Helms v. Holmes

129 F.2d 263, 141 A.L.R. 1367, 1942 U.S. App. LEXIS 3337

• Court: Court of Appeals for the Fourth Circuit
• Decided: June 15, 1942
• Docket: 4911
• Status: Published

Opinions

DOBIE, Circuit Judge.

On March 24, 1931, the appellee, M. C.' Holmes, filed a voluntary petition in bankruptcy in the District Court of the United States for the Western District of North Carolina. He secured a discharge in the usual form on October 8, 1931, from all debts set up in the Schedule of Liabilities. At the time the bankruptcy petition was filed, Holmes and his wife, • as joint obligors, were indebted to the appellant, H. K. Helms, in the sum of $2,570.10. This debt was secured by a deed of trust on certain real estate in Union County, North Carolina.

Holmes had specifically listed this indebtedness in his Schedule of Liabilities, but Helms filed no claim for his debt in the bankruptcy proceedings. When the bankruptcy court heard the cause, the equity in the property which secured the deed of trust was waived by the trustee in bankruptcy. Helms thereupon foreclosed the deed of trust. On March 21, 1932, five months after Holmes had obtained his discharge in bankruptcy, a sale of the property secured by the deed of trust was made by the Trustee to Helms for "$1,500.

On April 2, 1934, Helms instituted a civil action in the Superior Court of Union County, North Carolina, against Holmes and his wife on the original indebtedness of $2,570.10, less a credit of $1,454.65, the net proceeds derived from the sale of the property to Helms. Personal service of the summons, together with a copy of the complaint, was duly made upon both Holmes and his wife on April 10, 1934, by the Sheriff of Union County. No answer was filed by either of the defendants and after the time for the filing of an answer had expired, judgment was duly entered by default on June 11, 1934, against both Holmes and his wife.

On March 22, 1940, a transcript of this judgment was duly docketed in Mecklenburg County, North Carolina, where Holmes and his wife then resided and where Holmes had acquired property subsequent to his discharge in bankruptcy. Thereafter, in October, 1941, execution was issued on the original default judgment out of the Superior Court of Union County directing the appellant, G. Mack Riley, Sheriff of Mecklenburg County, to levy on any property found in his county belonging to Holmes or his wife, and to sell the same to satisfy the judgment. Holmes thereupon brought this action in the United States District Court for the Western District of North Carolina, for the purpose of enjoining the execution of this writ by Sheriff Riley.

Upon the institution of the action, a temporary restraining order was issued, and this order was made permanent by the court below on January 27, 1942, after a hearing on the agreed statement of facts and the testimony of Holmes. From this final restraining order, Helms has duly taken an appeal to this Court.

It is obvious that the Superior Court of Union County had jurisdiction of both the subject matter and the parties in the action brought by Helms against Holmes and his wife. Nor is there any allegation or evidence of fraud, accident, or surprise. The default judgment, therefore, was validly obtained in due course and remained on the docket of the Union County Court from June 11, 1934, until execution was issued in October, 1941.

While admitting these facts, Holmes, nevertheless, vigorously contends that he ignored the summons served upon him and his wife, and failed to consult a lawyer or answer the complaint because he thought the discharge in bankruptcy operated as an automatic defense to any subsequent action brought against him by a creditor on a claim which came within the discharge in the bankruptcy proceeding. Of course, Mrs. Holmes remained liable as joint obligor on the original debt, since a discharge in bankruptcy is personal to the party to whom it is granted and does not inure to the benefit of the co-debtor. Moyer v. Dewey, 103 U.S. 301, 26 L.Ed. 394. Under North Carolina law, however (with certain exceptions not here applicable), in an action instituted against a married woman, her husband must be made a party defendant. North Carolina Consolidated Statutes, § 454. This was a further reason why Holmes failed to plead his discharge, for he thought he was a mere nominal party defendant and that the action by Helms was, in reality, one against his wife alone, in an effort to secure a judgment against her.

It is a matter of Hornbook learning that a defendant in an action at law who has a valid defense to a suit which is fully cognizable in a court of law and within its jurisdiction, and which he has an adequate opportunity to interpose, is chargeable with gross negligence if he fails to set up this defense, in the absence of fraud, accident or surprise. Moreover, he cannot later seek relief in equity against the enforcement of the judgment in that action, on the same grounds which constituted his original defense.

As applied to the instant case, it is patently clear that Holmes’ discharge in bankruptcy constituted a complete and adequate remedy at law in the nature of an affirmative defense. Accordingly, under the rules of pleading in the United States Courts, as well as in the Courts of all the States, it was incumbent upon Holmes to plead this defense if he desired to avail himself of it. Federal Rule of Civil Procedure 8(c), 28 U.S.C.A. following section 723c; Paschall v. Bullock, 80 N.C. 329.

