Court Opinion

ID: 9443458
Source: CourtListenerOpinion
Date Created: 2023-08-03 19:20:59.638781+00
Date Added: 2024-06-11T17:29:29.667081
License: Public Domain

SOPER, Circuit Judge
(dissenting).
This appeal is taken from an order of the District Court of Maryland whereby the First National Bank of Houston, Texas, its officers' and attorneys, were enjoined from proceeding in an action brought by the Bank in the District Court -for the Southern District of Texas against Charles M. Lake, who is the trustee appointed by the District Court of Maryland in a proceeding under Ch. X of the Bankruptcy Act for the reorganization of Petrol Terminal Corporation and several of its subsidiaries,' including Petrol California 'Marketers, Inc. For some time past the Bank had been a-creditor of the debtor corporation in a large sum upon which payments and transfers of securities and contracts as collateral have been made, which the trustee claims were preferential since they were accepted by the Bank within four months prior to the bankruptcy proceeding with reason to believe that the debtor was insolvent. The purpose of the suit brought by the Bank in Texas is to remove the cloud thus cast upon its right to retain the moneys paid on account of the debt and the property pledged as collateral. But the Bank does not ask for the foreclosure of its lien on the collateral. The question involved in the present appeal is whether the District Court of Maryland 'had jurisdiction to enjoin the prosecution of the Texas suit as an unwarranted interference with the reorganization of the debtor corporations. The court answers this question in the affirmative on the ground that in a proceeding under Ch. X, only the reorganization court has the power to determine the title of a creditor to collateral held as security for a debt of the bankrupt; and hence the decision necessarily involves the important inquiry as to the extent of the jurisdiction of the reorganization court to determine summarily adverse claims against the property of the bankrupt.
Ori May 29, 1951 an involuntary petition in bankruptcy was filed in the District Court of Maryland against Terminal and a receiver was appointed. On June 30, 1951 a petition for reorganization of the debtor under Ch. X of the Bankruptcy Act was filed and approved. Subsequently similar petitions for the reorganization of the subsidiary corporations were filed and approved; and on July 3, 1951 Charles M. Lake was appointed and qualified as trustee.
Prior to these proceedings Terminal, through its subsidiary Marketers, became indebted to the Bank for loans in the aggregate sum of $1,100,000. This sum was reduced to approximately $839,000 by payments on or about February 8, 1941; and later the debt was further reduced by payments amounting to $395,000 between February 26, 1951 and April 12, 1951 which the trustee claims were made with knowledge by the Bank of the debtor’s insolvency.
On April 17, 1951 Terminal and Marketers, to secure the balance of $445,000 owing the Bank, pledged shares of common stock in various corporations worth between $100,000 and $200,000. On May 29, 1951 Marketers assigned to the Bank *534as additional collateral certain contracts-which entitled Marketers to receive between $200,000 and $250,000 over a period of years. The Bank held physical possession of this .collateral at the time of the filing and approval of the reorganization petitions. .
The Bank did not file a claim in the reorganization proceeding, although it was notified thereof and the time for filing has apparently passed. The trustee, however, instituted ancillary proceedings in the District Court for the Southern District of Texas under Section 21, sub. a of the Bankruptcy Act, 11 U.S.C.A. § 44, sub a, and examined officers of the Bank and other witnesses in regard to the aforementioned transactions with Terminal. On February 13, 1952 the trustee reported to the reorganization court that evidence developed in the Texas proceedings indicated that the payments aggregating $395,000-and the transfers of the stocks and contracts to the Bank, made within four months prior to the reorganization proceedings, constituted voidable preferences recoverable by the trustee.
On March 26, 1952 the Bank filed the Texas suit against the trustee under 28 U.S.C.A. § 1655, which authorizes service upon a non-resident defendant in an action in a District Court to enforce a lien upon or remove a cloud upon the title to property within the District; and in case the defendant does not appear, restricts the adjudication to the property subject to the action. Without appearing in the Texas court, the trustee brought the instant suit and the District Court below issued the injunction which was served upon the Bank and its agents in Texas. They appeared specially in answer to the- action and moved the court to dissolve the injunction on the ground that the court was without jurisdiction; but the court overruled the motion. In the order overruling the motion, from which this appeal is taken, the court stated that the trustee had not made any claim for relief other than the claim for the injunction.
