In re North Star Ice & Coal Co.

• Decision Date: 13 May 1918
• Docket Number: 1949.
• Citation: 252 F. 301
• Court: U.S. District Court — Eastern District of Tennessee
• Parties: In re NORTH STAR ICE & COAL CO. Petition of GRIFFIN ICE & COAL CO.

252 F. 301

In re NORTH STAR ICE & COAL CO. Petition of GRIFFIN ICE & COAL CO.

No. 1949.

United States District Court, E.D. Tennessee, Northern Division.

May 13, 1918

Webb Baker & McDermott, of Knoxville, Tenn., for Griffin Ice &amp Coal co.

L. C Ely, of Knoxville, Tenn., for trustee in bankruptcy.

Johnson & Cox, of Knoxville, Tenn., for S. L. Lewis, petitioner for review of referee's order.

SANFORD District Judge.

After the appointment of the trustee in this cause, he intervened in a proceeding pending in the Chancery Court of Knox County in which the affairs of the bankrupt were being wound up, and by order of that court obtained possession of all the bankrupt's property except certain property, known as the North Side plant, which he elected not to take over. He subsequently filed a petition in this cause asking authority to sell another plant, known as the North Star plant, which had been taken into possession by him, subject to valid incumbrances or in such other manner as the court might direct. At the creditors' meeting at which this petition of the trustee came up for consideration, the petitioner, the Griffin Ice & Coal Company, filed a proof of claim, substantially in accordance with Official Form No. 32 for the proof of a secured debt. This proof of claim was based on notes of the bankrupt for $36,000 alleged to have been given as part of the purchase price for the North Side plant, which had been sold by the petitioner to the bankrupt and was still in possession of the Chancery Court, and secured both by a vendor's lien on the North Side plant and by a mortgage on the North Star plant, given in further security of $20,000 of this same purchase money debt. This proof of claim was entirely formal and contained no prayer for the enforcement of the petitioner's security by the bankruptcy court, either as to the mortgage or otherwise; nor was any separate pleading filed by it asking for enforcement of its mortgage security. The petitioner furthermore did not allege any insufficiency in its security, or take any steps as provided by section 57e of the Bankruptcy Act of July 1, 1898, c. 541, 30 Stat. 560 (Comp. St. 1916, Sec. 9641), to have the value of its security determined in order that its claim might be allowed for any excess of its claim over the value of its securities. It was therefore, in this situation, not entitled, under the provisions of this clause, to have its secured claim allowed in any amount in order that it might participate in the creditors' meetings. Re Eagles (D.C.) 99 F. 695, 697. At this meeting the attorney for the petitioner, stating that he also represented certain unsecured creditors who had not filed proofs of claim, opposed the petition of the trustee for a sale of the property covered by the petitioner's mortgage, and insisted that it should not be disposed of until the status of the petitioner's secured claim had been ascertained and determined by the court, and opposed the sale of the property subject to incumbrances until this was done. He also asked an opportunity to show by evidence that the allegation of the trustee's petition concerning the necessity and expediency of the proposed sale, were incorrect; which application was denied. Thereupon, with the consent of all unsecured creditors whose claims had been filed and allowed in the cause, the referee entered the order which the petitioner now seeks to review, adjudging that the petitioner being an alleged secured creditor, so far as the record showed, was not interested in the manner or method of the sale of the property if the sale was to be made subject to all valid liens or incumbrances, that only the unsecured creditors had the right to be heard on the trustee's petition, and that they requested that the sale should be made as recommended; and thereupon ordered the trustee to advertise the property and sell the same to the highest bidder subject to all valid and subsisting liens and incumbrances of every kind and character which might exist in favor of the petitioner or other parties, and subject to confirmation by the court. Some days after the entry of this order, the petitioner also filed its proof of an unsecured claim for $60.53.

Under section 70 of the Bankruptcy Act (Comp. St. 1916, Sec. 9654), the trustee is vested only with the bankrupt's title to property. Hence where the bankrupt's property is subject to a mortgage or other incumbrances, the trustee takes only the bankrupt's equity therein, subject to such incumbrances; and since, under section 67 of the Act (section 9651), the validity of the pre-existing liens is not affected, the lien holder, unless restrained by the order of the bankruptcy court, may enforce the same dehors the court. Ward v. Bank of Ironton (6th Circ.) 202 F. 609, 612, 120 C.C.A. 655; Re Goldsmith (D.C.) 118 F. 763, 767; Coll. Bank'cy (11th Ed.) 1050, 1051. Nevertheless the bankruptcy court may in the interest of general creditors regulate the method of enforcing such lien in order to realize as much as possible from the bankrupt's equity. Re Jersey Island Packing Co. (9th Circ.) 138 F. 625, 71 C.C.A. 75, 2 L.R.A. (N.S.) 560; Cohen v. Nixon (D.C.) 236 F. 407, 411. If the property comes into the possession of the bankruptcy court it may sell the property free from the lien and award the lien holder a preferential payment representing the proceeds of his lien. Re Oconee Milling Co. (5th Circ.) 109 F. 866, 48 C.C.A. 703; Re Loveland (1st Circ.) 155 F. 838, 839, 84 C.C.A. 72; Re Keet (D.C.) 128 F. 651; Re Cutler (D.C.) 228 F. 771, 773. This practice is, however, of doubtful propriety where the right to a lien is disputed and its determination would involve a controversy productive of delay in the bankruptcy proceedings. Re Muhlhauser (6th Circ.) 121 F. 669, 673, 57 C.C.A. 423. Or the bankruptcy court may, in its discretion, sell merely the bankrupt's equity in the property, that is, sell the property subject to the incumbrance and leave the lienor to enforce his lien upon the property by appropriate proceedings. Re Gerry (D.C.) 112 F. 958; Re Cutler (D.C.) 228 Fed.at page 773; Lovel. Bank'cy (2d Ed.) 1093. In thus selling the property subject to lien 'the trustee acts only in the interest of general creditors.' 2 Lovel. Bank'cy, supra, at page 1094.

There is no provision in the Bankruptcy Act, however, which gives the lien claimant the right to enforce his lien in the bankruptcy cause itself. He is not even required to file a formal proof of claim; though where the trustee has taken possession of the property and sold it, he may file a petition to obtain the proceeds of the lien in the hands of the trustee. Ward v. Bank of Ironton (6th Circ.) 202 F. supra, page 612, ...