Nos. 15, 16.
Argued April 20, 1903. Decided May 18, 1903.
1. The jurisdiction of the courts in bankruptcy in the administration of the affairs of insolvent persons and corporations is essentially exclusive. 2. The general rule as between courts of concurrent jurisdiction is that property already in possession of the receiver of one court cannot rightfully be taken from him without the court's consent by the receiver of another court appointed in a subsequent suit, and although that rule has only a qualified application when winding up proceedings in a state court are superseded by proceedings in bankruptcy, it obtains as a rule of comity, and its considerate observance is adequate to avert collisions between Federal and state courts. 3. The preservation of the independence of the bar is vital to the due administration of justice, and its members cannot be imprisoned for contempt for error in judgment when advising in good faith and in the honest belief that their advice is well founded. 4. Members of the bar cannot be properly held to have intended to obstruct the administration of justice and to bring the authority of a court of the United States into contempt when it is the orders of a state court appearing to have been entered of record of its own motion that are complained of, and counsel in that court acted in good faith and in the honest discharge of their duty.
Mr. David Fairleigh, with whom Mr. Bernard Flexner was on the brief, for the petitioner Watts.
I. When a person is imprisoned by a United States court for refusing to comply with an order of that court, and such order is beyond the jurisdiction or power of the court to make, the order itself is void, and the order punishing for contempt is likewise void, and this court will, on writ of habeas corpus, discharge the person so imprisoned. Ex parte Lange, 18 Wall. 163; Ex parte Rowland, 104 U.S. 604; Ex parte Fisk, 113 U.S. 713; In re Ayres, 123 U.S. 443; In re Lane, 135 U.S. 443; In re Tyler, 149 U.S. 164; In re Bonner, 151 U.S. 242; In re McKenzie, 180 U.S. 536.
II. An order of a United States District Court sitting in bankruptcy, commanding its receiver to peremptorily take from the possession of a receiver of a state court property in his hands as such at the time the bankruptcy proceedings were begun, is void. Peck v. Jenness, 7 How. 611; Taylor v. Carryl, 20 How. 583; Marshall v. Knox, 16 Wall. 551; Doe v. Childress, 21 Wall. 643; Covell v. Heyman, 111 U.S. 182; Shields v. Coleman, 157 U.S. 168; Johnson, Assignee, v. Bishop, Sheriff, Woolworth, 324; Metcalf v. Barker, 187 U.S. 165; Pickens v. Roy, 187 U.S. 177; Louisville Trust Co. v. Comingor, 184 U.S. 18; Bardes v. Hawarden Bank, 178 U.S. 524.
III. A receiver appointed by a court has no authority to surrender the possession of the property in his hands without authority from the court which appointed him, and the person who so acquires the possession of the property from him is in wrongful possession, and the court may issue an appropriate writ to restore the possession of the property to a custodian of the court. Davis v. Gray, 16 Wall. 217; Shields v. Coleman, 157 U.S. 168; White v. Schloerb, 178 U.S. 542; Metcalf v. Barker, 187 U.S. 165.
Mr. W.H.H. Miller, with whom Mr. W.M. Smith was on the brief, for the petitioner Sachs.
1. The Floyd Circuit Court was in the lawful, actual possession of the property in controversy when the bankruptcy proceeding commenced. First National Bank v. U.S. Encaustic, etc., 105 Ind. 227; Pressley v. Lamb, 105 Ind. 171. The fact of actual possession is undisputed.
This proceeding in the state court is not subject to collateral attack. Phelps v. Mutual Reserve, etc., 112 F. 453; Weiss v. Guerineau, 109 Ind. 438; Hollinger v. Reeme, 138 Ind. 363.
The suit in the state court was not under an "insolvency law." Mayer v. Hellman, 91 U.S. 496; Carling v. Seymour, 113 F. 483.
It is idle to say that the filing of the bill and procurement of the appointment of a receiver was a fraud on the state court because preferences had been given; since, in the absence of bankruptcy proceedings, the preferences were lawful. Sandford Fork, etc., v. Howe, 157 U.S. 312, 317; McCormick v. Smith, 127 Ind. 230, 235. It was uncertain whether bankruptcy proceedings would ever be commenced.
2. The rules of comity between the state court and the United States District Court sitting in bankruptcy apply in all their breadth and force. Peck v. Jenness, 7 How. 612 (Bankrupt Act, 1841); Eyster v. Gaff, 91 U.S. 521 (Bankrupt Act, 1867); Metcalf v. Barker, 187 U.S. 165 (Bankrupt Act, 1898); Carling v. Seymour, 113 F. 483.
