Carling v. Seymour Lumber Co.

SHELBY, Circuit Judge,

after stating the case as above, delivered the opinion of the court. Under the Georgia system the superior courts have exclusive jurisdiction in cases affecting the title to lands and in equity cases. The superior court of Bibb county, Ga., is a court of general jurisdiction, and has the powers and jurisdiction of a court of chancery. Code Ga. 1895, § 5842. It has, by express statute, jurisdiction of suits to foreclose mortgages (Id. 2770); and to appoint receivers (Id. 4904). The judges of the superior courts *488 are, in equity cases, chancellors. While bills in. equity are “abolished” (Id. 4931), they survive in the “petition,” which is addressed to the court, and sets forth the cause of action, legal or equitable, or both, and claims legal or equitable relief, or both. Id. 4937.

Chapter 4 of the fourth title of the Georgia Code is entitled “Insolvent Traders.” It embraces sections 2716 to 2722, inclusive, which are copied in the margin. 1 These sections, in brief, provide that when any corporation not municipal, or any trader being insolvent, fails to pay debts' at maturity, creditors representing one-third or more of the unsecured debts of the insolvent may invoke by petition the power of a court of equity to collect the debts and distribute the assets of such insolvent. The chancellor is authorized, in cases where the insolvent has fairly surrendered his property for distribution, “to recommend to the creditors of the defendant that they may release him from further liability.” This insolvent traders’ act is held by the supreme court of Georgia to be a kind of state bankrupt law. Describing the procedure, the court said: “It is putting a trader in bankruptcy, and relieving him from past debts, as far as state legislation can do so.” Comer v. Coates, 69 Ga. 491 -495. In a later case this language is repeated and approved, and the court added: “The act does in many respects resemble the bankrupt acts of congress.” Ryan v. Kingsbery, 88 Ga. 361 -389, 14 S. E. 596, 605 . The constitution limits the power of a state to legislate on this subject, for it is not permitted to so legislate as to impair the obligation of contracts. U. S. Const. art. 1, § 10. This act is clearly a state insolvency law, within the power of the state to enact when the congress has not exercised its power to pass a uniform bankrupt law. The administration of the estates of insolvents by the state courts under this statute would be inconsistent with the exclusive jurisdiction of the courts of,bankruptcy under the bankrupt law. The passage of the bankrupt law by congress, therefore, suspended the operation of this state statute. Sturges v. Crowninshield, 4 Wheat. 122 -196, 4 L. Ed. 529 ; Tua v. Carriere, 117 U. S. 201 -210, 6 Sup. Ct. 565, 29 L. Ed. 855 ; Butler v. Goreley, 146 U. S. 303 -314, 13 Sup. Ct. 84, 36 L. Ed. 981 .

The main question of contention between the parties to this suit is whether or not the state court had jurisdiction of the suit in which it appointed the temporary and the permanent receiver. The solution of-this question will answer others raised in the record.

It is contended by the creditors of the Macon Sash, Door & Lumber Company, who procured the adjudication in bankruptcy, that the state court had no jurisdiction of the case made by the petition in equity, and'that, therefore, the appointment of the receiver is void. The argument is that the proceeding in the state cpurt is based on the general insolvency laws, and that its purpose is to wind up and distribute the estate of an insolvent debtor. And it is asserted that the congress is vested by the constitution with power to establish uniform laws on .the subject of bankruptcy for the purpose of administering and distributing the estates of insolvent persons (Const. art. 1, § 8); and *489 that congress having exercised this power, and committed the administration of the bankrupt’s estate exclusively to the courts of bankruptcy, proceedings in state courts in insolvency are void. If the state court’s jurisdiction depended alone on the insolvent traders’ law (Code Ga. 1895, §§ 2716-2722), its order appointing Carling receiver would be void. This is true because the passage of the bankrupt law by the congress rendered conflicting state insolvent or bankrupt laws void. Tua v. Carriere, 117 U. S. 201, 210 , 6 Sup. Ct. 565, 29 L. Ed. 855 ; Butler v. Goreley, 146 U. S. 303, 314 , 13 Sup. Ct. 84, 36 L. Ed. 981 .

