Benton v. Callaway

165 F.2d 877

• Court: Court of Appeals for the Fifth Circuit
• Decided: March 15, 1948
• Docket: 12130
• Status: Published

Opinions

HOLMES, Circuit Judge.

This appeal is from a judgment of the court below, entered in the exercise of its bankruptcy jurisdiction, which permanently enjoined the appellants (individually and as members of a stockholders protective committee) from prosecuting a suit filed in the Superior Court of Bibb County, Georgia. A temporary injunction had been issued by said state court against the officers and directors of the South Western Railroad Company, restraining them, without the unanimous consent of the stockholders, from the execution of any written instrument conveying to the debtor or its trustee the fee-simple title of the property of said railroad company. This injunction was annulled, and further proceedings in the state court enjoined, by the bankruptcy court. The issue presented here is whether the court below had jurisdiction to stay proceedings in the state court and to annul the action previously taken therein. More definitely, the question is: did the bank- . ruptcy court, in a reorganization proceeding under Section 77, Bankr. Act, 11 U.S. C.A. § 205, have exclusive jurisdiction to determine whether the properties of SouthWestern legally could be acquired by the Central of Georgia, on the terms set forth in the plan, by a mere majority vote of the stockholders of South-Western? The answer to this question turns upon whether or not the bankruptcy court had jurisdiction in rem of property the conveyance of which had been enjoined by the state court. The facts are undisputed, and are substantially as follows:

The Central of Georgia Railway Company is the debtor in a reorganization proceeding under Section 77 of the Bankruptcy Act, as amended. The proceeding was filed by the debtor in the court below in 1940, and is now pending therein. Prior to 1940 (beginning in 1932), the debtor’s properties were operated by a receiver appointed in an equity suit in the federal court. For many years prior to the suit in equity, the South Western Railroad Company was operated by the debtor under a lease dated June 24, 1869. A plan of reorganization of the debtor was promulgated by the Interstate Commerce Commission. It proposed to issue $14,000,000 of 4% first-mortgage bonds, due in 1995, and $16,000,000 of 4}4>% income-bonds due in 2022. It proposed the allotment to SouthWestern of $2,200,000 of first-mortgage bonds and $1,700,000 of income bonds if it would convey all of its leased property to the debtor. The allotment thus offered to South-Western was that proposed by the trustee of the debtor in the reorganization plan submitted by him.

Objections to the proposal by SouthWestern were unavailing in the district court. The bonds are to be issued by the reorganized company, but whether that will be the debtor or a new corporation is to be determined later by the reorganization managers. Upon confirmation of the plan, the reorganized company is required to have title to all the property of the debtor, but this requirement is not to be construed as prohibiting the rejection of any lease. The plan provides that, prior to its consummation, the debtor shall acquire the properties of three railroads leased to the company, including South-Western, if they can be acquired upon the terms specified in the plan. This provision may be disregarded as to one of the leased roads if the reorganized company shall not acquire the property of the South-Western Company. If any of these properties shall not be acquired as a result of the acceptance of the plan by the leased-line security holders, then the lease of any line not so acquired shall be disaffirmed. The method of acquisition, whether through purchase, merger, or consolidation, is to be determined by the trustee, or the reorganization managers when they begin to function. The importance to the debtor of acquiring SouthWestern is indicated by the fact that, if it fails to do so, the provision for the acquisition of the Chattahoochie & Gulf Railroad Company may be disregarded.

The South Western Railroad Company was incorporated under the laws of Georgia in 1845. ■ Its capital stock is of the par value of $5,191,100, all of which is common stock. Its properties are free from mortgage or other liens. It owes no bonded indebtedness. Its current liabilities are less than $100,000. Its road and equipment were valued at $12,830,257 by the Interstate Commerce Commission in 1942, and at $9,523,736.81 by its board of directors in 1947. Its properties comprise some 340 miles of railroads, bridges, depots and appurtenances, in the southern portion of the Central of Georgia’s railway system. Without the South-Western, the Central could not operate its trains from Florida through Macon to the north and west; without it, the Central could not operate its trains from the coal fields in the vicinity of Birmingham to Savannah. Emanating from Macon, the lines of South-Western form part of Central’s system through Fort Valley to Columbus, Georgia; and through Fort Valley to Americus, Smithville, Albany, Georgia, and Eufaula, Alabama. In addition to its railroad properties, SouthWestern has in its hands government and municipal securities of the market value, as of December 31, 1946, of $1,124,581.25. The plan does not contemplate the transfer of these securities to the reorganized company.

