In Re Fidelity Mortgage Investors, Debtor. Fidelity Mortgage Investors, Applicant-Appellee v. Camelia Builders, Inc.

VAN GRAAFEILAND, Circuit Judge

(dissenting):

Although the War between the States terminated more than a century ago, it might be difficult to convince appellants of this fact. Residents of Texas, they have been fined $20,000 for alleged violation of a rule governing the practice and procedure of a bankruptcy court in New York City in a proceeding in which they were not even parties. I cannot join my brothers in their approval of what has taken place.

Appellants, Camelia Builders, Inc. and Farnale, Inc., were mechanics lienors of a construction project in Jackson, Mississippi; and, if they wished to have the benefit of their liens, were required to commence suit to foreclose within twelve months after their debt came due. Miss.Code of 1972 § 85-7-141. They did commence suit in Rankin County Court of Mississippi in January, 1975.

Fidelity Mortgage Investors (FMI) was the interim lender on the project, and its indebtedness was secured by a deed of trust. Shortly after the institution of appellants’ suit in Mississippi, FMI commenced a Chapter XI proceeding in New York City and thereafter filed a plea of abatement in the Mississippi action based on this proceeding. It then had one of its attorneys substituted as trustee under the deed of trust, and the attorney commenced the publication required in Mississippi for nonjudicial sale of his trust estate.

Appellant Hubbard, attorney for the mechanics lienors, thus found himself faced with the prospect of an immediate non-judicial sale and possible loss of his clients’ liens. He decided that his clients’ interests could best be protected by commencing an action in the United States District Court for the Southern District of Mississippi seeking to prevent the trustee’s sale, or, alternatively, that it be conducted by chancery proceeding and that FMI be directed to pay over from the proceeds of the sale the sum of $75,964.33, the amount of his clients’ liens. 1 District Judge Nixon wisely *59 permitted the foreclosure sale to continue but directed the deposit of the $75,964.33 with his court until a determination could be made as to whether these proceeds were the property of FMI or were subject to the prior lien of appellants. It is for their temerity in bringing this action that appellants, including attorney Hubbard, have been held jointly and severally liable for over $20,000.

Section 41(a) of the Bankruptcy Act, 11 U.S.C. § 69 (a), provides in part that in proceedings before a referee, a person shall not disobey “any lawful order, process, or writ”. Bankruptcy Rule 920 provides that conduct prohibited by § 41(a) may be punished by the referee. The prohibited conduct in the instant ease is the alleged violation of Rule 11-44 of the Chapter XI rules, which provides in part that a Chapter XI petition shall operate as a stay of the commencement or continuance of any proceeding against the debtor or to enforce any lien against his property. 2

28 U.S.C. § 2075 empowers the Supreme Court to prescribe by general rules the “practice and procedure under the Bankruptcy Act”. It provides further that such rules “shall not abridge, enlarge or modify any substantive right”. The authority granted the Supreme Court by § 2075 is restricted in its operation to matters of pleading and court practice and procedure. Sibbach v. Wilson & Co., 312 U.S. 1, 10 , 61 S.Ct. 422 , 85 L.Ed. 479 (1941). Bankruptcy rules enacted thereunder may not add to, subtract from or vary the provisions of the bankruptcy law and cannot extend the jurisdiction of a referee beyond that which is conferred upon him by statute. Meek v. Centre County Banking Co., 268 U.S. 426 , 434, 45 S.Ct. 560 , 69 L.Ed. 1028 (1925); In re State Thread Co., 126 F.2d 296, 300 (6th Cir. 1942).

The jurisdiction of a bankruptcy court is basically in rem, and possession of the res is a prerequisite to the court’s summary exercise of its power. Callaway v. Benton, 336 U.S. 132, 142 , 69 S.Ct. 435 , 93 L.Ed. 553 (1949); Harrison v. Chamberlin, 271 U.S. 191 , 46 S.Ct. 467 , 70 L.Ed. 897 (1926); In re Dolly Madison Industries, Inc., 504 F.2d 499, 503 (3d Cir. 1974); Texas & N. O. R. R. v. Phillips, 211 F.2d 419, 421 (5th Cir. 1954), cert. denied, 348 U.S. 913 , 75 S.Ct. 293 , 99 L.Ed. 716 (1955). Congress did not give bankruptcy courts jurisdiction over all controversies that in some way affect the debt- or’s estate, In re Beck Industries, Inc., 479 F.2d 410 , 415 (2d Cir.), cert. denied, 414 U.S. 858 , 94 S.Ct. 163 , 38 L.Ed.2d 108 (1973); In re Unishops, Inc., 494 F.2d 689, 690 (2d Cir. 1974); and the mere financial interest of a bankrupt’s estate in the outcome of litigation pending in state court does not authorize the issuance of an injunction against its prosecution. In re Adolf Gobel, Inc., 80 F.2d 849, 852 (2d Cir. 1936).

