Although district courts of the United States, sitting in
bankruptcy, have power to order a sale of the real estate of the
bankrupt which he has mortgaged in such a way as to discharge it of
all liens, and although as a general thing, if they order a sale so
that the purchaser shall take a title so discharged the purchaser
will have a title wholly unencumbered, yet to pass in this way an
unencumbered title of property previously mortgaged, it is
indispensable that the mortgagee have notice of the purpose of the
court to make such an order; or that in some other way he have had
the power to be heard, in order that he may show why the sale
should not haws the effect of discharging his lien. And if a sale
be made without any notice to him, his mortgage is not
discharged.
The case was thus:
The first section of the Bankrupt Act enacts:
"That the several district courts be and hereby are constituted
courts of bankruptcy. . . . And the jurisdiction hereby conferred
shall extend to all cases and controversies arising between the
bankrupt and any creditor or creditors who shall claim any debt or
demand under the bankruptcy; to the collection of all the assets of
the bankrupt; to the ascertainment and
liquidation of the liens
and other specific claims thereon; to the adjustment of the
various priorities and conflicting interests of all parties, and to
the marshalling and disposition of the different funds and assets,
so as to secure the rights of all parties, and due distribution of
the assets among all the creditors."
The twentieth section enacts:
"When a creditor has a mortgage or pledge of real or
personal
Page 90 U. S. 129
property, or a lien thereon for securing the payment of a debt
owing to him from the bankrupt, he shall be admitted as a creditor
only for the balance of a debt after deducting the value of such
property, to be ascertained by agreement between him and the
assignee, or by a sale thereof, to be made
in such manner as
the court shall direct."
With these provisions of the Bankrupt Act in force, W. A. Parks,
owning a plantation in Louisiana, sold the same to one Brigham,
who, in consideration of the sale, gave his note for $11,666.66 to
Parks, and to secure the note gave also what is called, in
Louisiana, "a special mortgage with vendor's privilege" -- a sort
of security apparently like a common law mortgage for purchase
money.
Parks sold for value this mortgage with its privileges to one
Norseworthy (the transfer being duly recorded), and soon afterwards
died. Brigham, the purchaser of the land, was declared bankrupt,
and his assignee, one Norton, filed a petition in the District
Court of the United States at New Orleans setting forth certain
facts, though exactly what facts -- as the petition itself was not
produced -- did not appear. So far as might be inferred from a
recital and order hereinafter quoted, made upon the petition, it
rather seemed that the petition represented that Parks had owned
the land and sold it Brigham, taking the mortgage &c.; that
Brigham was now bankrupt, and that he, Norton, was his assignee;
that it was necessary to sell the land to pay the debts of the
bankrupt; and praying an order of sale and power to apply the
proceeds to paying, in discharge of special mortgages, to one J. D.
Denegre, $7,091; to Parks, $11,666.66; and to one R. Nugent,
$2,044. Parks had at this time been dead for more than a year, and
his estate had been sold. Denegre too was dead. Norseworthy lived
in Texas, several hundred miles from New Orleans. Whether the fact
of his interest in the mortgage originally owned by Parks was in
any way stated, or indeed whether his name was mentioned in the
petition in any way did not appear. But it appeared that a notice
of the sale, intended to be a notice to him, had been sent through
the mail by the assignee in bankruptcy,
Page 90 U. S. 130
to a person supposed by the said assignee to be Norseworthy's
attorney, and to represent him, but who in fact did not represent
him at all in any way. Neither did it appear what rule was made or
what return had been made by the marshal.
Although, as above said, the petition itself was not produced,
nor the rule, nor the marshal's return, the following proceedings
upon the petition in the court of bankruptcy were produced:
"The petition and rule filed by the assignee, came up, Mr. H. D.
Stone,
for the assignee, and it appearing to the
satisfaction of the court that the service required by law has been
duly made and that
the facts set forth in the petition are
true, it is ordered that the prayer of the petition be granted
and the rule be made absolute; that he assignee be authorized to
sell the bankrupt's property following, to-wit:"
"[Here followed a description of the property mortgaged.]"
"It is further ordered that said assignee be also authorized to
cancel and mortgages, liens, judgments, and encumbrances resting on
said property, and particularly those in favor of the estate of J.
D. Denegre for $7,091, being a special mortgage; the special
mortgage and vendor's privilege in favor of W. A. Parks, for
$11,666.66, and the special one in favor of R. Nugent for $2,044,
reserving to said parties and to all other persons in interest all
the rights in law to the proceeds according to their rank and
priority."
