Opinion ID: 369237
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Heading: The Chapter XI Injunction

Text: 6 A bankruptcy court acting under Chapter XI may enjoin or stay until final decree any act or the commencement or continuation of any proceeding to enforce any lien upon the property of a debtor. 11 U.S.C. § 714. The purpose of this stay is to prevent interference with, or diminution of, the assets of the debtor, See, e. g., Teledyne Industries, Inc. v. Eon Corp., S.D.N.Y.1974, 373 F.Supp. 191, 203, and to protect the bankruptcy court's exclusive jurisdiction over the debtor and his property, wherever located. 11 U.S.C. § 711. These courts have similar power in Chapter X (reorganization) proceedings under 11 U.S.C. §§ 513, 516(4) and 548, and in bankruptcy under 11 U.S.C. § 11(a) (15). Thus, whether the petition is for bankruptcy, reorganization or an arrangement, the bankruptcy court has the power to enjoin admiralty proceedings in rem brought against a vessel or cargo that is the property of the debtor if the bankruptcy court has previously acquired jurisdiction over the property. See, e. g., In re Meredosia Harbor & Fleeting Service, Inc., 7 Cir. 1976, 545 F.2d 583, 586-87, Cert. denied, 1977, 430 U.S. 967, 97 S.Ct. 1649, 52 L.Ed.2d 359; Texas Co. v. Hauptman, 9 Cir. 1937, 91 F.2d 449, 451; West Kentucky Coal Co. v. Dillman, 8 Cir. 1926, 15 F.2d 25, 26; Defense Plant Corp. v. United States Barge Lines, Inc., S.D.N.Y.1944, 57 F.Supp. 14, 15, Aff'd, 2 Cir., 145 F.2d 766. 7 When the admiralty proceeding precedes the petition in bankruptcy court, the power of the bankruptcy court to enjoin further proceedings depends on the type of insolvency proceeding that is, whether the action is in bankruptcy as distinguished from a reorganization (Chapter X) or an arrangement (Chapter XI) and the nature of the property held by the admiralty court. Here, where the Massachusetts proceeding is pursuant to Chapter XI, and the res is a surety bond rather than property of the debtor, we conclude that the admiralty court properly proceeded with the in rem claim. 8 When an in rem action is instituted, the property comes into the jurisdiction of the admiralty court and neither the later filing of a bankruptcy proceeding nor the issuance of a stay by the bankruptcy court divests the maritime court of jurisdiction. See, e. g., The Philomena, D.Mass.1911, 200 F. 859. 2 This conclusion is a practical means of resolving the conflict between courts of concurrent jurisdiction by allowing the court that first secures custody of the property to proceed with the action without interference. See Moran v. Sturges, 1894, 154 U.S. 256, 284, 14 S.Ct. 1019, 1028, 38 L.Ed. 981, 990; Bryan v. Speakman, 5 Cir. 1931, 53 F.2d 463, 465, Cert. denied, 1932, 285 U.S. 539, 52 S.Ct. 312, 76 L.Ed. 932; 1 Collier on Bankruptcy P 2.10 at 180 (14th ed. 1974). Cf. Parks v. B. F. Leaman and Sons, Inc., 5 Cir. 1960, 279 F.2d 529, 533 (appeal held moot). No competing need arises by virtue of the later insolvency proceeding, the purpose of which is solely to liquidate the debtor's estate and distribute its assets among creditors. 9 However, in reorganization and arrangement proceedings the court seeks to achieve the continuation of the debtor's enterprise, and it is essential to marshal all assets of that business necessary to its rehabilitation whether or not those assets are subject to liens. See generally G. Gilmore & C. Black, The Law of Admiralty 807-08 (2d ed. 1975); Landers, The Shipowner Becomes a Bankrupt, 39 U.Chi.L.Rev. 490, 509 (1972). Therefore, the powers of the court administering the debtor's estate are more extensive. Thus, in In re J. S. Gissel & Co., S.D.Tex.1965, 238 F.Supp. 130, a stay issued in a Chapter X proceeding was held applicable to a suit in rem and in personam brought earlier to foreclose a preferred mortgage on a vessel. 3 10 Were there property of the debtor involved, then, the stay would have been proper, and the Florida court's route would have been barred. Here, however, that court did not act with respect to property of (the) debtor or with respect to any asset needed for its rehabilitation. This action therefore neither falls within the literal language of the stay issued by the Massachusetts court, nor do the policies behind the broad injunctive powers of a Chapter XI bankruptcy court motivate us to extend that stay to embrace it. 11 The res at issue is the bond posted by the surety, Peerless; the cargo of oil is long gone and even its proceeds are presumably under reorganization administration. The admiralty court explicitly limited the action to one determining the liability of the surety on the bond. Under these circumstances, there is no need to preserve the property of the debtor for rehabilitative purposes and, therefore, no justification for a stay. See, in accord, Kapczynski v. T. M. T. Trailer Ferry, Inc., E.D.Pa.1959, 176 F.Supp. 190, 192. Cf. Peter Pan Seafoods, Inc. v. M/V Polar Viking, W.D.Wash.1977, 446 F.Supp. 1283, 1285 (res was property of third party rather than of Chapter XI debtor). 12 Recent changes in the Bankruptcy Rules setting forth the proper procedure for challenging the operation of an ordered stay in a Chapter XI proceeding do not undermine this rationale: the res in question is not the property of the estate nor was it ever the property of the bankrupt. Whatever the procedure for challenging a stay, there was no property that the stay could operate to protect. 4 13 Good Hope invites us to speculate that the arrangement between Good Hope and Peerless may have implicated other assets of the debtor in which the bankruptcy court might have an interest, and, therefore, that the outcome of the admiralty proceeding might have some potential impact on the Chapter XI proceeding. No evidence of such wave-wash has been presented. Moreover, should Peerless make a claim against assets now administered by the bankruptcy court, that court has the power adequately to safeguard the debtor's estate. 14 We therefore conclude that the district court properly proceeded with the in rem action against the bond posted by Good Hope and Peerless despite the pending Chapter XI proceeding and injunction issued by the district court in Massachusetts.