Whitney v. Wenman/Opinion of the Court

This case is here upon the question of the jurisdiction of the district court to entertain the action. The case in the court below was dismissed for want of jurisdiction, the demurrer having been sustained solely upon the ground that the bankruptcy act of July 1, 1898 [30 Stat. at L. 545, chap. 541, U.S.C.omp. Stat. 1901, p. 3421], as amended by the act of February 5, 1903, [32 Stat. at L. 797, chap. 487], gave the court no jurisdiction. We are not concerned with the merits of the controversy further than the allegations concerning the same are necessary to be considered in determining the question of the jurisdiction of the district court, as a court of bankruptcy, to entertain this suit. It is sufficient to say that, in our opinion, the bill made a case which presented a controversy for judicial determination as to the right of the defendants to hold the lease and property under the alleged security of the warehouse receipts undertaken to be issued in the manner set forth in the petition. Whether it will turn out, upon full hearing, that the lease and securities are good, is not now to be determined. The bill makes allegations which raise a justiciable controversy as to the validity of the alleged lien in view of the lack of change of possession of the goods under the circumstances set forth. The question for this court now to determine is whether the bankruptcy court, on the allegations made and admitted as true by the demurrer, had jurisdiction to determine the controversy. It is positively alleged in the bill that the supervision and control of the goods continued in the firm of Dresser & Company, and that the alleged doings of the Security Warehousing Company and its agents were merely colorable, and did not, in fact, change the control over the goods, nor give any notice of the alleged lease of the warehousing company, nor the lien of the instruments thereby secured. It is further positively averred that when the receivers were appointed upwards of $150,000 worth of goods belonging to the firm were in the possession and under the control of the bankrupts, and after the receivers had taken possession of the store the goods were delivered up to the warehousing company without any order or attempt to procure the sanction of the court to such surrender of the property. Under these circumstances, had the bankruptcy court jurisdiction to determine the rights of parties claiming interests in the property?

Section 2 of the bankrupt act of 1898, among other things, confers jurisdiction upon the district courts of the United States, as courts of bankruptcy, (3) to 'appoint receivers or the marshals, upon application of parties in interest, in case the court shall find it absolutely necessary, for the preservation of estates, to take charge of the property of bankrupts after the filing of the petition, and until it is dismissed or the trustee is qualified;' (7) 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.'

This section, in connection with § 23, was before this court for construction in the case of Bardes v. ''First Nat. Bank'', 178 U.S. 524, 44 L. ed. 1175, 20 Sup. Ct. Rep. 1000, in which case it was held that § 23b of the act as it then stood prevented the courts of the United States from entertaining jurisdiction over suits brought by trustees in bankruptcy to set aside fraudulent transfers of money or property made by the bankrupt to third parties before the institution of the bankruptcy proceedings, without the consent of the defendants. In that case it was held that the power conferred in subd. 7 of § 2, above quoted, was limited by the direct provisions of § 23 as to the jurisdiction of suits brought by trustees, the effect of which section was to compel the trustee to resort to the state courts to set aside conveyances of the character named where an alleged fraudulent transfer had been made by the bankrupt before the beginning of the proceedings, unless jurisdiction in the district court was by consent. This case (Bardes v. First Nat. Bank) did not determine the right of the district court to entertain jurisdiction of a proceeding having in view the adjudication of rights in or liens upon property which came into the possession of the bankruptcy court as that of the bankrupt, the right to proceed concerning which would seem to be broadly conferred in the section of the bankruptcy act above quoted. At the same term at which the Bardes Case was decided, this court determined the case of White v. Schloerb, 178 U.S. 542, 44 L. ed. 1183, 20 Sup. Ct. Rep. 1007. In that case it was held that, after an adjudication in bankruptcy, an action in replevin could not be brought in the state court to recover property in the possession of and held by the bankrupt at the time of the adjudication, and in the hands of the referee in bankruptcy when the action was begun, and that the district court of the United States, sitting in bankruptcy, had jurisdiction by summary process to compel the return of the property seized. In the case of Bryan v. Bernheimer, 181 U.S. 188, 45 L. ed. 814, 21 Sup. Ct. Rep. 557, it appeared that the bankrupt had made a general assignment for the benefit of his creditors nine days before the filing of his petition in bankruptcy, and the assignee sold the property after the bankruptcy proceedings had been begun, after the adjudication in bankruptcy, but before the appointment of a trustee. Upon petition of creditors, the district court ordered that the marshal take possession, and the purchaser appear within ten days and propound his claim to the property, or, failing so to do, be declared to have no right in it. The purchaser appeared and set up that he bought the property in good faith from the assignee, and prayed the process of the court that the creditors might be remitted to their claim against the assignee for the price, or the same be ordered to be paid into court by the assignee, and paid over to the purchaser, who was willing to rescind the purchase upon receiving his money. It was held that the purchaser had no title to the bankrupt's estate, and that the equities between him and the creditors should be determined by the district court, bringing in the assignee, if necessary. In this case Mr. Justice Gray, who also delivered the opinion in the Bardes Case, said:

