Opinion · Supreme Court of the United States
In Re Watts and Sachs
190 U.S. 1
- Type
- Opinion
- Court
- Supreme Court of the United States
- Jurisdiction
- Federal
- Date
- 1903-05-18
- Topic
- general
How later courts describe this case
- applying the doctrine and expressing "regret at the unfortunate collision between the two courts"
- “Preemption mandates Congress and the federal court system maintain exclusive jurisdiction of deciding who can and cannot be a bankrupt.”
- "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"
- “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.”
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UpLaw has not yet analyzed In Re Watts and Sachs. The absence of a flag is not a finding that it is good law.
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IN REWATTS AND SACHS,190 U.S. 1(1903)
23 S.Ct. 718
In reWATTS AND SACHS, PETITIONERS.
ORIGINAL.
HABEAS CORPUS AND CERTIORARI.
Nos. 15, 16.
Argued April 20, 1903.
Decided May 18, 1903.
M. ZIER COMPANY, a corporation located at New Albany.
Indiana, engaged in the boiler manufacturing business, was
Page 2
hopelessly insolvent on and prior to December 30, 1902, and some
thousands of dollars had been drawn from its treasury by the
manager of its affairs for the purpose of making certain
payments, of which $3100 had been paid to Ryerson Son, a
corporation of Chicago, Illinois, and a large creditor of the
Zier Company, previously to December 30, and $9600 was on that
day placed by M. Zier, the manager of the company, in the hands
of his attorney to be paid over to Zier's sister-in-law, who was
a stockholder and creditor of the Zier corporation. It was
arranged by Zier's attorney with the Chicago corporation on
December 29 that the latter should apply for the appointment of a
receiver of the Zier corporation, and that the New Albany Trust
Company should be appointed receiver, and this resulted in a
complaint filed by the Ryerson corporation, represented by W.W.
Watts, a member of the bar of Kentucky, in the Circuit Court of
Floyd County, Indiana, charging that the Zier Company was
insolvent and was dissipating its property and assets, and
praying for the appointment of a receiver, "and that the court
shall make such orders as shall be necessary and proper for the
preservation of said property, for the continuance of said
business for the purpose of completing unfinished contracts,"
etc., to which defendant voluntarily appeared and consented to
the appointment of the New Albany Trust Company as receiver. The
appointment was accordingly made, and the Trust Company
immediately qualified and proceeded to administer the estate and
wind up its affairs.
On January 16, the Trust Company, as receiver, filed its
report and petition, giving an inventory and appraisement of the
assets of Zier Co., the receipts and expenditures of the
receiver to that date, the particulars in respect of outstanding
contracts; raising the question as to the further operation of
the plant, and advising an order for a meeting of the creditors
to consider that subject; requiring creditors to prove their
claims, and enjoining them from the prosecution of suits except
by intervention. A list of the creditors was attached, which
included the Inland Steel Company, John C. Thurston, and the Dey
Time Register Company.
The court entered an order directing such meeting to be
Page 3
held January 24, and notice by mail to be given, which was done,
and the meeting was held on that day, a large number of creditors
being represented, including the Inland Steel Company. An order
was thereupon entered for payment of rent, the completion of
unfinished contracts, for the continuance of the operation of the
plant to a specified extent, for the issue of certificates of
indebtedness to a small amount, but that no new contracts should
be made. It was further ordered that creditors be notified by
mail and by publication to file their claims on or before May 11,
and "that all creditors and other persons be and they are hereby
enjoined and restrained from prosecuting any claim or suit
against this estate except by intervention in this cause or by
first obtaining leave of this court."
February 6, 1903, the Inland Steel Company, John C. Thurston,
and John Dey, doing business as Dey Time Register Company,
creditors of the Zier corporation to the amounts of $935, $15,
and $100, respectively, filed their petition in bankruptcy in the
United States District Court for the District of Indiana against
that corporation to have it declared a bankrupt. The petition
alleged that the company was hopelessly insolvent and had
committed, within four months next preceding the filing of the
petition, acts of bankruptcy, which were specified. It was
further alleged that it was necessary, for the preservation of
the estate of Zier Company and for the benefit of its creditors
alike, that a receiver in bankruptcy be appointed at once to take
charge of the affairs of said company. On February 11 a further
petition was filed by the Inland Steel Company, and, on the same
day, a supplemental petition, in which the appointment by the
Circuit Court of Floyd County of a receiver and his being put in
charge of the insolvent's property, were set up as additional
acts of bankruptcy.
