In re McDermott

• Decision Date: 28 October 1940
• Docket Number: No. 7257.,7257.
• Citation: 115 F.2d 582
• Parties: In re McDERMOTT et al. KERWIN v. HUMMEL et al.
• Court: U.S. Court of Appeals — Seventh Circuit

115 F.2d 582 (1940)

In re McDERMOTT et al. KERWIN v. HUMMEL et al.

No. 7257.

Circuit Court of Appeals, Seventh Circuit.

October 28, 1940.

Bernard Rosencranz, of Chicago, Ill., for appellant.

Ross Langdon, Lewis Schimberg, Simon H. Alster, Ely M. Aaron, and Chas. Aaron, all of Chicago, Ill., for appellees.

Before SPARKS and MAJOR, Circuit Judges, and BRIGGLE, District Judge.

BRIGGLE, District Judge.

A petition was filed by John J. Kerwin in the bankruptcy court, seeking to have $4,000 in bonds owned by him declared a lien against certain assets of the bankrupt estates superior to that of similar bonds held by other creditors of the bankrupts. The referee denied Kerwin's petition, and on affirmance by the District Court, this appeal followed.

Kerwin's petition alleges that the bankrupts, Martin McDermott and Frank McDermott, and their respective spouses, on December 1, 1930, executed two hundred bonds in the nature of promissory notes in the aggregate principal sum of $73,000, maturing on December 1, 1931, and secured same by their certain mortgage of even date, covering real estate then owned by them in the City of Chicago; that said McDermotts continued to own said real estate up to the time of their being adjudicated bankrupts in 1938. Soon after their issue, Kerwin became the purchaser of $14,000 worth of the bonds and other persons became the purchasers of the balance of said issue. On February 9, 1932, the bonds having all matured and being in default the Chicago Title and Trust Company, trustee under the mortgage, filed a bill in the Superior Court of Cook County to foreclose the same, which proceeding was pending and undisposed of at the time of the bankruptcy herein. Petition further alleges that beginning in November, 1933, and thereafter, the McDermotts acquired all of said bonds except $4,000 in principal amount of the Kerwin bonds and subsequently hypothecated same with the appellees, Drovers National Bank of Chicago, the National Cereal Products Company, and Northwestern Malt and Grain Company, creditors of the McDermotts.

The real estate so conveyed as security has subsequently been liquidated by the bankruptcy court and the funds derived therefrom are in the hands of the trustee in bankruptcy. Kerwin asserts that his rights against this fund are superior to the rights of the other holders of said bonds acquired in the manner indicated. The questions for review are:

1. What is the effect of a previous order of the referee in bankruptcy and is the same binding upon petitioner Kerwin?

2. Is the lien of the bonds held by Kerwin superior to that of the other holders?

In reference to the first question, we find that prior to the present petition the Chicago Title and Trust Company, trustee under the McDermott mortgage, filed its petition in the bankruptcy court, seeking instructions with reference to its duties in regard to the pending foreclosure in the Superior Court of Cook County. The trustee in bankruptcy filed an answer and a cross petition, alleging that all of said bonds acquired by the bankrupts as hereinbefore indicated were paid and not purchased by said bankrupts and that the subsequent placing of the same in the hands of the pledgees herein was a preference over other creditors and asserting that said bonds should be surrendered by the pledgees for cancellation. Kerwin also filed an answer and cross petition, claiming that the only bonds outstanding which are a lien secured by the trust deed are those held by him in the principal amount of $4,000 and that all other bonds have been paid by said bankrupts. Upon the issues thus tendered, the referee on April 8, 1939, entered an order holding that in the year 1933, and subsequently, the McDermotts acquired all of said bonds by purchase from the then owners, except the sum of $4,000 so held by Kerwin and other bonds in the principal sum of $600 in the hands of unknown owners; that having so acquired them, they subsequently pledged them with the appellees herein; that none of said bonds were cancelled by the bankrupts but were acquired for the purpose of being renegotiated. To this order Kerwin filed objections and on April 21, 1939, the referee overruled such objections "without prejudice to the right of said Kerwin to claim subordination of other bonds to the bonds held by him," and at the same time gave Kerwin leave to file, within twenty days, his petition for subordination of the other bonds to those held by him. On May 8, 1939, Kerwin's present petition was filed. Apparently it was the intention of the referee that Kerwin's assertion of priority was not to be affected by his order of April 8, 1939.

Undoubtedly Kerwin placed this same interpretation on the language of the Referee — "without prejudice to the right of said Kerwin to claim subordination of other bonds to the bonds held by him," and rested secure in his right to adjudicate this question upon any proper basis and supported by any reason whatsoever. Indeed, the Referee at the same time gave him leave to file his petition for subordination and this he promptly did seventeen days later. Had Kerwin interpreted the preceding order to mean that he could not urge in support of his present petition the assertion that when McDermotts reacquired the bonds a legal and equitable merger was effected and that the subsequent negotiation of the bonds after maturity was not effective as to him, he undoubtedly would have chosen to file a petition for review of such order rather than filing the present original petition. He undoubtedly believed that he was to have his day in Court, on this question, unhampered by the order of April 8th. True, the Referee had found in the matter before him at that time that said bonds had not been paid, but that McDermotts had reacquired them for the purpose of...