Case ID: how-pr_52/html/0426-01.html
Source: Caselaw Access Project
Author: {"author": "Blatchford, J.\n    ", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

U. S. DISTRICT COURT.
    In the Matter of Isidor Goldstein and Abraham Goldstein, bankrupts.
    
      Southern District of New York, in bankruptcy.
    
    
      Stilwell act—operations of, in its relations with the United States bankrupt law.
    
    The provisions of the Stilwell act are in direct conflict with those of the bankrupt law, and inasmuch as a bankrupt cannot comply with the requirements of the Stilwell act, he ought not to he subjected to its penalties.
    After an adjudication in bankruptcy, the bankrupt acquires an undeniable claim to the protection of the United States court, and where a state court, as in this case, attempts to interfere by the issuance of a “ Stilwell warrant,” causing the arrest of the bankrupt, an injunction will issue enjoining the state courts from prosecuting under said warrant.
    On December 27, 1876, a number of" the creditors of Gold-stein & Brother (including Haines, Bacon & Co.), filed a petition praying for the adjudication of Goldstein & Brother in bankruptcy. On January 13,1877, they were adjudicated by default and a provisional warrant was issued to the United States marshal. On February 2, 1877, Haines, Bacon & Co. commenced an action in the supreme court of the state of Hew York, against Goldstein & Brother, to recover the sum of $1,056.10, being the same claim proven by them in the bankruptcy proceedings. In said action, Haines, Bacon & Co. applied for and obtained from judge Donohue, upon the ground of fraudulent representations and concealment of property, a “ Stilwell” warrant under the act of April 26, 1831, and on February 2,1877, the Goldsteins were arrested thereunder and held to bail. Then the present application was made to judge Blatoheord, sitting as United States district court judge in bankruptcy, for a perpetual injunction prohibiting the prosecution of said action and “ Stilwell ” warrant in the ¡New York supreme court.
    
      David Leventritt, counsel for the Goldsteins, in support of the application.
    
      First. The right to prosecute the suit in question is absolutely denied under section 5106 of the Revised Statutes of the United States. The fact of the proof of the debt in bankruptcy is most unquestionable evidence that it is so provable (In re Rosenberg, 2 B. R., 236 ; In re Metcalf, 1 id., 201).
    
      Second. The adjudication in bankruptcy having been already had, the bankrupts have clearly acquired an undeniable claim to the protection of the United States court (Maxwell and ano. agt. Faxon and ano., 4 B. R., 210).
    
      Third. As the “ Stilwell ” warrant is auxiliary to the action at-law, the restraint of the latter necessarily involves the prohibition of the former. And as it is already established that the action cannot be maintained, every branch of the suit must terminate with it. The warrant can have no existence — has no life — without the suit in which it originated.
    
      Fourth. The language of section 5107 of the Revised Statutes of the United States: “ The bankrupt shall not be liable during the pendency of proceedings in bankruptcy to arrest in any civil action, unless the same is founded on some debt or claim from which his discharge in bankruptcy would not release him,” is sufficiently broad to cover the case at bar and entitles the bankrupts to the relief sought.
    
      Fifth. An arrest under the “Stilwell act” and all proceedings thereunder are not for the punishment of fraudulent debtors, but the enforcement of payment by resort to its stringent measures (Goodwin agt. Sharky, 5 Abb. [N. S.] 64; In the Matter of Adroit, 2 Daly, 28; chap. 300, Laws 1831, secs. 3-10).
    
      Sixth. Even if the Stilwell act ” is criminal in its tendeucy, the measure of the punishment to be inflicted is limited to the payment of the demand involved in the litigation, and as such payment ipso facto terminates the imprisonment, the primary object of the act can only be the collection of the creditor’s claim, and therefore proceedings under the act are in direct conflict with the bankrupt law (Goodwin agt. Sharkey, 3 B. R., 558, or 5 Abb. N. S., 64).
    
      Seventh. The “Stilwell act” prescribes the making of a general assignment for the benefit of creditors and its prosecution to a final, successful issue as one method of limiting the penalties, which ensue upon conviction. Such an assignment is absolutely, ab initio, void under the bankrupt law, and therefore a bankrupt cannot avail himself of this means of relief. Can a harsh, persistent creditor “ close the door ” against escape by procuring an adjudication in bankruptcy, and then, at his option, adopt a proceeding, which by his own act, he has rendered the bankrupt powerless to avoid ?
    
      Eighth. Payment of the debt, as required by the act of 1831, cannot be performed by the bankrupt, as the provisional warrant, issued under section 5028 of the Revised Statutes of the United States, compels a surrender of all the bankrupt’s effects, thus placing him in a position of compulsory financial inability to comply with the “ payment ” provisions of the Stilwell act. Previously legally debarred from fulfilling its requirements, and yet subject to its penalties, is a proposition obnoxious to both law and justice.
    The supreme court should be perpetually restrained from the further prosecution of the action instituted and from the proceeding against the bankrupts under the Stilwell warrant.
    
