Warder v. Brady

• Decision Date: 15 October 1940
• Docket Number: No. 4625.,4625.
• Citation: 115 F.2d 89
• Parties: WARDER v. BRADY.
• Court: U.S. Court of Appeals — Fourth Circuit

115 F.2d 89 (1940)

WARDER v. BRADY.

No. 4625.

Circuit Court of Appeals, Fourth Circuit.

October 15, 1940.

Jed W. Robinson, of Grafton, W. Va., for appellant.

Elmer A. Bowers, of Elkins, W. Va., for appellee.

Before SOPER, DOBIE, and NORTHCOTT, Circuit Judges.

SOPER, Circuit Judge.

Francis L. Warder, a special receiver appointed by the Circuit Court of Taylor County, West Virginia, for the benefit of the bondholders of the Maryland Coal Company of West Virginia, appeals from a turn-over order of the District Court whereby he was summarily directed to pay the sum of $2,475.52 held by him for the bondholders, to A. Spates Brady, a trustee for the Coal Company appointed by the District Court in a reorganization proceeding under Ch. X of the Bankruptcy Act of June 22, 1938, 52 Stat. 883 et seq., 11 U.S.C.A. § 501 et seq. The grounds of the appeal are that the District Court was without jurisdiction to decide the controversy and pass the order in a summary proceeding, and that in any event, the order was not justified on its merits by the circumstances of the case.

The fund came into existence during the course of a receivership proceeding in the State court, which was instituted by the creditors of the corporation on November 12, 1932. The receiver therein operated the mines of the corporation under the authority of the court. On January 27, 1936 an intervening petition was filed on behalf of the holders of certain income bonds dated July 6, 1911 and due February 1, 1941, which had been issued by the company in the aggregate sum of $257,500 and contained the following provision: "The Directors shall set aside from the proceeds of the sales of coal mined from the property of the company, a fund equal to five cents per gross ton on all coal mined, and such further sum as may fairly represent the depreciation of the mining plant connected therewith. With this fund, and such other funds as the Directors may appropriate the Directors may from time to time, purchase, or redeem at par, this Bond or any or all of the Bonds issued hereunder." The petitioners alleged that for a great many years prior to the receivership the company had failed and neglected to comply with the quoted provision, and no such fund had been established or maintained, and that the operating receiver had likewise failed in this respect; that with the exception of the bonded indebtedness, all other debts of the company and all costs of the proceeding had been paid or would be paid in the year 1936, and that the property in the hands of the receiver would be turned back to the company, and that it was reasonable to believe from the past conduct of those in control of the company that the property would be wasted, dissipated and mismanaged, so that there would be no funds for the payment of the bonds when they fell due; and that there were not sufficient properties belonging to the company to pay the bonds in full. It was further alleged that the receiver had operated the mines at a profit, and it was prayed that the court direct the receiver to retain possession of the property and to continue the operation of the mines for the benefit of the bondholders. The questions raised by the intervening petition were considered by the state court, and further proceedings were had which resulted in a decree of December 31, 1937 wherein a description of the property found by the court to be owned by the company was set out, the amount of the outstanding bonds was found to be $257,500, and the owners thereof were ascertained; and it was decreed that the property of the company should be charged in equity with a lien in favor of the bondholders. The receiver was ordered to turn over the property to the company, which was directed to set aside a fund as provided in the quoted provision of the bonds until the further order of the court "unless such bonds are sooner redeemed and until such funds so set aside shall equal the sum of $257,500". The company was also directed to pay interest on the bonds to the bondholders, and to pay all sums set aside for the benefit of the bondholders in accordance with the provisions of the bonds, to Francis L. Warder, who was appointed a special receiver to receive the moneys which were "to be held by him for the benefit of the bondholders until the further order of this court". The operating receiver was also directed to pay any surplus remaining in his hands after the settlement of his accounts to Warder, to be held by him for the same purpose. It was further directed that Warder might from time to time under the order of the court purchase the bonds or any of them by calling for bids on a discount basis or redeem at par any or all of said bonds.

