U.S. Supreme Court
Ray v. Norseworthy, 90 U.S. 23 Wall. 128 128 (1874)
Ray v. Norseworthy
90 U.S. (23 Wall.) 128
Although district courts of the United States, sitting in bankruptcy, have power to order a sale of the real estate of the bankrupt which he has mortgaged in such a way as to discharge it of all liens, and although as a general thing, if they order a sale so that the purchaser shall take a title so discharged the purchaser will have a title wholly unencumbered, yet to pass in this way an unencumbered title of property previously mortgaged, it is indispensable that the mortgagee have notice of the purpose of the court to make such an order; or that in some other way he have had the power to be heard, in order that he may show why the sale should not haws the effect of discharging his lien. And if a sale be made without any notice to him, his mortgage is not discharged.
The case was thus:
The first section of the Bankrupt Act enacts:
"That the several district courts be and hereby are constituted courts of bankruptcy. . . . And the jurisdiction hereby conferred shall extend to all cases and controversies arising between the bankrupt and any creditor or creditors who shall claim any debt or demand under the bankruptcy; to the collection of all the assets of the bankrupt; to the ascertainment and liquidation of the liens and other specific claims thereon; to the adjustment of the various priorities and conflicting interests of all parties, and to the marshalling and disposition of the different funds and assets, so as to secure the rights of all parties, and due distribution of the assets among all the creditors."
The twentieth section enacts:
"When a creditor has a mortgage or pledge of real or personal
property, or a lien thereon for securing the payment of a debt owing to him from the bankrupt, he shall be admitted as a creditor only for the balance of a debt after deducting the value of such property, to be ascertained by agreement between him and the assignee, or by a sale thereof, to be made in such manner as the court shall direct."
With these provisions of the Bankrupt Act in force, W. A. Parks, owning a plantation in Louisiana, sold the same to one Brigham, who, in consideration of the sale, gave his note for $11,666.66 to Parks, and to secure the note gave also what is called, in Louisiana, "a special mortgage with vendor's privilege" -- a sort of security apparently like a common law mortgage for purchase money.
Parks sold for value this mortgage with its privileges to one Norseworthy (the transfer being duly recorded), and soon afterwards died. Brigham, the purchaser of the land, was declared bankrupt, and his assignee, one Norton, filed a petition in the District Court of the United States at New Orleans setting forth certain facts, though exactly what facts -- as the petition itself was not produced -- did not appear. So far as might be inferred from a recital and order hereinafter quoted, made upon the petition, it rather seemed that the petition represented that Parks had owned the land and sold it Brigham, taking the mortgage &c.; that Brigham was now bankrupt, and that he, Norton, was his assignee; that it was necessary to sell the land to pay the debts of the bankrupt; and praying an order of sale and power to apply the proceeds to paying, in discharge of special mortgages, to one J. D. Denegre, $7,091; to Parks, $11,666.66; and to one R. Nugent, $2,044. Parks had at this time been dead for more than a year, and his estate had been sold. Denegre too was dead. Norseworthy lived in Texas, several hundred miles from New Orleans. Whether the fact of his interest in the mortgage originally owned by Parks was in any way stated, or indeed whether his name was mentioned in the petition in any way did not appear. But it appeared that a notice of the sale, intended to be a notice to him, had been sent through the mail by the assignee in bankruptcy, chanroblesvirtualawlibrary
to a person supposed by the said assignee to be Norseworthy's attorney, and to represent him, but who in fact did not represent him at all in any way. Neither did it appear what rule was made or what return had been made by the marshal.
Although, as above said, the petition itself was not produced, nor the rule, nor the marshal's return, the following proceedings upon the petition in the court of bankruptcy were produced:
"The petition and rule filed by the assignee, came up, Mr. H. D. Stone, for the assignee, and it appearing to the satisfaction of the court that the service required by law has been duly made and that the facts set forth in the petition are true, it is ordered that the prayer of the petition be granted and the rule be made absolute; that he assignee be authorized to sell the bankrupt's property following, to-wit:"
"[Here followed a description of the property mortgaged.]"
"It is further ordered that said assignee be also authorized to cancel and mortgages, liens, judgments, and encumbrances resting on said property, and particularly those in favor of the estate of J. D. Denegre for $7,091, being a special mortgage; the special mortgage and vendor's privilege in favor of W. A. Parks, for $11,666.66, and the special one in favor of R. Nugent for $2,044, reserving to said parties and to all other persons in interest all the rights in law to the proceeds according to their rank and priority."
The assignee, in pursuance of the already-quoted order, sold the land at public sale, and it came finally in the hands of one Ray.
Norseworthy now sought, in one of the state courts of Louisiana and by some of the proceedings usual in the civil law practice or in the code of the state just named, to subject the land to the payment of his mortgage for $11,666.66.
To establish his case, he produced his mortgage and transfer.
The other side, to show a discharge of the mortgage, put in evidence the recital and order of the district court, quoted just above, but did not produce or put in evidence chanroblesvirtualawlibrary
the petition on which the order and proceedings were had, nor the rule, nor the marshal's return.
One of the issues in the court in which Norseworthy made his proceeding was whether Norseworthy received a proper notice or was legally made a party to the proceeding under which the assignee attempted to sell the property free of his mortgage.
The court held that he had not received a proper notice, and that his rights were thus unaffected by the sale. The supreme court of the state was of the same opinion, and from its judgment made on that view the case was now here.
It was admitted in this Court on both sides to be plain alike under the first and the twentieth sections above quoted of the Bankrupt Act that under proper proceedings -- which, of course, included a notice properly given to parties in interest -- the district court had authority to order the sale of the property free of liens. So that the only questions in the case were 1st., whether Norseworthy was to be taken as having received proper notice, and if not, 2d., whether the want of it was fatal to the discharge of his lien. chanroblesvirtualawlibrary