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Emil v. Hanley.

July 29, 1942


Appeal from the District Court of the United States for the Eastern District of New York.

Author: Hand

Before L. HAND, AUGUSTUS N. HAND, and CLARK, Circuit Judges.

L. HAND, Circuit Judge.

This is an appeal from an order in bankruptcy which denied a motion of the bankrupt's trustee asking that a receiver in foreclosure appointed by the state court should account to the referee. The case was heard upon petition of the trustee with supporting and answering affidavits in which the following state of facts appeared. The petition in bankruptcy was filed on August 31, 1940 and the petitioner was appointed trustee in the following November. The bankrupt owned an apartment house which had been completed two or three months before (whether it was its only property or not does not appear), upon which there were three mortgages. At petition filed, an action to foreclose the third mortgage in the state court was pending, in which Hanley, the respondent, had been appointed receiver on August 17, 1940. He qualified on that day, collected the rents for the month of August and has collected those which fell due thereafter. Judgment of foreclosure was entered on June 13, 1941, the sale under which was set for August 6 and adjourned to August 14. On the 13th a corporation, known as Apartment Investing Corporation, paid and satisfied the mortgage, leaving nothing further to be done in the foreclosure suit except to pass the receiver's accounts; the same corporation had already on February 21, 1941, bought in the property under a judgment of foreclosure upon several mechanics' liens, junior to the mortgage. On August 14, 1941 the receiver moved in the state court for an order passing his accounts, and on the 15th the trustee made the motion now at bar to compel him to account in the bankruptcy court. Both motions were returnable on the 22nd, on which day the trustee appeared in the state court to protest against its jurisdiction; he was overruled, and on December 3, 1941, the receiver's accounts were passed, allowances were made to him and to his attorney, he was discharged and his bond was cancelled. The district judge held this motion open meanwhile and denied it on February 10, 1942. The outcome of the appeal turns on whether § 2, sub. a(21) and § 69, sub. d of the Bankruptcy Act, 11 U.S.C.A. § 11, sub. a(21), and § 109, sub. d, which were added in 1938, gave exclusive jurisdiction to the bankruptcy court over the accounts of a receiver in foreclosure.

As soon as the receiver qualified, all the rents were sequestered for the benefit of the third mortgagee. That is the law of the state (Sullivan v. Rosson, 223 N.Y. 217, 119 N.E. 405, 4 A.L.R. 1400) and the state law governs. In re Humeston, 2 Cir., 83 F.2d 187. The trustee questions whether the receiver is to be regarded as in possession before petition filed - August 31, 1940 - because he collected no rents until September 1st. As we have said, he qualified on August 17th, but he never took possession because he could not, the property being held on leases. Even if he could have taken possession, but failed to do so until September 1st, it would not have mattered, for priority between courts in point of jurisdiction depends, not upon the day when the property comes into their possession but upon that of the commencement of the first suit in which possession can be taken. Farmers' Loan & Trust Company v. Lake Street Elevated Railroad Co., 177 U.S. 51, 61, 20 S. Ct. 564, 44 L. Ed. 667; Palmer v. Texas, 212 U.S. 118, 129, 29 S.ct. 230, 53 L. Ed. 435; United States v. Bank of New York & Trust Co., 296 U.S. 463, 477, 56 S. Ct. 343, 80 L. Ed. 331; Princess Lida v. Thompson, 305 U.S. 456, 466, 59 S. Ct. 275, 83 L. Ed. 285. Before the addition of § 2, sub. a(21) and § 69, sub. d, there was therefore no doubt that the jurisdiction of the bankruptcy court over foreclosure receivers - including the power to pass their accounts - depended upon the petition's being earlier than the suit. Isaacs v. Hobbs Tie & Timber Co., 282 U.S. 734, 51 S. Ct. 270, 75 L. Ed. 645; Straton v. New, 283 U.S. 318, 51 S. Ct. 465, 75 L. Ed. 1060; In re Greenlie-Halliday Co., 2 Cir., 57 F.2d 173; Dannel v. Wilson-Weesner-Wilkinson Co., 6 Cir., 109 F.2d 364, 366. Such a receiver is quite unlike a receiver appointed in an "equity receivership" (Duparquet H. & M. Co. v. Evans, 297 U.S. 216, 56 S. Ct. 412, 80 L. Ed. 591), or a statutory state insolvency proceeding, both of which are entirely superseded by a later bankruptcy proceeding. Straton v. New, supra, 283 U.S. at page 327, 51 S. Ct. 465, 75 L. Ed. 1060. Thus, the only question is whether the sections added in 1938 assimilated the two receiverships.