Under this decree, the special receiver received certain sums of money from the company and also a larger sum from the operating receiver, after the latter had stated his accounts and had been directed by a subsequent order of July 1, 1938, to pay to Warder the surplus in his hands. The special receiver, acting under the orders of the state court, thereafter made certain payments from the fund in the redemption or purchase of some of the bonds at a discount, after the bondholders, upon notice, had submitted bids therefor; and there remained in his hands when the present controversy arose the sum of $2,511.18.

This controversy began on September 20, 1939, when the trustee in the reorganization proceeding prayed the District Court to stay further proceedings in the state court and to order the special receiver therein to turn over the funds in his hands. It was alleged in the trustee's petition that the fund in the hands of the special receiver belonged to the debtor and that it could be advantageously used by the trustee as working capital in operating the business of the debtor. In answer to the petition the special receiver appeared specially and filed an answer in which the aforegoing facts were set out and it was alleged that the legal title to the fund was vested in him for the use and benefit of the bondholders who held the equitable title thereto, and that the fund was not and never had been the property of the debtor. The matter was heard summarily upon the petition and answer. The court ordered that the fund should be transferred to the trustee and that all further proceedings in the state court should be stayed, and referred the matter to a referee to ascertain the amount of the fund. An accounting was accordingly had, and thereupon, on February 10, 1940, the court passed the turn over order appealed from, directing the special receiver to pay to the trustee the sum of $2,475.52, being the amount of the fund in his hands less certain allowances. From this order the pending appeal was taken.

The special receiver seems to contend that the District Court was without power to pass this order in a summary proceeding because of the provisions of § 23 of the Bankruptcy Act, 11 U.S.C.A. § 46, as interpreted by the decisions of the courts. This section was reenacted with minor changes as part of the Chandler Act of June 22, 1938. It provides in substance that the United States District Courts shall have jurisdiction of all controversies at law and in equity, as distinguished from proceedings under the act, between receivers and trustees as such and divers claimants, concerning the property acquired or claimed by the receivers or trustees, in the same manner and to the same extent as though such controversies had been between the bankrupt and the adverse claimants; and suits by the receiver and the trustee, with certain exceptions, shall be brought or prosecuted only in the courts where the bankrupt may have brought or prosecuted them if bankruptcy proceedings had not been instituted, unless by the consent of the defendant.

It is well settled by decisions interpreting this section that property or money held adversely to the bankrupt can only be recovered in a plenary suit and not by a summary proceeding in a bankruptcy court. The mere assertion of an adverse claim is not sufficient to oust the jurisdiction of the courts of bankruptcy, for they have power to inquire preliminarily whether the claim is so unsubstantial and obviously insufficient, either in fact or in law, as to be plainly without merit; and if so, to dispose of it summarily. On the other hand, if the claim be found to be substantial and the property is in the possession of the claimant, the court is without jurisdiction to proceed at all even in a plenary proceeding without the consent of the defendant, unless the other conditions prescribed by the statute are met. May v. Henderson, 268 U.S. 111, 115, 116, 45 S.Ct. 456, 69 L.Ed. 870; Taubel, etc., Co. v. Fox, 264 U.S. 426, 432, 433, 44 S.Ct. 396, 68 L.Ed. 770; Harrison v. Chamberlin, 271 U.S. 191, 46 S.Ct. 467, 70 L.Ed. 897; MacDonald v. Plymouth Trust Co., 286 U.S. 263, 52 S.Ct. 505, 76 L.Ed. 1093; In re Rathman, 8 Cir., 183 F. 913; Central Republic Bank & Trust Co. v. Caldwell, 8 Cir., 58 F.2d 721, 730; Marcell v. Engebretson, 8 Cir., 74 F.2d 93, certiorari denied 296 U.S. 579, 56 S.Ct. 89, 80 L.Ed. 409; In re Indiana Flooring Co., 2 Cir., 62 F.2d 763, 764. There can be no doubt that under these authorities the claim of the special receiver in the pending case would be considered substantial and adverse within the meaning of § 23. At the time of the institution of the reorganization proceeding, the fund was not actually or constructively in the possession of the trustee, but in the possession of the special state court receiver who set up the substantial and bona fide contention that the title to the fund resided in him under the decree of the state court and not in the bankrupt.

Another restriction upon jurisdiction that has been recognized by the courts of bankruptcy (as well as courts of equity) is the rule of comity which forbids one court from exercising control over the property of the debtor which is already the subject of proceedings in another co...