In re Wood, 210 U.S. 246 (1908)

‘ It appearing to the court from the evidence that a copy of this application, together with a copy of the order to show cause issued thereon, returnable on the twentieth day of June, A. D.1905, was duly served on said J. B. Wood and Jethro P. Henderson on the twenty-sixth day of May, 1905; and that p. 248the said J. B. Wood and J. P. Henderson, not having appeared on the said twentieth day of June, 1905, herein, or shown to this court any cause why this court should not proceed to reexamine the said transaction; and it further appearing to this court that the matter of the said hearing has been duly continued from the said twentieth day of June until the first day of August, 1905, and that due notice of such continuance has been served upon the said J. B. Wood and Jethro P. Henderson, and that the said J. B. Wood and Jethro P. Henderson are fully advised that this hearing would be duly had on this day; and the said J. B. Wood and Jethro P. Henderson not having shown cause against the said application, and the court having heard the evidence on the part of the said trustee in support of the said application, and the arguments of counsel thereon, and the court being fully advised as to all matters of law and fact arising herein, the court doth find and adjudge that the said R. H. Williams, in contemplation of the filing of a petition in bankruptcy against him did, on the fifth day of December, 1902, transfer to said J. B. Wood and Jethro P. Henderson, attorneys at law, for services to be rendered, the sum of $5,000, lawful money of the United States, and one certificate of deposit for the sum of $3,000, issued by the Security Bank of Hot Springs, Arkansas, to the said R. H. Williams, and one certificate of deposit issued by the Arkansas National Bank of Hot Springs, Arkansas, to R. H. Williams for the sum of $1,795, the said two certificates of deposit having since been collected by the said J. B. Wood and Jethro P. Henderson. And the court doth find on reexamination of the said transaction that the sum of $800 is reasonable compensation for the services rendered the said bankrupt under the terms of the transaction by which said money and property were transferred to the said J. B. Wood and Jethro P. Henderson, and doth find and adjudge that the said transaction is valid to that extent only, which the court determines and adjudges to be the reasonable value for said services.”

It was thereupon ordered and adjudged that the transaction p. 249was valid as to the sum of $800, found to be the reasonable value of the services, and the trustee was ordered to proceed to recover the excess, being the sum of $8,995, from said Wood and Henderson. Thereupon, and after this order, Wood and Henderson appeared before the referee for the sole purpose of challenging his jurisdiction to make the foregoing order, upon the ground that neither the parties nor the subject-matter was within the jurisdiction of the District Court of Colorado. Thereafter the case was certified to the District Court, and in that court Wood and Henderson renewed their objection to the jurisdiction of the District Court, and that court affirmed the ruling of the referee; thereupon Wood and Henderson filed their petition in the Circuit Court of Appeals for a review of the order of the District Court, and challenged the jurisdiction of that court and the referee to make the order aforesaid, because they were citizens and residents of Arkansas; that the service of the notice of proceedings was made upon them at Hot Springs, in that State; that they had not appeared or submitted to the jurisdiction of the District Court except to raise the jurisdictional questions; that the subject-matter of the proceedings was certain transactions which took place wholly within the State of Arkansas. Thereupon the Circuit Court of Appeals certified three questions to this court, as follows:

the extent of the reasonable amount to be allowed for such services, and to direct that the excess may be recovered by the trustee for the benefit of the estate, in the instance where p. 250such attorney or counsellor at the time of receiving such payment or property and at the time of the proceedings in question was a non-resident of the State, or of the district, in which the bankrupt court instituting such inquiry is located, and where the money or property was so paid to, and is held by, such attorney or counsellor outside of the district in which such court of bankruptcy sits, and the order to show cause, citation, or notice of the proposed hearing is served upon him without, and not within the district in which such court of bankruptcy sits?

This section does not undertake to provide for a plenary suit, but for an examination and order in the course of the administration of the estate with a view to permitting only a p. 251reasonable amount thereof to be deducted from it because of payments of money or transfers of property to attorneys or counsellors in contemplation of bankruptcy proceedings. There is no provision for the enforcement of this section in another court of bankruptcy, where the bankrupt may be personally served with process in a plenary suit; such court is not given authority to reexamine the transaction. No other court has authority to determine the reasonable amount for which the transaction can stand. Swartz v. Frank, 183 Missouri, 439.

A pledge or payment for a consideration given in the present, or to be given in the future, whether in money or goods or services, is not a preference. The object of prohibiting preferences is to prevent favoritism, whether for secret benefit to himself or other reason, among a debtor’s creditors who ought in fairness to stand on the same footing. A transaction by which the debtor parts with something now, in return for something he acquires or is to acquire in the future, is not within the mischief the act was aimed against^ Section 60 therefore expressly recognizes this class of transactions; but, as it is capable of abuse, provides for a reexamination and p. 252reduction, if necessary, to a reasonable amount by the court on the petition of the trustee or a creditor.”

