Messrs. W. Scott Bicksler, Edmon G. Bennett, and George L. Nye for petitioners.
Mr. Harvey Riddell for respondent. [210 U.S. 246, 247]
Mr. Justice Day delivered the opinion of the court:
This case is here upon certificate from the circuit court of appeals for the eighth circuit.
The facts certified are: R. H. Williams had been adjudicated a bankrupt on January 13, 1904, in the district court of the United States for Colorado. On the 17th of May, 1905, it appears that the trustee in bankruptcy (following 60d) petitioned the court, representing that the bankrupt, in contemplation of filing the petition in bankruptcy, did pay to certain counsel, the petitioners in this case, at Hot Springs, Arkansas , $5,000 in cash, and transfer to them a certificate of deposit for $3,000, and a certificate of deposit for $1,795; that said money and property were transferred to said conusel, Wood and Henderson, by said Williams, in contemplation of the filing of a petition in bankruptcy against him, within four months of the filing thereof, for legal services to be rendered thereafter by said Wood and Henderson. They were thereupon ordered to appear at the office of the referee, in the city of Colorado Springs in the state of Colorado, on June 20, 1905, and show cause, if any they had, why an order should not be made determining and adjudicating the reasonable value of the services rendered by the said attorneys for the said bankrupt, and that, in default of their appearance, the referee would proceed to hear and determine the matter on the evidence presented. It was ordered that a copy of the citation, together with a copy of the petition, be served on Wood and Henderson at Hot Springs, Arkansas, at least twenty days before the day set for the hearing. On the first day of August, 1905, the referee in bankruptcy, holding a court of bankruptcy, made the following order:
It was thereupon ordered and adjudged that the transaction [210 U.S. 246, 249] was 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 the 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:
An answer to these questions involves the construction of 60d of the bankruptcy act of 1898, which reads:
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 [210 U.S. 246, 251] reasonable amount thereof to be deducted from it because of payments of money or transfers of property to attorneys or counselors 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 parsonally served with process in a plenary suit; such court is not given authority to re-examine the transaction. No other court has authority to determine the reasonable amount for which the transaction can stand. Swartz v. Frank, 183 Mo. 439, 82 S. W. 60.
Section 60d added a feature to the bankruptcy act not found in former acts regulating practice and procedure in bankruptcy; therefore adjudications upon other provisions of the bankruptcy act, or concerning the judiciary act giving jurisdiction to the courts of the United States, have no binding effect in the construction of this section.
This is not a case of preference, where part of the estate is transferred to a creditor so as to give to him more of the estate than to others of the same class, under 60 of the bankruptcy act, nor is it a case of fraudulent conveyance under 67. It is a transfer in consideration of future services, to be reduced if found unreasonable in amount. In Furth v. Stahl, 205 Pa. 439, 55 Atl. 29, the opinion is by Mr. Justice Mitchell, and, speaking for the supreme court of Pennsylvania, the learned justice, after quoting 60d, says:
The same statute was before the court of appeals for the sixth circuit in the case of Pratt v. Bothe, 65 C. C. A. 48, 130 Fed. 670. In that case, in speaking of the provisions of 60d, Judge Severens, speaking for the court, said:
And the court reached the conclusion that there having been no petition of the trustee or any creditor to inquire into the reasonableness of the compensation to be paid attorneys in contemplation of bankruptcy, his claim should be allowed; and the learned judge adds: 'As the rights of the parties are governed by the specific provision of the statute relating to the subject, no question of preference by reason of the payments arises.'
The bankrupt act itself leaves no doubt as to what is a preference which can be sued for in another jurisdiction, for the section (60a) provides:
To undertake to bring within this definition of a preference, requiring a plenary action for its recovery, the protection given a bankrupt's estate because of a transfer of property or money to an attorney or counselor for services to be rendered in contemplation of filling a petition in bankruptcy, is to add to the clearly-defined preferences contemplated by the act, and is to include entirely different transactions, not embraced in the statutory definition of a preference as Congress has defined that term.
Section 60d is sui generis, and does not contemplate the bringing of plenary suits or the recovery of preferential transfers in another jurisdiction. It recognizes the temptation of a filing debtor to deal too liberally with his property in employing counsel to protect him in view of financial reverses and probable failure. It recognizes the right of such a debtor to have the aid and advice of counsel, and, in contemplation of bankruptcy proceedings which shall strip him of his property, to make provisions for reasonable compensation to his counsel. And, in view of the circumstances, the act makes provision that the bankruptcy court administering the estate may, if the trustee or any creditor question the transaction, re-examine it with a view to a determination of its reasonableness.
The section makes no provision for the service of process, and, in that view, such reasonable notice to the parties affected should be required as is appropriate to the case, and an opportunity should be given them to be heard.