In In re Stanndco Developers, Inc., 534 F.2d 1050 (2d Cir. 1976), we held squarely that a bankruptcy court has no jurisdiction to restrain state court proceedings seeking to enforce liens on property not belonging to the debtor. This holding is in accord with similar decisions in other circuits which hold that mortgaged premises are not the “property” of the bankrupt mortgagee within the meaning of the Bankruptcy Act. See, e. g. Brunn v. Wichser, 75 F.2d 25, 28 (3d Cir. 1934); In re Holiday Lodge, Inc., 300 F.2d 516 , 519 (7th Cir.), cert. denied, 371 U.S. 824 , 83 S.Ct. 43 , 9 L.Ed.2d 63 (1962); In re A. Roth Co., 125 F.2d 396, 398 (7th Cir. 1942). I am unable to reconcile the holding *60 of the majority herein with Stanndco and the eases above cited. In my opinion, FMI’s interest as beneficiary of a deed of trust did not confer jurisdiction over the Jackson construction project in the New York bankruptcy court.

Some states, such as Mississippi, use a deed of trust to perform the functions of a mortgage. 4A Powell on Real Property § 574. A deed of trust is conveyed to one other than the lender who holds it in trust for both the lender and the borrower. 9 Thompson on Real Property § 4660. Under Mississippi law, the lender, as beneficiary of the deed of trust, has no estate in the land, but only an interest therein to the extent that he can cause the trustee to sell the land and apply the proceeds to the payment of the secured debt. Baker v. Conn. General Life Ins. Co., 196 Miss. 701 , 18 So.2d 438 (1944). There is nothing in the Mississippi mortgaging procedure which justifies a holding that mortgaged premises are the “property” of the mortgagee. In my opinion, the summary jurisdiction of a bankruptcy referee would be extended far beyond the intent of Congress if an action by one lienor to enforce his lien could be stayed by a bankruptcy rule of practice and procedure simply because another lienor had filed for a Chapter XI arrangement. 3

No court has the power to punish for the violation of an order issued without jurisdiction over the subject matter or the parties. Brougham v. Oceanic Steam Navigation Co., 205 F. 857, 860 (2d Cir. 1913). Likewise, a court without jurisdiction over the person of an alleged contemnor cannot punish him for the alleged violation of one of its rules. DeParcq v. United States District Court, 235 F.2d 692 (8th Cir. 1956). If, as I believe, the referee in bankruptcy had no jurisdiction over the construction project in Jackson, Mississippi, neither he nor the District Court was empowered to hold appellants in contempt for attempting to protect their lien rights in that property.

Assuming, however, that the bankruptcy referee did have jurisdiction over the persons of appellants, he did not have the power to institute Rule 920 proceedings against them for violation of Rule 11-44. Prior to the promulgation of the bankruptcy rules, a referee had no power to punish for contempt. O’Hagan v. Blythe, 354 F.2d 83, 84 (2d Cir. 1965). Bankruptcy Rule 920 now authorizes a referee, in proceedings before him to punish for disobedience of “any lawful order, process, or writ” or to certify the facts to the District Court for such punishment. I disagree with my brothers when they hold a bankruptcy rule of practice and procedure to be a “lawful order” within the meaning of this rule. Many years ago, this Court committed itself to the proposition that statutory contempt proceedings should be reviewed in a highly technical manner, stating that “where Congress has been so industrious to restrict the natural inherent powers of a federal court, scrupulous attention to the limitations it has imposed would seem to be the proper course.” In re Probst, 205 F. 512, 513 (2d Cir. 1913). The contempt powers of a federal court are specifically limited by statute, Berry v. Midtown Service Corp., 104 F.2d 107, 109 (2d Cir.), cert. granted, 308 U.S. 536 , 60 S.Ct. 114 , 84 L.Ed. 452 , appeal dismissed per stipulation, 308 U.S. 629 , 60 S.Ct. 297 , 84 L.Ed. 525 (1939); and such powers should not be extended beyond the plain terms of the statute which grants them. Denver-Greeley Valley Water Users’ Ass’n v. McNeil, 131 F.2d 67, 70 (10th Cir. 1942). 4

