The question in this case was whether, under § 67
f of
the Bankruptcy Act of 1898, where a final decree recovered within
four months of the petition, but which was based on a judgment
creditors' bill in equity filed long prior thereto, the creditor
had a lien on the assets involved in the action which was superior
to the title of the trustee in bankruptcy, or whether (as was held
by the district court) § 67
f prevented the complainant
from acquiring any benefit from the lien, or the fund attached
except through the trustee in bankruptcy
pro rata with
other creditors.
Held that while the lien created by a
judgment creditors' bill is contingent in the sense that it may
possibly be defeated by the event of the suit, it is in itself, and
so long as it exists, a charge, a specific lien, on the assets not
subject to being divested save by payment of the judgment sought to
be collected, and a judgment or decree in enforcement of an
otherwise valid preexisting lien is not the judgment denounced by
the bankruptcy statute which is plainly confined to judgments
creating liens.
When, therefore, a judgment creditor files his bill in equity
long prior to the bankruptcy of the defendant, thereby obtaining a
lien on specific assets, and diligently prosecutes it to a final
judgment, he acquires a lien on the property of the bankrupts which
is superior to the title of the trustee, and a district court of
the United States does not have jurisdiction to make an order in
bankruptcy proceedings against the defendants enjoining him from
enforcing such lien.
See also Pickens v. Roy, decided this term, p.
187 U. S. 177,
post.
The certificate in this case is as follows:
"This matter came before this court upon a petition of Metcalf
Brothers & Co. to superintend and revise in matter of law
certain proceedings of the District Court of the United States for
the Southern District of New York wherein an order was made by said
district court enjoining the petitioners, Metcalf Brothers &
Co., from taking any further proceedings under any judgment
obtained by them in the Supreme Court of the State of New York in a
judgment creditors' action wherein certain transfers made by the
bankrupts had been set aside as to them
Page 187 U. S. 166
as fraudulent and void, and wherein receivers of the property of
the bankrupts appointed by the said supreme court had been directed
to pay to them the amount of their judgments at law upon which
their said judgment creditors' action was founded."
"For its proper decision of the matter, this court desires the
instruction of the Supreme Court upon the questions of law
hereinafter stated, and hereby certifies the same to the Supreme
Court of the United States for that purpose."
"
Statement of Facts"
"On the 2d of October, 1896, Lesser Brothers, subsequently
adjudged bankrupts, who were copartners, being then insolvent,
transferred all their property, copartnership and individual, to
certain favored creditors. All their outstanding accounts, being
copartnership property, they transferred by instruments of
assignment to Marcus A. Adler and others. They confessed various
judgments in the supreme court of the State of New York in favor of
Bernhard Moses and others, upon which executions were at once
issued to the Sheriff of the County of New York, who levied
thereunder on all their tangible personal property, consisting of
clothing material and stock in trade. This also was copartnership
property, and, with the book accounts, comprised all their property
except a piece of real estate owned by Israel Lesser individually
and a ground lease of another piece of real estate owned by Tobias
Lesser individually. These two pieces of real estate the
individuals owning them conveyed to Joseph Lilianthal."
"After making these transfers, and after the levy by the sheriff
under the executions issued upon the confessed judgments, and on
the same day, by a fraud upon the court, in a collusive action in
the Supreme Court of New York to dissolve the partnership, they
procured the appointment of a receiver of the partnership property,
Morris Moses, who was nominated by and in collusion with them.
Subsequently a receiver nominated by certain creditors, James T.
Franklin, was associated with Mr. Moses by the same court."
"Various creditors of the bankrupts immediately commenced
Page 187 U. S. 167
actions of replevin to recover portions of the goods in the
hands of the sheriff. Their claims were conflicting with each other
and with those of the confessed judgment creditors, and in an
action brought in the supreme court of New York by the receivers an
order was made restraining the sale by the sheriff under the
executions, directing a sale by receivers (Mr. Moses and Mr.
