Court Opinion

ID: 8813248
Source: CourtListenerOpinion
Date Created: 2022-11-26 15:10:08.015727+00
Date Added: 2024-06-11T17:04:22.228659
License: Public Domain

STONE, Circuit Judge
(dissenting). This is a petition to revise an order of the District Court confirming an order of the referee in bankruptcy denying a motion to modify an order allowing certain property as exemptions to the bankrupt, and directing the delivery thereof to her by the receiver of the state court, in whose custody it then was. The motion sought to annul that portion of the order directing such delivery. The petitioners here are the receiver and the judgment creditor in the state court.
This debtor is evidently seeking to avoid payment of an honest debt. She had before endeavored to do this in an unlawful and fraudulent manner by a bogus mortgage and by a concealed removal of her property. These attempts the court will promptly prevent. But she has also attempted to attain the same result in lawful methods, by claiming exemptions. The federal and state legislative policy is to prevent a creditor from completely stripping his debtor of all property, unless the debtor is willing that such may be done. This is founded upon the theory of public policy, which deems it more important that a debtor shall be left a pittance with which to sustain himself and family than that his debts shall be paid. No exemption can be claimed by an insolvent debtor without the object and result of avoiding payment of honest debts. But this avoidance the law sanctions to the extent of the permitted exemptions. The motive of the debtor in claiming exemptions or his prior attempts, however unlawful and reprehensible, have nothing to do with his exemption rights, unless expressly made material by statute. Therefore I think the prior questionable conduct of this debtor, and her evident desire and design to escape this indebtedness, have nothing to do with her right to claim and secure exemptions allowed by the statutes of Arkansas, operating directly,. or, through the Bankruptcy Act, indirectly. In my judgment the Zeitinger Case is not applicable. That was an attempt by unfaithful corporate officers, who were about to be made responsible for their derelictions, to avoid that result by throwing into voluntary bankruptcy a solvent corporation. Undoubtedly the court could inquire into such a transaction, and prevent itself being used for such a nefarious purpose, where no real ground of bankruptcy existed. But it is not wrongful to claim legal exemptions and no attack is here attempted upon the propriety of the adjudication of bankruptcy, but it is expressly admitted that the referee acted properly in allowing this very property as exempt from creditors generally.
Admitting that the property was properly allowed to the debtoi as exempt from her general creditors, the controversy is as to whether it was subject to the judgment lien of petitioners and as to what tribunal should determine that matter. There is no dispute what*98soever as-to the character of this lien or the time it attached. It is a judgment levy lien, attaching less than four months prior to the filing of the petition in bankruptcy. Such a lien is nullified by the bankruptcy adjudication, under section 67f of the Bankruptcy Act, if, at the time of its attachment, the bankrupt were insolvent.
Petitioners claim that any adjudication made of that matter was not binding upon them because there was lack of due process of law, since they were not notified thereof, and had no legal opportunity to be heard. The finding of the referee in ruling on the motion to modify was that they had been duly notified of the adjudication of bankruptcy and of the creditors’ meeting to be held February 8th. This is not questioned and therefore must be taken as true. There being no point as to the form of that notification, we musí presume that it was in accordance with law, and followed the form prescribed by general'order 38, form No. 18 (89 Fed. xxxvi, 32 C. C. A. ix), which provides “at which time the said creditors may attend * * * and transact such other business as may properly come before said meeting.” This broad language has been held sufficient to authorize consideration, at such meeting, of the allowance of exemptions. In re Hilborn (D. C.) 104 Fed. 866. Also see Smalley v. Langenour, 196 U. S. 93, 25 Sup. Ct. 216, 49 L. Ed. 400. It would seem entirely proper at such time to make the allowance of exemptions where, under general order 15 (89 Fed. vii, 32 C. C. A. xviii), no trustee was to be appointed. Petitioners had notice of, and are bound by, any action which could properly be taken at that meeting, and their absence is due to their own voluntary act. Again, they had, in so far as they desired-it, a sufficient day in court when they were accorded full hearing upon their motion to modify that order of the referee. At that time they raised no point of lack of due process at the previous hearing, but confined themselves to questioning the jurisdiction of the referee as to part of his earlier order.
Petitioners also claim that the referee made no adjudication upon the necessary facts of insolvency of the bankrupt at the time the lien attached, and residence of the bankrupt necessary to entitle to exemptions. It may be that no oral or written testimony as to either of these facts was presented to the referee, but he was authorized to find all necessary facts from the unopposed motion for exemption allowance. When petitioners filed their motion they made no such claim, and, after resting alone on their claim of lack of jurisdiction, they cannot now question the basis in fact of the ruling of the referee.
Finally they claim that the referee had no jurisdiction to order delivery of the property set off by him as exempt. They say.that they are adverse claimants, through their judgment lien, to this property, and that their rights thereto cannot be determined in a summary proceeding before the referee, but are triable only in a plenary suit before some court of proper jurisdiction, which, in this instance, is, they say, the state chancery court, having custody of the property through the possession of its receiver.
