The principles established in the case of
Ex Parte City Bank
of New Orleans in the matter of Christy, assignee of Walden,
renewed and confirmed.
But this Court does not decide whether or not the jurisdiction
of the district court over all the property of a bankrupt,
mortgaged or otherwise, is exclusive, so as to take away from the
state courts in such cases.
The controversy was between the bankrupt's assignee, on one
side, and a mortgage creditor and purchasers at the sale under
state process of the mortgaged premises, on the other.
The points to be
Page 44 U. S. 427
decided grew out of the bankrupt law, and especially out of the
saving in favor of state liens in the 2d section, and the
jurisdiction granted to the district and circuit courts of the
United States in cases of bankruptcy by the 6th and 8th. The
validity of certain rules established by the District Court of
Louisiana, sitting in bankruptcy, was questioned, and the mortgage
creditor, not having proved under the commission, claimed exemption
from those rules, and asserted the right to pursue his prior lien
in the state court.
The complainant's bill stated in substance that Elizabeth Norton
filed her petition to be declared a bankrupt on 9 May, 1842. On 1
June it was decreed accordingly, and Richard Nugent appointed
assignee.
At the time, and long before the date of the petition, George W.
Boyd, one of the defendants, was the holder of notes, secured by
mortgage duly recorded according to the laws of Louisiana, for the
sum of $9,000, on which judgment had been rendered, order of
seizure and sale granted, and execution issued and been levied, all
before the date of the bankrupt's petition. The levy took place on
16 February, 1842. The sale was the only proceeding after the date
of the decree of bankruptcy, that decree being dated the 1st and
the sale taking place on 4 June, 1842.
The bill admitted that all the forms and notices &c.,
required by the laws of Louisiana for the sale of mortgaged
premises under execution, were observed, but set up the petition
and decree of bankruptcy, made before the sale, and alleged, that
before the property was sold the assignee gave written notice of
the decree, and of his appointment as assignee under it, to the
sheriff, the mortgage creditor, Boyd, and to Preston and Phelps,
who afterwards became the purchasers of the mortgaged premises at
sheriff's sale, cautioning them respectively, and claiming at the
same time the right to stay the sale, and take the property into
his own hands for sale and distribution under the rules of the
bankrupt court. Copies of the proceedings in bankruptcy and of the
rules of the bankrupt court were made exhibits to the bill. These
general orders of the District Court of the United States for the
District of Louisiana, sitting in bankruptcy, and purporting to be
made in pursuance of the authority delegated to it by the Bankrupt
Act, and especially the 6th section thereof, provided in substance
that notice should be served on all creditors of the bankrupt who
had any special mortgage, lien, or privilege. The assignee was
authorized to take a rule on the mortgage creditor to show cause
why the mortgaged premises should not be sold by the assignee, and
the court would thereupon pass in order of sale, which order should
ipso facto annul the mortgages, liens &c., existing on
the property sold, and upon its presentation to the recorder of
mortgages, he should be required to cancel the inscription of all
such mortgages, liens &c., on his records, and the liens,
privileges &c., should attach to the proceeds in the hands
Page 44 U. S. 428
of the assignee. The mortgage creditor was entitled, under
certain reservations, to prescribe the terms of sale, and at such
sale might become the purchaser, but was required to pay the
expenses and commissions on the sale, and the surplus, if any, over
and above the amount of his mortgage, but these privileges were
allowed only on the condition of his filing the proof of his debt
in the registry of the court.
The complainant alleged, that by the act of Congress the rules
aforesaid made in pursuance thereof, and the proceedings thereunder
in the case of the bankrupt, the sale should have been stayed, and
the said George W. Boyd having been notified and cited to appear
and contest the proceedings in bankruptcy, all the acts done under
color of the state process, after the date of the petition, were
irregular and void; that Preston and Phelps having also been
notified and cautioned, they derived no title from the sheriff's
sale, such sale being invalid.
