Case ID: ohio-cir-dec_12/html/0419-01.html
Source: Caselaw Access Project
Author: {"author": "Cook, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

BANKRUPTCY — TRUSTEES—ACTIONS.
    [Geauga (7th) Circuit Court,
    April Term, 1901.]
    Burrows, Laubie and Cook, JJ.
    Clark H. Nye, Trustee, v. Arthur P. Hart et al.
    1. Where Suit by Trustee to Set Aside Conveyance Must be Brought. ■
    An action by a trustee in bankruptcy to set aside a fraudulent transfer of property made by a bankrupt to a third party, before the institution of pro'eedings in bankruptcy, cannot be brought in the federal court, but must be brought in the state court, except by defendant’s consent.
    2. Within What Time Suit may be Brought.
    In such case suit may be brought at any time within four years from the discovery of the fraud.
    
      3. Discharge of Bankrupt Does not Affect Right of Trustee to Bring Suit.
    The discharge of the bankrupt by the bankrupt court does not affect the right of the trustee to bring an action to set aside the fraudulent transfer.
    Heard on Error.
    
      E. J. Hart, for plaintiff in error.
    
      Tuttle & Tuttle, for defendants in error.
   Cook, J.

Clark H. Nye, plaintiff in error, was appointed by the United States district court for the northern district of Ohio, trustee in bankruptcy of Arthur P. Hart, and duly qualified as such trustee. On March 28, 1901, he commenced an action in the court of common pleas of this county against Arthur P. Hart and Charles B. Hart, his father, for the purpose of setting aside a conveyance of certain real estate made by Arthur P. Hart to his father; in January, 1897, and before the proceedings in bankruptcy, for the reason that the conveyance was without consideration and was made for the purpose of hindering, delaying and defrauding the creditors of Arthur P. Hart. A general demurrer was filed to the petition which was sustained by the court below.

Counsel for defendant in error contend that the action of the court below in sustaining the demurrer was correct, for three reasons:

First — The court of common pleas had no jurisdiction of the subject matter.

Second — The conveyance having been made more than four months before the commencement of the proceedings in bankruptcy the conveyance cannot be attacked by the trustee.

Third — Arthur P. Hart having received his discharge in bankruptcy before the commencement of this action, the trustee had no authority to commence the action.

The first claim is made upon the theory that the action being instituted by a trustee in bankruptcy, that the federal court had exclusive jurisdiction and we are informed by counsel in argument that that was the principal ground upon which the court below sustained the demurrer. There has been a great diversity of opinion among the profession as to the proper construction of the bankruptcy act of 1898 upon this question, and there also has been a great difference in the decisions of the courts, both federal and state, but it seems to us that whatever different opinions may have existed, the case of Bardes v. Hawarden Bank, 178 U. S. 524 [20 S. Ct. Rep. 1000], now settles the question. It is held in that case as follows:

“ First — The provisions of the second clause of Sec. 23 of the bankrupt act of 1898 control and limit the jurisdiction of all courts, including the several district courts of the United States, over suits brought by trustees in bankruptcy to recover or collect debts due from third parties, or to set aside transfers of property to third parties, alleged to be fraudulent, as against creditors, including payments in money or property to preferred creditors.”
“ Second — The district court of United States can, by the proposed defendant’s consent, but not otherwise, entertain jurisdiction over suits brought by trustees in bankruptcy to set aside fraudulent transfers of money or property, made bv the bankrupt to the third parties before ! the institution of the proceedings in bankruptcy.”

Mr. Justice Gray in the opinion sets forth fully and clearly that all suits brought by trustees in bankruptcy to set aside lraudu'ent transfers of money or property must be brought in the state court and cannot be brought in the federal court except by consent of the defendants.

The decision of the second proposition turns upon tne effect to bé given paragraph e of Sec. 67 and of paragraph e of Sec. 70 of the bankrupt act. ' Paragraph e of Sec. 67 provides as follows : ' ‘ That all conveyances, transfers, assignments or incumbrances of his property, or any part thereof, made or given by a person adjudged a bankrupt under the provisions of this act subsequent to the passage of this act and within four months prior to the filing of the petition with the intent and purpose on his part to hinder, delay or defraud his creditors or any of them, shall be null and void as against the creditors of such debtor, except as to purchasers in good faith and for a present- fair consideration ; and all property of the debtor conveyed, transferred, assigned, or incumbered as aforesaid shall, if he be adjudged a bankrupt, and the same is not exempt from execution and liability for debt by the laws of his domicile, be and remain a part of the assets and estate of the bankrupt and shall pass to his said trustee whose duty it shall be to recover and reclaim the same by legal proceedings or otherwise for the benefit of the creditors. And all conveyances, transfers or incumbrances of his property made by a debtor at any time within four months prior to the filing of the petition against him, and while insolvent, which are held null and void as against the creditors of such debtor by the laws of the state, territory or district in which such property is situate, shall be deemed null and void under this act against the creditors of such debtor if he be adjudged a bankrupt, and such property shall pass to the assignee and be by him reclaimed and recovered for the benefit of the creditors of the bankrupt.”

