In re Rathman, 106

CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)
Citation183 F. 913
Docket NumberOriginal. 3,366.,106
Decision Date30 December 1910

Syllabus by the Court

Held (1) The bankruptcy court had no jurisdiction to determine in a summary proceeding the merits of the claim of B. under the mortgages and the decree and sales thereunder.

(2) That court had jurisdiction to determine in such a proceeding whether his claim was frivolous or substantial, and whether he or the trustee in bankruptcy was in actual possession of the property, and when it found this claim was substantial and that he was in possession of the property in controversy it rightly dismissed the petition of the trustee.

Jurisdiction of federal courts in suits relating to bankruptcy, see note to Bailey v. Mosher, 11 C.C.A. 313.)

One who has a substantial claim to a lien created by a bankrupt upon his property before the petition is filed is equally an adverse claimant with one who claims absolute title.

But the bankruptcy court may not thus take possession from a receiver appointed by another court in a suit to enforce a lien antedating the filing of the petition in bankruptcy, or thereby draw to itself jurisdiction summarily to determine the validity of such a lien.

Shull, Farnsworth & Sammis and Davis, Lyon & Gates, for appellant.

W. J. Hooper and French & Orvis, for respondent.

Before SANBORN and VAN DEVANTER, Circuit Judges, and REED, District judge.

SANBORN Circuit Judge.

Has the United States District Court sitting in bankruptcy jurisdiction against the objection of a respondent who is in possession of real and personal property under a sale pursuant to a decree of a state court of foreclosure of mortgages that were made by the mortgagor more than four months before the petition in bankruptcy against him was filed, to adjudicate summarily on an order to show cause, the claim of the trustee in bankruptcy that the mortgages, the decree, and the sale were void, that the trustee recover of the respondent the value of the personal property which he purchased under the decree, and that the trustee be permitted to redeem the real estate from the mortgage and the foreclosure sale by paying the amount which the respondent paid for it at the sale less the amount which the mortgagor realized from the sale of a portion of the mortgaged property before the foreclosure sale of the balance to the respondent?

This question is presented by a petition of the trustee to revise an order of the court below which dismissed his petition for an order to show cause, on the ground that without the consent of the respondent and without a plenary suit that court had no jurisdiction to try and determine summarily the adverse claim of the respondent challenged by the petition. The material facts set forth in the petition for the summary adjudication are these: Harvey, the bankrupt, owed J. S. Booth $3,000, for which, in June, 1907, he had given to Booth his promissory note and two mortgages to secure the payment of the note, one on a town lot and his store building situated thereon, and the other on his stock of merchandise with which he was trading. Harvey, with Booth's knowledge and consent, continued to trade with the stock after the chattel mortgage was given, to buy new goods and mingle them with the mortgaged stock, and to sell out of the stock of merchandise, pay the expenses of conducting the business and the price of the purchases of new goods until November, 1907, when he made a general assignment for the benefit of his creditors to one Alexander. The assignee took possession of both the real estate and the personal property and proceeded to sell the merchandise and convert it into money until some time after the sale to Booth in April, 1908, under the decree of the foreclosure of the mortgages, when, upon the demand of the trustee, he delivered to him that portion of the personal property which consisted of purchases after the mortgage was made and which had not been mortgaged, and the trustee proceeded to sell these purchases and to distribute their proceeds to the creditors. The chattel mortgage did not cover after-acquired property, and it contained no provision authorizing the mortgagee to take possession of the merchandise mortgaged. Between the date of the assignment and the foreclosure sale and on December 30, 1907, a petition for the adjudication of Harvey, a bankrupt, was filed, and on January 22, 1908, he was so adjudged. On February 24, 1908, while Alexander, the assignee, was in possession of both the real and personal property, Booth commenced a suit in the circuit court for Gregory county, in South Dakota, to foreclose his mortgages and caused the summons and complaint therein to be served upon Harvey and upon the assignee. In the regular course of proceedings that state court rendered a decree of foreclosure and sale of the property on March 31, 1908, took possession thereof by means of a receiver, and pursuant to this decree the mortgaged property was sold, conveyed, and delivered by the proper officer of that court to Booth, the purchaser at the foreclosure sales. There is no averment in the petition and no evidence that any receiver, marshal, or other officer of the District Court ever demanded of Booth, or of Alexander, any of the mortgaged property, or that they were ever notified or aware of the proceedings in bankruptcy before the foreclosure sales were made and confirmed by the state court. It was not until April 28, 1908, that the trustee in bankruptcy was appointed, and during the foreclosure proceedings the title and the possession of the property was in the assignee, Alexander, subject to the lien of the mortgages. And it was not until September 16, 1908, more than four months after the foreclosure sales and the possession of Booth, that the trustee filed his petition for this order to show cause. That petition contains averments of the legal conclusions that Alexander, the assignee, was holding the mortgaged property during this time for the bankrupt, that the title to it vested in the trustee as of the date of the filing of the petition, that the officers of the state court and Booth, although the former took and delivered to Booth and the latter at the time the petition for the order to show cause was filed had possession of the property, were never entitled to possession, and that the foreclosure proceedings were void. The order issued upon this petition required the respondent to show: (1) Why the chattel mortgage and the certificate of sale of the real and personal property should not be avoided; (2) why he should not pay to the trustee the value of the mortgaged personal property that he bought at the foreclosure sale; (3) why he should not credit on his certificate of sale of the real estate the amount of the sales of personal property made by the mortgagor, Harvey, before the assignee, Alexander, took possession; and why he should not allow the trustee to redeem the real estate by paying the balance.

