
    BEAN et al. v. AMERICAN TRUST & SAVINGS BANK et al.
    (No. 1789.)
    (Court of Civil Appeals of Texas. El Paso.
    April 9, 1925.)
    1. Bankruptcy &wkey;2ll — Court of bankruptcy and state courts have concurrent jurisdiction over proceedings of mortgage creditor to enforce iien.
    Court of bankruptcy and state 'courts have concurrent' jurisdiction over proceedings of mortgage creditor to enforce lien.
    2. Bankruptcy &wkey;>2l I —Jurisdiction of state court over pending foreclosure suit not ousted by subsequent adjudication of bankruptcy.
    Jurisdiction of State court over pending suit to foreclose valid mortgage given more than four months prior to filing of petition in bankruptcy is not ousted by subsequent adjudication of mortgagor in bankruptcy, especially where property is in actual possession of state court or its receiver, under rule of comity that court first acquiring complete jurisdiction will be allowed to continue to exercise it.
    3. Bankruptcy &wkey;>2l7(l)-‘-Court of bankruptcy may enjoin, prosecution of foreclosure suit where necessary.
    Court of bankruptcy may enjoin prosecution of foreclosure suit pending at time of petition, where necessary for proper exercise of its. own jurisdiction, which in such case is paramount and exclusive.
    4. Bankruptcy &wkey;>2l7(l) — Only effective remedy of party aggrieved by'assertion of jurisdiction by bankruptcy court is appeal to higher federal courts.
    Only effective remedy of party aggrieved by assertion by bankruptcy court of its paramount right to assume exclusive jurisdiction, by enjoining foreclosure suit in state court, is appeal to higher federal courts, .and counter injunction in state court is ineffective.
    5. Bankruptcy <&wkey;2ll — State court will yield jurisdiction over property of bankrupt to bankruptcy court.'
    Where foreclosure proceedings were begun in state court before bankruptcy, but bankruptcy court by -orders entered by three different judges asserted paramount right to administer property in controversy, from which no appeal was prosecuted, state court would yield its jurisdiction to avoid unseemly conflict and preserve the spirit of comity.
    <g^For other eases see same topic and KEY-NUMBER in ail Key-Numbered Digests and Indexes
    Appeal from District Court, Culberson County; W. D. Howe, Judge.
    Suit by the American Trust & Savings Bank and.others against James E. Bean, trustee, and others. From denial of motion to dissolve injunction granted to plaintiffs, defendants appeal.
    Reversed and rendered.'
    Isaacks & Lattner, of El Paso, for appellants.
    Croom, Goldstein & Croom, of El Paso, for appellees.
   HIGGINS, J.

The material facts disclosed by the record are as follows: On November 8, 1922, D. Taylor (D. Taylor and Stephen Alexander Douglas Taylor being the same person) executed a chattel mortgage in favor of El Paso Cattle Loan Company covering certain cattle and the increase thereof. On September 19, 1923, the loan company filed suit in the district c.ourt of Culberson county, Tex., against Taylor upon the indebtedness secured by such mortgage and to foreclose the mortgage lien. On October 2, 1923, an agreed judgment was entered in said cause in favor of the loan company against Taylor for the sum of $76,399.80 with foreclosure of the mortgage lien upon certain cattle. Contemporaneously with the rendition of the judgment, a written agreement was entered into between Taylor and the loan company which provided for a stay of execution and contained this provision;

“Until said debt and judgment is entirely liquidated the same shall stand secured by said Chattel mortgage lien, deed of trust lien and judgment lien as therein provided, except as to.the parcels of property sold under this contract and the proceeds derived therefrom applied thereon.”

Said judgment and agreement was before this court in the case of Taylor v. American Trust & Savings Bank of El Paso, 265 S. W. 727.

On September 29, 1924, an order of sale issued upon such judgment which was levied upon certain calves which had come since the rendition of the judgment, being the offspring of the cattle upon which the decree of foreclosure had been rendered. In the case cited above, the sheriff was restrained from selling such calves upon the ground that their' seizure and sale was not authorized under the judgment and order of sale. In the case cited the question of whether or not the loan company and its assignees had a lien upon such increase which might be thereafter established and foreclosed was not determined.

