In a railroad reorganization under § 77 of the Bankruptcy Act,
the court ordered "creditors" to file their claims by a certain
date or be denied participation except for cause shown. Creditors
other than mortgage trustees and those who had appeared in court
were notified by publication only. A city which received no copy of
the order did not file claims for its local improvement liens on
specific parcels of the railroad's real estate.
Held: a final decree providing for transfer of the
railroad's properties to a newly organized company could not
validly destroy or bar enforcement of the city's liens. Pp.
344 U. S.
294-297.
1. The city was a "creditor" within the meaning of § 77(b) of
the Bankruptcy Act. Pp.
344 U. S.
295-296.
2. In the circumstances of this case, publication did not
constitute the "reasonable notice" to the city required by §
77(c)(8). P.
344 U. S.
296.
3. The bar order against the city cannot be sustained because of
the city's knowledge that reorganization of the railroad was taking
place in the court. P.
344 U. S.
297.
197 F.2d 428, reversed.
The District Court enjoined enforcement of a city's liens for
local improvements on specific real estate of a railroad which had
since been reorganized under the Bankruptcy Act. 105 F. Supp. 413.
The Court of Appeals affirmed. 197 F.2d 428. This Court granted
certiorari. 344 U.S. 809.
Reversed, p.
344 U. S.
297.
Page 344 U. S. 294
MR. JUSTICE BLACK delivered the opinion of the Court.
The question presented is whether, under the circumstances of
this case, reorganization of the respondent railroad under § 77 of
the Bankruptcy Act [
Footnote 1]
destroyed and barred enforcement of liens which New York City had
imposed on specific parcels of the railroad's real estate for
street, sewer, and other improvements. The improvements were made
and the liens were all laid prior to 1931. Reorganization was begun
in the District Court in 1935. Subsequently, acting pursuant to
subdivision (c)(7) of § 77, the court issued an order directing
"creditors" to file their claims by a prescribed date, after which
unfiled claims would be denied participation except for "cause
shown." The railroad was required to mail copies of the order to
mortgage trustees or their counsel and to all creditors who had
already appeared in court. Other creditors had to depend for their
notice on two once--eek publications of the order in five daily
newspapers, one of which was the Wall Street Journal. [
Footnote 2] New York thus received no
copy of the bar order. Its lien claims were never filed.
The court's final decree provided for transfer of the old
railroad's properties to the newly organized company free from the
city's liens. [
Footnote 3]
Jurisdiction was reserved to consider and act on future
applications for instructions concerning disputes over
interpretation and execution of the decree. Pursuant to this
reservation, the railroad brought the present action alleging that
the city in failing to file had forfeited its claims; the railroad
prayed for a declaration that the liens were forever barred, void
and unenforceable,
Page 344 U. S. 295
and that the real property was discharged and released
therefrom. The District Court agreed with the railroad, and
enjoined enforcement of the liens. 105 F. Supp. 413. The Court of
Appeals affirmed, Judge Frank dissenting. 197 F.2d 428. In both
courts, the city made several arguments only two of which we need
consider here: (1) since the lien claims were collectible only out
of specified parcels of real estate, the city was not a "creditor"
of the railroad, and consequently was not required to file its
claims in bankruptcy court; (2) in the absence of actual service of
notice on the city, the court was without power to forfeit its
liens because of its failure to appear as a claimant. To consider
these questions we granted certiorari. 344 U.S. 809.
(1) We reject the city's contention that it was not a creditor
within the meaning of § 77 of the Bankruptcy Act. Section 77(b)
defines "creditors" as " . . . all holders of claims of whatever
character against the debtor or its property . . . ," and
specifically defines "liens" as "claims." [
Footnote 4] We had reason to comment recently on the
broad coverage of this section in
Gardner v. New Jersey,
329 U. S. 565,
where we held that state tax liens made states "creditors" for
purposes of § 77. True, the state's liens there were general
charges against all railroad assets, while the liens here are not.
New York can look only to each parcel of property on which its
liens are laid. But the reasons for our
Gardner holding
are equally applicable
Page 344 U. S. 296
here. New York is a "creditor" in the statutory sense, and
consequently was required to file its claims in bankruptcy unless
freed from that duty by lack of adequate notice.
(2) Section 77(c)(8) of the Act states that "The judge shall
cause reasonable notice of the period in which claims may be filed,
. . . by publication or otherwise." 11 U.S.C. § 205(c)(8). We hold
that publication of the bar order in newspapers cannot be
considered "reasonable notice" to New York under the circumstances
of this case.
Notice by publication is a poor, and sometimes a hopeless,
substitute for actual service of notice. Its justification is
difficult, at best.
See Mullane v. Central Hanover Bank &
Trust Co., 339 U. S. 306. But
when the names, interests, and addresses of persons are unknown,
plain necessity may cause a resort to publication.
See, e.g.,
Standard Oil Co. v. New Jersey, 341 U.
S. 428. The case here is different. No such excuse
existed to justify subjecting New York's claims to the hazard of
forfeiture arising from "constructive notice" by newspaper. In the
first place, subdivision (c)(4) of § 77 is designed to enable the
court to serve personal notices on creditors. It provides that
"[t]he judge shall require . . . " proper persons to file in the
court a list of all known creditors, the amount and character of
their claims, and their last known post office addresses. This was
not done here. Had the judge complied with the statute's mandate,
it is likely that notice would have been mailed to New York City.
Moreover, the railroad and the bankruptcy trustees knew about New
York's asserted liens. And there was at least as much reason to
serve a mail notice on New York City as on representatives of the
railroad's mortgagees. Their liens were subordinate to New York's.
There was even more reason to mail notice to the nonappearing known
creditor New York City than to the creditors who had actually filed
appearances as claimants.
Page 344 U. S. 297
Nor can the bar order against New York be sustained because of
the city's knowledge that reorganization of the railroad was taking
place in the court. The argument is that such knowledge puts a duty
on creditors to inquire for themselves about possible court orders
limiting the time for filing claims. But even creditors who have
knowledge of a reorganization have a right to assume that the
statutory "reasonable notice" will be given them before their
claims are forever barred. When the judge ordered notice by mail to
be given the appearing creditors, New York City acted reasonably in
waiting to receive the same treatment.
The statutory command for notice embodies a basic principle of
justice -- that a reasonable opportunity to be heard must precede
judicial denial of a party's claimed rights. New York City has not
been accorded that kind of notice.
Reversed.
MR. JUSTICE FRANKFURTER and MR. JUSTICE JACKSON doubt that a
city whose only claim is
in rem and which has no standing
to participate in the general estate is a creditor in the sense of
§ 77(b). But whether New York is or is not such a creditor, they
agree with the opinion that the notice in this case is not adequate
support for an order destroying the liens.
[
Footnote 1]
47 Stat. 1474, as amended, 49 Stat. 911, 11 U.S.C. § 205.
[
Footnote 2]
The other newspapers were located in Connecticut, Massachusetts,
and Rhode Island.
[
Footnote 3]
The city has contended strongly that the decree should not be so
construed, but we find it unnecessary to discuss this question.
[
Footnote 4]
". . . The term 'creditors' shall include, for all purposes of
this section all holders of claims of whatever character against
the debtor or its property, whether or not such claims would
otherwise constitute provable claims under this title, including
the holder of a claim under a contract executory in whole or in
part including an unexpired lease."
"The term 'claims' includes debts, whether liquidated or
unliquidated, securities (other than stock and option warrants to
subscribe to stock), liens, or other interests of whatever
character."
11 U.S.C. § 205(b).