If the possession of the state court is actual, the fact, (if it be a fact,) that the jurisdiction of the bankruptcy court is exclusive does not warrant the latter court in taking the possession from the state court by summary proceedings. Moran v. Sturges, 154 U.S. 256; The Oliver Jordan, 2 Curtis, 414; Taylor v. Carryl, 20 How. 583; The E.L. Cain, 45 F. 367; The James Roy, 59 F. 784; Carling v. Seymour Lumber Co., (C. C.A. 5th Cir.) 113 F. 483, 490, 491, reversing same case, In re Macon, etc., in 112 F. 323, where the District Court seems to have held opinions similar to those of the District Court in the case at bar. See also, Temple v. Glasgow, (C. C.A. 4th Cir.) 80 F. 443-446.
3. And the fact that the suit in the state court was not based on a valid lien is immaterial. The power of the bankruptcy court is as plenary when there are liens as when there are not. Rev. Stat. § 4972 (act 1867); sections 2 and 69, act 1898; Johnson v. Bishop, 1 Wool. 324; Bradley v. Frost, 3 Dillon, 457; In re Price, 92 F. 987; In re Lingert, 110 F. 927; In re Lesser, 100 F. 433; In re Wells, 114 F. 222; In re Ward, 104 F. 985; Smith v. Belford, 106 F. 658; Louisville Trust Co. v. Comingor, 184 U.S. 18.
For discussion of rule of comity, Covell v. Heyman, 111 U.S. 176.
4. The act of 1898 (as well as that of 1867) provides for intervention by representative of bankruptcy court in a suit in a state court. Section 11, sub. b and c.
5. This was actually done in case at bar by a general appearance.
6. This being done, the bankruptcy court was bound to await the decision of the state court in the ordinary way. Peck v. Jenness, 7 How. 612, 625; Johnson v. Bishop, 1 Wool. 324; Doe v. Childress, 21 Wall. 643; Scott v. Kelly, 22 Wall. 57; Mays v. Fritton, 20 Wall. 414; Davis v. Friedlander, 104 U.S. 570; Winchester v. Heiskell, 119 U.S. 450; Adams v. Crittenden, 133 U.S. 296; Ludeling v. Chaffe, 143 U.S. 301.
The bankruptcy court never got lawful possession of the property. a. Because such possession as it got from the state court's receiver was the result of a threat to take it with "a club." b. Because the state court receiver could not deliver lawful possession without the consent of his court. This is elementary. Shields v. Coleman, 157 U.S. 168; White v. Schloerb, 178 U.S. 542; Metcalf v. Barker, 187 U.S. 165; The E.L. Cain, 45 F. 367-370; The James Roy, 59 F. 784; Moran v. Sturges, 154 U.S. 256.
7. The amendment to the bankrupt act of February 5, 1903, making a receivership an act of bankruptcy, is not retroactive so as to apply to this case. All bankrupt acts have been prospective as to acts of bankruptcy. Act 1841, 5 Stat. 442; Act 1867, 14 Stat. 536; Act 1898, sec. 71; Chew Hong v. United States, 112 U.S. 536, 559; Endlich on Statutes, 276; McEwan v. Den, 24 How. 245. If the amendment is not retroactive, this receivership was not an act of bankruptcy. In re Wilmington Hosiery Co., 120 F. 180; also 179.
Mr. George H. Hester (by special leave), with whom Mr. William Wilhartz was on the brief, for the receiver in bankruptcy of M. Zier Co.
All state laws for the administration of insolvents' estates and all actions and proceedings thereunder are suspended by the enactment of the general bankruptcy law. In re Smith, 92 F. 135; Tua v. Carriere, 117 U.S. 201-209; In re Bruss-Ritter Co., 90 F. 651; Lea v. George M. West Co., 91 F. 237; In re Rouse, Hazard Co., 91 F. 96; Lothrop v. Highland Foundry Co., 128 Mass. 120; Parmenter Mfg. Co. v. Hamilton, 172 Mass. 178; Harbaugh v. Costello, 184 Ill. 110; In re Gutwillig, 90 F. 475.
The jurisdiction of the Federal courts over the administration of insolvent estates is exclusive and supreme. In re Merchants Insurance Co., 6 N.B.R. 43; In re Smith, 92 F. 135; Harbaugh v. Costello, 184 Ill. 110; Watson v. Bank, 11 N.B.R. 161.
The Bankruptcy Act of 1898 authorizes the District Court "to make such orders, issue such process and enter such judgments in addition to those specifically provided for as may be necessary for the enforcement of this act."