Franklin being also appointed such receivers in that action), and
that the latter should hold the proceeds of the sale subject to the
claims of all parties, such claims to be determined in that action.
Pursuant to this order, the goods were sold, and the receivers so
appointed now hold the proceeds thereof. This order was made
November 23, 1896. The action is still pending, undetermined."
"On the 22d day of October, 1896, and the 29th day of October,
1896, Metcalf Brothers & Co. procured judgments in the Supreme
Court of the State of New York against the Lessers for $930.21 and
$2,547.80 respectively, upon which executions were issued and
returned unsatisfied."
"On the 17th day of December, 1896, Metcalf Brothers & Co.
commenced a judgment creditors' action in the Supreme Court of the
State of New York, which came to trial on the 17th day of December,
1897, and as a result of which the transfers to which reference has
been made and the proceedings for the appointment of the receivers
were adjudged fraudulent and void as to them. The court, however,
set aside the transfers of the copartnership property, not only in
favor of Metcalf Brothers & Co., but also in favor of the
receivers. It set aside the transfer of the real estate in favor of
Metcalf Brothers & Co. alone. Judgment was entered on this
decision April 6, 1898."
"This judgment determined that the proceeds of the sale of the
tangible property then in the hands of the receivers and the
outstanding accounts or their proceeds in the hands of the
transferees (to be accounted for under the judgment to the
receivers) were to be administered by the receivers for the benefit
of all the creditors of the copartnership equally, including
Metcalf Brothers & Co., while the real estate transferred
Page 187 U. S. 168
became subject to the lien of the judgments of Metcalf Brothers
& Co. on October 22d and 29th, 1896."
"All parties except the receivers appealed from this judgment to
the appellate division of the supreme court of New York; that court
affirmed the judgment of the trial court as to the fraud, but
reversed it insofar as it granted relief in favor of the receivers.
It directed the payment by the receivers to Metcalf Brothers &
Co. of the amount of their judgments out of the money in the
receivers' hands, and, since Metcalf Brothers & Co. were to be
so paid, it reversed the judgments in their favor against Adler,
one of the transferees of the accounts. Upon the ground that there
was no proof of fraud, it also reversed it against the transferee
of the real estate."
"This decision was embodied in an instrument made the 30th day
of December, 1898, entitled an 'order,' but which, after reciting
the necessary facts, 'ordered and adjudged' that the judgment of
the trial term be modified as stated, and also 'ordered and
adjudged' that the transfers in question, except the transfer of
the real estate, were fraudulent and void as to Metcalf Brothers
& Co.; that the receivers be, and they were thereby, directed
to pay to Metcalf Brothers & Co. the amount of their judgments,
with costs, and that final judgment should be entered in accordance
therewith. This instrument was filed in the office of the clerk of
the appellate division of the supreme court of New York, and was
the only paper signed by that court or kept in its records. A
certified copy of it was transmitted to the clerk of the supreme
court, upon which, after the costs had been taxed, a final judgment
was entered by the latter clerk on the 31st day of January, 1899,
following in all essential respects its verbiage. The delay in the
entry of final judgment was caused by various motions before the
appellate division for reargument."
"On the 12th day of May, 1899, Lesser Brothers filed in the
District Court of the United States for the Southern District of
New York a petition to be adjudged bankrupts, and they were
adjudicated bankrupts on that day. Subsequently, and
Page 187 U. S. 169
on the 7th day of June, 1899, Benjamin Barker, Esq., was
appointed their trustee in bankruptcy."
