First National Bank of Chicago v. Chicago Title Trust Company/Opinion of the Court

In the view we take of the case, the petition for certiorari sufficiently discloses the facts. If the proceeding in the district court was a proceeding in bankruptcy, and not an independent suit, no appeal lay to the circuit court of appeals, and the jurisdiction of that court was confined to revision in matter of law 'on due notice and petition' under clause b of § 24.

The distinction between steps in bankruptcy proceedings proper and controversies arising out of the settlement of the estates of bankrupts is recognized in §§ 23, 24, and 25 of the present act, and the provisions as to revision in matter of law and appeals were framed and must be construed in view of that distinction. Holden v. Stratton, 191 U.S. 115, 48 L. ed. 116, 24 Sup. Ct. Rep. 45; ''First Nat. Bank v. Klug'', 186 U.S. 202, 46 L. ed. 1127, 22 Sup. Ct. Rep. 899; Elliott v. Toeppner, 187 U.S. 327, 333, 334, 47 L. ed. 200, 203, 23 Sup. Ct. Rep. 133.

This distinction existed under the prior bankruptcy law, and the then decisions in respect of a proceeding in bankruptcy and an independent suit are applicable. It was settled that the bankruptcy court was without jurisdiction to determine adverse claims to property not in the possession of the assignee in bankruptcy, by summary proceedings, whether absolute title or only a lien was asserted. Smith v. Mason, 14 Wall. 419, 20 L. ed. 748; Marshall v. Knox, 16 Wall. 551, 21 L. ed. 481; Re Bonesteel, 7 Blatchf. 175, Fed. Cas. No. 1,627, Mr. Justice Nelson; Knight v. Cheney, 5 Nat. Bankr. Reg. 305, Fed. Cas. No. 7,883, Mr. Justice Clifford; Re Ballou, 4 Ben. 135, Fed. Cas. No. 818, Mr. Justice Blatchford, then district judge; Re Marter, 12 Nat. Bankr. Reg. 185, Fed. Cas. No. 9,143, Mr. Justice Brown, then district judge.

The present act was plainly framed in recognition of the principle of these cases. Subdivision 7 of § 2 confers jurisdiction on the district courts as courts of bankruptcy to 'cause the estates of bankrupts to be collected, reduced to money, and distributed, and determine controversies in relation thereto, except as herein otherwise provided;' and we held in Bardes v. ''First Nat. Bank'', 178 U.S. 524, 44 L. ed. 1175, 20 Sup. Ct. Rep. 1000, that this exception referred to clause b of § 23 of the act, which provides: 'Suits by the trustee shall only be brought or prosecuted in the courts where the bankrupt whose estate is being administered by such trustee might have brought or prosecuted them if proceedings in bankruptcy had not been instituted, unless by consent of the proposed defendant.' [30 Stat. at L. pp. 546, 552, chap. 541, U.S.C.omp. Stat. 1901, pp. 3422, 3431.] And that the district courts had no jurisdiction of such plenary suit without consent.

Petitioners asserted this express statutory limitation on jurisdiction, and objected that the district court could not proceed, but their objections were overruled. That they then did not abandon their claims did not amount to a waiver of their objections or to a consent to an exercise of jurisdiction against which they protested. Louisville Trust Co. v. Comingor, 184 U.S. 18, 46 L. ed. 413, 22 Sup. Ct. Rep. 293. In that case, to a rule entered in the bankruptcy court, requiring an adverse claimant in possession of a fund to pay it to the trustee in bankruptcy, the claimant tendered a formal response, denying jurisdiction, which the court refused to entertain, and he then participated in a hearing upon the merits. The bankruptcy court sustained its jurisdiction upon the ground that, by his 'acquiescence in that mode of procedure,' he had assented to its jurisdiction. Upon petition for review the circuit court of appeals reversed the bankruptcy court, and this court, upon certiorari, affirmed the circuit court of appeals. We said:

'This brought the controversy within the ruling in Bardes v. ''First Nat. Bank'', 178 U.S. 524, 44 L. ed. 1175, 20 Sup. Ct. Rep. 1000, and the questions attempted to be litigated before the referee and in the district court as to the allowance of the two amounts could only be raised in the district court by consent, and then only by plenary suit. If the jurisdiction of the district court was not consented to, then the state court, under the circumstances of this case, was the proper forum, and the matters in dispute were to be disposed of there. . ..

