United States Fidelity & Guaranty Co. v. Bray

delivered the opinion of the court.

This appeal brings up for review a decree of the Circuit Court of Appeals for the Fourth Circuit reversing-a decree of the Circuit Court for the Northern District of West Virginia in a suit in equity which was intended, inter alia, to affect a fund of $26,000 in the hands of the trustee of a bankrupt’s estate then in the course of administration in the District Court of that district. The decree reversed was an interlocutory one granting an injunction, but the decree of reversal was final, for it directed not only dissolution of the injunction but also the dismissal of the bill.

.The complainant, the United States Fidelity and

The jurisdiction of the Circuit Court was invoked on the ground of diversity of citizenship, and on the further ground that the case was one arising under the act of August 13,1894, 28 Stat. 278 , c. 280, amended February 24, 1905, 33 Stat. 811 , c. 778; and the right to bring the suit in that district against the defendants who were not resident therein was rested upon •§• 8 of the act of March 3, 1875, 18 Stát. 470 , 472, c. 137, on the theory that the suit was one to enforce a lien and claim upon.personal property within the district, that is, upon the fund in the hands of the trustee, which he then had on deposit in the two Parkersburg banks. Section 23a of the bankruptcy act was also relied upon as sustaining the jurisdiction.

The case made by the bill and its exhibits was this: About 1902 the Evansville Contract Company, which will be spoken of as the contractor and as the bankrupt, entered into four several contracts with the United States

“ ... and’ it does hereby bind itself, its successors and assigns, to indemnify the said The United States Fidelity and Guaranty Company against all loss, costs, damages, charges and expenses whatever, resulting from any of its acts, default or neglect that said The United States Fidelity and Guaranty Company may sustain or incur by reason of its haying executed .said bond or any continuation thereof. And it does further agree, in the event of its being unable to complete or carry on the aforementioned contract, to assign, and does hereby assign, such plant as it may own, or have upon said work to the said The United States Fidelity and Guaranty Company, under the aforesaid obligation, together with vouchers or other evidence of payment, of all costs and expense whatever • incurred by said The United States

Fidelity and Guaranty Company in adjusting such loss or in completing said contract, as conclusive evidence against it, its successors and assigns, of the fact and extent of its liability under said obligation to the said The United States Fidelity and Guaranty Company. And it does further agree in the event of any breach or default on its part in any of the provisions of the contract hereinbefore mentioned, that The United States Fidelity and Guaranty Company as surety upon the aforesaid bond shall be subrogated to all its rights and properties as principal in said contract, and that deferred payments and any and all moneys and properties that may be due and payable to it at the time of such breach or default or that may thereafter become due and payable to it on account of said contract, shall be credited upon any claim that may be made upon The United States Fidelity and Guaranty Company under the bond above mentioned.”

The contractor partially performed each contract, but became embarrassed, and in February, 1904, on the petition of creditors, was adjudged a bankrupt by the District Court' for the Northern District of West Virginia, which appointed three trustees , of its estate, M. J. Bray being one. The trustees took charge of its property, and, by an order of the referee having the approval of the creditors, were authorized to complete the contracts, to borrow $75,000 on trustee’s certificates, which were to be a first lien on the property and moneys of the estate, to pay the annual premiums accruing to the surety company and to save it harmless from any liability on the bonds, to collect from the Government the contract price and all retained percentages, and to employ Jacob Eichel, who had been the president of the contractor, to assist in completing the contracts and looking after the interests of the creditors. At first the surety company was disposed to object to such an order, but the seven banks before mentioned,

Thereafter the trustees carried all the contracts to completion, received from the Government the entire contract price and the retained percentages, sold the bankrupt’s property, paid all the certificates issued under the order before mentioned, and on December 19, 1905, had on hand a balance of $36,602.96, subject to allowances and costs of administration yet undetermined. The completion of the contracts was undertaken in the expectation of all concerned that a profit to the estate would result therefrom, but the expectation was not realized. In March, 1906, M. J. Bray became the sole trustee; and on September 21, 1907, when the bill was filed, the net amount remaining in the trustee’s hands, after deducting the allowances and costs of administration, was about $27,600, of which $26,000 was held on deposit in equal amounts in the two Parkersburg banks.

