The bankruptcy court has jurisdiction of a proceeding in the
nature of a plenary action brought by the trustee to determine
controversies in relation to property held by the bankrupt or by
other parties for him, and the extent and character of liens
thereon, and this applies to a suit brought against parties
claiming possession of goods in the bankrupt's store, as
warehousemen, under a nominal lease of the store from the
bankrupt.
A receiver in bankruptcy is appointed as a temporary custodian,
and it is his duty to hold possession of property until the
termination of the proceedings or the appointment of the trustee,
and meanwhile the bankruptcy court has possession of the property
and jurisdiction to hear and determine the interests of those
claiming liens thereon or ownership thereof, and this jurisdiction
cannot be affected by the receiver's turning the property over to
any person without the authority of the court.
Page 198 U. S. 540
Edward B. Whitney, as trustee in bankruptcy of Daniel LeRoy
Dresser and Charles E. Riess, members of the firm of Dresser &
Company, filed a bill in equity against Charles H. Wenman,
Stuyvesant Fish, and George C. Boldt, in the District Court of the
United States for the Southern District of New York. Upon demurrer
to the bill, the court dismissed the same for want of jurisdiction.
The allegations of the bill set forth in substance that, on
September 17, 1903, the complainant was duly appointed trustee in
bankruptcy of Dresser and Riess, doing business as Dresser &
Company, and that as such trustee he qualified on September 29,
1903. That during the time mentioned in the bill, and up to March
7, 1903, Dresser & Company were carrying on business as
merchants in the City of New York. That the defendants the Security
Warehousing Company and the United States Mortgage & Trust
Company were corporations of the State of New York. That the
defendant Charles H. Wenman acted as the agent and attorney in fact
of the defendants Fish and Boldt. Prior to March 7, 1903, the
bankrupts, partners, as Dresser & Company, became insolvent,
and on that day assigned all their property for the benefit of
their creditors. On March 9, 1903, upon the petition of certain
creditors, Robert C. Morris and Charles S. Mackenzie were appointed
by the District Court for the Southern District of New York
receivers in bankruptcy of Dresser & Company. That at least six
months prior to March 7, 1903, the firm of Dresser & Company
had been insolvent and unable to pay its debts, and was only able
to continue in business by borrowing large sums of money, and, in
order not to injure the creditors, it became necessary to pledge
the goods, wares, and merchandise in which the company was dealing,
but to conceal said pledge from the unsecured creditors. That the
goods dealt with by Dresser & Company consisted, for the most
part, of Japanese silks imported for sale. For the purpose of
pledging these goods with certain of the creditors without the
knowledge of the other creditors, Dresser & Company entered
Page 198 U. S. 541
into a plan or arrangement with the defendants the Security
Warehousing Company, to-wit, a certain alleged lease of the store,
display and sales rooms was made by Dresser & Company to the
Security Warehousing Company at a nominal rental of $1 a year, in
order that thereafter the said warehousing company might claim that
the goods and display and sales rooms belonged to it. That the
goods in reality belonged to the firm of Dresser & Company, and
there was no change of location or ownership of the said goods, but
Dresser & Company remained in possession and control thereof,
and permitted the display of them in the same manner as that firm
had done prior to the pretended storage. Dresser & Company
exhibited the goods to their customers, sending portions to dyers
and manipulators, and generally handled and used them as if they
were their own, and free and clear from all claims and
encumbrances. That the Security Warehousing Company exercised no
supervision or control over the said goods, but merely employed, or
pretended to employ, the confidential clerk and secretary of Daniel
LeRoy Dresser and Dresser & Company, as its alleged custodian,
in whose charge it was claimed the goods had been placed at a
salary of one dollar per month. She exercised no control or
supervision over the goods, but, during the period of her
employment, continued to act as the confidential secretary of the
bankrupts. The security company also placed a few small tags on the
shelves and bins in which the goods were stored and displayed for
sale, upon which tags the name of the security company was printed,
but the tags were not easily discovered, and in most instances were
so placed as not to be readily seen, and were not of such a
character as to identify the goods.