"From the judgment of the appellate division in the action
brought by Metcalf Brothers & Co. all parties except
Lilianthal, the transferee of the real estate, appealed to the
Court of Appeals of the State of New York. That court affirmed the
judgment of the appellate division in favor of Metcalf Brothers
& Co., and also restored to them the rights awarded them by the
judgment of the trial court, of which they had been deprived by the
appellate division. The final result of the litigation was that the
transfers in question were declared fraudulent and set aside in
favor of Metcalf Brothers & Co. only; that as to all other
persons they were (until impeached in a proper action) valid; that
the receivers were directed to pay out of the funds in their hands
to Metcalf Brothers & Co. the amount of their judgments, and
that those creditors could also proceed for the collection of their
judgments, if necessary, against the transferees of the accounts
and real estate."
"The decision of the Court of Appeals was made on the 6th of
February, 1900. The remittitur from that court to the supreme court
was received and filed on the 12th day of March, 1900. On the 8th
day of March, 1900, the bankrupts' trustee, upon affidavits of
himself and his counsel, procured from the District Court of the
United States for the Southern District of New York an order,
entitled in the bankruptcy proceeding, requiring Metcalf Brothers
& Co. to show cause on the 13th day of March, 1900, why a writ
of injunction should not issue enjoining them from taking any
further proceedings under any judgment in their creditors' action,
and so enjoining them in the interim. This order provided for its
service upon the members of the firm of Metcalf Brothers & Co.,
but it was not in fact served upon anyone but their attorneys in
their judgment creditors' action. Metcalf Brothers & Co.
appeared specially upon the return day of the order to show cause,
and filed a written objection that the district court was without
jurisdiction, power, or authority over them in the premises; that
no action or other proceeding was pending or had ever been begun
against them in any way relating to the subject matter of the
Page 187 U. S. 170
proposed injunction; that they had not appeared in or been made
a party to any proceeding founded upon the petition of Lesser
Brothers to be adjudged bankrupts, and that they had not been
brought into court on any process, or been given any notice of the
order to show cause, except that their attorneys in their
creditors' action had received a copy thereof, and especially that
no statute conferred upon the district court jurisdiction, power,
or authority to issue any writ of injunction in the premises."
"Their objection was overruled, and after an argument of the
merits of the application, the injunction was continued."
"Subsequently Metcalf Brothers & Co. presented a petition to
this court to superintend and revise in matter of law the said
proceedings of the district court."
"
Questions Certified"
"Upon the facts above set forth, the questions of law concerning
which this Court desires the instruction of the Supreme Court for
its proper decision are:"
"1. Had the District Court of the United States for the Southern
District of New York jurisdiction to make the injunction order in
question?"
"2. If said court had jurisdiction to restrain Metcalf Brothers
& Co. from receiving the fund in question, could such
jurisdiction be exercised by summary proceedings?"
"3. Did Metcalf Brothers & Co. by the commencement of their
creditors' action acquire a lien on the property of the bankrupts
superior to the title of the trustee thereto?"
"4. If the lien acquired by the commencement of the creditors'
action was inchoate merely, was it perfected by a judgment obtained
more than four months prior to the filing of the petition of the
Lessers in bankruptcy, within the meaning of the provisions of the
act of Congress of July 1, 1898, known as the Bankruptcy Act?"
"5. If the lien acquired by the commencement of the creditors'
action was inchoate merely, was the judgment in the creditors'
action, whenever obtained, one which is avoided by
Page 187 U. S. 171
any of the provisions of the act of Congress of July 1, 1898,
known as the Bankruptcy Act?"
MR. CHIEF JUSTICE FULLER delivered the opinion of the Court.
Metcalf Brothers & Company, judgment creditors of Lesser
Brothers, commenced their creditors' suit in the supreme court of
New York December 17, 1896. The case came to trial December 17,
1897, and decree was rendered April 6, 1898. 22 Misc. 664. On
appeal, the appellate division affirmed the judgment of the trial
court in part, and reversed it in part, and directed the payment by
the receivers to Metcalf Brothers & Company of the amount of
their judgments out of the money in the receivers' hands. 35
App.Div. 596. This decree or judgment was embodied in an order
dated December 30, 1898, but the clerk of the supreme court appears
not to have entered it until January 31, 1899. The decision of the
Court of Appeals, 161 N.Y. 587, was made February 6, 1900, and the
remittitur was received and filed in the court below March 12,
1900.
