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In re Ripp

March 25, 1957


Author: Lindley


LINDLEY, Circuit Judge.

Gregory Ripp appeals from a judgment of the district court entered in a show cause proceeding in the bankruptcy case of William H. Ripp, declaring chattel mortgages given by the bankrupt to appellant, his brother, invalid and ordering the property which they purported to cover sold free and clear of liens and the liens, if any, transferred to the proceeds of sale.

William Ripp was adjudicated bankrupt upon his voluntary petition on February 18, 1955. The record discloses that a hearing was held before the referee, to whom the cause had been referred, on May 20, 1955, but does not tell us what transpired at that time. However, on that day, the referee ordered appellant and the bankrupt to show cause, if any they had, on the 27th day of May, 1955, why the chattel mortgages given by William Ripp to Gregory Ripp should not be held null and void. Apparently, this unreported hearing of May 20, upon which the show cause order was based, was attended by the trustee and various creditors, and, in pursuance thereof, one Fleming, receiver in a judgment creditors' supplemental proceeding in the state court against William Ripp, filed objections to the validity of the mortgage then in existence, contending that it was in violation of the Wisconsin Bulk Sales Law, did not conform to the requirements of the state statutes, and was fraudulent and void as against then existing creditors of the bankrupt, and praying that, upon the hearing on the order to show cause, the mortgage be held void and of no effect.

At the hearing on May 27, 1955, those appearing before the referee included the trustee in bankruptcy, the bankrupt and his attorney, the appellant, Fleming, the state court receiver, McDermott, Assistant U.S. Attorney representing the Government's tax claim, and two attorneys for other creditors. The court, with the parties represented, thereupon proceeded with the hearing upon the question of validity of the mortgage. No objection to this procedure was raised by anyone.

The evidence taken shows that on October 5, 1951, the bankrupt mortgaged to appellant, his brother, personal property in his tavern in Madison, for the purpose of securing $9,500 represented by a note due September 27, 1957; that, on October 9, 1954, a second mortgage was executed by William Ripp to appellant to secure the same sum, which was recorded October 11, 1954, two days before Fleming was appointed receiver in the state court. Prior to the filing of this mortgage, however, on August 27, 1954, an order had been entered in the state court enjoining William Ripp from making any transfer or other disposition of his property and, on the 17th day of September, 1954, the sheriff served the injunction writ upon William.

The evidence icluded also the oral testimony of Fleming, the state receiver, the bankrupt, the mortgagee, appellant herein, and one Goodwin called by the mortgagee. Upon conclusion of the evidence the referee indicated that he would hold the mortgage invalid as against the trustee, and asked the parties to present suggested findings and conclusions of law.

Up to this time the trustee had filed no pleading, but the report of the referee filed upon review recites that the trustee had joined in objections made by the creditors to the validity of the mortgage orally. Whether this was done at the original hearing on May 20, of which there is no transcript, or on May 27, is not clear, but, at any rate, after the referee had indicated that his decision would be against validity, the trustee, on July 19, filed written objections to the lien averring that each of the mortgages was invalid for various reasons, including the suggestion that the second mortgage was of no avail because no affidavit of renewal of the original mortgage had been filed in accord with Wisconsin Statute, Sec. 241.11, and because it was in violation of the Bulk Sales Law of Wisconsin, Sec. 241.18 through 241.21 of the Wisconsin statutes. At any rate, the referee's final order was not entered until December 7, 1955, almost five months after the trustee had presented formally, his opposition to the validity of the mortgages.

After the pleading of the trustee was filed, no further proceedings were requested or had, other than a hearing upon proposed findings of fact and conclusions of law, held October 11, 1955. On December 7, 1955, the referee entered his formal order, including findings of fact and conclusions of law. He found the first mortgage invalid as against creditors after expiration of three years, inasmuch as the attempted renewal had not been made in conformity with the statutes. He found also that no notice had been given to creditors of the transfer, as required by the Bulk Sales Law of Wisconsin; that appellant had no knowledge of the execution of the second mortgage until after it was delivered to him after being filed, that it was without valid consideration, and that the mortgagee had been ordered to produce all his records, bills, and documents relating to the mortgage and had failed to do so or to comply in any way with the order. He found also that the evidence was insufficient to enable him to determine any amount due the mortgagee.

On the same day, the referee entered an order that the trustee sell the mortgaged property, and that the liens of secured creditors, if any, including the alleged tax lien of the United States, attach to the proceeds of sale.

Upon review of these orders, on March 24, 1956, the district court approved the findings of fact and conclusions of law of the referee, and held the mortgages invalid and the property described therein free of each of them and ordered it sold free of liens, as the referee had directed. It is to review this order that this appeal is prosecuted.

The record is fragmentary and confused. It does not show what occurred at the original hearing of May 20, 1955, or include the schedules of the bankrupt or any evidence upon which the referee may have relied, other than what was submitted on May 27. In the absence of the production of all the evidence, under well-known rules, we must presume that the unreported evidence was sufficient to sustain the judgment. However, in view of the contentions of the respective parties, we think it well to discuss briefly the merits.

As we understand appellant's contentions, in his petition for review, he raised the question of jurisdiction for the first time. He insists here, that the court was without jurisdiction to enter the order of which complaint is made, for the reasons, first, that the issue should have been raised in a plenary suit and not summarily; and, second, that, upon the merits, the court was in error in finding the liens invalid upon any ground and in ordering a sale free of liens.

Under Sec. 70 of the Bankruptcy Act, 11 U.S.C.A. ยง 110, subsection a, the trustee is vested with the title of the bankrupt to all property which prior to bankruptcy might have been levied upon and sold under judicial process against him, and under subsection c, with "all the rights, remedies, and powers of a creditor then holding a lien * * * whether or not such a creditor actually exists." All property under the bankrupt's control or in his possession, passes to his trustee in bankruptcy. From the time of the filing of the petition, the assets are in custodia legis and over them the bankruptcy court has exclusive jurisdiction and the sole right to determine the validity of any and all alleged liens thereon. Isaacs v. Hobbs Tie & Timber Co., 282 U.S. 734, 51 S. Ct. 270, 75 L. Ed. 645; Irving Trust Co. v. Fleming, 4 Cir., 73 F.2d 423. Summary proceedings are available unless the property has passed into the possession of third persons claiming adverse title. In re 671 Prospect Avenue Holding Corp., 2 Cir., 118 F.2d 453. Persons claiming liens may be brought in by a show cause order. Sampsell v. Imperial Paint & Color Corp., 313 U.S. 215, 61 S. Ct. 904, 85 L. Ed. 1293; First Bank of Marianna, Florida v. Pinckney, 5 Cir., 139 F.2d 575; In re Knott, 6 Cir., 134 F.2d 833. And a plenary suit is not necessary. ...

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