Muffler v. Petticrew Real Estate Co.

• Decision Date: 04 February 1943
• Docket Number: No. 9264.,9264.
• Citation: 132 F.2d 479
• Parties: MUFFLER et al. v. PETTICREW REAL ESTATE CO.
• Court: U.S. Court of Appeals — Sixth Circuit

132 F.2d 479 (1942)

MUFFLER et al. v. PETTICREW REAL ESTATE CO.

No. 9264.

Circuit Court of Appeals, Sixth Circuit.

December 1, 1942.

As Amended on Denial of Rehearing February 4, 1943.

Roscoe C. Lorentz, of Springfield, Ohio (Roscoe C. Lorentz and George W. Tehan, both of Springfield, Ohio, on the brief), for appellants.

Sidney G. Kusworm, of Dayton, Ohio (Kusworm & Kusworm, of Dayton, Ohio, on the brief), for appellee.

Before SIMONS, ALLEN, and McALLISTER, Circuit Judges.

ALLEN, Circuit Judge.

This case presents a problem of conflicting jurisdiction between a state court and the federal court. It arises out of the denial by the federal court of a motion to vacate an adjudication of bankruptcy, to set aside an order of reference, to dismiss the bankrupt's petition, and to dissolve a restraining order theretofore issued enjoining proceedings in the state court. The state court receiver and two mortgagees who were parties to the state court proceedings join in the appeal.

The following facts are conceded:

Prior to March 5, 1933, appellee was a corporation doing a general real estate business in the city of Springfield, Ohio. The appellants, the Merchants and Mechanics Federal Savings & Loan Association and the Springfield Federal Savings & Loan Association, held mortgages upon all but one of some eighty parcels of real property then owned by appellee. Upon that date a receivership proceeding was instituted in the state court and on March 8, 1933, a receiver was appointed, who took possession of the assets of the corporation, including the real estate. On February 16, 1938, the receiver filed a petition in the state court, praying that liens be marshaled, that the mortgaged real estate be sold, and for other equitable relief. No deficiency judgment was asked. Thereafter, in March, 1939, appellee filed a petition in the federal court under the Chandler Act, praying for corporate reorganization. In these proceedings the assets of the corporation were removed from the custody of the state court receiver and placed in the custody of a trustee appointed by the federal court.

The case was referred to a special master who found that the corporation was hopelessly insolvent; that its mortgage indebtedness substantially exceeded its assets, and recommended dismissal of the petition on the ground that it had not been filed in good faith. The District Court adopted the findings of fact and conclusions of law of the special master, confirmed the special master's report, dismissed the petition for reorganization, and ordered the trustee to surrender custody and possession of the assets, except for certain moneys and deposits in bank which are not herein involved, to the state court receiver "under and subject to all the orders of the Court of Common Pleas of Clark County, Ohio, heretofore entered and made respecting the same."

The case proceeded in the state court upon the petition to sell the real estate filed by the receiver February 16, 1938. Other parties were added and full proof was taken on various issues. On March 16, 1942, the state court entered an order granting the prayer of the petition. It held the mortgages to be valid liens duly recorded under Ohio law, and held that each of the mortgagees was entitled to foreclosure at and prior to May 8, 1933, the date of the appointment of the state court receiver. The state court found that the corporation was insolvent; that the real estate asked to be sold constitutes practically all the assets of the corporation, and ordered appraisement, advertisement and sale of the real property in accordance with the petition unless the obligations were paid within ten days. Before the property was appraised or advertised (upon April 16, 1942) the appellee corporation filed the instant proceeding in the federal court, praying to be adjudicated bankrupt. An order of adjudication was made and a restraining order was entered staying all acts and proceedings to enforce any lien upon any property of the bankrupt and the continuation of any suit or proceeding against it until further order of the court. The appellants moved for an order dissolving the restraining order, vacating the adjudication of bankruptcy and the order of reference and dismissing the petition. The appeal is prosecuted from the denial of this motion.

Under the circumstances described, there was plainly no error in the refusal to vacate the adjudication and order of reference and to dismiss the bankrupt's petition. The bankrupt was not deprived of the right to file its petition merely because its property was in the custody of the state court receiver. Struthers Furnace Co. v. Grant, 6 Cir., 30 F.2d 576. The District Court had exclusive jurisdiction of the petition for discharge under the Bankruptcy Act and could not be deprived of that jurisdiction by the prior pendency of proceedings in any other court. McKesson & Robbins, Inc. v. Morris Travis Drug Co., 6 Cir., 106 F.2d 681, 683.

A closer question is presented by the denial of the motion to vacate the stay of proceedings in the state court. It was held in Bushong v. Theard, 5 Cir., 37 F.2d 690, certiorari denied 281 U.S. 763, 50 S. Ct. 461, 74 L.Ed. 1171, that the trustee on application for a similar stay order must show that the bankrupt estate has an equity in the mortgaged property. Cf. Hoehn v. McIntosh, 6 Cir., 110 F.2d 199. The special master in fact found in May, 1941, that the mortgage debts here greatly exceed the assets.

However, we think another feature of the case decisive. Since the liens matured more than four months before the present bankruptcy proceedings, and the action to enforce the liens in the state court antedated the filing of the bankruptcy petition, and since the state court had possession of the property, it has exclusive jurisdiction to foreclose the mortgages thereon and the District Court, under the decisions of the Supreme Court, was required to dissolve the stay.

Under Ohio law a mortgage upon real estate is a lien from time of record General Code of Ohio, Section 8542; Stewart v. Hopkins, 30 Ohio St. 502; In re Farm & Home Co., 6 Cir., 84 F.2d 933, 935. The validity of the mortgages is not questioned and they had matured through record a number of years prior to the filing of the bankruptcy petition. The petition for their enforcement had been filed in the state court more than four years before the instant bankruptcy petition was filed. The case therefore seems to be squarely governed by Straton v. New, 283 U.S. 318, 51 S.Ct. 465, 75 L.Ed. 1060; Dannel v. Wilson-Weesner-Wilkinson Co., 6 Cir., 109 F.2d 364, and similar decisions, and to require the conclusion that the District Court erred in denying the motion to vacate the restraining order. Straton v. New declared that liens acquired more than four months before the bankruptcy proceedings are instituted, if valid under state law, are preserved and will be accorded priority by the bankruptcy court in distribution of the estate in accordance with applicable local law. It also declared that when under liens thus acquired prior to the four months' period the state court has taken possession of the res for the purpose of enforcing the lien, the District Court sitting in bankruptcy has no power to enjoin the continuation of such action. See Beeler v. Schumacher, 6 Cir., 80 F.2d 715. Cf. In re Conservative Mortgage & Guaranty Co., 6 Cir., 24 F.2d 38, and Willis v. Beeler, 6 Cir., 90 F.2d 538, 542.

Here the state court took possession and custody of the property in 1933, and under its orders the receiver and his agents collected rents, made repairs, and administered the property generally until custody was yielded to the bankruptcy court in the reorganization proceeding filed March 1, 1939. Upon dismissal of that case the federal court ordered the trustee to surrender the custody and possession of the property and assets to the state court receiver subject to the orders of the ...