We think the bankruptcy court erred in attempting to exercise exclusive jurisdiction over property which the debtor did not own and upon which it had no lien. The debtor was in actual possession of the tangible property leased by it, but it held the same as lessee, not as owner in fee. The granting of a lease always supposes that the grantor reserves to himself a reversion in the leased premises. A leasehold estate is personal property which becomes subject to the exclusive jurisdiction of the bankruptcy court upon the filing of a petition by the debtor under said Section 77; but the lessor’s title in fee, out of which the leasehold was carved, was not an asset of the debtor, and no claim of title thereto or lien thereon is made by the debtor or its trustee.

The jurisdiction of the federal district courts sitting in bankruptcy is limited to matters conferred by statute expressly or impliedly. Such jurisdiction is paramount and exclusive in the administration of the bankrupt’s estate. The basis of the court’s exclusive jurisdiction in rem is its actual or constructive possession of the debtor’s property.¹ It is not limited to the administration of property that belonged to the debtor without question, but extends to the determination of all questions of title or liens affecting the debtor’s estate. It is not exclusive as to the right or title of a party not in bankruptcy to property not legally or equitably owned or claimed by the debtor. Section 77, sub. a provides that during the pendency of the reorganization proceedings the court shall have “exclusive jurisdiction of the debtor and his property wherever located.” By 77, sub. c(2) the title and powers of the trustee are assimilated to those of trustees in ordinary bankruptcy proceedings. Meyer v. Fleming, supra. ■

In the instant case, the plan assumes that the fee of the leased lines will be acquired by the acceptance of the plan, and provides that, if not accepted, the lease of any such line shall be disaffirmed. Not only that, but the Act itself looks forward to the contingency of a lease being rejected and of the lessor being unable to operate the line. In this event, the Act provides that it shall be the duty of the lessee to continue operation of the line for account of the lessor until the abandonment of such line be authorized by the Commission.² There is no danger of the public interest being adversely affected by rejection of the lease and the inability of the lessor to operate the railroad.

The suit in the state court, which was enjoined by the judgment below, was a proceeding in personam, between parties not in reorganization, over property that might never be acquired by the reorganized company. The Commission recognized this fact, and expressly provided that nothing in the plan should be construed as a grant of authority for the transfer of the debtor’s property until further action of the Commission. The plan contemplated that the leased lines should be acquired upon the terms stated in the plan. The question submitted to the state court for decision was whether or not the fee of South-Western’s properties, exclusive of the lease, could be legally conveyed by the owner by a vote of a simple majority of its stockholders. This was peculiarly a question of state law. It was not a controversy over property in the actual or constructive possession of the trustee.

Whatever control the court below had over South-Western’s assets was not by reason of the fact that its railroad properties were in the custody of the court, but simply because the leasehold estate was the property of the debtor. It was specifically pointed out by the Interstate Commerce Commission that no petitions for reorganization of the lessors had been filed. Undoubtedly the Commission intended that the reorganized company should get a good marketable title to the property in question.

If the leased lines shall be acquired, the plan provides that the railroads of each of the three, and all the real estate owned by each lessor, must be conveyed to the reorganized company; each of said lessors must waive any damage to which it has become or shall become entitled; and the South Western Railroad Company shall waive all claims in respect to equipment. Such conveyances and waivers will be the sole consideration of the delivery to each of the respective lessors of the securities proposed to be allocated to it as thereafter specified in the plan. There is much that needs to be done in carrying out the Commission’s plan of reorganization, and the sooner an authoritative decision in the state court is obtained in the above suit, the nearer the parties may be to the consummation of that plan.

