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5. SAME ASSUMPTION OF DEBT.
After the execution of the mortgage, the agent of the mortgagees retained the money, and material was furnished on his representation by one materialman that there was still $1,500 left, and that he would see that such material was paid for out of that fund. Held, that in a distribution of the proceeds of the property, including both the improvements and the land, the claim of this materialman was entitled to preference over that of the mortgagees, since, even if they were not estopped from asserting the priority of their lien, they had "assumed" the payment of the claim for the material.
Sanborn, Circuit Judge, dissenting.
Appeal from the District Court of the United States for the Western District of Arkansas.
Joe P. Matthews was adjudicated a bankrupt by the district court of the United States for the Western district of Arkansas, and in the course of such proceeding A. A. McDonald, one of the appellees, was appointed trustee of his estate. At the time of the adjudication the bankrupt owned lot 7, in block 530, in Reserve addition to the city of Fort Smith, Ark., which property was subject to a deed of trust or mortgage held by Elihu Chauncey, Charles Chauncey, and William L. Savage, as trustees, to secure a note of $4,000, dated April 28, 1899, and due April 28, 1904, to which note 10 semiannual interest coupons were attached, each coupon representing six months' interest on the loan. At the time of the adjudication, or shortly thereafter, certain mechanics' liens had been or were filed against the mortgaged property for materials supplied in the erection of a building thereon. One of such liens was filed by Dyke Bros., one of the appellees, another by J. M. Tenney & Co., another of the appellees, and another by H. I. Goddard, the remaining appellee. On May 4, 1900, McDonald, as trustee of the bankrupt's estate, filed a petition setting forth the incumbrances that existed upon the property, and praying for an order that he, as owner of the equity of redemption in the property, might be authorized to sell it free and clear of all liens; the proceeds received at such sale to stand in lieu of the property, and to be distributed according to the various priorities of the lien claimants as they might thereafter be determined. He also prayed that the owner of the debt secured by the deed of trust might be restrained from selling the mortgaged property in pursuance of the power of sale contained in the mortgage. After such a petition had been filed, and the parties affected thereby had been served with notice of the same, and cited to appear and show cause why the order prayed for should not be granted, they appeared before the referee in bankruptcy; whereupon the trustees in the deed of trust, namely, the present appellants, entered into an agreement with the various holders of mechanics' liens, to wit, the present appellees, to the effect that they would file with the referee in bankruptcy their respective interventions, setting up their respective claims to priority of payment, and that no injunction should be issued against the owner of the deed of trust, and that no sale of the property should be made until the rights and priorities of the respective parties had been definitely settled and determined by the referee upon said interventions. Thereupon a hearing at considerable length was had before the referee, who decided that the lien of the mortgage or deed of trust was superior to that of the mechanics' liens which had been filed against the property, and directed that the property be sold free and clear of all liens and incumbrances by the trustee in bankruptcy. The case was then certified into the district court, and, upon a hearing before that tribunal, the action of the referee, directing that the property be sold free and clear of all liens and incumbrances, was approved. The district court decided, however, that the claim of Dyke Bros. was entitled to priority and should be paid in full; that the sum of $3,000 should next be paid to the owner of the deed of trust; and that the claims of J. M. Tenney & Co. and H. I. Goddard, the appellees, be next paid. The trustees in the deed of trust excepted to this order of the district court, and have brought the case to this court by appeal.
Homer C. Mechem and Edgar E. Bryant, for appellants.
Before CALDWELL, SANBORN, and THAYER, Circuit Judges.
THAYER, Circuit Judge, after stating the case as above, delivered the opinion of the court.
