Before HAND and LUMBARD, Circuit Judges, and MADDEN, Judge, United States Court of Claims.
The appeals are from two orders of Judge Palmieri, entered in a voluntary Reorganization Proceeding under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., brought by Swan-Finch Oil Corporation, incorporated in New York. The plaintiffs are the trustees appointed in the proceeding and the defendants are depositors named in eight bank accounts in the Doylestown Bank in Pennsylvania, and in one account with the Lawrence Warehouse Company, a California corporation doing business in New York. Judge Palmieri enjoined the bank and the warehouse from paying any part of these accounts to the payees and further assumed summary jurisdiction over any claims to share in the distribution of the proceeds of the accounts. No dispute arises on these appeals as to the injunction against payment of the accounts; but two questions do arise as to the assertion of jurisdiction over the distribution of the proceeds. The first is whether an appeal lies from such an interlocutory order, and the second is whether, if it is appealable at all, the proceeding may be summary or must be by action in the District Court.
The facts, so far as it is necessary to state them, are as follows. Substantially all the activities of the Debtor were confined to transactions in the shares of subsidiary companies, and for the purposes of these appeals it may be treated as though it were not an operating corporation at all. The bank accounts involved in the Doylestown proceeding were made up of deposits by eight separate corporations. One of these was "Olean Industries, Inc.," all of whose shares had been owned by the Debtor, but had been pledged to another of the depositors which we shall speak of as "Leduc," and which had transferred them to its wholly owned subsidiary, "Canuck." The accounts of "Olean Industries," of "Leduc" and of "Canuck" in the Doylestown Bank contain about $25,000 some part of which are proceeds received from the Olean company; and the accounts of Keta Gas & Oil Company and Penn Canadian Oil Co. in the same bank consist of $14,600 of proceeds of the Keta Gas & Oil Company. The source of the residue of the eight accounts amounting to less than $2,000 is not clear and we shall disregard it. The "Keta" income came from a corporation, all of whose shares the Debtor had owned, but had transfered to another corporation, "Doeskin," and the Debtor's interest in that account must await the outcome of another appeal. The account in the Lawrence Warehouse Company was made up of proceeds from the operation of the Olean company.
As we have said, the Olean shares had been pledged to a Canadian corporation and assigned to its wholly owned subsidiary. The Debtor's note, for whose payment they were pledged, contained a power of sale in the following words: "to sell * * * at any broker's board, or at public or private sale, * * * without either demand, advertisement or notice of any kind * * *. At any sale hereunder the Lender may itself purchase * * * the property * * *. In the event of any sale or other disposition of any of the security, after deducting all costs and expenses * * * the Lender may apply the residue of the proceeds of such sale or other disposition to the payment of reduction * * * of the Liabilities * * * returning any overplus to any of the undersigned, and the undersigned to remain liable for any deficiency." Acting under this power, the holder of the pledge, "Canuck," on July 5, 1957 demanded payment by the Debtor of the demand note of $500,000, and gave notice that on the 9th it intended "to deal with the property deposited and pledged with us * * * in such manner as we consider necessary to protect our interest and as permitted under the terms of said Demand Note." On the 10th it wrote that "on July 10, 1957, at the hour of 11 o'clock A.M. we purchased for our own account One thousand (1000) shares of the Capital stock of Olean Industries, Inc. held by us as collateral for your note."
First, as to the proceeds from the Olean shares. Sections 596 and 597 of Title 11 U.S.C.A., give the District Court in a reorganization proceeding under Chapter X summary jurisdiction to determine the validity and amount of claims against the Debtor, "to determine summarily the value of the security" of secured claims, "and classify as unsecured the amount in excess of such value." There can be no question therefore that, if the claim of "Leduc," assigned to "Canuck," was not foreclosed, Judge Palmieri had jurisdiction summarily to determine the validity and amount of the security - i. e. of the Olean shares. First National Bank in Houston, Texas v. Lake, 4 Cir., 199 F.2d 524; In Matter of Muntz TV, Inc., 7 Cir., 229 F.2d 228. Indeed, it is difficult to distinguish in law the decision of the Sixth Circuit in In re Cuyahoga Finance Co., 6 Cir., 136 F.2d 18, where the bankruptcy court assumed summary jurisdiction over the debtor's claims against a secured creditor so far as they could be used as set-offs against the creditor's claim against the debtor.
In the case at bar the appellants rely upon the fact that "Canuck" had foreclosed the pledge and become an absolute owner before the petition was filed. There is, however, no evidence of what constituted the "purchase" of the shares, especially whether the pledgee made any effort to secure outside bidders by means of whom the value of the pledge could be measured. So far as appears, the pledgee assumed that the property was worth no more than the debt, and that it might assume the dual office of seller and buyer and take over the pledge without any attempt at an objective appraisal. That has been universally denied as a lawful interpretation even of such broad powers as those granted here; for a "sale" presupposes two parties who shall in some measure actually compete as to value. Such powers establish a fiduciary relation between the pledgor and the pledgee, and may not be exercised without reasonable regard for the pledgor's right. Matter of Kiamie's Estate, 309 N.Y. 325, 130 N.E.2d 745; Gins v. Mauser Plumbing Supply Co., 2 Cir., 148 F.2d 974, 979; Cole v. Manufacturers Trust Co., 164 Misc. 741, 299 N.Y.S. 418; Deitch v. Kessler, 13 Misc.2d 421, 177 N.Y.S.2d 792, 796; 38 Col.L.Rev. 923. Indeed, such a sale is equivalent to a "strict foreclosure," to control which was one of the earliest exercises of equitable intervention. Restatement of Security § 55(1) Comment (a). In the absence of anything more than the two letters in evidence the supposed foreclosure of the pledge was a nullity. We hold therefore that the order was right in assuming summary jurisdiction to determine the interests in the deposits in the Doylestown Bank so far as these arose from any proceeds of the Olean shares, or Olean operations.
