Appeal by intervenor from the Circuit Court of Cook county;
the Hon. HARRY M. FISHER, Judge, presiding. Heard in the second
division of this court for the first district at the October
term, 1948. Judgment order reversed, and cause remanded with
directions. Opinion filed January 24, 1950. Released for
publication March 9, 1950.
MR. JUSTICE SCANLAN DELIVERED THE OPINION OF THE COURT.
H.S. Merrell, Trustee in Bankruptcy of the estate of Joseph William Council by appointment of the District Court of the United States for the Eastern District of North Carolina, Wilson Division, in bankruptcy cause No. 590, appeals from a judgment order entered in the Circuit court of Cook county.
On November 3, 1947, National Bank of Commerce of Norfolk, Norfolk, Virginia, (hereafter referred to as the Bank), filed its complaint in the Circuit court of Cook county alleging that J.W. Council was indebted to it by virtue of a certain note dated August 18, 1947, in the principal sum of $7,388.24, which sum was past due. At the same time the Bank filed an affidavit for attachment and an attachment writ issued to attach any funds due Council. Weber Costello Company, a corporation, was summoned as garnishee, and subsequently it stated, in answer to interrogatories, that: "1. It holds indebtedness in the sum of $4811.28, representing commissions due J.W. Council on account of orders obtained by him and shipped to respective customers; 2. Indebtedness in the sum of $200.25 representing commissions due J.W. Council on account of orders obtained by him and having been shipped and payment having been made therefor after the date of service; 3. Said J.W. Council obtained certain orders for garnishee's products, shipped to various customers, but payment not made in amount of $192.40. J.W. Council obtained orders which had not been accepted. Goods not shipped and commissions when accepted and shipped total $1372.50." On December 12, 1947, which was within four months of the issuance of the attachment writ, Council filed his petition in bankruptcy in the United States District Court for the Eastern District of North Carolina, Wilson Division, and he was adjudicated a bankrupt on December 13, 1947. When the Weber Costello Company filed its answer to the interrogatories, it also filed a countercomplaint, which admits that it owed Council, at the time of the service of the attachment writ, $4,811.28, that Council has demanded all commissions due him, and prays that Council and the Bank may settle their demands between themselves and that the court shall determine to whom the money should be paid. On March 22, 1948, it was ordered that Weber Costello Company pay to the Clerk of the Circuit court $5,178.68, which sum was to be subject to the order of the court. The judgment order entered by the trial court orders the Clerk of the court to pay to the Bank "out of the monies deposited by the counter-plaintiff" $3,026.86 and costs, and "that the Trustee in Bankruptcy is entitled to receive all funds in the possession of Weber Costello Company in excess of the sum of $3,026.86 to be administered by the Court of his appointment." The Trustee appeals from that judgment order. The countercomplaint was filed two days after Council had been adjudged a bankrupt in the North Carolina court. On December 26, 1947, the Bank filed its answer to the countercomplaint, in which it set up that on June 4, 1946, Council had executed an assignment wherein he assigned to the Bank commissions due him from Weber Costello Company to secure his indebtedness to the Bank; that the assignment was in the amount of $3,026.86; that notice was given to Weber Costello Company of the assignment; that that Company acknowledged receipt of the assignment and agreed to pay to the Bank all commissions due Council on shipped orders totaling up to $3,026.86 beginning June 4, 1946.
On February 7, 1948, the District Court of the United States for the Eastern District of North Carolina, Wilson Division, in bankruptcy, entered an order reciting that Council was adjudicated a bankrupt in that court on December 13, 1947; that H.S. Merrell was appointed Trustee on February 4, 1948, and authorizing him "to take the necessary steps to avoid the attachment lien . . . in the Circuit Court of Cook County, Illinois." In the instant case, the answer field by the Trustee, on March 2, 1948, to the countercomplaint filed by Weber Costello Company alleges, inter alia, "the fact to be that said Joseph William Council was adjudicated a bankrupt on the 13th day of December, 1947, and that this defendant was duly appointed and qualified as Trustee in said bankruptcy of J.W. Council and has taken constructive possession of all of the assets of the said J.W. Council, and that the said sums due as aforesaid should be paid this defendant to be administered in the said bankruptcy proceedings now pending in the District Court of the United States for the Eastern District of North Carolina, Wilson Division, in Cause No. 590. . . . That the said cross-complaint was not filed in this cause until the 15th day of December 1947. That the said Joseph William Council was adjudicated a bankrupt on December 13, 1947, and all assets, including the debt due him by Weber Costello Company, passed into the possession of the Trustee in Bankruptcy and jurisdiction to determine the validity or the amount of all liens against the property of the said Joseph William Council vested exclusively in the Bankruptcy Court in the District Court of the United States for the Eastern District of North Carolina, Wilson Division, in Cause No. 590. That neither this trustee nor the said Bankruptcy Court have given permission to file this counterclaim or to adjudicate this claim outside of the said Bankruptcy Court. That this Court does not have jurisdiction of the person of Joseph William Council for the reason that he was served herein by publication; that it does not have jurisdiction of the subject matter of this cause for the reason that jurisdiction thereof has passed to the Bankruptcy Court. Therefore, this defendant asks that this cause be dismissed with plaintiff's costs."
