McRaney v. Riley

Anderson, J., delivered the opinion of the court. Appellant, O. C. McRaney, filed his bill in the chancery court of Covington county against appellee J. H. Riley, in which he alleged that he was the true owner of lot 12,’ in block 5, in the city of Collins in said county, and that ap-pellee held a pretended deed of trust against said property which was of no validity, and seeking to cancel the same as a cloud upon his title. Appellee answered the bill, denying its material allegations,, and there was a trial on bill, answer, and proofs, and a decree dismissing appellant’s bill from which he prosecutes this appeal. Both appellant and appellee claimed title through a common source, A. V. Easterling. In 1916 A. Y. Easterling was adjudged a bankrupt by the federal district court for the southern district of this state. At that time he owned the property here in question, and it therefore constituted part of his assets as a bankrupt. Shortly before his bankruptcy said Easterling executed the deed of trust sought to be canceled to secure an indebtedness to appellee of three thousand dollars on the land in question, which is a lot and storehouse thereon in the city of Collins where said Easterling was doing a mercantile business at the time of his failure. In the progress of the administration of the estate of said bankrupt said lot was by decree of the referee in said bankruptcy matter sold by the trustee therein, and purchased by one Welch at one thousand and fifty dollars, through whom appellant claims title by mesne conveyances. — 684 — This sale was confirmed by the referee, and the money paid into court, and a deed made to the purchaser by the trustee in obedience to an order of the referee. The sale of said lot was made free of liens, the lien of appellee’s deed of trust being transferred to the proceeds of said sale by decree of the referee authorizing the sale. The deed of trust in question was executed in 1916 before the bankruptcy of said Easterling, and was given to secure an indebtedness due five years after date. It is contended on behalf of the appellee that the referee in bankruptcy had no authority under the law to order a sale of the property in question free from the lien of the deed of trust to appellee; that such a power is vested alone in the federal district judges sitting as courts of bankruptcy, and is not a power that can be exercised by referees in bankruptcy. The Bankrupt Law of 1867 (14 Stat. 517) expressly conferred the power on referees to sell the property of a bankrupt free from incumbrances; and it is true that the present bankrupt law contains no such provision, and for this reason, in the early administration of the law there was doubt as to the referees having such' authority. The supreme court of the United States has not decided the question. The lower federal courts, however, seem to be unanimous in holding that referees have such power. 2 Collier on Bankruptcy (12 Ed.), p. 1171; Black on Bankruptcy (3 Ed.), section 471. The authorities on this question will be found collected in the notes of the references to Collier and Black, supra. It is contended that, even though the referee had authority to order the sale in question, still the proceedings and sale are void because the bankrupt court by such proceedings never acquired jurisdiction of the appellee, Riley, for the reason notice thereof ivas only given him through the mails, and not served on him personally, as it should have been. The determination of this question depends in a measure at least on the question whether or not by the bankruptcy — 685 — proceedings the bankrupt court got jurisdiction of said property. The bankrupt law required Easterling, the bankrupt, to file schedules with a list of creditors, with their post office address, secured and unsecured, including a description of the property on which there were liens, and a list of the holders of such liens. This was done, and said bankrupt in his schedules listed appellee as a simple unsecured creditor in the sum of seventy-five dollars for wages, which was set down as a preferred claim, and also as a secured creditor in the sum of three thousand dollars by a deed of trust on the house and lot here in question. Section 70 of the Bankrupt Act (U. S. Comp. St., section 9654) in express terms provides that on his appointment the trustee in bankruptcy gets the title and the possession of all of the assets of the bankrupt subject to his debts for the purpose of administration. It is hardly necessary to discuss this question further. One of the fundamental requirements of the bankrupt law is that the entire assets of every kind of the bankrupt, subject to his debts, shall be taken into the custody of the bankrupt court for administration, where all conflicting rights, claims, and liens thereto shall be adjudicated by the bankrupt court, in a summary way. This does not apply, however, to property of the bankrupt in the possession of adverse claimants. In such cases it seems that in order to settle the conflicting rights of the trustee representing the estate of the bankrupt, and the adverse claimant, a formal adversary proceeding is necessary in the proper court. However, we have nothing to do with that question here. The property here involved was not in the possession of an adverse claimant, but of thé bankrupt. Appellee Riley only had a deed of trust on it to secure an indebtedness. He claimed no title to the land. Therefore it seems clear that this lot at the time of its sale by order of the referee free from liens, was in the custody of the bankrupt court. The res was in court, and the creditors of the bankrupt under the law knew that the bankrupt court, and that alone, was the forum to which they must resort to — 686 — settle any rights or claims of whatever kind they might have therein. Appellee contends that, notwithstanding the bankrupt court had jurisdiction