*61 18 U.S.C. § 401 empowers a court of the United States to punish for disobedience of its “lawful writ, process, order, rule, decree, or command.” (Emphasis supplied). In contrast, in proceedings before a referee, punishment for contempt is limited to violations of a “lawful order, process, or writ.” 11 U.S.C. § 69 . The omission of the word “rule” could not have been inadvertent. The phrase “lawful order” is also used in § 14(c)(6) of the Bankruptcy Act ( 11 U.S.C. § 32 (c)(6)) wherein it is provided that the bankruptcy court shall grant a discharge unless satisfied that the bankrupt “has refused to obey any lawful order of, or to answer any material question approved by the court.” Sections 14 and 49 of the Bankruptcy Act are read together so that, upon the failure of a petitioner to obey an order of the referee, the referee has the alternative of either denying discharge or holding petitioner in contempt. In re Kokoszka, 479 F.2d 990, 997 (2d Cir. 1973), aff’d, 417 U.S. 642 , 94 S.Ct. 2431 , 41 L.Ed.2d 374 (1974).

In cases decided under § 14, the courts have concerned themselves with the violation of orders, not of rules. We have required, not only that the order violated be an express court order, Berry v. Midtown Service Corp., supra, 104 F.2d at 110 , but also that it be a “lawful” one. In re Teper-man, 123 F.2d 732 (2d Cir. 1941). I see nothing in 28 U.S.C. § 2075 or the orders of the Supreme Court issued pursuant thereto to indicate that the phrase “lawful order” is hereafter to be so broadly construed as to include within its meaning all of the newly enacted bankruptcy rules. 5

When these rules were approved by the Supreme Court, Mr. Justice Douglas expressed strong disagreement with Rule 920, quoting the statement of Chief Justice Taft in Cooke v. United States, 267 U.S. 517, 539 , 45 S.Ct. 390, 396 , 69 L.Ed. 767 (1925) that the exercise of contempt power is “a delicate one and care is needed to avoid arbitrary or oppressive conclusions.” Had Justice Douglas known that Rule 920 would be construed to empower a referee to punish anyone even remotely affected by the broad sweep of a bankruptcy court’s jurisdiction for violation of one of the many, little known rules of bankruptcy procedure, I am sure his disagreement would have been expressed in even stronger terms.

Appellants have absconded with .no money belonging to the debtor in arrangement; it is safely under the control of the United States District Court in Mississippi awaiting a determination as to whether it is the property of FMI or appellants. I see no injustice in requiring FMI to prove its right to these funds in a plenary proceeding in the Mississippi District Court. I believe, on the other hand, that appellants have been dealt with most unjustly by being held in contempt of a New York bankruptcy referee’s “lawful order” and required to pay $20,000 from their own pockets because of such “contempt”.

For the reasons above set forth, I respectfully dissent.

. For some unknown reason, appellants named FMI as a party defendant, rather than the trus *59 tee who was planning to conduct the sale. However, it is clear that appellants were not seeking any affirmative relief against FMI but were attempting only to protect their interest as lienors of the Jackson, Mississippi construction project.

. Rule 920(a)(3) provides that a referee shall not order imprisonment nor impose a fine of more than $250 as punishment for contempt. If he believes that more substantial punishment is warranted, he may certify the facts to a district judge who “shall proceed as for a contempt not committed in his presence”. Rule 920(a)(4). In the instant case, the referee found appellants guilty of contempt and then certified the facts to the District Court which made an additional finding based upon the certified facts.

. If, as the majority seems to hold, premises subject to a lien are the “property” of the lienor, interesting legal problems are presented. There may be three or four mortgages and 50 to 100 mechanic’s liens on file against a building project. As these lienors take turns in filing for bankruptcy or for bankruptcy Chapter proceedings in various parts of the United States, resolution of the jurisdictional maze which results will be a formidable task.

. With all due respect to my brothers, I do not think that it is “overly-formalistic” to require a federal court to comply with the strict language of a contempt statute. Neither do I believe that such requirement exalts “form over substance”. A man such as appellant Hubbard must work long and hard to accumulate $20,-000. Before we permit a court to take this from him, using the “legal thumbscrew” of contempt, we should be sure that it has kept *61 strictly within the limitations of the statute which empowers it to act. This is not exalting form over substance. It is simple justice.

. I do not share my brothers’ concern about the enforcibility of rules of practice and procedure which are not self-executing, cf. Bardin v. Mondon, 298 F.2d 235, 238 (2d Cir. 1961). More importantly, since Congress did not provide that in proceedings before a referee punishment could be imposed for the violation of a rule, it, too, felt that a referee’s “lawful orders” could enforce such compliance as was required. It is interesting to note that Official Form 11-F13 covering notice to creditors in a Chapter XI proceeding is now in the form of an order and incorporates the language of Rule 11-44. This indicates to me that something more is required to call forth the punitive sanctions of contempt than the mere enactment of the rule.