The American Trust & Savings Bank of El Paso, Tex., and the. Liberty Trust & Savings Bank of Chicago, Ill. (hereinafter referred to as the. “Banks”), are the assignees of the El Pasp Cattle Loan Company of said mortgage and judgment.

On October 23,1924, these Banks instituted suit in the district court of Culberson county against D.’ Taylor and others, in the first count of their petition praying for a foreclosure of their chattel mortgage lien upon said calves, being the increase which had come after the rendition of the judgment on October 2,1923, and 'being the same calves involved in the case above cited; and- in the second count prayed for the establishment of their debt in the sum of $11,215.55 against appellants on the judgment and that a judgment lien, as of date October 2, 1924, be established upon the said calves and foreclosed. At the time the last-mentioned foreclosure suit was filed, all of the defendants therein, except one Merchant, whose connection with the case is not apparent, were served with citation.

On October 30, 1924, Taylor filed a voluntary petition in bankruptcy in the. District Court of the United States for. the Western District of Texas, and upon said date was adjudged a bankrupt. Upon the'date the petition in bankruptcy was filed and Taylor ad-, judged a bankrupt, the calves were in his possession.

On November 2, 1924, the referee in bankruptcy appointed .Tames E. Bean as receiver of the bankrupt estate.

On November 10, 1924, W. E. Neill was appointed receiver by the state court, and he was directed to sell the calves on November 14, 1924.

The receiver. Bean, applied to the United States court for an injunction restraining Neill from selling said calves. On November 10, 1924,'Hon. Colon Neblett, presiding judge of the United States District Court for the Western District of Texas, sitting at El Paso, entered an order restraining Neill, the receiver, and the two banks from taking charge or possession of, selling, disposing of, or otherwise interfering with the possession by Bean, as receiver of the court of bankruptcy, of any property belonging to the estate of Taylor, especially the calves above mentioned; and, if any of the parties so restrained had theretofore taken possession of any of said property, they were ordered to immediately restore such possession to the receiver Bean.

On November 12, 1924, the attorneys for the Banks and for Bean, receiver of the bankrupt estate, entered into an agreement in writing that the calves should be sold on November 14, 1924, at public auction, and the net proceeds deposited in the State National Bank of El Paso to be held until it was judicially determined which court had jurisdiction of the fund and which claimant was entitled thereto. The agreement stipulated that neither party waived any of their rights with respect to the subject-matter, and that the fund stood in place of the calves, and at all times and in all courts it should be considered as though the calves were in litigation. The agreement to sell was approved by Judge Neblett, and the calves were sold and the proceeds placed in the State National Bank.

Some time between the date of the entry of the above-mentioned restraining order and December 13, 1924, the federal receiver, Bean, was elected and qualified as trustee of the bankrupt’s estate. The two Banks move# to dissolve the injunction granted by Judge-Neblett, and on December 13, 1924, the same was heard by Hon. Wm. H. Atwell, the then-presiding judge of the United States District Court sitting at El Paso, and the same was-overruled and the temporary injunction granted on November 10, 1924, made perpetual. On December 27, 1924, Bean, the trustee in bankruptcy, filed, an application with the referee in bankruptcy for an order to the Banks to show causé why the lien which they claimed should not be set aside.

On December 31, 1924, the referee in bankruptcy issued a notice directed to the Banks, or their attorney, Hon. C. W. Croom, notifying them of the petition filed by Bean, the trustee in bankruptcy, praying that the calves be declared free of any lien or incumbrance claimed by the Banks as assignees of the El Paso Cattle Loan Company, and that said alleged lien be held for naught; wherefore, the Banks were ordered to answer and set up their claim to said property on or before January 6, 1925, or be forever, barred from-asserting the same.

