Adair v. Bank of America Assn.
303 U.S. 350 (1938)

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U.S. Supreme Court

Adair v. Bank of America Assn., 303 U.S. 350 (1938)

Adair v. Bank of America National Trust & Savings Association

No. 365

Argued February 2, 1938

Decided February 28, 1938

303 U.S. 350




1. Subdivisions (e) and (n) of § 75 of the Bankruptcy Act, which provide for exercise of such control over the property of the farmer-debtor as the court deems in his best interest and in that of his creditors, look to the maintenance of the farm as a going concern and authorize, in a proper case, the continuance of the farm operations after the filing of the petition. P. 303 U. S. 354.

2. A conciliation commissioner, appointed pursuant to § 75 of the Bankruptcy Act and Rule L of the General Orders in Bankruptcy, exercises judicial powers like those of a referee in bankruptcy; his acts in authorizing expenditure of funds in his charge, if performed in good faith and not in violation of any rule or positive enactment, are judicial acts for which he cannot be held personally liable. P. 303 U. S. 357.

3. In a proceeding under § 75 of the Bankruptcy Act, proceeds of the sale of a crop of grapes were spent by the conciliation commissioner in harvesting the crop and in work for the preservation of the vineyard and cultivation of the crop for the next year. Part of the disbursements were made before the farmer-debtor was adjudged a bankrupt, and part thereafter by direction of the referee. A creditor claimed the gross proceeds of the sale under a mortgage of the crop sold and future crops. The same creditor had a mortgage on the farm.


(1) That, as the commissioner acted either judicially, as conciliation commissioner, or ministerially, as an arm of the court by authority of the referee, he was not personally liable to the creditor. P. 303 U. S. 358.

(2) Expenditures, reasonable in amount, for gathering the crop sold, and also those in preparation for the next year's crop and for maintenance of the property, were proper charges on the fund, being for its protection and in the interest of the mortgagee. P. 303 U. S. 360.

90 F.2d 750 reversed.

Page 303 U. S. 351

Certiorari, 302 U.S. 674, to review a judgment which reversed an order of the district court settling the final account of the present petitioner as a conciliation commissioner in a bankruptcy proceeding.

MR. JUSTICE REED delivered the opinion of the Court.

This writ was asked to review a decree of the Circuit Court of Appeals for the Ninth Circuit, upholding the objections and exceptions of the respondent, a creditor, to the final account of petitioner, a conciliation commissioner appointed under § 75(a) of the Bankruptcy Act, as amended, and reversing the order of the District Court which had settled and allowed the account. The Circuit Court of Appeals held that the petitioner should have been required to pay to respondent the gross proceeds of the grape crop harvested on the debtor's land after the debtor had filed his petition under § 75 of the Bankruptcy Act, as amended, without any deduction for moneys spent in harvesting that crop and for other purposes, because of the fact that the crop was subject to a chattel mortgage held by respondent. 90 F.2d 750. In view of the importance of the question with respect to proceedings instituted under § 75 of the Bankruptcy Act, this Court granted certiorari.

On August 6, 1934, Andrea Cuccia, a farmer, filed an adequate petition under § 75(a) to (r) of the Bankruptcy Act, 47 Stat. 1470-1473, as amended, 48 Stat. 925, §§ 8, 9, showing by the schedules secured claims to respondent of over $12,000 and unsecured claims of a

Page 303 U. S. 352

slightly larger amount, and expressing his desire to effect a composition or extension of time to pay his debts. His petition was referred to Noah Adair, the Conciliation Commissioner for the County of San Bernardino, California. On January 7, 1935, an amended petition was filed by the debtor, stating that he had failed to obtain the approval of his creditors to a composition or extension proposal and praying that he might be adjudged a bankrupt under the provisions of § 75, subsection (s) of the Bankruptcy Act, as enacted June 28, 1934, 48 Stat. 1289. Adjudication was entered and the proceedings referred to the referee in bankruptcy. On October 14, 1935, the District Court, on a motion by the respondent, dismissed the petition. On March 16, 1936, the debtor attempted to invoke the benefits of the amended § 75(s), but we are not here concerned with that petition and the subsequent proceedings (set out in Bank of America National Trust & Savings Assn. v. Cuccia, 93 F.2d 754, decided December 30, 1937, on rehearing, by the Circuit Court of Appeals for the Ninth Circuit).

The respondent, at the beginning of and throughout the proceedings, held a matured note of the debtor and his wife, secured by a deed of trust on certain lands in the county of San Bernardino, California, and by a mortgage on the crops growing or to be grown on the same lands, during 1933 and 1934, or prior to the payment in full of the total indebtedness. The crop mortgage required the mortgagor to cultivate, harvest, and deliver the crop to the mortgagee, without cost to the mortgagee, for sale and application of the proceeds to the debt.

