Palmer v. Warren

• Decision Date: 04 March 1940
• Docket Number: No. 38-98.,38-98.
• Citation: 108 F.2d 164
• Parties: PALMER et al. v. WARREN et al.
• Court: U.S. Court of Appeals — Second Circuit

108 F.2d 164 (1939)

PALMER et al. v. WARREN et al.

Nos. 38-98.

Circuit Court of Appeals, Second Circuit.

December 18, 1939.

Rehearing Denied January 25, 1940.

Writ of Certiorari Granted March 4, 1940.

Erwin N. Griswold, of Cambridge, Mass., for appellants.

Hermon J. Wells and J. H. Gardner, Jr., both of New Haven, Conn., for appellees.

Before L. HAND, AUGUSTUS N. HAND, and CLARK, Circuit Judges.

Writ of Certiorari Granted March 4, 1940. See 60 S.Ct. 607, 84 L.Ed. ___.

L. HAND, Circuit Judge.

The Boston & Providence R. R. Corporation and its trustees in reörganization appeal from two orders, entered in a joint proceeding under § 77 of the Bankruptcy Act, 11 U.S.C.A. § 205, to reörganize the New York, New Haven and Hartford R. R. Co. and the Old Colony R. R. Co. The first of these orders, entered January 16, 1939, decided that the bankruptcy court had jurisdiction to determine the amount of the deficit caused by the operation of the Boston & Providence between the day when the New Haven rejected its lease of the property of the Old Colony (June 3, 1936) and December 31, 1937; and further to determine and declare whether this deficit was a lien upon the road. The second order, entered April 20, 1939, liquidated the amount of the deficit, and charged it as a lien prior to general creditors — there was no mortgage. The Boston & Providence is a Massachusetts corporation and the owner of a railroad, running, as its name implies, between Boston and Providence; in 1888 it leased all its property for 99 years to the Old Colony, also a Massachusetts corporation, owning and operating a network of lines in that state. In 1893 the Old Colony in turn leased its own lines — including the term for years that it held of the Boston & Providence — to the New Haven; also for a term of 99 years. The New Haven operated all three roads until, having become insolvent, it was put into reörganization under § 77 of the Bankruptcy Act, on October 23, 1935, and Palmer and others were made its trustees. The trustees continued to operate the Old Colony as lessees until June 3, 1936, when, by order of the bankruptcy court they rejected the lease, and they thereafter operated it by virtue of an order, presumably made under subdivision c(6) of § 77, although the order did not so recite. All three roads had run at a deficit for the first seven months, and on June 3, 1936, the Old Colony was also put into reörganization under § 77. Since the New Haven held a majority of its shares, the court united the two proceedings, as the statute allows (sub. a), and appointed the same trustees.

The deficits still continued, and on July 19, 1938, the court instructed the trustees to reject the Boston & Providence lease, which they did; though they continued, as before, to operate both roads at the court's order under sub. c(6) of § 77. On August 4th, 1938, the Boston & Providence was put into reörganization, and Warren and others were appointed its trustees. That proceeding was in the District Court of Massachusetts, and could not have been united with the joint one at bar, because neither the New Haven, nor the Old Colony, owned a majority of the Boston & Providence shares, as required by sub. a of § 77. The appeals (over both of which we have jurisdiction, Robertson v. Berger, 2 Cir., 102 F.2d 530) involve the following questions: (1) whether the Connecticut court had jurisdiction to declare that the Boston & Providence operating deficit between June 4, 1936, and December 31, 1937, was a lien upon the Boston & Providence reversion; (2) if so, whether that court was right in declaring that the deficit did constitute a lien; (3) whether the amount found was correct.

(1) The Jurisdiction of the Connecticut Court.

