In a railroad reorganization proceeding under § 77 of the
Bankruptcy Act in the federal court for Missouri, rights in oil
underlying the right of way of the railroad in Illinois were
claimed by the trustee and by others adversely. The trustee had
possession of the right of way lands under claim of fee simple
ownership.
Held:
1. The bankruptcy court had summary jurisdiction to adjudicate
the question of title. P.
309 U. S.
481.
2. The bankruptcy court did not abuse its discretion in ordering
that the underlying oil be extracted and marketed, to prevent
irreparable loss to the estate by its being drained off through
wells on adjacent lands, and that the net proceeds thereof be
impounded pending determination as to the rightful owner. P.
482.
3. Under the circumstances, the ownership of the fee to the
right of way lands should be determined by the state courts of
Illinois, and the bankruptcy court should order the trustee to
proceed accordingly. P.
309 U. S.
483.
106 F.2d 217 reversed.
Certiorari, 308 U.S. 630, to review a decree which reversed an
order of the District Court and directed dismissal
Page 309 U. S. 479
of a petition to that court by a trustee in a proceeding under §
77 of the Bankruptcy Act.
MR. JUSTICE BLACK delivered the opinion of the Court.
A rich oil field was discovered in Illinois in 1938. Thereupon,
this dispute arose between a trustee of a railroad in
reorganization under § 77 of the Bankruptcy Act, 11 U.S.C. § 205,
and other claimants as to the legal right to drill for and capture
fugitive oil under the railroad's right of way traversing the newly
discovered field. The trustee asserts fee simple ownership of the
right of way lands with consequent right to reduce the underlying
oil to possession. Respondents deny the trustee's alleged title or
that he has any interest in the land beyond a mere easement -- a
limited right to use the surface for railroad purposes only. They
allege that ownership of the fee is in others, from whom they have
obtained oil leases. This determinative question of fee simple
ownership can be decided only by interpretation, under Illinois
law, of instruments granting the railroad its right of way.
The questions here are whether the bankruptcy court has summary
jurisdiction to adjudicate ownership of the right of way lands, and
whether that court abused its discretion in ordering the fugitive
oil captured and its proceeds impounded pending adjudication of the
ownership.
Petitioner is trustee of the Missouri-Illinois Railroad Co., a
subsidiary of the Missouri-Pacific Railroad Co., in process of
reorganization in the same proceeding with the parent company in
the United States District Court
Page 309 U. S. 480
for the Eastern District of Missouri. The trustee petitioned the
bankruptcy court" . . . for determination of title and for advice
and directions respecting certain proposed oil operations on right
of way near Salem, Illinois." And his petition alleged that the
right of way lands had been
"fenced and used by Trustee and his predecessors in interest
without interruption, and with actual visible and exclusive
possession acquired under claim of title inconsistent with the
claims of title of any other owner for at least twenty years prior
to institution of these proceedings;"
that, by reason of this adverse possession and various
conveyances and decrees of record, the trustee had title to the
lands and a right to the oil thereunder; that numerous wells had
been dug in close proximity to the right of way, and, without
prompt action to remove the oil under the right of way, it would be
drained into wells on adjacent lands, and its value forever lost to
the stockholders and creditors of the railroad. The prayer sought
notice to claimants of rights to the oil to appear and show cause
why they should not be
"estopped and enjoined from asserting any further title in and
to the lands . . . upon which said right of way is located or to
the mineral, oil or gas deposits in and under . . . [the] right of
way or extracted therefrom;,"
and that, pending "determination of adverse claims to title,"
the trustee be authorized to have wells drilled, oil captured and
sold, and the proceeds, less cost of production, impounded and held
for the account of the rightful owner as might be thereafter
determined by the bankruptcy court.
Although they admitted that the railroad "had been in possession
of the . . . premises" using them for right of way and tracks,
respondents denied both that the trustee owned the fee and that the
railroad had been, or that the trustee was, in adverse possession
of the oil and other minerals under the right of way.
The bankruptcy court found that the trustee was in "actual
possession of the property . . . under assertion
Page 309 U. S. 481
of claim to fee simple title thereto," that the court
accordingly had jurisdiction, and that immediate action was
necessary
"to conserve the oil supply underlying the property for the
benefit of the parties in interest as their rights, title, and
interest thereto may hereafter be determined by this Court."
The trustee was therefore directed to provide for wells,
production and sale of oil, with the proceeds -- less expenses --
to be impounded pending adjudication of ownership.
Upon consideration of Illinois law, which admittedly must
govern, the Court of Appeals reversed with instructions to dismiss
the trustee's petition, concluding that, as interpreted under
Illinois law, the instruments relied on by the trustee conveyed an
easement only, and that the trustee's possession of the right of
way lands under an erroneous claim of fee simple ownership was not
such possession of the oil and gas as to give the bankruptcy court
summary jurisdiction to determine fee simple ownership. [
Footnote 1] Conveyances of rights of
way in Illinois substantially similar to those here in dispute have
been held by the Court of Appeals for the Seventh Circuit, in which
Illinois is located, to convey a fee simple title under that
State's law. [
Footnote 2]
Because of this conflict and the importance of the question of the
bankruptcy court's asserted summary jurisdiction, we granted
certiorari. [
Footnote 3]
First. 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. [
Footnote 4] Here, the trustee succeeded
to the physical possession,
Page 309 U. S. 482
custody and control of the right of way lands which the railroad
had enjoyed at the time of bankruptcy. In fact, however, no one
had, when the petition was filed, physical possession of the
fugitive oil apart from the lands under which it lay. The Supreme
Court of Illinois has said,
"The grant of oil and gas is a grant of such oil and gas as the
grantee may find, and he is not vested with any estate in the oil
or gas until it is actually found. [
Footnote 5]"
And this entire controversy can only be resolved by solution of
the primary question of fee simple ownership. The parties agree
that, if ownership of the right of way lands is in the trustee, he
has the right to capture the underlying oil, and if not, that the
trustee has no such right. Thus, the right to the disputed oil
necessarily hinges upon where the ownership of the fee to these
lands lies. And possession of those lands under claim of fee simple
ownership by the railroad and later by the trustee was an adequate
basis for the District Court's summary jurisdiction. As previously
determined in litigation involving another aspect of this same
reorganization, the jurisdiction thus acquired by the bankruptcy
court "extends . . . to the adjudication of questions respecting
the title."