“A person shall be deemed to have given a preference if, being insolvent, he has, within four months before the filing p. 253of the petition, or after the filing of the petition and before the adjudication, procured or suffered a judgment to be entered against himself in favor of any person, or made a transfer of any of his property, and the effect of the enforcement of such judgment or transfer will be to enable any one of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class.”

We see no reason why notice of the proceedings under § 60d may not be by mail or otherwise, as the court shall direct, so that an opportunity is given to appear in the court where the p. 254estate is to be administered and contest the reasonableness of the charges in question.

“ ■ Such a course must be appropriate to the case, and just to the party affected. It must give him notice of the charge or claim against him, and an opportunity to be heard respecting the justice of the order or judgment sought. The notice p. 255must be such that he may be advised from it of the nature of the claim against him, and of the relief sought from the court if the claim is sustained? ”

Section 60d is a part of the original Bankruptcy Act of 1898, and intended by Congress to be a part of a uniform system of bankruptcy to be consistently administered by the courts given jurisdiction. Suppose, then, instead of obtaining the order in the District Court administering the property, the trustee, because he could not get personal service upon the attorneys, had gone to any court within the limits of the State of Arkansas, p. 256state or Federal, upon the theory of a preference, and obtained jurisdiction by valid service of process, it was in the power of the defendants to end the suit by refusing to consent to the jurisdiction of such court. If suit was begun in the state court of Arkansas that court would have answered, as did the Supreme Court of Missouri in Swartz v. Frank, 183 Missouri, 439, the bankruptcy act confers no jurisdiction upon a state court to entertain an application of the trustee, or of a creditor to reduce the provision made for counsel, that jurisdiction is given alone to the District Court of the United States administering the property. If the action had been brought in the United States court it would have made the same answer, and, in addition thereto, the jurisdiction of the Circuit or District Court of the United States could have been ousted, prior to the amendment of 1903, by the defendants withholding their consent to the jurisdiction of the Federal court. It is true that by the amendment referred to (the act of February, 1903) concurrent jurisdiction with the state courts is now given to the Federal courts, to suits for the recovery of property under § 60, subdivision 5, and § 67, subdivision e. These last-named sections have reference to suits to recover preferences or fraudulent conveyances. No attempt has been made to change the exercise of jurisdiction under § 60d. The transfer to counsel may be wholly sustained; it is certainly valid to the extent that it is reasonable. It is neither a preference nor a fraudulent conveyance, as defined by §§ 606 or 67e of the act.

The court has jurisdiction over the attorney to require revo l , ccx—17 p. 258payment by hiim Such jurisdiction may be exercised in the bankruptcy proceedings themselves; and its exercise is not violative of the rules regarding the form for suits against adverse claimants; moreover, it is provided for by a special clause of the bankrupt act itself. Such reexamination should be had, however, only on due notice to the attorney concerned.” Sec. 2099, p. 1298.

The first and second questions should be answered in the affirmative and the third, as having application to a suit before the order is made in the bankruptcy proceeding, in the negative. p. 259210 U. S. Bre wer , Pec kham and Moody , JJ., dissenting.

Now the recovery of an amount due or of property belonging to an individual or an estate is ordinarily by a common law action. That the claimant is an estate and in the hands of a trustee or receiver does not change the nature of the proceeding. Suppose one of our large railroad properties is in the hands of receivers, can it be tolerated that the amount of the indebtedness by any individual to that estate can be determined absolutely by the court without a jury? If this be so, what becomes of the protection given by Article VII of the Amendments to the Constitution, that “in suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved”? Even if an action has to be brought to obtain the process of execution in the State where the alleged debtor resides, of what significance is it if t*16 amount which is to be recovered is already settled, not by a jury, but by a court acting independently and in a prior pro- p. 263210 U. S. Bre wer , Pec kha m and Moody , JJ., dissenting.

Under its charter, derived from the constitution of Missouri, art. IX, §§ 20-25, the city of St. Louis had the broad and specific power, in general, to enact ordinance 21,087 imposing a license tax on all street railway cars operated within its limits, as well as to enact the prior ordinance thereby replaced which had fixed the amount at $25.00 per car, per annum. The power p. 267210 U. S. Argument for Appellant.

Whilst it is true in one sense that all Missouri corporations, including street railways, derive their franchises or right to exist originally from the State, acting through the General Assembly under general law, yet the rights-of-way conferred by the city upon street railroads are in effect equivalent to franchises, because unlike other corporations, under the Constitution, no street railroad can be granted the right “to construct and operate a street railroad within any city, town, village, or on any public highway without first acquiring the p. 268consent of the local authorities, nor can the franchise so granted be transferred without similar assent.” Constitution of Missouri of 1875, art. XII, § 20. See also as to such power being equivalent to a franchise: Blair v. Chicago, 201 U. S. 400, loc. cit. 457-460; State ex rel. Cream City Ry. v. Hilbert, 72 Wisconsin, 184, loc. cit. 190.

