A petition filed by a trustee in bankruptcy in the bankruptcy
proceeding, asserting title to lands of the bankrupt reciting
encumbrances thereon and asking that they be sold, the assets
marshaled, and all persons claiming liens be made parties, gives
rise to a controversy in bankruptcy proceedings, the decision in
which may be reviewed by the Circuit Court of Appeal under § 24a of
the Bankruptcy Act and 128, Judicial Code.
Although such a proceeding is commenced by the trustee, the
appearance of holders of mortgage liens asserting their rights and
seeking to have them enforced conformably to their contentions is
equivalent to affirmative intervention, and brings a controversy
quite apart from ordinary steps in bankruptcy.
Homestead rights in land are creations of the states in which
the lands are situated, and the validity and operation of mortgages
thereon are determined by the statutes of the state in which the
homestead is situated, as construed and applied by the courts of
that state.
Under the laws of Iowa, as construed by the courts of that
state, a homestead, even when validly mortgaged, may be sold only
for a deficiency remaining after exhausting all other property
covered by the same mortgage.
The right to insist on the exemption of a homestead in Iowa from
sale except for deficiency is not personal to the mortgagor, but
may be asserted by anyone to whom the homestead owners may have
transferred an interest; nor can they after such transfer prejudice
the transferee in the exercise of this right.
204 F. 963.
The facts, which involve the jurisdiction of this Court of
appeals from judgments of the circuit court of appeals, in a
bankruptcy proceeding and the marshaling of proceeds of sale of
homestead property in Iowa, are stated in the opinion.
Page 239 U. S. 375
MR. JUSTICE VAN DEVANTER delivered the opinion of the Court.
The facts bearing upon the questions presented by his appeal are
these: on his voluntary petition, Oscar M. Hartzell, a resident of
Madison County, Iowa, was adjudged a bankrupt. He owned 960 acres
of land in that county, 40 acres of which he and his family had
been and were occupying as a homestead. Three mortgages in terms
covering all the land had been given by him -- the first to Emma
Johnson, the second to Moody & Son, and the third to the
Century Savings Bank. His wife had joined in the first and third,
but not in the second. After he was adjudged a bankrupt, he and his
wife executed an instrument waiving and surrendering their right in
the homestead and authorizing the trustees in bankruptcy to take
possession and dispose of the same for the benefit of all the
creditors. At a later date, the trustees filed in the bankruptcy
proceeding a petition asserting title to all the land, reciting the
existence of the mortgages and other asserted liens, and praying
that the 960 acres be sold free of all liens, that the proceeds be
held by the trustees subject to the further order of the court,
that all persons asserting liens on any part of the land be
required to set them up by answer, that certain of the asserted
liens be declared void, and that, as to the others, the assets be
marshaled. Acting upon this petition, the court, with the assent of
the parties in interest, directed that the land be sold as prayed,
that all liens thereon be transferred to the proceeds, and that the
latter be held by the trustees for the payment of whatever liens or
claims might be established against the same. The lands were sold,
all liens found to be superior to the three mortgages were paid out
of the proceeds, and there remained a balance of $54,264.77,
Page 239 U. S. 376
which, although $13,683.94 in excess of what was required to pay
the first mortgage, was insufficient to pay it and either of the
others. Of this balance, $8,000 arose from the sale of the
homestead. Moody & Son and the Century Savings Bank, both
appearing in response to notice of the trustees' petition, asserted
conflicting rights under their respective mortgages to a part of
the proceeds. Although conceding that the first mortgage -- that to
Johnson -- should be fully paid, they differed widely respecting
the disposition of the proceeds of the homestead, Moody & Son
asserting a right to have the same applied on the first mortgage,
and to receive on their mortgage whatever remained of the proceeds
of the other land, and the bank asserting a right to have the first
mortgage satisfied from the proceeds of the other land, and to
receive on its mortgage the proceeds of the homestead. Under the
first contention, Moody & Son would receive $13,683.94 and the
bank nothing, while under the other, Moody & Son would receive
$5,683.94 and the bank $8,000. The bankruptcy court rejected both
contentions and held that the proceeds of the homestead and those
of the other land should be proportionally applied in paying the
first mortgage, that the balance then remaining from the sale of
the homestead, being $2,947.22, should be paid on the bank's
mortgage, and that the balance from the sale of the other land,
being $10,736.67, should be paid on Moody & Son's mortgage. A
decree was entered accordingly, and the bank appealed to the
circuit court of appeals, which, after overruling a motion
challenging its jurisdiction, sustained the bank's contention and
reversed the decree with instructions which were equivalent
(
see Chesapeake & Potomac Telephone Co. v. Manning,
186 U. S. 238,
186 U. S. 240;
Metropolitan Water Co. v. Kaw Valley Drainage District,
223 U. S. 519,
223 U. S. 523)
to directing a decree giving full effect to that contention. 204 F.