It will have been observed that in both the Texas and Maryland proceedings, the moving party definitely restricts the relief which it seeks. In Texas the Bank goes to the merits of the controversy by asking a decision upon the validity of the pledge of collateral and its right to retain the moneys paid upon the debt; but it does not seek to foreclose its lien by disposing of the collateral. The Bank has. -carefully refrained from filing its claim in the reorganization proceeding and thus submitting to the jurisdiction of- the Maryland court. As an adverse holder o-f property of- the bankrupt it stands upon its right to. be sued in a plenary action in Texas; but at the same time it recognizes that the-rights of secured as well as unsecured creditors are subject to adjustment under the reorganization statute, and it therefore declares its purpose to -hold the property in its hands subject to the plan of reorganization to be formed in the Maryland proceeding. The effect upon the reorganization proceeding of a decision in t-he Texas case would thus be limited to a determination of the rights of the parties in the funds and the collateral; and it would seem that a decision on this point must necessarily be made either in Texas or in Maryland before the reorganization can be consummated.
The trustee on his part would prefer that the controversy be determined in the District Court of Maryland, but he recognizes, that the Bank is an adverse holder in possession of property claimed by the bankrupt, and he concedes that if he decides-to sue the Bank to recover the alleged preferential payments, he must bring a plenary suit against the Bank in Texas. He claims that the reorganization court has broad powers and exclusive jurisdiction over all property of the bankrupt wherever situated, including in this case the collateral in the possession of the Bank; and he contends. that he and not the Bank should be allowed to decide at what stage in the proceedings claims against the debtor’s property should be litigated, but does not contend that the reorganization court has jurisdiction in a summary proceeding to determine the Bank’s rights in the collateral without its consent, and he has eliminated from the instant casé any claim for relief in this respect.
*535Substantial support may be found for the cautious attitude of the parties in Ch. X of the Bankruptcy statute and in the decisions of the courts in this field of the law. Reorganization under Ch. X does not contemplate liquidation of the assets of the bankrupt’s estate but an adjustment or reduction of the rights of creditors, secured and unsecured, under a plan which will enable the bankrupt to continue its business activities; and the bankruptcy court is given important powers to this end. Thus in Warder v. Brady, 4 Cir., 115 F.2d 89, 95, we said:
“These cases related to ordinary bankruptcy procedure, and are not conclusive here. The bankruptcy court in reorganization proceedings under § 77B, 11 U.S.C.A. § 207, had, and under Ch. X of the 1938 Act now has a wider control, that comprehends not only property of the debtor in his actual or constructive possession, but also property of the debtor in the hands of lien holders. The formulation of a plan of reorganization contemplates a readjustment of secured as well as unsecured debts, and so the summary power of the court extends to all of the debtor’s property that can be affected by a plan, whether or not the property is in his possession.”
The power of the courts in reorganization proceedings is derived from and implemented by a number of statutory provisions. Thus § 102 of the Act, 11 U.S.C.A. § 502, eliminates the limitation upon the jurisdiction of the court in ordinary bankruptcy proceedings imposed by § 23, sub. b of the Bankruptcy Act, 11 U.S.C.A. § 46, sub. b, which restricts suits by the trustee to suits which might have been brought by the bankrupt if bankruptcy had .not been instituted; Section 2(15) gives bankruptcy courts the power to make such orders as may be necessary for the enforeement of the provisions of the Act; Section 111 gives the reorganization court exclusive jurisdiction of the debtor, and its property wherever located; Section 115 gives the court upon the approval of the petition for reorganization the powers which a court of the United States would have if it had appointed a receiver in equity on the ground of insolvency. Sections 256 and 257 authorize the filing of a petition for reorganization notwithstanding a prior mortgage foreclosure or equity proceeding in a court of the United States and the appointment of a receiver therein, and vest the trustee with the rights of the prior receiver in the property of the bankrupt. Section 148 provides that until otherwise ordered by the judge an order approving a petition for reorganization shall operate as a stay of any action or other proceeding to enforce a lien against the debtor’s property; Section 116(4) empowers the judge to enjoin or stay until final decree the commencement or continuation of a suit against the debtor or its trustee, or any act or proceeding to enforce a lien on the property of the debtor. In addition Sections 196 and 197 empower the court to fix a time within which proofs of claims of creditors may be filed and to determine summarily the objections of any party in interest to the allowance of claims; also empower the court to divide creditors into classes according to the nature of their claims'; and to determine summarily the value of the security and classify as unsecured the amount in excess of such value. Sections 216 to 228, relating to the plan of reorganization, give the court broad powers to' deal with the rights of creditors and to alter and modify the rights of secured or unsecured creditors and to deal with all or any part of the property of the debtor. Section 216(10) provides for the modification or cancellation of liens and the sale of property free from liens. Section 224 (1) makes the plan upon confirmation binding upon all creditors whether or not they have accepted it or have filed proofs of their claims and whether or not these claims have been scheduled or allowed. Sections 226 and 228 provide that the property dealt with by the plan, when transferred in accordance therewith, shall be free and clear of all claims of creditors and that the final decree shall discharge the debtor from all debts and liabilities except as provided in the plan.
