In re Diamond's Estate

259 F. 70, 170 C.C.A. 138, 1919 U.S. App. LEXIS 1599

• Court: Court of Appeals for the Sixth Circuit
• Decided: January 7, 1919
• Docket: No. 3173
• Status: Published

Opinion

KNAPPEN, Circuit Judge.

The order under review is one directing a state court receiver of the estate of the present bankrupts to pay certain moneys to the trustee in bankruptcy of that estate.

On September 17, 1917, the superior court of Cincinnati, in a partnership dissolution proceeding, instituted by one of the bankrupt partners, appointed petitioner receiver. Under intervening petitions for adjudication of bankruptcy, the first filed October 5, 1917, charging as acts of bankruptcy (a) the application by the debtors, while insolvent, for a receiver of all their property,o and the appointment of such receiver because of such insolvency, and (b) a preferential payment (the original petition, filed October 4th, charging only the second act stated), the bankruptcy court on October 22d following appointed a receiver, with instructions to apply to the state court for an order directing the receiver of that court to turn over all the debt- or’s assets to the bankruptcy receiver. The state court thereupon, on October 23d, ordered its receiver to make such complete delivery, excepting $1,175 then and there awarded by the state court to the receiver for his services, counsel fees, and other expenses. On October 29th, delivery, with the exception stated, was made, and on that date the superior court, on petitioner’s application, directed its receiver to disburse the $1,175 in question; the receiver being thereupon discharged.

On the same date the bankruptcy court directed its receiver to request the superior court to set aside its orders of October 23d and October 29th. This request was complied with by the state court on November 21st, upon the ground that “the United States District Court in Bankruptcy has found that it had exclusive jurisdiction in the premises, and that this court was without jurisdiction to enter same,” and its former receiver was ordered to pay to the bankruptcy receiver the money in question. Meanwhile, on November 10th, bankruptcy adjudication was had, and on November 24th, on application of the bankruptcy receiver (apparently no trustee had then been appointed), the petitioner herein was ordered to show cause why he should not pay the money in question. After an extended hearing petitioner was ordered to make such payment to the trustee in bankruptcy ; the question of the allowance to the receiver for his services and expenditures being expressly reserved for further hearing by the bankruptcy court, upon the filing of his account with appropriate application. Under the order of this court the fund in question has been paid to the trustee in bankruptcy, without prejudice to petitioner’s rights. It seems to have been conceded below that the partnership was actually insolvent when the state receivership was applied for, .although the receivership was neither ordered nor asked for on that ground.

[1-6] The broad question involved is whether the bankruptcy court had power, by summary order, to compel the state court receiver to turn over the money to the bankruptcy court, to await its action upon the question of compensation, fees, and disbursements of that receiver. We think this question must be answered in the affirmative. From the time the petition in bankruptcy was filed the property of the bankrupt estate was constructively in the custody of the law. Acme Co. v. Beekman Co., 222 U. S. 300, 32 Sup. Ct. 96, 56 L. Ed. 208. Upon the adjudication of bankruptcy, the District Court acquired jurisdiction essentially exclusive to administer the estate of the bankrupts generally, including the determination of claims to or liens upon their property, as well as questions of disbursement and distribution generally. In re Watts & Sachs, 190 U. S. 1, 27, 23 Sup. Ct. 718, 724 (47 L. Ed. 933);¹ U. S. Fidelity Co. v. Bray, 225 U. S. 205, 217, 32 Sup. Ct. 620, 56 L. Ed. 1055; In re Martin (C. C. A. 6) 193 Fed. 841, 846, 113 C. C. A. 627. The property so subject to its jurisdiction included that in its constructive as well as in its actual possession (Orinoco Co. v. Metzel [C. C. A. 6] 230 Fed. 40, 144 C. C. A. 338); and upon the adjudication of bankruptcy the trustee’s title to the property and funds of the bankrupt related back to the time of filing the petition for bankruptcy adjudication (Everett v. Judson, 228 U. S. 474, 478, 33 Sup. Ct. 568, 57 L. Ed. 927, 46 L. R. A. (N. S.) 154; Bailey v. Baker Co., 239 U. S. 268, 275; 276, 36 Sup. Ct. 50, 60 L. Ed. 275; Toof v. Bank [C. C. A. 6] 206 Fed. 250, 251, 124 C. C. A. 118. This exclusive jurisdiction the bankruptcy court was not at liberty to surrender (Fidelity Co. v. Bray, supra, 225 U. S. at page 218, 32 Sup. Ct. 620, 56 L. Ed. 1055); and after bankruptcy supervened the state court (broadly speaking) no longer had power, unless under circumstances of emergency not applicable to the order here, to so dispose of the bankrupts’ estate, in whole or in part, as to deprive the bankruptcy court of power to determine finally the propriety of such disposition.

