Nugent v. Boyd

THIS case came up by appeal from the Circuit Court of the United States for East Louisiana, sitting as a court of equity.

The controversy was between the bankrupt's assignee, on one side, and a mortgage creditor and purchasers at the sale under state process of the mortgaged premises, on the other.

The points to be decided grew out of the bankrupt law, and especially out of the saving in favor of state liens in the 2d section, and the jurisdiction granted to the District and Circuit Courts of the United States in cases of bankruptcy by the 6th and 8th. The validity of certain rules extablished by the District Court of Louisiana, sitting in bankruptcy, was questioned, and the mortgage creditor, not having proved under the commission, claimed exemption from those rules, and asserted the right to pursue his prior lien in the state court.

The complainant's bill stated in substance, that Elizabeth Norton filed her petition to be declared a bankrupt, on the 9th May, 1842. On the 1st June, it was decreed accordingly, and Richard Nugent appointed assignee.

At the time, and long before the date of the petition, George W. Boyd, one of the defendants, was the holder of notes, secured by mortgage duly recorded according to the laws of Louisiana, for the sum of $9,000, on which judgment had been rendered, order of seizure and sale granted, and execution issued and been levied, all before the date of the bankrupt's petition. The levy took place on the 16th of February, 1842. The sale was the only proceeding after the date of the decree of bankruptcy; that decree being dated the 1st, and the sale taking place on the 4th of June, 1842.

The bill admitted that all the forms and notices, &c., required by the laws of Louisiana for the sale of mortgaged premises under execution, were observed; but set up the petition and decree of bankruptcy, made before the sale, and alleged, that before the property was sold the assignee gave written notice of the decree, and of his appointment as assignee under it, to the sheriff, the mortgage creditor, Boyd, and to Preston and Phelps, who afterwards became the purchasers of the mortgaged premises at sheriff's sale, cautioning them respectively, and claiming at the same time the right to stay the sale, and take the property into his own hands for sale and distribution under the rules of the bankrupt court. Copies of the proceedings in bankruptcy and of the rules of the bankrupt court were made exhibits to the bill. These general orders of the District Court of the United States for the district of Louisiana, sitting in bankruptcy, and purporting to be made in pursuance of the authority delegated to it by the Bankrupt Act, and especially the 6th section thereof, provided, in substance, that notice should be served on all creditors of the bankrupt who had any special mortgage, lien, or privilege. The assignee was authorized to take a rule on the mortgage creditor to show cause why the mortgaged premises should not be sold by the assignee; and the court would thereupon pass in order of sale, which order should ipso facto annul the mortgages, liens, &c., existing on the property sold, and upon its presentation to the recorder of mortgages, he should be required to cancel the inscription of all such mortgages, liens, &c., on his records; and the liens, privileges, & c., should attach to the proceeds in the hands of the assignee. The mortgage creditor was entitled, under certain reservations, to prescribe the terms of sale, and at such sale might become the purchaser, but was required to pay the expenses and commissions on the sale, and the surplus, if any, over and above the amount of his mortgage; but these privileges were allowed only on the condition of his filing the proof of his debt in the registry of the court.

The complainant alleged, that by the act of Congress the rules aforesaid made in pursuance thereof, and the proceedings thereunder in the case of the bankrupt, the sale should have been stayed, and the said George W. Boyd having been notified and cited to appear and contest the proceedings in bankruptcy, all the acts done under color of the state process, after the date of the petition, were irregular and void; that Preston and Phelps having also been notified and cautioned, they derived no title from the sheriff's sale, such sale being invalid.

The bill prayed that the sheriff's sale might be set aside, the title of Preston and Phelps declared null; that George W. Boyd be compelled to come into the District Court, sitting in bankruptcy, and conform himself in all things to the rules of said court in such cases, and for other and general relief.

To this bill there was a demurrer, which, admitting all the facts, insisted, in point of law,

1. That the petition, decree, appointment of the assignee, &c., did not prevent the mortgage creditor from enforcing his lien under the process of the state court.

2. That the District Court had no right to pass the rules insisted on.

3. That the mortgage creditor was not bound by law to submit his claims to the District Court, sitting in bankruptcy, but might elect not to prove his debt, and still pursue his lien and remedy under the law.

4. That the title obtained at the sheriff's sale was, according to the facts set forth by the complainant, a good title for the purchasers against the assignee.