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 [210 U.S. 246, 254] estate is to be administered and contest the reasonableness of the charges in question.
Congress has the right to establish a uniform system of bankruptcy throughout the United States; and, having given jurisdiction to a particular district court to administer and distribute the property, it may, in some proper way, in such a case as this, call upon all interested to appear and assert their rights.
Our attention is called to other cases in which this view has been taken of this section of the bankruptcy act. In Re Lewin, 103 Fed. 850, it was held that a proceeding upon the petition of a trustee under this section is one administrative in its character, and that jurisdiction was not dependent upon service of regular process, as in a suit, but is expressly given by statute, and that a notice of the hearing before the referee, given by mail to the attorneys in interest, a reasonable time before the hearing, was sufficient. In speaking of this section Judge Wheeler says:
Jurisdiction to re-examine the transfer to counsel was certainly not conferred upon any state court. When the statute says that if the transfer in contemplation of filing a petition in bankruptcy shall be found to be excessive it may be reduced by 'the court,' is it possible that it was intended to give the state courts jurisdiction of that much of the administration of the estate, and oust the district court of the United States, and perhaps delay the settlement of the estate until the state courts of original and appellate jurisdiction shall determine the reasonableness of the counsel fee provided for in contemplation of bankruptcy? The answer to this question is obvious, and clearly against a construction which has this effect upon the system of bankruptcy to be administered in the district courts of the United States, established by the act of Congress.
It is true that the state courts, under the bankruptcy act as it stood before the amendment of February, 1903, were given jurisdiction to entertain suits to recover preferences, to the exclusion of the Federal courts, unless the defendant consented to be sued in the Federal court. Bardes v. First Nat. Bank, 178 U.S. 524 , 44 L. ed. 1175, 20 Sup. Ct. Rep. 1000. The district courts had jurisdiction only over proceedings in bankruptcy, as distinct from plenary suits against third persons having possession of transferred property, to be exercised when the district court had acquired jurisdiction of the bankrupt's property. Bardes v. First Nat. Bank, supra; White v. Schloerb, 178 U.S. 542 , 44 L. ed. 1183, 20 Sup. Ct. Rep. 1007; Bryan v. Bernheimer, 181 U.S. 188 , 45 L. ed. 814, 21 Sup. Ct. Rep. 557; Whitney v. Wenman, 198 U.S. 539 , 49 L. ed. 1157, 25 Sup. Ct. Rep. 778.
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, [210 U.S. 246, 256] state 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 this 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 Mo. 439, 82 S. W. 60,-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, of suits for the recovery of property under 60, subdivision b, 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 60b or 67e of the act.
It is to be noted that in this case, as the statement of the certificate shows, the district court rendered no judgment against the defendant for a recovery of the excess, but directed the trustee to bring an action therefor. It simply assumed and exercised the jurisdiction conferred by 60d to determine the amount of the excessive transfer for a counsel fee provided in view of filing a petition in bankruptcy. It may be that this order, though binding upon the parties, cannot be made finally effectual until a judgment is rendered in a jurisdiction where it can be executed. [210 U.S. 246, 257] We reach the conclusion that no re-examination can be had in this transaction, except in the district court of the United States administering the estate.
If the opinions of text writers are to be looked to,-and certainly they are entitled to much respect,-they have spoken with clear meaning as to the section of the bankruptcy act which is the subject-matter now under consideration. In Loveland on Bankruptcy, 3d ed. p. 166, that author says: 'The petition by the trustee to re-examine a transaction between the bankrupt and his attorney under this section is administrative in character, of which the court of bankruptcy has jurisdiction, irrespective of 23 of the act.'
And in Collier on Bankruptcy, 6th ed., the rule is thus stated (p. 492):
In Brandenburg on Bankruptcy, 3d ed. 971, it is said:
And in the latest work on the subject, Remington on Bankruptcy, the rule is thus stated:
The construction which we have given 60d does not deprive parties of rights secured under the 7th Amendment of the Constitution to trials by jury in suits at common law where the value in controversy exceeds $20. This provision of the Constitution extends to rights and remedies peculiarly legal in their nature, and such as it was proper to extend in courts of law by the appropriate modes and proceedings of such courts. Shields v. Thomas, 18 How. 253-262, 15 L. ed. 368-372.
This section in effect confers a special jurisdiction in a bankruptcy proceeding; it is only available when property has been transferred in contemplation of the filing of a petition in bankruptcy. When the affairs of one about to be adjudicated a bankrupt are in that situation, then the act, recognizing the right of the bankrupt to legal services to be rendered, undertakes to prevent the diminution of the estate to be administered and distributed for the benefit of creditors beyond a fair provision for counsel under such circumstances. To the extent that the provision is unreasonable the transfer is not given the effect to separate the property from the bankrupt's estate. As to this excess, the estate comes, within the meaning of the bankruptcy act, within the jurisdiction of the court, and will be ordered to be restored and administered for the benefit of creditors. The order contemplated can only be made after reasonable notice, which the facts certified in this case show was given to the petitioners.
