In re Knight

Citation125 F. 35
Decision Date15 September 1903
Docket Number830.
PartiesIn re KNIGHT.
CourtU.S. District Court — Western District of Kentucky

Wheeler & Hughes and W. M. Smith, for petitioning creditors and trustee.

Robbins & Thomas and Thos. W. Bullitt, for R. M. Chowning, receiver.

EVANS District Judge.

Upon hearing the testimony and considering the record so far as applicable to the pending rule, the court finds the facts to be as follows: On March 21, 1903, Henry Knight, of Fulton Ky., owning property probably worth $45,000, made a general assignment for the benefit of his creditors to R. M. Showing who then was and now is the cashier of the First National Bank of Fulton. That on the same day, in writing at the foot of the deed of assignment, Chowning accepted the trust though he did not qualify as assignee in the county court of Fulton county, as required by section 76 of the Kentucky Statutes of 1899, until March 26, 1903, when, at an early hour in the morning, with W. W. Morris, then vice president of said bank, and J. E. Robbins and Gus Thomas, its attorneys, as sureties thereon, he did so by executing the bond required by law. That the assignee was thenceforward subject to the orders of the county court under section 82 of the Kentucky Statutes of 1899. That while, under section 96 this would not prevent an action for a settlement of the trust, yet otherwise the trust was to be executed and the assets administered pursuant to the provisions of what constitutes a portion of the insolvency laws of the state, embraced in chapter 7 of the Kentucky Statutes of 1899, and covering sections 74 to 96, inclusive, though it is not understood that this qualification of the assignee would prevent the appointment of a receiver in the bank's action, if otherwise admissible. That on the same day, to wit, on March 26, 1903, the First National Bank of Fulton, by its attorneys, J. E. Robbins and Gus Thomas, brought a suit in equity in the Fulton circuit court against Henry Knight and others upon certain promissory notes for large sums, and which had more than four months before March 21, 1903, been secured by a mortgage upon certain real estate-- principally a large hotel belonging to the bankrupt-- the relief sought being a personal judgment upon the indebtedness, and a foreclosure of the mortgage given to secure its payment. That certain other persons, who also had liens upon the same property, mostly if not altogether prior to that of the bank, were made defendants to the action, and required to set up their claims. That subsequently they did this by cross-petitions filed in the action. That on May 14, 1903, upon the claim in the petition and otherwise that Knight was insolvent (which fact at the hearing of the rule was admitted to have been true at the time), and upon the further claim that the mortgaged property was probably insufficient to pay the mortgage debts, the Fulton circuit court, in the action referred to, appointed the same R. M. Chowning as its receiver therein, with directions to take possession of the mortgaged premises, rent the same, etc., and to do certain other things in the way of operating the hotel, which constituted the major part of the mortgaged premises. That said Chowning at once gave bond as receiver, and entered upon the discharge of his duties as such. That no suit was ever brought in the circuit court for a settlement of the assignee's trust, under section 96 of the statutes, nor did the county court make any orders in the premises under section 82, nor was any order taken in either court concerning the duties of the assignee in the premises. That on June 9, 1903, Chowning sold certain personal property of the bankrupt, to wit, a building on leased premises, used as a restaurant, and certain appurtenances thereto, to one J. A. Milner. That the consideration therefor was the full amount of the debt due by Knight to Chowning, and which Milner assumed and agreed to pay, but no part of which has yet been paid. That Chowning claimed to have a mortgage on this last-named property for a debt due to himself for $2,700, and made the sale as assignee without orders from any court. That before this sale, namely, on June 1, 1903, three or more creditors of Knight, whose claims aggregated $500 in amount, filed a petition in this court, wherein they showed that on May 21, 1903, Knight had made a general assignment for the benefit of his creditors, and upon that ground prayed that he might be adjudged a bankrupt, within the meaning of the law. That pending that proceeding, and when it was about ready for determination, the said Knight, on June 22, 1903, filed his own voluntary petition in this court, praying for the same relief. That the two proceedings were consolidated by the orders of this court, and on June 23, 1903, the said Knight was accordingly adjudged a bankrupt. That on the 8th day of August, 1903, H. F. Oliver was duly appointed trustee of the bankrupt, and shortly thereafter entered upon the discharge of his duties as such, and that on September 5th he filed herein his affidavit, wherein he stated, in substance, that the said Chowning had possession of the property of the bankrupt, and refused, upon demand, to surrender it to the trustee, and prayed for a rule against said Chowning to show cause why he should not be required to surrender the assets of the bankrupt to the trustee. The court further finds as a fact established by the testimony that the mortgaged property exceeds in value the amount of the liens upon it, including the several mortgages and the vendor's lien. Another point was raised, and upon it the court, under the rule established in Mueller v. Nugent, 184 U.S. 15, 22 Sup.Ct. 269, 46 L.Ed. 405, heard evidence, to wit, the question whether the receiver's possession of the property, under the facts found, was adverse to the trustee. The court concluded that such possession of the receiver was not adverse, but, as that may be a question involving considerations both of law and of fact, it may be better disposed of by what may be hereafter said. At the close of the testimony of the court, without disposing of the questions arising upon the rule, was clearly of opinion that there ought to be at least a temporary stay of proceedings in the case pending in the state Court; and under section 11 of the bankruptcy law (Act July 1, 1898, c. 541, 30 Stat. 549 (U.S. Comp. St. 1901, p. 3426)), and upon the admission in open court that, at the time of the appointment of the receiver, Henry Knight was insolvent, an order was entered accordingly.

