In re Schaeffer

• Citation: 14 F. Supp. 807
• Decision Date: 02 April 1936
• Docket Number: No. 7942,7943.,7942
• Parties: In re SCHAEFFER et al.
• Court: U.S. District Court — District of Maryland

14 F. Supp. 807

In re SCHAEFFER et al.

Nos. 7942, 7943.

District Court, D. Maryland.

April 2, 1936.

Z. N. Diamond, I. P. Whitehead and Peyton G. Jefferson, all of Baltimore, Md., for Federal Land Bank.

Robert H. McNeill, of Washington, D. C., for debtors.

CHESNUT, District Judge.

In these cases in bankruptcy under United States Code, title 11, § 203 (11 U. S.C.A. § 203), including subsection (s) as enacted August 28, 1935 (11 U.S.C.A. § 203 (s) (the second Frazier-Lemke Mortgage Moratorium Act), the Federal Land Bank of Baltimore is seeking freedom to foreclose a mortgage on 517 acres of farm land in Montgomery County, Maryland, which was mortgaged to it by the debtors in 1925; and the debtors are resisting the mortgagee's application, under the asserted authority of that Act of Congress.

The Bank has not raised the question of the constitutionality of the second Frazier-Lemke Act, and there is, therefore, no occasion to consider that subject in this case.¹

The Bank does, however, contend that the debtors in this case are not entitled to the three-year moratorium for a number of reasons of which the principal are the following: (a) That the debtors are not farmers within the meaning of the act; (b) that they did not comply with the provisions of section 75, as amended (11 U.S. C.A. § 203) which constitutes a condition precedent to the application of subsection (s) in that they did not submit to the Conciliation Commissioner in good faith a reasonable and equitable proposition for composition of their indebtedness to their creditors, including the Bank as a secured creditor.

In order to understand just how the subject matter is now presented to the court, it is necessary to say something in explanation of the complicated procedure in this case. This complication has been occasioned principally by the changing legal situation caused by the original Frazzier-Lemke Law, the judicial determination that it was unconstitutional, and the passage of the second Frazier-Lemke Act. The original proceeding in this case was filed August 30, 1934, shortly after the passage of the first Frazier-Lemke Act on June 28, 1934, 48 Stat. 1289, and the approval of the debtors' petition operated automatically to stay foreclosure of the mortgage, pending further proceedings. The case was thereupon referred in due course to the Conciliation Commissioner before whom counsel for the Federal Land Bank appeared and made objection to the proceedings. The debtors submitted an original, and subsequently an amended, proposition for composition of their indebtedness, both secured and unsecured. It was, however, not a definite and absolute proposition but was made conditional on the debtors' winning a then existing law suit in a Maryland State Court, the Circuit Court for Montgomery County, in which it was stated that there was an issue pending as to the title of the debtors to certain live stock and farming equipment which was essential to them for the conduct of the dairy farm covered by the mortgage to the Bank. There was no acceptance of this merely conditional offer by the creditors and the report of the Conciliation Commissioner was to the effect that the proceeding should be dismissed. Shortly thereafter the debtors filed an amended petition under the then existing subsection (s) of the law (48 Stat. 1289) asking to be adjudicated bankrupts and to have the benefit of the five-year moratorium as to their mortgage indebtedness. This was formally opposed by the Bank, but nothing further material transpired in the case until after the Supreme Court determined in the case of the Louisville Joint Stock Land Bank v. Radford, 295 U. S. 555, 55 S.Ct. 854, 79 L.Ed. 1593, 97 A. L.R. 1106, on May 27, 1935, that subsection (s) of the act was unconstitutional. Thereafter, on August 16, 1935, the court, on the petition of the Bank, gave leave to it to proceed with the foreclosure of its mortgage; but shortly thereafter, and pending the mortgage foreclosure proceeding in the State Court, the debtors filed a new petition seeking the benefit of the second Frazier-Lemke Act, subdivision 5 of which (11 U.S.C.A. § 203 (s) (5) provided that "this title shall be held to apply to all existing cases now pending in any Federal court, under this title, as well as to future cases; and all cases that have been dismissed by any conciliation commissioner, referee, or court because of the Supreme Court decision holding the former subsection (s) unconstitutional, shall be promptly reinstated, without any additional filing fees or charges." This application of the debtors was granted ex parte by the court; and the case was again referred to the Conciliation Commissioner for further proceedings under the new subsection (s), and further action in the mortgage foreclosure was temporarily discontinued, the parties apparently treating the ex parte order as in effect a renewed stay of the foreclosure, although no express order therefor was signed, as is seemingly contemplated by subsection (s) (2), 11 U.S.C.A. § 203 (s) (2); but shortly thereafter the Bank petitioned for a rescission of the ex parte order substantially on the grounds above stated. This petition of the Bank was answered and resisted by the debtors, and a preliminary hearing on the questions raised led to an amended and more extended petition of the Bank in support of its position, which in turn was answered by the debtors. On the issues thus framed by the amended papers, testimony has been taken and the matter now submitted for determination. In the meantime, however, the Conciliation Commissioner has filed a second report stating that the farm had been appraised as of the value of $25,850; and its rental value appraised at $1,500 a year if operated as a dairy farm; otherwise at $1,000 a year. The Commissioner further reported in effect that the debtors' financial condition was hopeless and recommended a dismissal of the case.