The jurisdiction of the bankruptcy court being supreme, it may properly, by summary process, obtain possession of property in the hands of an assignee or other officer of a state court. In re John A. Etheridge Furniture Co., 92 F. 329; White v. Schloerb, 178 U.S. 542; Bryan v. Bernheimer, 181 U.S. 188; Mueller v. Nugent, 184 U.S. 1; In re Tune, 115 F. 906; In re Green Pond R. Co., 13 N.B.R. 118; Fed. Cas. No. 5786; In re Safe Deposit and Sav. Inst., 7 N.B.R. 392; Fed. Cas. No. 12,211; In re Washington Marine Ins. Co., 2 Ben. 292; Fed. Cas. No. 17,246; In re Merchants Ins. Co., 3 Biss. 162; Fed. Cas. No. 9441; In re National Life Ins. Co., 6 Biss. 25; Fed. Cas. No. 10,046; In re Whipple, 6 Biss. 516; Fed. Cas. No. 17,512; In re Smith, 92 F. 135; Clarke v. Larremore, 188 U.S. 486.
Summary proceedings are also authorized to take property from the hands of a receiver of a state court. In re Merchants Ins. Co., 6 N.B.R. 43; In re Lengert Wagon Co., 110 F. 927; In re Storck Lumber Co., 114 F. 360; In re Bruss-Ritter Co., 90 F. 651; Platt v. Archer, 9 Blackf. 559; Fed. Cas. No. 11,215.
The proceeding in the state court for the appointment of a receiver of M. Zier Co. was, in substance, a voluntary assignment, or bankruptcy proceeding. Every asset of the insolvent was placed by it in the hands of the receiver selected by it. The purpose was the distribution of these assets among all its creditors. In re John A. Etheridge Furniture Co., 92 F. 329; In re Storck Lumber Co., 114 F. 360.
The cases at bar do not involve either the question of property held by adverse claim, or that of a lien attaching more than four months previous to the bankruptcy proceedings. The following cases relied on by the petitioners are not, therefore, in point: Peck v. Jenness, 7 How. 625; Louisville Trust Co. v. Comingor, 184 U.S. 18; Metcalf v. Barker, 187 U.S. 165.
The state court having no jurisdiction whatever after the filing of the petition in bankruptcy, it had no power to hear and determine the question of whether or not it would relinquish the property. It became its duty to do so at once, upon being informed of the proceedings in the United States court, and every step taken thereafter with reference to the property and its custody was coram non judice.
If a receiver is appointed by a Federal court and actually takes possession of the property, possession will not be yielded to a receiver subsequently appointed by a state court, although the suit in the state court was commenced before that in the Federal court. East Tenn., Virginia G.R. Co. v. A. T.R. Co., 49 F. 608; Central Trust Co. of N.Y. v. Chattanooga R. Co., 69 F. 950.
Where a state court has no jurisdiction over property and loses the actual possession thereof to the Federal court, there remains no possession by the state court, either actual or constructive. The Willamette Valley, 62 F. 293; 66 F. 565; Moran v. Sturges, 154 U.S. 256, 293.
Where there is neither actual nor constructive possession there can be no obstacle to proceeding summarily, and an action thus taken cannot be invalidated by relation. Moran v. Sturges, 154 U.S. 256, 284.
The bankruptcy court having been given voluntary and peaceable possession, the question of comity between the courts is not involved, except as it applies to the action of the state court in retaking the property. It is a question of the supremacy of the Constitution and laws of the United States. In re Tune, 115 F. 906; East Tenn., etc., R. Co. v. A. T.R. Co., 49 F. 608.
Where property is in the custody of the bankruptcy court, no other court, and no person acting under any process from any other court, can, without the permission of the bankruptcy court, interfere with it; and to so interfere is a contempt of the bankruptcy court. In re Vogle, 7 Blackford, 18; Moran v. Sturges, 154 U.S. 256; Freeman v. Howe, 24 How. 450, 459.
Mr. Solicitor General Hoyt for the United States.
I. The argument of counsel for petitioners relates exclusively to the manner in which the District Court exercised its jurisdiction over the property in dispute.
The power of a bankruptcy court to enforce its jurisdiction by contempt proceedings is unquestioned. Whether the facts presented warranted petitioners' conviction and the punishment imposed, were matters within the judgment of the District Court to determine, as they are within the power and discretion of this court to review. Acts similar to those committed by petitioners have been held to constitute contempt in the following cases: In re Vogel, 2 N.B.R. 427; Fed. Cas. 16,983; In re Ulrich, 8 N.B.R. 15; Fed. Cas. 14,328; In re Litchfield, 13 F. 186; Ex parte Davis, 112 F. 139; Royal Trust Co. v. Washburn, etc., Ry. Co., 113 F. 531. See particularly Anderson v. Comptois, 48 C. C.A. 1, and note, p. 7; also reported in 109 F. 971.