of the property in question, still that the proceeding to sell it free from liens was in the nature of an adversary proceeding, and that the referee had no power to decree a sale except upon a petition or bill by the trustee for that purpose, making the appellee a party thereto, setting out the facts and the reasons for the proposed sale; and that it was necessary.that appellee be notified by summons or rule to appear at a given time and contest such bill or petition; and that this was not done in the proceedings in question; the only notice of such proceeding being a general notice to creditors, including the appellee, given by mail, of the pendency of the petition by the trustee, and the time and place for its hearing; and that this was insufficient; and that the condemnation and sale of the property on such a proceeding and notice amounted to depriving appellee of a property right without due process of law, in violation ,of the due process clause of the Constitution of the United States. The petition of the trustee praying for the sale of the property in question free from liens, after the formal caption stating the court in which the proceeding was pending, contained the style of the bankruptcy proceedings, viz., “In the Matter of A. Y. Easterling, Bankrupt,” and was addressed to the referee before whom said bankruptcy matter was pending, and set out in substance that the lot and storehouse thereon here in question constituted part of the assets of the bankrupt in the possession of the trustee, and described the deed of trust thereon by the bankrupt to the appellee, and the amount of indebtedness it was given to secure, including its date, and alleged that it was to the best interest of the estate and the creditors and all parties concerned that said property be sold free from said lien, and said lien be transferred to the proceeds of said sale. The petition also averred that for certain reasons said deed of trust was void, and at the proper time — 687 — the trustee would resist the application of the proceeds of the sale of said property to the payment of appellee’s said indebtedness. The petition concluded without a specific prayer for process for the appellee. On the filing of this petition the referee issued and mailed notices to all the creditors, including the appellee, of the filing of said petition, its purpose, and the time and place of the hearing of the same. These notices were signed by the referee, and addressed “To the Creditors of the Above Estate” (referring by “above estate” to the style of the cause which was set out above), and were mailed in time to be received by appellee more than ten days before the time and place set for the hearing of the petition; and the evidence in the case shows that the appellee actually received the notice mailed to him. In pursuance of this petition and notice, there being no objections filed to the petition, nor answer made by any of the creditors, the referee made a decree for the sale of the property free from the deed of trust of appellee, which sale accordingly took place, the notice of which was published in a newspaper in the county, giving a description of the property and the time and place of sale; the property was purchased by Welch for one thousand and fifty dollars who accordingly received a deed from the trustee after having paid his bid. As stated above, appellant claims title by mesne conveyance through said Welch. The said sale by the' trustee was afterwards confirmed by the decree of the referee after ten days’ notice by mail to all the creditors of the estate, including appellee. In addition to the notice by mail of the application of the trustee to sell the property in question free of liens which the appellee received, the bankruptcy proceedings, which are a part of the record in this case, show that appellee probated an unsecured claim against the estate of said bankrupt, Easterling, for the sum of seventy-five dollars for wages as a clerk in the store of said bankrupt, for which he claimed a preference, and that the court allowed — 688 — said claim to the amount of something like fifty dollars, which was paid to the appellee and receipted for by him. In considering the proposition whether by the proceedings and notice in question the bankrupt court acquired jurisdiction of the appellee, or, stating it differently, whether the condemnation and sale of said property through said proceedings and notice amounted to depriving the appellee of a property right (the lien of his deed of trust), without due process of law, it will be well to have in. mind a general view of the bankrupt law from a standpoint of the Constitution. Although what will be said in this respect will not be decision, still it will probably serve the purpose of clearing the field of undergrowth, and thereby aid in obtaining a better view of the main question. Paragraph 4, section 8, article 1, of the federal Constitution, among other things, confers on Congress the power to establish “uniform law on the subject of bankruptcies throughout the United States.” In pursuance of that provision of the Constitution the present bankrupt law was enacted. By the enactment of this statute Congress occupied the entire field. All state laws, as well as state constitutional provisions, on the subject were superseded. In other words, the Bankrupt Act in its scope and purpose, under the Constitution, is the supreme law of the land on that subject. The power of Congress under this clause of the Constitution is broad enough to authorize not only a uniform system of bankruptcy, but rules and modes of procedure for its administration, and if such rules and .procedure should differ from that in ordinary suits, still they would be obligatory upon the bankrupt courts, for the reason that Congress under the Constitution has plenary authority on the subject. Black on Bankruptcy (3 Ed.), section 2, and authorities