Matter of Forgay, B-137-54.

• Decision Date: 04 April 1956
• Docket Number: B-137-54.
• Citation: 140 F. Supp. 473
• Parties: Matter of Kenneth Dickson FORGAY, Voluntary Bankrupt.
• Court: U.S. District Court — District of Utah

140 F. Supp. 473

Matter of Kenneth Dickson FORGAY, Voluntary Bankrupt.

B-137-54.

United States District Court D. Utah, Central Division.

April 4, 1956.

Joseph W. Boone, Salt Lake City, Utah, for bankrupt.

Macoy A. McMurray, Salt Lake City, Utah, for Personal Industrial Loan Corp.

RITTER, District Judge.

This is an ancillary proceeding to enjoin a judgment creditor from executing upon a judgment obtained in a state court and thereby to protect and effectuate the bankruptcy court's orders of adjudication and discharge in the matter of Kenneth Dickson Forgay, voluntary bankrupt.

The bankrupt and his wife obtained a loan from Personal Industrial Loan Corporation¹ on November 21, 1953, in the sum of $878.38. They executed a note and completed the written form prepared by the Loan Co. concerning their financial condition.

On May 18, 1954, the bankrupt filed a voluntary petition in bankruptcy in the United States Court for the District of Utah, and listed the debt owed to the Loan Co. in the annexed schedules. Adjudication followed on June 15, 1954. The Loan Co. had personal notice of the bankruptcy proceedings but entered no appearance, filed no proof of claim and interposed no objections to discharge.

While the bankruptcy was pending and prior to discharge the Loan Co. commenced action on the note against the bankrupt in the city court of Salt Lake City, Utah, and alleged also in its complaint that bankrupt made a false financial statement to induce the loan. Upon bankrupt's failure to appear in the state court proceeding, a default judgment on the note was entered in the sum of $696.18, together with interest and attorney's fees according to the tenor of the note. The record does not show that a trial was held, or that any competent evidence was presented to establish the alleged fraud and no findings of fact or conclusions of law were prepared or filed.

The bankruptcy court entered its order of discharge on April 20, 1955. The debt owed to the Loan Co. on the note was among the bankrupt's obligations which were discharged.

Thereafter, bankrupt filed in the state court a notice of appeal and motion to restrain the Loan Co. from executing on the judgment, and the Loan Co. filed a motion to dismiss the appeal. The state court denied the bankrupt's motion and dismissed his appeal. Subsequently the bankrupt filed a motion in the city court of Salt Lake City, Utah, to vacate the judgment and to allow him to plead. This also was denied, and the Loan Co. proceeded to attach bankrupt's wages.

The bankrupt is here seeking a permanent injunction against the Loan Co. and directing it to dismiss the garnishment proceedings, on the grounds that the judgment was based upon a debt which was discharged in bankruptcy. The Loan Co. contends that it was at liberty to commence the action in the state court while the bankruptcy proceedings were pending, and having alleged a nondischargeable claim in the complaint filed in the state court and obtained a judgment thereon, the bankruptcy court has no jurisdiction to enjoin the state court proceedings.

The Loan Co. relies upon two decisions of the Tenth Circuit, Personal Finance Co. of Colorado v. Martinez² and Beneficial Loan Co. v. Noble.³

Both cases are plainly distinguishable from the present. In both cases the state court action was one sounding in tort for damages for fraudulent misrepresentations. In neither was the action brought upon the debtor's note.

In the case before us, the state court action is founded upon the debtor's note. The Loan Co. took a judgment on the note, which included interest and attorneys' fees as provided in the note.

It is one thing to hold, as the Tenth Circuit did in Noble, that the state court judgment in the action for damages for fraud was binding upon the bankruptcy court under the doctrine of res adjudicata. It is quite another matter to hold that the state court judgment on the debtor's note, the very same note scheduled and discharged in the bankruptcy court, precludes the bankruptcy court from taking such action as may be necessary to effectuate its orders of adjudication and discharge and for the enforcement of the provisions of the Bankruptcy Act, 11 U.S.C.A. § 1 et seq.