On January 3, 1925, the Banks and the-state receiver, Neill, presented their petition to Hon. W. D. Howe, judge of the Thirty-Fourth' judicial district of Texas, of which-district Culberson county is a .part, complaining of James B. Bean, trustee of the bankrupt estate of Taylor, and his attorneys,. Messrs. Isaacks & Lattner. This petition was. ancillary to the foreclosure suit then pending-in the district court of Culberson county, and' prayed that the defendant be enjoined from proceeding, further in the, court, of bankruptcy or taking any action relative to the-suhject-matter of the suit or the determination of plaintiffs’ lien upon said calves. The-petition was set for hearing by Judge Howe on January 25, 1925, and the defendants ordered to show cause why the relief sought should not be granted.

The defendants answered setting up the-orders theretofore entered by Judge Neblett and Atwell which, they asserted, determined' the jurisdictional issue involved in favor of the court of bankruptcy. Upon the hearing-judge Howe held that the jurisdiction of the state court had not been divested by the proceedings in bankruptcy and enjoined the-trustee in bankruptcy and his attorneys from-proceeding in the court of bankruptcy or taking any action relative to the subject-matter of the suit,, or the determination of the plaintiffs’ lien, or the right to enforce the same.

On January 14, 1925, Hon. Chas. A. Boyn-ton, the then presiding judge of the United States District Court sitting at El Paso, entered an order enjoining the Banks and their-attorneys, Messrs. Croom,. Goldstein & Croom, from interfering with the possession of the trustee, Bean, and the administration of the bankrupt estate, especially the proceeds of said calves, and from further prosecuting any suit' or suits in the state court, and Bean was ordered to take exclusive possession and custody of said proceeds. This order was entered, according to its recitals, upon an application theretofore filed by the trustee in bankruptcy and his said attorneys for an injunction against the Banks, the state receiver, Neill, and their said attorneys, to restrain them from interfering with the possession and administration of the estate of the 'bankrupt and from further prosecuting a suit in the state court involving the assets of the bankrupt estate.

The order of Judge Atwell recited that at the Same time was heard the motion of the Banks and their attorneys that such injunction be denied and that the trustee in bankruptcy be required to represent the estate of the bankrupt in the suit then pending in the state court. The order of Judge Atwell also overruled this motion of the Banks and their attorneys. The orders of Judges Neb-lett, Atwell, and Boynton, each, expressly stipulated that the same was not to be construed as adjudicating the rights of any of the parties to the lien which was asserted. It is apparent from the record that the proceeds of the calves are wholly inadequate to satisfy the debt due the Banks.

On February 6, 1925, the trustee in bankruptcy moved to dissolve the temporary injunction theretofore issued by Judge Howe, in support thereof setting up the order made by Judge Boynton. This motion to dissolve was heard by Judge Howe on January 24, 1925, and overruled, from which order the present appeal is prosecuted.

A mortgage creditor has the right to institute proceedings in either the court of bankruptcy or the state court to enforce his lien. For this purpose the jurisdiction of the two courts is concurrent. And it is the general rule that the jurisdiction of a state court over a pending foreclosure suit of a valid lien is not ousted by the subsequent adjudication of the mortgagor in bankruptcy. If the mortgage was given more .than four months prior to the filing of the petition in bankruptcy and its validity is not assailed on any other ground under the Bankruptcy Law (U. S. Comp. St. §§ 9585-9656), the state court may proceed to foreclosure and sale, and the proceedings should not be stayed by injunction issuing from the court, of bankruptcy. This rule applies with special force when the property upon which foreclosure is sought is in the actual possession and control of the state court or its receiver. This is based upon the well-established rule of comity between the federal and state courts that the court which first' acquires complete jurisdiction over the parties and subject-matter will be allowed to continue in the exercise of 'that jurisdiction to final judgment without interference from the other court. Black on Bankruptcy, §§ 389 and 390, and cases there cited. ■

Upon the date the petition in bankruptcy herein was filed, the state court had not acquired actual possession of the calves, but they were, still in the possession of the bankrupt, Taylor. The federal receiver was first appointed.

