16 F. Cas. 769 | U.S. Circuit Court for the District of Minnesota | 1871
The adjudication of bankruptcy was made by the United States district court for the district of Kansas, where the bankrupt resided. The property mortgaged to the defendant is situate in Indiana; and the defendant himself is a citizen of and resides in Minnesota. He has never proved, or offered to prove, his debt in bankruptcy; but after the proceedings in bankruptcy were instituted, and the assignees appointed, and while those proceedings were pending in the bankruptcy court in Kansas, the defendant commenced and is prosecuting in one of the state courts of Indiana a bill to foreclose his mortgage, making the assignees defendants thereto, and constructively serving them by notice of publication, pursuant to the laws of the state, and practice of the state tribunals. The present bill is filed by the assignees, not in the circuit court of the United States for the district of Kansas, but in the circuit court for the district of Minnesota, and the suit was thus commenced because service of process could not be :had upon the defendant in the former district. A similar suit was brought by the assignees in the United States circuit court for Indiana; but because the defendant could not be there served it was withdrawn.
The bill charges that the mortgage made by the bankrupt to the defendant, a few days before the former suspended payment, and which the latter is seeking to have foreclosed in the state court in Indiana, is both fraudulent in fact and under the bankrupt act; and it seeks a decree to have it so adjudged, and meanwhile asks for a writ of
On the other hand, the defendant’s counsel argue that a mortgage creditor is not bound to. nor can he be compelled to prove up his claim in the bankrupt court; that the only effect of not proving it up is that he waives or loses all right to share in dividends in respect to any balance of his debt which the mortgaged estate may prove insufficient to pay; that such a creditor, notwithstanding the mortgagor shall have been adjudged a bankrupt, may rightfully file his bill in any state court, having jurisdiction, to foreclose his mortgage; that the defendant did so file his bill in this instance, and that the assignees, having appeared thereto and answered, setting up as a defence the same matters which aré made the basis of the present bill, the result is that the state court in Indiana first acquired jurisdiction of the matter in controversy, to-wit, the validity of the mortgage; and if so, then on acknowledged principles of lav-, no other court can arrest •or interfere with the exercise of such jurisdiction.
Section 1 of the bankrupt act constitutes the district courts of the United States courts of bankruptcy, and confers and defines their jurisdiction: “That the several •district courts of the United States be, and they are hereby, constituted courts of bankruptcy, and they shall have original jurisdiction in their respective districts, in all matters and proceedings in bankruptcy; and they are hereby authorized to hear and- adjudicate upon the same, according to the provisions of this act, * * * And the jurisdiction hereby conferred shall extend to all cases and controversies arising between the bankrupt and any creditor or creditors who shall claim any debt or demand under the bankruptcy; to the collection of the assets of the bankrupt; to the ascertainment and liquidation of the liens and other specific claims thereon; to the adjustment of the various priorities and conflicting interests of all parlies; and to the marshaling and disposition of the different funds and assets so as to secure the rights of all parties and due distribution of the assets among all the creditors; and to all acts, matters, and things to be done under and in-virtue of the bankruptcy, until the final distribution and settlement of the estate of the bankrupt, and the close of the proceedings in bankruptcy,” etc.
The language of this section is taken in part from the sixth section of the bankrupt act of 1841, and the part above, placed in italics, from Judge Story’s opinion in Ex parte Christy, 3 How. [44 U. S.] 221, expounding the policy and purpose of that act I shall again refer to this opinion, after calling attention to the provisions contained in the second section of the bankrupt act of 18G7, respecting the jurisdiction and powers of the circuit courts of the United States.
This section, after giving “the several circuit courts of the United States within and for the districts where the proceedings in bankruptcy shall be pending, a general superintendence and jurisdiction,” revisory of all cases and questions in the district court arising under the act, adds that, “said circuit courts shall also have concurrent jurisdiction with the district courts of the same district of all suits at law or in equity which may or shall be brought by the assignee in bankruptcy against any person claiming an adverse interest, or by such person against the assignee, touching any property or rights of property of said bankrupt transferable to, or vested in, such assignee.”
It is not my purpose to recite in detail the various provisions of the bankrupt act; but a review of them would clearly show, as I think, that congress in passing the act, in pursuance of its constitutional power, not only intended to make it uniform, but operative throughout the United States. It does not stop at state lines, and the bankruptey tribunal it establishes not only acts independently of state tribunals, but it would be destructive of the system itself to permit suitors by resorting to state tribunals to withdraw, against the will of the bankruptcy court, property or cases which belong to its jurisdiction.
