Opinion
No. 97.
January 3, 1930.
Appeal from the District Court of the United States for the Southern District of New York.
Suit by Harold L. Fierman, as trustee in bankruptcy of Ralph S. McConnell, against the Seward National Bank of New York to set aside an alleged preference. The complainant moved by petition for an injunction to restrain the defendant from continuing the prosecution of a claim filed by it in certain proceedings in bankruptcy pending in the United States District Court for the Middle District of Pennsylvania, and the defendant moved by cross-bill to restrain the complainant from continuing the prosecution of his preference suit. A decree was entered denying the defendant's motion, granting the complainant an injunction, which restrained the defendant from prosecuting, except for limited purposes, its claim in the Pennsylvania proceeding in bankruptcy, and adjudging that any determination of the defendant's claim made in such proceeding should be without prejudice to a determination of the issues between the parties in the preference suit. From this decree the defendant has appealed. Reversed in part, and affirmed in part.
The present suit, which will be spoken of as the New York preference suit, was begun October 29, 1928. The transfer therein attacked as a preference was an assignment to the bank by McConnell, as security for his pre-existing indebtedness, of a note for $60,000 made by Pennsylvania Hardwood Flooring Corporation, payable to the order of McConnell and by him indorsed, and secured by an issue of $150,000 of mortgage bonds of said Pennsylvania Hardwood Flooring Corporation. This corporation will for convenience be hereafter referred to as the Hardwood Company. The bank's answer denied the allegations of preference, and set up as an affirmative defense that the Hardwood Company had been adjudged a bankrupt in Pennsylvania, and that the Pennsylvania bankruptcy court "had sole jurisdiction of the res and jurisdiction of the parties." The "res" was a fund of $40,000 derived from a sale of the property of the Hardwood Company free of the lien of the mortgage bonds above mentioned.
On December 30, 1928, the complainant Fierman filed in the New York preference suit a petition seeking to restrain the bank from continuing the prosecution in the Pennsylvania bankruptcy proceedings of any further claim to the proceeds realized on the sale of the Hardwood Company's property. It was alleged that the bank was endeavoring to avoid the trial of the issues in the New York preference suit by compelling complainant Fierman to litigate these issues in the Pennsylvania bankruptcy. The bank by cross-bill sought to enjoin Fierman from continuing the prosecution of the New York preference suit. It set out the Pennsylvania bankruptcy proceedings in considerable detail, and alleged that the Pennsylvania court had first obtained jurisdiction and was proceeding to determine the rights of the bank and of Fierman. Upon the pleadings and supporting affidavits, the District Court entered the decree appealed from.
Some description of the litigation in Pennsylvania is also necessary. The Hardwood Company was adjudicated bankrupt in the Middle District for Pennsylvania on May 5, 1928, and the proceeding was referred to Referee Kurtz. Shortly thereafter the trustee in bankruptcy of the Hardwood Company filed with said referee a petition for leave to sell its property free and clear of liens, and the bank, alleging that it was a bona fide holder for value of the bankrupt's note and mortgage bonds aforesaid, filed objections to such sale. The trustee denied the bank's ownership. Upon the issue thus framed, several hearings were had before Referee Kurtz. These hearings were actively participated in by David W. Kahn, who was attorney for Fierman, as trustee in bankruptcy of McConnell.
