Texas Co. v. Hauptman , 91 F.2d 449 ( 1937 )

WILBUR, Circuit Judge.

I dissent.

The appellants have expressly waived, all questions except the jurisdictional one. They do not complain of the order if it is within the jurisdiction of the' trial court, or ask for a modification of it. I think the order should be reversed, but if not, should be affirmed and not modified. We cannot control the action of the admiralty court, either by enjoining the parties or otherwise. If we concede jurisdiction in the admiralty court to proceed to foreclose the lien of the appellant, the most that we can do is to control the disposition of the funds resulting from the sale of the vessel when they reach the hands of the successful litigant, hence, we should affirm or reverse in toto.

I think that the admiralty court has jurisdiction to proceed to foreclose the appellants’ lien. There is no doubt that the $20,-000 promissory note assigned to the trustee in bankruptcy is property subject to the control of the bankruptcy court. Furthermore, it is clear that the mortgage securing the note gives a property right in the ship, recognized in admiralty. The statute refers to it as a lien (46 U.S.C.A. §§ 925, 953(b), 971). It follows that the mortgagee has such a property interest in the ship that he can, and. if he desires to foreclose, must proceed r.gainst it by seizure and condemnation in an admiralty court (The Thomas Barlum, 293 U.S. 21, 31, 55 S.Ct. 31, 32, 79 L.Ed. 176, as to jurisdiction of admiralty, and as to seizure see 1 Am.Jur. § 13, p. 553; § 39, pp. 568, 569, subject Admiralty; see same subject in 2 C.J.S., p. 103, §§ 46, 47, p. 106, § 49(b) ; Id., § 79(b) p. 162). I have no doubt that the bankruptcy court can control the disposition of the $20,000 mortgage note by sale thereof, but I think its control over the foreclosure of the appellants’ lien which must occur in admiralty and in a proceeding in rem must be exercised through the trustee in barkruptcy who can appear in such proceeding to protect the interest of the bankrupt in the mortgage note. The admiralty court can determine the rights of all parties, including the bankrupt, in the rem — the ship,.

If the bankrupt had been entitled to the possession of the ship, the right of possession would pass to the court and would be exercised through the trustee [as in the case of Consumers Co. v. Goodrich Transit Co. (C.C.A.) 53 F.(2d) 972], where the court of equity in possession of a ship in an equity receivership was held to have authority to forbid a foreclosure of a preferred ship’s mortgage for a reasonable period in order to facilitate the disposition of the whole matter in the equity receivership. Here the bankrupt could only secure possession of the ship and consequent jurisdiction over it by seizure in admiralty as an incident to foreclosure, hence, it seems to me it must be held that without possession of the ship, and without right of possession, the bankruptcy court must either enforce the lien of the ship’s mortgage by seizure in the jurisdiction where it lies under process issued by the District Court of the United States, therein, or in the pending proceeding in that court. In other words, the property over which the bankruptcy court now has control is the indebtedness due to the bankrupt and not the ship, and that as to the ship the limited right of property therein is and must be asserted in the admiralty court having exclusive jurisdiction of the matter. We are dealing here with the problem of two United States District Courts, each by express statutory provision having exclusive jurisdiction, one in admiralty, the other in bankruptcy. We must either reconcile the two statutes or hold that the latter one repeals the former pro tanto.

My conclusion is that the bankruptcy court has no jurisdiction over the ship unless the right of the bankrupt is such that he is entitled to possession. The bankruptcy court, or rather, its trustee, steps into the shoes of the bankrupt. If the bankrupt would have been obliged to invoke the aid of an admiralty court to enforce his rights, so must the trustee in bankruptcy. The fact that reorganization proceedings under section 77B of the Bankruptcy Act (11 U.S.C.A. § 207) may be hampered by the foreclosure of a lien on the ship in another court cannot increase the rights of the bankrupt, and, consequently, of the bankruptcy court in the res, for the reasons I will now state:

It is provided in that section (11 U.S.C.A. § 207(a), Bankruptcy Act § 77B(a) that, “If the petition or answer is so approved, an order of adjudication in bankruptcy shall not be entered and the court in which such order approving the petition or answer is entered shall, during the pendency of the proceedings under this section, have exclusive jurisdiction of the debtor and its property wherever located for the purposes of this section, and shall have and may exercise all the powers, not inconsistent with this section, which a Federal court would have had it appointed a receiver in equity of the property of the debtor by reason of its inability to pay its debts as they mature.”

