In re Schoenleber, 2630.

• Decision Date: 18 January 1936
• Docket Number: No. 2630.,2630.
• Parties: In re SCHOENLEBER.
• Court: U.S. District Court — District of Nebraska

13 F. Supp. 375

In re SCHOENLEBER.

No. 2630.

District Court, D. Nebraska, Lincoln Division.

January 18, 1936.

J. Jay Marx, of Lincoln, Neb., for debtor.

Moran & James, of Nebraska City, Neb., for Kansas City Life Ins. Co.

George B. Clark, of Tilden, Neb., Elmer McClain, of Lima, Ohio, N. H. Cornell, of Schuyler, Neb., Morgan, Sutton & Fromkin, Morsman & Maxwell, Charles S. Reed, Albert L. Ramacciotti, and Richard E. Robinson, all of Omaha, Neb., Calvin Webster, of York, Neb., Field, Ricketts & Ricketts, Hall, Cline & Williams, and Boehmer & Boehmer, all of Lincoln, Neb., Tinley, Mitchell, Ross & Everest, of Council Bluffs, Iowa, J. H. Wiltse and Bayard T. Clark, both of Falls City, Neb., and A. R. Oleson, of Wisner, Neb., amici curiæ.

Before MUNGER and DONOHOE, District Judges.

PER CURIAM.

In this case, Charlotta A. Schoenleber, the debtor, filed a petition in March, 1934, under the provisions of section 75 of the Bankruptcy Act (11 U.S.Code, § 203, 11 U. S.C.A. § 203), alleging that she was engaged in farming operations and was insolvent and unable to meet her obligations as they matured.

The schedules disclosed an excess of liabilities over assets. The debtor listed 320 acres of farm land as owned by her, which was encumbered by a first mortgage to the Kansas City Life Insurance Company, and by a second and third mortgage to other parties. The petition was referred to a conciliation commissioner. Proofs were made of these mortgages, and each was allowed by the commissioner. From the proofs, it appears that the note and mortgage now held by the Kansas City Life Insurance Company was executed by the debtor and her husband in 1923, and by this note and mortgage the makers agreed to pay the principal sum of $27,000 on December 1, 1933, and that the principal sum was due, as well as sums of interest thereon, on June 1, 1933, and December 1, 1933. The mortgage contained a provision that, in the event of the commencement of an action to foreclose the mortgage, the mortgagee or its successors or assigns should have the right to have a receiver of the mortgaged property appointed at once, who should take possession of, control, and preserve the property, and collect the rents and profits thereof for the payment of the mortgage debt.

The debtor's petition, in this case, was filed after the Kansas City Life Insurance Company had begun a suit in the state court to foreclose the mortgage. An amended petition was filed by the debtor under the terms of the first Frazier-Lemke Act of June 28, 1934, 48 Stat. 1289, which was dismissed by the court after the decision of the Supreme Court declaring this act of Congress unconstitutional. Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 55 S.Ct. 854, 865, 79 L.Ed. 1593, 97 A.L.R. 1106. The amended petition was reinstated on application of the debtor after the passage of the second Frazier-Lemke Act, approved Aug. 28, 1935 (11 U.S.Code, § 203 (s), 11 U.S.C.A. § 203 (s). The Kansas City Life Insurance Company has submitted objections to this reinstatement and asks to have the order vacated, upon the ground of the unconstitutionality of the second Frazier-Lemke Act.

The original Frazier-Lemke Act was held to be invalid in the case of Louisville Joint Stock Land Bank v. Radford, supra. The mortgage considered in that case had been given upon lands in Kentucky, and a suit had been begun in the state court by the mortgagee seeking its foreclosure and the appointment of a receiver to control the premises and to collect the rents. The debtor in that case had proceeded under section 75 of the Bankruptcy Act, and, after the enactment of the original Frazier-Lemke Law, had filed an amended petition seeking the benefits of that act. The federal court, in which this petition was filed, refused the mortgagee's request for a dismissal of the petition and affirmed several orders of the referee, one staying for five years all proceedings for the enforcement of the mortgages; another, that the mortgagor should remain in possession of the mortgaged property, subject to liens, and subject to the control of the court; another, fixing the rental value of the land for the first year, and declaring that each subsequent year's rental would be fixed by the court.

In its decision in the Radford Case, the Supreme Court held that the original Frazier-Lemke Act, as thus applied, had taken from the mortgagee, without compensation, and had given to Radford, rights in specific property which were of substantial value, and that this was a violation of the Fifth Amendment to the Constitution. The court said:

"The controlling purpose of the act is to preserve to the mortgagor the ownership and enjoyment of the farm property. It does not seek primarily a discharge of all personal obligations; a function with which alone bankruptcy acts have heretofore dealt. Nor does it make provision of that nature by prohibiting, limiting, or postponing deficiency judgments, as do some state laws. Its avowed object is to take from the mortgagee rights in the specific property held as security; and to that end `to scale down the indebtedness' to the present value of the property. As here applied it has taken from the Bank the following property rights recognized by the Law of Kentucky:

"(1) The right to retain the lien until the indebtedness thereby secured is paid.