The District Court thereupon appointed Frederick D. Connor as
receiver, and directed that he should take into his possession
the plant of Zier Company and all its other property, and
further ordered that the New Albany Trust Company should deliver
up to the receiver all the property of Zier Company and refrain
from in any way interfering with him. The receiver
Page 4
immediately qualified by giving bond as required by the court.
February 13, 1903, and before the receiver of the District
Court had made demand for the property, on learning of Mr.
Connor's appointment as receiver, Mr. Watts, after consulting
with the local attorneys of Zier Company, communicated with the
District Judge and requested that the Federal receiver should not
proceed until he, Mr. Watts, could procure an order from the
Floyd Circuit Court permitting him to do so, and could come to
Indianapolis, and present to the District Judge reasons why the
receiver should not have been appointed by that court, and why
his order to that effect should be vacated. The District Judge
immediately caused the court's receiver and the attorneys
interested in the case to be notified to take no further steps
until a hearing could be had on the questions suggested by Mr.
Watts, on February 16, at Indianapolis. No further action was
taken by the receiver of the District Court, but he presented to
the Floyd Circuit Court a petition setting forth his appointment
and qualification, together with a certified copy of the order
appointing him, on the morning of Saturday, February 14, and
asked the delivery to him of the property and effects of Zier
Company and the discharge of the Trust Company as receiver. The
Floyd Circuit Court entered an order reciting that Connor, as
receiver, came by his attorney, "and by leave and order of the
court, and upon his own motion, makes himself a party to this
proceeding, and thereupon by leave of the court files his
verified petition showing his appointment as receiver of said M.
Zier Co. by order of the United States District Court for the
District of Indiana," and praying for the surrender of the
property, "and the matter of said petition is now continued until
the next term of this court." Saturday, February 14, was the last
day of the term, and the next term of the court commenced on the
ninth day of March.
On the same day, February 14, the Trust Company, by Watts, its
attorney, filed its petition, framed by him, which alleged that
the Trust Company was carrying out as receiver the terms of the
order of January 24; that that order had
Page 5
been entered without objection from the Inland Steel Company,
John C. Thurston or the Dey Register Company, or any creditor;
that the three last-mentioned creditors had filed a petition in
involuntary bankruptcy against M. Zier Company, February 6,
1903; that supplemental petitions were filed February 11, 1903,
but that the petitions, although setting up the receivership in
the state court, had not shown to the United States District
Court the participation of the Inland Steel Company in the
proceedings of January 24, its appearance, and the restraining
order and injunction; that thereupon the order had been obtained
in the bankruptcy proceedings appointing Connor receiver, and
directing him to take charge of the estate of M. Zier Company
in bankruptcy, and directing the receiver of the state court to
deliver up the property. The petition further averred that the
creditors whose appearance was noted in the state court on
January 24 had claims aggregating $53,279.51; that creditors with
claims aggregating $11,622.49 had filed claims with the state
court receiver, making a total of $64,902 in amount, so filed or
appearing, out of a total liability of $76,463.36; that the total
number of creditors was seventy-six; that thirty-seven appeared
to the action, and twenty-five, including the Dey Time Register
Company, had filed their claims with the state court receiver,
making a total of sixty-two creditors who had appeared or filed
their claims.
That, with a view to the due observance of the comity existing
between the state and the Federal courts, and of avoiding a clash
of jurisdiction, petitioner had communicated through its
attorneys with the United States District Judge and requested the
non-enforcement of his order until after the matters in question
had been presented to the state court, with the request that that
court direct it and its attorneys to lay said matters before the
judge of the District Court, whereupon the District Judge
requested counsel to notify the attorneys of the creditors
petitioning in bankruptcy that the matter would be heard on
Monday, February 16, in Indianapolis, and that in the meantime
the order appointing Connor was not to be enforced.