The idea of exclusive jurisdiction in the bankruptcy court over the property of the debtor is not a novel one introduced for the first time in section 77B providing for reorganization proceedings, but is inherent in the nature and functions of a federal bankruptcy court which deals with the estate of the debtor as the res over which it has exclusive jurisdiction. See 6 Am.Jur. p. 535, subject, Bankruptcy, § 30, and cases cited, Straton v. New, 283 U.S. 318, 51 S.Ct. 465, 75 L.Ed. 1060; Lazarus, Michel & Lazarus, 234 U.S. 263, 34 S.Ct. 851, 58 L.Ed. 1305; Cameron v. U. S., 231 U.S. 710, 34 S.Ct. 244, 58 L.Ed. 448; Acme Harvester Co. v. Beekman Lumber Co., 222 U.S. 300, 32 S.Ct. 96, 56 L.Ed. 208. That the jurisdiction of the bankruptcy court over the property of the debtor is dependent upon the possession of the res, either actual ’or constructive, has been uniformly held. 6 Am.Jur. pp. 531, 532, §§ 25, 26, 27; Tube City Min. & Mill. Co. v. Otterson, 16 Ariz. 305, 146 P. 203, L.R.A. 1916E, 303. The Supreme Court has recently stated the rule, speaking through Justice Sutherland, in Taylor v. Sternberg, 293 U.S. 470, at page 472, 55 S.Ct. 260, 261, 79 L.Ed. 599, where he said, of an ordinary bankruptcy proceeding:

“Upon adjudication in bankruptcy, all the property of the" bankrupt rests in the trustee as of the date of the filing of the petition. Upon such filing, the jurisdiction of the bankruptcy court becomes paramount and exclusive; and thereafter that court’s possession and control of the estate cannot be affected by proceedings in other courts, whether state or federal. Gross v. Irving Trust Co., 289 U.S. 342, 344, 53 S.Ct. 605, 77 L.Ed. 1243, 90 A.L.R. 1215; Acme Harvester Co. v. Beckman Lumber Co., 222 U.S. 300, 307, 32 S.Ct. 96, 56 L.Ed. 208; In re Diamond’s Estate (C.C.A.) 259 F. 70, 73. This applies while the possession is constructive as well as when it becomes actual. Mueller v. Nugent, 184 U.S. 1, 14, 22 S.Ct. 269, 46 L.Ed. 405; Taubel-Scott-Kitzmiller Co. v. Fox, 264 U.S. 426, 432, 433, 44 S.Ct. 396, 68 L.Ed. 770.”

In Ex parte Baldwin, 291 U.S. 610, 54 S.Ct. 551, 553, 78 L.Ed. 1020, the Supreme Court had under consideration the jurisdiction of a bankruptcy court under section 77 of the Bankruptcy Act, added March 3, 1933 (47 Stat. 1474, c. 204, § 1, 11 U.S.C. A. § 205 note). This section contained a provision similar to that contained in section 77B (11 U.S.C.A. § 207) now under consideration, that is, that the bankruptcy court should “have exclusive jurisdiction of the debtor and its property wherever located” (11 U.S.C.A. § 205(a), in note page 199 of Cumulative Supplement of 1936). See Grand Boulevard Inv. Co. v. Strauss (C.C.A.) 78 F.(2d) 180. Justice Brandéis, in Ex parte Baldwin, supra, speaking for the court, treated the jurisdiction of the court under section 77 (11 U.S.C.A. § 205 note) as substantially the same as it had always been in bankruptcy, .that is, jurisdiction dependent upon possession actual or constructive. He said:

