In re Iroquois Utilities, Inc.

MAYER, Circuit Judge (after stating the facts as above). [1] We have repeatedly pointed out that, on a petition to revise, we do not review the facts but consider only questions of law. In re Nagel (C. C. A.) 278 Fed. 105; In re B. & R. Glove Corp. (C. C. A.) 279 Fed. 372; In re Miltones (C. C. A.) 286 Fed. 806. We have also stated that “we take the facts as found by the District Court,” and, where there are no specific findings of fact, we look to [401] the opinion, if any, of the District Court. In re Nagel, supra; In re Miltones (C. C. A.) 279 Fed. 106. Bearing this practice in mind, we have no occasion to inquire into the merits of the acrimonious controversy which this record discloses. 1. The first question argued at bar was whether the bankruptcy court had power to enjoin the further prosecution of the foreclosure action which had been begun in the New York Supreme Court prior to the filing of the petition in involuntary bankruptcy. The dates are important. The date of the execution and delivery of the mortgage was July 1, 1918. The date when the foreclosure suit was duly commenced in the New York Supreme Court was December 18, 1922, and the date when the petition in bankruptcy was filed in the District Court was January 15, 1923. It thus appears that the mortgage lien was created some 4% years prior to the filing of the bankruptcy petition, or, in other words, more than 4 months prior to such filing. The mortgage lien, therefore, was not subject to the provisions of section 67f of the Bankruptcy Act (Comp. St. § 9651). As said in Metcalf v. Barker, 187 U. S. 165, 174, 23 Sup. Ct. 67, 71 (47 L. Ed. 122): “A judgment or decree in enforcement of an otherwise valid pre-existing lien is not the judgment denounced by the statute, which is plainly confined to judgments creating liens.” (Italics ours.) . The fact that the foreclosure suit was begun within four months of the date of filing'the bankruptcy petition is immaterial so far as affects the operation of section 67f. The question as to whether the bankruptcy court had any power to restrain the further prosecution of the foreclosure suit arises because the New York Supreme Court first acquired jurisdiction in a proceeding in rem where the lien was created by the act of the parties prior to the four months period. That question must not be confused with the one which arises where insolvency proceedings of some character have been begun in a state court prior to the filing of the bankruptcy petition, as in Re Federal Mail & Express Co. (D. C.) 233 Fed. 691. In New River Coal Land Co. v. Ruffner, 165 Fed. 881, 91 C. C. A. 559, the facts demonstrate that the action, in effect, was a creditors’ action wherein the state court was asked to and did appoint a receiver of the property to take charge of it and after due administration to hold the balance, if any, subject to the order of the court. The court said at page 887 of 165 Fed. (91 C. C. A. 565): “It is evident from the character of the suit and the condition of the colliery company, as disclosed by the pleadings, that at the time of .the commencement of the suit it was insolvent; it was unable to meet its obligations or to carry on its work, so alleged in the bill filed, and by the cross-bill of the coal land company its entire property was claimed by one creditor to the exclusion of all others. “The appointment by a court of a receiver for an insolvent debtor is an act of bankruptcy on the part of such debtor.” [402] It also appeared in that case that the proceeding in the state court which might have resulted in a judgment was within four months after filing of the bankruptcy petition While there is some difference of opinion among District Courts upon varying states of facts, we have been unable to find any case decided by the Supreme Court or any Circuit Court of Appeals which holds, upon facts similar with those in the case at bar, that the bankruptcy court has the power to restrain further prosecution of a foreclosure suit begun prior to the filing of the petition in bankruptcy in respect of a mortgage lien created more than four months prior to the filing of the petition. On the other hand, In re Rohrer, 177 Fed. 381, 100 C. C. A. 613, decided by a distinguished court, is precisely in point with the case at bar. In that case, the mortgage and notes secured by it were executed and delivered on February 28, 1908, and the mortgage was recorded on May 4, 1908. The foreclosure suit was begun on August 31, 1909. The'decree in foreclosure, including a personal judgment against Rohrer for any deficiency, was entered on October 25, 1909, the appropriate writ of execution was issued on November 2, 1909, and the sheriff on the same day began an advertisement of the sale of the land on December 14, 1909. On November 5, 1909, an involuntary petition’in bankruptcy was filed against Rohrer, and on November 15, 1909, he was adjudicated a bankrupt. As in the case at bar, it will be noted that the mortgage in the Rohrer Case was executed and delivered more than four months prior to the bankruptcy petition while the foreclosure suit was begun within four months of the date of the filing of the bankruptcy