It is the contention of Mr. Kahn that in so participating he was representing Mr. Niles, trustee in bankruptcy of the Hardwood Company. The bank, however, contends that Mr. Kahn was representing Fierman as trustee in bankruptcy of McConnell, and in support of this contention relies particularly upon a petition, verified by Fierman on July 9, 1928, and filed with Referee Davis, of the Southern District of New York, to whom McConnell's bankruptcy proceedings had been referred. This petition sought to enjoin the bank from making a private sale of the mortgage bonds of the Hardwood Company, and set out the same facts subsequently alleged in the New York preference suit, as showing that the bank's receipt of the note and bonds was a voidable preference. It alleged, as a reason for enjoining the bank's private sale of the bonds, the bankruptcy proceedings in Pennsylvania, stating that the bank had appeared in opposition to the Pennsylvania trustee's petition to sell free of liens, "and your petitioner was represented by his counsel David W. Kahn, Esq.," and that "all of the rights of the Seward National Bank will be litigated in the proceeding now pending before Referee Kurtz, and he will determine whether the $150,000 of bonds are the property of the Seward National Bank or are the property of the other claimants, including your petitioner. * * *"
An order was entered, staying the bank from making a private sale of the bonds, and thereafter, on July 11th and subsequent dates, hearings were held and testimony taken before Referee Kurtz. On August 15th, the bank having withdrawn its objection, the property of the Hardwood Company was ordered sold free of liens, and the sale was made on October 20th. Prior to this order, and on July 23d, Referee Kurtz had, on the bank's petition ordered Fierman to appear and assert any rights he claimed in the mortgage bonds, and Fierman had filed a special appearance denying the referee's jurisdiction to make such an order. Subsequently, on November 5th he filed a claim to the proceeds of sale, protesting, however, that he did not waive his right to prosecute his New York preference suit. This petition the bank answered. Hearings on Fierman's petition of November 5th were several times adjourned at the request of Mr. Kahn. It appears from the appellant's brief that, subsequent to the order appealed from in the New York preference suit, Referee Kurtz made findings of fact and conclusions of law, in which he held that the bank's claim to the proceeds of the sale of the Hardwood Company's property was superior to that of Fierman as trustee in bankruptcy of McConnell. This order, however, is not a part of the record, and cannot be considered on this appeal.
Willcox, Swiger Chambers, of New York City (Arlen G. Swiger, of New York City, Frederic L. Clark, and Andrew R. McCown, both of Philadelphia, Pa., Leo Oppenheimer and Milton P. Kupfer, both of New York City, of counsel), for appellant.
David W. Kahn, of New York City, for appellee.
Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
[1, 2] It is elementary that the Pennsylvania bankruptcy court had jurisdiction to collect and distribute the estate of the Pennsylvania bankrupt, the Hardwood Company. When the bankrupt's property was sold free of liens, the liens upon the property became rights against the substituted proceeds of sale, and claimants to this fund were obliged to assert their rights by applying to the court in whose custody it was. See In re Rochford, 124 F. 182 (C.C.A. 8); In re Kohl-Hepp Brick Co., 176 F. 340 (C.C.A. 2); Murphy v. John Hofman Co., 211 U.S. 562, 29 S. Ct. 154, 53 L. Ed. 327. Hence the bank, claiming ownership of the bonds, very properly intervened in the Pennsylvania proceedings, at first to prevent the destruction of its lien by the proposed sale, and later to reach the substituted fund. Indeed, no other course was open to it, if it wished to realize anything upon its collateral security.
But Fierman, as McConnell's trustee in bankruptcy, was under no similar necessity. He had the alternatives of claiming the Pennsylvania fund, or of refraining from intervention in the Pennsylvania proceedings and bringing a preference suit against the bank in any court of competent jurisdiction. If he claimed the fund, he would necessarily submit for decision by the Pennsylvania referee his claim that McConnell's transfer of the note and mortgage bonds to the bank was a voidable preference, for only by establishing this would he show any title in himself. See In re Valecia Condensed Milk Co., 233 F. 173 (D.C. Wis.); Logan v. Haynes, 11 F.2d 369 (C.C.A. 8). On the other hand, if he did not intervene, a decision awarding the fund to the bank would decide nothing as to the preference, and would affect not at all his right to maintain a preference suit against the bank. In such a suit, if he proved the preference, he would get a decree for the value of the bonds, not for the physical return of them. The bonds themselves would have been converted into the fund which the Pennsylvania court would distribute to the bank.
The legal principles above stated are not seriously disputed, if we correctly understand the contentions of the parties. At least, it is conceded that, if Fierman submitted his claim of title to the bonds or to the substituted fund to the jurisdiction of the Pennsylvania court, that court had power to determine the conflicting rights of the parties, and no injunction should have issued. The real dispute is whether or not he did so submit himself. The District Court found that he did not.
