In re Zehner , 193 F. 787 ( 1912 )

FOSTER, District Judge.

In this case Joseph Burnstein, the holder and owner of two promissory notes, secured by mortgage on certáin real estate surrendered by the bankrupt, petitions the court for leave to foreclose his mortgage ■ in the state court. He alleges that he has reason to believe the property cannot be sold for a price exceeding the amount of his claim, with interest, costs, and attorney's fees stipulated for in the act of mortgage. Emile W. Del Bondio, trustee of the bankrupt, opposes the petition.

The parties have agreed to the following stipulation as to the facts:

“That (lie mortgage referred to in plaintiff’s petition was executed as alleged therein for the sum of $(5,000 as therein stated, of which $200 has been paid.

“That the said act of mortgage was duly recorded in the mortgage office of the parish of Orleans, as required by the laws of Louisiana, ou the day of its execution. That the interest is due on the two notes of $(1.300 as stated therein. That the first mortgage on the property thirdly described in tbe petition and in the act of mortgage is for $2,000, and interest is due thereon since June 24, 1911.

“That the appraisement by the appraisers appointed by the trustee was for the sum of $10,275 for all of the property described in the petition or in the act of mortgage. That Joseph Burnsteiu, the petitioner herein, is the holder and owner of the notes, and they are not paid.”

It is urged by petitioner that his contract stipulates for a sale without appraisement, and if the property is sold by the trustee it will have to bring three-fourths of an appraisement made in the bankruptcy proceedings; that it will be subject to the payment of ices of an auctioneer, of the trustee and referee in bankruptcy, and of appraisers appointed in the proceedings; that the cost of advertising the property will be at a higher rate, ánd the advertisement will occupy more space, than if sold by the sheriff; and that he would not have the right to bid in the property and offset his debt against the price, but would be compelled to pay the full amount over to the trustee and await a distribution in due course.

[1] it is well settled that the trustee is not required to administer property burdened with liens or mortgages, and he may abandon same to the secured creditor. In fact, it is his duty to do so whenever it is certain the general estate will derive no benefit from the sale of such property. In such contingency it was the practice under former bankruptcy acts for mortgage creditors to foreclose in the federal courts, and the. jurisdiction, regardless of citizenship, with special reference to Louisiana mortgages, was upheld by the Supreme Court in Ex parte Christy, 3 How. 317, 11 L. Ed. 603, and Nugent v. Boyd, 3 How. 437, 11 L. Ed. 664. So far as I know, however, this particular question has not been presented under the act of 1898; hut there would appear to be no good reason why the court, having the custody of the res, could not grant an order of sale in a summary manner on the application of the mortgage creditor. However, the a]'plication is for leave to foreclose in the state court, and the trustee has not seen fit to abandon the mortgaged property. On the contrary, he strenuously asserts there is a considerable equity in it that will benefit the general fund, and he does not admit the validity of the petitioner’s mortgage. And further he contends this court has exclusive jurisdiction to administer the bankrupt estate, and cannot vest jurisdiction in the state court by its order allowing the mortgage creditor to foreclose therein.

[2] The jurisdiction of the state court to sell the property of the bankrupt, even after adjudication, is concurrent with that of the federal court, and the latter jurisdiction is only exclusive by reason of its custody of the res. Whether the trustee abandons the mortgaged property voluntarily, or is forced to do so by order of court, this court can certainly grant permission to the mortgage creditor to foreclose in the stale court. In re Johnson (D. C.) 127 Fed. 618; In re San Gabriel Sanatorium Company, 111 Fed. 892, 50 C. C. A. 56; McHenry v. La Société Francais d'Epargnes, 95 U. S. 58, 24 L. Ed. 370.

[3 J But it seems to me, however, that in all cases where it is probable a surplus will be realized over and above the liens and mortgages, or even in doubtful cases, it would be better for all parties concerned that the property be sold through the bankruptcy court.

[4] Undoubtedly, under the law of Louisiana, the full title to mortgaged property vests in the trustee in bankruptcy, and it is well settled that this court has authority to sell it free of all liens and incumbrances upon due notice to the lienholders and upon affording them opportunity to appear and protect their claims.

[5] It has been repeatedly held that the provision of the bankruptcy act that' valid liens should not be affected by the bankruptcy proceedings has reference only to the validity of the contract, and not to the remedy for -enforcing the lienholder’s rights, which may be changed without impairing the obligation of the contract, provided an equally efficient and adequate remedy is substituted. In re Williams, 156 Fed. 939, 84 C. C. A. 434; In re Utt, 105 Fed. 754, 45 C. C. A. 32; In re Harralson, 179 Led. 490, 103 C. C. A. 70, 29 L. R. A. (N. S.) 737. With regard to the present application I can see no reason why the property should not be sold in the bankruptcy proceedings and the mortgage holder amply protected in all his rights.

[6] Any appraisement of the propert)^ made in the usual course of bankruptcy proceedings may be disregarded in selling it and the sale approved by the court, if the price is considered adequate. Section 70b, Bankruptcy Act 1898.

[7, 8] There is no reason why advertising in bankruptcy should be at any higher rate than that fixed for legal advertisements by the state laws, nor should there be any more display than is usual in other judicial advertisements, and the trustee could very properly sell the property himself without the assistance of an auctioneer in all cases where it is doubtful that the property will bring enough to pay such fees.

[8] The details as to the sale of incumbered property may well be left to the fairness and discretion of the creditors, giving to the mortgage holder a full voice in the proceedings, under the rules of court, of course subject to the approval of the court in order that no injustice m'ay be done. The rules adopted by this court under the bankruptcy act of 1841 in substance provided that the mortgage creditor might fix the terms of sale, provided he did not fix the terms of credit for shorter periods than those to which the bankrupt was entitled; that the order of sale should ipso facto annul the mortgages, liens, and privileges; but that they should attach to the proceeds in the same manner and to the same extent; that the mortgage creditor should have the right to purchase the property subject to his claim and to offset the amount of his claim against the price. If the present rules of the court are inadequate, they will be supplemented or amended to such an extent as may be necessary.

[10] Petitioner’s fears with regard to the fees of the referee and trustee seem to me to be without foundation. It has been held in a number of cases that mortgaged property cannot be charged with the expenses of its sale or the fees of the referee and trustee in bankruptcy; but, so far as I am advised, in all these cases the mortgage holder had the right to enter upon the property and sell it without resorting to judicial proceedings. In Louisiana the mortgage creditor would have to regularly foreclose by proceedings in court, and therefore it would seem only just and equitable that the mortgaged property should contribute a proportion of the law charges and the expenses of sale not exceeding the amount the mortgagee would be forced to expend in foreclosure proceedings in the state courts. The rules under the act of 1841, above referred to, so provided; but this is a question that does not arise at this stage of the proceedings. If the property brings the amount the trustee alleges it will, the mortgage creditor will of course be paid his claim in full, with interest and reasonable attorney’s fees.

For these reasons the application will be denied.