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In re McGrew

March 23, 1942


Appeal from the District Court of the United States for the Western District of Pennsylvania; Frederic P. Schoonmaker, Judge.

Author: Clark

Before CLARK and JONES, Circuit Judges, and GANEY, District Judge.

CLARK, Circuit Judge.

The farmer in almost every nation has been excluded from the class against whom involuntary bankruptcy proceedings may be brought.*fn1 This general cloak of protection,*fn2 however, does not wholly explain the reasons for the special advantages afforded the farmer-debtor by the Frazier-Lemke Act.*fn3 It is true that the economic condition of the farmer had grown steadily worse.*fn4 However, one cannot overlook the historical fact that the American farmer has always been zealous in his own interests.*fn5 At any rate state laws were enacted to extend the period of mortgage redemption, to prohibit deficiency judgments and to declare a complete moratorium on the payment of mortgage indebtedness.*fn6 The Federal Government in 1933 passed three measures designed to improve the farmers' financial situation.*fn7 The Agricultural Adjustment Act*fn8 sought to restore purchasing power by raising the level of farm prices; the Farming Mortgage Act*fn9 was enacted to improve farm credit through the refinance of mortgage indebtedness; and Section 75*fn10 of the Bankruptcy Act was intended to provide relief via composition and extension agreements to distressed farmer-debtors whose affairs did not warrant or require liquidation. These measures however proved inadequate for the task of rescuing the farmer from his financial plight. The cumbersome machinery of Section 75 was rarely resorted to because of two outstanding defects in its procedure.*fn11 Since the mortgage debt of most farmers represented a majority of their indebtedness, the requirement that a composition or extension be agreed to by a majority in number and amount of all creditors often tended to grant to a single mortgage a veto power over composition and extension proposals. A mere composition or extension without any reduction in the amount of the lien was not a sufficiently effective remedy, particularly in view of the fact that in the absence of consent by at least a majority of the secured creditors, there was nothing to prevent foreclosure and dispossession of the farmer.*fn12

So finally a complete departure from the concept that bankruptcy legislation should preserve and distribute the debtors' assets for the creditors' benefit was resorted to.The Frazier-Lemke Act was designed solely to keep the farmer-debtor in possession of his farm perhaps for the general benefit of the state, but at any rate at the expense of his creditors.*fn13 After an unsuccessful attempt,*fn14 a constitutional act was passed as an amendment (subsection s) to Section 75 of the Bankruptcy Act.*fn15 Section 75 was originally to run only until March 4, 1938, but was extended to petitions filed prior to March4, 1940*fn16 and re-extended to March 4, 1944.*fn17

The debtor now before us filed a petition under Subsection s of Section 75 and on July 21, 1937 was adjudicated a bankrupt.*fn18 Some time after the close of the three year moratorium period (April 12, 1941), a mortgage-creditor presented a petition for the appointment of a trustee. Testimony on this petition was taken before a Conciliation Commissioner. The latter found that the debtor was not a farmer*fn19 when he instituted the proceedings and accordingly recommended that the proceeding should be dismissed. To this report the debtor excepted and demanded a reappraisal of his property. Upon the confirmation of the Commissioner's report*fn20 by the District Judge, a dismissal of the proceedings followed.

If the detailed background of the passage of the Frazier-Lemke Act proves any one point, it demonstrates that the Act was intended for the relief of farmers only and only those who come within the statutory definition of farmer may participate in its benefits. The necessity that a debtor be a farmer, therefore, is jurisdictional.*fn21 Like all matters going to the jurisdiction over the subject matter, it may be raised at any point in the proceedings and by either the parties themselves or the court, sua sponte.*fn22 With but a dictum contra,*fn23 the cases are unanimous in holding that even though the court approves a petition as validly filed, it may later and of its own motion dismiss when the debtor is found not to be a farmer.*fn24

It is essential, however, that jurisdictional issues under Section 75, sub. s may not be disposed of until a hearing thereupon has been held after due notice to the debtor.*fn25 To make the notice due it should have included within its terms the question of farmer vel non. This it did not do but rather postulated the question of whether a trustee should be appointed. This defect was cured by the proceedings in the District Court. In those hearings the debtor expressly excepted*fn26 to a finding of fact*fn27 by the Conciliation Commissioner which was worded as follows:

"The Commissioner makes the following Finding of Fact

"1. That the debtor was not a bona fide farmer when he instituted these proceedings, in that he did not derive his principal source of income from farming, nor was he primarily engaged in farming." Appellant's Appendix p. 31. The learned District Judge at the hearing before him made an independent finding saying: "In our opinion, McGrew was not a farmer, as defined by Section 75 of the Bankruptcy Act." Appellant's Appendix, p. 48.

We must therefore affirm his dismissal of the proceedings. Since the court had no jurisdiction of the debtor, it may not order a reappraisal.

The order of the District Court confirming the Conciliation Commissioner's report is affirmed.

JONES, Circuit Judge, concurs in ...

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