It must be remembered that a discharge in bankruptcy is neither a payment nor an extinguishment of debts. It is simply a bar to their enforcement by legal proceedings. Robinson v. Exchange National Bank of Tulsa, Oklahoma, D.C., 28 F.Supp. 244; Citizens’ Loan Association v. Boston & Maine Railroad, 196 Mass. 528, 82 N.E. 696, 14 L.R.A.,N.S., 1025, 124 Am.St.Rep. 584, 13 Ann.Cas. 365. And no court, other than the bankruptcy court, is bound to take judicial notice of the discharge, unless it is pleaded as a release. Collins v. McWalters, 35 Misc. 648, 72 N.Y.S. 203. Nor is a creditor guilty of contempt of the bankruptcy court in suing on the old debt in the state court, even though he has notice of the debtor’s discharge. In re Weisberg, D.C., 253 F. 833, 834.

Holmes’ erroneous belief that the effect of the bankruptcy proceedings was to absolve him, ipso facto, from all future liability for his debts covered by the discharge, is contrary to the express rule of the Federal Courts: “The discharge in bankruptcy * * * did not automatically relieve him from even the provable debts previously owed by him and duly scheduled.’’ In re Weisberg, D.C., 253 F. 833, 834.

Thus, the bankrupt is merely given a personal defense which is waived if he chooses not to avail himself of it. This rule that a failure so to plead operates in iaw as a waiver of the defense has been uniformly followed by State and Federal Courts alike. Remington on Bankruptcy, Fifth Edition, §§ 3459, 3499; First National Bank v. Pothuisje, 217 Ind. 1, 25 N.E.2d 436, 130 A.L.R. 1238; Rice v. Chapman, 234 App.Div. 279, 255 N.Y.S. 35; Smith v. Cook, 71 Ga. 705. As was stated in an early Federal case:

“Boardway, when sued, might have appeared in the City Court and there pleaded his discharge in bankruptcy and defeated the suit, assuming the facts to have been as stated; but this he did not do. This court has no power to interfere with the enforcement of that judgment. If, after bankruptcy proceedings are ended, a creditor sues the bankrupt on a claim which has been discharged, he may appear and plead and prove his discharge, and it will be a complete defense. If he do'es not appear, but allows judgment by default, the court in bankruptcy is powerless to grant any relief. [Italics ours]. The remedy of Boardway, if any, is under section 1268 of the New York Code of Civil Procedure. That section provides:

“ ‘At any time after one year has elapsed, since a bankrupt was discharged from his debts, pursuant to the acts of Congress relating to bankruptcy, he may apply, upon proof of his discharge * * * for an order, directing the judgment to be canceled and discharged of record. If it appears upon the-hearing that he has been discharged from the payment of that judgment or the debt upon which such judgment was recovered, an order must be made directing said judgment be canceled and discharged of record.’ ” In re Boardway, D.C., 248 F. 364, 365.

We are unaware of a similar applicable statute in North Carolina. Cf. Paschall v. Bullock, 80 N.C. 329. And in the absence of such an enactment, a defendant who fails to plead his discharge in bankruptcy in an action on a debt so discharged cannot have a subsequent default judgment vacated. Tune v. Vaughan, 170 Ark. 971, 281 S.W. 906; cf. Bell v. Cunningham, 81 N.C. 83. Finally, execution may be levied on the property of a bankrupt acquired after his discharge on a default judgment on a discharged debt.. Garner v. Hartsfield Loan & Savings Association, 49 Ga.App. 199, 174 S.E. 647. For a State Court is bound to take notice of a discharge only when properly and seasonably pleaded by the bankrupt. In re Devereaux, D.C., 76 F.2d 522, certiorari denied Devereaux v. Belsey, 296 U.S. 589, 56 S.Ct. 100, 80 L.Ed. 416.

We are not unmindful of a recent line of Federal cases alleviating the harsh rule of In re Boardway. The trend is aptly illustrated by Holmes v. Rowe, 9 Cir., 97 F.2d 537, 539:

“A review of the decisions discloses that a Federal District Court, once having obtained jurisdiction of a controversy, and having rendered a decision in the matter, has complete power to protect the judgment or decree which it has rendered, and may go so far .as to enjoin an action entertained in the state court by a litigant, involving the same subject-matter, when such action may in any way interfere with, or nullify the effect of said judicial determination. So here, the Court having discharged the appellee in bankruptcy, still retained sufficient jurisdiction to grant an injunction restraining appellant from levying execution upon a judgment rendered in his favor by the state court against the appellee upon a claim adjudicated in the bankruptcy court.

“That the District Court had the power to issue this writ is undoubted. The Judicial Code provides (28 U.S.C.A. § 377) that; ‘ * * * The Supreme Court, the circuit courts of appeals, and the district courts shall have power to issue all writs not specifically provided for by statute, which may be necessary for the exercise of their respective jurisdictions, and agreeable to the usages and principles of law.’