The petition further alleged that the court was about to
adjourn
Page 6
over to the first day of its next term, March 9; that the order
of January 24, directed petitioner as receiver to go on and
complete various contracts; that it had entered upon the work;
that the operation of the plant was for the beneficial purposes
of the estate; and that the stoppage of the plant would involve
loss to the creditors and many complicated questions of damage;
that it would work great hardship to leave the estate with the
court adjourned and without instructions as to what to do; and
that the petitioner was this court's officer, and must be ordered
and directed by this court only, with respect to the property in
its hands.
Petitioner averred that the injunction and restraining order
of the state court had been knowingly violated by the Inland
Steel Company and the Dey Time Register Company; that these two
creditors and all other creditors were estopped from prosecuting
the petition in bankruptcy, and from seeking to take from
petitioner the assets in its hands as receiver; and that all the
creditors were enjoined from prosecuting any attempt to take from
the receiver any of the assets in its hands except by leave. And,
further, that the record in the District Court of the United
States for the District of Indiana did not disclose all the facts
regarding the matters herein; that that court had no information
as to the restraining orders and estoppels, by entry of
appearance, participation, and otherwise. That the assets of the
Zier Company werein custodia legis;that the parties had
submitted themselves to this forum; that the court came into
lawful custody of the property, and the orders and proceedings
were entered and had before the institution of the bankruptcy
proceedings, and the attempt to oust this court and receiver
therefrom. Petitioner, therefore, asserted its belief that the
District Court, under the peculiar circumstances of the case,
would coincide with the state court, if it should deem wise to
enter orders specifically restraining the Inland Steel Company,
John L. Thurston and the Dey Time Register Company and their
attorneys; Connor; and the United States marshal from further
prosecuting any matters in relation to the estate or of the
taking of the assets in any manner, except by intervention in
this action.
Page 7
Petitioner prayed for instructions; that it should present the
facts to the District Court of the United States, either by
limited or general appearance in the bankruptcy proceedings, and
ask such relief, if any, as this court might direct; and that an
injunction be granted.
An order was then entered, prepared by Mr. Watts, embodying
matters set up in the petition, granting an injunction, ordering
the operation of the plant to continue, and directing the
receiver, through its attorneys, to proceed to Indianapolis and
there by a limited appearance to lay before the District Court
the facts with regard to the matters herein, and to suggest to
that court the orders of this court, and its belief that with
full information of the facts the order of that court would at
most have been a direction for application to be made to this
court for the delivery of the assets to the receiver or trustee
of the District Court. It was further ordered that the Inland
Steel Company, John L. Thurston, and the Dey Time Register
Company show cause why they should not be punished for contempt
in disobeying the orders of this court by taking action without
obtaining leave.
On Monday, February 16, Mr. Watts, with the vice president of
the New Albany Trust Company, receiver, appeared in the District
Court at Indianapolis, and the proceedings in the state court,
including the petition and order of February 14, were laid before
that court, and hearing was had that day and on February 17. At
the conclusion of the argument the District Judge announced his
ruling that the court in bankruptcy had supreme and exclusive
jurisdiction in the matter; and asked Mr. Watts and the
representative of the Trust Company if it were not better to
avoid the clash of jurisdiction by voluntarily turning the
property over to the Federal receiver, indicating at the same
time that otherwise it would be his duty to exert the power of
the court in vindication of its jurisdiction, Mr. Watts and his
colleague thereupon announced that the property would be turned
over to the Federal receiver. Mr. Watts at the same time stated
to the court that he would do all in his power to see that the
proceedings in the state court of February 14 were
Page 8
stricken out, and that he would endeavor to have the state court
make an order directing the surrender of the property.