'The bankrupt act of 1898, § 2, invests the courts of bankruptcy with such jurisdiction, at law and in equity, as to enable them to exercise original jurisdiction in bankruptcy proceedings, in vacation in chambers, and during their respective terms to make adjudications of bankruptcy, and, among other things, '(3) appoint receivers or the marshals upon the application of the parties in interest, in case the courts shall find it absolutely necessary for the preservation of estates to take charge of the property of bankrupts after the filing of the petition, and until it is dismissed or the trustee is qualified;' '(6) bring in and substitute additional persons or parties in proceedings in bankruptcy when necessary for the complete determination of a matter in controversy; (7) cause the estates of bankrupts to be collected, reduced to money, and distributed, and determine controversies in relation thereto, except as herein otherwise provided.' The exception refers to the provisions of § 23, by virtue of which, as adjudged at the last term of this court, the district court can, by the proposed defendant's consent, but not otherwise, entertain jurisdiction over suits brought by trustees in bankruptcy against third persons, to recover property fraudulently conveyed by the bankrupt to them before the institution of proceedings in bankruptcy. Bardes v. ''First Nat. Bank'', 178 U.S. 524, 44 L. ed. 1175, 20 Sup. Ct. Rep. 1000;Mitchell v. McClure, 178 U.S. 539, 44 L. ed. 1182, 20 Sup. Ct. Rep. 1000; Hicks v. Knost, 178 U.S. 541, 44 L. ed. 1183, 20 Sup. Ct. Rep. 10006.'

This case (Bryan v. Bernheimer) would seem to limit the effect of the decision in the Bardes Case to suits against third persons on account of transfers made before the bankruptcy, and to recognize the right of the bankruptcy court to adjudicate upon rights in property in the possession of the court, belonging to the bankrupt. In the case of Mueller v. Nugent, 184 U.S. 1, 46 L. ed. 405, 22 Sup. Ct. Rep. 269, this court recognized the power of the bankruptcy court to compel the surrender of money or other assets of the bankrupt in his possession or that of some one for him. In that case the decisions in Bardes v. ''First Ant. Bank, White v. Schloerb, Bryan v. Bernheimer were reviewed by the chief justice, who delivered the opinion of the court, and it was held that the filing of a petition in bankruptcy is a caveat'' to all the world, and, in effect, an attachment and injunction, and that, on adjudication, title to the bankrupt's estate became vested in the trustee, with actual or constructive possession, and placed in the custody of the bankruptcy court.

We think the result of these cases is, in view of the broad powers conferred in § 2 of the bankrupt act, authorizing the bankruptcy court to cause the estate of the bankrupt to be collected, reduced to money, and distributed, and to determine controversies in relation thereto, and bring in and substitute additional parties when necessary for the complete determination of a matter in controversy, that when the property has become subject to the jurisdiction of the bankruptcy court as that of the bankrupt, whether held by him or for him, jurisdiction exists to determine controversies in relation to the disposition of the same, and the extent and character of liens thereon or rights therein. This conclusion accords with a number of well-considered cases in the Federal courts. Re Whitener, 44 C. C. A. 434, 105 Fed. 180; Re Antigo Screen Door Co. 59 C. C. A. 248, 123 Fed. 249; Re Kellogg, 57 C. C. A. 547, 121 Fed. 333. In the case of ''First Nat. Bank v. Chicago Title & T. Co. (decided on May 8 of this term), 198 U.S. 280, ante'', 693, 25 Sup. Ct. Rep. 693, in holding that the jurisdiction of the district court did not obtain, it was pointed out that the court had found that it was not in possession of the property. Nor can we perceive that it makes any difference that the jurisdiction is not sought to be asserted in a summary proceeding, but resort is had to an action in the nature of a plenary suit, wherein the parties can be fully heard after the due course of equitable procedure.

It is insisted that in the present case the property was voluntarily turned over by the receiver, and thereby the jurisdiction of the district court, upon the ground herein stated, is defeated, as the property is no longer in the possession or subject to the control of the court. But the receiver had no power or authority, under the allegations of this bill, to turn over the property. He was appointed a temporary custodian, and it was his duty to hold possession of the property until the termination of the proceedings, or the appointment of a trustee for the bankrupt. The circumstances alleged in this bill tend to show that the transfer of the property was collusive, and certainly, if the allegations be true, it was made without authority of the court. The court had possession of the property, and jurisdiction to hear and determine the interests of those claiming a lien therein or ownership thereof. We do not think this jurisdiction can be ousted by a surrender of the property by the receiver, without authority of the court. Whether the rights of the claimants to the property could be litigated by summary proceedings, we need not determine. What we hold is, that under the allegations of this bill, the district court had the right, in a proceeding in the nature of a plenary action, in which the parties were duly served and brought into court, to determine their rights, and to grant full relief in the premises, if the allegations of the bill shall be sustained. This view renders it unnecessary to consider the effect of the amendments of the bankruptcy act, passed February 5, 1903, broadening the power of the bankruptcy courts to entertain suits by trustees to set aside certain conveyances made by the bankrupt.

Decree reversed.