The bill then avers the issue of certain warehouse receipts upon
said goods, representing that they had been stored with the company
at its warehouse at 15-17 Greene Street, New York, which was in
fact the store of Dresser & Company. Then follow allegations as
to the delivery of the warehouse receipts, some to the United
States Mortgage & Trust Company and
Page 198 U. S. 542
some to the defendant Wenman for himself or defendants Fish and
Boldt. And it is averred that the security instruments did not
describe the goods in such a way as to make them capable of
identification. That Daniel LeRoy Dresser was one of the
incorporators of the Security Warehousing Company, and one of its
directors and stockholders. That, at the time of the delivery of
the security instruments, Charles S. Mackenzie was general counsel
of the security company, and was fully cognizant of the system of
pretended storage before described, and was also personal counsel
for Daniel LeRoy Dresser. That, after the delivery of the warehouse
instruments, Dresser & Company continued to display and sell
and dispose of the goods and manage the business in the same manner
that they had been in the habit of doing prior to the said
pretended storing, without objection from the Security Warehousing
Company. Then follow allegations as to the knowledge or opportunity
for knowing, on the part of the defendants, of the situation above
described. When the receivers, Morris and Mackenzie, went into
possession of the stock of Dresser & Company on March 9, 1903,
upwards of $150,000 worth of the goods was still in the possession
and under control of Dresser & Company. After the receivers had
taken possession of the store the Security Warehousing Company
notified them that it claimed that the store, display and sales
rooms belonged to it under the alleged lease, and that the goods
therein contained had been stored with it by Dresser & Company,
and requested the delivery of all the goods to it. The receivers
did not dispute this claim of the warehousing company, but complied
with it. Neither the court nor the unsecured creditors of Dresser
& Company were advised of the facts concerning this claim or
the character of the pretended storing upon which the issue of the
so-called warehouse house receipts was based. Then follow
allegations as to the sale of the goods, and that the Security
Warehousing Company claimed that certain of the goods supposed to
have been stored with it by Dresser & Company, and covered by
the security instruments, had been sold by
Page 198 U. S. 543
Dresser & Company before March 7, 1903, amounting to the sum
of $22,000. That said receivers collected upwards of $20,000 of
accounts receivable of Dresser & Company, and paid the same
over to the Security Warehousing Company. That these goods were
sold and the accounts collected by the warehousing company before
the appointment of complainant as trustee in bankruptcy of Dresser
& Company. None of said goods or their proceeds have come into
the hands of the trustee except the sum of $1,944.93, paid to the
complainant by the security company. Then follow averments as to
the payment of the proceeds of the goods sold and accounts
collected to the other defendants and the holders of said warehouse
receipts. It is averred that the books and records of the Security
Warehousing Company are lost or destroyed. It is alleged that the
attempt to create a lien upon the goods in the manner aforesaid was
contrary to law and the statutes of the State of New York. That the
silk goods had been sold at much less than their value. The prayer
of the bill is that the security instruments be declared invalid,
fraudulent, and void, and that the complainant be decreed the owner
of the goods and accounts, and that the defendants be required to
account for the value of the same, and for general relief, as the
nature of the case may require.
Page 198 U. S. 548
MR. JUSTICE DAY, after making the foregoing statement, delivered
the opinion of the Court.
This case is here upon the question of the jurisdiction of the
district court to entertain the action. The case in the court below
was dismissed for want of jurisdiction, the demurrer having been
sustained solely upon the ground that the Bankruptcy Act of July 1,
1898, as amended by the Act of February 5, 1903, gave the court no
jurisdiction. We are not concerned with the merits of the
controversy further than the allegations concerning the same are
necessary to be considered in determining the question of the
jurisdiction of the district court, as a court of bankruptcy, to
entertain this suit. It is sufficient to say that, in our opinion,
the bill made a case which presented a controversy for judicial
determination as to the right of the defendants to hold the lease
and property under the alleged security of the warehouse receipts
undertaken to be issued in the manner set forth in the petition.
Whether it will turn out, upon full hearing, that the lease and
securities are good is not now to be determined. The bill makes
allegations which raise a justiciable controversy as to the
validity
Page 198 U. S. 549
of the alleged lien in view of the lack of change of possession
of the goods under the circumstances set forth. The question for
this Court now to determine is whether the bankruptcy court, on the
allegations made and admitted as true by the demurrer, had
jurisdiction to determine the controversy. It is positively alleged
in the bill that the supervision and control of the goods continued
in the firm of Dresser & Company, and that the alleged doings
of the Security Warehousing Company and its agents were merely
colorable, and did not in fact change the control over the goods,
nor give any notice of the alleged lease of the warehousing
company, nor the lien of the instruments thereby secured. It is
further positively averred that, when the receivers were appointed,
upwards of $150,000 worth of goods belonging to the firm were in
the possession and under the control of the bankrupts, and after
the receivers had taken possession of the store, the goods were
delivered up to the warehousing company without any order or
attempt to procure the sanction of the court to such surrender of
the property. Under these circumstances, had the bankruptcy court
jurisdiction to determine the rights of parties claiming interests
in the property?