The bill prayed that the sheriff's sale might be set aside, the
title of Preston and Phelps declared null; that George W. Boyd be
compelled to come into the district court, sitting in bankruptcy,
and conform himself in all things to the rules of said court in
such cases, and for other and general relief.
To this bill there was a demurrer, which, admitting all the
facts, insisted, in point of law,
1. That the petition, decree, appointment of the assignee
&c., did not prevent the mortgage creditor from enforcing his
lien under the process of the state court.
2. That the district court had no right to pass the rules
insisted on.
3. That the mortgage creditor was not bound by law to submit his
claims to the district court, sitting in bankruptcy, but might
elect not to prove his debt, and still pursue his lien and remedy
under the law.
4. That the title obtained at the sheriff's sale was, according
to the facts set forth by the complainant, a good title for the
purchasers against the assignee.
On the hearing of the argument on the bill and demurrer, the
circuit court sustained the demurrer, and ordered the bill of the
complainant to be dismissed.
From this decree the complainant appealed.
Page 44 U. S. 434
MR. CHIEF JUSTICE TANEY delivered the opinion of the Court.
It appears in this case that in January, 1844, a bill was filed
in the Circuit Court of the United States for the Eastern District
of Louisiana, sitting in chancery, by Richard Nugent, assignee of
the estate of Elizabeth Norton in bankruptcy, stating that the said
Elizabeth Norton, on 9 May, 1842, filed her petition in the
district court of the United States to be declared a bankrupt, and
that she was accordingly decreed to be such about 1 June in
Page 44 U. S. 435
the same year; that she returned in her schedule two lots of
ground in the City of La Fayette particularly described in the
bill, and that George William Boyd was, among others, returned as a
creditor for the sum of $9,000, and that notice was served on him
of the proceedings in bankruptcy. The bill further states that
prior to and at the time of the petition in bankruptcy, the two
lots above mentioned were affected by a special mortgage to the
said Boyd, which was valid by the laws of Louisiana, for the sum of
$9,000 and upwards; that prior to the bankruptcy of Elizabeth
Norton -- that is to say, about 11 November, 1841 -- Boyd commenced
suit upon his said mortgage in the proper state court of Louisiana
and obtained judgment, with the privileges of a mortgage, and
issued execution thereon, which was levied upon the said property
about 16 February, 1842, and on or about 4 June following, the
property was regularly sold by the sheriff under the execution to
Isaac T. Preston and Abner Phelps, who took possession of the said
two lots and continue to hold them, claiming as owners. The bill
further states that the complainant, having received notice of the
levy and intended sale under the execution, duly notified the said
Boyd, Preston, Phelps and the sheriff in writing, before the sale,
of his appointment as assignee as aforesaid, and cautioned them not
to proceed with the sale, but that the parties, continuing and
intending to defeat the just rights of the complainant, proceeded
to sell, and placed the purchasers above mentioned in possession of
the property in question. The complainant refers to and exhibits
with his bill certain rules adopted by the district court of the
United States for the disposition of real estate surrendered by
bankrupts, and encumbered by mortgages and charges, that by virtue
of the Bankrupt Act, all the proceedings in the state court ought
to have been stayed, from the moment the petition of the bankrupt
was filed, and that the subsequent proceedings were irregular, and
conferred no title on the purchasers, and that the complainant was
entitled to take the property from the hands of the sheriff, and to
administer and sell the same under the direction of the district
court by virtue of the act of Congress and the rules of court above
mentioned. The bill then prays process against Boyd, Preston, and
Phelps, and that the proceedings under the execution subsequent to
the petition in bankruptcy should be declared irregular; that the
title of Preston and Phelps from the sheriff should be decreed to
be null and invalid, and the said Preston and Phelps be ordered to
restore the said lots to the possession of the complainant, to be
administered and sold by him in conformity with the orders of the
district court of the United States, and in pursuance of the rules
before referred to, and that Boyd should be directed to come into
the district court, and conform himself to the orders of the court
and the rules aforesaid.