The modernization of American bankruptcy law by the enactment of Section 77 of the Act, and kindred legislation, did not alter, lessen, or abolish the several distinct classes of jurisdiction exercised by the bankruptcy court. Such jurisdiction in civil cases is either in rem or in personam, exclusive or concurrent, summary or plenary. The power to adjudicate as to bankruptcy, to grant or refuse discharges, to administer assets of the bankrupt, and to close estates, is exclusive. The exclusive jurisdiction of the district court in reorganization proceedings is that which bankruptcy courts have customarily possessed.³ In entering the judgment in this case, annulling and staying proceedings in the state court, the bankruptcy court undertook in a summary proceeding to exercise exclusive jurisdiction in rem as to property that the trustee did not own but was seeking to acquire. The proceeding in the state court that was enjoined, and the injunction that was annulled, were strictly in personam. It does not appear from this record that the bankruptcy court had any jurisdiction whatever of that controversy; but, conceding that it did, such jurisdiction was concurrent, not exclusive, and should not have been exercised in a summary proceeding.⁴

The Commission envisaged a merger or consolidation as well as a purchase of the leased lines, but the activities of the trustee so far as this record shows have been directed principally to the acquisition of South Western’s properties by purchase. The lessor has been made an offer for its property upon specific terms, which it must accept or reject. If it rejects the offer, its lease will be disaffirmed. There is nothing in the plan to indicate that an ultra vires acceptance is authorized or required, or that any state law which prohibits acceptance should be disregarded. The plan does not provide that the leased lines may be acquired by a simple majority vote of the stockholders of the company.

Because the debtor’s trustee has actual possession under its lease of certain tangible property of the South Western Railroad Company, the trustee claims to be in possession of all the property in controversy. We do not concur in this contention. The debtor is seeking (not to enforce a lien upon tangible property as in Warren v. Palmer, 310 U.S. 132, 60 S.Ct. 865, 84 L.Ed. 1118, but) to acquire the incorporeal reversionary interest of its lessor, which arose by operation of law when the leasehold was carved out of the fee-simple title. This is a vested future interest to commence in possession after the determination of the lease. The lessee is not disputing the lessor’s title, but is seeking to acquire it, and is claiming that the bankruptcy court is administering this intangible asset. The fallacy in the argument is this: In the case of a tangible res, there can be possession in fact as well as in contemplation of law; but in the case of something intangible, possession is purely a legal concept that manifests itself only through recognition of legal consequences.⁵ So far as pertinent here, the legal consequences of a debtor’s possession of a tangible asset at the time of his bankruptcy are that his trustee in bankruptcy succeeds to the debt- or’s possession; and that the bankruptcy court, acquiring possession thereby, has summary jurisdiction in rem to adjudicate adverse claims respecting the asset. Therefore, for practical reasons, the law attaches to the ownership of intangible property the legal consequences of possession of a tangible res. Thus in this case the law limits the possession of the lessee to the duration of the lease, while it attaches to ownership of the reversion in fee the legal consequences of possession. Such reversion, not being owned by Central at the time its petition for reorganization was filed, is in legal contemplation not now in possession of the bankruptcy court; and, since the law attributes to its mere ownership the legal consequences of possession, the bankruptcy court has no jurisdiction in rem of said reversionary interest.

It is well settled that the bankruptcy court has no summary or exclusive jurisdiction in rem of tangible property adversely held by a third party under a bona fide claim of ownership.⁶ The same is true of intangible property, except that ownership of the latter carries with it the legal consequences of possession. In the case of a reversion, the law attributes to ownership the jurisdictional consequences of possession. To illustrate, let us suppose that South-Western were the debtor here, and that Central were a solvent corporation holding under its lease. The bankruptcy court would have jurisdiction in rem of the reversion, but not of the leasehold.

