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September 7, 1977

In re UNIVERSAL MONEY ORDER CO., Debtor. Carl J. SCHMITT, Appellant-Respondent,
Eliot LUMBARD, Receiver, Appellee-Applicant

The opinion of the court was delivered by: HAIGHT

Carl F. Schmitt, Superintendent of Banks of the State of California (the "Superintendent") appeals from three orders of the Hon. John J. Galgay, Bankruptcy Judge, which in effect directed the Superintendent to turn over to Eliot Lumbard, the Receiver of debtor-in-possession Universal Money Order Co. ("UMO") assets of UMO which the Superintendent had seized in California. The Receiver and UMO resist the Superintendent's appeal, which is before the Court pursuant to Bankruptcy Rules 801 Et seq. For the reasons stated, the orders appealed from are affirmed.


 The facts as found by the Bankruptcy Judge are set forth in his opinion of May 3, 1977, at pp. 1-4, and are not challenged in any significant respect on this appeal. The decisive issues turn upon legal interpretations and consequences.

 Briefly stated, UMO was in the business, Inter alia, of selling money orders. Companies such as UMO provide services to persons who cannot establish regular banking services. Typically, a UMO customer pays in cash and receives a money order payable to one of his creditors, such as a utility company or landlord. UMO conducted such business directly, and also through agents and subagents with which it had contracts. Much of UMO's business was done in California. *fn1" The proceeds of California money order sales were deposited in bank accounts in California maintained in UMO's name. Those accounts also received, from time to time, the proceeds of UMO's other activities (check cashing, sale of food stamps), as well as transfers of funds (required for operational purposes) from UMO accounts in other states.

 UMO encountered financial difficulties. It stopped honoring its money orders on January 6, 1977. However, UMO continued selling money orders subsequent to that date. This situation came to the Superintendent's attention on January 10, when it was reported to him that "money orders were being returned by the paying agent in Connecticut." *fn2"

 UMO had been licensed to sell money orders in California in 1971, pursuant to Chapter 14, Article 3 of the Banking Law of California (Division One of the Financial Code (hereinafter "Cal.Bk. Law")), §§ 1800 Et seq. The Bankruptcy Judge found that UMO's license had lapsed on or about July 1, 1976; that a renewal application was subsequently made (but apparently not acted upon); and that, subsequent to July 1, 1976, UMO continued to do business in California without a license then in effect, and with the knowledge of the Superintendent. On January 10, 1977, the Superintendent issued a license to UMO, mailing it to an old New York address for the company, from whence it was returned by the postal authorities to the Superintendent. The Bankruptcy Judge, for the purposes of his opinion, regarded UMO as being at all pertinent times a duly authorized licensee in California; and so does this Court for purposes of the appeal, although the inference appears inescapable that the Superintendent issued UMO its renewed license on January 10, 1977 for the sole purpose of arming himself to take the actions to which we now turn.

 On January 12, 1977, the Superintendent, at his offices in San Francisco, prepared a document entitled "Order Taking Possession of Property and Business". That Order recited the Superintendent's findings of fact that UMO was licensed by the Superintendent under the Cal.Bk. Law; and that money orders issued and sold by UMO in California were being dishonored. As "Ultimate Findings", the Superintendent found that UMO had violated California law and was in such condition that it was unsound, unsafe and inexpedient for it to transact business. In these circumstances, the Superintendent purported to "take possession of the property and business" of UMO. Immediately above the Superintendent's signature and his seal of office on this order, there appears the notation:

"Date and Hour: January 12, 1977, at 9:45 a.m."

 It is apparently not disputed that the Superintendent affixed that date and time himself, while sitting in his office. 9:45 a.m. Pacific Standard Time is, of course, the equivalent of 12:45 p.m. Eastern Standard Time.

 On January 12, 1977, at 12:57 p.m. Eastern Standard Time, or 12 minutes after the Superintendent signed his order in California, UMO by its attorneys filed in this Court a petition pursuant to Chapter XI of the Bankruptcy Act and Rules, 11 U.S.C. §§ 1 Et seq.

 What happened after the Superintendent signed his order is described in a letter dated March 16, 1977 from Messrs. Levin & Weintraub, counsel for the Superintendent, to Messrs. Cleary, Gottlieb, counsel for the Receiver:

"Immediately after the signing of the Order, James Carrig, Esq., counsel to the Superintendent telephoned the State Banking Department's Los Angeles office and requested that that office immediately notify an officer of UMO at the Culver City office of the Order. Mr. Bernard Rolnick, Vice President of Universal was notified on or about 9:50 A.M. P.S.T. by Mr. Allan A. Farias the Bank Examiner at Universal's Culver City office of the Order Taking Possession and further advised that a copy of the Order would be delivered later in the day. In fact, at 10:30 A.M. P.S.T., copy of the Order with the transmittal letter was delivered to Mr. Rolnick.
"Between 10:15 A.M. and 11:30 A.M. P.S.T. on January 12, 1977, Bank Examiners telephoned Bank of America, Bank of Finance, Imperial Bank, Security Pacific National Bank and Western Bank of Commerce, and read to them a Notice of Taking Possession which recited the facts set forth in the Order. All other banks involved were notified on the following day January 13, 1977." *fn3"
Thereafter, as the Bankruptcy Judge found, the Superintendent issued a written "Notice of Taking Possession and Order Regarding Deposits" which was addressed to "All Banks Holding or Having in Their Possession Any Deposits or Other Assets of Universal Money Order Co."
As a result of these actions, the Superintendent succeeded in seizing in excess of $ 5,500,000 in UMO assets on deposit in California banks. The Superintendent proposes to distribute these assets to purchasers of money orders from UMO resident in California, such distribution to be governed by California law.
The proceedings below were instituted by the debtor-in-possession, and carried forward by the Receiver subsequent to his appointment. The Receiver takes the position that the assets seized by the Superintendent in California must be processed as part of the estate of the debtor-in-possession within the context of the federal Chapter XI proceeding.
The Bankruptcy Judge, ruling in favor of the Receiver, held that federal bankruptcy law extinguished and superseded any right or power of the Superintendent to seize UMO's assets or to distribute them in California; that the bankruptcy court had summary jurisdiction to require the Superintendent to turn over the assets to the Receiver; and that the bankruptcy court had personal jurisdiction over the Superintendent. The effects of the Bankruptcy Judge's orders of April 11, May 3 and May 9, 1977 were to direct the Superintendent to deliver to the Receiver appointed by the bankruptcy court all assets of UMO seized by the Superintendent; and to direct the Superintendent to file an accounting with respect to his administration of such assets. The Superintendent, having complied with these orders of the Bankruptcy Judge, now prosecutes this appeal.
The Bankruptcy Judge held, in effect, that the supremacy of the national bankruptcy law placed an unsurmountable obstacle in the path the Superintendent sought to follow for the benefit of California creditors alone. Before turning to the Superintendent's several attempted justifications of his actions, we consider the nature of that national law which the Bankruptcy Judge found to be decisive.
The concept of a uniform, national bankruptcy law derives from the Constitution, Article I, Section 8, Clause 4 of which provides:
"The Congress shall have Power . . . To establish . . . uniform Laws on the subject of Bankruptcies throughout the United States."
The passage by Congress of the Bankruptcy Act and its several amendments, including the provisions for Chapter XI arrangements with which we are primarily concerned, constitutes an exercise of that power.
It is well settled that where a state statute conflicts with a mandate of the Bankruptcy Act, it is invalid under the Supremacy Clause of the Constitution. Perez v. Campbell, 402 U.S. 637, 91 S. Ct. 1704, 29 L. Ed. 2d 233 (1970).
"The original and primary purpose of bankruptcy legislation has been, and continues to be, a fair and equitable distribution of the nonexempt property of a bankrupt person to and among his creditors." 4 Collier on Bankruptcy P 67.01 at p. 15 (14th ed. 1976). It is an essential implementation of that purpose that the several states, by means of their own laws, cannot devise preferences among creditors of a federal bankrupt which the federal law does not recognize. Thus in Elliott v. Bumb, 356 F.2d 749, 754-755 (9th Cir. 1966), upon which all parties in the present case rely, the Ninth Circuit reviewed turn-of-the-century case law and then observed:
"Since the time of that decision, Congress has made even clearer its intent that state law shall not be permitted to confer preference on one class of the creditors of one adjudged a bankrupt under federal law, even though the state may have the highest public purpose in attempting to do so."
In order that uniform and equitable distribution among all similarly situated creditors be accomplished, Congress has vested the bankruptcy courts with broad powers of possession, recapture and control of a debtor's property. Thus Section 311 of the Act, 11 U.S.C. § 711, which deals (as does the case at bar) with arrangements, provides that where not inconsistent with other provisions of Chapter XI, the court in which the debtor's petition is filed has "exclusive jurisdiction of the debtor and his property, wherever located." Section 311, which confers upon the Chapter XI court "greater jurisdiction than is possessed by the court in an ordinary bankruptcy case under Chapters I to VII," Collier, op. cit., Vol. 8, P 3.01, p. 147, rests that jurisdiction upon ownership of property, as distinguished from possession. Where, as in the case at bar, a third party in possession claims ownership of the property, it is well settled that:
". . . the bankruptcy court has jurisdiction in the first instance to determine if the adverse claim of ownership is substantial or colorable; if found to be substantial the court must decline to determine the merits and must dismiss the summary proceeding, but if found to be merely colorable the court has jurisdiction ...

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