Schaffer v. Hughes

• Decision Date: 05 January 1944
• Docket Number: No. 12549,12550.,12549
• Citation: 139 F.2d 438
• Parties: SCHAFFER v. HUGHES et al. GARDNER et al. v. SAME.
• Court: U.S. Court of Appeals — Eighth Circuit

139 F.2d 438 (1943)

SCHAFFER v. HUGHES et al. GARDNER et al. v. SAME.

Nos. 12549, 12550.

Circuit Court of Appeals, Eighth Circuit.

December 14, 1943.

Rehearing Denied January 5, 1944.

John R. Stockham, of St. Louis, Mo. (Roscoe Anderson, W. R. Gilbert, and Anderson, Gilbert, Wolfort, Allen & Bierman, all of St. Louis, Mo., on the brief), for appellant A. H. Schaffer.

Edward W. Tobin, of St. Louis, Mo. (Harry S. Gleick, of St. Louis, Mo., on the brief), for Henry C. Hughes, trustee, etc.

Crawford Johnson, of St. Louis, Mo. (Bryan, Williams, Cave & McPheeters, of St. Louis, Mo., on the brief), for Russell E. Gardner, Jr., and others.

Before SANBORN, WOODROUGH, and RIDDICK, Circuit Judges.

WOODROUGH, Circuit Judge.

Two appeals are presented on one record. No 12,550 is by individuals doing business as copartners in the partnership name of Reinholdt and Gardner; No. 12,549 is by A. H. Schaffer.

The appeal by Reinholdt and Gardner is to reverse the part of a decree entered in summary proceedings in the bankruptcy of G. A. Gantz and Company which ordered the appellants to turn over to the trustee in bankruptcy certain cash and securities in their possession and to submit whatever claims of interest they asserted therein to the determination of the bankruptcy court and which restrained prosecution by them of action in the state court to obtain such determination. The parties here are the same as in a prior case where Reinholdt and Gardner were plaintiffs and A. H. Schaffer and Henry C. Hughes, trustee, were defendants, which we considered on appeal in Gardner v. Schaffer, 8 Cir., 120 F.2d 840, and the controversy here arises out of the same transactions between this appellant, A. H. Schaffer, and the bankrupt G. A. Gantz and Company, alleged in the complaint in that case and described in the opinion of this court on that appeal.

The decree dismissing the action of Reinholdt and Gardner which we reviewed at their instance on that appeal was entered in a plenary action brought by them in the federal district court in which they set up their possession of the same cash and securities belonging to the bankrupt involved in these proceedings, and in which they described their claim of right to retain such possession and sought to compel interpleader of the trustee in bankruptcy and A. H. Schaffer, alleged claimants, and to obtain adjudication of the rights of the parties in respect to the cash and securities, and appropriate remedy. But it was decided by the district court, and on the appeal by this court, that Reinholdt and Gardner had mistaken their forum and that the federal district court was without jurisdiction to adjudicate the conflicting claims described in the complaint because there was no diversity of citizenship between the parties and no federal question was involved.

The decree here appealed from was predicated upon a petition in summary proceedings filed in the bankruptcy court by the trustee against Reinholdt and Gardner and A. H. Schaffer after our decision had been entered. Following our decision Schaffer had brought suit in the state court against Reinholdt and Gardner upon the check issued by them to the bankrupt and endorsed and delivered by the bankrupt to him, as described in our opinion. In that suit Reinholdt and Gardner had appeared and prayed to have the trustee in bankruptcy made a party. The petition filed by the trustee asserted paramount jurisdiction in the bankruptcy court in summary proceedings to issue its turn-over order and adjudicate the controversies. The parties responded and appeared at the hearing before the bankruptcy court. In their response the appellants Reinholdt and Gardner alleged the same facts and asserted the same claim of right to retain possession of the bankrupt's cash and securities in their hands summarized in Gardner v. Schaffer, supra. They also denied the jurisdiction of the bankruptcy court in the summary proceedings. In his response Schaffer also challenged the jurisdiction in the summary proceedings. He admitted that he had brought suit against Reinholdt and Gardner on the check issued by them to the bankrupt and endorsed and received in due course by him, but denied that he had received unlawful preference and insisted that he had a right to maintain the action against Reinholdt and Gardner on the check. The facts concerning the transactions between the bankrupt, these appellants and A. H. Schaffer, were developed by the pleadings, stipulations and oral testimony considered by the court, and the findings, conclusions and decree were drawn with meticulous care. There was but little dispute of fact. But again on this appeal, as on the former appeal, we are confronted with the question of jurisdiction. In the former case it was a question of the jurisdiction of the federal court in the absence of diversity of citizenship and of controversy arising under federal law. Here it is a question of the jurisdiction of the bankruptcy court in summary proceedings.