The Bankruptcy Law was approved July 1, 1898. May 12, 1899,
Lesser Brothers filed their petition in bankruptcy and were
adjudicated bankrupts, and Barker was appointed trustee June 7,
1899. March 8, 1900, the bankrupts' trustee procured from the
district court an order entitled in the bankruptcy proceedings
requiring Metcalf Brothers & Company to show cause on March 13
why a writ of injunction should not issue enjoining them from
taking any further proceedings under any judgment in their
creditors' action, and so enjoining them in the interim, which
injunction, after argument on the merits, was continued. No
question arises here in respect of real estate, and on the case
stated in the certificate the property affected was equitable
assets. There had been tangible personal property,
Page 187 U. S. 172
subject to levy and sale under execution, but this had been
previously sold by an order of the supreme court of New York, and
the proceeds were held by receivers.
The general rule is that the filing of a judgment creditors'
bill and service of process creates a lien in equity on the
judgment debtor's equitable assets.
Miller v.
Sherry, 2 Wall. 237;
Freedman's Savings &
Trust Company v. Earle, 110 U. S. 710. And
such is the rule in New York.
Storm v. Waddell, 2
Sandf.Ch. 494;
Lynch v. Johnson, 48 N.Y. 27;
First
National Bank v. Shuler, 153 N.Y. 163. This was conceded by
the district court, but the court held that the lien so created
was
"contingent upon the recovery of a valid judgment, and liable to
be defeated by anything that defeats the judgment, or the right of
the complainants to appropriate the fund;"
that
"such a contingent or equitable lien, it is evident, cannot be
superior to the judgment on which it depends to make it effectual,
but must stand or fall with the judgment itself;"
and "§ 67
f, therefore, in declaring that a judgment
recovered within four months "shall be deemed null and void," etc.,
necessarily prevents the complainants from acquiring any benefit
from the lien, or the fund attached, except through the trustee in
bankruptcy
pro rata with other creditors," it being also
held that, although the judgment at special term was rendered more
than four months before the filing of the petition, yet that the
judgment of the appellate division, as affirmed by the Court of
Appeals, was within the four months. 100 F. 433.
Assuming that the judgment at special term is to be disregarded,
and that the judgment of the appellate division was entered within
the four months, it will be perceived that, if the views of the
district court were correct, the third question propounded should
be answered in the negative, while if incorrect, that question
should be answered in the affirmative.
Doubtless the lien created by a judgment creditor's bill is
contingent in the sense that it might possibly be defeated by the
event of the suit, but in itself, and so long as it exists, it is a
charge, a specific lien, on the assets, not subject to being
divested save by payment of the judgment sought to be
collected.
Page 187 U. S. 173
The subject was fully discussed, and the effect of bankruptcy
proceedings considered, by Vice Chancellor Sandford in
Storm v.
Waddell, which has been so repeatedly recognized with approval
as to have become a leading case.
As Mr. Justice Swayne remarked, in
Miller v. Sherry,
the commencement of the suit amounts to an equitable levy, 2 Wall.
69 U. S. 249,
or, in the language or Mr. Justice Matthews, in
Freedman's
Savings & Trust Company v. Earle:
"It is the execution first begun to be executed, unless
otherwise regulated by statute, which is entitled to priority. . .
. The filing of the bill, in cases of equitable execution, is the
beginning of executing it."
110 U.S.
110 U. S. 717.
And the right to payment out of the fund so vested cannot be
affected by a subsequent transfer by the debtor,
McDermutt v.
Strong, 4 Johns.Ch. 687, or taken away by a subsequent
discharge in bankruptcy.
Hill v. Harding, 130 U.
S. 699;
Doe v.
