Opinion ID: 340500
Heading Depth: 1
Heading Rank: 1

Heading: The Question of Summary Jurisdiction

Text: 9 Section 2(a)(7) of the Bankruptcy Act, 11 U.S.C. § 11(a)(7), creates original jurisdiction in federal bankruptcy courts to 10 (c)ause the estates of bankrupts to be collected, reduced to money, and distributed, and determine controversies in relation thereto, except as herein otherwise provided . . . . 11 As courts of equity, charged with the duty of assuring the fair and efficient settlement of the estates of bankrupts, bankruptcy courts characteristically and properly exercise their jurisdiction in summary fashion. Katchen v. Landy, 382 U.S. 323, 327, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966). It is elementary bankruptcy law, id., that this summary jurisdiction exists as to all property in the actual or constructive possession of the court on the date the bankruptcy petition is filed: 12 Bankruptcy courts have summary jurisdiction to adjudicate controversies relating to property over which they have actual or constructive possession. And the test of this jurisdiction is not title in but possession by the bankrupt at the time of the filing of the petition in bankruptcy. (Footnote omitted.) 13 Thompson v. Magnolia Petroleum Co., 309 U.S. 478, 481, 60 S.Ct. 628, 630, 84 L.Ed. 876 (1940); accord, Cline v. Kaplan, 323 U.S. 97, 98, 65 S.Ct. 155, 89 L.Ed. 97 (1944); Taubel-Scott-Kixmiller Co., Inc. v. Fox, 264 U.S. 426, 432-33, 44 S.Ct. 396, 68 L.Ed. 770 (1924); In re American National Trust, 426 F.2d 1059, 1065 (7th Cir. 1970); In re Patrick, 194 F.2d 750, 752 (7th Cir. 1952); 2 Collier on Bankruptcy P 23.04(2), at 453 (14th ed. 1975). 14 Appellants Kersten and Harding do not dispute that this is the law; they urge instead that it does not apply here. Their argument is based on the proposition that property which is held by a third party under a bona fide and substantial adverse claim is not subject to summary bankruptcy jurisdiction. In such cases, they insist, the property holder/claimant cannot be denied the right to litigate his claim in a plenary suit brought in a proper court. 1 We do not doubt that appellants have correctly stated a rule of law, see Cline v. Kaplan, supra; Taubel-Scott-Kixmiller Co., Inc. v. Fox, supra; 2 Collier on Bankruptcy, supra, P 23.04(2), at 453-55, 464, but we find it has no application to the facts of this case. 15 The fundamental concept underlying summary jurisdiction is actual or constructive possession of the property in question by the bankruptcy court. Thompson v. Magnolia Petroleum Co., supra; In re American National Trust, supra; 5 J. Moore, Federal Practice P 38.30(3), at 221 (2d ed. 1976). If the court has such possession, it has summary jurisdiction; if, instead, possession of the property is in the hands of a bona fide adverse claimant, 2 no summary jurisdiction exists. 3 As we have noted, the time to judge possession is the time of filing of the bankruptcy petition. In many cases, the statement of these rules and their straightforward application would provide a ready answer to the question of the propriety of summary jurisdiction. The matter is somewhat complicated here by the fact that the property in question on the filing date was a judgment, an intangible, and not readily capable of possession in the ordinary sense. In such cases, the doctrine of constructive possession is applied and suffices to confer summary jurisdiction on the bankruptcy court if the bankrupt was the legal owner of the intangible at the time of filing. As this court stated In re Marsters, 101 F.2d 365, 367 (7th Cir. 1938), cert. denied sub nom. Herman v. Henley, 306 U.S. 663, 59 S.Ct. 788, 83 L.Ed. 1059 (1939): 16 In the case of a tangible there can be a possession in fact as well as in legal theory; but in the case of an intangible, possession is a legal concept and is manifested only through recognition of legal consequences. It may be said that ownership of intangibles is the subject of possession, or that ownership draws to itself a constructive possession, but such statements merely afford a rational basis for the practical rule that the legal consequences of possession of a tangible res are attached to the ownership of an intangible res. One of the legal consequences of a bankrupt's possession of a tangible asset is that his trustee succeeds to the possession, and the bankruptcy court thereby acquiring possession, has summary jurisdiction to adjudicate adverse claims respecting the asset. 17 Accord, In re Rubin, 378 F.2d 104, 109 (3d Cir. 1967); In re Wiltse Brothers Corp., 357 F.2d 190, 193 (6th Cir. 1966); Kohn v. Myers, 266 F.2d 353, 355 (2d Cir. 1959); Benton v. Callaway, 165 F.2d 877, 882 (5th Cir. 1948), aff'd, 336 U.S. 132, 69 S.Ct. 435, 93 L.Ed. 553 (1949); In re Worrall, 79 F.2d 88, 90 (2d Cir. 1935); 2 Collier on Bankruptcy, supra, P 23.05(4), at 489; cf. England v. Nyhan, 141 F.2d 311 (9th Cir. 1944). 