The total liabilities, of the contractor at the time it was adjudged a bankrupt were about $200,000, and of these $42,164.89 were allowed by .the referee, November 19, 1904, as preferred claims for labor and materials furnished the bankrupt in the prosecution of the work under the contracts. Most of the claims allowed as preferred were purchased, at much less than their face value; from the .original claimants by Philip W. Frey, who was counsel for the trustees. His purchases were principally in advance of the allowance, but in some instances were made thereafter. The allowance, however, was in the names of the

In February, 1906, after it became evident that the net proceeds of the estate would not be sufficient to pay the preferred -claims for labor and materials, the surety company filed in the cause in bankruptcy a petition asserting, inter alia, a lien upon the funds in the hands of the trustees and a right to have the same applied to the payment of •the claims for labor and materials upon which recourse could be had against it as the contractor’s surety, and praying that such lien and right be respected and enforced, that the court would ascertain what claims were for labor and materials and would direct that the funds remaining be applied to them. The trustees demurred to this petition and the demurrer was overruled. Bray, on becoming the sole trustee, answered, evidence was taken, and the matter is still pending before the referee.

In March, 1907, separate actions were commenced against the surety company in the Common Pleas Court of Allegheny County, Pennsylvania, in the name of the United States for the use of Laura Eichel, on the claims

Substantially all the claims against the bankrupt’s estate, .save those of the. defendants the Riter-Conley Company a,nd the Nicolette Lumber Company, each of Avhich has a preferred claim for labor or materials, have been acquired and are now held by Bray and the two Eichels, or one or more of them, and these parties are endeavoring, as is alleged, to compel the surety company to pay claims that are unjust, and to divert the funds in the hands of the trustee from the payment''of just claims for labor and materials to the payment of general claims, as to which recourse cannot be had to the bond of the contractor. The seven banks which gave the indemnity bond to the surety company are no longer creditors of the bankrupt’s estate, their- claims being now held by Bray or one or both of the Eichels.

By the bill the surety company asserts (1) that under the indemnity agreements made with it by the contractor, under the contracts with the Government and the bonds given pursuant to the act of August 13, 1894, supra, for their performance, and under the equitable doctrine of subrogation it has a lien on the fund remaining in the hands of the trustee, is entitled to have that fund applied .to the payment of just claims for labor and materials as to which recourse can be had against it as surety, and is entitled to every right and remedy which the Government or those who furnished -the labor and materials

The prayer of the bill is that an accounting be had to ascertain the several amounts justly due for labor and materials furnished the contractor in respect of each of the contracts with' the Government; that the surety company’s liability on each of the bonds be fixed and apportioned as to each party in interest; that the fund in the hands of the trustee be declared subject to a lien for the payment , of all just claims for such labor and materials, and the net amount of the fund be applied on such claims; that no claim held by Bray or either of the Eichels be paid in an amount in excess of the sum actually expended for it; that each of the indemnitor banks be held liable to the surety company according to the terms of their bond to it, and the amount of the liability of each bank be fixed and payment thereof directed; that Bray and the Eichels be enjoined from maintaining any of the actions theretofore begun against the surety company and from instituting any other like action against it; and that it be granted such other relief as may be appropriate to the occasion.

Before the bill was filed, the District Court having charge of the estate of the bankrupt entered an order granting leave to the surety company to begin.the suit in the Circuit Court.

In the Circuit Court all the defendants save the Riter-Conley Company challenged in various ways the jurisdiction of that court, but an interlocutory decree was entered overruling the objections to the jurisdiction and enjoining Bray and the Eichels, until the further order of the.court, from prosecuting or maintaining any of the

In the Federal courts an appeal, as a general rule, lies only from a final decree. But § 7 of the act of March 3, 1891, 26 Stat. 826 , c. 517, as amended April 14, 1906, 34 Stat. 116 , c. 1627, establishes an exception by providing for an appeal to the Circuit Court of' Appeals from an interlocutory-decree granting or continuing an injunction or appointing a receiver. It was under this 'section that the appeal to that court was taken, and on that appeal the' court was authorized to review the whole of the interlocutory-decree, not merely the part granting the injunction, and also to determine whether there was any insuperable objection, in point of jurisdiction or merits, to the maintenance of the suit, and-, if there was, to direct a final decree dismissing the bill. Smith v. Vulcan Iron Works, 165 U. S. 518 ; In re Tampa Suburban Railroad Co., 168 U. S. 583 ; Mast, Foos & Co. v. Stover Manufacturing. Co., 177 U. S. 485 ; Ex parte National Enameling Co., 201 U. S. 156 . In the exercise of this authority the Circuit' Court of Appeals reached the conclusion that the suit could not be maintained in the Circuit Court', and directed both that, the injunction be dissolved and that the bill be dismissed. That was a final decree, and as the jurisdiction of .the Circuit Court had been invoked not solely' upon the ground of diverse citizenship, but also upon the ground that' the suit was. one arising under the act of Congress

