Mid-Jersey Nat. Bank v. Fidelity Mortg. Investors, MID-JERSEY

• Decision Date: 16 June 1975
• Docket Number: MID-JERSEY,Nos. 74-1544,FIDELITY-MORTGAGE,No. 74-1544,No. 74-1545,74-1545,74-1544,s. 74-1544
• Citation: 518 F.2d 640
• Parties: NATIONAL BANK, a National Banking Association, Appellant in, v.INVESTORS, a Massachusetts business trust, Appellant in
• Court: U.S. Court of Appeals — Third Circuit

Page 640

518 F.2d 640

MID-JERSEY NATIONAL BANK, a National Banking Association, Appellant in No. 74-1545, v. FIDELITY-MORTGAGE INVESTORS, a Massachusetts business trust,

Appellant in No. 74-1544.

Nos. 74-1544, 74-1545.

United States Court of Appeals, Third Circuit.

Argued Feb. 6, 1975.

Decided June 16, 1975.

Richard S. Miller, Williams, Caliri, Miller & Otley, Wayne, N.J., for appellant Mid-Jersey National Bank.

Michael R. Griffinger, Crummy, Del Deo, Dolan & Purcell, Newark, N.J., for appellant Fidelity-Mortgage Investors.

Before ADAMS, ROSENN and WEIS, Circuit Judges.

OPINION OF THE COURT

ADAMS, Circuit Judge.

These appeals confront us with a novel procedural issue regarding the scope of Bankruptcy Rule 11-44 as well as questions pertaining to a summary judgment in favor of a bank, and pre- and post-judgment interest on that judgment.

Before we may consider the merits of the appeal and cross-appeal in this matter, it is necessary first to determine whether under Bankruptcy Rule 11-44 the filing of a Chapter XI petition operates to stay the appeals.

A.

Plaintiff, Mid-Jersey National Bank (hereinafter Mid-Jersey), is a National Banking Association with its principal office in New Jersey. Defendant, Fidelity-Mortgage Investors (hereinafter FMI), is a Massachusetts real estate investment trust. Beginning in December 1971 Mid-Jersey extended a line of credit to FMI. FMI utilized this line of credit for nearly two years by borrowing money in exchange for a series of 90-day promissory notes.

On November 7, 1973, FMI executed the promissory note which is the subject of the present suit. The note was payable at the offices of Mid-Jersey on February 5, 1974 in the principal amount of $300,000. Since FMI prepaid interest at the rate of 93/4% per annum, on the date the note was signed, the note, itself, stated no rate of interest.

Shortly after the execution of the note, Mid-Jersey learned of FMI's worsening financial condition and of an attempt by FMI's other creditor banks to obtain Mid-Jersey's agreement to a revolving credit plan designed to keep FMI out of bankruptcy. Instead of becoming a party to the revolving credit agreement, Mid-Jersey decided to terminate FMI's line of credit on the expiration date of the November 7, 1973 note. After the failure of FMI to pay the note on the date of maturity, Mid-Jersey made a written demand for payment on February 13, 1974. Mid-Jersey then applied against the principal amount of the note FMI's compensating balances on deposit with the bank, thereby reducing the amount due Mid-Jersey to $240,000.

After unsuccessfully seeking a voluntary payment from FMI, Mid-Jersey brought this action in the Superior Court of New Jersey, Law Division, Hudson County, alleging default on the note and damages in the amount of $240,000. plus interest from February 5, 1974. The action was removed to the United States District Court for the District of New Jersey, based on diversity of citizenship. On April 10, 1974, a motion by Mid-Jersey for summary judgment was granted, and interest was awarded at the rate of six per cent from February 5, 1974 to the date of entry of judgment.

An order was entered on April 17, 1974, by the district court staying execution of the judgment pending appeal, providing a supersedeas bond was filed by FMI. Subsequently, FMI moved for, and the district court allowed, a modification of the order permitting FMI to make a deposit in court in lieu of the supersedeas bond. The deposit was made in the form of a Chase Manhattan Bank negotiable certificate of deposit, payable to the Clerk of the District Court for the District of New Jersey. The certificate of deposit is in the amount of $300,000, and provides for interest at the rate of 81/4% per annum. FMI then appealed from the order and judgment in favor of Mid-Jersey, and Mid-Jersey cross-appealed, challenging the rate of pre-judgment and post-judgment interest. ¹

While the appeal and cross-appeal were pending before this Court, FMI on January 29, filed a petition for reorganization under Chapter XI in the United States District Court for the Southern District of New York. Since that date, FMI's affairs have been administered subject to the supervision and jurisdiction of the District Court for the Southern District of New York. ²

B.

shall operate as a stay of the commencement or the continuation of any court or other proceeding against the debtor, or the enforcement of any judgment against him, or of any act or the commencement or continuation of any court proceeding to enforce any lien against his property . . ..