Childress, 21 Wall. 642;
Eyster v. Gaff,
91 U. S. 521;
Peck v.
Jenness, 7 How. 612.
Kittredge v. Warren, 14 N.H. 509, was relied on as to
the effect of attachments on mesne process in New Hampshire, in
Peck v. Jenness. And it may be remarked that Chief Justice
Parker's vigorous discussion in that case of the point that the
attachment lien was not contingent on a subsequent judgment is
a fortiori applicable in cases where the prior
establishment of the creditor's claim is the foundation of the
creditor's suit.
Granting that possession of the power "to establish uniform laws
on the subject of bankruptcies" enables Congress to displace these
well settled principles and to divest rights so acquired, we do not
think that Congress has attempted to do so.
Section 67
f provides:
"That all levies, judgments, attachments, or other liens,
obtained through legal proceedings against a person who is
insolvent at any time within four months prior to the filing of a
petition in bankruptcy against him, shall be deemed null and void
in case he is adjudged a bankrupt, and the property affected by the
levy, judgment, attachment, or other lien shall be deemed wholly
discharged and released from the same, and shall pass to the
trustee as a part of the estate of the bankrupt, unless the court
shall, on due notice, order that the right under such levy,
judgment, attachment, or other lien
Page 187 U. S. 174
shall be preserved for the benefit of the estate, and thereupon
the same may pass to and shall be preserved by the trustee for the
benefit of the estate as aforesaid. And the court may order such
conveyance as shall be necessary to carry the purposes of this
section into effect."
In our opinion, the conclusion to be drawn from this language is
that it is the lien created by a levy, or a judgment, or an
attachment, or otherwise, that is invalidated, and that where the
lien is obtained more than four months prior to the filing of the
petition, it is not only not to be deemed to be null and void on
adjudication, but its validity is recognized. When it is obtained
within four months, the property is discharged therefrom, but not
otherwise. A judgment or decree in enforcement of an otherwise
valid preexisting lien is not the judgment denounced by the
statute, which is plainly confined to judgments creating liens. If
this were not so, the date of the acquisition of a lien by
attachment or creditor's bill would be entirely immaterial.
Moreover, other provisions of the act render it unreasonable to
impute the intention to annul all judgments recovered within four
months.
By section 63
a, fixed liabilities evidence by judgments
absolutely owing at the time of the filing of the petition, or
founded upon provable debts reduced to judgments after the filing
of the petition and before the consideration of application for
discharge, may be proved and allowed, while, under section 17,
judgments in actions of fraud are not released by a discharge, and
other parts of the act would be wholly unnecessary if section
67
f must be taken literally.
Many of the district courts have reached and announced a similar
conclusion:
In re Blair, 108 F. 529;
In re Beaver Coal
Co., 110 F. 630;
In re Kavanaugh, 99 F. 928;
In
re Pease, 4 Amer.Bank.Rep. 547, as have also the Supreme Court
of Rhode Island and the chancery court of New Jersey in well
considered decisions.
Doyle v. Heath, 22 R.I. 213;
Taylor v. Taylor, 59 N.J.Eq. 86.
And see Wakeman v.
Throckmorton, 74 Conn. 616.
As under sections 70
a, e, and section 67
e, the
trustee is vested with the bankrupt's title as of the date of the
adjudication, and
Page 187 U. S. 175
subrogated to the rights of creditors, the foregoing
considerations require an affirmative answer to the third question,
but in answering the first question, some further observations must
be made. This creditors' action was commenced December 17, 1896,
more than eighteen months before the passage of the Bankruptcy Act,
and was prosecuted with exemplary diligence to final and complete
success in the judgment of the Court of Appeals. At this point, the
bankruptcy court intervened and on summary proceedings enjoined
Metcalf Brothers & Company from receiving the fruits of their
victory. The state courts had jurisdiction over the parties and the
subject matter, and possession of the property. And it is well
settled that, where property is in the actual possession of the
court this draws to it the right to decide upon conflicting claims
to its ultimate possession and control.