But was the jurisdiction of the slate court dependent on the validity of these Georgia statutes relating to insolvency? We have seen that it had jurisdiction to foreclose mortgages and to appoint receivers. The only pecuniary claim asserted by the petitioner in the state court was secured by two mortgages. The petition contains a prayer to foreclose these mortgages. The notes secured by the mortgages have two indorsers. The insolvent traders’ act, before it was superseded, must have been put in operation at the suit of “unsecured’’ creditors. Code Ga. 1895, § 2716; Cracker Co. v. Brooke, 91 Ga. 243 , 18 S. E. 136 . The appointment of a receiver is a jurisdiction often exercised by equity courts in foreclosure suits. The insolvent traders’ law provides for a proceeding against insolvents only, and the petition alleges that the defendant therein is insolvent; but that allegation is proper, if not necessary, to obtain a receiver in a foreclosure suit. So of all the averments as to the business embarrassments of the defendant in the petition. They are usual in bills seeking the appointment of a receiver. It is true that the petition contains other averments that are unnecessary and unusual in a foreclosure suit, such as demand and refusal to pay, that the petition is for the benefit of the petitioner and other creditors, etc. These and other averments show that the pleader had in view the insolvent traders’ law. But the bill contains all the allegations necessary to a valid decree appointing a receiver and foreclosing the two mortgages. The fact that it contains other and unnecessary averments, even if made to conform to a statute no longer operative, does not deprive the petition of equity, and defeat the jurisdiction as to the matters well pleaded. Conceding that the petition was imperfect and required amendments, it would not follow that the state court was without jurisdiction. The purpose of the petition was, among other things, the foreclosure of the mortgages and the possession of the property by a receiver to be appointed by the court; and when the court adjudged the petition sufficient, and made the appointment, that appointment cannot be questioned by another court, or the possession of the receiver appointed disturbed. Shields v. Coleman, 157 U. S. 168 , 15 Sup. Ct. 570, 39 L. Ed. 660 , at page 178, 157 U. S., page 574, 15 Sup. Ct., and page 660, 39 L. Ed.

A demurrer or plea to the entire petition for want of jurisdiction would not have been sustained, although part of its statement and prayer were based on matters as to which relief could not be granted. The Georgia statute in question being void, only that part of the petition dependent on it would have been subject to demurrer. Beach, Mod. Eq. Prac. 241. A demurrer or plea to.the whole petition for want of jurisdiction would have been overruled. We think, therefore, *490 conceding the "traders’ insolvent” law to be superseded and made void by the bankrupt law, that the state court had jurisdiction of the suit as one to foreclose a mortgage, and to appoint a receiver of the property covered by the mortgages.

The bankrupt act was unquestionably designed by the congress to secure the possession of the property of the bankrupt for administration under the proceedings in bankruptcy. The district court has authority, under paragraph 3 of section 2, to appoint receivers, or the marshals, upon application of parties in interest, in case the court shall find it absolutely necessary, for the preservation of estates, to take charge of the property of bankrupts after the filing of the petition, and until it is dismissed or the trustee appointed. Other provisions are in the act for the recovery of the bankrupt’s property by the trustee when appointed. By authority so conferred, the district court, in a proper case, may direct the marshal, under summary process, to seize the property of the bankrupt in the hands of third persons claiming to own it (Sharpe v. Doyle, 102 U. S. 686 , 26 L. Ed. 277 ; Feibelman v. Packard, 109 U. S. 421 , 3 Sup. Ct. 289, 27 L. Ed. 984 ); may compel the return of property of the bankrupt illegally taken out of the possession of the referee in bankruptcy (White v. Schloerb, 178 U. S. 542 , 20 Sup. Ct. 1007, 44 L. Ed. 1183 ); and may take property from the possession of the purchaser from the assignee of the bankrupt under a general assignment (Bryan v. Bernheimer, 181 U. S. 188 , 21 Sup. Ct. 557, 45 L. Ed. 814 ). But it has not been held that property of the bankrupt in the hands of a receiver of a state court having jurisdiction can be so taken out of his possession. It is indicated in Moran v. Sturges, 154 U. S. 256, 283 , 14 Sup. Ct. 1019, 38 L. Ed. 981 , that the federal courts, in the exercise of their exclusive jurisdiction to enforce maritime liens, will not interfere with the actual possession of a state court. It was there said: “When its [the state court’s] jurisdiction has determined, the admiralty courts may proceed.” However this may be in cases of the exclusive jurisdiction of the federal courts, it is clear, on precedent and principle, that the federal courts will not interfere with the actual possession of a state court, through its receiver, of mortgaged property, in a case where the state court has jurisdiction to foreclose the mortgage. The case of Davis v. Railroad Co., 1 Woods, 661 , Fed. Cas. No. 3,648, decided on circuit by Mr. Justice Bradley, is directly in point, so far as it applies to the property covered by the mortgages sought to be foreclosed in the state court. It was there held that a receiver in possession of mortgaged property under order of a state court of chancery, in proceedings for foreclosure begun prior to the commencement of proceedings in bankruptcy, cannot be dispossessed by order of the district court in the bankruptcy proceedings ; “that a proceeding to enforce a mortgage or other specific lien involves the right of property,' and possession in pursuance thereof, legally or judicially taken, before proceedings in bankruptcy, cannot be interrupted by those proceedings.” This proposition is sustained by Eyster v. Gaff, 91 U. S. 521 , 23 L. Ed. 403 ; for it is there decided that the foreclosure suit may proceed notwithstanding the proceedings in bankruptcy, and that the purchaser at the foreclosure sale will obtain a good title.

*491 The orders made by the bankruptcy court which are under review were made on the theory that the proceeding in the state court was based alone on the insolvent traders' act, and that the appointment of the receiver was void. These orders, in effect, require the receiver of the state court to surrender to the marshal all of the property held by him as receiver. Part oí this property, but not all of it, is covered by the mortgages sought to be foreclosed in the state court. No separate questions are raised as to the property not mortgaged. The orders made by the bankruptcy court which are submitted for review and revision relate to all the property held by the receiver.

