In re Jacobs

• Decision Date: 31 August 1934
• Docket Number: No. 56344.,56344.
• Citation: 7 F. Supp. 749
• Parties: In re JACOBS.
• Court: U.S. District Court — Northern District of Illinois

7 F. Supp. 749

In re JACOBS.

No. 56344.

District Court, N. D. Illinois, E. D.

August 1934.

Abraham Teitelbaum, of Chicago, Ill., for petitioner.

LINDLEY, District Judge.

In the year 1932 proceedings were instituted in a court of equity in Illinois to foreclose the lien of a mortgage or trust deed securing certain bonds and incumbering the debtor's property. In those proceedings a receiver was appointed, who took and remains in possession of the debtor's property. No final decree has been entered in the cause pending in the state court.

On June 25, 1934, the debtor filed his voluntary petition under section 74 of the Bankruptcy Act, added by Act March 3, 1933, c. 204, § 1, as amended by Act June 7, 1934, c. 424, § 2 (11 USCA § 202), which was thereafter approved by the court. Upon application for a receiver and an order directing him to take possession of the property now in the custody of the receiver appointed by the court of equity, objection was made by the trustee in the trust deed and the receiver of the state court. Thereupon the court referred to the master the question of whether or not the court has, under section 74, power and authority to appoint a receiver and to order possession of the property of the debtor which is in the custody of the receiver of a court of equity, by virtue of an appointment made more than four months prior to bankruptcy proceedings, to be delivered to the receiver of the bankruptcy court. The master reported that the bankruptcy court has exclusive and paramount jurisdiction over the debtor's property wherever located, and the matter is submitted upon exceptions to that report.

It is contended under section 74 (h) of the Bankruptcy Act that the court acquires no jurisdiction over property not in the actual and constructive possession of the debtor, and that the language of subsection (m), as amended in 1934, cannot properly be construed to grant to the court of bankruptcy jurisdiction to take possession of and administer property incumbered by mortgage, not in the actual or constructive possession of the debtor, but in the possession of a receiver appointed by a court of equity more than four months prior to the filing of petition under section 74. The debtor, on the other hand, insists that there is express grant of jurisdiction to the court of bankruptcy by subsection (m) as amended.

In order to reach a proper conclusion, it is necessary to consider somewhat the origin and character of jurisdiction in bankruptcy. That jurisdiction arises by virtue of a provision of the Constitution (Const. art. 1, § 8, cl. 4), and is, therefore, a paramount and exclusive jurisdiction, in so far as it may be granted to the court by the Congress. Constitutional jurisdiction, obviously, may be withheld entirely by Congress or limited by it. Previously liens obtained within four months have by legislative act been declared invalid, and the legislation has been such as to sustain the jurisdiction of the court to restrain actions in foreclosure instituted within four months prior to bankruptcy. The substantial question involved here is whether that four-month period has been extended by valid act of the Congress.

The law regarding actions to enforce liens in courts other than that in bankruptcy prior to the present amendment, and concerning the paramount and exclusive character of the latter court, is rather fully stated by the Supreme Court in Isaacs v. Hobbs Tie & Timber Co., 282 U. S. 734, 51 S. Ct. 270, 271, 75 L. Ed. 645, thus: "Upon adjudication, title to the bankrupt's property vests in the trustee with actual or constructive possession, and is placed in the custody of the bankruptcy court. Mueller v. Nugent, 184 U. S. 1, 14, 22 S. Ct. 269, 46 L. Ed. 405. The title and right to possession of all property owned and possessed by the bankrupt vests in the trustee as of the date of the filing of the petition in bankruptcy, no matter whether situated within or without the district in which the court sits. Robertson v. Howard, 229 U. S. 254, 259, 260, 33 S. Ct. 854, 57 L. Ed. 1174; Wells v. Sharp (C. C. A.) 208 F. 393; Galbraith v. Robson-Hilliard Grocery Co. (C. C. A.) 216 F. 842. It follows that the bankruptcy court has exclusive jurisdiction to deal with the property of the bankrupt estate. It may order a sale of real estate lying outside the district. Robertson v. Howard, supra; In re Wilka (D. C.) 131 F. 1004. When this jurisdiction has attached, the court's possession cannot be affected by actions brought in other courts. White v. Schloerb, 178 U. S. 542, 20 S. Ct. 1007, 44 L. Ed. 1183; Murphy v. Hofman Co., 211 U. S. 562, 29 S. Ct. 154, 53 L. Ed. 327; Dayton v. Stanard, 241 U. S. 588, 36 S. Ct. 695, 60 L. Ed. 1190. This is but an application of the well-recognized rule that, when a court of competent jurisdiction takes possession of property through its officers, this withdraws the property from the jurisdiction of all other courts which, though of concurrent jurisdiction, may not disturb that possession; and that the court originally acquiring jurisdiction is competent to hear and determine all questions respecting title, possession, and control of the property. Murphy v. Hofman Co., supra; Wabash R. Co. v. Adelbert College, 208 U. S. 38, 28 S. Ct. 182, 52 L. Ed. 379; Harkin v. Brundage, 276 U. S. 36, 48 S. Ct. 268, 72 L. Ed. 457. Thus, while valid liens existing at the time of the commencement of a bankruptcy proceeding are preserved, it is solely within the power of a court of bankruptcy to ascertain their validity and amount and to decree the method of their liquidation. Ex parte City Bank of New Orleans, 3 How. 292, 11 L. Ed. 603; Houston v. City Bank of New Orleans, 6 How. 486, 12 L. Ed. 526; Ray v. Norseworthy, 23 Wall. 128, 23 L. Ed. 116; In re Wilka, supra; Nisbet v. Federal Title & T. Co. (C. C. A.) 229 F. 644."