“The Bankruptcy Act, section 2(15), reinforces that authority by providing (11 U.S.C.A. § 11(15), that: * * The courts of bankruptcy * * * are hereby invested, * * * with such jurisdiction at law and in equity as will enable them to exercise original^ jurisdiction in bankruptcy proceedings, * * * to * * ¥ (15) make such orders, issue such process, and enter such judgments in addition to those specifically provided for as may be necessary for the enforcement of the provisions of tms title

“Referring to these statutes, the Supreme Court has repeatedly said that, ‘the power to issue an injunction when necessary to prevent the defeat or impairment of its jurisdiction is * * * inherent in a court of bankruptcy, as it is in a duly established court of equity’. Steelman v. All Continent Corp., 301 U.S. 278, 289, 57 S.Ct. 705, 710, 81 L.Ed. 1085. See, also, Continental Illinois Nat. Bank & Trust Co. v. Chicago, Rock Island & P. Ry. Co., 294 U.S. 648, 675, 55 S.Ct. 595, 605, 79 L.Ed. 1110.”

' We recognized and applied this principle in Seaboard Small Loan Corporation v. Ottinger, 4 Cir., 50 F.2d 856, 859, 77 A.L.R. 956, where Judge Parker stated:

“In view of this purpose of the act and of the express provision that the bankrupt shall be released from all provable debts,, it would be indeed a s.trange situation if the court vested with jurisdiction to enforce the' act were without power to stay the hand of a creditor whose debt has been discharged by bankruptcy, but who nevertheless persists in harassing the bankrupt with efforts to collect it. It will not do to say that the bankrupt has an adequate remedy at law by pleading the discharge in case of suit, or by suing an employer if -the latter withholds wages under an order such as that here. Such remedy is not adequate, because its assertion involves trouble, embarrassment, expense, and possible loss of employment. A laboring man who had availed himself of the benefits of the act would in man7 cases Prefer t0 Pa^ a debt discharged by bankruptcy rather tban hazard hls employment by bringing suit f°r wages withheld under notice like tbat with which we are dealing. And an employer in many cases would prefer to discharge an employee against whom a claim had been filed rather than engage in litigation with the claimant.”

has be£n expressly heldj how. ever, that whether the Bankruptcy Court should exercise such discretionary authority is a matter to be determined from the peculiar facts of the particular case. In re Cleapor, D.C., 16 F.Supp. 481. In the instant situation, we do not feel that there ¡s sufficient ground for the invocation of equitable relief. Holmes was not unduly harassed by Helms, and the simple expedient of a plea in bar was fully available j-0 him. True, he labored under a misconception that his discharge was an automatic defense and he erroneously thought that the action was purely one against his wife. But the Federal Judiciary may interfere with state proceedings only where “unusual circumstances” exist. Local Loan Co. v. Hunt, 292 U.S. 234, 54 S.Ct. 695, 78 L.Ed. 1230, 93 A.L.R. 195. A liberal application of such Federal interference has been severely criticized by the commentators. Glenn on Liquidation, § 355; (1942) 28 Virginia Law Review 650. See, also, In re Harris, D.C., 28 F.Supp. 487; In re Anthony, D.C., 42 F.Supp. 312. Moreover, the defense of discharge, while perfectly legal and valid, is not highly favored. Remington on Bankruptcy, Fifth Edition, § 3490. Accordingly, while we are fully cognizant of the present unfortúnate predicament of Holmes, the dictates of orderly administration in bankruptcy proceedings must prevail in this situation, which is fraught with danger, We, therefore, adhere to the early mandate of the Supreme Court: “We are of opinion that [the defendant bankrupt], having in his hands a good defense at the time judgment was rendered against him, namely, the order of discharge, and having failed to present it to a court which had jurisdiction of his case, and of all the defenses which he might have made, including this, the judgment is a valid judgment * * *,” Dimock v. Revere Copper Co., 117 U.S. 559, 6 S.Ct. 855, 859, 29 L.Ed. 994. The local law of North Carolina is to the same effect. Paschall v. Bullock, 80 N.C. 329; Bell v. Cunningham, 81 N.C. 83.

In this connection, it may be noted, too, that after the default judgment had been obtained in the State Court against the bankrupt, or even after execution had been issued on this judgment, the State Court, if any equities still existed in favor of the bankrupt, had ample power over its own judgments and processes, and could grant the bankrupt any equitable remedies to which the bankrupt might fairly be entitled. The failure of the bankrupt even to seek any such redress in the State Court affords, we think, another reason for the views expressed in our opinion.

We feel our holding that the court below erroneously issued an order restraining Helms from levying execution on his judgment is in accord with the motivating philosophy of the recent decision of Toucey v. New York Life Insurance Company, 314 U.S. 118, 62 S.Ct. 139, 86 L.Ed. —, 137 A.L.R. 967.

For the reasons assigned, the judgment-below is reversed.

Reversed.