In re Kessler

• Decision Date: 26 May 1950
• Docket Number: No. 46737.,46737.
• Citation: 90 F. Supp. 1012
• Court: U.S. District Court — Southern District of California
• Parties: In re KESSLER.

90 F. Supp. 1012

In re KESSLER.

No. 46737.

United States District Court S. D. California, Central Division.

May 26, 1950.

COPYRIGHT MATERIAL OMITTED

Craig, Weller & Laugharn, Los Angeles, Cal., for trustee.

Hugo A. Steinmeyer and Robert H. Fabian, Los Angeles, Cal., for Bank of America Nat. Trust & Savings Ass'n. Petitioner-on-Review.

Reuben G. Hunt, Los Angeles, Cal., Referee in Bankruptcy.

MATHES, District Judge.

This matter is here upon petition for review of (1) referee's order of August 4, 1949, issued in proceedings under Chapter XI of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq., declaring a mortgage lien void as against the receiver in bankruptcy, and (2) referee's order of August 19, 1949, denying the mortgagee's petition to recover proceeds derived from sale of the chattels mentioned in the mortgage. Bankruptcy Act §§ 2, 38, 11 U.S.C.A. §§ 11, 66.

There is no issue as to the facts. On October 9, 1947, Kessler, now bankrupt, executed a chattel mortgage in favor of petitioner, Bank of America, to secure repayment of a loan. The mortgage describes a cash register, soda fountain and other equipment, gives the mortgagor's occupation as "Kessler's Pharmacy," and gives the location of the mortgaged property as "Burbank, California."

The mortgage was acknowledged October 10th. On October 11th the bank forwarded the mortgage to the Los Angeles County Recorder with a request that the instrument be recorded and the bank billed for the recording fees. On October 14th the County Recorder received the mortgage, placed it in a "hold" file, and mailed the bank a statement showing the fees required for recordation. The County Recorder received in due course the bank's check dated October 23rd as payment of the recording fees, and thereupon on October 24, 1947, duly recorded the mortgage.

Prior to execution of the mortgage in question there were creditors of the mortgagor whose claims still remained unpaid when on December 16, 1948, Kessler was adjudged bankrupt upon an involuntary petition filed November 30, 1948. At the filing of the petition the bankrupt was in actual or constructive possession of all property mentioned in the mortgage. See Page v. Arkansas Natural Gas Corp., 1932, 286 U.S. 269, 52 S.Ct. 507, 76 L.Ed. 1096; Honeyman v. Hughes, 9 Cir., 1946, 156 F.2d 27, certiorari denied, 1946, 329 U.S. 739, 67 S.Ct. 99, 91 L.Ed. 638; In re Pinsky-Lapin Co., 2 Cir., 1938, 98 F.2d 776.

On January 3, 1949, the receiver, alleging that the bank's mortgage was invalid by reason of delayed recordation and insufficient description of the property, petitioned the bankruptcy court for an order requiring the bank to appear and show what lien, if any, it had upon the store fixtures and equipment located in the bankrupt's place of business. An order to show cause was issued upon the receiver's petition, the bank appeared, a hearing was had, and the August 4, 1949, order under review followed.

Before the validity of the bank's mortgage had been determined, the bankrupt filed a petition and plan of arrangement under Chapter XI, § 321 of the Act, 11 U.S.C.A. § 721, and the plan was confirmed by the referee. Bankruptcy Act, §§ 1(9), 2, sub. a (9), 38(5), 11 U.S.C.A., §§ 1(9), 11, sub. a(9), 66(5). The plan provided for distribution to general creditors of the "net proceeds" derived from sale of the assets of the bankrupt's drugstore. If the bank's mortgage were invalid, proceeds from the sale of the fixtures and equipment listed therein were to be included in the fund.

The receiver thereupon sold the assets of the bankrupt, including the chattels mentioned in the mortgage, and the bank then petitioned the court for the proceeds. After a hearing the referee denied the bank's petition by the August 19, 1949, order here under review.

The plan and order of confirmation provided for retention of jurisdiction "until all of the terms and conditions of said arrangement have been completed" and "for the purpose of hearing and determining such objections as may be filed to the claims of creditors herein." Until challenged the referee proceeded upon the assumption that the bankruptcy court retained jurisdiction, after confirmation of the plan, to determine the validity of the bank's mortgage. And when jurisdiction was challenged by the bank, the referee amended the order of confirmation to make it clear that the court expressly retained such jurisdiction.

It is settled that the bankruptcy court, like all federal courts, has only such jurisdiction as is conferred by statute. Taubel-Scott-Kitzmiller Co. v. Fox, 1924, 264 U.S. 426, 431, 44 S.Ct. 396, 68 L.Ed. 770. An arrangement under Chapter XI "may include * * * provisions for retention of jurisdiction." Bankruptcy Act, § 357(7), 11 U.S.C.A. § 757(7). Jurisdiction shall be retained "if so provided in the arrangement." § 368, 11 U.S.C.A. § 768. The bank contends that the referee's amendment of the order of confirmation could not serve the purpose, see In re Faerstein, 9 Cir., 1932, 58 F.2d 942, 943; but see Matter of Pottasch Bros. Co., 2 Cir., 1935, 79 F.2d 613, 617, and that if jurisdiction over this controversy was not expressly retained as provided by § 368, the bankruptcy court lacks such jurisdiction.

