Adair v. Bank of America National Trust & Savings Association/Opinion of the Court

This writ was asked to review a decree of the Circuit Court of Appeals for the Ninth Circuit, upholding the objections and exceptions of the respondent, a creditor, to the final account of petitioner, a conciliation commissioner appointed under section 75(a) of the Bankruptcy Act, as amended, 11 U.S.C.A. § 203(a), and reversing the order of the District Court which had settled and allowed the account. The Circuit Court of Appeals held that the petitioner should have been required to pay to respondent the gross proceeds of the grape crop harvested on the debtor's land after the debtor had filed his petition under section 75 of the Bankruptcy Act, as amended, 11 U.S.C.A. § 203, without any deduction for moneys spent in harvesting that crop and for other purposes, because of the fact that the crop was subject to a chattel mortgage held by respondent. 90 F.2d 750. In view of the importance of the question with respect to proceedings instituted under section 75 of the Bankruptcy Act, this Court granted certiorari, 302 U.S. 674, 58 S.Ct. 55, 82 L.Ed. --.

On August 6, 1934, Andrea Cuccia, a farmer, filed an adequate petition under section 75(a) to (r) of the Bankruptcy Act, 47 Stat. 1470-1473, as amended, 48 Stat. 925, §§ 8, 9, 11 U.S.C.A. § 203 and note, showing by the schedules secured claims to respondent of over $12,000 and unsecured claims of a slightly larger amount, and expressing his desire to effect a composition or extension of time to pay his debts. His petition was referred to Noah Adair, the Conciliation Commissioner for the County of San Bernardino, California. On January 7, 1935, an amended petition was filed by the debtor, stating that he had failed to obtain the approval of his creditors to a composition or extension proposal and praying that he might be adjudged a bankrupt under the provisions of section 75, subsection (s) of the Bankruptcy Act, as enacted June 28, 1934, 48 Stat. 1289, 11 U.S.C.A. § 203 note. Adjudication was entered and the proceedings referred to the referee in bankruptcy. On October 14, 1935, the District Court, on a motion by the respondent, dismissed the petition. On March 16, 1936, the debtor attempted to invoke the benefits of the amended section 75(s), 11 U.S.C.A. § 203(s), but we are not here concerned with that petition and the subsequent proceedings (set out in Bank of America National Trust & Savings Ass'n v. Cuccia, 93 F.2d 754, decided December 30, 1937, on rehearing, by the Circuit Court of Appeals for the Ninth Circuit).

The respondent, at the beginning of and throughout the proceedings, held a matured note of the debtor and his wife, secured by a deed of trust on certain lands in the county of San Bernardino, California, and by a mortgage on the crops growing or to be grown on the same lands, during 1933 and 1934, or prior to the payment in full of the total indebtedness. The crop mortgage required the mortgagor to cultivate, harvest and deliver the crop to the mortgagee, without cost to the mortgagee, for sale and application of the proceeds to the debt.

The present controversy had its origin in the respondent's petition to the Court, on February 6, 1936, for an accounting by the conciliation commissioner of funds realized from crops sold off the debtor's premises in 1934. In response to the order of the District Court, the conciliation commissioner made an accounting as appears in the footnote. The Bank objected to the account on the ground that the money was the proceeds of the sale of a crop covered by the chattel mortgage above referred to and that the disbursements from the fund were made without valid order by the District Court and without the Bank's notice or knowledge of any court order. It was further objected that after adjudication in bankruptcy under section 75(s) the conciliation commissioner had no jurisdiction. Petitioner stated in his answer and testimony that the items appearing prior to the adjudication in bankruptcy of January 7, 1935, were disbursed, on his orders as conciliation commissioner, either to gather the 1934 crop or to provide for care of the property, and that the items appearing from January 22 through June 1, 1935, were disbursed under the direction of the referee in bankruptcy. The District Court, finding that the expenditures of the conciliation commissioner were made in good faith and for the purpose of conserving the estate, settled and allowed the account. The Circuit Court of Appeals directed the disallowance of the account and the payment by the conciliation commissioner to the respondent of the gross proceeds of the mortgaged crop.

First. The powers granted by the bankruptcy clause of the Constitution, article 1, § 8, cl. 4, are not limited to the bankruptcy law and practice in force in England or the States at the time of its adoption. Continental Illinois Nat'l Bank & Trust Co. v. Chicago, Rock Island & Pacific Ry. Co., 294 U.S. 648, 668, 55 S.Ct. 595, 603, 79 L.Ed. 1110. Then the interests of the creditor alone were protected. Progressive liberalization of bankruptcy and insolvency laws, in an effort to avert the evils of liquidation, has furnished opportunity for composition in bankruptcy proceedings and later for composition and extension of debts in relief proceedings for individual debtors, for reorganization of railroads and other corporations, and for public debtor proceedings.

Section 75 of the Bankruptcy Act provides similar opportunities for the rehabilitation of farmers. Wright v. Vinton Branch, 300 U.S. 440, 456, 57 S.Ct. 556, 559, 81 L.Ed. 736. It is sought to accomplish this rehabilitation through composition or extension of debts, subsections (e) to (l) 47 Stat. 1471, 1472, 11 U.S.C.A. § 203(e to l).

