Appeal from the District Court of the United States for the Eastern District of Illinois; Walter C. Lindley, Judge.
Before SPARKS, MAJOR, and TREANOR, Circuit Judges.
This action arose in a proceeding for composition and extension under section 75 of the Bankruptcy Act, 11 U.S.C.A. § 203. At its inception the appellee was prosecuting a foreclosure proceeding in the District Court against the debtor's farm. A receiver was in possession, a decree of foreclosure had been entered, a special master in chancery had been appointed to execute the decree, and he had advertised the sale of the land for a day certain. Thereupon the bankruptcy court enjoined further proceedings in the foreclosure. Subsequently the debtor's petition for composition and extension was dismissed by the court, and after due notice the property was sold to appellee. Thereafter, during the period of redemption, the debtor's petition for composition and extension was reinstated and referred to the conciliation commissioner who enjoined further proceedings in carrying out the foreclosure decree. At appellee's request the court reviewed the commissioner's order, dissolved the restraining order, struck the real estate from the debtor's schedules, and permitted appellee to receive its deed, the period of redemption having expired. From this order the appeal is prosecuted.
A chronological statement of the facts as disclosed by the record is as follows: On January 5, 1926, Edward E. Welch and wife owned the 325 acres of Illinois land in question. On that day they executed a first mortgage lien thereon to secure the payment of $40,000 borrowed by them from appellee.
On March 1, 1926, Welch and his wife executed to W. L. Plankenhorn a second mortgage on the same land to secure five notes in the principal aggregate amount of $25,600, bearing six and one half per cent interest per annum. Subsequently and before December 1930, the debtor Cresap's father acquired the second mortgage ad the notes secured thereby. Thereafter, but before December 13, 1930, the father died and the debtor inherited from him these second mortgage notes.
On December 13, 1932, Welch and his wife deeded the land in question to the debtor, appellant, and the deed was properly recorded on December 15, 1930.The mortgage was never released of record. At the time of this inheritance, and the transfer by Welch and wife to the debtor, the latter was employed, and had been employed for several years, at the Wabash Railroad shops at Decatur, Illinois, and such employment was continuing at the time of the hearing in the District Court.
Since March 1, 1932, the debtor has paid nothing on the first mortgage indebtedness, principal or interest, except $1,012 on one installment, and that was collected on an assignment of the lease of the land by the debtor to the mortgagee. That rent was collected in 1932, but thereafter the debtor-appellant, under subsequent leases, collected all rentals down to the time the bill to foreclose the first mortgage was filed on May 19, 1934. He paid nothing on the interest accruing, and paid no part of the taxes. On May 28, 1934, appellee was compelled to and did pay accrued taxes in default in the sum of $796.57. When the bill for foreclosure was filed a receiver was appointed to take possession of the property and collect the rentals. This he did, and from the proceeds of two years' rentals, accruing after his appointment, he applied $3,000 on the judgment for $44,904.17, which was entered by the decree of foreclosure on January 19, 1935. This decree ordered the property sold to satisfy the judgment, and appointed a special master in chancery to execute the decree. The master duly advertised the sale for March 15, 1935.
On March 11, 1935, the debtor filed his petition for composition and extension under section 75 of the Bankruptcy Act, and on March 13, 1935, secured an order restraining the special master from carrying out the sale as advertised for March 15, 1935. The debtor's petition was referred to a conciliation commissioner who on August 10, 1935, filed his report showing that the debtor had made no progress toward effecting any compromise with his creditors, and recommending dismissal of the petition. On August 19, it was ordered that the debtor have leave to amend his petition to include a prayer for adjudication in bankruptcy within ten days or show cause why the original petition should not be dismissed. The debtor failed to respond to this rule to show cause, and on September 10, the proceeding was dismissed.
On October 21, 1935, the debtor filed his petition to reinstate his petition for rehabilitation, and his petition was allowed and the cause was reinstated. Another restraining order was issued enjoining the special master from proceeding with the sale.
The debtor having made no progress in any attempted rehabilitation, but having apparently abandoned his efforts in that behalf, appellee on January 31, 1936, moved the court to vacate the restraining order of October 2, 1935, and prayed for an order authorizing the special master to proceed to execute the decree by a sale of the property. That motion and prayer were granted, but in order to protect the debtor's rights the court directed appellee not to assign its certificate of purchase, or to take a deed from the master until further order of the court.
On March 12, 1936, the special master sold the property to appellee, it being the highest and best bidder, pursuant to previous notice as provided by the decree of foreclosure. On March 198 1935, the master filed his report of sale showing the amount due on the date of sale to be $44,480.22, after applying the $3,000 received from the receiver by order of the court. Appellee had bid $42,039.06 at the sale and it was accepted, and an order was entered approving the sale and the master's report, and finding a deficiency of $2,441.16 in favor of appellee which the court made a lien on the rents and profits until redeemed, during which time the receiver was continued in possession by order of the court.
On April 22, 1936, the conciliation commissioner filed a second report showing that the debtor had made no progress toward his rehabilitation. On April 25, 1936, the court entered an order requiring the debtor, within ten days, to show cause why his proceeding should not be dismissed. No response having been made by the debtor to that order, the court, on May 6, 1936, entered an order dismissing the debtor's proceeding, which in effect rendered the restraining order of no further force.
On March 12, 1937, the debtor's equity of redemption expired under the Illinois Statute, Ill. Rev. Stat. 1937, c. 77, §§ 18, 18a. However, the creditors of the debtor had three additional months under the Illinois Statute within which to redeem, so that the deed could not be issued until June 12, 1937. Until long after the debtor's equity of redemption had expired, he had not been adjudicated a ...