New River Coal Land Co. v. Ruffner Bros. , 165 F. 881 ( 1908 )

BOYD, District Judge

(after stating the facts as above). We cannot consent to the proposition laid down as the first ground assigned by the petitioner in this case — that the action of the state court upon the petition of Ruffner Bros., refusing to stay the proceedings in the ease of Clark & Krebs, is final. If such was the law, then it would be within the power of the state court, in many instances, upon the action of a single creditor, to divest the District Courts of the United States of jurisdiction to administer the estates of bankrupts for the benefit of all the creditors. It is our opinion that notwithstanding this action oí the state court the judge of the District Court, sitting in bankruptcy, had full power upon the application of the bankrupt itself, of creditors, or of the trustee, in case one had been appointed, to take such action as in the discretion of the court was necessary for the preservation of the bankrupt estate, the determination of existing liens, if such there were, and the collection, custody, and distribution of the bankrupt’s estate in the manner and to the ends contemplated by the bankruptcy law. In the act forbidding courts of the United States to stay proceedings in a state court, the courts of bankruptcy are specifically excepted, and the bankruptcy law of 1898 (Act July 1, 1898, c. 541, 80 Stat. 544 [U. S. Comp. St. 1901, p. 3418]) expressly confers upon these courts the. power to issue injunctions to stay proceedings within this exception. We do not deem it necessary to further discuss the proposition stated in the first assignment of error.

Coming, then, to the other two grounds assigned by the petitioner and treating them together, we are also of the opinion that, in view of the circumstances and conditions attending this case, they cannot be upheld. The court of bankruptcy lias exclusive power to determine whether a suit pending in the state court should be stayed or not, and the exercise of this power rests in the discretion of the judge. It is true that this discretion can be reviewed by a Circuit Court of Appeals on petition for review, but will not be interfered with by the appellate court unless it appears that it has been abused.. Loveland (3d Ed.) p. 109, notes 23 and 24. A stay of a suit pending in the state court effected by an injunction issued by a court in bankruptcy iá not a dismissal of the suit. It does not defeat the cause of the action pending in the state court; it merely suspends the proceedings in the state court so long as the injunction is in force.- If, therefore, in the further proceedings in the bankruptcy court the petition in bankruptcy is dismissed, or if the injunction is dissolved, or if, in the end, the bankruptcy court.should determine that the basis of the suit in the state court is a claim against which the discharge in bankruptcy is not a release, then the case pending in the state court may proceed as if it had not been interrupted. If, however, a bankruptcy court-.holds that the claim upon which suit is brought in the state court is discharged, then the bankrupt may go into the state court and plead his discharge as against the recovery. See note 60, p. 113, Loveland (3d Ed.).

Thus far what we have said applies more particularly to cases in which an injunction is sought to stay a proceeding in a state court, to the. end that the bankrupt himself may have the benefit of the stay, where'a personal judgment is sought against him, so that, if the suit in the state court is based upon a provable claim and one against which the discharge in bankruptcy would operate, an opportunity, as before stated, would be afforded the bankrupt after his discharge to go into the state court and set it up as a defense in the action. The right of the court of;bankruptcy to enjoin proceedings in a state court, in order to administer the estate of the bankrupt through the instrumentalities of the general bankruptcy law, is founded upon a different reason. The prime purpose of the bankruptcy act is to secure an equal distribution of an insolvent’s estate among the creditors, and it is not only a power conferred upon the court in a bankruptcy proceeding to take jurisdiction of the unincumbered property of a bankrupt, but also of property to which liens attach, provided the judge of the court in bankruptcy shall determine that such property should be administered by that court. It has not unfrequently been the case that the bankrupt courts have issued injunctions to stay proceedings in a state court, to foreclose mortgages, to enforce other liens, and even to forbid state officers from proceeding with executions upon judgments where, in. the opinion of the judge of the bankruptcy court, it was to the interest of the general estate to do so.

It is said in Re Watts & Sachs, Petitioners, 190 U. S. 1, 23 Sup. Ct. 718, 47 L. Ed. 933, that “the jurisdiction of the courts in bankruptcy in the administration of the affairs of insolvent persons and corporation^ is essentially exclusive.” In the course of the opinion in that .case. Chief'Justice Fuller, speaking for the court, says:

*■/ *: And the. operation of the bankruptcy laws of the United States cannot .be defeated by insolvent commercial corporations applying to be wound up under state statutes. The bankruptcy law Is paramount, and the jurisdiction of the federal • courts in bankruptcy, when properly invoked in the administration'of "the affairs óf .insolvent persons and corporations, is.essentially exclusive. Necessarily, when like proceedings in the state courts are determined by the commencement of proceedings in bankruptcy, care lias to be taken to avoid collision in respect of property in the possession of (lie state courts. Such cases are not cases of adverse possession, or of possession in the enforcement of pre-existing liens, or in aid of the bankruptcy proceeding. The general rule as between courts of concurrent; jurisdiction is that; property already in the possession of the receiver of one court cannot rightfully be taken from him without the court’s consent by the receiver of another court appointed in a subsequent suit, but that rule can have only a qualified application whore winding-up proceedings are superseded by those in bankruptcy, as to which the jurisdiction is not concurrent.”