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. [210 U.S. 246, 259]
Mr. Justice Brewer, with whom Mr. Justice Peckham and Mr. Justice Moody concur, dissenting:
I am constrained to dissent in this case, and will state my reasons therefor. The facts are sufficiently given in the opinion of the court. The petitioners were lawyers, living at Hot Springs, Arkansas. They had never been within the state of Colorado, or appeared in the district court except to file their petition for review, and the only service upon them was made in Arkansas by the delivery of a copy of the application and an order to show cause. The district court of Colorado, the court in which the bankruptcy proceedings were had, confirming the report of the referee, adjudged that, of the money paid to the petitioners employed by the bankrupt in anticipation of proceedings in bankruptcy, to render services therein, the sum of $800 was a reasonable compensation for such services, and ordered that the trustee proceed to recover the excess from petitioners. Justification for this order is found in this paragraph of the bankruptcy act:
It is said that this was an administrative, and not a judicial, proceeding. There possibilities are suggested by the section. One is that the bankruptcy court, after an examination, may find that there is reason to believe that the attorneys have been paid an excessive sum, and direct the trustee to proceed by action in any court acquiring jurisdiction of the persons of the attorneys to recover what, by that court, shall be adjudged excessive. This would be a strictly administrative proceeding, [210 U.S. 246, 260] and if that were the conclusion of the court I should have nothing to say in the way of dissent. Another is that the bankruptcy court both adjudicates the amount of the excess-the amount which has been wrongfully paid to the attorneys, and be which, in effect, they have been preferred to the prejudice of creditors of the bankrupt-and also awards process for the collection of that excess. This is not suggested in the opinion of the court, which, in effect, holds the third possibility,-to wit, that the bankruptcy court can adjudicate the amount of the wrongful prepayment, leaving the recovery of that amount to be accomplished by action in a court acquiring jurisdiction of the person in the ordinary way of legal proceedings. Such a construction is inconsistent with the whole history of the jurisdiction of district and circuit courts since the foundation of the government, and is, indeed, against the construction placed on other provisions of the present bankruptcy law.
By article 6 of the Amendments to the Constitution, criminal prosecutions are limited to 'the state and district wherein the crime shall have been committed, which district shall have been previously ascertained by law.' By this, so far as criminal cases are concerned, a state locality of jurisdiction is established beyond the power of Congress to disturb. We need not stop to inquire whether Congress can invest the district court of a single district or state with a jurisdiction in civil cases operative through the whole length and breadth of the country, but has it done so?
The original judiciary act, passed in 1789 (1 Stat. at. L. 73, 79, chap. 20), provides, in respect to circuit courts, that 'no civil suit shall be brought before either of said courts against an inhabitant of the United States by any original process in any other district than that whereof he is an inhabitant, or in which he shall be found at the time of serving the writ.' See also, with respect to the jurisdiction of district courts, Rev. Stat. 563, U. S. Comp. Stat. 1901, p. 455; and, with respect to that of circuit courts, Rev. Stat. 629, U. S. Comp. Stat. 1901, p. 503.
Construing the judiciary act of 1789, it was said in Toland v. Sprague, 12 Pet. 300, 328, 9 L. ed. 1093, 1104: [210 U.S. 246, 261] 'The judiciary act has divided the United States into judicial districts. Within these districts a circuit court is required to be holden. The circuit court of each district sits within and for that district, and is bounded by its local limits. Whatever may be the extent of their jurisdiction over the subject-matter of suits, in respect to persons and property, it can only be exercised within the limits of the district. Congress might have authorized civil process from any circuit court, to have run into any state of the Union. It has not done so. It has not in terms authorized any original civil process to run into any other district; with the single exception of subpoenas for witnesses, within a limited distance.'
While the general conditions of jurisdiction of the Federal courts were in some respect changed by the act of August 13, 1888 (25 Stat. at L. 433, chap. 866, U. S. Comp. Stat. 1901, p. 508) the change does not affect the present question.