The District Court, on February 17, made the following order:
"This cause coming on now to be heard upon the petition of
Frederick D. Connor, filed herein on the 16th day of February,
A.D. 1903, for the instruction of the court concerning the
property and assets of said M. Zier Company, which are now in
the possession of the New Albany Trust Company, as receiver of
the Floyd Circuit Court, in a suit therein pending against said
M. Zier Company, because of their insolvency; and the
petitioning creditors in this cause and said Connor, receiver as
aforesaid, being now present and represented by George H. Hester
and William Wilhartz, their solicitors, and said New Albany Trust
Company, receiver as aforesaid, being now present and represented
by Henry E. Jewett, its vice president, and by William W. Watts,
its solicitor, and after argument by counsel, the said New Albany
Trust Company, as receiver of the Floyd Circuit Court, by its
said vice president, having voluntarily offered and agreed, by
and with the consent and approval of said William W. Watts, its
solicitor, in open court, to surrender full and immediate
possession and control of the property and assets of said M. Zier
Company, in its possession or under its control, as receiver of
the Floyd Circuit Court, to said Connor, as receiver of this
court, upon the presentation by him to said New Albany Trust
Company of a certified copy of the order for his appointment as
such receiver heretofore made by this court. It is now hereby
ordered by the court that said Connor, receiver as aforesaid,
forth with present a certified copy of the order for his
appointment as such receiver to the said New Albany Trust
Company, and immediately thereupon take full possession and
control of the property and assets of said M. Zier Company that
are now in the possession or under the control of said New Albany
Trust Company, as receiver of the Floyd Circuit Court."
On February 19 the Trust Company by its vice president filed a
report in the Floyd Circuit Court, in which it stated that, in
pursuance of the order of the court, it had appeared before the
Page 9
District Judge in Indianapolis on Monday, February 16, and, upon
the hearing in that court, the receiver had stated that it was
ready and willing to deliver to the receiver appointed by the
Federal court all the property and assets of Zier Company in
its hands; that it had not yet been able to make up its accounts
as receiver, but was preparing the same to submit to the court,
and was willing to turn over all the property to the Federal
receiver; and prayed leave from the court to do so. The company
further asked that upon the presentation and approval of its
accounts as receiver, its resignation be accepted, and that it be
fully and finally discharged.
On the same day Connor demanded of the Trust Company the
property of Zier Company in its possession, to which that
company at once replied that it had that morning filed before the
judge of the Floyd Circuit Court, in chambers, a report, a copy
of which was attached; that the judge had stated orally that he
wished the property held until the accounts of the Trust Company
as receiver were rendered and passed on; that the company thought
this might be done the next day, and desired, if Connor was
willing, to defer action until then, because it would "relieve us
of embarrassment in the premises. On the other hand, if you
insist on immediate surrender of the property to you, we are
bound to say that we believe that to carry out in good faith the
understanding with the Honorable Judge of the United States Court
of Indianapolis and our vice president, H.E. Jewett, we ought to
surrender the property to you at once." Connor declined to grant
further time, and the Trust Company turned over to him the plant
of Zier Company, which constituted all the property of that
company except certain books and cash. Connor immediately took
possession of the property and put watchmen in charge to hold the
same for him.
On February 20 the United States Tube Company presented to the
Floyd Circuit Court, "in vacation, at chambers," a petition
signed and verified by D.A. Sachs, in which it was set forth that
the Trust Company, as receiver, had wrongfully turned over and
surrendered the possession of the boiler plant of Zier Company
to Connor, the receiver in bankruptcy, and was
Page 10
threatening to turn over to Connor all the other assets of Zier
Company in its hands. Petitioner therefore prayed that the Trust
Company be cited to appear before the court, in chambers, on the
afternoon of that day, and show cause why it should not be
punished for contempt, and that if the court found that the Trust
Company had violated its orders as represented that it be removed
from its office as such receiver and a successor be appointed;
and that the Trust Company be required to account immediately and
turn over to its successor the property of Zier Company. On
this petition the judge of the Floyd Circuit Court on the same
day entered an order removing the Trust Company from the
receivership and directing it to account for the assets of Zier
Company. The order further provided for the appointment of
Charles D. Kelso as receiver and directed him, on qualification,
to demand of the Trust Company and Connor the immediate
possession of the property of Zier Company which came into the
hands of the Trust Company as receiver, and should Connor fail or
refuse to surrender the possession of the assets, that he at once
report to the judge for further instructions.
Kelso, having qualified, on the same day reported to the judge
at chambers that he had demanded of the Trust Company the
possession of the assets of Zier Company, and that the Trust
Company had refused to surrender the possession for the reason
that it had turned over the possession of the plant to Connor,
and that as to the other assets it intended to account forth with
to the judge of the Floyd Circuit Court; and that he then
demanded the property of Connor, who refused to surrender the
same. The state court then entered an order that a writ be
issued, directed to the sheriff of the county, requiring him
immediately to seize and deliver to Kelso all the property which
Connor had in his possession, and forthwith to make a return to
the court.