From another angle, let us suppose that both Central and South-Western were insolvent, and that each was the debtor in a reorganization proceeding pending in different judicial districts. Can anyone doubt that one court would have jurisdiction in rem of the leasehold and another of the reversion? Then the symmetry of the Bankrupcty Act, as amended, would come into view. The federal judicial power would be exercised by the courts to the extent vested in them, and the delegated power of the Congress to regulate commerce would be exercised by the Interstate Commerce Commission. A harmonious plan of reorganization, of both roads would be promulgated by the Commission, subject to the approval of one court as to Central and another court as to South-Western, with final jurisdiction in the Supreme Court.

A solvent corporation, which has appeared specially as creditor and lessor in a reorganization proceeding, cannot be constitutionally compelled against its will to convey to the debtor a larger and better title than was granted in the lease. The Commission knew this, and made provision for disaffirmance of the lease. Its use of the word “acquired” implied that something was to be added to the debtor’s estate. The plan did not contemplate that the limited interest of the debtor in the leased lines should be converted into a fee-simple title without the consent of the owners. Such an economic blood transfusion is not strained; it is a matter of contract with the carrier that is not in reorganization.

The appellants here do not ask that the plan of the Commission be set aside or that the order of the court below approving it be reversed. They ask that full effect be given to the language of the plan. Counsel for the trustee stated at the stockholders’ meeting: “The plan makes an offer to you gentlemen; that is all it does.” The plan did not attempt to amend the charter of South Western Railroad Company.⁷ In its opinion approving the plan, the court below said: “If the lessors do not accept the proposal to acquire their lines, they are, on disaffirmance, at liberty to take their properties back.” In a letter to the stockholders, the president of the company quoted that part of the court’s opinion, and said: “So it is that under the terms of the approved plan, South Western is not required to accept the Trustee’s offer of purchase, but may take its property back and operate it, or petition the Court to require the new company to operate South Western’s railroads at the risk and for the account of South Western as provided by the Bankruptcy Act.”

The judicial process is brigaded with the administrative process in reorganization proceedings under Section 77,⁸ The bankruptcy courts and the Interstate Commerce Commission work cooperatively, but this does not mean that the statutory powers of the two departments are blended so that either may exercise the functions of the other. Each exercises its own distinct powers. The court may judicially approve or affirm legislative or executive action by the Commission, but it is only the latter that has full power under Section 5(11) to approve a sale, merger, or consolidation of two railroads with the assent of a majority of the stockholders unless a different vote is required under applicable state law.⁹ It is only upon action by the Commission, subject to confirmation by the court, that the reorganized company may carry such transaction into effect without invoking any approval under state authority and without regard to state or federal prohibitions.¹⁰

In thus transcending all existing legislation, it is the Commission, not the court, in reorganization proceedings that is exercising the delegated legislative power of Congress under the Constitution to regulate commerce. Const, art. 1, § 8, cl. 3. This accounts for the concluding sentence of the paragraph to the effect that no federal corporation is deemed created thereby, but that any power therein granted to any carrier shall be in addition to and in modification of its powers under its corporate charter or under the laws of any state.¹¹ This provision does not authorize the Commission to compel a railroad corporation, which is not a debtor in reorganization proceedings, to enter into a sale, lease, merger, or consolidation, but authorizes the carrier, with the required assent of its stockholders, to participate in any such transaction with the approval of the Commission. Neither does it authorize the bankruptcy court to compel a lessor not in reorganization to sell its property to the debtor, or to a reorganized company. It has no application to the controversy now being litigated in the state court between the stockholders of SouthWestern. The suit in the state court was intended to prevent the illegal conveyance of South-Western’s interest that was not subject to the lease. Such contingency was within the contemplation of the Commission when the plan was promulgated.