‘Eleventh.—To protect rights of city in corporations—Grant, regulate and repeal railway franchises—Free passes on street railways prohibited.—To take all needful steps in and out of the State, to protect the rights of the city in any corporation in which the city may have acquired an interest; to have sole power and authority to grant to persons or corporations the right to construct railways in the city, subject to the right to amend, alter or repeal any such grant, in whole or in part, and to regulate and control the same as to their fares, hours and frequency of trips, and the repair of their tracks, and the kind of their rails and vehicles; but every right so granted shall cease, unless the work of construction shall be begun within one year from the granting of the right and be continued to completion with all reasonable practical speed, and it shall be the cause of forfeiture of the rights and privileges derived from the city of any railroad company operating p. 272its road only within this city, which shall allow any person to ride or travel on its road gratuitously or for less than usual price of fare, unless such person be an officer or employee of such company.”

VOL. ccx—18 p. 274license fees, at the same time the principle has been established that such deprivation can only follow when the State or city has concluded itself by the use of clear and unequivocal terms. The existence of doubt in the interpretation of the alleged contract is fatal to the claim of exemption. The section of the Missouri constitution and the laws, to which we have referred, clearly show that while the franchise of the corporation essential to its existence is derived from the State, the city retains the control of its streets, and the use of them must be acquired from the municipal authorities upon terms and conditions which they shall fix. Blair v. Chicago, 201 U. S. 400.

A leading case is New Orleans City & Lake Railroad Co. v. New Orleans, 143 U. S. 192. In that case the city of New Orleans, on October 2, 1879, sold to the New Orleans City Railroad Company, assignor of the plaintiff in error, for the price of $630,000, the right of way and franchises for running certain lines of railroad for carrying passengers within the city, for the term of twenty-five years, and the company agreed to construct its railroad, to keep the streets in repair, to comply with the regulations as to the style and running of cars, rates of fare and motive power, and to annually pay into the city treasury, upon the assessed value of the road and fixtures, the annual tax levied upon the real estate, the value of the road and fixtures to be assessed by the usual mode of assessment, and the city bound itself not to grant, during the period for which the franchises were sold, a right of way to any other p. 275railroad company upon the streets where their right of way was sold, unless by mutual agreement between the city and the purchaser or purchasers of the franchises.

In Gordon v. Appeal Tax Court, 3 How. 133, upon which e plaintiff in error much relied, the only point decided was t at an act of the legislature, continuing the charter of a bank, P°n condition that the corporation should pay certain sums p. 276annually for public purposes, and declaring that, upon its acceptance and complying with the provisions of the act, the faith of the State was pledged not to impose any further tax or burden upon the corporation during the continuance of the charter, exempted the stockholders from taxation on their stock; and so much of the opinion as might, taken by itself, seem to support this writ of error has been often explained or disapproved. State Bank v. Knoop, 16 How. 369, 386, 401, 402; People v. Commissioners, 4 Wall. 244, 259; Jefferson Bank v. Skelly, 1 Black, 436-446; Farrington v. Tennessee, 95 U. S. 679, 690, 694; Stone v. Farmers’ Loan & Trust Company, 116 U. S. 307, 328.

Road Tax Case, 18 Wall. 206. The New Orleans case was quof with approval, and the former cases in this court reviewed in t e recent case of Metropolitan Street Railway Company v. p. 277York Tax Commissioners, 199 U. S. 1. In that case the decision of the New York Circuit Court of Appeals was affirmed, sustaining the right of the State of New York to tax franchises of street railway companies, notwithstanding the railway companies had already paid for the right to construct, maintain and operate and use street railroads in consideration of payment into the treasury of the city of New York of a percentage of their gross receipts. In that case Mr. Justice Brewer, who spoke for the court, said (pp. 37, 38):

troversy. In some of them is found the language that “ such Payments are to be in addition to all taxes, as now or p. 278afterwards shall be prescribed by law.” In one ordinance concerning consolidation of roads it is agreed, as to certain payments from gross receipts, that such “ payments shall be in addition to all other taxes or license fees now or hereafter prescribed by law.” In one of them is found the following language:

No ordinance contains any express relinquishment of the right to exact a license fee or tax. It is true that the city in granting the right to use the streets by special ordinance and in exercising by general ordinance the right conferred in the charter to impose a license tax upon cars is dealing with rights and privileges somewhat similar, but, nevertheless, essentially separate and distinct. In the special ordinances the city is making an arrangement with the railway company to confer the right to use the streets in consideration of certain things the company is to do by way of operation and otherwise, including, it may be, payment of fixed sums or a proportion of receipts in consideration of the rights and privileges conferred. p. 279The city does this by virtue of its power to grant rights and privileges and control their exercise in the streets of the city, power expressly conferred in the charter of the city.