Section 2 of the Bankrupt Act of 1898, among other things,
confers jurisdiction upon the district courts of the United States,
as courts of bankruptcy, (3) to
"appoint receivers or the marshals, upon application of parties
in interest, in case the court shall find it absolutely necessary,
for the preservation of estates, to take charge of the property of
bankrupts after the filing of the petition, and until it is
dismissed or the trustee is qualified;"
(7) to
"cause the estates of bankrupts to be collected, reduced to
money, and distributed, and determine controversies in relation
thereto, except as herein otherwise provided."
This section, in connection with section 23, was before this
Court for construction in the case of
Bardes v. Hawarden
Bank, 178 U. S. 524, in
which case it was held that section 23
b of the act as it
then stood prevented the courts of the United
Page 198 U. S. 550
states from entertaining jurisdiction over suits brought by
trustees in bankruptcy to set aside fraudulent transfers of money
or property made by the bankrupt to third parties before the
institution of the bankruptcy proceedings, without the consent of
the defendants. In that case, it was held that the power conferred
in subdivision 7 of section 2, above quoted, was limited by the
direct provisions of section 23 as to the jurisdiction of suits
brought by trustees, the effect of which section was to compel the
trustee to resort to the state courts to set aside conveyances of
the character named where an alleged fraudulent transfer had been
made by the bankrupt before the beginning of the proceedings,
unless jurisdiction in the district court was by consent. This
case,
Bardes v. Bank, did not determine the right of the
district court to entertain jurisdiction of a proceeding having in
view the adjudication of rights in or liens upon property which
came into the possession of the bankruptcy court as that of the
bankrupt, the right to proceed concerning which would seem to be
broadly conferred in the section of the Bankruptcy Act above
quoted. At the same term at which the
Bardes case was
decided, this Court determined the case of
White v.
Schloerb, 178 U. S. 542. In
that case, it was held that, after an adjudication in bankruptcy,
an action in replevin could not be brought in the state court to
recover property in the possession of and held by the bankrupt at
the time of the adjudication, and in the hands of the referee in
bankruptcy when the action was begun, and that the district court
of the United States, sitting in bankruptcy, had jurisdiction by
summary process to compel the return of the property seized. In the
case of
Bryan v. Bernheimer, 181 U.
S. 188, it appeared that the bankrupt had made a general
assignment for the benefit of his creditors nine days before the
filing of his petition in bankruptcy, and the assignee sold the
property after the bankruptcy proceedings had been begun, after the
adjudication in bankruptcy, but before the appointment of a
trustee. Upon petition of creditors, the district court ordered
that the marshal take possession, and
Page 198 U. S. 551
the purchaser appear within ten days and propound his claim to
the property, or, failing so to do, be declared to have no right in
it. The purchaser appeared and set up that he bought the property
in good faith from the assignee, and prayed the process of the
court that the creditors might be remitted to their claim against
the assignee for the price, or the same be ordered to be paid into
court by the assignee, and paid over to the purchaser, who was
willing to rescind the purchase upon receiving his money. It was
held that the purchaser had no title to the bankrupt's estate, and
that the equities between him and the creditors should be
determined by the district court, bringing in the assignee, if
necessary. In this case, Mr. Justice Gray, who also delivered the
opinion in the
Bardes case, said:
"The Bankrupt Act of 1898, § 2, invests the courts of
bankruptcy with such jurisdiction at law and in equity, as to
enable them to exercise original jurisdiction in bankruptcy
proceedings, in vacation in chambers, and during their respective
terms to make adjudications of bankruptcy, and, among other
things,"
"(3) appoint receivers or the marshals upon the application of
the parties in interest, in case the courts shall find it
absolutely necessary for the preservation of estates to take charge
of the property of bankrupts after the filing of the petition, and
until it is dismissed or the trustee is qualified; . . . (6) bring
in and substitute additional persons or parties in proceedings in
bankruptcy when necessary for the complete determination of a
matter in controversy; (7) cause the estates of bankrupts to be
collected, reduced to money, and distributed, and determine
controversies in relation thereto, except as herein otherwise
provided."
