United States Rubber Company, Appellant, v. Allan L. Poage, Trustee of Paul Wanner Carter, Bankrupt, Appellee, 297 F.2d 670 (5th Cir. 1962)

This is an appeal from an order denying the appellant's petition for review and affirming referee's findings entered by the United States District Court for the Western District of Texas, on April 20, 1961 in a cause in bankruptcy.

The facts out of which this appeal arises are as follows: Paul W. Carter operated a business known as the Monarch Machine and Supply Company in Fort Stockton, Texas. On or about January 19, 1959, his business was destroyed by fire. His petition in bankruptcy was filed on September 25, 1959. Thereafter, on April 15, 1960, the United States Rubber Company, the appellant herein, filed in Carter's bankruptcy proof of both secured and unsecured claims, to the former of which appellee, Carter's trustee in bankruptcy objected. A hearing on the objections was held before a referee in bankruptcy, who entered findings of fact and conclusions of law sustaining the objections of the trustee. Upon a hearing pursuant to appellant's petition for review of the findings and conclusions of the referee, the United States District Court for the Western District of Texas affirmed and sustained the findings and conclusions of the referee and denied the petition for review. This appeal followed.

In the course of his business Carter had dealt with appellant and incurred an open account in the amount of $14,293.49. The basis for appellant's claim to security for part of this debt was and is a judgment entered by the Civil Court of DeKalb County, Georgia on April 8, 1959, more than four months prior to the filing of the petition in bankruptcy. It is the validity and effect of this judgment which is in issue here.

Carter carried a fire insurance policy with the Trinity Universal Insurance Company, a Texas corporation, in the amount of $6,000.00. Subsequent to the destruction by fire of Carter's business, on January 28, 1959, appellant filed a declaration in attachment in the Civil Court of DeKalb County, Georgia, alleging that Carter was indebted to appellant in the amount of $4,700.65, and naming the Trinity Universal Insurance Company as garnishee. A summons of garnishment was issued and the insurance company made answer, after which the court adjudged that the United States Rubber Company recover judgment against Carter in the amount of the alleged debt, together with interest and court costs, to be satisfied from the sum admitted to be due and owing by the garnishee to Carter.¹ 

The proof of claim filed with the bankruptcy court by appellant was in the amount of the judgment rendered by the Georgia court. The stated consideration for the debt was the Georgia judgment, and security was claimed in the form of a lien against the fund paid into the registry of the court by the Trinity Universal Insurance Company. Appended to appellant's claim was a certified true copy of the Georgia judgment.

In the hearing before the referee on the trustee's objections it was undisputed that Carter had never been present in Georgia and had not been served with process in the DeKalb County proceeding. Although the parties are now in disagreement on the point, the record plainly reveals that the copy of the Georgia judgment appended to appellant's claim was both in evidence and was considered by the referee, certain assertions of the referee to the contrary notwithstanding.²  No evidence, other than his proof of claim and copy of the Georgia judgment, was presented by appellant, and no transcript of the referee's hearing on objections was prepared.

Our task on this appeal is to determine whether or not the district judge was clearly in error in affirming the findings and conclusions of the referee. Among these "findings of fact" were: that appellant, by filing an action in the Texas district court on a sworn and verified account, in the full amount of such account and without mention of the Georgia judgment or of any claim to a lien, thereby waived its right to assert the benefits, if any, of the Georgia decree;³  that the Georgia decree amounted to a fraud on the bankrupt and was a nullity without force or effect as to Carter; that the Georgia Court had not obtained any jurisdiction over the person of Carter or over the subject matter; that therefore no lien securing the claim to the funds paid into the registry of the court existed or ever had existed; and that the claim filed by appellant as a secured claim should be, and was, disallowed. As "conclusions of law," the referee found that by filing its claim appellant had consented to the summary jurisdiction of the bankruptcy court to pass upon the validity of the claim and the defenses interposed thereto by way of objections; that he had power to inquire into the validity of a foreign judgment by determining if the foreign forum had jurisdiction; that the Georgia court had no jurisdiction over the person of Carter; and that the decree as a fraud against him was a nullity.⁴ 

