In re Muhlhauser, No. 1,129

No. 1,129 | 6th Cir. | Mar 18, 1903

SEVERENS, Circuit Judge,

after making the preceding statement, delivered the opinion of the court.

We think the position taken by the learned counsel for the petitioners is quite correct to the extent that it is claimed that, if the proposed petition presents a matter properly cognizable by the bankruptcy court, ■ the orderly course would have been to allow it to be filed, leaving the final adjudication upon its merits to be settled upon full inquiry; with this reservation, however, that, if the case as made by the petition is manifestly frivolous or wanting all color of claim for the relief sought, the court might properly decline to entertain an idle controversy, such as the case supposed would be. We do not, however, think it indispensably necessary to express a definite opinion upon the question whether this petition, properly construed, is of the character last mentioned, because we agree that the order of the District Court was right, for the reason the petition presented issues and sought relief beyond the proper jurisdiction of the bankruptcy court; although we incline to the view that no ground for any relief within the power.of the court is shown. The controversy proposed to be brought on was one peculiarly the subject of the jurisdiction of a court of equity, where all the parties interested might be brought in, and the whole subject determined upon plenary procedure. The petitioners were strangers to the proceedings, and other necessary parties, notably the executrix of Frederick Muhlhauser’s will, were not present, nor could they then properly be brought in to litigate, with other strangers, questions of general equity in the District Court. The primary function of that court, when sitting in bankruptcy, is that of administration. It takes possession of the bankrupt’s assets for that purpose. Of necessity, it must have and exercise such incidental jurisdiction as pertains to a court which takes exclusive possession and. control of property. We do not need to define the extent of its powers while it retains the property under its dominion. It is quite clear that they do not follow it after it has been released and passed into the hands of purchasers, and extend to the settlement of the equities which may be claimed in the property by other parties. It is possible that before the sale the court had power, upon application, to settle the rights of parties, and make a special order that the whole title be sold and the proceeds distributed according to its determination of their interests, or that it be sold and the controversy postponed to the distribution of the fund. Whether that could have been done, or would have been expedient, we do not say. Such practice would seem to be of doubtful propriety where such rights are disputed and their determination would involve a controversy productive of delay-in the bankruptcy proceedings. But the rights of purchasers have now become fixed,' and such a course is impracticable.

Unless there is some special direction in the order of sale, the trustee in bankruptcy sells, and the purchaser acquires, no other or greater rights in the property than the bankrupt had, except those rights of the bankrupt which are dominated by those of the creditors arising from a disposition of his property forbidden to the bankrupt— an exception not here involved- And it is not claimed that there was any special direction here, or that the court had acquired any authority to order a sale which would divest the interest of the petitioners. Such rights and interests as the bankrupt had, the court had lawful authority to sell. Such rights as these petitioners may have had in the property sold, remain to them, and can be asserted against the purchaser after the sale as effectually as they could have been before the bankruptcy against the bankrupt. The purchaser is subject to the rule of caveat emptor. Moreover, it is alleged in the petition that in this case the purchaser bought with full notice of the equities of the petitioners.

Undoubtedly, upon the facts alleged, the bankrupt had some interest in the property sold which it was proper to sell, and the creditors had the right to the proceeds. Only that was sold. The petitioners are not, as we understand, seeking to establish a claim as general creditors of the estate, but to pursue the property in specie, and assert a right therein superior to the rights of creditors. The relief they demand is that the decision of the referee that the property was subject to the liens claimed, and fixing the order of priority, should be vacated, a determination which did not affect them, for they were not parties and had not been notified; and that the sale should be set aside, or, as suggested on the argument, if that is not granted, then, under the prayer for general relief, that the proceeds of the property should be distributed to them in proportion to their interest. But if they had an interest, it was not sold, the order of sale not including it; and they would have no right to share in the proceeds.

Nor were the petitioners in position to prove as general creditors. They disaffirm the sale of the property by the executrix, and allege that, because of its invalidity, their rights in it were not divested. If that be so, they did not become creditors for its value. But we need not pursue that subject, for, as we have said, we think the petition must be construed as seeking to protect their specific interests in the property as they would stand if not affected by the sale of the executrix.

We are of opinion, therefore, that the petition was properly rejected, for the reasons that the controversy evidently proposed by it was one of which the District Court could not properly take jurisdiction, and that, upon any construction which might be put upon it, it clearly did not present a case which would entitle the petitioner to the relief prayed, nor to any relief of like character which a bankruptcy court could award.

The order of the District Court must therefore be affirmed.

Note. Judge DAY participated in the decision of this case, although not now a member of the court.