February 21, Connor filed a petition in the District Court, in
which, after setting forth the facts as to the delivery of the
possession of the plant of Zier Company to him, February 19, he
stated that he retained possession of the same until February 20,
when possession was demanded of him by Kelso, as
Page 11
receiver appointed by the Floyd Circuit Court, which demand he
refused; that he was served with a certified copy of the order of
the Floyd Circuit Court, and with a writ issued by that court
February 20, to the sheriff, requiring him forthwith to take
possession of the plant and the assets; and that the sheriff
forcibly took possession thereof, and delivered the same over to
Kelso, who was then in possession.
The petition of Connor further stated:
"That this petitioner believes the above-stated proceedings
were procured to be had by William W. Watts, Esq., of Louisville,
Ky., who during the continuation of the New Albany Trust Company,
as receiver of M. Zier Company, represented said Trust Company
as such; that said Charles D. Kelso is now represented by one
D.A. Sachs, Esq., of Louisville, Ky., an attorney-at-law, and
that the petitioner believes that said Sachs also assisted in
procuring the orders of the said Floyd Circuit Court above set
out, and the petitioner further says that he verily believes the
forcible removal of said property from his possession and control
as receiver appointed by this court as aforesaid, was brought
about by the joint action and efforts of said Charles D. Kelso,
as receiver, and Charles D. Kelso, individually, and William W.
Watts, as attorney for said New Albany Trust Company, and D.A.
Sachs, attorney for said Charles D. Kelso, receiver."
The petitioner further prayed that Kelso, as receiver and
individually; the sheriff, the deputy sheriff, and the custodian
of the plant; and William W. Watts, as attorney for the Trust
Company, and D.A. Sachs, as attorney for Kelso, be required and
directed to redeliver the property to petitioner, and be cited to
appear and show cause why they should not be punished for
contempt.
On this petition the District Court, February 21, made an
order requiring the parties therein named to appear before it at
Indianapolis on February 25 to show cause why they should not
redeliver the property, and restraining them from in any way
interfering therewith; and further ordering that the parties show
cause why they should not be punished for contempt. On the same
day, the United States District Attorney
Page 12
for the District of Indiana filed informations in the District
Court against Kelso, Watts, Sachs, and others, for contempt of
the District Court in disobeying and disregarding its orders.
Watts and Sachs filed separate answers and pleas to the rule to
show cause and to the information against them, which were
traversed by the United States District Attorney.
William W. Watts, by way of response to the rule, and plea to
the information, pleaded that he was not guilty of the alleged
contempts stated in the rule and information, or either of them.
He denied that he had committed or advised any act of contempt of
the orders of the District Court, or that he had in any way,
directly or indirectly, or by aiding or advising, forcibly, or in
any other way, taken from the receiver in the bankruptcy
proceedings the property of Zier Company, or any part of it, or
in any way, by aiding, abetting or advising, had withheld the
custody of said property or any part of it. But he said that the
orders of the District Court directing its receiver to take the
property of Zier Company into its custody were void because of
want of jurisdiction, and that the possession of the property by
Connor, receiver, was wrongfully and unlawfully obtained, and the
retaking under the orders and writ of the Floyd Circuit Court was
a lawful and proper taking.
He then set up the various proceedings hereinbefore
enumerated, and the part he took therein; adding: "All this was
done solely for the purpose of preventing any possible conflict
between the two jurisdictions, and it was believed by this
defendant and respondent, and by the said New Albany Trust
Company, and by the judge of the Floyd Circuit Court, that upon
such presentation, the United States District Court would rescind
its said order appointing said Frederick D. Connor, as receiver,
and directing him to take possession of said property of M. Zier
Company." Under this authorization he and the Trust Company
appeared at Indianapolis on Monday, February 16, and exhibited to
the District Court the order of the Floyd Circuit Court
authorizing them to appear, and make a full statement of the
situation in the state court, after which and extended argument,
the District Judge refused in any way to reconsider, modify or
set aside his order, and demanded of
Page 13
the representative of the Trust Company whether or not it would
turn over the property, and of defendant and respondent whether
or not he, as counsel for the Trust Company, would advise it to
turn the property over, to Connor, as receiver. "Under these
circumstances and not otherwise, and believing that the said
demand of said judge of the said United States District Court was
peremptory, this defendant and respondent, as counsel for the
said New Albany Trust Company, stated that he would advise the
said New Albany Trust Company to turn over the said property to
the said Frederick D. Connor, receiver." On February 17,
defendant and the vice president of the Trust Company left
Indianapolis, and defendant supposed that it was not necessary
for any order respecting the hearing in the District Court
February 16 and 17 to be entered, and that no order would be
entered. But an order was entered, a fact which he learned
several days thereafter.