Before the district court of Colorado could, in ordinary matters, acquire jurisdiction over the person of one not found within its territorial limits, there must be a voluntary appearance of the defendant. He cannot, in an ordinary ligitation, be brought into that court by service of process outside the limits of the court's jurisdiction. It has been held that the circuit court of one state has no jurisdiction in matters such as the sale of real property beyond the limits of the state. Boyce v. Grundy, 9 Pet. 275, 9 L. ed. 127; Mississippi & M. R. Co. v. Ward, 2 Black, 485, 17 L. ed. 311; Northern Indiana R. Co. v. Michigan C. R. Co. 15 How. 233, 14 L. ed. 674. It is true that, when suit is brought to enforce any legal or equitable claim against real or personal property within the district where the suit is brought, one who is not an inhabitant of nor found within the district, and does not voluntarily appear thereto, can be brought into court by personal service outside the limits of the district or by publication, as the court may direct; but any adjudication made in that suit, as regards such absent defendant, without appearance, affects only his property within the district. Rev. Stat. 738. So, where suit is brought to foreclose a mortgage or trust deed on property [210 U.S. 246, 262] situate in several states, the settled practice is for proceedings of foreclosure to be commenced in one court, called the court of primary jurisdiction, and then, in order to establish and maintain judicial control over the property in the other states, obtain ancillary administration in those states; although, if the defendant, the owner of the property, is brought into the court of primary jurisdiction, that court may act upon him and compel him to do with the property that which ought to be done. But, in all these cases, either the person or the property is within the territorial jurisdiction of the court.
When an individual, not an inhabitant of the state or district, and not found therein, is sought to be charged by reason only of his indebtedness to a defendant duly served, jurisdiction is not acquired by mere service of notice outside the state, for the fact of indebtedness does not bring him within the jurisdiction of the court. While, for some purposes, the situs of a debt may accompany the creditor, yet that situs is not sufficient to give to a court jurisdiction of a personal action against the debtor; that must be maintained in the state where the debtor is found.
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 7 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 the amount which is to be recovered is already settled, not by a jury, but by a court, acting independently, and in a prior proceeding? [210 U.S. 246, 263] If the benefit of a trial by jury can in that way be taken away, it will take but little ingenuity on the part of lawmakers to provide for the total destruction of the right of trial by jury,-a right which has been considered of priceless benefit in all English-speaking nations, and the protection of which is imbedded in the national as well as state Constitutions.
How appropriate, in this connection, is the language of Mr. Justice Brandley, delivering the opinion of the court in Boyd v. United States, 116 U.S. 616, 635 , 29 S. L. ed. 746, 752, 6 Sup. Ct. Rep. 524, 535, where, speaking of an attack upon another constitutional provision, he says:
Again, it is said that an excessive prepayment to an attorney does not come within the technical definition of a preference, as stated in 60:
An attorney rendering services becomes thereby a creditor of the client; and, if he is paid more for the services than they are worth, he has received as creditor more than he is entitled to, [210 U.S. 246, 264] and comes within the spirit, if not the letter, of 60a, which provides that 'a person shall be deemed to have given a preference if, being insolvent, he has, within four months before the filing of the petition . . . made a transfer of any of his property, and the effect of the enforcement of such . . . 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.' The idea of bankruptcy is that the bankrupt is unable to pay his debts in full; and, if the attorney has received payment in full, he has received a greater percentage of his debt than any other creditor.
While 60d is not in the bankruptcy act of 1867 [14 Stat. at L. 517, chap. 176], obviously it was specially inserted in the present act for the purpose of making clear the liability of counsel receiving payment in advance. It is simply a declaration that an excessive prepayment to counsel employed with a view to bankruptcy proceedings is to be considered, so far as the excess is concerned, a preference, and recoverable by the trustee in bankruptcy. And, unless a contrary intent be clearly manifested, the proceeding to recover that preference should be in the same way and by the same tribunals that have jurisdiction of any other proceeding to recover money or property given by way of preference. It would be giving an unreasonable extension to language to make it not simply a declaration of the right to recover, but also a limitation of the tribunal in which the recovery can be had or the amount due determined,-a limitation not obtaining in respect to any other preference.
In Re Waukesha Water Co. 116 Fed. 1009, it was held by the district court of the eastern district of Wisconsin that the 'bankrupt act 1898 confers no power on a court of bankruptcy to summon before it, by a rule to show cause, third persons who are not parties to the record, and who reside without the district and state, and are there served with the order, and, under the general rules of law governing the Federal courts, in the absence of express authority, such service is ineffectual to confer jurisdiction in personam.' [210 U.S. 246, 265] Again, it is suggested that 60d provides for proceedings in the bankruptcy court,-no vesting of jurisdiction in any other than that court,- and it is said there is no provision for a plenary suit to recover the amount of the excessive prepayment and none for a jury. But, by the bankrupt act of March 2, 1867, the general jurisdiction over bankruptcy proceedings was vested in the court in which they were commenced, and there was no special provision for ancillary proceedings in the courts of other districts, and yet it was decided that those ancillary proceedings might be held; that that seemed to be the necessary result of the general jurisdiction conferred, and to be in harmony with the design and scope of the act. As said by Mr. Justice Bradley, in Lathrop v. Drake, 91 U.S. 516, 518 , 23 S. L. ed. 414, 415:
For these reasons, thus outlined, I must dissent from the opinion and judgment of the court.