The first question which confronts us in this case is one of jurisdiction. The appellants urge, and such is the fact, that they did not present their claim, which was secured by a mortgage or deed of trust, for allowance against the bankrupt's estate; that the trustee in bankruptcy did not dispute the existence of the mortgage indebtedness; that the only real controversy which was tried and determined was that between the mortgagee and the mechanics' lien holders concerning their respective priorities; and that, as this was a controversy in which the bankrupt's estate was in no wise interested, the bankrupt court had no jurisdiction to determine it, and that the power to determine it could not be conferred by consent. It will be conceded that the authority to try the issue which arose between the lien claimants, and to determine their respective priorities, could only be exercised by the bankrupt court in virtue of the fact that by the proceeding in bankruptcy it had acquired the custody of the res to which the controversy related. The bankrupt court had no right to assume jurisdiction of a controversy between third parties, in which the trustee was not concerned, and decide whose claim was paramount, in equity, merely because the claimants happened to be creditors of the bankrupt estate, or merely because the liens affected a part of the bankrupt's property. The bankrupt act confers no such authority. But if, in the exercise of its customary jurisdiction, the bankrupt court obtained the lawful custody of the res to which the liens related or of a fund realized from its sale, then the duty which was thereby devolved upon it, of distributing the fund among those to whom it rightfully belonged, did empower it to determine the relative priorities of the conflicting claims to the fund. A court which has lawfully acquired the custody of property or money must of necessity dispose of the same according to law; and, when conflicting claims are preferred, it is not bound to require the claimants to litigate their claims in some other forum, and to adopt the judgment of that tribunal, although it may do so, but it is at liberty to dispose of such controversies according to its own ideas of right and justice. This is one of those incidental powers which may be exercised by any court of record in the absence of an express prohibition. The jurisdictional question, therefore, resolves itself into an inquiry whether the bankrupt court acquired the lawful custody of the fund which was realized by the sale of the mortgaged property. The trustee in bankruptcy clearly had the power, acting under the directions of the bankrupt court, to sell the bankrupt's equity of redemption in the mortgaged property. He would doubtless have discharged his full duty by praying for authority to sell simply the bankrupt's equity of redemption. He saw fit, however, to ask for authority to sell the property free and clear of all liens, and in response
to such an application the mortgagees and the lien claimants appeared, and, without objecting to such order, agreed to submit their respective claims to the arbitrament and decision of the referee, and they further agreed that the sale as prayed for should be postponed until the priorities had been determined. It is obvious that there was no need of submitting and no propriety in submitting this question to the decision of the bankrupt court, unless it was for the purpose of laying the foundation for a proper distribution of the fund realized at the sale of the mortgaged property, after it had been sold free of all liens and incumbrances. Therefore the action that was taken by the appellants in this respect can be regarded in no other light than as a waiver of all objections on their part to a sale of the property free from incumbrances by the trustee in bankruptcy, and as a consent, voluntarily given, that such a sale might be made. It will not be presumed that the appellants and the appellees entered into a stipulation with intent to cast upon the bankrupt court the trial of a moot question, the decision whereof would be extrajudicial and binding upon no one. It must be presumed, on the contrary, that the parties entered into the stipulation aforesaid in good faith, with the understanding that the mortgaged property should be sold free of liens, and that the fund should be divided as the referee or the bankrupt court, after hearing the interventions, might direct. We are constrained to hold, therefore, that the parties in effect agreed that the property in question might be sold free and clear of all liens and incumbrances. This, we think, is the necessary construction which must be placed on the stipulation that was entered into before the referee. Such being the effect of the stipulation, it follows that in a controversy between a purchaser at said sale and these appellants the appellants would be estopped by their own acts from denying that the sale operated to discharge the lien of the mortgage and to transfer it to the fund realized at the sale, and we are of opinion that they cannot in this proceeding challenge the validity of the sale or deny that the proceeds of the sale came into the lawful custody of the trustee in bankruptcy and became subject to the disposition and control of the bankrupt court. The latter court, as we have already remarked, had the power to order the sale of the bankrupt's equity of redemption. The provision that at the sale the property should be sold free of all existing liens was a provision which the appellants consented might be added to the terms of the proposed sale either for their own advantage or convenience; and, even if it should be conceded that under the present bankrupt act the bankrupt court had no power to prescribe this condition without the consent of the lienors, yet, having given such consent and taken part in a long trial to determine their respective priorities, they will not now be heard to complain of an order made, or of action taken, which, if in any respect erroneous, they themselves invited. We accordingly conclude that the lower court had the power, incidental to the right of disposition of a fund that had or would come lawfully into the custody of the trustee in bankruptcy, to determine how the fund should be divided among the rival claimants.
Under the old bankrupt law it was held that a court of bankruptcy
could direct a sale of mortgaged property owned by the bankrupt, devested of all liens, and could determine the priority of liens on the incumbered property, without the consent of the lienors and against their will. Ray v. Norseworthy, 23 Wall. 128, 135, 23 L. Ed. 116. It is denied by the appellants that any such power is conferred on courts of bankruptcy by the present bankrupt law because of the omission of those provisions from which, under the old law, the authority in question was derived. But, in view of the fact that the sale in the case in hand was ordered by consent of all parties in interest, it is unnecessary, we think, to express a definite opinion with reference to the last-mentioned contention of the appellants, and none will be expressed at this time.