The defendants appeared and demurred to the bill, and upon
Page 44 U. S. 436
final hearing on the demurrer, the following decree was passed
by the circuit court:
"This is a bill in equity presented by an assignee in bankruptcy
to set aside a certain sale, made under a writ of seizure and sale
from the District Court of Louisiana, upon the ground that the
district court of the United States was, by the bankrupt law passed
by Congress on 19 August, 1841, vested with exclusive jurisdiction
over all matters appertaining to the settlement of the affairs of
the bankrupt, and that consequently the sale made by the District
Court of Louisiana has transferred no legal title to the property.
The bill further claims the property sold as a part of the property
of the bankrupt to be sold or otherwise disposed of under the
orders of the district court of the United States. It appears that
the property in question consists of real estate, and that the same
was sold to satisfy a special mortgage held by the creditor who
obtained the order of seizure and sale from the state
tribunal."
"I have, after an attentive consideration of the various
allegations in the bill, ordered the same to be dismissed, and
shall now proceed to state very briefly the grounds upon which I
acted. In the first place, I do not consider that there is any
equity in the bill; the property was specially mortgaged to satisfy
the claim of the creditor who demanded the sale, and it does not
appear that in the assertion of his right he has in any manner
interfered with the rights of the other creditors of the bankrupt.
It does not appear that any doubt existed as to the validity of the
mortgage or that the creditor has obtained any right or any
advantage over the other creditors which the district court,
sitting in bankruptcy, would not have been bound to award him under
the express provisions of the bankrupt law. It is quite clear that
the liens and mortgages which are valid under the state law must be
protected by the district court of the United States, sitting in
bankruptcy, and it will not be pretended that the creditor at whose
instance the property in question was sold would not have been
entitled, under any and all circumstances, to the proceeds of that
property to satisfy the amount alleged to be due him. What benefit
would then accrue to the general creditors of the bankrupt by the
interference of this Court in a matter which seems to have been
fairly and finally adjudicated? While I am well satisfied that no
good would arise from such an interference, I am equally well
satisfied that great injustice would be done both to the mortgage
creditor and to the estate of the bankrupt, by subjecting both
unnecessarily to additional costs and expenses."
"I agree fully in the opinion that upon the ground of expediency
the jurisdiction of the district court of the United States over
all the property of the bankrupt, mortgaged or otherwise, should be
exclusive, but I do not understand the bankrupt law to render it
so. Where a creditor, by virtue of a special mortgage, elects to
foreclose that mortgage before a state tribunal, the federal court
is not called
Page 44 U. S. 437
upon to interpose except in cases where from the nature of the
case wrong or injustice may be done to other creditors in interest,
or where the mortgage itself may be contested."
"I wish it, however, to be distinctly understood that I am fully
of opinion that the district court of the United States is vested
with jurisdiction over mortgaged property belonging to the
bankrupt, and that when a proper case is shown, it has power to
foreclose a mortgage and to do all other acts necessary to bring
about a final distribution and settlement of the bankrupt estate. I
am also of the opinion that in a case where a creditor calls in
question the validity of a mortgage held by another creditor, it is
the duty of the said court to exercise jurisdiction over the
questions involved, and if necessary to declare the mortgage null
and void."
"In the case before me, no such question is involved, and I see
no reasons why the equity powers of this Court should be exercised
to do that which cannot change the rights of the parties
interested, but which would have the effect of doing a positive
injustice to the mortgage creditor by subjecting his property to
useless costs and expenses."
"It is therefore ordered that the complainant's bill be
dismissed."
We have inserted the whole of this decree because we think the
court was not only right in dismissing the bill, but, with a single
exception, we concur also in the principles and reasoning on which
the learned judge founded his decision. The exception to which we
allude is that part of the decree in which he expresses his
opinion, that upon the ground of expediency the jurisdiction of the
district court of the United States over all the property of the
bankrupt, mortgaged or otherwise, should be exclusive, so as to
take away from the state courts any jurisdiction in such cases.
