Land Investors, Inc., Matter of
| Decision Date | 16 November 1976 |
| Docket Number | 76-1255,Nos. 76-1254,s. 76-1254 |
| Parties | In the Matter of LAND INVESTORS, INC., Debtor, and Gerald Jolin, Bankrupt. Pierce H. BITKER, Trustee in Bankruptcy of Gerald Jolin, Bankrupt, Petitioner-Appellee and Cross-Appellant, v. WHYTE, HIRSCHBOECK, MINAHAN, HARDING & HARLAND (now, Whyte & Hirschboeck, S.C.) and Kersten & McKinnon, Attorneys at Law, Respondents-Appellants and Cross-Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Victor M. Harding, George P. Kersten, Milwaukee, Wis., for respondents-appellants.
R. Arthur Ludwig, Milwaukee, Wis., for petitioner-appellee.
Before FAIRCHILD, Chief Judge, PELL, Circuit Judge, and WOLLENBERG, Senior District Judge. *
These cross-appeals arise from an order of the district court, which affirmed an order of the bankruptcy court, requiring the respondents to turn over to Bitker, the trustee of the bankrupt Jolin, certain proceeds of a state court judgment in Jolin's favor, entered prior to, but affirmed and satisfied after, the filing of bankruptcy. The issues are whether the bankruptcy court had the summary jurisdiction it exercised, a precondition of such a turnover order, and, if it did, whether the order in this case was proper.
The underlying facts are not in dispute. In 1966, Jolin commenced a state court lawsuit against his former business partner, one Oster. George P. Kersten and his law firm, Kersten & McKinnon (Kersten), and a Chicago law firm not involved here were Jolin's counsel. In late 1967, Victor M. Harding and his law firm, Whyte, Hirschboeck, Minahan, Harding & Harland (Harding), were substituted for the Chicago firm. Neither Harding nor Kersten had a written fee arrangement with Jolin. Harding apparently undertook representation on the oral understanding with Jolin that compensation would be on a straight hourly basis, plus expenses, but when it developed that Jolin would be unable to pay such fees, an oral agreement was made for a fee based on the amount and difficulty of services provided and the degree of success achieved, contingent on success. Kersten had a contingent fee oral agreement from the outset.
The litigation was vigorously contested, and proved protracted and expensive to prosecute. A trial in 1968 yielded a verdict for Oster, but Kersten and Harding were able to get it reversed on appeal. A second trial, in 1970, resulted in a judgment of $161,000 for Jolin. Oster appealed, but the Wisconsin Supreme Court affirmed the judgment in June 1972 and denied rehearing in September of that year. Jolin v. Oster, 55 Wis.2d 199, 198 N.W.2d 639 (1972).
During the pendency of this litigation, Jolin's financial situation deteriorated. Unable to pay legal fees in excess of $18,000 to Harding for services provided in establishing the corporation Land Investors, Inc. (Land Investors) and in registering its securities (services unrelated to the Oster litigation), Jolin, in 1969, assigned to Harding $15,000 of any proceeds of the Oster suit as payment in full. In 1970, prior to the second Oster trial, Jolin assigned an unspecified amount of any proceeds of the suit to Thorp Finance Corporation (Thorp), equal to the sum of his and Land Investors' obligations to Thorp, as additional collateral to secure loans made by Thorp to finance Land Investors. The Thorp assignment was expressly subordinate to attorneys' liens and the $15,000 Harding assignment.
In early 1972, both Jolin and Land Investors filed bankruptcy petitions. Because of a misunderstanding on Harding's part the accompanying asset and liability schedules, which his firm prepared, included the Oster judgment and claims thereon with respect to Land Investors, but not with respect to Jolin. Neither Land Investors' trustee, Verbest (not a party to this appeal), nor Bitker made any attempt to intervene in or in any way influence the final stages of the Oster lawsuit, then on appeal. When the judgment was affirmed, a check for $178,110.44 drawn to both trustees, Thorp, and Kersten and Harding as attorneys for Jolin was issued in satisfaction. Harding negotiated it to his firm's trust account, without objection or written approval by the trustees or the bankruptcy court. When the parties were unable to agree on the proper distribution of the sum, Harding distributed it as follows:
Harding and Kersten,
for legal services $ 83,145.75
Harding and Kersten,
for disbursements 12,403.01
Harding,
per assignment 15,000.00
Thorp,
per assignment 63,041.68
Retained in trust fund for the
benefit of the trustees 4,520.00
-----------
$178,110.44
Both trustees filed a joint petition with the bankruptcy court to have Kersten and Harding turn over the entire proceeds of the judgment and to have the court determine the validity and amounts of the claimed liens and assignments. A motion by Kersten and Harding to dismiss the petition for want of the bankruptcy court's summary jurisdiction was denied, and the bankruptcy court subsequently determined a 40% fee to be reasonable compensation, accepted the validity of the assignment payments to Thorp and Harding, and ordered the turnover to Bitker of the remainder of the judgment proceeds, $23,382.78, plus interest. The district court affirmed this order in its entirety.