On the hearing of the argument on the bill and demurrer, the Circuit Court sustained the demurrer, and ordered the bill of the complainant to be dismissed.

From this decree the complainant appealed.

The cause was submitted, upon printed arguments, by Richard Nugent, for the appellant, and Wilde and Henderson, for the appellees.

The argument for the appellant was as follows:-

It having been agreed by all parties to submit this case in printed briefs, so as to expedite its decision, and the final proceedings in the bankrupt court, the appellant respectfully represents, that the facts set forth by the bill being admitted by the demurrer, and substantially set forth in the statement of the appellees, it is unnecessary here to repeat them. The contest is one entirely of law; and as the best and most conclusive argument he can present, the appellant annexes hereto certain decisions heretofore made on the points in controversy in similar cases, by the Supreme Court of Louisiana, and the Circuit Court of the United States for the Louisiana district. These decisions were all rendered after elaborate argument, on due deliberation, and disclose so fully the reasons on which they are founded, that it cannot be requisite for the appellant to do more than state the principles established by them. These courts have considered, that, to prevent confusion, and secure uniformity of action and decision, it is indispensable that all the claims of all the creditors, without distinction, be brought before the bankrupt court, and that all the property to which the bankrupt may have any claim shall be administered, sold, and distributed, under the authority of that court, no matter what liens exist upon it. These liens themselves cannot, indeed, be disputed or impaired, and against that the rules of the bankrupt court have made due provision; but they cannot be enforced under state laws and process, for that must inevitably disturb the uniform and harmonious administration of the bankrupt act.

Hence it has been held, that, from the moment of filing the petition, the bankrupt became incompetent to stand in judgment in the state courts, and that the assignee in bankruptcy has the right to cause the state process to be stayed, to take the property into his own possession, and to sell it free from the mortgage, leaving to the mortgagee the right to claim the proceeds in the court of bankruptcy, under such rules as that court may prescribe. Such has been the practice of the bankrupt court in Louisiana, and the rules annexed as an exhibit to the bill were adopted by the District Court of the United States, in analogy to, or conforming with them. The power to prescribe such rules is given by the 6th section of the Bankrupt Act, and they contain nothing repugnant to the proviso in the second section, since the state liens are saved.

There is also a distinction to be noted between the legal effect of a mortgage in the state of Louisiana, and the common law mortgage. Under the latter, the legal title passes to the mortgagee. According to that system, therefore, the assignee does not acquire the legal title by the assignment, and mortgaged property consequently is not subject to administration and sale, as part of the bankrupt's effects. The mortgage of Louisiana is thus defined: 'Mortgage is a right granted to the creditor over the property of his debtor, for the security of his debt, and gives him the power of having the property seized and sold in default of payment.' Civil Code of Louisiana, art. 3245.

Hence the legal estate in, and possession of, the mortgaged premises in Louisiana, remains in the mortgagor, and passes to his assignee. Being seized of the legal estate and in possession, it is for him to sell. In other states, the legal title passing to the mortgagee does not rest in the assignee of the bankrupt mortgagor, and consequently the decisions in other states are not applicable here.

The argument for the appellees was the following:

The decisions of the Supreme Court of Louisiana, and the Circuit Court of the United States, for the Louisiana district, as well as the rules in cases of bankruptcy, adopted by the District Court, all of which are relied upon by the complainant, proceed upon the mistaken assumption of an analogy between the cessio bonorum or concurso de acreadores of the Louisiana law, and the Bankrupt Act of the United States, and a supposed obligation or authority to model the one upon the other. There is no such analogy and no such authority.

The Louisiana concurso requires all the creditors of the bankrupt to come in, grants an immediate cessation of all actions of every description against him, and vests in the syndic all his property without distinction, with power to sell, cancelling all mortgages and liens, and conveying an absolute and clear title to the purchaser. The rights of the several creditors are settled contradictorily, and the liens on the property sold, which have been cancelled by order of the syndic, attach upon the proceeds of the property in his hands. Elwes v. Estewan, 1 Marl., 193; Code of 1824, art. 2172; Greiner Lou. Dig., tit. Insolvency, 237; and the authorities quoted in Fisher v. Vose, 3 Rob. (La.), 475.

In the bankrupt law there is nothing of all this. The mortgage creditor is not compellable to prove his debt under the bankruptcy. He may rely upon his lien, and assert and prosecute it under the state law and process. There is no authority to stay his proceedings, unless his mortgage is fraudulent or void, or alleged to be paid off, none of which is pretended here.

