Bracewell v. Hughes

A rehearing was granted in this case, the former opinion being found in 235 N.W. 37, which opinion is hereby withdrawn.

[1] The Farmers National Bank was the owner and holder of a note executed by the defendant, Kate Hughes, dated Nov. 7, 1925. The bank went into liquidation, and this note, with others, was turned over to the plaintiffs as trustees, and as such trustees, on May 10, 1929, they filed their petition in this cause, suing on said note; and in pursuance of the prayer of said petition, attachment was issued and levy made on Lots 1, 2, and 3, in Block 1, Cook's Second Addition to Clio, Iowa.

On April 29th, prior to the bringing of this suit, Kate Hughes was adjudged a bankrupt in United States Federal Court. On June 28, 1929, plaintiffs amended their petition and moved to transfer the cause to equity, and in this amendment they set out that Kate Hughes was adjudged a bankrupt as aforesaid; that a trustee had been appointed, and said trustee filed a report setting off to Kate Hughes, the defendant, as her homestead, the above described lots, which report was approved by the bankruptcy court; that Kate Hughes acquired title thereto through the will of her mother in 1922; that she at no time lived on these lots until 1929, and acquired no residence or homestead rights therein. The prayer was that the plaintiffs have a decree for the amount due by reason of the debts created prior to the acquisition of the homestead, to be established as a lien against said lots, and that the same be sold on execution.

Later, plaintiffs again amended the petition, setting out that the note sued on was a renewal of many previous notes, the principal part of which was for money borrowed from the bank in the year 1922, and again asking that the amount found to be due be established as a lien against said lots.

[2] Much time was devoted to evidence, pro and con, on the question of whether or not this property was the homestead of Kate Hughes at the time it was set over by the trustees in bankruptcy. This question, as we understand it, was not before the court for determination. When the trustees filed their report in the bankruptcy proceedings, setting off this property to Kate Hughes as a homestead, these parties had a right to appear thereto and object to such report, and having failed so to do, it is a final adjudication, by which they are bound for all time. See official form as prescribed by the United States Supreme Court, Collier on Bankruptcy (13th Ed.), Vol. 1, p. 334; also Vol. 3, p. 2410, Form 231.

General Order 17 (11 U.S.C.A., Sec. 53) defines the duty of the trustee, and among other things provides:

"The trustee shall make report to the court, within twenty days after receiving notice of his appointment, of the articles set off to the bankrupt by him, according to the provisions of the forty-seventh section of the act, * * * and any creditor may take exceptions to the determination of the trustee within twenty days after the filing of the report."

See also McGahan v. Anderson, 113 Fed. 115.

That a setting off of this property as exempt by the Federal Bankruptcy Act is a final adjudication against all the world, see Lockwood v. Exchange Nat. Bank, 47 L. Ed. (U.S.) 1061; McGahan v. Anderson, 113 Fed. 115; In re Bordelon, 4 Fed. (2d Series) 285; In re Brown, 228 Fed. 533; Duffy v. Tegeler, 19 Fed. (2d Series) 305.

It must be held, therefore, as against said trustee in bankruptcy and the creditors whom he represented on the date of the approval of the trustee's report setting off this property to Kate Hughes as a homestead, and therefore exempt, it was finally settled as against all parties, including the plaintiffs herein, that on that date, to wit, April, 1929, the property was the homestead of Kate Hughes.

When exempt property is thus set off by the Federal Court, the rights or claims of creditors therein must be adjudicated and determined in the state courts under the state law, limited or superseded by the bankruptcy act and its effects. Eckhardt v. Hess, 200 Iowa 1308; Schwanz v. Farmers Co-operative Co.,204 Iowa 1273. That the Federal Court recognizes equitable liens under certain circumstances see Johnson v. Root Mfg. Co., 60 L. Ed. (U.S.) 934; Mott v. Wissler Min. Co., 135 Fed. 697; Moore v. Green, 145 Fed. 472.

The evidence in the case abundantly shows that the indebtedness represented by the renewal note was created long prior to that date. The evidence equally shows that Kate Hughes never acquired a homestead right in said property prior to the time it was set off to her in bankruptcy court. She did not acquire a homestead right in said property from her parents, because the same passed to her by will in a different share from what she would have taken under the law of descent. Rice v. Burkhart, 130 Iowa 520; Voris v. West, 180 Iowa 138; Arispe Bank v. Werner, 201 Iowa 484.

It follows, therefore, that Kate Hughes had no homestead right in said property prior to April, 1929, when the same was set off to her in the Federal Court as exempt property, being a homestead. From thence on, under the adjudication of the Federal Court, she had a homestead right in this property.