"(2) The right to realize upon the security by a judicial public sale.

"(3) The right to determine when such sale shall be held, subject only to the discretion of the court.

"(4) The right to protect its interest in the property by bidding at such sale whenever held, and thus to assure having the mortgaged property devoted primarily to the satisfaction of the debt, either through receipt of the proceeds of a fair competitive sale or by taking the property itself.

"(5) The right to control meanwhile the property during the period of default, subject only to the discretion of the court, and to have the rents and profits collected by a receiver for the satisfaction of the debt."

It may be conceded that the first, second, and fourth of these enumerated property rights of a secured creditor are now protected under a provision of paragraph 3 of section 6 of the second Frazier-Lemke Act (11 U.S.C.A. § 203 (3), by which such a creditor may require a public sale of the encumbered property.

The question remains whether rights similar to those enumerated in the Radford Case as Nos. 3 and 5 are given by the laws of Nebraska to the Kansas City Life Insurance Company, as owner of the mortgage under consideration, and, if they are, whether these rights are impaired or destroyed by the second Frazier-Lemke Act to an extent that constitutes a violation of the Fifth Amendment. As the foundation of the rights of the mortgagee in the Radford Case, the court referred to the law of Kentucky conferring such rights as follows: "Under the law of Kentucky, a mortgage creates a lien which may be foreclosed only by suit resulting in a judicial sale of the property. Civil Code of Practice, §§ 375, 376; Insurance Co. of North America v. Cheathem, 221 Ky. 668, 672, 299 S.W. 545. While mere default does not entitle the mortgagee to possession, Newport & Cincinnati Bridge Co. v. Douglass, 12 Bush (Ky.) 673, 705, section 299 of the Civil Code of Practice provides that, in an action for the sale of mortgaged property a receiver may be appointed if it appears `that the property is probably insufficient to discharge the mortgage debt,' Mortgage Union of Penn v. King, 245 Ky. 691, 54 S.W.(2d) 49; and where there is (as here) a pledge in the mortgage of rents, issues, and profits, and provision for appointment of a receiver, the mortgagee is entitled as of right to have a receiver appointed to collect them for his benefit, Brasfield & Son v. Northwestern Mutual Life Insurance Co., 233 Ky. 94, 25 S.W.(2d) 72; Watt's Adm'r v. Smith, 250 Ky. 617, 630, 63 S.W.(2d) 796, 91 A. L.R. 1206. Under section 374 of the Civil Code of Practice a sale may be ordered at any time after default. Under Carroll's Ky. St. (1930), §§ 2362, 2364, there must be an appraisal before the sale; and if the sale brings less than two-thirds of the appraised value, the mortgagor may redeem within a year by paying the original purchase money and interest at 10 per cent. But inadequacy of price is not alone ground for setting aside a sale. Kentucky Joint Land Bank of Lexington v. Fitzpatrick, 237 Ky. 624, 36 S.W.(2d) 25. No provision permits the mortgagor to obtain a release or surrender of the property before fore-closure without paying in full the indebtedness secured. Nor does any provision prohibit a mortgagee from protecting his interest in the property by bidding at the foreclosure sale. Thus, the controlling purpose of the law of Kentucky was and is that mortgaged property shall be devoted primarily to the satisfaction of the debt secured; and the provisions of its law are appropriate to ensure that result."

In Nebraska, also, a mortgage on lands creates a lien which may be foreclosed only by suit with resulting judicial sale. Comp. St.Neb.1929, § 76-235; Orr v. Broad, 52 Neb. 490, 72 N.W. 850; Barber v. Crowell, 55 Neb. 571, 75 N.W. 1109. A mere default does not entitle the mortgagee to possession, but in a foreclosure action a receiver may be appointed when the mortgaged property is probably insufficient to discharge the mortgage debt. Comp.St.Neb.1929, § 20-1081; Waldron v. First Nat. Bank, 60 Neb. 245, 82 N.W. 856; Philadelphia Mortgage & Trust Co. v. Oyler, 61 Neb. 702, 85 N. W. 899. The court in a foreclosure suit may decree a sale of the property or such part of it as may be sufficient to discharge the debts and costs of suit. Comp. St.Neb.1929, § 20-2140.

It will be observed that the substantive rights of the mortgagee which the decision in the Radford Case declared were rights which had been conferred either by the statutes of Kentucky or by decisions of its courts, allowing the mortgagee...