“First, all property in the possession of a bankrupt of which he claims the ownership passes, upon the filing of a petition in bankruptcy, into the custody of the court of bankruptcy. To protect its jurisdiction from interference, that court .may issue an injunction. The power is not peculiar to bankruptcy or to the federal courts. It is an application of the general principle that, where a court of competent jurisdiction has, through its officers, taken property into its possession, the property is thereby withdrawn from the jurisdiction of other courts. Having possession, the- court may not only issue all writs necessary to protect its possession froift physical interference, but is entitled to determine all questions respecting the same. Julian v. Central Trust Co., 193 U.S. 93, 112, 24 S.Ct. 399, 48 L.Ed. 629; compare Riehle v. Margolies, 279 U.S. 218, 223, 49 S.Ct. 310, 73 L.Ed. 669; Straton v. New, 283 U.S. [318] 319, 51 S.Ct. 465, 75 L.Ed. 1060. The jurisdiction in such cases is esclusive of the jurisdiction of other courts, although otherwise the controversy would be cognizable in them. Murphy v. John Hofman Co., 211 U.S. 562, 569, 29 S.Ct. 154, 53 L.Ed. 327. In bankruptcy, this rule applies regardless of whether the property is located in the district in which the bankruptcy proceeding originated. The injunction to protect its possession may issue either from the court of original jurisdiction or from the federal court for the district in which the state court suit is brought or in which the plaintiff in that suit resides. Isaacs v. Hobbs Tie & Timber Co., 282 U.S. 734, 737, 738, 51 S.Ct. 270, 75 L.Ed. 645.”

The Circuit Court of Appeals for the Third Circuit in Continental Bank & Trust Co. of New York v. Nineteenth & Walnut Streets Corporation, 79 F.(2d) 284, held that the bankruptcy court acting under section 77B of the Bankruptcy Act had no right to take possession of the debtor’s real estate where a mortgagee was entitled to the possession (see, also, statement by Judge Cardozo, speaking for the Supreme Court in Duparquet Huot & Moneuse Co. v. Evans, 297 U.S. 216, 222, 56 S.Ct. 412, 80 L.Ed. 591). The Circuit Court of Appeals for the Second Circuit held in Re Lake’s Laundry, 79 F.(2d) 326, 102 A.L.R. 247, that the bankruptcy court, acting under section 77B, did not have jurisdiction over personal property purchased by the debtor under conditional sales contract.

Enough has been said to indicate that in general the exclusive jurisdiction of the bankruptcy court over the debtor’s property is based upon actual or constructive possession of the property. In dealing with a conflict of jurisdiction between two federal courts, each claiming exclusive jurisdiction over the res, one uñder acts of Congress enacted under its bankruptcy power, and the other under acts enacted under its admiralty power, each being exclusive as to its jurisdiction within its proper sphere, it should be noted that the bankruptcy power over specific property has always been related to such property in the actual or constructive possession cf the debtor. If not in the possession of the debtor, possession must be first secured by plenary action against third persons claiming the right thereto. So too, the admiralty jurisdiction over specific property must be secured by seizure. Under such circumstances, it seems clear that as between two counts asserting jurisdiction over a thing, the one first securing possession thereof has exclusive jurisdiction over it. This conclusion does not deprive the bankruptcy court of any essential right for its trustee can present the claims of the bankrupt to the property for adjudication in the admiralty court. It is true that this reasoning does not dispose of the contention that a mortgage under the 'Ship Mortgage Act has some property right in the ship which is transferred to the trustee in bankruptcy, nevertheless, as the only correlative right to the possession of the ship is by seizure by an admiralty court, it would seem logical to hold that the vessel having been seized by an admir.alty c.ourt for condemnation the right of the mortgagee should be asserted in that court, particularly as the admiralty court also has exclusive jurisdiction of an action to enforce the mortgage. The bankruptcy court does not acquire exclusive jurisdiction over a ship because the debtor has a preferred ship mortgage thereon, notwithstanding the peculiar technical significance given to the holder of a maritime lien under admiralty law as a jus in re. The Propellor Commerce, 1 Black (66 U.S.) 574, 580, 17 L.Ed. 107; The Maggie Hammond, 9 Wall. (76 U.S.) 435, 456, 19 L.Ed. 772. Although it may be conceded that if both title' and possession of the ship were in the trustee, the bankruptcy court could enjoin the enforcement of a maritime lien on the ship by an admiralty court, as was held by the Circuit Court of Appeals for the Seventh Circuit in Consumers Co. v. Goodrich Transit Co., 53 F.(2d) 972.

The order of the trial court enjoining the appellants from proceeding to enforce its maritime lien in the District Court of the United States for the Southern District of Texas should be reversed.