On failure of composition and extension, further opportunity for rehabilitation is afforded the debtor, through provisions enabling him to retain possession of his property, under conditions favorable to its ultimate redemption by him. These steps are carried out under judicial supervision, subsection (s).

To accomplish its purpose, section 75 provides that the filing of a petition shall effect a stay. Such a stay under judicial discretion as to enforcement of claims does not take property without due process and is constitutional. Continental Illinois Nat'l Bank & Trust Co. v. Chicago, Rock Island & Pacific Ry. Co., supra, 294 U.S. 648, at pages 675 et seq. and 680 et seq., 55 S.Ct. 595, 605, 608, 79 L.Ed. 1110; Wright v. Vinton Branch, supra, 300 U.S. 440, 460, 57 S.Ct. 556, 561, 81 L.Ed. 736; Home Bldg. & Loan Ass'n v. Blaisdell, 290 U.S. 398, 54 S.Ct. 231, 78 L.Ed. 413, 88 A.L.R. 1481. In order to operate and protect the property during the stay, and pending confirmation or other disposition of the composition or extension proposal, the statute provides in subsections (e) and (n) for the exercise by the court of 'such control over the property of the farmer as the court deems in the best interests of the farmer and his creditors.' These provisions look toward the maintenance of the farm as a going concern, and afford clear authority, in a proper case, for the continuance of the operations of the farm after the filing of a petition under section 75 of the Bankruptcy Act.

Second. In holding the conciliation commissioner personally liable, we think the lower court misconceived the nature of his office. At the time of filing the original petition for composition and extension, August 6, 1934, section 75 of the Bankruptcy Act was comprised of subsections (a) to (s), inclusive. Subsections (a) to (r) made provision for conciliation commissioners, set up the same qualifications for eligibility to this office as are required for the office of deferee, authorized the conciliation commissioners to receive and transmit the petitions and schedules, to call the first meeting of creditors, with notice of terms of composition or extension, to hear the parties in interest, to prepare final inventory, to supervise the farmer's affairs during an extension period and to distribute the consideration after a composition. In accordance with section 75, subsection (b), this Court, as of April 24, 1933, established Rule L, 11 U.S.C.A. following section 53, governing proceedings under section 75(a) to (r) inclusive, as an addition to the General Orders in Bankruptcy, 288 U.S. at page 641. Rule L provided for reference to the conciliation commissioner, and his carrying out of the duties outlined above. The commissioner was given, in so far as consistent with section 75 and Rule L, 'all the powers and duties of a referee in bankruptcy,' to be carried out under the General Orders in Bankruptcy. Rule L, par. 11. Sections 38, as amended, and 39 of the Bankruptcy Act 11 U.S.C.A. §§ 66, 67 and paragraphs 3 and 6 of Rule L indicate the wide extent of the authority of the conciliation commissioner. Under section 38, Bankruptcy Act, clause four, the referee is empowered to 'perform such part of the duties, except as to questions arising out of the applications of bankrupts for compositions or discharges, as are by this Act (title) conferred on courts of bankruptcy.'

In view of the foregoing the conciliation commisioner had the authority, prior to the adjudication of bankruptcy under section 75(s), to act as the 'court,' in the first instance and subject to review, in controlling the property of the debtor 'in the best interests of the farmer and his creditors.' Section 75(e), 11 U.S.C.A. § 203(e); In re Wiedmer, 7 Cir., 82 F.2d 566. Under this authority the conciliation commissioner acted in authorizing the expenditures shown on the account for gathering the crop of 1934, preparing for the crop of 1935, and paying fees and expenses. It is plain that the conciliation commissioner, like the referee (White v. Schloerb, 178 U.S. 542, 546, 20 S.Ct. 1007, 44 L.Ed. 1183; Mueller v. Nugent, 184 U.S. 1, 13, 22 S.Ct. 269, 46 L.Ed. 405) exercises some of the 'judicial authority' of the bankruptcy court. The acts just detailed were judicial acts. Error within his jurisdiction does not subject him to personal liability. Randall v. Brigham, 7 Wall. 523, 535, 19 L.Ed. 285. See, also, Bradley v. Fisher, 13 Wall. 335, 20 L.Ed. 646; Alzua v. Johnson, 231 U.S. 106, 34 S.Ct. 27, 58 L.Ed. 142; Yaselli v. Goff, 275 U.S. 503, 48 S.Ct. 155, 72 L.Ed. 395. Cf. First Nat'l Bank of Ardmore v. Bonner, 10 Cir., 74 F.2d 139, 142; United States v. Ward, 8 Cir., 257 F. 372, 377. This doctrine is quite clear when, as here, no rule or positive enactment was violated and the acts were bona fide.