In reliance upon these provisions, it has been held that the reorganization court *536may enjoin the foreclosure of a lien upon the property of the bankrupt in the possession of a creditor or third party. Continental Ill. Nat’l Bank & Trust Co. v. Chicago, R. I. & P. Ry. Co., 294 U.S. 648, 55 S.Ct. 595, 79 L.Ed. 1110; In re Prudence Bonds Corp., 2 Cir., 77 F.2d 328; In re International Power Securities Corp., 3 Cir., 170 F.2d 399.
The reorganization court also has power, in a summary proceeding, to determine the validity of an adverse claim to property of the bankrupt, such as a creditor’s lien for debt, provided the property is in the actual or constructive possession of the court. In Thompson, Trustee, v. Magnolia Petroleum Co., 309 U.S. 478, 481, 60 S.Ct. 628, 630, 84 L.Ed. 876, the court said:
“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. Here, the trustee ■ succeeded to the physical possession, custody and control of the right of way lands which the railroad had enjoyed at the time of bankruptcy.”
But even in this situation, the court held that since a question of state law concerning the title to rights in certain lands was involved, the case should be submitted to the state courts by the trustee, the status quo of the property being maintained in the meantime.
It is, however, well established that the bankruptcy court does not have summary jurisdiction to determine the merits of an adverse claim to property of the debtor in the claimant’s possession without the claimant’s consent. This has long been the rule in ordinary bankruptcy. See Cline v. Kaplan, 323 U.S. 97, 99, 65 S.Ct. 155, 156, 89 L.Ed. 97, where the court said:
“Once it is established that the claim is not colorable nor frivolous, the ¡claimant has the right to have the merits of his claim passed on in a plenary suit and not summarily. Of such a claim the bankruptcy court cannot retain further jurisdiction unless the claimant consents to its adjudication in the bankruptcy- court. MacDonald v. Plymouth County Trust Co., 286 U.S. 263, 52 S.Ct. 505, 76 L.Ed. 1093.”
This rule has been applied not only in ordinary bankruptcy but also in reorganization proceedings under Section 77 or 77B. See Thompson v. Terminal Shares, Inc., 8 Cir., 104 F.2d 1, 9; (Railroad Reorganization under § 77); In re Standard Gas & Electric Co., 3 Cir., 119 F.2d 658, 661; (§ 77B) ; In re Mt. Forest Fur Farms of America, Inc., 6 Cir., 122 F.2d 232; (§ 77B).
In Thompson v. Terminal Shares, Inc., supra, the court said, 104 F.2d at page 9:
“To sustain the lower court’s jurisdiction of this suit would do violence to the general policy of Congress that persons shall not be subjected to civil suits exc.ept in the districts of which they are inhabitants. (Citations omitted.) The language used by Congress in Section 77, in conferring jurisdiction upon the courts of bankruptcy, does not, in our opinion, indicate any intention to abandon that ¡policy with respect to such suits as this. (Citations omitted.) We think that the jurisdiction- conferred by Section 77 upon the courts of bankruptcy is not to be regarded as general, plenary, nationwide jurisdiction at law and in equity over all questions incident to the collection of the claims of the debtor against third persons, but is to be considered as the traditional jurisdiction of such courts ovemthe property of a bankrupt, wherever located, freed, however, from those limitations which made ancillary proceedings in' other districts necessary, and with the powers which Federal equity courts exercise in receivership proceedings, so far as those powers may be necessary or appropriate in order to preserve and safeguard the property in the actual or constructive possession of debtors and in order to carry on their business pending reorganization.”
*537Although, this course has been consistently pursued by the courts, Congress took no action to abolish it in the careful revision which now constitutes Chapter X of the statute, and accordingly, the same rule has been given effect. Warder v. Brady, 4 Cir., 115 F.2d 89, 94; Duda v. Sterling Mfg. Co., 8 Cir., 178 F.2d 428, 433, 14 A.L.R.2d 899. See Finletter, The Law of Bankruptcy Reorganization, 1939, p. 178.
