Rutledge v. Bristol

BRYAN, Circuit Judge. This is a controversy between a state court receiver and a trustee in bankruptcy over the right to take possession of and administer certain assets of the Investment Securities Company, bankrupt. The bankruptcy court decided in favor of the trustee, ordered the First National Bank in Dallas to turn over to him assets which it held under a deed of trust from the Investment Company, and enjoined the receiver appointed by the state court from further attempting to secure possession of such assets. From this order the receiver appeals. The Investment Company prior to being adjudged a bankrupt on April 16, 1930, was engaged in the mortgage loan business. To secure funds it issued and sold several series of bonds aggregating over $13,000,000. Series A bonds amounted to upwards of a million dollars; they were secured by notes and mortgages held by the bank as trustee under a deed- of trust which provided that [987] if the Investment Company should become and remain in default sixty days the bank as trustee was authorized, and, upon request of the bondholders of a majority in amount of the bonds, was under a duty to declare all bonds due, to sell the notes, and to resort to any judicial remedy necessary or appropriate for the protection and enforcement of the rights and liens of the bondholders. The deed of trust also contained this provision: “The security hereby created and held by said trustee under this indenture shall be enforced only through and by said trustee, but any holder whose bond is due and unpaid may sue said Company thereon and obtain a personal judgment against it.” On April 11, 1930, five days before the adjudication in bankruptcy, Rutledge, the appellant here, was by interlocutory decree of a state district court appointed receiver of the funds, notes, and properties held by the bank to secure series A bonds, empowered to demand and receive from the Investment Company or the bank all money, notes, or other evidence of indebtedness held by either under the trust deed covering series A bonds, and to take possession of, manage, control, and sell the same for the purpose of distributing the proceeds ratably among the bondholders entitled to participate. This decree was entered upon a bill filed by B. W. Brown, owner of a $100 bond, and of common and preferred stock of the par value of $12,740. The bill alleged that the Investment Company was insolvent; that in the interest of creditors and stockholders the company should be dissolved and its assets applied to the payment of its debts, any surplus to be distributed among its stockholders; that complainant was interested in the application of trust funds held by the bank to the payment of his bond rat-ably with other bonds of series A, and also in the distribution of any assets remaining after payment of debts among the stockholders. And the bill prayed for the appointment of a general receiver to take possession of all the assets of the company to the end that it might be dissolved and its affairs wound up. It also prayed that judgment be entered in favor of complainant for the amount of his bond with interest, “together with foreclosure of the lien which in equity exists in his behalf.” The decree above mentioned denied the appointment of a receiver of the general assets, and limited the receivership to series A bonds and assets derived therefrom. The holders of series A bonds of the par value of $14,300 intervened, but later all of them except the holder of $1,200 in bonds filed their claims in the bankruptcy court. The bank holds as trustee notes and mortgages of the face value of $990,000, besides $60,000 in cash. The object of the bill in the state court was to wind up the affairs of an insolvent corporation. It invoked an insolvency proceeding which would be superseded by bankruptcy. In re Watts, 190 U. S. 1, 23 S. Ct. 718, 47 L. Ed. 933; Straton v. New, 283 U. S. 318, 51 S. Ct. 465, 75 L. Ed. 1060; Hooks v. Aldridge (C. C. A.) 145 F. 865. The bill did not seek the foreclosure of a lien held by the plaintiff, and ask for the appointment of a receiver to preserve the property in aid of the suit. It prayed for judgment on plaintiff’s bond, it is true, but it did not seek foreclosure by the plaintiff in his own right. According to the terms of the trust deed plaintiff had the right to sue for judgment, but he did not have the right to foreclose. The foreclosure prayed for could only be had by the receiver, who it was intended should supplant the trustee bank. Plaintiff did not ask that the money realized on foreclosure be paid to him, but only that his bond be paid ratably with other bonds out of the proceeds of the foreclosure suit. The bank as trustee had the lien, and under the averments of the bill it only had the right to foreclose. Plaintiff was not entitled to a legal lien before he secured judgment on his bond. He had no equitable lien upon assets in the hands of the bank; under the trust deed he had only a right in equity to have a lien upon such assets established in his favor. Nor does the decree of the state court undertake to establish a lien in plaintiff’s favor; it merely purports to authorize the receiver to supplant the trustee bank in the assertion of the common rights in equity of all holders of series A bonds. The state court at the time the trustee in bankruptcy was appointed had not assumed jurisdiction over any assets of the bankrupt. This interlocutory decree went no further than to authorize the receiver to demand of the bank possession of assets. Before the receiver took any step to get possession of the res, bankruptcy intervened and superseded any right he otherwise might have had. The receiver not being in possession of the res cannot complain of the summary order restraining him from interfering with the trustee .in bankruptcy. An appeal was taken from an order of the bankruptcy court referring an application to set aside an injunction issued by the referee back to the referee for his consideration; but that order of the district judge has since been set aside and need not now be considered. [988] The order of March 23, 1933, from which the main appeal we have been considering was taken, is affirmed. All costs of appeal will be assessed against the appellant Rutledge.