Plaintiffs say, however, that, even if this be true, she had no homestead right as against them, because the debt owing to them by her long antedated her acquisition of this homestead, and they call to their aid in this respect Section 10155, Code, 1927, which reads in part as follows:

"The homestead may be sold to satisfy debts of each of the following classes: 1. Those contracted prior to its acquisition, but then only to satisfy a deficiency remaining after exhausting the other property of the debtor, liable to execution."

They say, therefore, that they would be entitled to issue an execution, levy on the property and sell it, even though it be the homestead of Kate Hughes, because their debt anteceded the acquisition of this homestead.

The summary of the contention of the appellants, stated in another way, is that they are seeking to have a judgment against Kate Hughes on this note, and after they have obtained said judgment, they will then be in a position to avail themselves of this section of the statute, by issuing execution and selling the property.

At this point in the case the troublesome questions arise. To take the plaintiffs at their word, after alleging the facts, they ask that they have judgment for the amount of their claim, and that the court establish the same as a lien on this property. To obtain such judgment and lien on the property, however, the foundation for the same is the promissory note on which they sue. Just what is the status of the plaintiffs on this promissory note in the light of the adjudication in bankruptcy?

It is fundamental that an adjudication in bankruptcy bars all proceedings in the state courts on unsecured claims, except as allowed in bankruptcy law. It is equally well settled that the adjudication in bankruptcy does not bar, or in any way interfere with, the proceedings in state courts to enforce liens (more than four months old) held by creditors against the property of the bankrupt. Lockwood v. Exchange Nat. Bank, 47 L. Ed. (U.S.) 1061; In re Boyd, 120 Fed. 999; In re Rabb, 21 Fed. (2d Ser.) 254; In re Cheatham, 210 Fed. 370; In re Vadner, 259 Fed. 614; In re McBryde, 99 Fed. 686; Duffy v. Tegeler, 19 Fed. (2d Series) 305; In re Maaget, 173 Fed. 232; Ingram v. Wilson, 125 Fed. 913; Phillips v. Krakower, 46 Fed. (2d Ser.) 764; Brown v. Four-in-One Coal Co., 286 Fed. 512; In re Tiffany, 147 Fed. 314.

Of course, if the plaintiffs had sued the defendant on this note and obtained a proper judgment more than four months before the adjudication in bankruptcy, their judgment, under the statute, would be a lien; but they did not do so, and now bring this action after such adjudication in bankruptcy. The pleading of plaintiffs presupposes that they have no lien. They in fact had no lien on the property at the time of the bankruptcy proceedings, and they are now asking the court in this proceeding not to enforce a lien which existed at the time of the bankruptcy, but to establish or create a lien.

Passing the question as to whether or not, under certain circumstances, this could be done in a state court, we are satisfied that it cannot be done in this case. The plaintiffs insist that it can, because they say they have a right to subject this property to the payment of their debt because the debt antedates the homestead. As a practical question, as against their claim there is, in fact, no outstanding homestead right. This is true because the general statute freeing homesteads from judicial process excepts from its operation the very situation we have before us in this case. The plaintiffs therefore have an unsecured claim against the defendant, and the defendant is not in a position to avail herself of this exemption statute as against the proper assertion of said claim. The right, therefore, of the plaintiffs to sue on this claim (without considering the bankruptcy law), take judgment thereon, and issue execution for the sale of said property, is a right which every person has on an unsecured claim against property of any debtor. This right to so subject the property is not a lien, nor is it in the nature of a lien. True, it may be ripened into a lien by suit on the note and judgment in which there is a finding setting out the date and the origin of the debt. If such judgment were entered and the date of the debt antedated the acquisition of the homestead, then, under Section 11602, Code, 1927, such judgment would become a lien on the property. But to accomplish this end, the basis of plaintiffs' action is the promissory note in controversy. Could the plaintiffs therefore sue on said promissory note and put it into judgment after the adjudication in bankruptcy? Plaintiffs stand in the position of holding this unsecured note of the defendant's, and the adjudication in bankruptcy bars any procedure therein in the state courts except, under the circumstances heretofore explained, they may put the same to judgment, but they can have no execution thereon.