In our opinion, that conclusion is too doubtful to justify the granting of an injunction pendente lite upon affidavits. Indeed, to our minds the proof strongly points to the opposite conclusion. When Fierman applied to Referee Davis to enjoin the bank from selling the bonds, he swore that he was represented before the Pennsylvania referee by his counsel, Mr. Kahn, and that the referee had set a hearing for July 11th, to determine who is the owner of the bonds, and who is entitled to be heard upon the application to sell the bankrupt's property free of liens, and he added that all the rights of the bank would be litigated in that proceeding, and that the referee would there determine whether the "bonds are the property of the Seward National Bank or are the property of the other claimants, including your petitioner." While this affidavit would not itself amount to an appearance in the Pennsylvania proceedings, it tends strongly to support an inference that, when Mr. Kahn appeared and took active part in the hearings before the Pennsylvania referee, both before July 11th and subsequently, he was in fact appearing as Fierman's representative, and litigating on his behalf the issues which Fierman said would be there litigated.
The affidavit of McClean Stock alleges that during the taking of testimony before the referee Mr. Kahn stated that he was attorney for Fierman as trustee in bankruptcy of McConnell. What testimony was taken and what issues were litigated before Referee Kurtz the record on appeal does not clearly show. We do not find as a fact that complainant Fierman did submit to the jurisdiction of the Pennsylvania bankruptcy court. We hold merely that under the proofs offered no injunction should have been granted pendente lite, on the ground that he had not submitted.
The decision of that question we leave for the trial of the New York preference suit, where the bank can plead the Pennsylvania proceedings as res judicata and all the facts can be shown. If the bank proves that the decision in the Pennsylvania proceedings was made after complainant Fierman had made a general appearance, or had otherwise submitted his rights to determination by Referee Kurtz, that decision will control. If, on the other hand, he did not so submit, then the Pennsylvania decision did not adjudicate the rights of the bank and Fierman, as between themselves.
We have not overlooked the contention of Fierman that the Pennsylvania litigation and the New York preference suit relate to different subject-matters, because the former has to do with the distribution of the proceeds of the Hardwood Company's real estate, and the latter has to do with title to the note transferred by McConnell, and accompanied by the mortgage bonds as collateral. The contention is fallacious. When the preference suit was started, the sale of the mortgaged property free of liens had already taken place. The mortgage bonds as such had ceased to exist, as completely as if the mortgage had been foreclosed. For the rights formerly evidenced by the bonds, there had been substituted a right to obtain the proceeds of sale upon application to the court having custody of the fund. That right belonged to the one who formerly owned the bonds. U.S. Trust Co. v. Gordon, 216 F. 929 (C.C.A. 6). The preference suit, in so far as it sought any relief with respect to the collateral securing the note, presented the issue whether Fierman or the bank was to be considered the owner of the bonds after McConnell's transfer. The identical issue was presented to the Pennsylvania court, provided Fierman appeared therein and claimed to be owner of the bonds or to be entitled to the substituted fund realized from the sale.
On November 5th, after the New York preference suit had been started, Fierman, filed with the Pennsylvania referee a claim to the proceeds of the sale, coupling with it an assertion that he did so without waiving the right to have his title determined in the New York suit. Whether such an assertion is effective to preclude his claim from operating as a general appearance (assuming he had not previously appeared), and to prevent the court having custody of the fund from passing upon the title he asserts, we need not now decide. Neither party has briefed this point, and we mention it merely by way of caution, to indicate that it has not been passed upon.
From the foregoing expression of our views, it is apparent that the injunction was improvidently issued, and that so much of the decree as adjudged that any determination of the defendant's claim by the Pennsylvania court should be without prejudice to a determination of the issues in the preference suit was erroneous.
The denial of the defendant's motion for an injunction is affirmed, and the remainder of the decree is reversed, with costs to the appellant.