In re SAN GABRIEL SANATORIUM CO. PERKINS v. MARKHAM et al., 102 F. 310

MORROW, Circuit Judge, after stating the case as above, delivered the opinion of the court.

After Markham had commenced his action in the state court, on August 14, 1899, ,to foreclose his mortgage upon the real and personal property of the -bankrupt, and for the appointment of a receiver to take charge of the same, and before he had applied to the United States district court, on September 8,1899, for leave to malee the bankrupt and the trustee of the bankrupt estate parties defendant to the action in the state court, the trustee in bankruptcy had, on August 29, 1899, applied to the state court having jurisdiction of the foreclosure proceedings, and had obtained the permission of that court to bring suit in the United States district court against the receiver appointed by the state court, for the recovery of all the property described in the complaint in the foreclosure proceeding; and the trustee had, on August 29, 1899, brought that suit in the United States district court, and process had been duly issued in the action and served upon all the parties.

This action was therefore pending in the district court at the time the court made the orders which are now the subject of review, and was within the jurisdiction of that court. See opinion in the case of Hall v. Kincell (rendered at the present term of this court) 102 Fed. 301. It appears from the record that the trustee in bankruptcy in this action challenges the validity of the Markham mortgage, to the extent of the personal property claimed by the mortgagee to be covered by it.

He also denies the validity of the chattel mortgage given to the First National Bank of Pasadena to secure the payment of $10,000, and alleges that the sale of the real and personal property to McCauley was illegal and void. It appears further that the district court, in determining the issues presented by the petition in bankruptcy, held that the latter-sale was without consideration, and was fraudulent and void as against the creditors of the bankrupt.

The court also held that the chattel mortgage was illegal and void, as to §8,000 thereof, for the reason that the mortgage was executed at a time when the bankrupt was insolvent, and ihat to the extent of §8,000 it was given and received as a. preference, contrary to the provisions of the bankrupt act. It remains for the district court, as a court of bankruptcy, to determine the validity of the chattel mortgage for the remaining §2,000, and the validity of the Markham mortgage with respect to the personal property therein described.

In this aspect of the proceedings, we are of the opinion that the district court, having the general jurisdiction at law and in equity provided in the act of July 1, 1898 (30 Stat. 544), was authorized to determine these questions, not only upon the issues presented by the petition in bankruptcy, but also in dealing independently with the claims of the lienholders as against the property of the bankrupt estate.

It is true, the state court has exclusive jurisdiction over proceedings to foreclose mortgages; but where, as in this case, the state jurisdiction has been invoked after bankruptcy proceedings have been commenced, and where the validity of a mortgage lien, or some part of it, is involved in the bankruptcy proceedings, we think the bankruptcy court should retain its jurisdiction until such claims are fully determined and adjudicated; and particularly should this be the action of the bankruptcy court when the state court, exercising the rule of comity which should always obtain between the state and federal counts, consents that its receiver may he made a party to the action in t lie federal court.

It follows from these considerations that pending adjudication of these claims the district comí should have denied the application to make the trustee in bankruptcy a party defendant to the foreclosure proceedings in the state court, and should have granted the petition of the trustee that the plaintiff in the foreclosure proceedings and the 'First National Bank be enjoined until the further order of the court from further prosecuting the foreclosure proceedings in the state court.

The disposition to be made of the property after an adjudication by the court of bankruptcy as to the validity of the mortgage lien may properly be left to be determined, in view of all the circumstances, when that stage of the proceedings has been reached. The court may direct the trustee to sell the property free from whatever mortgage lien may be found to exist upon it, or the court may direct that it may he sold subject to such lien, or the trustee may be directed to appear in the state court, and represent the interest of the bankrupt estate in foreclosure proceedings in that court.

The district court will, of course, pursue that method of procedure which will best subserve the interests of the bankrupt estate, while at the same time preserving the valid rights of the mortgagees. The orders of the district court involved in this review are reversed, and the cause remanded for further proceedings in accordance with this opinion.