The present controversy had its origin in the respondent's petition to the Court, on February 6, 1936, for an accounting by the conciliation commissioner of funds realized from crops sold off the debtor's premises in 1934. In response to the order of the District Court, the conciliation commissioner made an accounting, as appears in

Page 303 U. S. 353

the footnote. [Footnote 1] The Bank objected to the account on the ground that the money was the proceeds of the sale

Page 303 U. S. 354

of a crop covered by the chattel mortgage above referred to, and that the disbursements from the fund were made without valid order by the District Court and without the Bank's notice or knowledge of any court order. It was further objected that, after adjudication in bankruptcy under § 75(s), the conciliation commissioner had no jurisdiction. Petitioner stated in his answer and testimony that the items appearing prior to the adjudication in bankruptcy of January 7, 1935, were disbursed, on his orders as conciliation commissioner, either to gather the 1934 crop or to provide for care of the property, and that the items appearing from January 22 through June 1, 1935, were disbursed under the direction of the referee in bankruptcy. The District Court, finding that the expenditures of the conciliation commissioner were made in good faith and for the purpose of conserving the estate, settled and allowed the account. The Circuit Court of Appeals directed the disallowance of the account and the payment by the conciliation commissioner to the respondent of the gross proceeds of the mortgaged crop.

First. The powers granted by the bankruptcy clause of the Constitution, Article 1, § 8, cl. 4, are not limited to the bankruptcy law and practice in force in England or the States at the time of its adoption. Continental Illinois Nat. Bank & T. Co. v. Chicago, R.I. & P. Ry. Co.,294 U. S. 648, 294 U. S. 668. Then the interests of the creditor alone were protected. Progressive liberalization of bankruptcy and insolvency laws, in an effort to avert the evils of liquidation, has furnished opportunity for composition in bankruptcy proceedings, and later for composition and extension of debts in relief proceedings for individual debtors, for reorganization of railroads and other corporations, and for public debtor proceedings. [Footnote 2]

Page 303 U. S. 355

Section 75 of the Bankruptcy Act [Footnote 3] provides similar opportunities for the rehabilitation of farmers. Wright v. Vinton Branch,300 U. S. 440, 300 U. S. 456. It is sought to accomplish this rehabilitation through composition or extension of debts, subsections (e) to (l) 47 Stat. 1471, 1472. On failure of composition and extension, further opportunity for rehabilitation is afforded the debtor, through provisions enabling him to retain possession of his property, under conditions favorable to its ultimate redemption by him. These steps are carried out under judicial supervision, subsection (s). [Footnote 4]

To accomplish its purpose, § 75 provides that the filing of a petition shall effect a stay. [Footnote 5] Such a stay under

Page 303 U. S. 356

judicial discretion as to enforcement of claims does not take property without due process and is constitutional. Continental Illinois Nat. Bank & T. Co. v. Chicago, R.I. & P. Ry. Co., supra, at pages 294 U. S. 675et seq. and 294 U. S. 680et seq.; Wright v. Vinton Branch, supra,300 U. S. 460; Home Bldg. & Loan Assn. v. Blaisdell,290 U. S. 398. In order to operate and protect the property during the stay, and pending confirmation or other disposition of the composition or extension proposal, the statute provides in subsections (e) and (n) [Footnote 6] for the exercise by the court of "such control

Page 303 U. S. 357

over the property of the farmer as the court deems in the best interests of the farmer and his creditors." These provisions look toward the maintenance of the farm as a going concern, and afford clear authority, in a proper case, for the continuance of the operations of the farm after the filing of a petition under § 75 of the Bankruptcy Act.

Second. In holding the conciliation commissioner personally liable, we think the lower court misconceived the nature of his office. At the time of filing the original petition for composition and extension, August 6, 1934, § 75 of the Bankruptcy Act was comprised of subsections (a) to (s), inclusive. Subsections (a) to (r) made provision for conciliation commissioners, set up the same qualifications for eligibility to this office as are required for the office of referee, authorized the conciliation commissioners to receive and transmit the petitions and schedules, to call the first meeting of creditors, with notice of terms of composition or extension, to hear the parties in interest, to prepare final inventory, to supervise the farmer's affairs during an extension period and to distribute the consideration after a composition. In accordance with § 75, subsection (b), this Court, as of April 24, 1933, established Rule L, governing proceedings under § 75(a) to (r) inclusive, as an addition to the General Orders in Bankruptcy, 288 U.S. at 641. Rule L provided for reference to the conciliation commissioner, and his carrying out of the duties outlined above. The commissioner was given, insofar as consistent with § 75 and Rule L, "all the powers and duties of a referee in bankruptcy," to be carried out under the General Orders in Bankruptcy. Rule L(11). Sections 38, as amended, and 39 of the Bankruptcy Act and paragraphs 3 and 6 of Rule L indicate the wide extent of the authority of the conciliation commissioner. Under § 38, Bankruptcy Act, clause four, the referee is empowered to