In the present case Clark & Krebs, creditors, had filed a petition against the Cataract Colliery Company in a state court of West Virginia, and in that proceeding the court had appointed a special receiver of the property of the said company. As above set forth, the New River Coal I,and Company filed its answer and cross-hill in the suit, and set up a claim thereby to the entire property of the colliery company, basing the claim on amounts alleged to be due for royalties accruing under a contract of lease, for taxes paid, and for’ forfeiture of all said property as liquidated damages for the failure of the Cataract Colliery Company to fulfill the terms of said lease. The whole proceeding in the state court from the commencement of the action was within four months of the filing of the petition in bankruptcy and of the adjudication of the Cataract Colliery Company bankrupt. Ft is evident from the character of the suit and the condition of the colliery company, as disclosed by the pleadings, that at the time of the commencement of the suit it was insolvent; it was unable to meet its obligations or to carry on its work, so alleged in the bill filed, and by the cross-bill of the coal land company its entire property was claimed by one creditor to the exclusion of all others.

The appointment by a court of a receiver for an insolvent debtor is an act of bankruptcy on the part of such debtor. Section 67 of the bankrupt act provides that a lien created by, or obtained in or pursuant to, any suit or proceeding at law, or in equity, including a judgment upon mesne process or a judgment by confession, which was begun against a person within four months before the filing of the petition in bankruptcy by or against such person, shall be dissolved by the adjudication of such person to be a bankrupt, if, first, it appears that said lien was obtained and permitted while the defendant was insolvent, and that its existence and enforcement would work a preference.

In order to meet the positions contended for by the petitioner in, this case and the application of the authorities cited, we think it only necessary to call attention to the distinction which has been drawn as to the power of the District Court in bankruptcy to enjoin proceedings in cases of long standing in a state court, in which such court has. acquired complete jurisdiction of the person and property of the bankrupt before the bankruptcy proceeding, and those which have been instituted within four months of the filing of the petition in bankruptcy. This distinction is emphasized in the case of Pickens v. Roy, reported in 106 Fed. 653, 45 C. C. A. 522, and again in 187 U. S. 177, 23 Sup. Ct. 78, 47 L. Ed. 128. In that case Pickens was adjudged' bankrupt in October, 1899, upon his own petition. Theretofore, in 1889, Mrs.. Dent, who during the litigation intermarried and became Mrs. Roy, filed her bilk of complaint in the circuit court of Barbour county, W. Va., against Pickens, alleging certain indebtedness to her, and also charging the fraudulent conveyance of defendant’s property. In the progress of the. litigation she recovered judgment against Pickens for $9,000, and in 1900 a decree was enteled by the said circuit court setting aside the fraudulent conveyance made by Pickens, and appointing a commissioner and receiver to take charge of and sell the property described in the fraudulent conveyance to pay the debt of complainant and other debts of the defendant. In this situation Pickens filed his petition in the District Court of the United States for the District of AVest Virginia, setting forth the facts generally in regard to the litigation in the state court and his adjudication in bankruptcy, and asking that the receiver and commissioner be enjoined from making sale of the propert)^ under the decree of the state court, and that further proceedings in the said case be stayed'. A temporary restraining order was issued by the court aforesaid, but on the return thereof Pickens’ bill was dismissed and, he was charged with the cost, whereupon he appealed to the Circuit Court of Appeals for the Fourth Circuit. The judgment of the District Court was affirmed by the Circuit Court of Appeals on the ground that the case in which the injunction was sought was of long standing, and' that the state court had acquired complete jurisdiction of the bankrupt and his property long before the bankruptcy proceedings. In the case; Goff, Circuit Judge, delivering the opinion, says:

“The federal courts will not interfere with the administration of affairs lawfully in the custody and jurisdiction of a. state court, nor will they permit the courts of the states to interfere concerning litigation rightfully submitted to the decision of the courts of the United States.

“The bankrupt act of 1898 does not in the least modify this rule, but with unusual carefulness guards it in all of its detail, provided the suit pending in the state court was instituted more than four months before the District ■Court of the United States had adjudicated the bankruptcy of the party entitled to; or interested in, the subject-matter of the controversy.’’

■ Upon, appeal to-the Supreme Court this decision of the Circuit Court of Appeals was affirmed, and the case is reported- as before recited, and in the opinion, which was delivered by Chief Justice Fuller, the court reiterates with approval the last paragraph above quoted from the opinion of the Circuit Court of Appeals.

In the case here the-whole proceeding, in-the state court was within four months of the time both of the filing of the petition in bankruptcy and of the adjudication, and the entire property of the bankr rupt was involved in the litigation: The- District Court, therefore; had the jurisdiction, and the right to assert it, to stay further action by the state court,- and, if necessary to secure- a just and equitable dis-> tribution- of the bankrupt’s estate,-to take charge of the property to this endi The powers of the District Court in bankruptcy are ample to administer: an estate .with due regard to priorities or vested liens, and to protect-.all interests.in such estate; whether they be legal or equitable-.

For the reasons stated, we are of the opinion that the decree of the District Court should be affirmed.

Affirmed.