Vallely v. Northern Fire & Marine Insurance Company/Opinion of the Court

The Insurance Company was adjudged an involuntary bankrupt May 3, 1917, upon petition of its creditors. The petition averred the corporate capacity of the company under the laws of North Dakota, and that it had been 'engaged in the business of insuring property against loss by fire, hail,' etc. Process was duly issued and served, and the company making default, an order of adjudication was entered against it. No appeal was taken from the order. The administration of the estate proceeded in due course, claims presented, assets collected and reduced to money, payments made to protect equities, and suits brought by the trustee in his official capacity. In the matters of the estate the trustee frequently conferred with the president and secretary of the bankrupt and received from them co-operation, assistance and information without question of the validity of the adjudication. Considerable moneys were paid out and expenses incurred by the trustee.

After the above course of administration, and on December 18, 1917, the company by its attorneys filed a motion in the District Court to vacate the adjudication as null and void, and to dismiss the proceedings, upon the ground that it appeared that the company was an insurance corporation and that the court was, therefore, without jurisdiction. The motion was sustained and an order entered vacating the adjudication and dismissing the petition of the creditors on authority of section 4b of the Bankruptcy Act as amended by the Act of June 25, 1910 (36 Stat. 839 [Comp. St. § 9588]), which provides that--

'Any moneyed, business, or commercial corporation, except a     municipal, railroad, insurance, or banking corporation *  *  *      may be adjudged an involuntary bankrupt upon default or an      impartial trial, and shall be subject to the provisions and      entitled to the benefits of this act.'

The trustee filed a petition to revise the order of the District Court in a matter of law in the Circuit Court of Appeals, and the latter court certifies that it is indispensable to the determination of the case, and to the end that the court may properly discharge its duty, desires instruction upon the following questions:

'1. Is a petition to revise in matter of law under section     24b of the Bankruptcy Act the proper remedy to review an      order of an inferior court of bankruptcy vacating an      adjudication and dismissing the bankruptcy proceeding for      want of jurisdiction upon the motion of the bankrupt after      the expiration of the time for appeal, he having neither      contested the involuntary petition against him nor appealing      from the adjudication?

'2. Where it appears from the averments of a petition in     involuntary bankruptcy that the person proceeded against is      an insurance corporation and therefore within the exceptions      of section 4b of the Bankruptcy Act, as amended June 25, 1910      (36 Stat. 839), is there such an absence of jurisdiction in      the court of bankruptcy that its adjudication, rendered upon      due service of process and default, and not appealed from,      should be vacated and the proceeding be dismissed upon the      motion of the bankrupt after the time for appeal has expired?

'3. Where an insurance corporation adjudged bankrupt in an involuntary proceeding after the passage of the     amendatory Act of June 25, 1910 (36 Stat. 839), upon due      service of process and default, does not appeal from the      adjudication, but acquiesces therein and aids the trustee in      the performance of his duties in administering the estate,      may it be estopped from thereafter questioning the validity      of the adjudication and the power of the court and the      trustee to proceed?'

Of the construction of the statute there can be no controversy; what answer shall be made to the questions turns on other considerations, turns on the effect of the conduct of the company as an estoppel. That it has such effect is contended by the trustee, and there is an express concession that if objection had been made the company would have been entitled to a dismissal of the petition. It is, however, insisted that it is settled 'that an erroneous adjudication against an exempt corporation, whether made by default or upon a contest or trial before the bankruptcy court, can be attacked only by appeal, writ of error, or prompt motion to vacate,' and that section 4 does not relate to the jurisdiction of the court over the subject-matter. 'It does not, therefore,' is the further contention, 'create or limit jurisdiction of the court with respect to its power to consider and pass upon the merits of the petition,' and that 'the valid exercise of jurisdiction does not depend upon the correctness of the decision.' And again, if the court in the exercise of its jurisdictional power, 'reached a wrong conclusion, the judgment is not void, it is merely error to be corrected on appeal or by motion to vacate, timely made, but as long as it stands it is binding on every one.' There is plausibility in the propositions taken in their generality, but there are opposing ones. Courts are constituted by authority and they cannot beyond the power delegated to them. If they act beyond that authority, and certainly in contravention of it, their judgments and orders are regarded as nullities. They are not voidable, but simply void, and this even prior to reversal. Elliott v. Peirsol, 1 Pet. 328, 340, 7 L. Ed. 164; Old Wayne Life Ass'n v. McDonough, 204 U.S. 8, 27 Sup. Ct. 236, 51 L. Ed. 345.