It is important that, before entering upon a discussion of the question of jurisdiction, we have clearly in mind the controversies which the trustee presented for adjudication by his petition for this order to show cause. He presented no controversy over the possession by the trustee, or by Booth, of the real or personal property, either for preservation, or for administration or distribution. He did not ask the possession, and the respondent was not called to show cause why he should not deliver the possession of any of the property to the trustee.

What the trustee asked by the petition was the final adjudication of (1) his claim to recover of the respondent for the latter's alleged conversion of the personal property which he bought at the foreclosure sale thereof, the legal damages in conversion, the value of the property converted at the time of its conversion, a claim triable by jury, and (2) his claim to redeem the real estate from the mortgage thereon, whose validity is not challenged, and the foreclosure thereof by paying less than the amount for which this property was purchased by Booth at the foreclosure sale, a claim judicable in a suit in equity on a bill to redeem. And the respondent, who, at the time the petition for the order to show cause was presented, was and for months had been in undisturbed possession of both the real and the personal property, claims adversely that he is not liable for the conversion of the personal property because he was the owner of it from the time of his purchase of it at the foreclosure sale, and that the real estate may not be lawfully redeemed from his purchase at the foreclosure sale by the payment of less than the amount which he paid at the sale therefor with lawful interest. Are these claims summarily judicable by the United States District Court against the protest of the respondent without action at law or suit in equity, or the pleadings or proceedings for the protection of the defendant prescribed by the law for the conduct of such suits?

The bankruptcy law of 1898 (Act July 1, 1898, c. 541, 30 Stat 544 (U.S. Comp. St. 1901, p. 3418)), as amended by Act Feb. 5, 1903, c. 487, 32 Stat. 797, 798 (U.S. Comp. St. Supp. 1909, pp. 1308, 1312), provides, in section 2, subdivision 7, that the District Courts shall have jurisdiction to 'cause the estates of bankrupts to be collected, reduced to money and distributed, and determine controversies in relation thereto, except as herein otherwise provided. ' The exception in this subdivision is of cases involving those controversies between trustees in bankruptcy and adverse claimants specified in section 23 of the law. Bardes v. Hawarden Bank, 178 U.S. 524, 532, 533, 535, 536, 20 Sup.Ct. 1000, 44 L.Ed. 1175; Wall v. Cox, 181...

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