The assignee, in pursuance of the already-quoted order, sold the
land at public sale, and it came finally in the hands of one
Ray.
Norseworthy now sought, in one of the state courts of Louisiana
and by some of the proceedings usual in the civil law practice or
in the code of the state just named, to subject the land to the
payment of his mortgage for $11,666.66.
To establish his case, he produced his mortgage and
transfer.
The other side, to show a discharge of the mortgage, put in
evidence the recital and order of the district court, quoted just
above, but did not produce or put in evidence
Page 90 U. S. 131
the petition on which the order and proceedings were had, nor
the rule, nor the marshal's return.
One of the issues in the court in which Norseworthy made his
proceeding was whether Norseworthy received a proper notice or was
legally made a party to the proceeding under which the assignee
attempted to sell the property free of his mortgage.
The court held that he had not received a proper notice, and
that his rights were thus unaffected by the sale. The supreme court
of the state was of the same opinion, and from its judgment made on
that view the case was now here.
It was admitted in this Court on both sides to be plain alike
under the first and the twentieth sections above quoted of the
Bankrupt Act that under proper proceedings -- which, of course,
included a notice properly given to parties in interest -- the
district court had authority to order the sale of the property free
of liens. So that the only questions in the case were 1st., whether
Norseworthy was to be taken as having received proper notice, and
if not, 2d., whether the want of it was fatal to the discharge of
his lien.
Page 90 U. S. 134
MR. JUSTICE CLIFFORD delivered the opinion of the Court.
The theory of the plaintiff in error is that the title of the
petitioners under the first mortgage and privilege was extinguished
by the decree of the bankrupt court, and that the plaintiff
acquired an absolute title to the land from the assignee in
bankruptcy, discharged of all prior encumbrances and
privileges.
1. Jurisdiction of the bankrupt courts extends to all cases and
controversies arising between the bankrupt and any creditors who
shall claim any debt or demand under the bankruptcy, to the
collection of all the assets of the bankrupt, to the ascertainment
and liquidation of the liens and other specific claims thereon, to
the adjustment of the various priorities and conflicting interests
of all parties, and to the marshalling and disposition of the
different funds and assets, so as to secure the rights of all
parties and the due administration of the assets among all the
creditors. [
Footnote 1]
Powers of like kind were conferred upon the bankrupt courts by
the former Bankrupt Act, and the provision in that regard is
expressed in substantially the same terms. [
Footnote 2]
Cases involving the construction of that provision were several
times removed into this Court for reexamination, in all of which it
was held that the power conferred extended to all cases where the
rights, claims, and property of the bankrupt, or those of his
assignee, are concerned, because they were matters arising under
the act and were necessarily involved in the due administration and
settlement of the bankrupt's estate. [
Footnote 3]
So where the bankrupt court ordered the mortgaged premises to be
sold and directed that the mortgages should be cancelled and that
the property should be sold free from encumbrances, rendering to
the parties interested their respective priorities in the proceeds,
this Court decided that the bankrupt court did not exceed their
jurisdiction, and affirmed their action. [
Footnote 4]
Page 90 U. S. 135
Corresponding decisions were made by the state court in
construing the former Bankrupt Act, which are equally applicable to
cases like the one before the court. [
Footnote 5]
Even if, by the true construction of the first section of the
act, any doubt could arise as to the power of the bankrupt court to
authorize such a sale, it has been well held that it may be derived
from the twentieth section of the same act. By that section it is
provided that a creditor having a mortgage or pledge of real or
personal property or a lien thereon for the security of a debt
shall be admitted as a creditor only for the balance of the debt,
deducting the value of such property to be ascertained by agreement
between him and the assignee,
or by sale thereof, to be made in
such manner as the court may direct. [
Footnote 6]
Beyond all doubt, the property of a bankrupt may, in a proper
case, be sold by order of the bankrupt court free of encumbrance,
but it is equally clear that in order that such a proceeding may be
regular and valid, the assignee must apply to the bankrupt court
for an order to that effect, and must set forth the facts and
circumstances which it is supposed justify the application, that
the judge may decide whether or not the application shall be
granted. Secured creditors in such a proceeding must have due
opportunity to defend their interests, and consequently must be
properly notified and summoned to appear for that purpose.
[
Footnote 7]
None of these conditions was fulfilled in this case. Instead of
that, the state court finds that the petitioner was never properly
notified, and that he was not made a party to the proceeding
resulting in the order to sell the property in question free of his
prior mortgage, and it was upon that ground that the state court
decided that his rights were unaffected by the proceedings.