"perform such part of the

Page 303 U. S. 358

duties, except as to questions arising out of the applications of bankrupts for compositions or discharges, as are by this Act conferred on courts of bankruptcy. [Footnote 7]"

In view of the foregoing, the conciliation commissioner had the authority, prior to the adjudication of bankruptcy under § 75(s), to act as the "court," in the first instance and subject to review, in controlling the property of the debtor "in the best interests of the farmer and his creditors." Section 75(e); In re Wiedmer, 82 F.2d 566. Under this authority, the conciliation commissioner acted in authorizing the expenditures shown on the account for gathering the crop of 1934, preparing for the crop of 1935, and paying fees and expenses. It is plain that the conciliation commissioner, like the referee (White v. Schloerb,178 U. S. 542, 178 U. S. 546; Mueller v. Nugent,184 U. S. 1, 184 U. S. 13) exercises some of the "judicial authority" of the bankruptcy court. The acts just detailed were judicial acts. Error within his jurisdiction does not subject him to personal liability. Randall v. Brigham, 7 Wall. 523, 74 U. S. 535. See also Bradley v. Fisher, 13 Wall. 335; Alzua v. Johnson,231 U. S. 106; Yaselli v. Goff, 275 U.S. 503. Cf. First Nationall Bank v. Bonner, 74 F.2d 139, 142; United States v. Ward, 257 Fed. 372,

Page 303 U. S. 359

377. This doctrine is quite clear when, as here, no rule or positive enactment was violated and the acts were bona fide.

The fact that the proceeds of the crop were banked to the joint account of the debtor and the conciliation commissioner may have obscured the judicial character of the latter. Better practice would suggest that the account appear in the name of the debtor, with the countersignature of the conciliation commissioner required for withdrawals. Also at an early, preferably the first, meeting of creditors, the method of handling the business of the debtor pending confirmation or further order should have been developed and proper orders entered. Cf. § 12a, Bankruptcy Act, as amended. This does not appear to have been done. These irregularities do not suffice to withdraw from the conciliation commissioner his judicial protection. Alzua v. Johnson,231 U. S. 106.

Some disbursements were made after the adjudication in bankruptcy under subsection (s) and the reference of the proceedings to a referee in bankruptcy. It is unnecessary to decide whether, under § 75(s) as originally enacted, the conciliation commissioner could have continued to act as referee. In this case, there was no further reference of the proceedings to petitioner, and he continued to act solely at the direction of the referee in bankruptcy. His uncontradicted testimony was as follows:

"When this matter was referred to D. W. Richards, as referee I wanted him to take the money I had on hand and become the custodian of it. He asked me to keep the money, and said he would trust me in the expenditure of the money while it was under him and that he would O.K. the checks, so all the checks that were written after it went to D. W. Richards were O. K.'d by him and I wrote the checks at his request."

Without determining the effect of the unconstitutionality of subsection (s) upon the steps taken under its

Page 303 U. S. 360

authority, it appears that the petitioner acted either judicially, continuing to exercise his powers as conciliation commissioner, or ministerially, as an arm of the court, under the direction and with the approval of the referee. Under the facts of this case, we do not think petitioner is personally liable for these disbursements. Cf. First National Bank v. Bonner, 74 F.2d 139, 142.

Third. Moreover, the expenditures assailed by respondent were proper, at least with respect to the principal items (which are the only ones we shall consider) -- the amounts spent in harvesting the 1934 crop, which was sold in order to create the fund, and the amounts spent for preservation of the vineyard and for the cultivation of the 1935 crop. There is no showing that petitioner was improvident. Reference is made in his account to money paid to the farmer as "living expenses," but the record discloses that the amounts paid the debtor did not exceed the ordinary wages for the work he actually and necessarily performed in the maintenance of the vineyard. Compare Wright v. Vinton Branch, supra, 300 U.S. at 300 U. S. 466; In re Barrow, 98 Fed. 582.

The court below ruled that, under the crop mortgage, the farmer had the obligation to cultivate and harvest the crop at his own expense, and therefore the gross proceeds belonged to respondent. This conclusion disregards the fact that the debtor did not harvest the grapes as an ordinary mortgagor. He had come into court seeking relief under § 75 of the Bankruptcy Act. The filing of his petition put the property in the control of the court, and the harvesting of the crop and the preservation of the property became a matter for the concern and action of the court.

Respondent certainly cannot complain of the devotion of the proceeds of the 1934 crop to the cost of harvesting that crop. The care and harvesting of that crop represented the only way to preserve its worth (cf. 117 U. S. S. 361

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