It clearly appears that at the date of bankruptcy of G. A. Gantz and Company the appellant partnership had in its possession the securities and cash belonging to the bankrupt which are referred to in the turn-over order appealed from, and that such securities and cash were in a margin brokerage account kept pursuant to a written agreement between appellants and the bankrupt to the effect that they were to be held by appellants as security for the payment of all liabilities of the bankrupt to the partnership "however and whenever arising." It also appears that two days before the bankruptcy Reinholdt and Gardner made a loan to the bankrupt in the form of a check payable to the order of the bankrupt "for the account of A. H. Schaffer" and that the bankrupt endorsed and delivered the check to Schaffer before bankruptcy. Although appellant stopped payment on the check, Schaffer had it, and claimed to be the holder of it in due course and that appellants were legally obligated to pay it.

It is also clear that if appellants should be compelled to pay the check, then, and in that event, the amount so paid would be chargeable to G. A. Gantz and Company in the margin brokerage account as a debt owing by Gantz and Company to appellants, properly to be included among the debts which it had been agreed should be secured by the cash and securities of the bankrupt in Reinholdt and Gardner's possession.

Although these appellants at the time of bankruptcy made no claim of any present existing debt then owing by the bankrupt to them, and they admitted that the cash and securities in their hands belonged to the bankrupt, they claimed the right to retain possession of the cash and securities to secure them against the contingency of being compelled to pay the check outstanding in Schaffer's hands.

In summary proceedings to recover property in the possession of a third party and held adversely to the bankrupt estate the bankruptcy court had undoubted jurisdiction to adjudicate the merits summarily and require surrender of the property where the asserted claim is merely colorable, but if the claimant is in actual possession of the property at the time of the bankruptcy and in good faith and with reasonable cause claims the right to hold it adversely to the claim of the trustee in bankruptcy, a summary proceeding will not lie to determine the right of the trustee to recover possession of the property and only by plenary proceedings can the question be determined. Harrison v. Chamberlin, 271 U.S. 191, 46 S.Ct. 467, 70 L.Ed. 897; Shea v. Lewis, 8 Cir., 206 F. 877; Johnson v. Doebler, 8 Cir., 275 F. 822; Jenkinson v. First National Bank of Sheldon, 8 Cir., 295 F. 778; In re Rathman, 8 Cir., 183 F. 913; Johnston v. Spencer, 8 Cir., 195 F. 215; Marcell v. Engebretson, 8 Cir., 74 F. 2d 93, 96, 97, certiorari denied 296 U.S. 579, 56 S.Ct. 89, 80 L.Ed. 409; Thompson v. Terminal Shares, Inc., 8 Cir., 104 F.2d 1, 5, 9, certiorari denied 308 U.S. 559, 60 S.Ct. 100, 84 L.Ed. 470.

We think it is well settled that one who holds property of a bankrupt under substantial claim of right to be secured thereby against actual contingent liability asserted on substantial grounds in good faith holds adversely to the trustee and may not be subjected to turn-over order in summary proceedings. Such summary jurisdiction does not extend to determination of such actual and substantial adverse claims, even though the liability asserted is contingent. Jaquith v. Rowley, 188 U.S. 620, 23 S.Ct. 369, 47 L.Ed. 620; In re Horgan, 1 Cir., 158 F. 774; In re Squier, D.C., 165 F. 515; In re Detroit Waterproof Fabric Company, D.C., 295 F. 338; In re Horgan, 1 Cir., 164 F. 415.

In Jaquith v. Rowley, supra, the bankrupt, against whom two suits had been filed, deposited with the surety sums to indemnify him on two bail bonds if the bankrupt avoided the bonds. The plaintiffs in the two suits took judgments by default in the state court. The trustee filed a petition in the district court against the plaintiff in the two suits and the surety asking that the plaintiffs be enjoined from collecting the judgments or making any levy under the execution, that the surety be ordered to pay over to the trustee the funds deposited in its hands and also that the plaintiffs be ordered to appear before the referee in bankruptcy and prove their claims against the estate and establish their liens, if any, upon the funds paid over to the trustee by the surety. The court denied the petition for want of jurisdiction only and allowed an appeal to the Supreme Court. It was held that the district court did not have jurisdiction to a summary proceeding on the petition of the trustee to compel the surety to turn the money over to the trustee in bankruptcy. The court stated 188 U.S. 620, 23 S.Ct. 371, 47 L.Ed. 620:

"The proceeding was a summary application to the court in bankruptcy to grant an order in a matter, the result of the granting of which would be to immediately take from...