Defendant, further answering, alleged that on February 19
defendant and the Trust Company, receiver, appeared before the
judge of the Floyd Circuit Court, in chambers, and defendant, as
attorney for the Trust Company, then filed before the judge of
that court a written petition and motion, setting forth what had
passed at Indianapolis, in view of which he moved to strike out
and expunge from the files the petition and order of February 14,
1903. This was particularly desired, because the District Judge
seemed to regard the petition and order as offensive. That
defendant was in every way in good faith endeavoring to carry out
the understanding at Indianapolis, and advised, and at no time
gave any contrary advice, the Trust Company to turn over to
Connor, receiver, all the property of the Zier Company. The
response and plea further averred that Watts was much embarrassed
by the condition of affairs and felt that the judge of the Floyd
Circuit Court might misconstrue his actions in the premises, and
before going to New Albany on February 19, 1903, requested his
friend, D.A. Sachs, a lawyer residing in Louisville, Kentucky, to
accompany him for the purpose of explaining his action to the
judge of the Floyd Circuit Court, and this Sachs accordingly did.
But the judge of that court was not satisfied, and entered a rule on
Page 14
Watts to show cause "why he should not be punished for contempt."
On the same day the Trust Company filed its separate petition,
praying for leave to turn over the property, and for its
discharge in the premises on the approval of its accounts. But
the judge cited it also to show cause.
The pleading further set forth the communication of the Trust
Company to Connor, receiver, and the delivery of the property to
him; and that on February 20 defendant appeared before the judge
of the Floyd Circuit Court in obedience to his request. On that
day an order was entered removing the Trust Company as receiver,
and appointing Charles D. Kelso as receiver in its stead, and
authorizing him to demand of Connor the property of Zier
Company. Before that order was entered the Trust Company had, in
fact, under the advice of Watts, turned over the property to
Connor, and the response and plea asserted that defendant did not
advise, aid, connive at, or abet the entry of said order, and had
nothing whatsoever to do with it.
The response and plea further set forth the report of Kelso,
and the entry of an order directing the issue of a summary writ
to the sheriff of Floyd County, and stated: "This defendant and
respondent did not procure the entry of said order or connive at
its entry or advise its entry, and did not know of its entry
until after it had been entered. He had no connection whatever
with it."
Defendant and respondent reiterated that all of his acts and
doings and advice after his appearance at Indianapolis were with
the single purpose of having the Trust Company turn over all the
property and effects to the receiver of the District Court, and
that he did nothing and said nothing and advised nothing which
would in any way delay the execution of that purpose; that he did
nothing and said nothing with reference to the removal of the
Trust Company or the removal of Kelso, and in no way did he
advise anything looking to the retaking of said property from the
hands of said Connor, receiver, and with all these matters he had
nothing to do. Transcripts of the records were attached as
exhibits.