There is every antecedent reason to say that they did not. They certainly contain no intimation of intention to subject pending foreclosure suits as a whole to the jurisdiction of the bankruptcy court; so far as appears, the state court may press such suits to judgment, may sell the property and distribute the proceeds; indeed this can hardly be questioned. If so, it would be altogether anomalous to divorce from the land itself the income which accrues pendente lite. Indeed, when a court takes possession of mortgaged land by its receiver, it in effect merely anticipates its final action, acting in harmony with the general axiom that equity regards as done what ought to be done; if all the necessary steps could be taken together in piepowder fashion, the property would be sold, the buyer would begin to receive the rents at once, and the mortgagee the interest upon the purchase price. The receivership is the nearest substitute; the rents are security just as the land is security from the time when the court intervenes; they become part of the mortgaged res because only so can the mortgagee be protected during the inevitable delay. For this reason it is extremely unlikely that when Congress left to the state courts jurisdiction over the land it should have intended to separate the rents.Indeed, the receiver is as much an arm of the court as the master whom it appoints to conduct the sale; it is as unwarranted an invasion of its power to compel the receiver to account as to compel the master. Either the bankruptcy should supersede the whole suit, as it does in the case of a winding up, or it should not touch it at all; the tail goes with the hide. As Professor Moore has well said (Collier on Bankruptcy, 14th Edition, pp. 307-309), "Here it will be noted that the receivership is a mere incident of the lien or claim which the non-bankruptcy court had undertaken prior to bankruptcy and that the property, upon the institution of the proceedings was in custodia legis of the non-bankruptcy court. And it would appear that it was not the intent of clause (21) to change the established law in that respect."

The only even plausible objection appears to us to rest upon the exception of proceedings under Chapters X and XII, 11 U.S.C.A. §§ 501 et seq., 801 et seq. The argument drawn from this is that it shows that the section applies to those chapters and that it must therefore pro tanto include receivers in foreclosure. This is certainly true as to Chapter X because one of the grounds for an involuntary petition is the pendency of a foreclosure suit or possession by a mortgage trustee, though the mortgage must cover the "greater portion of the property of the corporation." § 131(3) and (4).Moreover, the "plan" in Chapter X - § 216(1) - and the "arrangement" in Chapter XII - § 461(1) - must in clude some modification of a valid mortgage. Yet this argument is not convincing, for there is nothing anomalous or inconsistent in saying that § 2, sub. a(21), when applied to proceedings under these chapters includes foreclosure receivers, but does not when applied to "Straight bankruptcy" - liquidation. Since the section merely granted a new remedy and was not intended to enlarge the jurisdiction of the bankruptcy court, the distinction was one which we should expect and which was indeed necessary. This is so because, even as to valid mortgages and other liens, proceedings under these chapters are supersessive, just as "straight bankruptcy" is supersessive as to state insolvency proceedings or "equity receiverships." The bankruptcy court should be able summarily to reduce to possession all property the interests in which it may have to adjust; it is only when the court has no power to do so that a statute court should be allowed to retain a custody already acquired; but there is every reason when it has not, that the state court's jurisdiction should be respected. A state court can foreclose as well as a bankruptcy court; indeed, it is presumptively better fitted to do so for it is more apt to be familiar with the questions involved. For these reasons we think that the words, "receivers" and "trustees," may be read distributively, covering those occasions for which the new remedy is appropriate; that is, those in which under the previous law the bankruptcy court had exclusive jurisdiction.

We are not sure what Congress meant by the added phrase: "agents authorized to take possession of or liquidate a person's property"; but whatever those words include, it does not disturb the argument, for they should be understood to subject to summary dispossession only those "agents" who hold property that must be administered in the bankruptcy proceeding. However, it must be confessed that consistently one would have expected the exception also to have included proceedings under § 77 to reorganize railroads, in which valid liens can be modified, § 77, sub. b(1), 11 U.S.C.A. § 205, sub. b(1). At first blush it is hard to see why the summary remedy granted should have been cut off at four months in such proceedings. Possibly these were forgotten in the drafting; possibly it was thought that the remedy would not be likely to be invoked in the case of railroads anyway, since they constitute a very special problem. But, whatever the reason, the omission offers no obstacle to our conclusion, for the exception as to Chapters X and XII remains explicable as it stands, even if consistently it should have been broader. For these reasons we conclude that § 2, sub. a(21), did not support the trustee's petition.

