Opinion
No. 70-B-209
July 21, 1978
Bankruptcy Court Jurisdiction — Assignment of Mortgage — Asset Within Court's Jurisdiction
An assignment of part of a mortgage made by a bankrupt to secure debt repayment was voided, thereby discharging the mortgage from the assignee's lien, where the assignee had been paid in full on the underlying debt and the assignment constituted a pledge in contravention of a confirmed plan of arrangement.
The instant case was a confirmed Chapter XI case, superseded by adjudication. The assignee had been assigned a part of a mortgage existing between the bankrupt mortgagee and a mortgagor. The assignment was given to secure repayment of an alleged obligation of the bankrupt-assignor to the assignee.
The assignee first argued that the court lacked jurisdiction because she did not reside within the Eastern District of New York and service was not effectuated within the confines of said geographical locus. The court noted that Bankruptcy Rule 704(c) explicitly authorizes service by first class mail in adversary proceedings. In point of fact, the court observed, it was contemplated and intended that service by mail be encouraged to generate savings of time and money. In the instant case, the trustee took the added precaution, albeit not statutorily required, of mailing the summons and complaint by certified mail, return receipt requested. Due proof of service was filed with the court. Thus, the court concluded that the trustee's observance of the statutory requirements in the service of process rendered this defense of the assignee bereft of any viable competence.
Secondly, the assignee contended that the court lacked subject matter jurisdiction, since the subject matter of the controversy was not within the actual or constructive possession of the court. Regarding this defense, the court stated that a bankruptcy court is vested with summary jurisdiction in disputed matters where the property at issue is in the actual or constructive possession of the court. Here, noted the court, the property in dispute pertained to a mortgage, with the bankrupt as mortgagee. The mortgage came into being during the life of the antecedent Chapter XI case in the instant court. Thus, from its birth, the mortage consisted of an asset within the ambit of the court's jurisdiction. Moreover, the jurisdictional chain was not broken upon adjudication in view of Section 70a of the Bankruptcy Act. The applicable segment of Section 70a clearly enunciates the maxim that by operation of law all property of the bankrupt vests in the trustee except insofar as it is property which is held to be exempt. Thus, the court dismissed this defense for lack of merit.
Having disposed of the defenses, the court found that the debt, secured by the assignment, had been paid in full. Once a debt collaterally secured by an assignment of mortgage has been paid in full, noted the court, the assignment given to collaterally secure the debt expires. Finding no lien presently extant, the court concluded that the assignment must be discharged.
The court also found that the assignment was a pledge that had been given without the essential written approval of the creditors' committee in violation of the plan of arrangement and thus voidable. The assignee was a creditor who was knowledgeable about the plan. Despite this knowledge, the assignee transacted the assignment in direct contravention to the plan. Equity demanded that the assignment of the mortgage be voided as a necessary prophylactic action by the court in order to protect the rights of all creditors and to preserve the authority of the court's orders. Thus, the court declared that the assignment was void and discharged the mortgage from the assignee's lien.
See Secs. 2a at ¶ 2041 and 70a [§ 541(a)] at ¶ 9501 and Bankruptcy Rule 704 at ¶ 20,204.