In a proceeding under § 75(s) of the Bankruptcy Act, the debtors
petitioned the conciliation commissioner for an appraisal and the
setting aside of the property to them (no action having been taken
upon a previous petition); appraisers were appointed and made
report to the commissioner of the value of the property, but no
stay order fixing terms on which the debtors would remain in
possession had been entered.
Held, the action of the
District Court at that stage, in granting leave to a creditor to
sell the property under deeds of trust was contrary to the
provisions of § 75(s). P.
310 U. S.
316.
107 F.2d 96 reversed.
Certiorari, 309 U.S. 648, to review the affirmance of an order
of the District Court, in a proceeding under
Page 310 U. S. 312
§ 75(5) of the Bankruptcy Act, authorizing the sale of the
debtors' property under deeds of trust.
MR. JUSTICE ROBERTS delivered the opinion of the Court.
We granted certiorari in this case, 309 U.S. 648, for the reason
that it presents important questions with respect to the procedure
required by § 75(s) of the Bankruptcy Act, as amended. [
Footnote 1]
The precise matter in controversy is whether the bankruptcy
court may permit foreclosure of mortgage liens where the procedure
prescribed by § 75(s) has not been followed.
The petitioners, husband and wife, are farmers. Over the period
January 24, 1927, to June 19, 1933, they borrowed from the
respondent, the California Bank, a total of $87,566.93, in varying
amounts, executing to the bank their promissory notes for the
respective loans together with deeds of trust [
Footnote 2] on their farm real estate as security.
From time to time, they made payments which reduced the principal
of the indebtedness to $53,919.20. The lender, in the meantime, had
made some advances towards the payment of taxes on the property.
Further to secure their indebtedness, they executed, on January 30,
1934, a mortgage on all the crops standing or growing, or
Page 310 U. S. 313
which should thereafter be planted, grown, cultivated, cut,
gathered, packed, or harvested during the life of the mortgage on
certain of their farm real estate.
November 17, 1934, they filed their petition under § 75 of the
Bankruptcy Act, which was approved and referred to a Conciliation
Commissioner. In January, 1935, the respondent bank declared
defaults, and recorded notices thereof and of its election to cause
the property to be sold pursuant to the deeds of trust, and the law
of California.
March 25, 1935, the Conciliation Commissioner appointed
appraisers who filed an appraisal on May 1 valuing the debtors real
estate at $68,550. It is to be noted that § 75 contains no
provision for appraisal during the course of the conciliation
proceedings covered by subsections (a) to (r), nor do we find any
rule of the District Court providing for appraisal at this stage of
the cause. The transcript of record does not disclose whether this
appraisal was asked by any creditor or by the debtors. So far as
appears, the order for the appointment of appraisers was made by
the Conciliation Commissioner of his own motion.
The debtors were unable to obtain the requisite acceptance of
creditors to the composition and extension proposal they submitted.
As a consequence, they amended their petitions and prayed to be
adjudicated bankrupts in accordance with the provisions of § 75(s).
The petition was granted and an adjudication entered May 6, 1935.
Apparently no further proceedings were taken until June 26, 1935,
when the bankruptcy cause was dismissed on the ground that this
court had held § 75(s) unconstitutional. [
Footnote 3] On the same day, the debtors petitioned a
local court for relief under a State moratorium act and obtained an
order granting a moratorium, which
Page 310 U. S. 314
remained in effect until September 20, 1935, when the debtors
filed a petition for reinstatement of the bankruptcy cause in
accordance with the amendment of § 75(s) adopted to meet the
decision in the
Radford case. [
Footnote 4] On the same date, the District Court approved
the petition, ordered the proceedings reinstated, and referred the
case to a Conciliation Commissioner in accordance with the
provisions of § 75(s). The court restrained the respondents from
selling, or proceeding with a sale of, the real estate covered by
the deeds of trust, and also enjoined them from collecting from
packers or processors the proceeds of crops covered by mortgage,
until the further order of the court.
October 18, 1935, the petitioner Franz J. Borchard presented his
petition to the conciliation Commissioner praying that appraisers
be appointed; that his exempt property be set aside to him, and
that he be allowed to retain possession, under the supervision and
control of the court, of all of the remainder of his property, and
for such further order as might be just and proper in the premises,
as authorized by § 75(s). Shortly thereafter, the debtors filed a
petition for an order on the bank to compel it to release its
asserted claim to the crop of oranges grown on their property in
1935. In opposition, the bank not only asserted the validity of its
lien, but urged that the proceedings be dismissed because § 75(s),
as amended, was unconstitutional. The District Judge held that the
bank had a lien on the 1935 orange crop, but refrained from passing
upon the validity of § 75(s), stating that he would decide that
question at a later date if the parties so desired. Apparently the
parties requested a ruling, and, on May 15, 1936, the Judge
overruled the contention of the bank and refused to dismiss the
proceedings.
Page 310 U. S. 315
Nothing having been done pursuant to the petition for appraisal
and award of possession to Franz J. Borchard, the petitioners and
respondents, on May 27, 1936, filed in the District Court a
stipulation by the terms of which $3,900, held by third parties,
being the proceeds of 1935 crops harvested from the premises, was
to be paid to the bank and by it expended for the cultivation and
improvement of the land. The District Court accordingly ordered the
sum paid to the bank. June 10, 1937, the parties stipulated that
$2,494, like proceeds of crops harvested, be paid to the bank, to
be expended for the cultivation of the farm. The court so ordered.