18 Appellants urge that Jolin had heavily encumbered his future judgment prior to bankruptcy, and the record and decisions below amply support this assertion. Nonetheless, a bankruptcy trustee succeeds to a bankrupt's title to encumbered property, subject to the encumbrance. In re Chicago, R. I. & P. Ry. Co., 155 F.2d 889, 892 (7th Cir. 1946), rev'd on other grds. sub nom. Fleming v. Traphagen, 329 U.S. 686, 67 S.Ct. 365, 91 L.Ed. 602 (per curiam). Because title creates the constructive possession necessary for jurisdiction, jurisdiction can be defeated only if the encumbrances in question have totally divested the bankrupt of his title. An absolute outright assignment would generally have this effect; conditional or partial assignments would not. Schwartz v. Horowitz, 131 F.2d 506 (2d Cir. 1942); In re Marsters, supra; In re Prince, 89 F.2d 681 (2d Cir. 1937); In re Worrall, supra; Street v. Pacific Indemnity Co., 61 F.2d 106 (9th Cir. 1932), cert. denied, 297 U.S. 718, 56 S.Ct. 595, 80 L.Ed. 1003 (1936); In re Borok, 50 F.2d 75 (2d Cir. 1931); 2 Collier on Bankruptcy, supra, P 23.05(4), at 489-90. 19 Both the bankruptcy court and the district court have concluded that the liens and assignments created by Jolin on his judgment did not divest him of his title thereto, and we can see no reason to disturb their findings. The action was prosecuted throughout in Jolin's name, and the record contains repeated admissions by Harding that Jolin was the real, not just the nominal, party in interest, that Jolin retained the right to continue and control the litigation, and that Jolin was his client all the way through. Moreover, a substantial portion of the encumbrance urged by appellants, the assignment to Thorp, was not an outright assignment made in payment of a specified part or all of Jolin's or Land Investors' debts to Thorp, but was instead merely additional collateral security for payment. An assignment in such circumstances is intrinsically conditional on the debtor's nonpayment of the underlying debt, and does not pass title. Thus this court held In re Muntz TV Inc., 229 F.2d 228 (7th Cir. 1956), that money or property even in the hands of a third party creditor was within the reach of the constructive possession doctrine and supported summary jurisdiction, when that money or property was given to the third party merely as security for debts. The same point was made In re American National Trust, supra, 426 F.2d at 1065, although a different result was reached because the money there involved was contract earnest money, title to which had passed on delivery. Other decisions recognizing the difference, for summary jurisdiction purposes, between outright assignments with rights of title and control and those merely for security purposes include Schwartz v. Horowitz, supra; Street v. Pacific Indemnity Co., supra; and In re Borok, supra. We note also, with reference to appellants' argument that Jolin had divested himself of all interest in the Oster judgment, that in their unauthorized distribution of the judgment proceeds over $4000 was retained for the benefit of the trustees after appellants had satisfied their asserted liens and assignment and the assignment to Thorp. We conclude that the district court did not err in affirming the finding of the bankruptcy court that Jolin retained the title to and possession of his judgment which were necessary to sustain summary jurisdiction. 20 The cases relied upon by appellants do not suggest a different result. In re Chicagoland Ideel Cleaners, Inc., 495 F.2d 1283 (7th Cir. 1974), aff'd sub nom. Phelps v. United States, 421 U.S. 330, 95 S.Ct. 1728, 44 L.Ed.2d 201 (1975), does support the notion that adverse possession sufficient to defeat summary jurisdiction can be found where the property in issue was not actually held by the claimant, but it does so in the unique context of a federal tax lien, fully effected as a levy by notice which, this court held, gave the Government full legal rights in the property levied upon. Id. at 1285. Likewise, the Fifth Circuit's decision In re American Southern Publishing Company, supra, 426 F.2d 160, is not in point. The court there did find a lack of summary jurisdiction where the bankrupt's books in a warehouse had been assigned as collateral for bank loans. But, unlike this case, the bank had full control of the books (the warehouse having been notified), it exercised that control as to the release of books to be shipped to buyers, and it received the payments made on the books shipped. No comparable circumstances exist here. 21 To the degree appellants' argument is that the proceeds of the judgment were tangible property actually possessed by them under an adverse claim and never within the possession of the bankrupt, the trustee, or the bankruptcy court, we totally disagree. At the critical time of bankruptcy filing, Jolin had title to and possession of the judgment which passed to his trustee, and the summary jurisdiction of the bankruptcy court attached. We will not honor appellants' unauthorized attempt to circumvent that jurisdiction by distributing the proceeds at a later date. See Street v. Pacific Indemnity Co., supra, 61 F.2d at 109. 4