Every plan of reorganization of a railroad, within the meaning of Section 77, is required to provide adequate means for its execution, which may include “the amendment of the charter of the debtor”; but there is no authorization for the court to amend the charter of a creditor or lessor that is not a debtor in reorganization.¹² Upon confirmation of the plan, which is subject to judicial review, the debtor, or any other corporation organized for the purpose of carrying out the plan, shall have full power to put it into effect; and shall do so: the laws of any state to the contrary notwithstanding.¹³ Evidently there must be a real or substantial conflict between the plan and any state law before the latter may be disregarded. The execution of the plan is “subject to the supervision and control of the judge,” Sec. 205, sub.f, supra; and this ought to be assurance enough that state authority will be overridden only to the extent necessary to make the plan effective. We have been cited to no provision in the plan that conflicts with any law of Georgia.

For the bankruptcy court to hold that a majority vote of the stockholders of South-Western would be sufficient, regardless of state law, would amount to amending the plan in the face of the statute which provides that no plan shall be approved or confirmed by the judge “unless the plan shall first have been approved by the Commission and certified to the court.” ¹⁴ The just-cited statute expressly .provides that the Commission may modify any plan which it has approved; and in ■Chicago, R. I. & P. R. Co. v. Fleming, it was held that the court must approve or disapprove the plan in its entirety; that it .alone cannot correct the plan, but may suggest improvements to the Commission.¹⁵

We think the judgment appealed from should be reversed, the injunction dissolved, and the cause remanded for further proceedings not inconsistent with this opinion. It is so ordered.'

Reversed.

1 Schumacher v. Beeler, 293 U.S. 367, 55 S.Ct. 230, 79 L.Ed. 433; Continental Illinois Nat. Bank & Trust Co. v. Chicago, Rock Island & Pac. Ry. Co., 294 U.S. 648, 55 S.Ct. 595, 79 L.Ed. 1110; Meyer v. Fleming, 327 U.S. 161, 66 S.Ct. 382, 90 L.Ed. 595; In re Retail Stores Delivery Corporation, D.C., 5 F.Supp. 892; In re Straus & Co., Inc., D.C., 6 F.Supp. 547; 11 U.S.C.A. §§ 11 and 46.

2 11 U.S.C.A. § 205, sub. e(6).

3 Meyer v. Fleming, 327 U.S. 161, 66 S.Ct. 382, 90 L.Ed. 595, cited in Gardner v. New Jersey, 329 U.S. 565, 67 S.Ct. 364.

4 Kline v. Burke Construction Co., 260 U.S. 226, 43 S.Ct. 79, 67 L.Ed. 226, 24 A.L.R. 1077; Central New England R. Co. v. B. & A. R. Co., 279 U.S. 415, 49 S.Ct. 358, 73 L.Ed. 770; Mandeville v. Canterbury, 318 U.S. 47, 49, 63 S.Ct. 472, 473, 87 L.Ed. 605.

5 In re Worrall, 2 Cir., 79 F.2d 88; In re Marsters, 7 Cir., 191 F.2d 865.

6 Harrison, Trustee, v. Chamberlin, 271 U.S. 191, 46 S.Ct. 467, 79 L.Ed. 897.

7 Compare In re New York, New Haven & Hartford R. Co., 2 Cir., 147 F.2d 40. The Central of Georgia here corresponds to New Haven in that case; South-Western corresponds to the Terminal Company.

8 Palmer v. Massachusetts, 308 U.S. 79, 87, 60 S.Ct. 34, 84 L.Ed. 93, quoted in Smith v. Hoboken R. Co., 328 U.S. 123, 132, 66 S.Ct. 947, 90 L.Ed. 1123, 168 A.L.R. 497; Warren v. Palmer. 310 U.S. 132, 137, 138, 60 S.Ct. 865, 84 L.Ed. 1118.

9 49 TJ.S.C.A. § 5(11).

10 11 TJ.S.C.A. § 205, sub. b authorizes the plan to include “the amendment of the charter of the debtor.”

¹¹

12 11 TJ.S.C.A. § 205, sub. b(5).

13 11 TJ.S.C.A. § 205, sub. f.

14 See last sentence in 11 U.S.O.A. § 205, sub. d.

15 7 Cir., 157 F.2d 241.