II. Upon the filing of the petition in bankruptcy the jurisdiction of the District Court immediately attached, and was exclusive. In re Merchants' Ins. Co., 6 N.B.R. 43; In re Lady Bryan Mining Co., 6 N.B.R. 252; Watson v. Citizens' Savings Bank, 11 N.B.R. 161; In re Gutwillig, 90 F. 475; In re Bruss-Ritter Co., 90 F. 651; In re Rouse Co., 91 F. 96; Lea v. George M. West Co., 91 F. 237; In re Smith, 92 F. 135; In re Etheridge Furniture Co., 92 F. 329; In re Richard, 94 F. 633; In re Lengert Wagon Co., 110 F. 927; In re Storck Lumber Co., 114 F. 360; Parmenter Mfg. Co. v. Hamilton, 172 Mass. 178; Harbaugh v. Costello, 184 Ill. 110.
Only a pretense of argument is made against the jurisdiction of the District Court over the property of the bankrupts. Within four months prior to the filing of the petition they had committed acts of bankruptcy by making preferences denounced by the statute. Besides, the amendment of February 5, 1903, to the Bankruptcy Act makes the appointment of a receiver by a state court because of insolvency an act of bankruptcy. That amendment is on its face retroactive, and applies to a case where a receiver "has been" appointed within four months of the filing of the petition in bankruptcy. In the original act, a retroactive effect was expressly provided against, and proceedings commenced under state insolvency laws before its passage were explicitly not to be affected, but the amendatory act contains no such provision.
That the jurisdiction of the District Court is not seriously attacked, is shown by the fact that opposing counsel frankly state that the question here is not as to the right of possession, but of proper procedure.
III. The question as to the authority of a bankruptcy court summarily to take property over which it has acquired jurisdiction from the possession of a state court or its officers, does not arise on this record. The District Court did not summarily seize the property but the same was voluntarily surrendered to its receiver. The fact that the receiver of the state court was not authorized to make the transfer, does not affect the legality of the possession received by the District Court, but was a matter wholly between the state court and its receiver. An order of the state court directing the surrender of the property could give the District Court no additional right to the possession. That right was already perfect.
IV. Assuming, however, for the sake of argument, that the property was summarily taken from the state court, it is apparent that, under the decisions of this court, summary action in such a case was authorized. The attitude of the state court toward the Federal court is indicated by the order enjoining the bankrupt's creditors from proceeding in any other court.
The attempt to defeat the jurisdiction of the District Court is evident.
The necessity for prompt and forcible action by the Federal courts, in order to enforce the provisions of the National Bankruptcy Law, when one exists, even as against the state courts, is recognized by section 720 of the Revised Statutes, which provides:
"The writ of injunction shall not be granted by any court of the United States to stay proceedings in any court of a State, except in cases where such injunction may be authorized by any law relating to proceedings in bankruptcy."
Among the powers conferred upon the courts of bankruptcy by section 2 of the act of 1898, are — "to (15) make such orders, issue such process, and enter such judgments, in addition to those specifically provided for, as may be necessary for the enforcement of the provisions of this act." 30 Stat. 546.
The twelfth general order in bankruptcy provides: "3. Applications . . . for an injunction to stay proceedings of a court or officer of the United States, or of a State, shall be heard and decided by the judge."
And section 2, clause 3, of the act of July 1, 1898, authorizes courts of bankruptcy to "appoint receivers or the marshals, upon application of 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."
A forced conception of what constitutes "proper procedure" should not, therefore, be allowed to defeat the Federal jurisdiction.
V. It is not asserted that the rule of comity does not apply to bankruptcy cases. On the contrary, the importance of a due observance of that rule is fully recognized. But it is contended that the rule of comity has its limitations; that it is not so one-sided as to operate only on the Federal court, and that it ceases to apply when the state court becomes remiss in its duty.
Counsel urge that the proper course is to appeal to the highest court of the State, and thence, if necessary, to this court. In the meantime the property of the bankrupt might be dissipated or destroyed. It would be curious, indeed, if the administration of the National Bankruptcy Law could be thus defeated by a state court. What would then become of the supremacy of the Constitution and laws of the United States? How does this view agree with the "incontrovertible principle that the Government of the United States may, by means of physical force, exercised through its official agents, execute on every foot of American soil the powers and functions that belong to it?" Ex parte Siebold, 100 U.S. 395.
The doctrine of Peck v. Jenness, 7 How. 611, and Johnson v. Bishop, Woolworth, 324, is not so much a rule of comity as a rule of law, and applies only to cases in which the state court had full and complete jurisdiction, or where the jurisdiction of the state court is concurrent, such as suits to enforce valid preexisting liens, or suits by assignees in bankruptcy to recover property of a bankrupt in the hands of an adverse claimant.