In the determination of this appeal we have been aided by the following statements made by the Bank in its brief:
"It is an established general rule in bankruptcy law that after an adjudication in bankruptcy, the Bankruptcy court has exclusive jurisdiction to determine all questions involving the bankrupt's property including the right to determine the extent and character of liens against the bankrupt's property. It has also been said that the filing of a bankruptcy petition is a caveat to all the world and in effect an attachment and injunction. But these rules and doctrines are subject to certain qualifications and limitations and must be taken with reference to the facts in each particular case.
"Congress recognized the need for additional process and procedure and provided that the Bankruptcy court shall have the right to ancillary proceedings through its trustee. After adjudication the trustee appointed in one district, may go into another and institute any action necessary to protect or recover the property of the bankrupt estate there. It is established law that any district court in bankruptcy, in the exercise of ancillary jurisdiction in aid of another Bankruptcy court, may grant injunctions, stay proceedings, etc. In other words, bankruptcy proceedings do not ipso facto, merely by virtue of their filing and maintenance, terminate an action already pending in a foreign State court, to which the bankrupt is a party or deprive the court of jurisdiction in such case.
"The Bankruptcy Statute also empowers the Bankruptcy court to permit its trustee to intervene in foreign State court proceedings to protect the bankrupt's estate and under such circumstances the trustee becomes bound by the decision in the State court case. For such purposes it matters not whether the State court case was filed before or after the trustee was appointed.
"The Trustee in Bankruptcy had the right to file ancillary proceedings in the United States District Court for the Northern District of Illinois without coming into the State court case, or, had the right upon entering into the State court case, to seek removal to our local Federal District Court. He did neither although he had ample opportunity so to do as appears from the various proceedings that took place in the State court.
"Instead, the Trustee in pursuance of permission granted by the court of his appointment in North Carolina, appeared voluntarily in the State court and upon leave of court filed his appearance and answer. The Trustee's answer to the counterclaim placed in issue the validity of the Assignment of Commissions held by the Bank, claiming that said assignment had been paid in full and that the Trustee was entitled to recover the entire amount of money held by Weber Costello Co.; further, that because of the bankruptcy of said Council, all assets including the moneys held by Weber Costello Co., allegedly passed into the constructive possession of the Trustee and that the Federal District Court of North Carolina had exclusive jurisdiction.
"Consequently the State court rightfully heard the case on its merits and adjudicated the claims of the parties." (Italics ours.)
The Bank further states in its brief: "There isn't any dispute about the fact that the Attachment Writ was voidable upon the election of the Trustee in Bankruptcy. . . . No evidence was offered by the Bank on the attachment issue," and it was stipulated that the writ of attachment be quashed, and the trial court quashed the writ upon motion of the Trustee. The Bank contends that "a Trustee in Bankruptcy who intervenes in a foreign State court proceeding upon leave of the court of his appointment and participates in the merits of the case, is bound by the judgment of the State court"; that "the trial court in this case had a clear right to proceed as no proper legal action had been taken to oust it from its jurisdiction," and that "the Bankruptcy court at North Carolina authorized the Trustee to intervene in the Circuit Court of Cook County; he did intervene, stayed in the case, litigated the validity of the assignment and now complains because the trial court held against his contentions."
"The law is perfectly clear, as appellee [the Bank] points out in the first paragraph of its argument, that bankruptcy courts, after adjudication, have exclusive jurisdiction to determine questions involving the bankrupt's property. Appellee suggests that if a bankruptcy court is to make its authority felt outside of its territorial jurisdiction it must have the cause in question transferred to the Federal Court having jurisdiction or resort to ancillary proceedings in the local bankruptcy court. Either of these means would be effective, but there is a third alternative. That is to go into the state ...