The fact that the proceeds of the crop were banked to the joint account of the debtor and the conciliation commissioner may have obscured the judicial character of the latter. Better practice would suggest that the account appear in the name of the debtor, with the counter-signature of the conciliation commissioner required for withdrawals. Also, at an early, preferably the first, meeting of creditors, the method of handling the business of the debtor pending confirmation or further order should have been developed and proper orders entered. Cf. Section 12a, Bankruptcy Act, as amended, 11 U.S.C.A. § 30(a). This does not appear to have been done. These irregularities do not suffice to withdraw from the conciliation commissioner his judicial protection. Alzua v. Johnson, 231 U.S. 106, 34 S.Ct. 27, 58 L.Ed. 142.

Some disbursements were made after the adjudication in bankruptcy under subsection (s) and the reference of the proceedings to a referee in bankruptcy. It is unnecessary to decide whether, under section 75(s) as originally enacted, the conciliation commissioner could have continued to act as referee. In this case, there was no further reference of the proceedings to petitioner, and he continued to act solely at the direction of the referee in bankruptcy. His uncontradicted testimony was as follows: 'When this matter was referred to D. W. Richards, as referee I wanted him to take the money I had on hand and become the custodian of it. He asked me to keep the money and said he would trust me in the expenditure of the money while it was under him and that he would O.K. the checks, so all the checks that were written after it went to D. W. Richards were O. K.'d by him and I wrote the checks at his request.'

Without determining the effect of the unconstitutionality of subsection (s) upon the steps taken under its authority, it appears that the petitioner acted either judicially, continuing to exercise his powers as conciliation commissioner, or ministerially, as an arm of the court, under the direction and with the approval of the referee. Under the facts of this case we do not think petitioner is personally liable for these disbursements. Cf. First Nat'l Bank of Ardmore v. Bonner, 10 Cir., 74 F.2d 139, 142.

Third. Moreover, the expenditures assailed by respondent were proper, at least with respect to the principal items (which are the only ones we shall consider)-the amounts spent in harvesting the 1934 crop, which was sold in order to create the fund, and the amounts spent for preservation of the vineyard and for the cultivation of the 1935 crop. There is no showing that petitioner was improvident. Reference is made in his account to money paid to the farmer as 'living expenses,' but the record discloses that the amounts paid the debtor did not exceed the ordinary wages for the work he actually and necessarily performed in the maintenance of the vineyard. Compare Wright v. Vinton Branch, supra, 300 U.S. 440, at page 466, 57 S.Ct. 556, 564, 81 L.Ed. 736; In re Barrow, D.C., 98 F. 582.

The court below ruled that under the crop mortgage the farmer had the obligation to cultivate and harvest the crop at his own expense, and therefore the gross proceeds belonged to respondent. This conclusion disregards the fact that the debtor did not harvest the grapes as an ordinary mortgagor. He had come into court seeking relief under section 75 of the Bankruptcy Act. The filing of his petition put the property in the control of the court and the harvesting of the crop and the preservation of the property became a matter for the concern and action of the court.

Respondent certainly cannot complain of the devotion of the proceeds of the 1934 crop to the cost of harvesting that crop. The care and harvesting of that crop represented the only way to preserve its worth (cf. Union Trust Co. of New York v. Illinois Midland R. Co., 117 U.S. 434, 455, 6 S.Ct. 809, 29 L.Ed. 963), and the cost of protecting a fund in court is everywhere recognized as a dominant charge on that fund. See Bronson v. La Crosse & M.R. Co., 1 Wall. 405, 410, 17 L.Ed. 616; Shepherd v. Pepper, 133 U.S. 626, 652, 10 S.Ct. 438, 33 L.Ed. 706; Thompson v. Phenix Ins. Co., 136 U.S. 287, 293, 10 S.Ct. 1019, 34 L.Ed. 408; Atlantic Trust Co. v. Chapman, 208 U.S. 360, 376, 28 S.Ct. 406, 52 L.Ed. 528, 13 Ann.Cas. 1155; Wright v. Vinton Branch, supra, 300 U.S. 440, at page 468, 57 S.Ct. 556, 564, 81 L.Ed. 736. The rule applies even in ordinary bankruptcy proceedings since the secured creditor benefits from the disbursement.

And since the creditor in this case had a lien on the crop for future years and on the real estate, we cannot say that the money expended for maintenance of the real estate and toward production of the 1935 crop was not likewise for its benefit. Compare Wright v. Vinton Branch, supra, 300 U.S. 440, at page 468, 57 S.Ct. 556, 564, 81 L.Ed. 736. Respondent itself has suggested, in another connection (see Bank of America National Trust & Savings Ass'n v. Cuccia, supra), that the grape vines require 'cultivation, pruning and care,' lest they 'deterioriate.' It is unnecessary to determine the effect of an expenditure of the proceeds of a crop where the mortgagee has no lien on the property preserved and protected by the expenditures.

The decree is reversed and the cause remanded for further proceedings in conformity with this opinion.

Reversed and remanded.

It is so ordered.

Mr. Justice McREYNOLDS concurs in the result.

Mr. Justice CARDOZO took no part in the consideration or decision of this case.