Ex parte Baldwin, 291 U.
S. 610,
291 U. S.
616.
Second. We are of opinion that it was not an abuse of
discretion for the bankruptcy court to authorize the trustee to
protect all interests -- so far as it appeared possible to do so --
by preserving the oil from waste and depletion through its
extraction and sale, with the net proceeds to be impounded until
final determination of the controversy over title to the right of
way lands.
The verified petition and supporting evidence offered a basis
for the District Court's finding that such steps were necessary to
protect the estate's possible interest in the oil under the right
of way. No other method has been suggested whereby such protection
against irreparable
Page 309 U. S. 483
loss to the estate of the wandering and vagrant oil [
Footnote 6] could have been better
afforded. The " . . . malleable processes of courts of bankruptcy
give assurance of a remedy that can be moulded and adapted to the
needs of the occasion."
Steelman v. All Continent Co.,
301 U. S. 278,
301 U. S.
290.
Third. A court of bankruptcy has an exclusive and
nondelegable control over the administration of an estate in its
possession. [
Footnote 7] But
the proper exercise of that control may, where the interests of the
estate and the parties will best be served, lead the bankruptcy
court to consent to submission to State courts of particular
controversies involving unsettled questions of State property law
and arising in the course of bankruptcy administration. [
Footnote 8] And, under the
circumstances of this case, we conclude that it is desirable to
have the litigation proceed in the State courts of Illinois.
[
Footnote 9] An order to the
trustee to proceed in the Illinois courts for a decision on the
ownership of the fee to the right of way lands will be comparable
to one in which the bankruptcy court, preserving the
status
quo the while, orders a trustee to determine in a plenary
State court suit the legal right to property alleged by the trustee
to have been fraudulently transferred by the bankrupt. [
Footnote 10] Decision with which
the
Page 309 U. S. 484
federal court of bankruptcy is here faced calls for
interpretation of instruments of conveyance in accordance with
Illinois law. Neither statutes nor decisions of Illinois have been
pointed to which are clearly applicable. And the difficulties of
determining just what should be the decision under the law of that
State are persuasively indicated by the different results reached
by the two Circuit Courts of Appeal that have attempted the
determination. Unless the matter is referred to the State courts,
upon subsequent decision by the Supreme Court of Illinois, it may
appear that rights in local property of parties to this proceeding
have -- by the accident of federal jurisdiction -- been determined
contrary to the law of the State which in such matters is supreme.
[
Footnote 11]
The judgment of the Circuit Court of Appeals is reversed and
that of the District Court is affirmed, except insofar as it
provides for adjudication of the disputed ownership in the
bankruptcy court. The cause is remanded to the District Court with
instructions to modify its order so as to provide appropriate
submission of the question of fee simple ownership of the right of
way to the Illinois State courts.
Reversed.
MR. JUSTICE McREYNOLDS took to part in the decision of this
case.
[
Footnote 1]
106 F.2d 217.
[
Footnote 2]
Carter Oil Co. v. Welker, 112 F.2d 299.
[
Footnote 3]
308 U.S. 630.
[
Footnote 4]
Harris v. Avery Brundage Co., 305 U.
S. 160,
305 U. S.
162-163 and notes 4, 5 and 6.
[
Footnote 5]
Poe v. Ulrey, 233 Ill. 56, 62, 84 N.E. 46, 48.
[
Footnote 6]
See Poe v. Ulrey, supra, 62.
[
Footnote 7]
Isaacs v. Hobbs Tie & T. Co., 282 U.
S. 734.
[
Footnote 8]
Id., 282 U. S. 739;
see In re Schulte United, Inc., 49 F.2d 264;
see,
e.g., Foust v. Munson Lines, 299 U. S. 77
(bankruptcy court's denial of permission for suit in admiralty
against debtor in 77(b) held abuse of discretion);
Texas v.
Donoghue, 302 U. S. 284
(refusal of permission for a State to try in a State court its
claim -- based on alleged forfeiture -- to oil held by trustee in
77(b), abuse of discretion). 5 Remington on Bankruptcy, 4th Ed., §§
2045, 2370.
[
Footnote 9]
Cf. Ex parte Baldwin, supra, 291 U. S. 619.
[
Footnote 10]
Cf. Steelman v. All Continent Co., 301 U.
S. 278.
See Scott v. Gillespie, 103 Kan. 745,
176 P. 132,
cert. denied, 249 U.S. 606 (trustee ordered
into State court for construction of will to determine estate, if
any, taken thereunder by bankrupt).
[
Footnote 11]
Cf. Erie R. Co. v. Tompkins, 304 U. S.
64.