Opinion ID: 1550675
Heading Depth: 1
Heading Rank: 3

Heading: State Proceedings as a Bar

Text: Appellants assert: Eighth Proposition: There is another action pending in the state courts of California upon the identical cause of action and demanding the same relief, and that that action was commenced and pending under state law prior to the passing of Chapter X [§§ 81-84] of the Bankruptcy Act upon which this proceeding was prosecuted. In the appellants' brief there is a concise analysis of the California Composition Act as codified in Cal.Stat.1937, Chap. 24, p. 92, titled Irrigation District Refinancing Act. We quote from the brief:    that act provides that any irrigation district being unable to pay its debts as they mature, such debts may be liquidated, refinanced, or readjusted as therein provided. Such a proceeding is initiated by the Board of Directors of the district who shall adopt a plan. The plan must be concurred in by two-thirds in principal amount of the holders of each class of security affected thereby. The plan shall be presented to the California Districts Securities Commission and if found to be fair and equitable to the creditors the Commission shall approve the same and the board of directors is then authorized to file in the Superior Court in the county in which the district or the major part thereof is located, a verified petition stating that the district is unable to meet such obligations as they mature; that it desires to effect the plan adopted and that it has been accepted by a sufficient number of creditors and the district desires to avail itself of the act. The Act provides that after the petition is filed the plan shall temporarily be in effect and that the filing of the petition shall automatically enjoin and stay, pending final determination of the proceedings as therein set forth, the commencement or continuance of proceedings or suits against the district or any officer thereof and shall enjoin and stay the enforcement of any lien or the levy of assessments except as is consistent with and in furtherance of the plan and that the Court in which the petition is filed shall have exclusive jurisdiction    with respect to all suits, actions and proceedings against the district on account of the indebtedness affected. It is then provided for notice of hearing and service upon known holders of bonds affected and at any time prior to the hearing any creditor may answer; changes or modifications may be made and then the court if it finds the plan to be fair and equitable and that it complies with the provisions of the act and has been accepted in writing by the required number of creditors and the offer and acceptance are in good faith and that the district is authorized to take the necessary action to carry out the plan, shall make an interlocutory judgment approving the plan. This decree does not enforce the plan as against non-consenting creditors. A separate hearing follows in which the rights of non-consenting creditors are determined through the condemnation of the bonds held by the objecting bondholders, etc. under eminent domain. The California Act was passed to become effective in March, 1937. The Federal Bankruptcy Act was amended to include the provision under which the present proceedings were brought in August, 1937. However, at the time of the amendment referred to, the state court proceedings under the California Act, which are set up in bar to the proceedings before us, were pending. The case was pending in the state court at the time the bankruptcy amendment had been held constitutional in the Bekins case (April 7, 1938). On March 10, 1938, the Superior Court in which the state composition proceedings were pending, reached a point of decision in the case, and the court was waiting the filing of proposed findings of fact and conclusions of law by the District, in accordance with the California Code of Civil Procedure [C.C.P. § 632]. The findings of fact and conclusions of law have never been submitted to the court for approval, and no findings of fact or conclusions of law and no judgment has been filed or entered in the state proceedings. The question then is whether such pendency of an action in the state court on substantially the same matter, is a bar to the federal action. If the state statute and action thereunder are superseded by the federal action, then, of course, there is no bar to the court's proceeding with the federal action. In Re Watts and Sachs, 190 U.S. 1, 23 S.Ct. 718, 724, 47 L.Ed. 933, there was a state proceeding under Section 1245 of the Revised Statutes of Indiana, Thornton's Rev.Stat. of 1897, providing that a receiver might be appointed, When a corporation has been dissolved, or is insolvent, or is in imminent danger of insolvency, or has forfeited its corporate rights. The Court appointed a receiver to complete old contracts but enter into no new ones. Certain creditors petitioned under the Bankruptcy Act of the United States for proper proceedings in the Federal Court and a receiver was appointed by the judge of that court and was given directions to take possession of the properties involved. He did so. Upon appeal, the court said at page 27 of 190 U.S., at page 724 of 23 S.Ct., 47 L.Ed. 933:    And the operation of the bankruptcy laws of the United States cannot be defeated by insolvent commercial corporations applying to be wound up under state statutes. The bankruptcy law is paramount, and the jurisdiction of the Federal courts in bankruptcy, when properly invoked, in the administration of the affairs of insolvent persons and corporations, is essentially exclusive. Necessarily, when like proceedings in the state courts are determined by the commencement of proceedings in bankruptcy, care has to be taken to avoid collision in respect of property in possession of the state courts. Such cases are not cases of adverse possession, or of possession in enforcement of pre-existing liens, or in aid of the bankruptcy proceedings. The general rule as between courts of concurrent jurisdiction is that property already in possession of the receiver of one court cannot rightfully be taken from him without the court's consent, by the receiver of another court appointed in a subsequent suit; but that rule can have only a qualified application where winding-up proceedings are superseded by those in bankruptcy as to which the jurisdiction is not concurrent. See also Taylor v. Sternberg, Trustee in Bankruptcy, 293 U.S. 470, 55 S.Ct. 260, 79 L.Ed. 599. It is argued by appellants that the action having been commenced in the state court is not superseded by the Bankruptcy Act, providing composition as is sought in this case. They cite certain authorities as sustaining their contention, among them the following: Proceedings under State insolvency laws pending at the time of the passage of a bankrupt act are not affected by the latter act. Note in 45 L. R.A. at page 187. However, the L.R.A. note cited by appellants referred to the original Bankruptcy Act, which contained a provision expressly saving certain state proceedings. This saving clause has since been stricken out, and the law as it now stands is in conformity with the view expressed by the opinion of In re Watts, supra. See 8 C.J.S. Bankruptcy, § 12, p. 421, wherein it is stated: The provisions of the federal Bankruptcy Act are superior to all state laws upon the subject, and suspend them in so far as they conflict therewith and relate to the same subject matter and affect the same persons. [Citing many cases.] In Pitcher v. Standish, 90 Conn. 601, 98 A. 93, L.R.A.1917A, 105, it was held that State laws are in conflict with federal, so as to be suspended by the latter when the two cover the same field or the subject matter of the state law is within the purview of the federal legislation. And in the case of Leonard Levin Co. v. Star Jewelry Co., 54 R.I. 465, 175 A. 651, it was held that insolvency law of a state is superseded by Bankruptcy Act, at least in so far as the law relates to the distribution of assets for payment of certain debts. The clarity of these cases and the extent of the uncontradicted authority compel the ruling that the state act was superseded by the federal Bankruptcy Act.