Rule 11-44, which became effective on July 1, 1974, was prescribed by the United States Supreme Court pursuant to 28 U.S.C. § 2075. That statute makes it clear that the bankruptcy and Chapter XI rules are exclusively procedural in nature and "shall not abridge, enlarge, or modify any substantive right . . ." conferred by Chapter XI itself. As the Advisory Committee note appended to Rule 11-44 states, "this rule supplements and reinforces the policy of §§ 11a, 311 and 314 of the Act." Thus we must construe the sweeping language of Rule 11-44 to accord with the substantive provisions of Chapter XI.

In this respect § 311 of the Bankruptcy Act, 11 U.S.C. § 711, is crucial to our analysis. Section 311 provides that "the court in which the petition is filed shall . . . have exclusive jurisdiction of the debtor and his property, wherever located." Thus it is apparent that the automatic stay of subsection (a) of Rule 11-44 extends only to proceedings which could divest the debtor of property over which the Chapter XI court has jurisdiction.

Our interpretation of Rule 11-44(a) is consonant with the purpose of the stay "to prevent interference with, or diminution of, the debtor's property during the pendency of the Chapter XI proceeding." ³ The stay "is intended to prevent a creditor from defeating the jurisdiction of the bankruptcy court over the debtor's property by instituting another action in a different forum." ⁴ As Judge Learned Hand has said, "stays must be ancillary to the main purpose of the (Chapter XI) proceeding and are not lawful when they cannot contribute to execution of the plan." ⁵

The question we must resolve, therefore, is whether the certificate deposited in the district court is the property of the debtor over which the Chapter XI court has exclusive jurisdiction. We hold that, in the context of this case, such a deposit in court is not the property of the debtor and is not subject to the after-arising jurisdiction of the Chapter XI court.

In United States v. Klein, the Supreme Court illuminated the status of property held by a federal court when it held that with respect to jurisdiction over such property, the federal court "is said to acquire exclusive jurisdiction . . . so far as restriction of the power of other courts is necessary for the federal court's appropriate control and disposition of the property." ⁶

Although the legal status of a deposit in court pending an appeal is not entirely pellucid, we are of the opinion that such a deposit in custodia legis may be considered the res of a trust. The court acts as trustee and is charged with the duty of determining the beneficiaries pursuant to the appeal.

This Court has previously considered the status of deposits in court. In In Re Moneys Deposited ⁷, funds representing unclaimed bankruptcy dividends had been deposited in the district court and were later transferred to the Federal Treasury. In an action by Pennsylvania to escheat the sums, we held that "the United States has no beneficial interest (in the deposits) but holds the money as statutory trustee for the rightful owners when and if they are determined by the court." 243 F.2d at 445.

The trust analysis of In Re Moneys Deposited was later applied by the Eighth Circuit in Baxter v. United Forest Products Co., Inc., ⁸ a case involving a plaintiff's deposit in court of installment payments owed to the defendants under a contract of sale. The court held that the plaintiff had no recognizable interest remaining in the funds after the deposit was made, and that the court was holding the moneys in trust for the rightful owners the defendants.

A trust analogy was also employed by the Second Circuit in Saper v. West, ⁹ an action by a trustee in bankruptcy to recover funds distributed out of a deposit in court by the clerk of a state court after the depositor lost on appeal. The Second Circuit held that the bankrupt had transferred the funds on the date the deposit was made, and that thereafter the bankrupt's only interest in those funds was a contingent one. Once the deposit had been effected, "there was no possible way in which (the bankrupt) could transfer these funds to a third party . . . until or unless that judgment were reversed. Under (applicable state) law no creditor could have obtained a lien on the fund 'in custodia legis.' " 263 F.2d at 427.

Saper v. West dealt with a situation quite similar to the one we are faced with in the case at hand. FMI parted with its ownership of the certificate of deposit when the certificate was entrusted to the court. Since then, the only property interest FMI has had in the certificate is a contingent reversionary interest as a potential beneficiary of the trust. Once we have determined that FMI does have an interest in the trust funds, the Chapter XI court would, of course, have jurisdiction over any funds to which the debtor has a rightful claim. At present, however, the Court is able to proceed with determining which party is entitled to receive the trust res and its accumulated interest.

Employment of this analysis preserves the function of the deposit as protection for the party prevailing at the trial level from the possibility of future insolvency of the losing party. ¹⁰ At the same time our interpretation does no material damage to the automatic stay provision of Rule 11-44, since the deposit serving as a...