This is the distinction on which the court in Noble grounded its decision. There is nothing in either Martinez or Noble contrary to the decision reached here. Indeed, we think Noble supports our view, by recognizing the power of the bankruptcy court to entertain an ancillary bill in aid of and to effectuate its order of adjudication and discharge. Judge Phillips' language in the Noble case, 129 F.2d 425, 427, is clearly to that effect:

"Among the granted powers of a bankruptcy court are the allowance and disallowance of claims, the collection and distribution of the estates of bankrupts and the determination of controversies in relation thereto, the rejection in whole or in part `according to the equities of the case' of claims previously allowed, and the entering of such judgments `as may be necessary for the enforcement of the provisions' of the Bankruptcy Act, 11 U.S.C.A. § 1 et seq. In respect to such matters, the jurisdiction of the bankruptcy court is exclusive of all other courts."

Certainly we have a question here of the "allowance and disallowance of claims," and "the determination of controversies in relation thereto," and "the entering of such judgments `as may be necessary for the enforcement of the provisions' of the Bankruptcy Act". In respect to these matters Judge Phillips says "the jurisdiction of the bankruptcy court is exclusive of all other courts."

In Personal Finance Co. of Colorado v. Martinez the court said 115 F.2d 228 that the suit in the state court was based upon a non-dischargeable claim and since it was a debt "from which the bankrupt would not be released by a discharge in bankruptcy, it was error to enjoin the prosecution of the state court action." However, in Beneficial Loan Co. v. Noble, the court said: "A bankruptcy court has jurisdiction of an ancillary bill in aid of and to effectuate its order of adjudication and its order of discharge. It may enjoin the prosecution of an action in the state court where facts are averred and established showing that such relief is necessary to effectuate its orders of adjudication and discharge. In so far as our decision in Personal Finance Co. of Colorado v. Martinez, 10 Cir., 115 F.2d 226, conflicts with the foregoing, it is hereby overruled." The court recognized the prevailing rule that a bankruptcy court has jurisdiction to enjoin proceedings in state courts to preserve the benefits of a discharge, and corrected any misinterpretation created by the holding in the Martinez case on that point.

The Bankruptcy Act was enacted by the Congress of the United States for the relief of the helplessly indebted citizen. Attempted encroachments upon this humane purpose by state courts have been curtailed by federal court edict and protective Acts of Congress. This purpose and meaning of the Act is stated by Justice Sutherland in Local Loan Co. v. Hunt, 1934, 292 U.S. 234, 54 S.Ct. 695, 699, 78 L.Ed. 1230, as follows:

"One of the primary purposes of the Bankruptcy Act is to `relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.' * * * This purpose of the act has been again and again emphasized by the courts as being of public as well as private interest, in that it gives to the honest but unfortunate debtor who surrenders for distribution the property which he owns at the time of bankruptcy, a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt. * * * The various provisions of the Bankruptcy Act were adopted in the light of that view and are to be construed when reasonably possible in harmony with it so as to effectuate the general purpose and policy of the act. Local rules subversive of that result cannot be accepted as controlling the action of a federal court."

Prior to 1934 it had become the practice of some federal courts who had formally discharged the bankrupt to send him forth without protection against suits and executions in state courts upon debts discharged by the federal courts. The now outmoded theory that the bankruptcy court lost jurisdiction after discharge of the bankrupt is set forth in the case of In re Boardway.⁴ In that case the federal court held that it had no power to interfere with the enforcement of a state court judgment obtained on a debt which had been discharged in bankruptcy because the bankruptcy court lost its jurisdiction after the discharge.

The Supreme Court of the United States in 1934 in the case of Local Loan Co. v. Hunt, supra, reversed this trend and established the contrary one. In that case bankrupt's employer was sued in a state court by a creditor on an assignment of wages on a debt discharged in the federal bankruptcy court. An injunction was sought by the bankrupt in the federal court and granted. It was held that "a federal court of equity has jurisdiction of a bill ancillary to an original case or proceeding in the same court, whether at law or in equity, to secure or preserve the fruits and advantages of a judgment or decree rendered therein * * *."

The Bankruptcy Act itself provides the basis for the rule. Section 2, sub. a of the Act, 11 U.S.C.A. § 11, sub. a, provides in part: "* * * courts of bankruptcy * * * are hereby invested * * * with such jurisdiction at law and in equity as will enable them to exercise original jurisdiction in proceedings under this Act * * *" and Section 2, sub. a(15) of the Act, 11 U.S.C.A. § 11, sub. a(15), invests the bankruptcy courts with the power to "make such orders, issue such process, and enter such judgments, in addition to those specifically provided for, as may be necessary for the...