That being true, little need be added as to § 69, sub. d. The phrase, "receiver or trustee, not appointed under this Act [title]," is almost in the same words as § 2, sub. a(21), and the variance cannot have indicated any change in intent; as the House report said, the section was intended as a guide for "equity receivers." Report No. 1409, 75th Congress, First Session. It made them accountable to the bankruptcy court, whether or not the trustee moved to dispossess them under § 2, sub. a(21); it required them to file a schedule of their property; it even forbade their disbursing any money without the bankruptcy court's consent. It this was meant also to cover foreclosure receivers in "straight bankruptcy," a revolutionary change, quite needless and galling to the state courts' dignity, was too well hidden within what are at best very equivocal words.

Order affirmed.

CLARK, Circuit Judge (dissenting).

I think that, under the express provisions of the Chandler Act, now appearing as Bankruptcy Act, §§ 2, sub. a(21), 69, sub. d, 11 U.S.C.A.§§ 11, sub. a(21), 109 sub. d, as well as by virtue of its policy and purpose, this receiver is subject to the supervision of the bankruptcy court as to his allowances and disbursements. The contrary view is arrived at only by a most violent contraction of the statutory language to make it fit into a framework of supposedly clear prior case law. As will appear from the discussion hereafter, I find the earlier precedents not clear, but highly confused, as to the meaning of "receiver" in applying the earlier bankruptcy act. But in any event, I believe it is a mistake to approach a problem as to the scope of new bankruptcy provisions supplied by the Chandler Act with an attitude of assimilating them into pre-existing law. That act represents a full-scale overhauling of the several types of debtor proceedings. Where the sections are entirely new, broad, and, on the surface, at war with old law, I think it much better to assume that the meaning to be attributed to them is one which squares with the general purpose of the act, even if this should involve some departure from past case law.*fn1

It is especially appropriate to approach § 2, sub. a(21), in this manner because of its unique nature. This paragraph is not quoted in its entirety in the opinion. It must, however, be considered in full, for it is not fairly represented by short excerpts. It is one of a considerable number of paragraphs conferring extensive jurisdiction on courts of bankruptcy. It authorizes such courts to "require receivers or trustees appointed in proceedings not under this Act, assignees for the benefit of creditors, and agents authorized to take possession of or to liquidate a person's property to deliver the property in their possession or under their control" to the bankruptcy receiver or trustee or to the debtor or other person entitled to it under an arrangement or plan under the act, "and in all such cases to account to the court for the disposition by them of the property of such bankrupt or debtor: Provided, however, That such delivery and accounting shall not be required, except in proceedings under chapters 10 and 12 of this Act, if the receiver or trustee was appointed, the assignment was made, or the agent was authorized more than four months prior to the date of bankruptcy." There follow important provisions as to the proceedings upon the accounting by virtue of which the bankruptcy court shall re-examine and determine the propriety and reasonableness of the receiver's disbursements to himself and to others for services and expenses; and "unless such disbursements have been approved, upon notice to creditors and other parties in interest, by a court of competent jurisdiction prior to" the bankruptcy proceeding, the court shall surcharge the receiver for excessive or improper charges.

Prior to 1938 there was absolutely nothing in the Bankruptcy Act authorizing this sort of action. Receivers, assignees, and trustees were replaced, but this was generally done on a theory that, since § 3, 11 U.S.C.A. § 21, made the appointment of such a person an act of bankruptcy, it was "necessarily implied" that the officer was to be displaced. Randolph & Randolph v. Scruggs, 190 U.S. 533, 536, 23 S. Ct. 710, 47 L. Ed. 1165; In re Watts, 190 U.S. 1, 23 S. Ct. 718, 47 L. Ed. 933. In this light, it is obvious that pre-existing law was limited by the necessity of relying on implications.*fn2 It seems a little strange, therefore, to ...

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