In 11 U.S.C.A., Section 103 of the Bankruptcy Act, provision is made that the debts of the bankrupt, founded upon provable debts reduced to judgments after the filing of the petition and before the consideration of the bankrupt's application for a discharge, less costs incurred and interest accrued after the filing of the petition and up to the time of the entry of such judgments, may be proved and allowed against his estate. Also, unliquidated claims against the bankrupt may be, pursuant to application of the court, liquidated in such manner as it shall direct, and may, therefore, be proved and allowed against the estate. These provisions have been interpreted and frequently applied. In re McBryde, 99 Fed. 686; In re James Dunlap Carpet Co., 163 Fed. 541; Moch v. Bank, 107 Fed. 897; Uden v. Construction Co., 1 Fed. (2d Ed.) 743; Berry Clothing Co. v. Shopnick, 144 N.E. (Mass.) 392.

These cases recognize, under a construction of the aforesaid section of the Bankruptcy Law, that this does not create a new claim, but changes the form of the claim from that of an unsecured note to a judgment which is provable in bankruptcy, thus settling the question as to the validity of the note, amount due, etc.

In Ingram v. Wilson, 125 Fed. 913, the Circuit Court of the 8th Circuit held that whatever relief the creditor was entitled to against a bankrupt, which was the homestead, under the laws of Iowa must be sought and obtained in that jurisdiction. The right to a personal judgment is not discussed.

In Roden Grocery v. Bacon, 133 Fed. 515, the matter involved was an instrument containing a waiver. The court said:

"Whether the bankrupt could avoid or defeat such contracts was for the state courts to decide, and the issue seems to us to be wholly immaterial in the bankruptcy court."

That opinion contains a paragraph in which the court says that the creditor did not have a lien on the property (the homestead).

In In re Maaget, 173 Fed. 232, the Federal District Court for the Southern District of New York held that a bankruptcy court may properly permit an attachment creditor, where the bankrupt has given a bond, to prosecute his action to judgment against the bankrupt for the purpose of perfecting his right of action against the surety, but no execution shall issue.

In the case of Simon Casady Company v. Hartzell, 171 Iowa 325, this court held, under the same circumstances, that no recovery could be had on such a bond.

The Circuit Court of Appeals in Chase v. Farmers Merchants Nat. Bank, 202 Fed. 904, said:

"We find nothing in the act to prevent a creditor from bringing his action upon a provable claim, even after adjudication. * * * Enforcement of the judgment in such a suit presents a different question, but with that we are not now concerned."

In In re Buchanan, 219 Fed. 492, the creditors had, prior to the bankruptcy, commenced suit in the New York state court to reach that portion of the income of certain trust funds which was in excess of what was necessary for the bankrupt's support. It was held that the action might be prosecuted to judgment, but prosecution of the suit beyond judgment could not be permitted.

In Brown v. Four-in-One Coal Co., 286 Fed. 512, it was held that the suit might be prosecuted to judgment in the state court, but "of course (he), can have no execution issued against the bankrupt upon any judgment he may recover therein."

In In re Rabb, 21 Fed. (2d Series) 254, it was held that liens against the homestead of a bankrupt must be enforced in the state court.

Phillips v. Krakower, 46 Fed. (2d Ser.) 764, does not involve exempt property, but property owned in the entirety by the husband and wife. The case turned on the peculiar conditions and qualifications of an estate in entirety.

It will be seen from the above review of the cases that the uniform holding is that while a suit may be prosecuted to judgment in the district courts of the state, no execution may be issued thereon, and practically the only thing accomplished by such judgment is that it may be filed as a provable claim in bankruptcy with the issues settled as to its validity and the amount thereof.

We have no case cited to us, nor have we been able to find any from any court holding, under such circumstances, that suit may be maintained successfully in a state court to create a lien as distinguished from a suit to enforce an existing lien.

So far, we have yet to find a holding that a suit may be brought in equity on a promissory note without an accompanying lien, legal or equitable, and carried to a judgment in rem. Such contention, of course, has its novelty, but we are unable to find any authority or basis for warranting such an action.

The Federal Court, by its order staying discharge until this matter be determined in the state courts, could not and did not, by such order, create a remedy in equity for the appellants, and whatever rights they have must be used by them in the state court, where their sole and only remedy, under this set of facts, is a law and not an equity action.

Of course, what has here been said with reference to liens must not be understood as applying to cases where the exemption is waived or the lien created on the exempt property by contract.

Further discussion of the question is not necessary, because the fundamentals underlying this case are fully settled and adjudicated in McMains v. Cunningham, 214 Iowa 300. It follows that the decree and judgment of the court below must be and they are affirmed.

WAGNER, C.J., and KINDIG, STEVENS, EVANS, and FAVILLE, JJ., concur.

MORLING, GRIMM, and De GRAFF, JJ., dissent.