It is thus apparent that from the outset of this proceeding the debtors have been vigilantly asserting, and the Bank has been throughout promptly and earnestly resisting, the stay of the mortgage foreclosure. While the question has not heretofore been pressed to final decision by the court, it is also apparent that there have been no laches on the part of the Bank. The delay which has occurred has been due for the most part to the pendency of litigation regarding the validity of the first Mortgage Moratorium Act and the subsequent passage of the substituted act.

Specifically what the Bank is now seeking is a rescission of the ex parte order of September 21, 1935 granting the amended petition of the debtors and adjudicating them bankrupts under the new subsection (s), and a dismissal of the proceedings under section 203, so that the Bank can be free to proceed with its mortgage foreclosure as permitted by the order of August 16, 1935, which was treated as superseded in effect by the ex parte adjudication in bankruptcy under subsection (s).

To properly understand the principal ground on which the Bank seeks this relief, there is required some analysis of the whole of section 203, because it is to be importantly noted that the second Frazier-Lemke Act providing for the mortgage moratorium is not an independent provision applicable to all farmer bankrupts but is, as indeed was also the former subsection (s), a dependent part of section 203. That is to say, the benefits to the farmer provided for in subsection (s) are available only on the condition of original compliance by the farmer debtor with the procedural requirements of the preceding subsections of section 203. By them it is provided, so far as applicable to this case, that the farmer debtor must file a petition, accompanied by schedules of assets and liabilities, stating that the farmer is insolvent or unable to meet his debts as they mature, and that it is desirable to effect a composition or extension of time to pay his debts. Upon the approval of the petition (usually ex parte) the case is referred to a Conciliation Commissioner who is to promptly call the first meeting of creditors with notice that the farmer proposes to offer terms of composition or extension, and with a summary of his assets and liabilities. If the composition offered is accepted by a majority in number of all creditors whose claims have been allowed, including secured creditors, an application may thereafter be made to the court for confirmation; which, however, is to be ordered only if the court is satisfied that "(1) it includes an equitable and feasible method of liquidation for secured creditors and of financial rehabilitation for the farmer; (2) it is for the best interests of all creditors; and (3) the offer and its acceptance are in good faith, and have not been made or procured except as herein provided, or by any means, promises, or acts herein forbidden." Bankr.Act, § 75 (i), 11 U.S.C.A. § 203 (i). It is provided that the terms of the farmer's proposal may (1) extend the time of payment; (2) provide for priority of payments during the extended period between secured and unsecured creditors and (3) may include specific undertakings of the farmer for payments on account and for supervisory or other control by the Conciliation Commissioner over the farmer's affairs. It will have been noted that the court may not confirm the farmer's proposal unless it has previously been approved by a majority of both secured and unsecured creditors. If, and only if, the creditors withhold their approval after such a proposal as is contemplated by the section has been made by the farmer, does subsection (s) come into operation, except that it is also provided in subsection (s) that the farmer may act thereunder "if he feels aggrieved by the composition and/or extension" (a somewhat obscure phrase in its application but with which we are not here concerned). In the events just mentioned the farmer "may amend his petition or answer, asking to be adjudged a...