Page 15
By his separate response and plea, D.A. Sachs denied the
commission of any act, or the advising or consenting to the
commission of any act, in disobedience of any order of the court
in the bankruptcy case, or that he had aided, abetted or advised
the taking from the receiver the property of Zier Company, or
in any way disobeyed or disregarded, or aided or abetted the
disregarding of, the orders or decrees of the District Court, or
been guilty of any contempt in the case. He said that he first
heard of the proceedings on February 18 from Mr. Watts, and
appeared before the state judge and attempted to explain the
matter simply as his friend. He at no time advised disobedience
or disregard of the orders of the District Court or the taking of
the property from Connor, but on the contrary advised against
that course; and "that all he did in this matter was without fee
or any consideration whatever except through friendship to said
Watts." He then believed and is still of the opinion that the
receiver of the Floyd Circuit Court had the rightful possession
of the property, and that the District Court did not have the
right or authority to interfere therewith in the summary way
pursued herein. The response then set forth the various
proceedings in both courts, and respondent asserted that on
Monday, February 23, 1903, he learned for the first time of the
making of the order in the District Court dated February 17. He
denied that he had anything to do with the proceedings other than
the action he took with a view of extricating Mr. Watts from the
complications, and "with a view of avoiding any action that might
be justly construed as a violation of the orders of either
court." He denied knowledge of a petition or order for the
property to be seized, and had nothing whatever to do in any way
with the procuring or execution of such an order or with the
forcible taking of the property or any part thereof from the
receiver.
The responses and pleas having been traversed, evidence,
documentary and oral, was adduced at considerable length, and on
March 14, 1903, the District Court found Watts and Sachs each
guilty of contempt as charged in the information and rules, and
sentenced each of them to confinement in the jail of Marion
County for sixty days and to pay costs.
Page 16
In the meantime the property had been restored to Connor,
receiver, the $9600 had been paid over to him, and Zier Company
had been adjudicated bankrupt.
Petitions by Watts and Sachs for writs ofhabeas corpusand
of certiorari, setting forth the foregoing matters and things,
were thereupon presented to this court, leave given to file them,
and the writs thereupon issued, and it was directed that each of
the petitioners be admitted to bail on his personal recognizance
in the sum of $500, to be entered into before the judge of the
United States court for the District of Indiana.
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 ofhabeas corpus, discharge the person so imprisoned.Ex parte Lange, 18 Wall. 163;Exparte Rowland,104 U.S. 604;Ex parte Fisk,113 U.S. 713;Inre Ayres,123 U.S. 443;In re Lane,135 U.S. 443;In reTyler,149 U.S. 164;In re Bonner,151 U.S. 242;In reMcKenzie,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.Peckv.Jenness, 7 How. 611;Taylorv.Carryl, 20 How. 583;Marshallv.Knox, 16 Wall. 551;Doev.Childress, 21 Wall. 643;Covellv.Heyman,111 U.S. 182;Shieldsv.Coleman,157 U.S. 168;Johnson, Assignee, v.Bishop, Sheriff, Woolworth, 324;Metcalfv.Barker,187 U.S. 165;Pickensv.Roy,187 U.S. 177;Louisville TrustCo. v.Comingor,184 U.S. 18;Bardesv.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 inPage 17wrongful possession, and the court may issue an appropriate writ to restore the possession of the property to a custodian of the court.Davisv.Gray, 16 Wall. 217;Shieldsv.Coleman,157 U.S. 168;Whitev.Schloerb,178 U.S. 542;Metcalfv.Barker,187 U.S. 165.Mr. W.H.H. Miller, with whomMr. W.M. Smithwas 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 Bankv.U.S. Encaustic,etc.,105 Ind. 227;Pressleyv.Lamb,105 Ind. 171. The fact of actual possession is undisputed.
This proceeding in the state court is not subject to collateral attack.Phelpsv.Mutual Reserve, etc., 112 F. 453;Weissv.Guerineau,109 Ind. 438;Hollingerv.Reeme,138 Ind. 363.
The suit in the state court was not under an "insolvency law."Mayerv.Hellman,91 U.S. 496;Carlingv.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.SandfordFork, etc., v.Howe,157 U.S. 312,317;McCormickv.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.Peckv.Jenness, 7 How. 612 (Bankrupt Act, 1841);Eysterv.Gaff,91 U.S. 521(Bankrupt Act, 1867);Metcalfv.Barker,187 U.S. 165(Bankrupt Act, 1898);Carlingv.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.Moranv.Sturges,154 U.S. 256;The Oliver Jordan, 2 Curtis, 414;Taylorv.Page 18Carryl, 20 How. 583;The E.L. Cain, 45 F. 367;TheJames Roy, 59 F. 784;Carlingv.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,Templev.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;Johnsonv.Bishop, 1 Wool. 324;Bradleyv.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;Smithv.Belford, 106 F. 658;Louisville Trust Co. v.Comingor,184 U.S. 18.