Upon that subject it is not our province to decide, and we have no
desire to express an opinion upon it. But in every other respect,
the decree conforms to the opinion delivered by this Court, at the
present term, upon the motion for a prohibition in the case
Ex
Parte City Bank of New Orleans in the matter of William Christy,
assignee of Daniel T. Walden, a Bankrupt v. City Bank of New
Orleans. In that case the opinion of this Court in relation to
the jurisdiction of the district court in matters of bankruptcy has
been fully expressed, and need not be repeated here, and according
to the principles therein stated, the decree of the circuit court
in this case must be
Affirmed.
MR. JUSTICE CATRON.
I think the adjudication in this case is in conflict with that
made in the Circuit Court at New Orleans in
Christy against The
City Bank, and in support of which, a majority of my brethren
saw proper to express their views at a previous day during this
term, in the unsuccessful application of the bank for a
prohibition, but that the
Page 44 U. S. 438
cases are alike -- and one cannot be maintained, and the other
overthrown.
In that case the petition of the assignee set forth the entire
legal grounds, why the district court should annul the judgments in
the state court, and pronounce the sale void.
1. That the property sold was given in by Walden, the bankrupt,
as part of his effects.
2. That the bank had notice thereof, before the sale by the
sheriff.
3. That the sale was void, being contrary to the Bankrupt Law,
which operated to stay all further proceeding so soon as Walden's
petition was filed, and was a bar to any further prosecution of the
suit until an assignee should be appointed. That the sale with
notice was a fraud upon the act of Congress, and the other
creditors of Walden, by reason of the law, because the bank was
endeavoring to obtain an illegal preference.
4. That at the sale the property was struck off in blocks,
although consisting of different buildings, at two-thirds of its
value: "All of which actings and doings are prohibited by law, and
render said sale null and void."
5. That the sale was in other respects irregular, the legal
formalities not having been observed.
6. That the mortgage was void for usury, because in effecting
the loan the bank gave Walden bonds on the Second Municipality
instead of money, and they were then at a discount at from twenty
to twenty-five percent
To these allegations the bank answered:
1. By plea that the district court was not by law empowered to
decide on the matters charged.
2. That all the matters and things set forth had already been
decided by a court of competent jurisdiction -- referring to the
adjudications by name.
3. The defendant answers and avers that the mortgage was legal
and valid and given upon a full and adequate consideration.
4. That the order of sale was duly granted, and the writ thereon
properly issued, and that the property described in the petition
was lawfully seized, and after a compliance with all the legal
formalities, was sold, and adjudicated to the defendants; that the
price was fully paid by giving a credit, and that the property is
held under an indefeasible title.
5. All the allegations in the petition not admitted are denied,
and a trial demanded of them.
This answer was excepted to as containing no legal grounds of
defense; the question was adjourned, under the 6th section of the
Bankrupt Law, to the circuit court to be there heard and
determined. It stood in that court as on bill and answer; the
answer was taken of course as true in all its parts, the only
question being whether
Page 44 U. S. 439
any legal ground of defense was furnished by the plea, supported
by an answer, denying the alleged unfairness of the sale,
presenting the same question in substance as did the case of
Harpending v. Dutch
Church, 16 Pet 455. By setting the case down on
plea and answers, the proceedings in the supreme and inferior state
courts were admitted of necessity to have been properly and fairly
conducted, and the sale legally and fairly made. This was the
undoubted aspect of the case as presented to and decided by the
circuit court. Its decree, in the form of instructions to the
bankrupt court, is first that the latter had full and ample powers
to try all the questions presented in the assignee's petition; 2d,
that the sale made under the seizure by order of the state court
was void; and that the bankrupt court should declare it so; 3d,
that the bankrupt court had full power to retry the validity of the
mortgage and ascertain whether it was void for usury or otherwise,
and this on the ground exclusively that the proceedings in the
state courts were annulled by force of the bankrupt law, and the
fact of Walden applying for its benefit.
Taking the petition and answer together, and a case existed in
all its features like the present, on the title by execution, each
being a fair and regular proceeding in the state court. One is
suppressed, and the other maintained. And on what ground does the
district judge assume to act contrary to the former adjudication?