VI. But the authority of receivers or marshals in bankruptcy is not to be measured by that of assignees under the act of 1867 or trustees under the present act.
The observation in Bardes v. Hawarden Bank, 178 U.S. 531, that courts of bankruptcy could hardly be considered as empowered by the provisions of the Bankruptcy Act to authorize receivers or marshals forcibly to seize property in the hands of adverse claimants, was stated to have been an inadvertence and therefore withdrawn in the subsequent case of Bryan v. Bernheimer, 181 U.S. 189, 197.
It seems plain that in Bryan v. Bernheimer, the court perceived that, since receivers or marshals were only to be appointed "in case it is necessary for the preservation of the property of the bankrupt," the right to authorize them to proceed summarily might in some cases be absolutely essential to the accomplishment of that purpose.
In White v. Schloerb, 178 U.S. 542, it was held that the District Court sitting in bankruptcy had authority, by summary proceedings, to compel the return of property taken from it on a writ of replevin from a state court, sued out after the jurisdiction of the District Court had attached. It is true that in Metcalf v. Barker, 187 U.S. 165, the court said that "this cautious utterance . . . sustains, as far as it goes, the converse of the proposition when presented by a different state of facts." In White v. Schloerb the District Court, at the time of the seizure of the property by the state court, not only had the possession of the property, but the right of possession as well. In the present case, at the time of the alleged seizure of the property by the District Court, the state court had absolutely no right of possession. In this respect it may indeed be said that this case is the converse of White v. Schloerb.
The distinction between cases where the state court has jurisdiction and where it has none, was pointed out in Clarke v. Larremore, 188 U.S. 486, decided February 23, 1903. In that case the right of the bankruptcy court to enjoin the officers of a state court and summarily take possession of property in their hands, when necessary to the enforcement of the exclusive jurisdiction in bankruptcy, is distinctly recognized.
The possession of the state court was in virtue of the title of this bankrupt. A mere refusal to surrender does not constitute an adverse holding. Mueller v. Nugent, 184 U.S. 1.
VII. The possession of the District Court being coupled with exclusive right, could not afterwards be disturbed, even by the court from which it was taken, unless it be that two wrongs make a right. In no case has it been held that a court which has been summarily dispossessed by another court having the exclusive right of possession, may retake what it has no further right to hold. It is futile to say that the "constructive possession" remains in the state court. Constructive possession is necessarily dependent on the right of possession, and at the time of the recaption, the right of possession, as well as the actual possession, was in the District Court.
In this matter writs of certiorari as well as of habeas corpus were issued, and the record returned to us includes the evidence below, which was duly preserved by bill of exceptions. The District Court held that a flagrant contempt of the court in bankruptcy was committed on the twentieth of February by the taking of the property of Zier Company out of the possession of its receiver, in whose hands, in the view of the court, it had been voluntarily placed; and that defendants Watts and Sachs were so connected with that transaction as to subject them to like condemnation.
The New Albany Trust Company was appointed receiver of the property of Zier Company under section 1245 of the Revised Statutes of Indiana, Thornton's Rev. Stat. of 1897, providing that this might be done, "when a corporation has been dissolved, or is insolvent, or is in imminent danger of insolvency, or has forfeited its corporate rights;" and it was directed to complete unfinished contracts but to make no new ones. The winding up of the business was contemplated and entered upon. Whether the transfers of $3100 and $9600 could have been overhauled in that suit we need not inquire, as they were undoubtedly acts of bankruptcy, and as such justified the application to the bankruptcy court. And the operation of the bankruptcy laws of the United States cannot be defeated by insolvent commercial corporations applying to be wound up under state statutes. The bankruptcy law is paramount, and the jurisdiction of the Federal courts in bankruptcy, when properly invoked, in the administration of the affairs of insolvent persons and corporations, is essentially exclusive. Necessarily when like proceedings in the state courts are determined by the commencement of proceedings in bankruptcy, care has to be taken to avoid collision in respect of property in possession of the state courts. Such cases are not cases of adverse possession, or of possession in enforcement of preexisting liens, or in aid of the bankruptcy proceedings. The general rule as between courts of concurrent jurisdiction is that property already in possession of the receiver of one court cannot rightfully be taken from him without the court's consent, by the receiver of another court appointed in a subsequent suit, but that rule can have only a qualified application where winding up proceedings are superseded by those in bankruptcy as to which the jurisdiction is not concurrent. Still it obtains as a rule of comity, and accordingly the receiver of the District Court brought his appointment to the knowledge of the Floyd Circuit Court and requested the delivery of the assets.