The last sentence is peculiarly enlightening, and establishes firmly that, while the bankruptcy court may recognize valid liens, it has jurisdiction, paramount to and exclusive of that of all other courts, if so authorized by Congress, in pursuance of the constitutional provisions granting such jurisdiction, to determine the validity of such asserted liens and to decree when, how, and in what court they shall be liquidated. So in the later case of Gross v. Irving Trust Co., 289 U. S. 342, 53 S. Ct. 605, 606, 77 L. Ed. 1243, 90 A. L. R. 1215: "The fact that the jurisdiction of the bankruptcy court is paramount effectually distinguishes that class of cases which hold that as between courts of concurrent jurisdiction property already in the hands of a receiver of one of them cannot rightfully be taken from him without that court's consent by a receiver subsequently appointed by the other court. In Buck v. Colbath, 3 Wall. 334, 341, 18 L. Ed. 257, the rule is stated to be that `whenever property has been seized by an officer of the court, by virtue of its process, the property is to be considered as in the custody of the court, and under its control for the time being; and that no other court has a right to interfere with that possession, unless it be some court which may have a direct supervisory control over the court whose process has first taken possession, or some superior jurisdiction in the premises.' And see Covell v. Heyman, 111 U. S. 176, 180, 4 S. Ct. 355, 28 L. Ed. 390. The present case falls within the italicized exception, since the jurisdiction of the bankruptcy court is paramount and not concurrent."

Thus it will be seen that the rule that the jurisdiction of the court first taking possession of the res of an estate will persist against that of any other court must fail when a court is authorized by Congress under the basic law of the nation, the Constitution, to assert, and in pursuance of such authorization exercises, a paramount and exclusive jurisdiction — not a concurrent one.

The rule carried to its ultimate effect means that, if Congress sees fit, it may, in view of the paramount character of the jurisdiction in bankruptcy, go so far as to interfere with or impair contracts. Thus in Re Franklin Brewing Company, 249 F. 333, 335, Judge Hough, speaking for the Circuit Court of Appeals for the Second Circuit, said: "Congress, in the exercise of its constitutional right to establish systems of bankruptcy, may, and indeed always does, impair the obligation of contracts; a doctrine going much further than this point requires."

In Canada Southern R. R. Co. v. Gebhard, 109 U. S. 527, 3 S. Ct. 363, 371, 27 L. Ed. 1020, discussing the constitutionality of a bankruptcy statute, which bound minority bondholders by a vote of the majority, the Supreme Court said: "It is in entire harmony with the spirit of bankrupt laws, the binding force of which, upon those who are subject to the jurisdiction, is recognized by all civilized nations. It is not in conflict with the constitution of the United States, which, although prohibiting states from passing laws impairing the obligation of contracts, allows congress `to establish * * * uniform laws on the subject of bankruptcy throughout the United States.'"

In Mitchell v. Clark, 110 U. S. 633, 4 S. Ct. 170, 175, 312, 28 L. Ed. 279, the court used this language: "It is no answer to this to say that it interferes with the validity of contracts for no provision of the constitution prohibits congress from doing this, as it does the states; and where the question of the power of congress arises, as in the legal-tender cases, and in bankruptcy cases, it does not depend upon the incidental effect of its exercise on contracts, but on the existence of the power itself."

Heretofore, under the Bankruptcy Act as it read before the recent amendments, Congress had seen fit to limit the bankruptcy courts' jurisdiction over property in the possession and custody of a receiver in a court of equity of either a state or the United States, to situations where such receiver had been appointed upon the ground of insolvency,...