"The exception refers to the provisions of section 23, by virtue
of which, as adjudged at the last term of this Court, the district
court can, by the proposed defendant's consent, but not otherwise,
entertain jurisdiction over suits brought by trustees in bankruptcy
against third persons, to recover property fraudulently conveyed by
the bankrupt to them before the institution of proceedings in
bankruptcy.
Page 198 U. S. 552
Bardes v. Hawarden Bank, 178 U. S.
524;
Mitchell v. McClure, 178 U. S.
539;
Hicks v. Knost, 178 U. S.
541."
This case (
Bryan v. Bernheimer) would seem to limit the
effect of the decision in the
Bardes case to suits against
third persons on account of transfers made before the bankruptcy,
and to recognize the right of the bankruptcy court to adjudicate
upon rights in property in the possession of the court, belonging
to the bankrupt. In the case of
Mueller v. Nugent,
184 U. S. 1, this
Court recognized the power of the bankruptcy court to compel the
surrender of money or other assets of the bankrupt in his
possession or that of some one for him. In that case, the decisions
in
Bardes v. Hawarden Bank, White v. Schloerb, Bryan v.
Bernheimer, were reviewed by the Chief Justice, who delivered
the opinion of the Court, and it was held that the filing of a
petition in bankruptcy is a caveat to all the world, and, in
effect, an attachment and injunction, and that, on adjudication,
title to the bankrupt's estate became vested in the trustee, with
actual or constructive possession, and placed in the custody of the
bankruptcy court.
We think the result of these cases is, in view of the broad
powers conferred in section 2 of the Bankrupt Act, authorizing the
bankruptcy court to cause the estate of the bankrupt to be
collected, reduced to money, and distributed, and to determine
controversies in relation thereto, and bring in and substitute
additional parties when necessary for the complete determination of
a matter in controversy, that, when the property has become subject
to the jurisdiction of the bankruptcy court as that of the
bankrupt, whether held by him or for him, jurisdiction exists to
determine controversies in relation to the disposition of the same,
and the extent and character of liens thereon or rights therein.
This conclusion accords with a number of well considered cases in
the federal courts.
In re Whitener, 105 F. 180;
In re
Antigo Screen Door Co., 123 F. 249;
In re Kellogg,
121 F. 333. In the case of
First National Bank v. Chicago Title
& Trust Company, decided on May 8 of this term,
ante, p.
198 U. S. 280, in
holding
Page 198 U. S. 553
that the jurisdiction of the district court did not obtain, it
was pointed out that the court had found that it was not in
possession of the property. Nor can we perceive that it makes any
difference that the jurisdiction is not sought to be asserted in a
summary proceeding, but resort is had to an action in the nature of
a plenary suit, wherein the parties can be fully heard after the
due course of equitable procedure.
It is insisted that, in the present case, the property was
voluntarily turned over by the receiver, and thereby the
jurisdiction of the district court, upon the ground herein stated,
is defeated, as the property is no longer in the possession or
subject to the control of the court. But the receiver had no power
or authority, under the allegations of this bill, to turn over the
property. He was appointed a temporary custodian, and it was his
duty to hold possession of the property until the termination of
the proceedings, or the appointment of a trustee for the bankrupt.
The circumstances alleged in this bill tend to show that the
transfer of the property was collusive, and certainly, if the
allegations be true, it was made without authority of the court.
The court had possession of the property, and jurisdiction to hear
and determine the interests of those claiming a lien therein or
ownership thereof. We do not think this jurisdiction can be ousted
by a surrender of the property by the receiver, without authority
of the court. Whether the rights of the claimants to the property
could be litigated by summary proceedings we need not determine.
What we hold is that, under the allegations of this bill, the
district court had the right, in a proceeding in the nature of a
plenary action, in which the parties were duly served and brought
into court, to determine their rights, and to grant full relief in
the premises, if the allegations of the bill shall be sustained.
This view renders it unnecessary to consider the effect of the
amendments of the Bankruptcy Act passed February 5, 1903,
broadening the power of the bankruptcy courts to entertain suits by
trustees to set aside certain conveyances made by the bankrupt.
Decree reversed.