Concede to the fullest extent the powers of the bankrupt
Page 90 U. S. 136
court to do everything specified in the Bankrupt Act, still it
is clear that the mortgage and privilege of the petitioner could
not be cancelled and displaced without notice nor without an
opportunity to be heard, nor could the proceeds of the sale be
adjudged to a junior mortgagee with or without notice, unless for
some cause other than what is disclosed in the record. [
Footnote 8] Notice in some form must be
given in all cases, else the judgment, order, or decree will not
conclude the party whose rights of property would otherwise be
divested by the proceeding. [
Footnote 9]
No man is to be condemned without the opportunity of making a
defense or to have his property taken from him by a judicial
sentence without the privilege of showing, if he can, that the
pretext for doing it is unfounded. Every person, as this Court said
in the case of
The Mary, [
Footnote 10] may make himself a party to an admiralty
proceeding and appeal from the sentence, but notice of the
controversy is necessary in order to enable him to become a party.
[
Footnote 11]
Authorities to the same effect are very numerous, nor is there
any well considered case which gives any support to the proposition
that the judgment, order, sentence, or decree of a court disposing
of property subject to conflicting claims will affect the rights of
anyone not a party to the proceeding and who was never in any way
notified of the pendency of the proceeding. [
Footnote 12]
Such a sale made in such manner without notice may, under some
circumstances, be set aside as violating the rights of the prior
mortgagee, but the mortgagee may, if he
Page 90 U. S. 137
sees fit, affirm the sale and proceed to enforce his priority
against the proceeds of the sale, which is the real nature of the
proceedings in this case. [
Footnote 13]
Authority is doubtless possessed by the assignee to sell the
property of the bankrupt, whether the same is or is not encumbered,
but when he sells encumbered property without any special order
from the court, he sells the same subject to any and all lawful
encumbrances, and can convey no better or higher interest than the
bankrupt could have done. In such a case, it will be taken for
granted that the assignee sold only such right or title to the
property as was vested in him as the representative of the
bankrupt, and therefore that he sold it subject to the
encumbrances.
Such sales may be made without notice to the secured creditor,
but if the assignee desires to sell the property free of
encumbrances, he must obtain authority from the bankrupt court and
must see to it that all the creditors having liens on the property
as duly notified, and that they have opportunity to adopt proper
measures to protect their interests. [
Footnote 14]
Decree affirmed.
MR. JUSTICE BRADLEY did not sit in this case.
[
Footnote 1]
14 Stat. at Large 517.
[
Footnote 2]
5
id. 445.
[
Footnote 3]
Ex Parte
Christy, 3 How. 313;
Norton
v. Boyd, 3 How. 437.
[
Footnote 4]
Houston v.
Bank, 6 How. 504.
[
Footnote 5]
Clark v. Rosenda, 5 Robinson (Louisiana) 39;
Conrad
v. Prieur, ib. 54;
Lewis v. Fisk, 6
id.
162.
[
Footnote 6]
In re Kirtland, 10 Blatchford 515.
[
Footnote 7]
Foster v. Ames, 1 Lowell 316;
Willard v.
Brigham, 25 La.Ann. 601.
[
Footnote 8]
Peychaud v. Bank, 21 La.Ann. 202.
[
Footnote 9]
The
Lottawanna, 20 Wall. 201;
Nations v.
Johnson, 24 How. 205;
Harris
v. Hardeman, 14 How. 339;
Borden v. Fitch,
15 Johnson 141;
Buchanan v. Rucker, 9 East 192.
[
Footnote 10]
13 U. S. 9
Cranch 144.
[
Footnote 11]
Webster v.
Reid, 11 How. 460;
Boswell's Lessee v.
Otis, 9 How. 350;
Oakley v. Aspinwall, 4
Comstock 515.
[
Footnote 12]
Weed v. Weed, 25 Conn. 337;
Means v. Means, 42
Ill. 50;
Hill v. Hoover, 5 Wis. 386;
Wallis v.
Thomas, 7 Vesey 292;
Water Power Co. v. Pillsbury, 60
Me. 427;
Lane v. Wheless, 46 Miss. 666;
Hettrick v.
Wilson, 12 Ohio State 136;
Vallejo v. Green, 16 Cal.
160.
[
Footnote 13]
Livaudais v. Livaudais, 3 La.Ann. 454.
[
Footnote 14]
King v. Bowman, 24 La.Ann. 506; Bump on Bankruptcy (7th
ed.) 156;
In re Kirtland, 10 Blatchford 515.
