Before SCHNACKENBERG and KNOCH, Circuit Judges, and MERCER, District Judge.
The debtor, Century Theatre Co., filed a petition for reorganization on September 13, 1954. The Court entered an order which, inter alia, restrained enforcement of liens against the debtor's property. The debtor's principal asset was a motion picture theatre, and the real estate on which it stood, in Milwaukee, Wisconsin. It was encumbered with mortgages aggregating $75,000.
City taxes for 1953 in the amount of $1,831.60 (plus interest) were delinquent and a lien on the realty. City taxes for 1954 in the amount of $2,254.02 became a lien on May 1, 1954. The United States also held a tax lien.
On September 20, 1954, the District Court entered an order setting a hearing for October 18, 1954, on the debtor's petition to sell the property for $92,500, free and clear of all liens except for $75,000 mortgages, which were to be satisfied out of the purchase price. Tax liens were to follow the proceeds of the sale. Determination as to amounts and priorities of such liens were to be made thereafter. The order of September 20, 1954, directed that notice of the October 18, 1954, hearing was to be given by mailing the same to all known creditors.
The notice*fn1 set out the fact that the hearing was being held to consider the petition and, in particular, the question of approving sale on the terms outlined above. One of the creditors was the City of Milwaukee which held liens for real estate taxes as indicated above.
Shortly before the hearing, another bid of $93,500 was received, which was increased to $95,000 at the hearing.
The hearing was not completed on October 18, 1954, but was adjourned to November 1, November 15 and November 18, 1954.
Notice of the October 18, 1954, hearing had been mailed to the City Treasurer of the City of Milwaukee. Assistant City Attorney Ewald Moerke appeared in response thereto on October 18, 1954. He was also present at the adjourned hearings.
On November 18, 1954, the prospective purchasers were allowed to withdraw their offers because the mortgagee refused to extend the due dates of the mortgages. Subsequently, on December 1, 1954, the mortgagee filed a commitment to extend the due date. The $92,500 offer was renewed, and a petition for approval of the sale on the same terms as previously proposed was filed December 15, 1954. The District Court set the matter for hearing on December 22, 1954, and directed notice to be given by mail as before.
Notice*fn2 was again mailed to the City Treasurer of the City of Milwaukee. The evidence shows that the notice was received in the City Treasurer's office and filed there, but that it was not transmitted to the office of the City Attorney.
At the hearing on December 22, 1954, (and later in his affidavit) Harvey C. Hartwig, counsel for the debtor, testified that he discussed the proposed sale with Mr. Moerke who had stated that he could not consent to the sale free of tax liens, but that he did not intend to appear at the hearing on December 22, 1954, because he would have no objections to offer. This statement has not been controverted.
On December 23, 1954, the District Court authorized the sale on the proposed terms. No appeal was taken from that order. The sale was consummated. The defendant, The Title Guaranty Company of Wisconsin, issued a policy of title insurance guaranteeing the purchaser's title free of all liens except the aforesaid mortgages.
The United States, which consented to the sale, claimed priority for its tax lien over that of the City. The priority question was referred to the Referee in Bankruptcy, acting as a Master. The City took part in the lengthy hearings held by this officer. On February 21, 1958, the Referee filed his Master's Report, in favor of the United States.
The City then, on March 4, 1958, filed its objections to the report and moved to vacate the order of December 23, 1954, in so far as it authorized sale free of the City's tax lien, on the ground that the City had no notice of the action. Affidavits in support of the motion stated that no copy of the order approving or confirming the sale was served on the City, and that the City Attorney was not made cognizant that there were insufficient funds to pay all tax liens until the time for appeal had expired. The City contended that authorization of such ...