An examination of the' bill discloses that its primary purpose is to obtain an adjudication of certain claims presented against, the estate of the bankrupt, now in the course of administration in the bankruptcy court, and of the priority to be accorded to them in the distribution of a fund belonging to the estate and now in the control of that court. That this fund arose in th.e due administration of the estate, is lawfully in the custody of the bankruptcy court, and is awaiting distribution among such of the creditors as are entitled to participate therein, is a necessary conclusion from the allegations of the bill, and' is conceded. The complainant does not assert a title to it, but at most only an equitable right to have it applied to just claims for labor and'materials, for which the complainant is liable as the bankrupt’s surety under the act of August 13, 1894, supra. The real controversy is over the merits of some of those claims, the right of the present holders to assert them for their full amount, and ■ the priority to be accorded to them in the distribution. By an intervening petition-in the bankruptcy proceeding the complainant voluntarily submitted its asserted equitable right to the court of bankruptcy for determination, and the matter is now pending before the referee. But by

We are not here concerned with a suit by a trustee to recover property in the possession of another who claims it adversely, nor with a suit against a trustee to recover property in his possession claimed by another, and therefore the'jurisdictional questions incident to suits of that character need not be considered. But we are concerned with a suit against a trustee, the purpose of which is to control the distribution of a fund in his possession, admittedly belonging to the bankrupt’s estate, and to determine to what extent and in what order the several creditors shall participate therein.

Section 2 of the Bankruptcy Act invests the. courts of bankruptcy "with such jurisdiction at law and in equity as will enable them to exercise original jurisdiction in bankruptcy proceedings, . . to

(2) "Allow claims, disallow claims, reconsider allowed. or disallowed claims, and allow or disallow them against bankrupt estates;

(6) "Bring in and substitute additional persons or parties in proceedings in bankruptcy when necessary for the complete determination of a matter in controversy;

(7) "Cause the estates of bankrupts to be collected, reduced to money and distributed, and determine pon-troversies in relation thereto, except as herein otherwise provided;

(13) "Enforce obedience by bankrupts, officers, and

(15) “Make such orders, issue such process, and enter such judgments in addition to those specifically provided for as may be necessary for the enforcement of the provisions of this act.”

And the section concludes by saying: “Nothing in this section contained shall bq construed to deprive a court of bankruptcy of any power it would possess were certain specific powers not herein enumerated.”

Section 23a provides: “The United States circuit courts shall have jurisdiction of all controversies at law and in equity, as distinguished from proceedings in bankruptcy, between trustees as such and adverse claimants concerning the property acquired or claimed by the trustees, in the same manner and to the same extent only as though bankruptcy proceedings had not been instituted and such controversies had been between the bankrupts and such adverse claimants.”

And § 57k reads: “Claims which have been allowed may be reconsidered for cause and reallowed or rejected in whole or in part, according to the equities of the case, before but not after the estate has been closed.”

We think it is a necessary conclusion from these and other provisions of the act that the jurisdiction of the bankruptcy courts in all “proceedings in bankruptcy” is intended to be exclusive of all other courts, and that such proceedings include, among others, all matters of administration, such as the allowance, rejection and reconsideration of claims, the reduction of the estates to money and its distribution, the determination of the preferences and priorities to be áecorded to claims presented for allowance and payment in regular course, and the supervision and control of the trustees and others who are employed to assist them.

Of the fact that the suit was begun in the Circuit Court with the express leave of the court of bankruptcy it suffices to say that the-latter was not at liberty to surrender its exclusive control over matters of administration or to confide them to another tribunal.

The portions of the bill seeking an adjudication of the

The decree of the Circuit Court of Appeals is

Affirmed.