It is, of course, elementary that a judgment binding on the person of a defendant may not be rendered in an action classified as in personam without some form of personal service sufficient to satisfy the requirements of due process of law. A statutory proceeding in garnishment, however is not an action in personam, nor is it, strictly speaking, a proceeding in rem. Partaking of the nature of both, it is frequently classified as a proceeding quasi-in-rem. Haft & Bros. v. Wells, 93 F.2d 991 (10th Cir. 1937); A. B. Baxter & Co. v. Andrews, 131 Ga. 120, 62 S.E. 43, 20 L.R.A.,N.S., 268 (1908). See also Sanders v. Armour Fertilizer Works, 292 U.S. 190, 54 S. Ct. 677, 78 L. Ed. 1206 (1933).⁵  Service of the summons of garnishment notifies the debtor not to pay the debt and operates both upon the person of the garnishee and the debt itself. Harris v. Balk, 198 U.S. 215, 25 S. Ct. 625, 49 L. Ed. 1023 (1905). It is no impediment to the validity of a judgment in garnishment that there was no service, constructive or otherwise, on the debtor of the plaintiff in garnishment, when the state statute does not require it. Baltimore & Ohio R. Co. v. Hosteter, 240 U.S. 620, 36 S. Ct. 475, 60 L. Ed. 829, (1916). Attachment and garnishment are creatures of the local law, and if state law provides for the attachment of a debt, then, by personal service upon a garnishee found in the state, the court acquires jurisdiction over him and can garnish the debt due from him to the debtor of the plaintiff. Harris v. Balk, supra.

While it was entirely proper for the referee in this case to inquire into the validity of the Georgia judgment, Pepper v. Litton, 308 U.S. 295, 00 S. Ct. 238, 84 L. Ed. 281 (1939), the scope of his inquiry was limited to determination of whether or not the judgment was void. Pepper v. Litton, supra. A judgment is not void merely because it may be erroneous, but only if the court which rendered it lacked jurisdiction of the subject matter (or in a case where that is required, of the parties). Jones v. Watts, 142 F.2d 575 (5 Cir. 1944). It was to the question of jurisdiction which the referee quite correctly looked. His conclusion was that since the Georgia court had no jurisdiction of the person of the bankrupt, Carter, it was without power to render judgment against him and his debtor in a garnishment action. In this conclusion he erred.

It is the law of Georgia, of which the Federal courts (and the referee in the instant case) take judicial notice without the necessity for pleading, Straub v. Jaeger, 9 F.R.D. 672 (D.C.Pa. 1950), that when suit is brought against a non-resident in the state by attachment levied by service of summons of garnishment, the situs of any debt due from the garnishee to the non-resident defendant is at the residence of the garnishee in Georgia. See Parks Georgia Code § 5095 (1914). Service of attachment by serving process of garnishment is as effectual as though the attachment had been served by levying it upon the property of the defendant. Parks Georgia Code § 5079 (1914). While the record in this case does not reveal what, if any, connection Trinity Universal Insurance Company had with Georgia, the law of that state also provides for service of summons of garnishment upon the agent in charge of the office or business of a corporation in the county or district at the time of service. Id. § 5720. The test is whether the judgment in question here was obtained in consonance with these and other pertinent provisions of Georgia law; if it was, the objections to appellant's proof of secured claim, and the referee's rulings thereon, must fail. We are unable to perceive in this record any way in which Georgia law was not complied with.⁶ 

The conclusion of the referee, that by instituting a suit in state court for the full amount of the debt owed it by Carter the appellant waived its asserted lien, is clearly erroneous. Taking judgment against a garnishee does not merge the demand against the principal. Judgment may be recovered against both and proceeded upon until one is satisfied. Farmer v. Simpson, 6 Tex. 303 (1851); 2 Freeman on Judgments § 566 (1925).

Service of the summons of garnishment, under the law of Georgia, creates a lien on such property of the debtor of the plaintiff in garnishment as may be found in the hands of the garnishee. Sanders v. Armour Fertilizer Works, supra; Henley v. Colonial Stages South, 56 Ga.App. 722, 193 S.E. 905 (1937). While "the bankruptcy law contains no express provision preserving liens acquired by legal proceedings more than four months before the petition is filed. * * * it is clearly implied that they shall be saved from the operation of the law, for section 67f voids only liens obtained by legal proceedings within that period." Straton v. New, 283 U.S. 318, 51 S. Ct. 465, 75 L. Ed. 1060 (1931). See also Metcalf Bros. & Co. v. Barker, 187 U.S. 165, 23 S. Ct. 67, 47 L. Ed. 122 (1902). On the basis of the record presented to us, we see no reason why the Georgia judgment which perfected his lien created more than four months prior to Carter's bankruptcy should not be recognized by the referee as security for appellant's admittedly valid claim.

The district court was clearly in error in affirming and sustaining the referee in the several particulars mentioned above. For this reason, the judgment of the district court is reversed and the cause is remanded for further proceedings not inconsistent with this opinion.

Reversed and remanded.