petition. On November 29, 1909, certain creditors of Rohrer moved for an injunction against Hofer, .the mortgagee, to stay the sale, and this motion was granted and an injunction issued on December 9th. Hofer’s motion "for rehearing and to vacate the injunction order was overruled on January 4, 1910. Meanwhile on December 21, 1909, three trustees were chosen and qualified in the bankruptcy proceeding. The court said: “Tiie state court acquired complete jurisdiction and control over the defendants and the property prior to the commencement ni the bankruptcy proceeding against Rohrer, and that jurisdiction was not divested by anything done in that proceeding; ‘the rule being applicable that the court which first obtains rightful jurisdiction over the subject-matter should not be interfered with.’ * * * “Bower vested by section 11a of the Bankruptcy Act (Act July 1, 1898, c.J 541, 30 Stat. 549, U. S. Comp. St. 1901, p. 3426) to stay a suit ‘founded upon, a claim from which a discharge would be a release’ is not applicable to the proceeding in rem involved in the action to foreclose.” In arriving at this conclusion, the court referred to many cases, to which may be added Eyster v. Gaff, 91 U. S. 521, 23 L. Ed. 403; Jerome v. McCarter, 94 U. S. 734, 24 L. Ed. 136; Davis et al. v. Railroad Company, 1 Woods, 661, Fed. Cas. No. 3,648; and In re Dayton Coal & Iron Co., 291 Fed. 390. [403] Although involving a different kind of proceeding and a different state of facts, Judge Learned Hand, in Re Hoey, Tilden & Co. (D. C.) 292 Fed. 269, 270, pointed out as follows: “There is, however, no caso that I can find which holds that after a suit in rom has been started in a state court, bankruptcy proceedings are,in a different position from any other judicial proceedings; or that the earlier court must yield because the later court is one of bankruptcy. Furthermore, it is not in this class of cases necessary that the earlier court should have actually assumed custody of the res before the second suit is commenced. It is enough that the first should be one in which custody could be assumed at any time after bill filed.” " Our conclusion is that the court had no power to restrain the further prosecution of the foreclosure suit. Of course, under section 11a of the Bankruptcy Act (Comp. St. § 9595), the court had power to slay the entry of a deficiency judgment against the bankrupt “until twelve months after the date of such, adjudication, or, if within that time such person applies for a discharge, then until the question of such discharge is determined.” 2. What we have said supra disposes of the case, but we deem it desirable also to make clear that the state court receiver is an adverse claimant. It is contended on behalf of the trustee in bankruptcy that the adverse claim is colorable, but the District Judge did not so hold. He stated: : “Tbe principal contention is that the foreclosure proceeding was instituted in bad faith, and to cheat and defraud the second bondholders and the unsecured creditors. I am not prepared to say that the evidence establishes this contention, but I nevertheless think the unsecured creditors should have an opportunity to test the validity of the mortgage or limit its scope, and to dispute the validity of the bonds if they are so advised in the bankruptcy court.” And while we do not express any opinion upon the merits, our examination of the record shows that there is a real dispute between the parties. In such circumstances, the bankruptcy court did not have power by summary order to compel the transfer of possession of the property from the state court receiver to the trustee in bankruptcy, as we have frequently held. It is sufficient to cite In re Midtown Contracting Co., 243 Fed. 56, 155 C. C. A. 586, and In re Wood (C. C. A.) 278 Fed. 355. 3. Under section lib of the Bankruptcy Act (Comp. St. § 9595), it is provided that— “The court may order the trustee to enter his appearance and defend any pending suit against the bankrupt.” It will be entirely proper for the court, in its discretion, to make such an order in this case, and the reservation in the interlocutory judgment of foreclosure and sale provides that all questions as to the validity of any of the bonds be reserved for future determination and opportunity has been safeguarded to apply at the foot of the decree for such further order or supplemental judgment as may be necessary for such purpose. [404] jNe have no reason to doubt that, upon appropriate application, the state court will accord to the trustee in -bankruptcy full opportunity to intervene and to make such application or take such further proceedings as in the opinion of the state court may be right and proper. The order below is reversed, with costs, but without prejudice to the granting, under section 11a, of a stay, if any in the discretion of the District Court, in respect of the entry of a deficiency judgment against the bankrupt and without prejudice to the entrjr of an order, in the discretion a of the District Court, authorizing or'directing the trustee to take the necessary steps to intervene or become a party to the foreclosure suit now pending in the New York Supreme Court.