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In re Marsters

December 17, 1938

IN RE MARSTERS (TWO CASES); HERMAN
v.
HENLEY (TWO CASES).



Appeals from the District Court of the United States for the Southern District of Indiana, Indianapolis Division; Robert C. Baltzell, Judge.

Author: Treanor

Before SPARKS, MAJOR, and TREANOR, Circuit Judges.

TREANOR, Circuit Judge.

These causes were consolidated for appeal from an order of the District Court for the Southern District of Indiana entered in each of two bankruptcy proceedings. The order adjudicated the interests of the bankrupts in a Missouri judgment held as Vernon F. Marsters, were husband and wife at the time of all the transactions herein material, and each of them was adjudicated a bankrupt on December 5, 1935, upon separate voluntary petitions filed on that date in the District Court for the Southern District of Indiana.

Prior to 1929 Mrs. Marsters had operated a dining room as her own separate business venture; and sometime prior to July, 1929, she began negotiations with one Jerome T. Bray for the purchase of a hotel business, including furniture and equipment and a leasehold interest in the building in which the business was operated. The lessor of the hotel building was one S. Herman. The purchase price agreed upon was $18,000 of which amount Mrs. Marsters paid $9,000 in cash, $8,000 of which was loaned to Mrs. Marsters by her brother and the remaining $1,000 was from her own funds. The balance of $9,000 was taken care of by a note secured by a chattel mortgage on the furniture and equipment. The note and the chattel mortgage were executed by Mrs. Marsters and her husband, and the instrument of conveyance of the business and property named both as vendees. Mrs. Marsters carried on the hotel business, her husband taking no part in its operation and management.

In November, 1929, Mrs. Marsters discovered that Bray, her vendor, had committed fraud in the aforesaid transaction, and she thereupon surrendered the property and instituted suit against Bray in Missouri in the name of herself and husband. On April 7, 1931, judgment was rendered against Bray in the sum of $10,500.

In 1934 Mr. and Mrs. Marsters became residents of Indiana and, as above stated, on December 5, 1935, filed their separate and voluntary petitions to be adjudicated bankrupts.

During the pendency of the Missouri suit S. Herman, the lessor of the hotel building, purchased from Bray the note signed by Mr. and Mrs. Marsters; and on August 7, 1935, Herman filed suit in a Missouri state court on the Marsters' note. A writ of attachment was issued in Herman's action but was returned showing the defendants not found. A notice of garnishment was issued and served on Bray, as judgment debtor of the Marsters. on August 8, 1935. This action was removed to the United States District Court for the Western Division of the Western District of Missouri where it was pending on December 5, 1935, the date upon which the Marsters were adjudicated bankrupts in the District Court of Indiana. This last stated date was less than four months after commencement of the garnishment suit in Missouri and service of the notice of garnishment on Bray.

Each bankrupt scheduled S. Herman as a creditor whose claim was disputed, and each listed as an asset an interest in the judgment against Bray. Howard E. Henley, who was elected trustee in each bankruptcy proceeding, made application in each cause for an order restraining the further prosecution of the garnishment suit in Missouri, on the ground that the Bray judgment was an asset of the estate of one or both bankrupts and that the bankruptcy court had jurisdiction to adjudicate adverse interests in such asset.

The referee granted the relief sought by the trustee holding that Mrs. Marsters was the beneficial owner of the Bray judgment and that Mr. Marsters had no beneficial interest therein; and that the bankruptcy court had jurisdiction in summary proceedings to determine adverse interests in the judgment. This appeal was prosecuted by the representative of S. Herman from the order of the District Court confirming the referee's decision and order.

Appellant's cause on appeal may be summarized as follows: (1) The District Court had no jurisdiction to proceed summarily because the garnishment action had removed constructive psossession of the Bray judgment from the bankrupts and therefore the trustee could only proceed plenarily. (2) Granting that there was jurisdiction to adjudicate by summary proceedings, the court erred in deciding that Mrs. Marsters was the equitable owner of the entire judgment, whereas the finding should have been that the Marsters held the judgment by entirety or as partners with the consequence that the judgment then jointly held would not pass into the bankruptcy estate of the individual bankrupts. It is appellant's contention that by the garnishment in Missouri the Missouri court drew to itself the possession of the garnished debt, with the result that the bankrupt's loss of possession destroyed any basis of summary jurisdiction of the judgment debt by the District Court of Indiana.

It is not questioned that the bankruptcy court had jurisdiction to proceed summarily to adjudicate any adverse claims to property within the possession, actual or constructive, of the bankrupts; and both parties accept the proposition that intangibles are included within such jurisdictional power of the court on the theory that there can be a "constructive" possession of an intangible. But appellant contends that the notice of garnishment in the unconcluded garnishment suit was a disturbance of the bankrupt's constructive possession and that the "Missouri Court drew to itself the possession of the garnished debt." This raises the question of what is the subject of "constructive" possession in the case of an intangible and also, what is the effect on the "constructive" possession of the owner of a judgment debt when a notice of garnishment is served upon the judgment debtor.

The term "constructive," as applied to the possession of an intangible, is not used to distinguish such possession from some other kind of possession of an intangible. In the case of a tangible there can be a possession in fact as well as in legal theory; but in the case of an intangible, possession is a legal concept and is manifested only through recognition of legal consequences. It may be said that ownership of intangibles is the subject of possession, or that ownership draws to itself a constructive possession, but such statements merely afford a rational basis for the practical rule that the legal consequences of possession of a tangible res are attached to the ownership of an intangible res. One of the legal consequences of a bankrupt's possession of a tangible asset is that his trustee succeeds to the possession, and the bankruptcy court thereby acquiring possession, has summary jurisdiction to adjudicate adverse claims respecting the asset. In Seligson v. Whitney et al.*fn1 the Court of Appeals of the second circuit, in considering the relation of ownership of an intangible to possession for the purpose of summary jurisdiction of the bankruptcy court, commented as follows [page 90]:

"The decisions are numerous that, if the bankrupt remained the legal owner of the chose in action up to the time of the filing of the petition, though it had become subjected to equitable liens or interests or attachments, his control was such that a trustee in bankruptcy who succeeded him was to be regarded as in 'possession' of the chose in ...


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