Property, wherever situate, which is not exempted from the operation of the act, passes to the assignee, who is an officer of the bankrupt court, and thus is in the custody or under the control of that court. This is equally true of property under mortgage as of that which is unincumbered. See sections 14, 20, 22, 25. Debts, whenever payable, and creditors wherever residing in the United States, are within the operation of the act. The bankrupt court is invested with this jurisdiction over the bankrupt and his estate, and over creditors who are brought involuntarily into it, in order to administer the estate for the benefit of all the creditors accord'ng to their respective rights. The* priorities of bona fide mortgagees and lien holders are protected by the bankrupt act, and will
Thus, it is plain beyond controversy, that tbe property of tbe bankrupt, though situate, as in this case, in another state, and although mortgaged by the bankrupt prior to the institution of proceedings in bankruptcy against him, is within the jurisdiction and under the control of the bankrupt court in Kansas. I think that to be an erroneous construction of the bankrupt act, which holds under the somewhat inapt phraseology of section 20, that mortgage .creditors have absolutely the election to stand outside of the operation of the bankrupt act. Their debts are required to be scheduled, and the mortgaged estate to be inventoried by the bankrupt (section 11); the title thereto passes to the assignee, subject to the mortgage, and the assignee may sell, sue for, and manage the property (section 14); the debt of the mortgagee is provable, and such proof does not waive the lien (sections 19, 20, 22); the assignee may redeem the mortgage debt, or sell the equity of redemption vested in him (Id.); and it follows from these various provisions that the assignee has a right to call the mortgage creditor into the bankruptcy court, or into the proper circuit court, and test the validity of his mortgage or the amount due thereon. Ex parte Christy, 3 How. [44 U. S.] 221, and cases cited, infra.
It is not necessary in this case to say that the mortgage creditor is bound at all events to go into the bankrupt court and prove his debt, or ask to foreclose, or to have the property sold and his debt paid from the proceeds. See In re Davis [Case No. 3,618]; Foster v. Ames [Id. 4,965].
It is clear that the assignee has at all events the right to bring the mortgage creditor into the court of bankruptcy (unless he prefers to file a bill in equity in the proper circuit court), and contest the amount of his debt and the validity of his mortgage, and to have the court make such equitable orders as to the disposition of the property as seem best
The powers to “ascertain and liquidate liens” on the property of the bankrupt, “to adjust the various priorities and conflicting interests of all parties, and to marshal and dispose of the different funds and assets,” and the other express powers of disposition and sale of property, confer upon the bankrupt court the right of control over mortgaged estates and the mortgagees, and by implication give the right to prevent its control from being taken away by the resort on the part of the creditor to other tribunals against the will of the bankrupt court.
This view of the law is sustained by the opinion of Mr. Justice Nelson, in the case of the Kerosene Oil Co. [Cases Nos. 7,725 and 7,726]. In that case the oil company were adjudged bankrupts on the 16th day of June, 1868. The New York Guaranty and Indemnity Company held a mortgage on the realty of the oil company, and on the 10th day of October, 1868 (after the adjudication in bankruptcy), commenced a foreclosure suit in the state court. A bill was filed by the assignee in the bankruptcy court alleging the invalidity of the mortgage, and praying that it be declared void, the property sold, and the proceeds brought into court and disposed of, according to the rights of the several parties, and for an injunction enjoining the Guaranty and Indemnity Company from taking any further proceedings in the foreclosure suit. The injunction was granted by the district court, and on review this action was sustained by Mr. Justice Nelson, who .directly affirmed the jurisdiction of the district court to entertain such a bill and grant such relief, and asserted a concurrent jurisdiction in the circuit court of the same district.
The fight in a proper case to enjoin proceedings in state courts which contravene the bankrupt act, is declared by the circuit' court of the United States, in the case of Irving v. Hughes [Case No. 7,076], heard be fore Grier and Cadwallader, JJ. The court says: “The state court cannot be enjoined, but the litigants in it may be restrained from doing what would frustrate, or directly impede, the jurisdiction expressly conferred by the bankrupt act.” And it is the opinion of Chase, C. J., that after the bankruptcy, liens must be enforced under the superintendence of the national tribunals. In re Wynne [Id. 18,117]. A similar view of the bankrupt act of 1841 [5 Stut. 440] was taken by Mr. Justice Story, in Ex parte Christy, 3 How. [44 U. S.] 221. “Its success was dependent upon the national machinery being made adequate to all the exigencies of the act. Prompt and ready action without heavy charges and expenses, could be safely relied on where the jurisdiction was confided to a single court in the collection of assets, in the ascertainment and liquidation of liens, and other specific claims thereon; in adjusting the various priorities and conflicting interests; in marshaling the different funds and assets; in directing sales at such time and in such manner as should best subserve the interests of all concerned; in preventing, by injunction, or otherwise, any particular creditor from obtaining an unjust and inequitable preference over the general creditors by an improper use of his rights and remedies in the state tribunals, and finally in making a due distribution of the assets, and bringing to a close within a
This language was quoted and approved by Justice Swayne, as applicable to the present bankrupt act (Bill v. Beckwith [Case No. 1,406]), and by Durell, J. (In re Barrow [Id. 1,057]), If the present bill had been filed in the circuit court for the district of Kansas, and service could have been had on the defendant in that district, I should for the reasons above stated, feel quite clear that 1 would have the power to award the writ of injunction against the defendant, and that under the circumstances it would be my duty to do so. But this bill is filed in the circuit court for the Minnesota district, and was s<? filed because the defendant resided in that district, and could be served with process therein, and it proceeds upon the assumption that the federal courts in Kansas by reason of the inability to serve the defendant therein, would be unable to take jurisdiction of the suit, had it been there instituted.