If he elects to come into the bankrupt court and prove his debt, he thereby relinquishes his mortgage or other lien, and stands upon the same footing as an ordinary creditor. There is no power given by the Bankrupt Act to the court, or to the assignee, to discriminate in the distribution of the proceeds of property sold by the assignee, between creditors holding liens on it and those holding none. The only authority the assignee has, is to redeem the mortgage under the order and direction of the court, (sec. 11.) If he does not choose to redeem, he has no power to enjoin the proceedings of the mortgage creditor. That would be to impair the lien, contrary to the proviso of the 2d section.

To prevent or obstruct the recovery of debts, has been held impairing the obligation of contracts. To prevent or obstruct the assertion of a lien, and take away the existing remedy upon it, must impair the lien.

All the decisions of this court upon the former subject are authorities for us.

The dissenting opinions of Judge Bullard, in the state of Louisiana, against the sheriff of the first judicial district, and J. D. Roasenda, for a prohibition, and in the case of F. B. Conrad, assignee of Thomas Banks, for a mandamus, which are before your honors in this case, outweigh, as we humbly contend, in soundness and acuteness of argument, the contrary decisions of his brethren.-Scevola assentior.

The wide range of judicial legislation exercised by the District Court, in providing that 'the order of sale shall, ipso facto, annul the mortgages, liens, &c., existing on the property sold,' and the vast addition to, and alteration in, the bankrupt law, thus made, cannot receive the sanction of this court. What part of the act authorizes the District Court to attach liens on the proceeds of property sold, to distribute such proceeds otherwise than ratably, without discrimination, or to force into its forum a mortgage creditor who chooses to rely upon his lien, and not to prove his debt?

Whence does that court derive its power to order a state register of mortgages to cancel the inscription of such mortgages on his records? If he refuses, how is such order to be enforced? If enforced, what is its effect? The Supreme Court of Louisiana, indeed, courteously lends its aid to enforce the decrees of the District Court sitting in bankruptcy, but will the courts of other states do so? If not, is the District Court of the United States armed with authority to enforce its own mandate against a state officer, in regard to his official duty under the laws of the state, as to the registration and cancellation of mortgages? Can such a pretension be maintained in all the states? And how is uniformity in the administration of the bankrupt law to be secured, by the adoption of rules going far beyond its text, and most certainly incapable of execution in many of the states?

This branch of the subject assumes a tenfold importance when the court considers that these rules and orders, and the decrees passed under them, constitute a part of the extraordinary bankrupt jurisdiction granted to the District Court alone, under the 6th section. Such decrees, this court had decided, are without appeal. Nelson v. Carland, 1 How., 265.

While concurrent jurisdiction, therefore, is granted by the 8th section to the Circuit and District Courts, of all suits at law and in equity, which may be brought by an assignee against any one claiming an adverse interest, or by such person against the assignee, and the suit so brought may be carried, by appeal, to this tribunal, the hasty and inconsiderate orders of the District Court in bankruptcy, though they may work irreparable injury, are not subject to any supervision.

On the score of authority, it cannot be expected we should do more than produce the decisions of circuit or district judges. These questions have not yet been adjudicated in this court.

We rely on the following cases, decided by judges of this court on their circuits or by district judges, respectable for learning and ability:

The decision of Mr. Justice Baldwin in the matter of Kerlin, a bankrupt, reported in the United States Gazette, of Philadelphia, of 26th October, 1843.

The decision of Mr. Justice Story in the case of Mitchell, assignee of Roper, v. Winslow and others, in the Circuit Court of Maine, reported in the Law Reporter of Boston, for December, 1843, pp. 347 and 360.

Mr. Justice McLean's decision in the case of N. C. McLean, assignee in bankruptcy, v. The Lafayette Bank, J. S. Buckingham and others; to be found in the Western Law Journal for October, 1843, p. 15.

Mr. Justice McLean's decision in the case of N. C. McLean, assignee, v. James F. Meline. Western Law Journal for November, 1843, p. 51.

Mr. Justice Story's decision in the case of Muggridge, 5 Law Rep., 357. In Ex parte Cooke, Id., 444; Ex parte Newhall, Id., 308. In Dutton v. Freeman, Id., 452.

Mr. Justice Thompson's decision in Haughton v. Eustis, Id., 506.