December 20, 1937, a stipulation was filed and an order made that
$2,000 be paid to the bank, $1,500 to the debtors, and $946 applied
to taxes. Finally, on March 7, 1938, pursuant to stipulation,
$1,763 was released from the hands of third parties to be expended
for the cultivation and preservation of the mortgaged real estate.
The stipulation further provided that the bank should receive the
monies realized from the sale of then growing crops and should
apply them, so far as necessary, to maintain and protect the orange
grove on the property.
All of the stipulations reserved the rights of the parties, and
were to be without prejudice to such rights.
May 24, 1938, the debtors petitioned the Conciliation
Commissioner for an appraisal and the setting aside of the property
to them. June 22, 1938, appraisers were appointed, and they
reported the value of the real estate as $87,300. It does not
appear what, if any, proceedings were had before the Conciliation
Commissioner upon the coming in of the appraisers' report. The
petitioners assert that the Commissioner was considering the terms
of an order for a stay and the conditions to be inserted in that
order. On November 10, 1938, however, the bank filed its petition
in the District Court for leave to sell under its trust deeds. The
petition recited the facts as
Page 310 U. S. 316
above outlined, stated the principal and interest due under the
various notes; set forth the amount of the advances the bank had
made for taxes and other accounts, and showed an existing
indebtedness, secured by deeds of trust and mortgage, totaling
$89,246.82. It alleged that the mortgaged premises would not bring
more than $65,000; that the bank had already suffered a serious
loss, and that further delay in the sale of the property would
entail a greater one. The court took testimony as to value, and
concluded that the real estate was not worth more than $65,000. It
found that, as the debtors had had several years within which to
arrange an adjustment of their obligations and had been unable so
to do, it was fair and equitable that the bank be allowed to
proceed so as to save itself further loss. The petition was granted
and the outstanding restraining order was dissolved.
On appeal by the debtors, the Circuit Court of Appeals affirmed
the decree, [
Footnote 5]
holding that the District Court's action was justified by our
decision in
Wright v. Vinton Branch of Mountain Trust
Bank, 300 U. S. 440.
We are of opinion that the action of the District Court in
permitting the creditor to proceed to a sale for the enforcement of
its liens at this stage of the proceeding was contrary to the
provisions of § 75(s). That this is so is made plain by our
decisions in
Wright v. Vinton Branch of Mountain Trust Bank,
supra, and
John Hancock Ins. Co. v. Bartels,
308 U. S. 180. As
was said in the latter case (p.
308 U. S.
187):
"The scheme of the statute is designed to provide an orderly
procedure so as to give whatever relief may properly be afforded to
the distressed farmer debtor, while protecting the interests of his
creditors by assuring the fair application of whatever property the
debtor has to
Page 310 U. S. 317
the payment of their claims, the priorities and liens of secured
creditors being preserved."
That orderly procedure includes an application by the debtor,
such as was made in the present case, for an appraisal of the
property, an order that the debtor remain in possession upon terms
fair and equitable to him and to secured creditors, and the entry
of a stay which will assure him of his possession for three years
from the date of the order, upon the conditions mentioned in the
Act. As a prerequisite to an intelligent determination of the terms
under which the debtor is to remain in possession, the statute
requires that the court and the parties shall be informed of the
fair value of the property. As pointed out in the
Wright
case,
supra, the secured creditors' rights are protected
to the extent of the value of the property. The court may order
rent to be paid by the debtor, may order him to make payments on
account of principal, and, in its continuing control over the
property, may enter any other orders for the protection of the
debtor and secured creditors which the situation requires. Failure
of the debtor to comply with any such orders may eventuate in a
sale.
Instead of prosecuting the cause before the Conciliation
Commissioner pursuant to the debtors' petition, the bank resorted
to a procedure not contemplated by the statute, evidently on the
theory that it could obtain some advantage by that course. By
written stipulations, the bank consented to the retention of
possession by the debtors and arranged that they should cooperate
in the cultivation of the farm, proceeds of the crops being used
for further cultivation and conservation of the real estate, for
payment of taxes, and for payments to the debtors. For more than
thirty-one months after the petition for appraisal was filed, no
action was taken. An appraisal was thereafter made. No stay order
has been
Page 310 U. S. 318
entered fixing terms on which the debtors are to remain in
possession. The petitioners were entitled to compliance with the
procedure required by the statute. The bank at any time could have
obtained action by the Conciliation Commissioner and the court, in
accordance with the statute. It cannot now maintain that the
disorderly and unauthorized procedure followed by the parties is
the equivalent of that prescribed by the statute, and that, as the
petitioners have not been able to rehabilitate themselves, it is
entitled to enforce its liens.
The judgment is reversed, and the cause is remanded for further
proceedings in conformity with this opinion.
Reversed.
[
Footnote 1]
Act of March 3, 1933, c. 204, 47 Stat. 1467; Act of June 28,
1934, c. 869, 48 Stat. 1289; Act of August 28, 1935, c. 792, 49
Stat. 942. The Act has been further amended in particulars not here
important by the Act of June 22, 1938, 52 Stat. 840, 939. Section
75, as it now stands, is Tit. 11 U.S.C. § 203.
[
Footnote 2]
The deeds of trust ran to the respondent Trust Company as
trustee.
[
Footnote 3]
Louisville Joint Stock Land Bank v. Radford,
295 U. S. 555.
[
Footnote 4]
Act of August 28, 1935, c. 792, 49 Stat. 942.
[
Footnote 5]
Borchard v. California Bank, 107 F.2d 96.