“ * * * It is stretching the restatement of existing law by the Supreme Court too far to say that it authorizes extraterritorial service in all matters with which the reorganization court has to deal. The complete -power of the court to issue nationwide service for all purposes would mean that persons who held property under a bona fide claim of right would be obliged to defend that right in a court far distant from the location of the property and the witnesses. * * * this would mean that every suit to which a trustee appointed under that chapter is a party could have its venue in the reorganization court, even though the defendant be a resident of and the property which is the subject of the litigation be situated in a far distant state. * * * ”
This review of the '.powers conferred upon the court of bankruptcy evinces the clear intent of Congress to endow the District Courts with sufficient power to afford business organizations in distress a constructive opportunity to reorganize and survive. To this end the court may take into account and bring into the plan not only property in the bankrupt’s hands but also property of the bankrupt in the' possession of a creditor as security for the debt. On the other hand, an adverse holder may not be forced against his will to submit the validity of his claim to the determination of the reorganization court in a summary proceeding.
These seemingly opposing rules give rise • to the present conflict, and the problem is to sustain the authority of the court without violating the rights of the bank. I do not think that the authority of the court to enjoin the trial of the Texas case can be sustained under the automatic stay of proceedings to enforce a lien on the debtor’s property which comes into play under § 148 upon the approval of the petition for reorganization; nor can it be sustained under the express power given to the judge to stay such a foreclosure by § 116(4), unless the purpose and effect of the Texas case is to give the bank the right to dispose of the collateral. That suit in its present form specifically asks only for the removal of the cloud upon the bank’s title to the collateral, and the Bank disclaims any further purpose.
The removal of a cloud upon the title of an adverse claimant to property of the bankrupt does not of itself amount to the enforcement of a lien thereon or necessarily interfere with a plan of reorganization. See the following comment on such a suit against a railroad company in the course of reorganization under § 77 in Gutensohn v. Kansas City Southern Ry. Co., 8 Cir., 140 F.2d 950, at pages 952, 953, where the court said:
“The trustee’s motion to dismiss for want of jurisdiction presents the theory that since the Missouri Pacific is in bankruptcy only the court having jurisdiction of the bankruptcy proceeding, the district court for the Eastern District of Missouri, has jurisdiction of any such case as this brought against the trustee. The statute, 11 U.S.C.A. § 205, sub. a, provides that during the pendency of a reorganization proceeding in bankruptcy the district court in which the .proceeding is pending shall ‘have exclusive jurisdiction of the debtor and its property wherever located.’ The contention that a declaratory judgment against the trustee would constitute interference with the court’s ‘jurisdiction of the debtor and its property’ cannot be successfully maintained. * * *
“In no event, it seems to us, could a mere declaratory judgment against the trustee — and no more than that was or. could be sought by plaintiffs under the Missouri Declaratory Judgment Act — ■ involve any direct or immediate interference with ‘the debtor and its prop*538erty.’ Su'ch a judgment only could ‘declare rights, status, and other legal relations.’ * H? * ‘A declaratory judgment or decree is one which simply declares the rights of the parties or expresses the opinion of the court on a question of law, without ordering anything to be done; its distinctive characteristic being that the declaration stands by itself, and no executory process follows as of course; and the action therefor is distinguished from other actions in that it does not seek execution or performance from the defendant or opposing parties.’ 1 C.J.S., Actions, § 18, p. 1018.”
See also 4145 Broadway Hotel Co., 7 Cir., 124 F.2d 891. In re Adolf Gobel, Inc., 2 Cir., 80 F.2d 849; Texas Co. v. Hauptman, 9 Cir., 91 F.2d 449; Lockhart v. Mercer Tube & Mfg. Co., D.C.Del., 53 F.Supp. 301; Coastal Club v. Shell Oil Co., D.C.La., 45 F.Supp. 859.
This line of authority has led the court in the pending appeal to conclude that a reorganization court may not exercise summary jurisdiction over the property of the debtor in the possession of one who claims absolute title; and the court might have added, as the trustee concedes in his brief on this appeal, that a reorganization court also lacks summary jurisdiction over a suit by the trustee to recover a preferential payment to a creditor or to recover upon a claim due the bankrupt estate. We had previously come to these conclusions in Warder v. Brady; 4 Cir., 115 F.2d 89, and Collier on Bankruptcy, Vol. 6, 584, is to the same effect. Hence it is obvious that Congress in its latest effort to establish a practicable and efficient scheme of reorganization still withholds from the reorganization court complete power over the property of the bankrupt and still protects adverse claimants to property of the debtor in their possession from suits in a distant state. Accordingly it is frequently necessary for the trustee to engage in litigation outside the reorganization court before a plan of reorganization can be effectuated; and that will be necessary in the present proceeding unless the trustee abandons his claims for the return of the preferential payments alleged to have been made to the Bank.