In
Peck v.
Jenness, 7 How. 612, the district court had decided
that the lien of an attachment issued out of a court of New
Hampshire was defeasible and invalid as against an assignee in
bankruptcy. But this Court held that this was not so, and that the
district court had no supervisory power over the state courts, and
Mr. Justice Grier said:
"It is a doctrine of law too long established to require a
citation of authorities, that, where a court has jurisdiction, it
has a right to decide every question which occurs in the cause, and
whether its decision be correct or otherwise, its judgment, till
reversed, is regarded as binding in every other court, and that,
where the jurisdiction of a court, and the right of a plaintiff to
prosecute his suit in it, have once attached, that right cannot be
arrested or taken away by proceedings in another court. These rules
have their foundation not merely in comity, but on necessity. For
if one may enjoin, the other may retort by injunction, and thus the
parties be without remedy, being liable to a process for contempt
in one, if they dare to proceed in the other. . . . The fact
therefore that an injunction issues only to the parties before the
court, and not to the court, is no evasion of the difficulties that
are the necessary result of an attempt to exercise that power over
a party who is a litigant in another and independent forum."
The rule indicated was applied under the act of 1841 in
Clarke v. Rist, 3
Page 187 U. S. 176
McLean 494; under the act of 1867, by Mr. Justice Miller in
Johnson v. Bishop, Woolw. 324, and by Mr. Justice Nelson
in
Sedgwick v. Menck, 21 Fed.Cases 984, and under the act
of 1898, among other cases, by the Circuit Court of Appeals for the
Fourth Circuit in
Frazier v. Southern Loan & Trust
Co., 99 F. 707, and
Pickens v. Dent, 106 F. 653.
*
White v. Schloerb, 178 U. S. 542,
proceeded on the familiar doctrine that property in the custody of
a court of the United States cannot be taken out of that custody by
any process from a state court, and the jurisdiction of the
district court sitting in bankruptcy by summary proceedings to
maintain such custody was upheld. Mr. Justice Gray, speaking for
the Court, said:
"By section 720 of the Revised Statutes,"
"the writ of injunction shall not be granted by any court of the
United States to stay proceedings in any court of a state, except
in cases where such injunction may be authorized by any law,
relating to proceedings in bankruptcy."
Among the powers specifically conferred upon the court of
bankruptcy by section 2 of the Bankrupt Act of 1898 are to
"(15) make such orders, issue such process, and enter such
judgments, in addition to those specifically provided for, as may
be necessary for the enforcement of the provisions of this
act."
30 Stat. 546. And, by clause 3 of the Twelfth General Order in
Bankruptcy, applications to the court of bankruptcy
"for an injunction to stay proceedings of a court or officer of
the United States, or of a state, shall be heard and decided by the
judge, but he may refer such an application, or any specified issue
arising thereon, to the referee to ascertain and report the
facts."
Not going beyond what the decision of the case before us
requires, we are of opinion that the judge of the court of
bankruptcy was authorized to compel persons, who had forcibly and
unlawfully seized and taken out of the judicial custody of that
court property which had lawfully come into its possession as part
of the bankrupt's property, to restore that property to its
custody.
This cautious utterance -- and courts must be cautious when
dealing with a conflict of jurisdiction -- sustains as far as it
goes
Page 187 U. S. 177
the converse of the proposition when presented by a different
state of facts.
We are of opinion that the jurisdiction of the district court to
make the injunction order in question cannot be maintained.
Louisville Trust Company v. Comingor, 184 U. S.
18,
184 U. S.
26.
The first question will be answered in the negative, and the
third question in the affirmative, and it is unnecessary to answer
the other questions.
Certificate accordingly.
* Affirmed by this Court
sub nomine Pickens v. Roy, p.
187 U. S. 177,
post.