963; 209 F. 775. Moody & Son then appealed to this Court.
Page 239 U. S. 377
Whether the circuit court of appeals rightly sustained this
jurisdiction turns upon whether this is one of those "controversies
arising in bankruptcy proceedings" over which the circuit courts of
appeals are invested, by § 24a of the bankruptcy act, with the same
appellate jurisdiction that they possess in other cases under the
Judicial Code, § 128, or is a mere step in bankruptcy proceedings
the appellate review of which is regulated by other provisions of
the bankruptcy act. If it is a controversy arising in bankruptcy
proceedings, the jurisdiction of that court was properly invoked,
as is also that of this Court. We entertain no doubt that it is
such a controversy. It has every attribute of a suit in equity for
the marshaling of assets, the sale of the encumbered property, and
the application of the proceeds to the liens in the order and mode
ultimately fixed by the decree. True, it was begun by the trustees,
and not by an adverse claimant, but this is immaterial, for the
mortgagees, who claimed adversely to the trustees, not only
appeared in response to notice of the trustees' petition, but
asserted their mortgage liens and sought to have them enforced
against the proceeds of the property conformably to the contentions
before stated. This was the equivalent of an affirmative
intervention, and, when taken in connection with the trustees'
petition, brought into the bankruptcy proceedings a controversy
which was quite apart from the ordinary steps in such proceedings,
and well within the letter and spirit of § 24a.
Hewit v. Berlin
Machine Works, 194 U. S. 296,
194 U. S. 300;
Knapp v. Milwaukee Trust Co., 216 U.
S. 545,
216 U. S. 553;
Teft v. Munsuri, 222 U. S. 114,
222 U. S. 118;
Houghton v. Burden, 228 U. S. 161,
228 U. S. 165;
Globe Bank v. Martin, 236 U. S. 288,
236 U. S.
295.
Coming to the merits, the matter for decision is the proper
application or disposition of the proceeds of the 40 acres which
the bankrupt and his family occupied as a homestead when the
mortgages were given and up to the time of the waiver before
mentioned. The homestead
Page 239 U. S. 378
right in this land was a creation of the statutes of the state,
and therefore to determine what bearing this right had upon the
validity and operation of the mortgages we must turn to those
statutes and the decisions of the supreme court of the state
construing and applying them. The statutes are found in the Code of
1897, and are as follows:
"Sec. 2972. The homestead of every family, whether owned by the
husband or wife, is exempt from judicial sale, where there is no
special declaration of statute to the contrary. . . ."
"Sec. 2974. No conveyance or encumbrance of or contract to
convey or encumber the homestead, if the owner is married, is valid
unless the husband and wife join in the execution of the same joint
instrument, whether the homestead is exclusively the subject of the
contract or not, but such contracts may be enforced as to real
estate other than the homestead at the option of the purchaser or
encumbrancer. . . ."
"Sec. 2976. The homestead may be sold on execution for debts
contracted prior to its acquisition, but in such case it shall not
be sold except to supply any deficiency remaining after exhausting
the other property of the debtor liable to execution. It may also
be sold for debts created by written contract, executed by the
persons having the power to convey, and expressly stipulating that
it is liable therefor, but then only for a deficiency remaining
after exhausting all other property pledged by the same contract
for the payment of the debt. . . ."
"Sec. 2981. The owner may, from time to time, change the limits
of the homestead by changing the metes and bounds, as well as the
record of the plat and description, or vacate it, but such changes
shall not prejudice conveyances or liens made or created previously
thereto, and no such change of the entire homestead, made without
the concurrence of the husband or wife, shall affect his or her
Page 239 U. S. 379
rights, or those of the children. The new homestead, to the
extent in value of the old, is exempt from execution in all cases
where the old or former one would have been."