In the response of Chowning, and by the argument of counsel, four contentions are made. The first is that the property of the bankrupt having been taken into the custody of the state court, through its receivership, before the adjudication in bankruptcy, and in an action of which the state court had jurisdiction, the case is one to be decided upon the well-known principle that that one of two courts of co-ordinate jurisdiction which first gets its grasp upon property is entitled to hold it for subjection to its judgment; and the case of Peck v.Jenness, 7 How. 612, 12 L.Ed. 841, is principally relied upon to support this contention. The second contention is that the respondent, as receiver, holds the assets adversely to the trustee in bankruptcy, and that a summary proceeding for its recovery is not admissible. The third is that the mortgage and vendor's liens sought to be enforced in the state court were all created more than four months before the making of the general assignment, and this circumstance is supposed, per se, to be sufficient to defeat the jurisdiction of this court, although the suit for the enforcement of those liens was commenced after the commission of the act of bankruptcy, and within four months before the adjudication. And the fourth contention is that Chowning having sold the restaurant before the adjudication to Milner, to whom possession was delivered, that portion of the estate is also held adversely to the trustee. We need not discuss these propositions separately, though it may be admitted that, if the bankruptcy court has only co-ordinate jurisdiction with the courts of the state in bankruptcy matters, the rule should be discharged. Knott v. Evening Post Co., 124 F. 342. On the contrary, a different result must follow if the bankruptcy court, within the powers bestowed upon it for bankruptcy purposes, is one of exclusive jurisdiction. Doubtless, that court, while it may, under section 11 of the statute, stay proceedings in actions in a state court in certain cases, can decline to exercise its jurisdiction and power in that respect. But this depends entirely upon its own discretion-- a discretion which cannot be controlled otherwise than by appellate proceedings in a higher court. This discretion has been exercised by this court in several instances-- among them, in the Case of Holloway, 93 F. 639, and in the Case of Porter, 109 F. 111. Doing this did not depend upon any want of power in such cases, but because it was discreet not to exercise the power, inasmuch as no benefit could come to the general creditors by staying a suit in the state court, the entire avails of which must go to the plaintiff in the action there pending. Here, however, the evidence shows that the property exceeds in value the amount of the liens upon it; and the court's discretion will move in the other direction, if, indeed, it be a matter of discretion at all. It must be a matter of discretion if the law gives the bankruptcy court superior or exclusive power in such cases, but the application of the trustee must be denied if the rights of the state court in the premises are superior to those of this court. We must endeavor, therefore, to ascertain what the law is.

By the decisions in Bryan v....

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