in the sum of $5000. The temporary trustee appointed by the District Court was permitted to take possession of debtor's property with the understanding that such action would be without prejudice to the rights of any of the interested parties. Thereupon, the State Court receiver surrendered control of the real estate and funds in its possession to the temporary trustee who proceeded to manage and operate the same, and collect the rents therefrom until the order appealed from was entered. This Court affirmed the orders of the District Court. In re Forty-One Thirty-Six Wilcox Bldg. Corporation, 7 Cir., 86 F.2d 667. Thereafter, the cause was reviewed by the Supreme Court, which on November 15, 1937, reversed the same with costs and remanded the cause to the District Court for further proceedings in conformity with its opinion. Chicago Title & Trust Company v. Wilcox Building Corporation, 302 U.S. 120, 58 S.Ct. 125, 82 L.Ed. 147. The Supreme Court decided that the debtor was not a corporation within the terms of Section 77B and was without authority to invoke the powers of the Court under said Act.

On December 20, 1937, Arthur P. Murphy, the temporary trustee appointed in the District Court, was appointed and qualified as Receiver in the State Court foreclosure proceedings.

Subsequent to the filing of the Supreme Court mandate, the petitioners filed their petition for the allowance of costs and expenses and for compensation for services rendered by them in connection with the proceedings as related. Respondent thereafter filed its petition, asking that possession of the real estate be turned over to the receiver appointed in the State Court foreclosure proceedings and that all moneys collected by the temporary trustee be turned over to such receiver without deducting therefrom any expenses or fees. Respondent denied that the District Court had jurisdiction to make the allowances requested, but if so, that the allowance could not properly be made out of the funds in the possession of the temporary trustee, as respondent had a first and paramount lien therein.

Upon hearing, the District Court vacated the orders which had been reversed by the Supreme Court in accordance with the mandate of that court and allowed the sum of $958.47 for expenses and the sum of $1500 to the attorneys who had represented the debtor corporation in the District Court, as well as in this and the Supreme Court, for services rendered by them, and directed that possession of the real estate and the balance of the funds in the possession of the temporary trustee, after making such payments, be turned over to the State Court receiver. It is from this order allowing costs, expenses and attorney fees to the petitioners that these appeals have been taken.

Two essential questions are presented. First, did the District Court have jurisdiction to enter the orders complained of? and, Second, if jurisdiction existed, did it have the authority? Respondent argues that by reason of the decision of the Supreme Court, the orders of the District Court approving the petition, appointing a temporary trustee and restraining the prosecution of the foreclosure proceedings, were void, and that likewise its possession and control of debtor's property was without authority. On the other hand, petitioners contend that the orders of the District Court, in view of the Supreme Court decision, were merely erroneous. We are of the opinion that respondent's theory is not tenable in this respect. The petition filed by the debtor was regular on its face and by its allegations, jurisdiction appeared to exist. Respondent, in denying a jurisdictional allegation, created an issue, which it is true, was finally determined in its favor, but it does not follow from this that the orders entered by the District Court were a nullity. When the issue was thus created, the court was confronted with the proposition of determining such issue, and it would seem it had jurisdiction for the purpose of determining the jurisdictional question, if for no other.

In Denver First National Bank v. Klug, 186 U.S. 202, 22 S.Ct. 899, 46 L.Ed. 1127, an involuntary petition in bankruptcy was filed against Klug who defended on the grounds that he was a farmer and, therefore, the bankruptcy court was without jurisdiction. The District Court determined the issue in favor of the debtor and dismissed the petition, from which an appeal was had. The court, at page 204, 22 S.Ct. at page 900 said:

"The conclusion was, it is true, that Klug could not be adjudged a bankrupt, but the court had jurisdiction to so determine, and its jurisdiction over the subject-matter was not and could not be questioned."

In the instant case, the most that can be said is that it was finally determined that the order of the District Court was erroneous. It was the character of order binding on all parties to the proceeding until reversed by a higher tribunal. It was not subject to collateral attack.¹ Respondent, in support of this point, relies strongly on the case of Lion Bonding & Surety Co. v. Karatz, 262 U.S. 77, 43 S.Ct. 480, 67 L.Ed. 871; Id., 262 U.S. 640, 43 S.Ct. 641, 67 L.Ed. 1151. There the court assumed jurisdiction of a creditor's bill and appointed a receiver. Jurisdiction depended upon diversity of citizenship, but the bill disclosed on its face that the amount in controversy was $2100. The Supreme Court held that the lower court lacked jurisdiction and was without power to make any charge upon the assets coming into its control during the course of a proceeding in which it had no jurisdiction. The bill there disclosed on its face that the court was without jurisdiction, which we think is readily distinguishable from the situation here, where the petition, on its face, showed jurisdiction and which, when the issue was raised, could only be determined by a hearing.

In Palmer v. Texas, 212 U.S. 118, 29 S.Ct. 230, 53 L.Ed. 435, we find a situation somewhat similar to the present case, although not entirely parallel. There the Federal Court appointed a receiver while a receivership proceeding was pending in the State Court. This, the Supreme Court held to be error. The Supreme Court, however, with reference to the costs of the receivership, on page 132, 29 S.Ct. on page 235, said:

"The receivership has gone on pending the proceedings upon appeal, and we are of opinion that justice will be done if the costs of the receivership are paid out of the fund realized in the Federal court, and it is so ordered; otherwise the judgment of the Circuit Court of Appeals is affirmed."

The Supreme Court in the Karatz Case distinguished the Palmer Case in the following statement, at page 642, 43 S.Ct. at page 642:

"The case at bar is unlike Palmer v. Texas, 212 U.S. 118, 132, 29 S.Ct. 230, 53 L.Ed. 435, upon which the receivers rely. In that case the costs and expenses of a receiver erroneously appointed by the federal court were directed to be paid out of funds realized in that court. There the Circuit Court had jurisdiction as a federal...