The area of disagreement is therefore restricted to the limited'position that controversies over property of the bankrupt held by a creditor as collateral security for a debt of the bankrupt must be adjudicated in the bankruptcy court. This position cannot be defended on the ground that there is a substantial distinction in principle between a claim of a partial interest in property of the bankrupt and a claim of absolute title thereto. In each case the claim is adverse and the propriety of a suit against the claimant in the district of his residence is based on the same considerations.
But it is said that the bankruptcy court has exclusive jurisdiction over controversies with respect to the claims of creditors because of certain sections of the bankruptcy statute. These provide that the judge shall fix the time within which proofs of claims may be filed, and empower the court to determine summarily objections to the allowance of any claim; and to classify claims according to their nature, and if necessary, to determine summarily the value of the securities held by Secured creditors; and upon confirmation of a plan of reorganization, to direct the distribution of the assets to the creditors whose claims have been allowed, or listed by the trustee or scheduled by the debtor and not disputed. See 11 U.S.C.A. §§ 596, 597, 624.
These sections, however, do not bear upon the question involved. The bankruptcy court has always had power under earlier statutes to receive and pass on claims of creditors; and that power has. never been construed to endow the court with authority to compel any creditor to file his claim, or to compel a secured creditor to submit his title to collateral security to the adjudication of the bankruptcy court. The creditor by failing to file his claim may lose his right to share in the distribution of the assets in possession of the trustee, but not his right to the collateral in his possession, or to the decision of the appropriate court if his right to the collateral is disputed
*539It is true that in certain reorganization proceedings the ’courts have had occasion to entertain an application of the trustee for an order directing a creditor to turn over property of the bankrupt in his possession without impairing the creditor’s substantive rights. In In re Cuyahoga Finance Co., 6 Cir., 136 F.2d 18, the trustee filed an application to the court for authority to redeem collateral in the hands of a creditor and in connection therewith asked the court to determine the amount of certain set-offs to the creditor’s claim; and the court in the face of objection to its jurisdiction went so far as to hold that it had the power summarily to determine the amount of the set-offs.
The decision is pertinent since it bears upon the extent of the summary jurisdiction of the reorganization court, but it relates to a situation which is not before us in the pending case. Here the trustee has made no effort to secure possession of the collateral in the hands of the Bank and manifests no intention to d.0 so in the future. His sole purpose is to compel the Bank to litigate its claims in the bankruptcy court. Even if it should become desirable for the trustee to obtain possession of the collateral so as to make use of it in the formation of a plan of reorganization, this could easily be done in such a way as to safeguard the Bank’s interest in the collateral without disturbing the jurisdiction of the Texas court to determine the respective rights of the parties therein. The determination of these rights could be made in either court without interfering with the plan of reorganization.
Moreover, it is significant that the court in the Cuyahoga case assumes a position more extreme than any one has ventured to take in the present litigation. That decision contains the statement, 136 F.2d 20, that the jurisdiction of the reorganization court “is not limited to the administration of the property which * * * belongs to the debtor, but also ■ extends to the determination of the question of title. Ex parte Baldwin, 291 U.S. 610, 54 S.Ct. 551, 78 L.Ed. 1020.” If this quotation contains a correct statement of the law, nothing is left of the rule that the title of an ad-
verse claimant of the property of the debtor in his possession cannot be adjudicated summarily in a court of bankruptcy; but the statement is not sustained either by the decisions of the Supreme Court or of this court. In Ex parte Baldwin, supra, the property was not in the possession of the claimant but in the possession of the trustee; and in the pending case this court on appeal expressly holds that the reorganization court may not exercise summary jurisdiction over property of the bankrupt in the position of an adverse claimant asserting absolute ownership. It should be added that the decision in Reconstruction Finance Corp. v. Kaplan, 1 Cir., 185 F.2d 791, does not support the extreme statement of the rule because in that case the adverse claimant submitted to the adjudication of his rights by the bankruptcy court.
In the present case, the Bank should not be enjoined from the trial of the suit in the Texas Court but might properly be enjoined from the enforcement of the lien upon the collateral in its hands.