On appeal, Kersten and Harding argue that the entire summary proceeding was invalid, because the judgment proceeds were entirely assigned away and were not part of the bankrupt estate, and because the proceeds were held by them (and Thorp) as adverse claimants with bona fide claims. They also assert that the bankruptcy court, even if it had jurisdiction, improperly determined the amount of attorneys' fees contrary to the evidence. On cross-appeal, the trustee insists that the bankruptcy court erred in sustaining the $15,000 Harding assignment, and in refusing to deduct that sum and the interest earned on the Oster judgment in calculating the 40% fee on that judgment.
Section 2(a)(7) of the Bankruptcy Act, 11 U.S.C. § 11(a)(7), creates original jurisdiction in federal bankruptcy courts to
(c)ause the estates of bankrupts to be collected, reduced to money, and distributed, and determine controversies in relation thereto, except as herein otherwise provided . . . .
As courts of equity, charged with the duty of assuring the fair and efficient settlement of the estates of bankrupts, bankruptcy courts characteristically and properly exercise their jurisdiction in summary fashion. Katchen v. Landy, 382 U.S. 323, 327, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966). It is "elementary bankruptcy law," id., that this summary jurisdiction exists as to all property in the actual or constructive possession of the court on the date the bankruptcy petition is filed:
Bankruptcy courts have summary jurisdiction to adjudicate controversies relating to property over which they have actual or constructive possession. And the test of this jurisdiction is not title in but possession by the bankrupt at the time of the filing of the petition in bankruptcy. (Footnote omitted.)
Thompson v. Magnolia Petroleum Co., 309 U.S. 478, 481, 60 S.Ct. 628, 630, 84 L.Ed. 876 (1940); accord, Cline v. Kaplan, 323 U.S. 97, 98, 65 S.Ct. 155, 89 L.Ed. 97 (1944); Taubel-Scott-Kixmiller Co., Inc. v. Fox, 264 U.S. 426, 432-33, 44 S.Ct. 396, 68 L.Ed. 770 (1924); In re American National Trust, 426 F.2d 1059, 1065 (7th Cir. 1970); In re Patrick, 194 F.2d 750, 752 (7th Cir. 1952); 2 Collier on Bankruptcy P 23.04(2), at 453 (14th ed. 1975).
Appellants Kersten and Harding do not dispute that this is the law; they urge instead that it does not apply here. Their argument is based on the proposition that property which is held by a third party under a bona fide and substantial adverse claim is not subject to summary bankruptcy jurisdiction. In such cases, they insist, the property holder/claimant cannot be denied the right to litigate his claim in a plenary suit brought in a proper court. 1 We do not doubt that appellants have correctly stated a rule of law, see Cline v. Kaplan, supra; Taubel-Scott-Kixmiller Co., Inc. v. Fox, supra; 2 Collier on Bankruptcy, supra, P 23.04(2), at 453-55, 464, but we find it has no application to the facts of this case.
The fundamental concept underlying summary jurisdiction is actual or constructive possession of the property in question by the bankruptcy court. Thompson v. Magnolia Petroleum Co., supra; In re American National Trust, supra; 5 J. Moore, Federal Practice P 38.30(3), at 221 (2d ed. 1976). If the court has such possession, it has summary jurisdiction; if, instead, possession of the property is in the hands of a bona fide adverse claimant, 2 no summary jurisdiction exists. 3 As we have noted, the time to judge possession is the time of filing of the bankruptcy petition. In many cases, the statement of these rules and their straightforward application would provide a ready answer to the question of the propriety of summary jurisdiction. The matter is somewhat complicated here by the fact that the property in question on the filing date was a judgment, an intangible, and not readily capable of "possession" in the ordinary sense. In such cases, the doctrine of constructive possession is applied and suffices to confer summary jurisdiction on the bankruptcy court if the bankrupt was the legal owner of the intangible at the time of filing. As this court stated In re Marsters, 101 F.2d 365, 367 (7th Cir. 1938), cert. denied sub nom. Herman v. Henley, 306 U.S. 663, 59 S.Ct. 788, 83 L.Ed. 1059 (1939):
In the case of a tangible there can be a possession in fact as well as in legal theory; but in the case of an intangible, possession is a legal concept and is manifested only through recognition of legal consequences. It may be said that ownership of...
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