A receiver or trustee, when appointed in the bankruptcy proceedings, while not entitled to the mortgaged property, will be entitled to any excess arising from the foreclosure sale, when made by order of the state court after the payment of the mortgages and costs of foreclosure. He will also be entitled, when appointed, to the possession of the dioses in action and the other property in the hands of the state court’s receiver which is not covered by the mortgages. The bankrupt law is equally binding on the state and the federal court, and we cannot doubt that the former will, on proper application, give full effect to it. Where assets are in the hands of the receiver of one court which legally and equitably belong to the. trustee or receiver appointed by another court, comity requires, as a general rule, that application should be made for a proper order to the former court whose officer has possession of the property. This rule is reciprocal between the federal and state courts, each respecting the possession of the other. Hagan v. Lucas, 10 Pet. 400 , 9 L. Ed. 470 ; In re Tyler, 149 U. S. 164 .

The jurisdiction and authority of the bankruptcy court for the enforcement of the bankrupt law is paramount. State insolvency laws are superseded by the bankrupt act. While it is a general rule that a federal court may not enjoin proceedings in a state court, an exception is made in cases where such injunction may be authorized by any law relating to proceedings in bankruptcy. Rev. St. U. S. § 720. When the state court is in possession, through its receiver, of assets that it is without jurisdiction or authority to hold against a receiver or trustee appointed in bankruptcy proceedings, instead of making a peremptory order on the receiver of the state court to surrender the funds, an injunction, if necessary, might be granted by the bankruptcy court to prevent the unlawful distribution of the assets, until application could be made to the state court for an order to its receiver to surrender the assets to the proper custodian. The laws of the United States being equally binding on all the courts, we cannot assume that the state court would refuse to administer them. We are not now called 011 to decide what course should be taken in the event of a disregard of the bankrupt law by the state court. That such application should be made in the first instance to the state court is sustained, not only by the analogous cases relating to comity, but by adjudications directly in point on this question of practice under the bankrupt law. Mauran v. Carpet-Lining Co. (R. I.) 50 Atl. 331 ; In re Lesser (D. C.) 100 Fed. 433, 439 ; In re Kersten (D. C.) 110 Fed. 929, 931 ; In re Lengert Wagon Co. (D. C.) 110 Fed. 927 ; Ex parte Waddell, Fed. Cas. No. *492 17,027; In re Seebold, 45 C. C. A. 117 , 105 Fed. 910 ; Scheuer v. Stationery Co. (C. C. A.) 112 Fed. 407 .

The judgments of the court of bankruptcy rendered December 6, 1901, and December 7, 1901, are reversed.

NOTE.

Georgia Code 1895 — Insolvent Traders.

“Section 2716 (3149a). Receiver for Insolvent Trader. In ease any corporation not municipal, or any trader, or firm of traders, shall fail to pay, at maturity, any one or more matured debts, payment of which has been properly demanded of such debtor, and by him refused, and shall be insolvent, it shall be in the power of a court of equity, under a creditor’s petition, to which one or more creditors, representing one-third in amount of the unsecured debt of such insolvent corporation, trader, or firm of traders, whose debts are matured and unpaid, shall be necessary parties, to proceed to collect the assets, real and personal, including choses in action and money, and appropriate the same to the creditors of such trader, firm of traders, or corporation.

“Sec. 2717 (3149b). Chancellor’s Power in Such Cases. The chancellor, under such proceedings as are usual in equity, may grant injunctions, and appoint receivers for the collection and preservation of the assets in the cases provided by this chapter, and may at any time appoint an auditor and take all proper steps to bring the matter to a final hearing.

“See. 2718 (3149c). Who May Be Parties. Any creditor may become a party to said petition, under an order of the court at any time before the final distribution of the assets, he becoming chargeable with his proportion of the expenses of the previous proceedings.

“See. 2719 (3149d). No Preferences; Assets, How Distributed. Upon the appointment of a receiver, no creditor shall acquire any preference, by any judgment or lien, on any suit or attachment, under proceedings commenced after the filing of the petition, and all assignments and mortgages to pay or secure existing debts made after the filing of said petition shall be vacated, and the assets be divided pro rata among the creditors, preserving all existing liens.

“Sec. 2720 (3149e). Allowance for Defendant’s Support. It shall be in the power of the judge to make a. suitable allowance for the defendant for a support during the pendency of the proceedings, having in so doing respect to the condition of the defendant and the circumstances of the failure.

“Sec. 2721 (3149f). Who is a Trader. Any person or firm shall be considered a trader who is engaged, as a business, in buying and selling real or personal estate of any kind, or who Is a banker or broker or commission merchant, or manufacturer manufacturing articles to the extent of five thousand dollars per annum.

“See. 2722 (3149g). Chancellor may Recommend Debtor’s Release. It shall be in the power of the chancellor, in his final judgment in the cases provided for, to express his opinion, if the facts authorize it, that, from the facts as they have transpired during the progress of the cause, the defendant has honestly and fairly delivered up his assets for distribution under the law, and to recommend to the creditors of the defendant that they release him from further liability.”

See note at end of case.