We think there can be no reasonable doubt that the judge of the Floyd Circuit Court and Messrs. Watts and Sachs entertained the conviction in good faith that the custody of the state court could not be lawfully interfered with by the bankruptcy court by summary proceedings. Their view was that the jurisdiction of the state court having attached, that court was, in all circumstances, entitled to exercise it until voluntarily surrendered. But if the state court had taken into consideration that Zier Company had committed acts of bankruptcy in the matter of preferential transfers; that the amendatory bankruptcy act of February 5, 1903, provided that acts of bankruptcy would exist if a person "being insolvent, applied for a receiver or trustee for his property or because of insolvency a receiver or trustee has been put in charge of his property under the laws of a State, of a Territory, or of the United States;" and that the intent of the bankruptcy law is to place the administration of affairs of insolvents exclusively under the jurisdiction of the bankruptcy courts, it appears to us that instead of continuing the application of the Federal receiver for three weeks, the court should have directed the surrender of the property to him at once, or at least after the report of its own receiver on returning from Indianapolis.
The state court, however, did not approve of the assurance given by its receiver at Indianapolis, and refused to allow the surrender of possession, so that the delivery to Connor by the Trust Company presently made was unauthorized by the court, whose receiver and officer the Trust Company was.
We are not now dealing with the right of the District Court to take possession in invitum, but with the voluntary delivery of property by the officer of a court, without the court's consent, and, therefore, unlawful. We say, "voluntary," for we decline to entertain the suggestion that the District Court intimidated the Trust Company and Watts, or that members of the bar can be intimidated in the discharge of their duty.
It is true that the state court had authorized the Trust Company and Mr. Watts to appear at Indianapolis and explain the situation, but in doing so it was attempted to limit the operation of the order to a special appearance in the bankruptcy court, while by the order continuing the Federal receiver's application it was attempted to make him a party to the proceedings in the state court and bound by them. Obviously the state court did not wish its receiver to be bound by going before the District Court, and did wish the receiver of the District Court to be bound by his appearance in the state court.
On the other hand the District Court made an order on February 17, which recited the presence of the Trust Company and of Watts, the voluntary offer of the Trust Company, with the approval of Watts, in open court, to surrender possession, and then directed Connor to present a certified copy of the order of February 11 to the Trust Company, and thereupon to take possession. Mr. Watts had no notice or knowledge of this order until February 23, and Sachs first saw it on that day, though he was informed of its existence February 22.
The situation February 19 was this: The Trust Company and Watts were under rules to show cause for disregard of the orders of the state court. One had done, and the other had advised the doing, that which the state court had not consented to, and it was after it had signified its disapproval that the District Court receiver obtained possession without such consent. The state court thereupon concluded that it was entitled to restore the status quo, and accordingly it entered the orders of February 20, under which Connor was dispossessed.
This was a reassertion of the jurisdiction which the state court insisted it was entitled to exercise, that it had not voluntarily parted with, or been lawfully deprived of.
The petitioners were sentenced to imprisonment for contempt because of their alleged participation in this action of the state court.
It is the action of the state court that was complained of, and the essence of the alleged contempt was that, assuming that action was taken pursuant to the advice of these attorneys, they were liable to condemnation for giving such advice. In the ordinary case of advice to clients, if an attorney acts in good faith and in the honest belief that his advice is well founded and in the just interests of his client, he cannot be held liable for error in judgment. The preservation of the independence of the bar is too vital to the due administration of justice to allow of the application of any other general rule.
But here we do not have the ordinary case of advice to clients, but the case of judicial action alleged to have been induced by the advice complained of. The theory of the condemnation is that of conspiracy between the state court and the attorneys to obstruct the administration of justice and to bring the authority of the United States court into contempt.
We are of opinion that such charges ought never to be indulged in, and that the ultimate consequences of attacks of such a character by the courts of one government on the courts of another are too serious to allow them to be made.
The state court was a court of original general jurisdiction. On the face of its record its jurisdiction had been properly invoked and been properly exercised and was not open to collateral attack. Assuming that the proceedings in bankruptcy superseded further proceedings in the state court, and that nothing remained for the latter but to direct the surrender of the assets and the winding up of the accounts, the District Court was of opinion that it might by summary proceedings take the assets out of the possession of the state court. But Connor's possession was not acquired in that way. The contention is that the property was given up voluntarily by the state court receiver and not in obedience to any order entered on summary proceedings to which that receiver was a party. And the difficulty is that the receiver had no power to make the surrender when it was made. It was the representative of the state court. The property in its hands was property in custodia legis, and it had only such authority as was given to it by the court, and could not exceed the limits prescribed by the court. Without doubt the receiver agreed to give up the property in its hands to the receiver of the court in bankruptcy on the supposition that the state court would assent to its doing so. But the state court took a different view, and therefore the possession of Connor was from its standpoint a wrongful possession.