Counsel are agreed that, under these statutes, the mortgages to
Johnson and the bank, in which the wife joined, became valid liens
on the homestead as well as on the other land; that the intervening
mortgage to Moody & Son, in which the wife did not join, was
void as to the homestead, and became a valid lien only on the other
land; that this mortgage remained void as to the homestead,
notwithstanding the subsequent waiver of the homestead right, and
that its invalidity in that respect could be asserted by the bank
as a subsequent mortgagee. We therefore come to the provision in §
2976 that the homestead, even where validly mortgaged, may be sold
"only for a deficiency remaining after exhausting all other
property" covered by the same mortgage. Whether only the mortgagors
may claim the benefit of this provision, and they only while they
retain the homestead, is the real point in dispute. Moody & Son
insist that it merely confers on the mortgagors a personal
privilege which they may exercise or waive, as they choose; that in
this instance the privilege was surrendered or terminated when the
homestead right was waived, and in consequence the provision has no
bearing on the proper application or disposition of the proceeds of
either the homestead or the other land. The bank, on the other
hand, insists that the right to have this provision followed is not
strictly personal to the mortgagors, but may be asserted by one to
whom they transfer an interest in the homestead, such as a
subsequent vendee or mortgagee, and that no act of theirs, done
after the transfer, can prejudice the transferee in the exercise of
this right. The solution of the question is not free from
difficulty, but we are persuaded, as was the circuit court of
appeals, that, in view of the decision of the supreme
Page 239 U. S. 380
court of the state in
Linscott v. Lamart, 46 Ia. 312,
the bank's contention must be sustained.
The fact in that case, so far as now material, were these: one
Ash owned 71 acres of land, 40 of which were his homestead. He and
his wife mortgaged the entire tract to Lamart. Linscott
subsequently obtained a judgment against Ash and purchased one half
of the tract at a sale under the judgment. Later Ash and his wife
sold and conveyed the entire tract to Lamart, it being understood
that this should not extinguish the mortgage. Lamart went into
possession and Linscott brought a suit to determine the rights of
the parties in the land. Lamart prevailed, and the supreme court
affirmed the decree, saying:
"Ash and his wife had the right to sell and convey the homestead
to Lamart, and he has the right to hold it exempt from judicial
sale on plaintiff's judgment."
And, after holding the sale under the judgment void because it
included part of the homestead, the court further said:
"What, then, are the rights of the parties? If Ash had not
conveyed to Lamart, upon foreclosure of the mortgage, the homestead
could only 'be sold to supply the deficiency remaining after
exhausting the other property' included in the mortgage. Lamart
paid Ash some $1,400 for the whole tract, being more than twice the
amount of the mortgage. No fraud is charged or shown, and as he had
the right to purchase the homestead and hold it as against
plaintiff's judgment, he should now have the right to have the
proceeds of the land, aside from the homestead, applied in payment
of his mortgage, to the exclusion of junior liens. In other words,
it would be inequitable to put him in a worse position than he
would be if he had not taken the title from Ash. The plaintiff, by
this rule, is left in precisely the same position he would now
occupy if Ash were still holding his homestead, and Lamart his
mortgage."
Thus, under the influence of the provision in § 2976, it was
ruled
Page 239 U. S. 381
that the mortgage, which embraced the homestead and other land,
could be satisfied out of the latter to the exclusion of a junior
judgment lien embracing the other land, but not the homestead, and
this although the mortgagors had sold the homestead and no longer
had any right therein. This decision is more nearly in point than
any other, and we think it shows that the right to invoke the
provision in § 2976 is neither strictly personal to the mortgagors
nor wholly terminated by their waiver of the homestead right. Moody
& Son place some reliance upon
Barker v. Rollins, 30
Ia. 412, and
Dilger v. Palmer, 60 Ia. 117, although
conceding that the cases are not closely in point. We think they
are without present bearing. In the former, a purchaser of a
mortgaged homestead, who thereafter made the land his homestead,
claimed that this entitled him to have the mortgage satisfied from
other unmortgaged property of the mortgagor, and the claim was
denied, the court observing:
"His homestead was not within the contemplation of the parties
to the contract sued on. The creditor might well be held to have
contracted with reference to all the phases of homestead claimed by
his debtor, but not as to any such claim by third parties, who
should voluntarily purchase the property with full knowledge of the
encumbrance upon it. They cannot intrude their rights upon the
property to the prejudice of the creditor."
In the other case, a homestead was mortgaged with other land,
and the mortgagors thereafter sold the latter to a third person,
but retained the former. When it was sought to foreclose the
mortgage, the mortgagors claimed that § 2976 entitled them to have
the mortgage satisfied from the non-homestead property, which they
had sold, and the claim was rejected, the court holding that, by
their sale of the non-homestead land, they were estopped from
insisting that it constituted the primary fund for the payment of
the mortgage.
Page 239 U. S. 382
Concluding, as we do, that the circuit court of appeals rightly
applied the local statutes as construed by the supreme court of the
state, its decree is
Affirmed.