Which of the propositions shall prevail in a given case connot be dogmatically asserted, and cases of their consideration and application can be cited against each other. There is such citation in the pending case. Plaintiff in error cites, among others, McCormick v. Sullivant, 10 Wheat. 192, 6 L. Ed. 300; Des Moines Navigation Co. v. Iowa Homestead Co., 123 U.S. 552, 8 Sup. Ct. 217, 31 L. Ed. 202; First National Bank v. Klug, 186 U.S. 202, 22 Sup. Ct. 899, 46 L. Ed. 1127.

McCormick v. Sullivant involved the effect of diversity of citizenship, and it was decided that an absence of its allegation did not impeach the judgment rendered in the case and preclude its being conclusive upon the parties. And it was said (as it has often been said) that the courts of the United States are 'of limited jurisdiction, but not inferior courts, in the technical sense of those words, whose judgments taken alone, are to be disregarded. If the jurisdiction be not alleged in the proceedings, their judgments and decrees are erroneous, and may, upon writ of error, or appeal, be reversed for that cause. But they are not absolute nullities.'

In Des Moines Navigation Co. v. Iowa Homestead Co., 123 U.S. 552, 8 Sup. Ct. 217, 31 L. Ed. 202, there came up to be considered also the effect of a prior adjudication as dependent upon an allegation of diversity of citizenship, and the ruling in McCormack v. Sullivant was affirmed.

The immediate comment on these cases is that the courts had jurisdiction of their subject-matter and necessarily power to pass upon the fact (diversity of citizenship) upon which that jurisdiction depended in the given case. The subject-matter of the suit was not withheld from them by explicit provision of the law which was their sole warrant of power.

First National Bank v. Klug is nearer to the question in the case at bar. It was a case in bankruptcy. The Act of July 1, 1898 (30 Stat. 544), provided that 'any natural person, except a wage-earner or a person engaged chiefly in farming or the tillage of the soil' might 'be adjudged an involuntary bankrupt upon default or an impartial trial' and should 'be subject to the provisions and entitled to the benefits' of the act.

A petition in involuntary bankruptcy was filed against Klug and a trial was had upon the issue, whether he was 'engaged chiefly in farming' within the meaning of the act, and the jury having found accordingly, the District Court entered a judgment dismissing the petition. The question of the jurisdiction was certified to this court and it was held that the 'District Court had and exercised jurisdiction.' This further was said:

'The conclusion was, it is true, that Klug could not be     adjudged a bankrupt, but the court had jurisdiction to so      determine, and its jurisdiction over the subject-matter was      not and could not be questioned'-citing Mueller v. Nugent,      184 U.S. 15, 25, 22 Sup. Ct. 269, 46 L. Ed. 405; Smith v.     McKay, 161 U.S. 355, 16 Sup. Ct. 490, 40 L. Ed. 731.

It will be observed, therefore, that the act of 1898, made jurisdiction depend upon an inquiry of fact and necessarily jurisdiction was conferred to make the inquiry, and pronounce judgment according to its result. The case, therefore, is not pertinent to, or authority upon, the case at bar. The Act of June 25, 1910, which covers the present proceeding is peremptory in its prohibition. It excludes, by section 4, insurance corporations from the benefits of voluntary bankruptcy, and by subdivision 'b' prohibits them from being adjudged involuntary bankrupts. The effect of these provisions is that there is no statute of bankruptcy as to the excepted corporations, and necessarily there is no power in the District Court to include them. In other words, the policy of the law is to leave the relation and remedies of 'municipal, railroad, insurance, or banking' corporations to their creditors and their creditors to them, to other provisions of law. It is easy to see in what disorder a different policy would result. We may use for illustration a municipal corporation. Its creditors may be enterprising, its officers acquiescent or indifferent. Can, threfore, the allegations of the former and the default of the latter confer jurisdiction on the District Court to entertain a petition in bankruptcy against the corporation and render a decree therein, and, if not, why not? If consent can confirm jurisdiction, why not initially confer jurisdiction? It is not necessary to point out the disorder that would hence result and the difficulties that the officers of a bankrupt court would encounter in such situation. The legislative power thought care against the possibility of it was necessary, and in that care associated insurance corporations. For a court to extend the act to corporations of either kind is to enact a law, not to execute one.

The first question concerns procedure only, and should be answered in the affirmative. First National Bank v. Klug, supra; Matter of Loving, 224 U.S. 183, 32 Sup. Ct. 446, 56 L. Ed. 725.

The second and third questions concern the merits and are respectively answered in the affirmative and negative.

So ordered.