In order to the adequate enforcement of the provisions of the bankruptcy law, it is necessary that the powers of courts in bankruptcy should be, as they are, most comprehensive.
Section 720 of the Revised Statutes provides: "The writ of injunction shall not be granted by any court of the United States to stay proceedings in any court of a State, except in cases where such injunction may be authorized by any law relating to proceedings in bankruptcy."
By section two of the bankruptcy act of 1898 the bankruptcy courts are empowered to "(3) appoint receivers or the marshals, upon application of 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;" . . . "(13) enforce obedience by bankrupts, officers, and other persons to all lawful orders, by fine or imprisonment or fine and imprisonment;" . . . "(15) make such orders, issue such process, and enter such judgments in addition to those specifically provided for as may be necessary for the enforcement of the provisions of this act."
The twelfth general order in bankruptcy provides: "3. Applications . . . for an injunction to stay proceedings of a court or officer of the United States or of a State shall be heard and decided by the judge."
But no writ of injunction as such was granted in this case. The order of February 11, for the appointment of a receiver, provided that the Trust Company should deliver up the property to the Federal receiver and should refrain from interfering with his possession and control of the same. That order was entered on the application of the Inland Steel Company, which had appeared in the state court at the creditors' meeting of January 24, and had interposed no objection to the order then entered for the completion of pending contracts and the running of the plant for that purpose. It was one of the contentions in support of the jurisdiction of the state court that the Inland Steel Company was thereby estopped from resorting to the bankruptcy court and obtaining the appointment of a receiver there. In Simonson v. Sinsheimer, 95 F. 948, it was held by the Circuit Court of Appeals for the Sixth Circuit, in a careful opinion by Taft, J., that a creditor might be estopped from filing a petition in involuntary bankruptcy, in the circumstances therein detailed, and In re Curtis, 91 F. 737, and 94 F. 630, in which a different conclusion was reached, was distinguished. We express no opinion on the matter, but it should be noted, in passing, as one of the elements of controversy entering into the views of counsel in the state court.
The completion of contracts by the state receiver and the procuring of materials therefor had been authorized at the creditors' meeting, in which the petitioning creditor participated, and the work had been entered upon, and it is possible that a state of facts might have existed which would involve the application of the doctrine of estoppel to some extent.
We do not understand it to be contended that the passage of the bankruptcy act in itself suspended the statute of Indiana in relation to the appointment of receivers, but only that when the proceedings for such appointment took the form, as they did here, of winding up the affairs of the insolvent corporation, the proceedings in bankruptcy displaced those in the state court and terminated the jurisdiction of the latter. But the acceptance of that view does not necessarily involve the concession that these attorneys were guilty of contempt of the District Court because of the action of the state court.
They could not be found guilty because they believed and declared their belief that the state court had jurisdiction and that the District Court had not. Granting that they were mistaken, it does not follow that their mistaken conviction constituted contempt. In point of fact the state court agreed with them, and would certainly not have entered orders of whose validity it entertained any reasonable doubt.
The distinction between the exclusive jurisdiction of the court in bankruptcy, proceeding, as it were in rem, to determine the status of a debtor and his assets, and the jurisdiction over property subjected to particular liens, and the like, exercised by courts of concurrent jurisdiction, was probably thought by them not to apply in the circumstances existing here, and advice based on that opinion could not in itself constitute contempt.
What evidence is there that these attorneys, or either of them, gave any advice or took any action in bad faith, not in the honest discharge of their duty as counsel, but with the deliberate intent to have the Federal court set at defiance and its orders treated with contempt?
When Mr. Watts returned from Indianapolis he had been disabused of his conviction that the District Court would modify its order of February 11, when fully informed of the actual situation of the suit in the state court, and the participation in the proceedings therein of the creditor on whose application that order had been granted, and he appears to have earnestly sought to bring about the delivery over of the property, the discharge of the Trust Company, and the withdrawal from the record of the petition and order of February 14.
But he realized, when about to appear before the state court, that his promise to endeavor to bring about the surrender of the property had been made under the pressure of expediency, and not by reason of change of judgment, and that he had placed himself in the embarrassing position of acting without leave and in disregard of the limitations of the order he had himself framed and procured to be entered. This led him to request Mr. Sachs to accompany him as his friend to New Albany, and assist in representing his situation in as favorable a light as possible to the state court. It is not disputed that Mr. Sachs visited New Albany solely in obedience to the dictates of friendship, and that he had no connection whatsoever with the litigation.