[7] Assuming that the action of the state court in respect to allowances to its receiver was presumptively correct and just, and that the bankruptcy court will give due weight to this presumption, yet the ultimate determination of that question must, under the facts of this case, rest with the court of bankruptcy, taking into account equitable considerations and the extent to which the bankrupt estate has been benefited by the services and disbursements of the state court receiver. In re Watts & Sachs, supra; In re Zier & Co. (C. C. A. 7) 142 Fed. 102, 103, 73 C. C. A. 326; Hume v. Myers (C. C. A. 4) 242 Fed. 827, 830, 831, 155 C. C. A. 415; In re Neuburger (C. C. A. 2) 240 Fed. 947, 153 C. C. A. 633. Any other rule would, pro tanto, take the ultimate distribution of the assets of the bankrupt estate out of the hands of the bankruptcy court. We have no occasion to consider what the effect would have been had the state court fixed its receiver’s compensation and allowances for merely the 18 days prior to bankruptcy. No action thus limited was had or asked, and the superior court, as the court of appointment, has since surrendered any claim of control over the subject. As the case stands, orderly administration will be best effected by treating the entire period of service as a unit.

[0-10] As to the remedy: The question of ultimate importance is whether or not the petitioner, at the time bankruptcy intervened, was holding the fund in question adversely to the bankrupts or their estate. If so, jurisdiction by summary proceeding was lacking. Louisville Trust Co. v. Comingor, 184 U. S. 18, 22 Sup. Ct. 293, 46 L. Ed. 413. On the other hand, there was jurisdiction to compel the surrender of the fund, if not so adversely held. Mueller v. Nugent, 184 U. S. 1, 22 Sup. Ct. 269, 46 L. Ed. 405. It is well settled that the possession of an assignee for the benefit of creditors is not adverse to the bankrupt or his estate. Bryan v. Bernheimer, 181 U. S. 188, 192, 193, 21 Sup. Ct. 557, 45 L. Ed. 814; Mueller v. Nugent, supra, 184 U. S. at page 70, 22 Sup. Ct. 269, 46 L. Ed. 405; In re Stewart (C. C. A. 6) 179 Fed. 222, 225, 102 C. C. A. 348; In re Neuburger, supra. In such case it is held that the adjudication in bankruptcy automatically and of its own force avoids the assignment and terminates the right of possession by the assignee. While the possession of the state court’s receiver differed in some respects from that of an assignee for the benefit of creditors, in that the latter holds merely as an agent or representative of the bankrupt himself, yet we think the difference not conclusive. When bankruptcy intervened, the receiver was holding not in his own right, but merely in an official capacity and as the hand of the court, and not, we think, adversely to the bankrupts or their estate, within the meaning of the law. In re Watts & Sachs, supra, 190 U. S. at page 27, 23 Sup. Ct. 718, 47 L. Ed. 933; Hooks v. Aldridge (C. C. A. 5) 145 Fed. 865, 76 C. C. A. 409; In re Hecox (C. C. A. 8) 164 Fed. 823, 90 C. C. A. 627. Had the state court made before bankruptcy an order for compensation, and had, disbursement thereunder been made before the commencement of bankruptcy proceedings (as was the case in Louisville Trust Co. v. Comingor, supra), the situation would have been different.

[11] The fact that petitioner disbursed the $1,175 fund under the state court’s order of October 29th did not convert a formerly non-adverse holding into one of an adversary character; for he then knew of the bankruptcy proceedings and of the efforts of the bankruptcy court then and there being made to prevent such action. Bryan v. Bernheimer, supra, 181 U. S. at pages 191 and 193, 21 Sup. Ct. 557, 45 L. Ed. 814.

[12] The proposition that the bankruptcy court had no power to authorize its receiver (as distinguished from a trustee) to take possession of the fund is answered by what is said in Bryan v. Bernheimer, supra, 181 U. S. at page 195, 21 Sup. Ct. 557, 45 L. Ed. 814, and in Lazarus v. Prentice, 234 U. S. 263, 266, 34 Sup. Ct. 851, 58 L. Ed. 1305. We see no merit in the proposition that the bankruptcy receiver, by going into the state court (as was highly proper in the observance of due comity) to ask that court to direct its receiver to turn over the fund to the bankruptcy receiver, thereby elected that remedy, so submitting himself to the jurisdiction of the state court and inviting the order complained of. The course taken by the bankruptcy receiver was designed to prevent that very action.

[13] The pendency of proceedings in the state appellate court for review of the state court’s action of November 21st, setting aside its previous order for compensation, is not and could not well be urged against the jurisdiction of the bankruptcy court. The commendable action of the state court last referred to terminated any conflict between the federal and state courts. The legality of that order and of its predecessors, as affecting the jurisdiction of the bankruptcy court, is one arising under the bankruptcy law, which it is our duty to decide.

The discussion in the opinion of the District Court respecting the professional conduct of certain counsel for the receiver has, in our opinion, no relation to the questions purely of law involved in the preliminary determination whether the state receiver should pay the fund to the trustee in bankruptcy, subject to later action upon the merits of the receiver’s claim. We have accordingly not considered that subject, and must not be understood as expressing any opinion upon its merits.

The order of the District Court is affirmed.

1 “Tlie general rule as between courts of concurrent jurisdiction is that property already in the possession of tbe receiver of one court cannot rightfully be taken from him without the court’s consent, by the receiver of another court appointed in a subsequent suit, but that rule can have only a qualified application where winding up proceedings are superseded by those in bankruptcy as to which the jurisdiction is not concurrent; Still it obtains as a rule of comity, and accordingly the receiver of the [bankruptcy court] brought his appointment to the knowledge of the [state court] and requested the delivery of the assets.”