Appellees assert that under the rule announced in Farmers’ L. & T. Co. v. Lake Street R. R. Co., 177 U. S. 53, 20 S. Ct. 564, 44 L. Ed. 667, actual possession of tije res is not the controlling factor in the determination of the right of the state court to proceed with the foreclosure suit; that the rule which disables a court of concurrent jurisdiction from interfering with the court which first acquires possession of the res is not restricted in its application to cases where the property has been seized under judicial process before the institution of the second, suit in another court, but applies with equal force where an action has been instituted as here to enforce a lien against specific property and service of citation obtained. Upon the doctrine of that case, it is asserted that the prior pendency of the foreclosure suit in the state court and service of process vested that court with constructive possession of the res, and therefore it was not permissible for the court of bankruptcy to interfere with the jurisdiction thus acquired. In the case cited the rule was not declared as being of invariable application, but it was merely stated ’it “often” applied. We do not regard the case as decisive of the absolute right of the state court to proceed with the foreclosure suit.

It is well settled that a court of bankruptcy may enjoin the prosecution of a foreclosure suit pending at the time the petition in bankruptcy was filed, where such a course is necessary for the proper exercise of its own jurisdiction or the effective administration of the estate in bankruptcy. In such cases the jurisdiction' of the court of bankruptcy is paramount and exclusive. Black: on Bankruptcy (3d Ed.) § 26.

Numerous applications of this rule have been made. Black on Bankruptcy (3d Ed.) § 390, and cases cited. In most of the eases where the paramount right of the federal court has been thus asserted,, the propriety of its exercise is obvious; but cases are sometimes presented where the question is debatable.

The state courts cannot sit in judgment upon the action of the federal court in assuming to assert its párámount right in such cases. The appropriate and only effective remedy of the aggrieved party is by appeal to tlie higher federal courts. The resort to a counter injunction in the state court is ineffective for any practical purpose.

In dealing with questions of conflicting jurisdiction, the “courts must be cautious.’’ Metcalf Bros. v. Barker, 187 U. S. 166, 23 S. Ct. 67, 47 L. Ed. 122. Comity is necessary to prevent unseemly conflicts and to promote the decent and orderly administration of justice.

In the present case three different judges of the United States court have each asserted the paramount right of the court of bankruptcy to administer that portion of the assets of the bankrupt involved in the foreclosure proceedings in the state court.

There are decisions by Circuit Courts of Appeals of the United States which, to some extent, sustain their action. Some of them are as follows: First S. & B. T. Co. v. Butler (C. C. A. N. M.) 282 F. 866; In re Dana, 167 F. 529, 93 C. C. A. 238; Rogers v. Levert Co., 237 F. 737, 150 C. C. A. 491.

On the other hand, there are decisions which seem to sustain the view that under the rules of comity existing between the United States and state courts, the jurisdiction of the district court of Culberson county should not haVe been interfered with under the circumstances of the case, and that the trustee in bankruptcy should have gone into the state court for the establishment and protection of any right which he as trustee had to the calves or their proceeds. In re Schmidt (D. C.) 224 F. 814; In re Rohrer, 177 F. 381, 100 C. C. A. 613; In re Wagner’s Estate (D. C.) 206 F. 364.

So far as we are advised, there is no decision by the United States Supieme Court which definitely controls the question upon the facts of this case.

We have here presented a record showing that three different United States District Judges have entered orders in effect asserting the paramount right of the court of bankruptcy to administer the assets in controversy ; no appeal prosecuted from those orders ; a case of conflicting jurisdiction where no vital, principle is involved, no personal right invaded, and in which counter injunctions have issued, and if we uphold the one granted by the state court an unseemly conflict will be. perpetuated. It is, without doubt, the duty of both the federal and state courts to observe every precaution to avoid such a situation. Under the circumstances of the case, we are therefore of the opinion that it is better for the state court to yield its jurisdiction and thus avoid an unseemly conflict. Hooks v. Aldridge, 145 F. 865, 76 C. C. A. 409.

We are therefore of the opinion the motion to dissolve should have been granted, and it is so ordered.

Reversed and rendered.  