The result was, however, and it might well have been anticipated, that it appeared to the state court that its jurisdiction had been treated cavalierly by the attorney who had represented the original complainant, who had insisted that the court retained jurisdiction, and who could not deny that he was of the same opinion still. It was then, and on the twentieth, that Mr. Sachs, without the assent or connivance of Mr. Watts, unless suspicion be allowed to supply the want of proof, signed and verified a certain statement by the United States Tube Company, which represented that the Trust Company had "wrongfully, unlawfully and without leave of this court" turned over the possession to Connor, and prayed for its removal, and the appointment of a successor. This statement is recited in the order of that date entered by the judge of the state court, disallowing the application of the Trust Company to resign because of its action "without leave or permission," and stating that "the judge of this court, upon his own motion and because of the open contempt of said receiver for the orders, judgment and process of this court, does now order and direct that said receiver be and it is hereby removed from its trust." The Trust Company was ordered to account immediately for all the assets, and Kelso was appointed as receiver in succession by the judge "upon his own motion," and directed to demand possession of the property, and in case of refusal to report to the judge for further action in the premises. This was followed by the qualification of the new receiver, the demand on Connor, the report of his refusal, the issue of the writ to the sheriff, and its execution.
Mr. Sachs testified that on the 19th the judge of the Circuit Court insisted on retaining the property and in declining to approve of the promise Mr. Watts had made; that when it was known that the property had been delivered the judge still declined to discharge Mr. Watts; that on the forenoon of the 20th the judge announced that he had made up his mind to remove the Trust Company and appoint another receiver; that he, Sachs, expressed the opinion that if the judge did that the better procedure would be for the new receiver to interplead in the District Court, setting up all the facts from the beginning and obtaining a determination in that court; that the judge asked Kelso to bring the facts in respect of the delivery of the plant to the official knowledge of the court, when he would remove the Trust Company and appoint Kelso. That in the afternoon Kelso desired him to sign the statement bringing the facts to the court's notice, which he, Kelso, objected to doing, because he was to be appointed receiver, and Sachs signed it supposing the course to be followed would be an application to the District Court in the nature of an interpleader; that he did not know what became of the paper and did not know, until after the commencement of the pending proceedings, what order had been entered upon it; that he did not know that any proceedings were contemplated or in course of preparation or prepared with the view of retaking the property; and did not advise or assist in any such, or believe any such would be undertaken.
In seeking to extricate Mr. Watts from his anomalous position, Sachs found himself involved, by the attitude of the state court, in similar embarrassment, for the state court adhered to its views as to jurisdiction, and insisted that it had never voluntarily yielded the position it occupied, which afforded the basis for testing the question. It does not seem to have occurred to Sachs that the mere effort to get an issue which could be transmitted to the District Court for determination subject to petition for review or such other appellate remedy as the bankruptcy act provided, could be regarded as contempt of that court, and want of intention to commit contempt is entitled to great weight in such circumstances.
There is some conflict of evidence as to Sachs' participation by way of suggestion in the preparation of papers on the twentieth, or knowledge of the preparation of the final order and writ, but, without attempting to review the evidence and pass upon its weight, we find nothing in this conflict to justify the conclusion of an intention to contemn.
State courts are entitled to the assistance of the gentlemen of the bar in the maintenance of their dignity and jurisdiction, and the fearless discharge of their duty by the latter should not be shaken by liability to punishment for mere errors of judgment in rendering such assistance.
The presumption on the verified response and plea of Sachs, which was sustained by his testimony, was that he had not been in any way a party to the dispossession of Connor, and had not advised it or expected it; that he not only had not intended any contempt, but had committed none. And as the record of the state court showed that the orders were entered by the judge of that court "upon his own motion," that presumption could not be overthrown without collaterally impeaching the record, and that we think was inadmissible.
It has been already assumed that the bankruptcy proceedings operated to suspend the further administration of the insolvent's estate in the state court, but it remained for the state court to transfer the assets, settle the accounts of its receiver and close its connection with the matter. Errors, if any, committed in so doing could be rectified in due course and in the designated way.
We cannot but express our regret at the unfortunate collision between the two courts and the belief that the considerate observance of the rule of comity is adequate to avert such occurrences.
We are of opinion that there was no legal evidence to sustain these convictions for contempt, and the order in each case must be
I concur in that part of the opinion of the court which shows that there was no evidence whatever upon which to base a judgment for contempt against Watts and Sachs, or either of them. That view of the evidence is sufficient to dispose of the case without reference to any other question arising on the record. My concurrence in the judgment discharging the petitioners is solely on the ground just stated.