Paragraph e of Sec. 70 is as follows : “ The trustee may avoid any transfer by the bankrupt of his property of which any creditor of such bankrupt might have avoided, and may recover the property so transferred. or its value, from the person to whom it was transferred, unless he was a bona fide holder for value prior to the date of the adjudication. Such property may be recovered or its value collected from whoever may have received it, except a bona fide holder for value.”

Do the provisions of paragraph e of Sec. 67 include all the powers of the trustee with regard to the fraudulent conveyance of property of the bankrupt or does the provision of paragraph e of Sec. 70 enlarge his powers ? If the provisions of paragraph é of Sec. 67 contained all his powers, then the court below was right in sustaining the demurrer as the conveyance was made more than four months before the filing of the petition to set aside the transfer, and that fact appears in the petition. One of the objects of the bankruptcy act is to provide against fraud upon the part of the bankrupt as to his creditors. The trustee represents the creditors as well as the bankrupt; after his appointment the bankrupt or the creditors can do no act respecting the éstate. Creditors could not bring an action to set aside a fraudulent transfer ,of property or recover the value thereof; the-action can only be brought by the trustee, and to hold that an action can only be brought in cases where the transfer was made within four months from the filing of the petition in bankruptcy would make the act an implement of fraud and an injury to creditors rather than an act intended to defeat fraud and protect creditors. If such a construction was placed upon the act, a failing debtor might voluntarily transfer all his property for the purpose of defrauding his creditors, and then by special effort put off the time of the development of his bankruptcy for four months and both he and his fraudulent vendee be perfectly safe in the possession of the property obtained by such fraud. We do not think that such was the intention of congress, but that paragraph e of Sec. 70 is additional and enlarges the powers of trustees. Paragraph e of Sec. 70 places the trustee in precisely the same relation to the property as a creditor would have, and whenever a creditor could have avoided a fraudulent transfer the trustee can avoid the same, and creditors could have avoided the transfer at any time within four years from the discovery of the fraud

It will be observed that paragraph e of Sec. 67 gives to the trustee other powers besides avoiding a fraudulent transfer by a plenary suit at law or in equity. The provision is “ all property of the debtor conveyed, transferred or incumbered as aforesaid, shall be and remain apart of the assets and estate of the bankrupt and shall pass to his said trustee whose duty it shall be to recover and reclaim the same by legal process or otherwise for the benefit of the creditors.” Possibly under paragraph e, Sec. 67, summary proceedings might be exercised by the trustee either by taking possession of the property or by process issued in the bankruptcy proceedings; however that may be, we are of the opinion that under paragraph e of Sec. 70, an action like this may be instituted at any time by the trustee iu bankruptcy that a creditor could have instituted suit had there been no proceedings in bankruptcy, which would be at any time within four years from the discovery of the fraud.

The opinion we have expressed is sanctioned by Collier on Bankruptcy, 388, and Black on Bankruptcy 265, and is held in Knowlton v. Moseley, 105 Mass. 136.

Does the discharge of the bankrupt before the commencement of the action by the trustee to avoid the fraudulent conveyance preclude the trustee from prosecuting the suit ? We think not. The discharge of the bankrupt has nothing to do with the settlement of the estate; it is a separate and distinct matter ; it is provided for by the filing of a petition for that purpose, in the original proceedings, it is true, but for that special purpose alone. The discharge of the bankrupt may be had at any time after one month from the filing of the petition in bankruptcy and before the discharge of the trustee. The trustee must obtain possession of all the property of the bankrupt or secure its value and distribute the proceeds to the creditors before he can be discharged, and if assets are discovered a new trustee may be appointed to take charge of the same, and that may be done after the discharge of the bankrupt. The discharge of the bankrupt has no effect upon the duties of the trustee in administering the estate whatever. The judgment of the common pleas court is reversed and the cause remanded with the instructions to overrule the demurrer to the petition and for further proceedings.