cited in note. The Bankrupt Act does not deprive creditors of their property without due process of law, because it does not provide for notice to creditors of the filing of a voluntary petition in bankruptcy; or because it does not require personal serv — 689 — ice of notice on creditors of the application for discharge of a bankrupt in voluntary proceeding; or because the notice provided by the Bankrupt Act is unreasonably short, and the right to oppose the discharge is unreasonably restricted. The supreme court of the United States held, in Hanover National Bank v. Moyses, 186 U. S. 181, 22 Sup. Ct. 857, 46 L. Ed. 1113, 8 Am. Bankr. Rep. 1, that Congress had the power to prescribe any regulations concerning the discharge of bankrupts from their debts that are not so grossly unreasonable as to be incompatible with fundamental law; and in that case the court held that the Bankrupt Act did not require personal service of notice on creditors of the application of the bankrupt for his discharge; that such notice was not required under the due process clause of the Constitution. Although the Bankrupt Act in its administration annuls vested rights and impairs or destroys the obligation of contracts by releasing debtors from their debts upon partial payment, or without any payment at all, and making its provisions compulsory upon all creditors, still for that reason it is not unconstitutional. Black on Bankruptcy (3 Ed.), section 2. The inhibition in the federal Constitution against impairing the obligation of contracts is a limitation alone upon state authority, and does not affect the authority of Congress. There is nothing in the federal Constitution which forbids Congress to pass laws impairing the obligation of contracts, provided, of course, such legislation is enacted in pursuance of constitutional authority. Therefore it has been held under the Bankrupt Act that debtors may be entirely discharged from the obligation of their contracts. Black on Bankruptcy (8 Ed.), section 2. Nor is there anything in the federal Constitution which prohibits the Bankrupt Act in its administration from destroying the liens upon the property of the bankrupt if it shall be deemed necessary for the effective administration of the law, whether such lien be created by contract, judgment, or statute. Black on Bankruptcy (3 Ed.), section 2. — 690 — Section 58 of the Bankrupt Act (U. S. Comp. St., section 9642) expressly provides as to the manner of service of notice on creditors of the bankrupt óf various proceedings in the bankrupt court, and, among other things, it provides that — “Creditors shall have at least ten days notice by mail to their respective addresses as they appear in the list of creditors of the bankrupt, or as afterward filed with the papers in the case by the creditors, unless they waive notice in writing, of . . . all proposed sales of property.” It seems to us the question in this case resolves itself into whether that provision of the Bankrupt Act is vio-lative of the due process clause of the Constitution, for it was complied with in the giving of the notice in question to appellee. We have reached the conclusion that it does not, for these reasons: As we have seen, the entire estate of the bankrupt, subject to his debts, was in the custody of, and being administered by, the bankrupt court. The bankrupt court thereby had acquired jurisdiction of the res. All creditors, including lien creditors, under the law knew this to be true. They were affected by law with notice of it. The bankruptcy proceeding was a pending cause, which had brought into the bankrupt court all the assets of the bankrupt over which the court had jurisdiction to settle all conflicting claims to and liens thereon. If the notice given to the appellee be treated only as constructive notice, we see no constitutional objection thereto. It is unnecessary to cite authorities to establish the principle that where property has been brought into the custody of the court, either by foreign attachment, or otherwise, the court has the power to condemn such property to the payment of the debt of the owner upon publication of notice in a newspaper, which is only constructive notice. We believe it will be found that the courts of this country, both state and federal, are practically unanimous in so holding, and that such notice by publication does not violate due process of law. Counsel for appellee cite as sustaining their contention that appellee by the proceedings in question was deprived — 691 — of due process: Ray v. Norseworthy, 28 Wall. 128, 23 L. Ed. 116; Haynes v. Pickett, 154 U. S. 627, 14 Sup. Ct. 1202, 23 L. Ed. 1008 ; Factors’ & Traders’ Insurance Co. v. Murphy, 111 U. S. 738, 4 Sup. Ct. 679, 28 L. Ed. 582 ; Cain v. Sheets, 77 Ala. 492 ; In re Kinsey, 184 Fed. 694, 106 C. C. A. 648 ; In re Kohl Brick Co., 176 Fed. 340, 100 C. C. A. 260 ; In re Saxton Furnace Co. (D. C.), 136 Fed. 697. Iu each of these cases there was involved, as here, the validity of a sale by a court of bankruptcy of the property of the bankrupt free of liens, but in none of those cases was any kind of notice whatever served on the bankrupt. The property had been condemned to be sold, as we understand these cases, without the lienors being in any manner made parties. In the Murphy case, supra, the lienor had actual notice of the proceeding. The court held that to be insufficient, and in discussing the question in that case as well as the others, it was held that notice either by rule or otherwise was indispensable to the validity of such sale, and in some of them it is stated that personal notice is necessary. But such statements must be limited to what was before the court. The court did not have in mind any particular kind of notice, but an entire absence of any kind of notice, except as stated, actual notice in the Murphy case, supra. Reversed, and decree here for appellant. Reversed.