For discussion of rule of comity,Covellv.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.bandc.
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.Peckv.Jenness, 7 How. 612, 625;Johnsonv.Bishop, 1 Wool. 324;Doev.Childress, 21 Wall. 643;Scottv.Kelly, 22 Wall. 57;Maysv.Fritton, 20 Wall. 414;Davisv.Friedlander,104 U.S. 570;Winchesterv.Heiskell,119 U.S. 450;Adamsv.Crittenden,133 U.S. 296;Ludelingv.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.Shieldsv.Coleman,157 U.S. 168;Whitev.Schloerb,178 U.S. 542;Metcalfv.Barker,187 U.S. 165;ThePage 19E.L. Cain, 45 F. 367-370;The James Roy, 59 F. 784;Moranv.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 Hongv.United States,112 U.S. 536,559; Endlich on Statutes, 276;McEwanv.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 whomMr.William Wilhartzwas 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;Tuav.Carriere,117 U.S. 201-209;In reBruss-Ritter Co., 90 F. 651;Leav.George M. WestCo., 91 F. 237;In re Rouse, Hazard Co., 91 F. 96;Lothropv.Highland Foundry Co.,128 Mass. 120;Parmenter Mfg. Co. v.Hamilton,172 Mass. 178;Harbaughv.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 MerchantsInsurance Co., 6 N.B.R. 43;In re Smith, 92 F. 135;Harbaughv.Costello,184 Ill. 110;Watsonv.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.Inre John A. Etheridge Furniture Co., 92 F. 329;Page 20Whitev.Schloerb,178 U.S. 542;Bryanv.Bernheimer,181 U.S. 188;Muellerv.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;Clarkev.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-RitterCo., 90 F. 651;Plattv.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:Peckv.Jenness, 7 How. 625;Louisville Trust Co. v.Comingor,184 U.S. 18;Metcalfv.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 wascoram non judice.
If a receiver is appointed by a Federal court and actuallyPage 21takes 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;Moranv.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.Moranv.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;Moranv.Sturges,154 U.S. 256;Freemanv.Howe, 24 How. 450, 459.Mr. Solicitor General Hoytfor 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 DistrictPage 22Court 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 reLitchfield, 13 F. 186;Ex parte Davis, 112 F. 139;Royal Trust Co. v.Washburn, etc., Ry. Co., 113 F. 531. See particularlyAndersonv.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 LadyBryan Mining Co., 6 N.B.R. 252;Watsonv.Citizens' SavingsBank, 11 N.B.R. 161;In re Gutwillig, 90 F. 475;In reBruss-Ritter Co., 90 F. 651;In re Rouse Co., 91 F. 96;Leav.George M. West Co., 91 F. 237;In reSmith, 92 F. 135;In re Etheridge Furniture Co., 92 F. 329;In re Richard, 94 F. 633;In re LengertWagon Co., 110 F. 927;In re Storck Lumber Co., 114 F. 360;Parmenter Mfg. Co. v.Hamilton,172 Mass. 178;Harbaughv.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 franklyPage 23state 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 aPage 24court 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 ofPeckv.Jenness, 7 How. 611, andJohnsonv.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 bankruptcyPage 25is not to be measured by that of assignees under the act of 1867 or trustees under the present act.
The observation inBardesv.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 ofBryanv.Bernheimer,181 U.S. 189,197.
It seems plain that inBryanv.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.
InWhitev.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 inMetcalfv.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." InWhitev.Schloerbthe 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 ofWhitev.Schloerb.
The distinction between cases where the state court has jurisdiction and where it has none, was pointed out inClarkev.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 titlePage 26of this bankrupt. A mere refusal to surrender does not constitute an adverse holding.Muellerv.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.
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 thePage 27application 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 UnitedPage 28States;" 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 possessionin 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.Page 29
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 thestatus 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 collateralPage 30attack. 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 propertyin 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,Page 31issue 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. InSimonsonv.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, andIn 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 IndianaPage 32in 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 werein rem, to determine thestatusof 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,Page 33that 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 demandPage 34on 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 asPage 35contempt 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 bePetitioner discharged.Page 36