There remains, however, the question whether, since the order taking summary jurisdiction is interlocutory, we have any formal jurisdiction over the appeal and that depends, upon whether the order, so far as it takes jurisdiction over the income arising from the Olean shares, is to be regarded as made in a "proceeding in bankruptcy" or as made "in a controversy arising in a proceeding in bankruptcy," ( § 47(a) Title 11). It is well settled that before any sale in foreclosure the ascertainment of the validity and amount of the security for a claim against the debtor is a "proceeding in bankruptcy." Coder v. Arts, 213 U.S. 223, 238, 29 S. Ct. 436, 442, 53 L. Ed. 772; Columbia Foundry Co. v. Lochner, 4 Cir., 179 F.2d 630, 635, 14 A.L.R.2d 1349; In re Greenstreet, Inc., 7 Cir., 209 F.2d 660, 662. We assume that, when a secured creditor sells the security to a third person any challenge of the buyer's title by the debtor is a "controversy" even if the sale be only "colorable." On the other hand we think that, when the pledgee himself buys in the pledge at a sale which is only colorable, so that his legal position remains what it was before: i. e., that of a pledgee in possession, the debtor's challenge of such a sale is a first step in a continuous proceeding "to determine summarily the value of the security" under § 597. Certainly for practical purposes it is only such a step, for it merely clears the ground for the liquidation of the claim by an appraisal of the validity of the claim and the validity and value of the security. We can perceive no antecedent reason for supposing that, although other interlocutory decisions of the constituent steps in liquidating the claim are appealable, the determination of the validity of the pledgee's effort to change his position to that of an owner, should be an exception. Nor can we find anything in the language of Chapter X that demands such a conclusion; for, to repeat, the purpose of the inquiry into the validity of the sale is only one constituent of the definitive liquidation of the claim.
The dispute over the Keta shares is certainly a "controversy."
We affirm the order so far as it affects any income from the Olean shares; we dismiss the appeal so far as the order affects the income from the Keta shares.
LUMBARD, Circuit Judge (dissenting).
I dissent from so much of the court's decision as determines that the order appealed from was an interlocutory order made in "a proceeding in bankruptcy" and was therefore an appealable order under 11 U.S.C.A. § 47. I would hold that no interlocutory order assuming summary jurisdiction to decide an asserted claim of right on the merits is appealable under 11 U.S.C.A. § 47, because every such order is entered in at least partial disposition of "a controversy arising in a proceeding in bankruptcy" and is therefore rendered unappealable by that section. See, e. g., In re Christ's Church of the Golden Rule, 9 Cir., 1944, 172 F.2d 523. I think that the contrary result reached by the court disregards the statutory language and creates the anomaly that in deciding the question of appealability this court must first determine the merits of the appeal itself.
The first issue presented is whether the order assuming summary judgment to decide the question of title to the contested accounts is an appealable order. This question is governed exclusively by the terms of 11 U.S.C.A. § 47.*fn1 Since it is conceded that the order is an interlocutory order within the meaning of that section, the entire dispute concerns whether the order was entered in a "controversy arising in a proceeding in bankruptcy," in which case because it is interlocutory it would be unappealable at this point in the litigation; or whether it was entered in a "proceeding in bankruptcy" in which there was no "controversy" in which case the interlocutory order would be appealable. The standard and until now the workable criterion which governs the determination whether a "proceeding in bankruptcy" contains a "controversy" has been whether the claimant raises a dispute with regard to the propriety of including the property in the estate for distribution, rather than a question with regard to the administration of the estate once it is amassed. If a question of the extent of the estate is raised, a "controversy" is presented in the "proceeding." See 2 Collier on Bankruptcy § 24.28; Taylor v. Voss, 1926, 271 U.S. 176, 46 S. Ct. 461, 70 L. Ed. 889. Such a "controversy" is raised whether or not the claim asserted as the basis of a right to a plenary hearing is substantial. The determination that the claim is "without color of merit" and that summary proceedings are therefore appropriate without consent, is merely a preliminary disposition on the merits of the controversy created by the claim. Harrison v. Chamberlin, 1926, 271 U.S. 191, 194-195, 46 S. Ct. 467, 469, 70 L. Ed. 897.
The second and wholly different question is presented by the merits of the appeal, namely, whether Judge Palmieri correctly assumed summary jurisdiction to decide the question of entitlement to the proceeds of the subject accounts. Had there been no claim of foreclosure, it would be incontestable that summary proceedings are authorized by § 597 of Title XI because Canuck admits that it gained possession of the Olean stock by a pledge from the debtor. In such a case §§ *fn5112 and *fn5973 invest a Chapter X court with constructive possession of the pledge and summary jurisdiction over the secured claim, see e. g., In re Muntz TV, Inc., 7 Cir., 1956, 229 F.2d 228; cf., In re Cuyahoga Finance Co., 6 Cir., 1943, 136 F.2d 18, although in an ordinary bankruptcy court property held by a pledgee is apparently not in the ...