'The proceeding was purely summary. . . . 'The question is whether the district court had jurisdiction to finally adjudicate the merits in this proceeding. ..

'In many cases jurisdiction may depend on the ascertainment of facts involving the merits, and in that sense the court exercises jurisdiction in disposing of the preliminary inquiry, although the result may be that it finds that it cannot go farther. And where, in a case like that before us, the court erroneously retains jurisdiction to adjudicate the merits, its action can be corrected on review.

'We are of opinion that even if Comingor could have consented to be pursued in this manner, he did not so consent. He was ruled to show cause, and the cause he showed defeated jurisdiction over the subject-matter,-that is, jurisdiction to proceed summarily. He did not come in voluntarily, but in obedience to peremptory orders; and although he participated in the proceedings before the referee, he had pleaded his claims in the outset, and he made his formal protest to the exercise of jurisdiction before the final order was entered.'

And since, as elaborately expounded in Bardes v. ''First Nat. Bank'', the district court had no jurisdiction of an independent suit, it follows that the proceeding in that court could not be held to have been such, as, indeed, in form, on reason, and on authority, it manifestly was not. But, nevertheless, the district court had jurisdiction to determine whether it could or could not proceed further. Louisville Trust Co. v. Comingor, 184 U.S. 18, 46 L. ed. 413, 22 Sup. Ct. Rep. 293; Mueller v. Nugent, 184 U.S. 1, 46 L. ed. 405, 22 Sup. Ct. Rep. 269; Schweer v. Brown, 195 U.S. 171, ante, 15, 25 Sup. Ct. Rep. 15.

In the present case, the receiver filed a petition reciting that he had taken possession of the property. This was denied. The district court adjudged that the receiver had not, at the time of filing its petition, the right of possession, and that the National Storage Company, at that date, and also at the time of the filing of the petition in bankruptcy, was entitled to possession and had possession. Nevertheless it retained jurisdiction and decreed payment to petitioners out of the proceeds of the sale.

The sale in the circumstances did not change the situation. The proceeds stood in place of the property, and the order returning the proceeds was equivalent to an order returning the property. This it was proper to do, whether the court had held that it lacked jurisdiction, or ruled in favor of petitioners on the merits. The court of appeals sustained the jurisdiction of the district court upon the ground that it had acquired a fund, and had jurisdiction to dispose of it; but we do not think that a court of bankruptcy can create a jurisdiction forbidden by statute. And, in any view, the proceeding was a proceeding in bankruptcy. Being such, an appeal from the decree of the district court, under § 25a, did not lie, and parties aggrieved could only invoke the supervisory power under § 24b. Holden v. Stratton, 191 U.S. 115, 48 L. ed. 116, 24 Sup. Ct. Rep. 45; Hutchinson v. Otis, 190 U.S. 552, 47 L. ed. 1179, 23 Sup. Ct. Rep. 778.

But this was an appeal, and not a petition for revision, and hence it was that the circuit court of appeals reviewed the questions of fact, and declined to accept the findings of the referee and the district court. In the exercise of supervisory power, it would have been confined to matter of law. We are clear that an appeal would not lie, and the decrees of the circuit court of appeals must be reversed, with a direction to dismiss the appeals, and remand the cause to the district court for further proceedings in conformity with this opinion.

In our view the district court should have declined, upon its findings, to retain jurisdiction; and in that event the decrees for the return of the money should have been without prejudice to the right of respondents to litigate in a proper court, which modification we direct to be made.

Ordered accordingly.