The allowance of exemptions to a bankrupt is a necessary step in the administration of his estate by the bankruptcy court. No *99oilier court can perform or interfere with this duty of the bankruptcy court. This jurisdiction is exclusive.
The extent of this jurisdiction is the determination that certain specified property falls within the state exemption laws, that the bankrupt is entitled to exemptions, and that the particular property shall be set aside as exempt from.® claims of his general creditors. The conclusion, therefore, is that the state chancery court here had no jurisdiction to decide the question of exemptions after the petition in bankruptcy was'filed.
Such adjudication has no necessary connection with the determination of any sjiecial claims of title or interest in, or right against, that specific property by particular creditors or by others. Such adverse titles, interests, or rights can be decided only in plenary proceedings brought in the courts designated by section 23 of the Bankruptcy Act (Comp. St. § 9607). With exceptions not here material, such courts are those, federal or state, having general jurisdiction of the persons and subject-matter. Physical custody of the res by a court is a paramount ground of general jurisdiction. Therefore the state court here had exclusive jurisdiction to determine any adverse claims to this property in its possession. No such claim was presented to that court or decided by it. The only controversy in that court was whether the debtor was entitled to exemptions under the state law. The filing of the bankruptcy petition had taken from the state court, and placed in the bankruptcy court, all jurisdiction to determine debt exemptions. That court had no jurisdiction, therefore, to order a sale of that property by its receiver for the purpose of satisfying the earlier judgment.
But is this an adverse claim within the meaning of the Bankruptcy Act and judicial decisions when the circumstances here are considered?
The bankruptcy statutes are complete within themselves as to the disposition to be made of all of the property of the bankrupt. That disposition is divided into two general classes, namely, that which the debtor is to be allowed to retain and that which is to be divided among his creditors. All of it comes into the jurisdiction of the bankruptcy court. Even that allowed to the debtor (C., B. & Q. Ry. Co. v. Hall, 229 U. S. 511, 515, 33 Sup. Ct. 885, 57 L. Ed. 1306) comes there for segregation, identification, and appraisement. As said in the Hall Case (229 U. S. 516, 33 Sup. Ct. 887, 57 L. Ed. 1306), “custody and possession may be necessary to carry out these duties.” If the custody is in the hands of some one opposing -delivery thereof to the trustee under an adverse claim thereto, and if the establishment of such claim could or would defeat or modify the title coming to the trustee, it might be proper to determine that claim in a plenary suit, for the trustee should acquire and administer only such titles, rights, and interests in property as belong to the bankrupt. But if, admitting the claim in so far as it is alleged to be adverse, there is no right to possession as against the trustee shown, then obviously there is no necessity for such plenary action, because, in reality, no substantial ground has been alleged for withholding from the trustee the rightful *100possession. Mueller v. Nugent, 184 U. S. 1, 22 Sup. Ct. 269, 46 L. Ed. 405; Clarke v. Larremore, 188 U. S. 486, 23 Sup. Ct. 363, 47 L. Ed. 555; Smalley v. Langenour, 196 U. S. 93, 25 Sup. Ct. 216, 49 L. Ed. 400; Lazarus v. Prentice, 234 U. S. 263, 34 Sup. Ct. 851, 58 L. Ed. 1305.
Measuring this controversy by this standard, what do we find? The facts are that ..the referee, in a proper manner, made the allowance of exemption; that no objection thereto has been made by any one, including these petitioners; there is no dispute that the exemptions covered all of the property of the bankrupt. The lien relied upon is an ordinary execution or judgment lien admittedly procured within four months of the filing of the bankruptcy petition. Such a lien is void if the debtor were insolvent when it was procured, whether the property be exempt or not. The petitioners nowhere allege that the debtor was then solvent. The record is barren of any such claim or issue, either in the bankruptcy court or in the state chancery court. But what would be the effect, even if it were admitted that the debtor was solvent when the lien affixed? That would in no wise affect the allowance of exemptions to the debtor. It is against just such levies and liens that exemptions protect the property of the debtor. If he had property beyond the amount allowable as exemptions, there might be some question as to the choice of property for exemption, or as to the survival of a lien against it as property beyond that allowable. No such situation is here. The undisputed facts are that the bankrupt was entitled to all of the scheduled property as exemptions, and that it was held by a state court receiver for the sole purpose of preserving it to satisfy an ordinary judgment debt belonging to a creditor listed by the bankrupt. Such a creditor could not possibly have a right to satisfaction from the property set aside, and the only property which could have been set aside, as exempt. The fact that steps had been taken through execution levy in no way affects the rights of the parties. There was no effective, substantial adverse claim. Therefore the summary order of the referee was correct.
What is really sought by petitioners is to have the state court usurp the exclusive jurisdiction of the bankruptcy court to decide and allow exemptions and to nullify its order in that matter.
I think the petition should be denied and the order affirmed.