In arrangement proceedings under former § 12 the bankruptcy court was held to have jurisdiction to try title to property in its possession whether or not jurisdiction was retained pursuant to § 74, sub. j. California Conserving Co. v. D'Avanzo, 2 Cir., 1933, 62 F.2d 528. In the words of Judge Learned Hand, "it is the duty of all courts, before taking any action, and the surrender of property is an affirmative step, to ascertain whether that action will respect or violate any individual rights of which it may have become aware. * * * A court must always award to each his own * * * It cannot so act without making inquiry into the relative rights of the conflicting claimants. The confirmation does not affect the situation at all * * * The very performance of the court's duty involves the sifting of claims. It is an inherent condition of the execution of the composition in itself." In re Kalnitzsky, D.C.S.D.N.Y.1922, 285 F. 649, 651, affirmed 2 Cir., 1922, 285 F. 652.

It is my opinion for like reasons that the bankruptcy court now has jurisdiction after confirmation of an arrangement under the present statute to hear and determine known claims to property remaining in its possession, regardless of whether the confirmed arrangement includes express provision for retention of such jurisdiction pursuant to § 368. See Murphy v. John Hofman Co., 1909, 211 U. S. 562, 569, 29 S.Ct. 154, 53 L.Ed. 327; Porter v. Sabin, 1893, 149 U.S. 473, 479, 13 S.Ct. 1008, 37 L.Ed. 815; 8 Collier, Bankruptcy (Moore's ed. 1941) 1242; 7 Remington, Bankruptcy (1939 ed.) 263.

Here the property described in the mortgage was in the possession of the court, United States v. Sykes, 9 Cir., 1930, 44 F.2d 334, 336, and the bank's claim against the property was known to the court. The proceeds from sale of the property are claimed for distribution under the arrangement if, as the receiver contends, the mortgage is invalid. The court could not properly distribute the property "without making inquiry into the relative rights of the conflicting claimants." In re Kalnitzsky, supra, D.C., 285 F. 649, affirmed 2 Cir., 285 F. 652.

"Jurisdiction is authority to decide the case either way." The Fair v. Kohler Die & Specialty Co., 1913, 228 U.S. 22, 25, 33 S.Ct. 410, 411, 57 L.Ed. 716; The Resolute, 1897, 168 U.S. 437, 439, 18 S.Ct. 112, 42 L.Ed. 533. The bankruptcy court had such authority over this controversy. Mangus v. Miller, 1942, 317 U.S. 178, 63 S.Ct. 182, 87 L.Ed. 169; Kalb v. Feuerstein, 1940, 308 U.S. 433, 60 S.Ct. 343, 84 L.Ed. 370; cf. Isaacs v. Hobbs Tie & Timber Co., 1931, 282 U.S. 734, 737, 51 S.Ct. 270, 75 L.Ed. 645.

The bank next questions the power of the receiver to challenge the validity of the mortgage. Section 2, sub. a(3) of the Act empowers the bankruptcy court to appoint receivers and to authorize such receivers "to commence and prosecute any suit or proceeding in behalf of the estate, before any judicial, legislative, or administrative tribunal in any jurisdiction, until the petition is dismissed or the trustee is qualified: Provided, however, That the court shall be satisfied that such appointment or authorization is necessary to preserve the estate or to prevent loss thereto." 11 U.S.C.A. § 11, sub. a(3).

Section 302, 11 U.S.C.A. § 702, incorporates the provisions of Chapters I to VII, inclusive, into Chapter XI, insofar as they are not inconsistent with the provisions of Chapter XI. Under § 2, sub. a(3) a receiver has been authorized to avoid a transfer made by the bankrupt, Maynor v. Schaefer, 1943, 244 Ala. 111, 11 So.2d 846, and to avoid a mortgage invalid as against creditors. McGlue v. Loudon, 1925, 251 Mass. 173, 146 N.E. 255. Thus when the bankruptcy court is "satisfied that such * * * authorization is necessary to preserve the estate or to prevent loss thereto," the receiver may be afforded the remedies of the trustee under § 70, subs. c, e, 11 U.S.C.A. § 110, subs. c, e. See 4 Collier, Bankruptcy (Moore's ed. 1942) 1493; cf. Moore v. Bay, 1931, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133, 76 A.L.R. 1198. This view as to the scope of powers authorized to be conferred upon receivers finds support in § 23, 11 U.S.C. A. § 46, providing for jurisdiction of actions by receivers; in § 11, sub. e, 11 U.S. C.A. § 29, sub. e, providing for time limitation on suits by receivers; and in § 48, sub. a(2), 11 U.S.C.A. § 76, sub. a(2), providing for compensation of receivers performing other than custodial duties.

The exercise by receivers of the powers authorized in § 2, sub. a(3) of the Act are not inconsistent with the provisions of Chapter XI. Indeed, in Chapter XI proceedings the necessity for arming a receiver with the trustee's remedies under § 70, subs. c, e, is greater than in ordinary...