I am inclined to the opinion that the circuit court for the Minnesota district has no jurisdiction over this controversy conferred upon it by the bankrupt act; and that whatever powers it has and can exercise in the present case will be in virtue of its ordinary equity jurisdiction.
By recurring to the first section of the bankrupt act, it will be seen that the “several district courts are constituted courts of bankruptcy with original jurisdiction in their respective districts in all matters and proceedings in bankruptcy.” The powers which this section confers upon district courts are limited to cases of bankruptcy pending therein, as was very properly held by Mr. District Judge Blatchford in Re Richardson [Case No. 11,774]. In that case the petitioners had been adjudgéd bankrupts in Louisiana, and applied to the United States district court for the Southern district of New York for an injunction to restrain certain creditors from prosecuting a suit against them in the state courts of New York. It was denied for want of jurisdiction, the judge alluding to, but expressing no opinion upon, the question, whether the circuit court for the New York district, under its general equity powers, or the bankrupt court, or circuit court of Louisiana could, without further legislation, give relief. The provision of the bankrupt act as to the jurisdiction of the circuit courts is that, “the several circuit courts of the United States within and for the districts where the proceedings in bankruptcy shall be pending, shall have concurrent jurisdiction with the district courts of the same district of all suits,” etc. Under this provision the circuit court of Minnesota has no bankruptcy jurisdiction in the present case, since the bankruptcy proceedings are pending in the district of Kansas. It can only exercise its ordinary equity powers, and I think it cannot be claimed, aside from its jurisdiction in bankruptcy, that a court of the United States would be warranted in enjoining a foreclosure proceeding in the state court. A state court of equity in Minnesota would scarcely look with favor on an application, because the defendant resided there, to stay him from prosecuting a foreclosure suit in another state, but would leave the parties in the court which had, or was asserting, jurisdiction over them. If the bankrupt act confers no bankrupt powers with respect to the ease on the circuit court for the district of Minnesota, it seems to me that it can only award an injunction on the same principle that would apply were the application made to a chancellor in the state tribunals. This point as to the jurisdiction of the Minnesota circuit court has not been prosecuted by counsel, and I therefore express only my first impressions concerning it.
Since I refuse for the present, the injunction on this ground alone, I will allow the counsel to be heard upon it if they think my impressions erroneous. In this view of the case, it is unnecessary to give any decided opinion respecting the question, whether on a similar bilí filed in the circuit court for the district of Kansas, service can right-fullj^ be made on the defendant without the limits of the district. Under the judiciary act which limits the powers of the federal courts to their respective districts, service within the district, or a voluntary appearance, is necessary to jurisdiction. If this limitation obtains in all suits and proceedings arising under the bankrupt act, it certainly will fail in many instances without further legislation, to meet the exigencies of particular cases, or to enable the courts to carry into effect the provisions of the statute. The power to bring creditors outside of the district within the operation of the bankruptcy court is often necessary to the exercise of the jurisdiction and powers conferred by the act; but at present, I refrain from giving any opinion upon the right to serve bankruptcy process, or process in bankruptcy suits, beyond the limits of the district in which the bankruptcy proceeding is pending.
The question may be presented on an application by the assignees to the bankrupt court, to sell the mortgaged estate free of incum-brance, substituting the proceeds in the place of the property sold. See Bankrupt Act, § 25; Foster v. Ames [Case No. 4,965]; Bill v. Beckwith [supra]; In re Barrow [supra]. If this section applies to such a case as the present, the provision is that, “The court may, upon the petition of the assignee after such notice to the claimant, his agent, or attorney, as the court shall deem reasonable, order the property to be sold under the direction of the assignee, who shall hold the funds received in the place of the estate disposed of;” not, in terms, at least, limiting the notice to claimants residing in this district. Or the question may be presented by a bill like the present, filed in the circuit court for the district of Kansas, to impeach the mortgage, and asking for an injunction against further proceeding