The only other question to be determined on this appeal is whether the lower court properly construed an act relating to mechanics' liens which was adopted in the state of Arkansas on April 20, 1895. Acts Ark. 1895, p. 217. The question arises in the following manner: When Matthews, the bankrupt, made his application to the appellants for a loan to be secured by mortgage, he represented in his application that the money was borrowed to help build a building on the mortgaged premises, to be used by himself as a wholesale grocery establishment, and that the lot on which the building was to be erected was worth $2,500, and that the value of the building would be $5,500. The money, when advanced by the mortgagees in pursuance of this application, was transferred to their agent residing at Ft. Smith, Ark., who had negotiated the loan, the mortgagees being nonresidents. On receipt of the money this agent gave the mortgagor credit therefor on his books, and as the work progressed he paid $3,000 of the money thus anced directly to contractors, laborers, and materialmen who were engaged in erecting the building on the mortgaged premises, but he permitted the residue of the fund, to wit, $1,000, to be expended for other purposes, and that amount never was in fact applied toward the erection of the building. The lien claims that are preferred by the appellees are in the main claims. for materials supplied toward the erection of the building, all of which were so supplied subsequent to the execution of the appellants' mortgage and the transfer of the fund to their agent. A part of the claim of one lienholder (H. I. Goddard) appears to be on account of services rendered in drawing plans and specifications for the building in question, the amount of that item being $174.30. It may be that the lien for this item of his account had attached before the mortgage was executed, but as the lower court treated the whole of Goddard's lien claim as being subsequent in point of time to the mortgage, and as Goddard did not appeal, and as the fund is probably adequate to pay Goddard's claim in full, if the decree of the lower court was in other respects right, we shall proceed on the assumption that all of the mechanics' liens became attached to the property subsequent to the execution of the mortgage, and shall dispose of the case on that assumption.
The lien law of the state of Arkansas that was enacted on April 20, 1895, supra, by its first section, gave to every mechanic, builder, artisan, workman, laborer, or other person who should do or per
form any work upon, or furnish any materials, etc., for, any building, erection, or improvement upon land, or upon any boat or vessel, or for repairing the same, under a contract with the owner thereof or his agent or contractor, upon compliance with the provisions of the act, a lien upon such building, erection, or improvement, and upon the land belonging to such owner, on which the same was situated, to the extent of one acre; or, if the building was upon any lot of land in a town or city, then a lien was given upon the building or improvement, and upon the lot or lots of land upon which the same were situated.
The second section of the act defined the extent of the lien aforesaid, declaring, in substance, that the lien should only bind such right, title, and interest as the person contracting for the erection of the building or improvement possessed.
The third section of the act, over which the controversy in this instance arises, was as follows:
"The lien for the things aforesaid, or work, shall attach to the buildings, erections or other improvements, for which they were furnished or work was done, in preference to any prior lien or incumbrance or mortgage existing upon said land before said buildings, erections, improvements or machinery were erected or put thereon, and any person enforcing such lien may have such building, erection or improvement sold under execution, and the purchaser may remove the same within a reasonable time thereafter: provided, however that in all cases where said prior lien or incumbrance or mortgage was given or executed for the purpose of raising money or funds with which to make such erections, improvements or buildings, then said liens shall be prior to the lien given by this act."
The fourth section of the act related to liens upon leasehold premises.
The fifth section of the act was as follows:
"The lien for work and materials as aforesaid shall be preferred to all other Incumbrances which may be attached to or upon such building, bridges, boats or vessels or other improvements, or the ground, or either of them, subsequent to the commencement of such buildings or improvements."
The sixth, seventh, eighth, and ninth sections of the act contained provisions relative to the steps to be taken by lien claimants to secure the benefits of the act. The provisions thereof have no special bearing upon the present controversy.
The tenth section of the act contained a provision, in substance, that any one interested in buildings or grounds on which improvements were being made, "as mortgagee or trustee," might at any time apply to the contractor or subcontractor for a list of all parties doing work or furnishing materials for such improvements, and for a statement of the amount due to each of such persons. It further declared that, if the contractor or subcontractor refused to give correct information on such points when it was applied for, he should be guilty of a misdemeanor, and punished by a fine not exceeding $500. The remaining provisions of the act have no special bearing upon the existing controversy.
On this state of facts, the question arose in the lower court whether, as respects the $1,000 of the mortgage indebtedness that had not been applied by the mortgagees' agent towards the erection of the