Because it was equitable and for the best interests of the estate
to be distributed, in his judgment. The obvious meaning of which is
that he had power to overthrow the title or not, at his discretion,
and that such discretion was the law of the case and the tenure of
the title, according to the true intention of the Bankrupt Act. On
this assumption are the two cases attempted to be reconciled, and
on no other can they avoid direct conflict, even in appearance. In
reality, the one title is as good as the other. The tendency of
such a doctrine is too threatening to titles to be silently
acquiesced in. Did Congress intend that the force and effect of
judgments and executions in a state court, should depend on the
sole discretion of a judge sitting in bankruptcy? Was it intended
to discard the axiom, that unrestrained discretion in those that
govern, is inconsistent with the rights of those that are governed,
be they of property or person? It is very difficult to suppose so,
and as difficult to accommodate the construction of the act to such
a supposition. It is declared
"That it shall not be construed to annul, destroy, or impair,
any liens or mortgages, on property real or personal, which may be
valid by the laws of the states respectively."
Here, two liens are combined -- one by mortgage, the other by
execution levied. In
Christy v. City Bank, as already
stated, that by mortgage was recognized as a right protected by the
act, but to be administered in the bankrupt court only; that by
execution was
Page 44 U. S. 440
pronounced void. This decision the court below was asked to
follow out in the case before us, and refused.
By the execution levied, the lien "was valid by the laws of the
state" in the words of the saving clause; the remedy by seizure
created the right; to annul, or to stay the execution, impaired a
right, excepted out of the act. Since the opinions were delivered
in the
ex parte application of The City Bank, we have in
effect so held at the present term, in
Waller v. Best.
In making exceptions in favor of liens created by judgment and
execution, Congress was governed by practical considerations. The
states usually were large, the bankrupt courts in many of them far
off from the creditors, the debts owing by the bankrupt small in
amount to a great extent; for these recoveries would be had in the
inferior courts and before magistrates; the property would be
seized by execution, and he the debtor be driven into bankruptcy;
this step might be taken secretly. The officer having possession of
the property had to dispose of it according to the commands of the
writ and make return to the state tribunal, a return that the
debtor had applied for the benefit of the bankrupt law would not be
a legal return, as I have held, and always supposed, and that a
decree declaring the party a bankrupt, would not alter the case; as
in either, the lien would be not only impaired, but destroyed where
the levy alone gave it, as is the case in many instances. To drive
the small creditor into the bankrupt court to establish his demand
and effectuate his lien, would often have been worth more in
trouble and expense than the debt, and in the meantime the
property, being abandoned by the officer, and not taken possession
of by the assignee, would in many instances perish. These facts
were too palpable for Congress to overlook. To protect such liens,
I take it the exception was a compromise between the opponents and
friends of the bill; the one side supporting rights secured by the
state laws, and the other seeking to adopt a different rule under
the Constitution of the United States, in regard to the relation of
debtor and creditor.
In many cases, the bankrupt might owe debts in other states than
that where he would be declared bankrupt; then other difficulties
would arise on executions being levied in the foreign jurisdiction,
to which the powers of the bankrupt court could not extend. In all
the cases enumerated the assignee had given to him the same powers
the bankrupt previously had, to sue and defend, and no material
difficulty could arise (or has arisen) in adjusting the claims in
the state courts, to which the assignee was bound to apply.
That a mortgage can be foreclosed in the bankrupt court, and the
lien given by it be preserved there, I have never doubted if the
jurisdiction of a state court had not attached and was not ousted
by the proceedings in bankruptcy.
For the foregoing reasons, I think the court of Louisiana
was
Page 44 U. S. 441
mistaken when it assumed to have power to suppress the sale made
by the sheriff or to let it stand, at its discretion.
The decree is deemed entirely proper; nor would the reasons for
it have been noticed had not my brethren adopted them to the extent
above, and with which adoption I cannot concur.