The Supreme Court has laid it down in numerous decisions that a court, state or federal, which has once lawfully assumed custody of property, may adjudicate any claims against it, not only when the claimant intervenes in the suit and asks that his rights be declared, but when the court cites him in in invitum.¹ Courts of other jurisdictions will recognize its judgment as res judicata, and it may enjoin claimants from prosecuting their rights elsewhere, except as it finds it more convenient to allow them to do so. All this is entirely familiar law, and the Boston & Providence does not dispute it; it says that it is inapplicable, because the district court never came into possession of its property. The argument is that the Old Colony got only a term for 99 years; and that the district court could take possession of no more than the lessee had had. This misconceives the nature of the doctrine, which depends merely upon possession in the natural sense that the court's officers are in control of the property de facto and can exclude all others. Indeed it would be scarcely practicable to adopt any other basis for jurisdiction. Were it necessary that the court should have possession of the insolvent's legal interest in order to adjudicate it, it would follow that every erroneous judgment would be beyond its proper jurisdiction, and it would have the right to act only when it acted correctly. Moreover, we can attach no meaning whatever to the "possession" of a legal interest in a thing, except as it means possession of the thing as an object of nature. The reason lying back of the whole doctrine is practical rather than conceptual, as appears very plainly when the dispute concerns the right to possession. A court, which has custody of the res, must at some time surrender it, and it can know to whom it should deliver only in case it either decides the right to possession itself, or awaits the action of such other competent tribunal as the claimant may choose. The second course subjects it to an indefinite delay in the dispatch of the cause before it, and may effectively cripple its powers. The same is not indeed true where the claimant demands, not the right to possession, but a lien or other similar interest in the res; the custodial court might then content itself with learning who was entitled to possession, and leave any other interests unadjudicated; indeed that is what it does in cases like a bare possessory libel in the admiralty, for instance. But this would leave incomplete the purpose of the main suit, if, as is generally the case, that is the distribution of the assets in its hands, which presupposes that all liens have been ascertained. In the case at bar the New Haven is not, it is true, resisting a lien; it is itself the claimant, a putative lienor. But, although, so far as we have found, that situation has not come before the courts, it seems to us plainly a variant of a claim to the right to possession. If the roads were private corporations, there could be no doubt about this. The Boston & Providence would in that case be asserting the right to possession, which the New Haven and Old Colony would be resisting on the ground that they had a lien on the road; it would be a typical case in which the court would have jurisdiction. Because the Boston & Providence is a public servant, and cannot, for the present at least, be operated as a separate carrier, this result is disguised; it and the Old Colony must be operated under the control and possession of the New Haven; sub. c(6) of § 77. But we can see no reason why this should falsify the relations between the two roads themselves; indeed, if it has any effect upon them, it is to confirm our conclusion, for the New Haven's possession is not likely to be disturbed. It may possibly be true that the Connecticut court will have to resort through its trustees to the Massachusetts court to realize upon the lien. If so, it is because distribution of the Boston & Providence assets — more properly the new allocation of interests in them — has been confided to the Massachusetts court. But that need not affect the power of the Connecticut court to liquidate and fix the rank of the lien. Nor would a consistent application of this reasoning require us to extend the jurisdiction of the Connecticut court to the collection of unsecured claims of the New Haven against third persons. The presence of the debtor within reach of the court's process is not a condition upon the exercise of power to declare legal interests in property which is in gremio legis. The fact that the Connecticut court could go no further and hold the Boston & Providence generally liable, is no reason why it may not declare what interests the New Haven and Old Colony have in its road.

Finally, the Boston & Providence argues that since § 77 sub. a gave "exclusive jurisdiction" to the Massachusetts court over "the debtor and its property wherever located", that court alone may adjudicate the lien. That, however, is a sword with two edges, for the Connecticut court had an equally "exclusive jurisdiction" over the "property wherever located" of the New Haven and of the Old Colony. The lien is as much their "property" as the encumbered fee is the Boston & Providence's, and the res to which the lien attaches is the same as that in which the fee resides. Granting arguendo that each court has "exclusive jurisdiction" over the legal interests of its debtor in the res, so far as those interests do not conflict, each cannot have it when they do, and there is no reason à priori to prefer one court over the other. In that logical dilemma we can only resort to the doctrine normally applicable in such cases; i. e., that the court first taking over the res, draws to itself power to determine all claims upon it.

Nor is this conclusion affected by the fact that Congress deliberately refused to provide for the joint reörganization of lessors and lessees, unless one held a majority of the others' shares. Mere liquidation of the lien is in no sense a joint reörganization of the three roads. It is quite true that if one corporation in reörganization has a claim upon the assets of another in reörganization, the court of the first has no power to...