      Richard S. Newcombe, of counsel for Haines, Bacon & Co., opposed.
    The bankrupt act is not intended to be used as a shield for the protection of criminals, for the protection of persons charged with a criminal act, nor for the purpose of protecting debtors from the consequences of frauds perpetrated by debtors, as provided for by the state laws. Under the twenty-sixth section of the act to abolish imprisonment for debt, section 39 of article 10, title 1, part 2, chapter 5 of the sixth edition of the Revised Statutes, it is provided that the acts charged against the defendants shall be regarded and treated as a misdemeanor. The proceeding now sought to be enjoined is not á proceeding for the collection of money. It is a proceeding to punish fraudulent debtors. In short, it is a criminal proceeding. The authority to issue injunctions possessed by the bankrupt court is auxiliary to the jurisdiction conferred upon it by statute for “the collection of all the assets of the bankrupt,” or “ the marshalling and disposition of the different funds and assets ” (Sec. 4972). The Stilwell act, in its operation, has none of these purposes in view, and the state court, in entertaining proceedings under said act, exercises its jurisdiction without any conflict whatever with the bankrupt act. As truly expressed in its title, that act has for an object the abolition of imprisonment and the punishment of fraudulent debtors. Hot the collection of the debtor’s property or estate, not the distribution of that estate, not the discharge of the debtor from his debts (Re Andriot, 2 Daly, 28). By section 5106 the court is authorized to enjoin creditors from prosecuting their suits until the question of discharge is determined; that is to say, the court may issue a temporary injunction which shall continue in force until the debtor has had opportunity to plead his discharge from the debt sued on, and so defeat the suit. But, upon the facts in this case, such plea can never be interposed. The debt here sued upon is not provable and not dischargeable, and the reason for issuing an injunction in ordinary cases does not and can never exist here. On determining this motion the court must also pass upon 5107, which declares that “no bankrupt shall be liable during the pendency of the proceedings in bankruptcy to arrest in any civil action, unless the same is founded on some debt or claim from which his discharge in bankruptcy would not release him.” The debt, the foundation of these proceedings, is one of the class excepted from the operation of this section. Here the affidavits and papers on which the S til well warrant issued show conclusively that the debt is not a dischargeable one, and this court cannot try the question of the truth or falsity of the statements contained in these papers (Re I. H. Kimball., 2 B. R.; Re Valk, 3 R. R., 278). The proceeding which will be enjoined is a proceeding to reach the estate of the bankrupts, and that is the only proceeding which the bankrupt court will enjoin, but will not enjoin the punishment of the debtors for fraud (Penny agt. Taylor, N. B. R., 204). The proceeding in question is one to punish the defendants as fraudulent debtors. The district court will exercise only the same powers to restrain judgments at law against a bankrupt that a state court of equity would have over such creditors if the debtor were not a bankrupt (Fowler, Assignee, agt. Dilloup, 308, vol. 12, Nat. B. R.). Goodwin agt. Sharkey differs from this case as presented in the following particulars. There the warrant was obtained upon the ground of a fraudulent removal of property. The essential difference here is, the defendants are charged with having fraudulently contracted the debt. Sharkey had been adjudicated bankrupt, and an order to that effect entered. An assignee had been elected and a discharge applied for. The motion papers in this proceeding alleges the filing of a petition and adjudication ; but no order to that effect having been entered, strictly there is no adjudication, but as a further answer to this case I cite: Lynde agt. Montgomery (15 Wend., 461); see, also, Re Androit, 2 Daly, 28-39, which both hold that the act in question is to punish fraudulent debtors, and not for the purpose of procuring an assignment of his property ; for if the debtor had fraudulently disposed of it, then the assignment would convey nothing. Under Re Wardell (1 N. Y., 144) and Re Bancker (5 id., 156), if the debtors show in the proceedings in the state court that they have transferred to their assignee in bankruptcy all of their property, including that with which they are charged with having fraudulently disposed of, they would be entitled to a discharge from the state court, so that really there is not the slightest conflict in the two proceedings. The nearest case in point that I have found is that of Henry Jacoby (1 Nat. Bk. R., 118), where a reference was ordered to ascertain whether the action was founded on a debt created by the fraud of the bankrupt,- and in the mean time in the state court proceedings were stayed except such as related exclusively to holding Jacoby in custody, &c., but in this case a reference is unnecessary, as the fraud is admitted. The judge of this court in Re Louis Glaser (1 Nat. Bk., 336) closely follows the decision by him rendered in Be Jacoby, using, among others, the following language: “ It follows, therefore, that this court is competent to grant to the bankrupt the relief sought by him, provided his arrest was founded on a debt from which his discharge in bankruptcy would release him. It is a disputed question of fact which cannot be decided on eon parte affidavits, whether the debt in this case was contracted by the fraud of the bankrupt, and is, therefore, one from which his discharge in bankruptcy would not release him; ” but in this ease there is no dispute but that the debt was fraudulently contracted, consequently no question arises upon that point, and no reference is necessary.
    In Re Devoe (2 N. B. R., 27) judge Lowell, not differing from the two decisions above cited, drew certain nice distinctions, which are applicable in this present case, holding that the state court action being founded on fraud, the bankruptcy court would leave that question to be determined by the state courts.
    This court, shortly after the case of Devoe, again passed upon similar questions (Re Kimball, 2 N. B. R., 204; affirmed, id., 354), there holding, that where it appears by inspection of the proceedings in the state court, on which the arrest was made, that the arrest was founded by the state court on á claim which appears on the face of such proceedings to be one of damages for fraud, the district court is concluded and cannot inquire whether such claim is'well or ill founded.
    The state court in this case “ has passed upon the question whether by the state laws the debtor was liable to arrest.” This arrest was granted upon the ground that the debtors “ fraudulently contracted the said debt, to recover which the said action is brought ” (See application for warrant).
    
    Proving a debt in bankruptcy, or joining in a petition, does not operate as against Haines, Bacon & Co. (Re Rosenberg, 2 B. R. 81, upheld by Mr. justice Helson in Re Robinson, 2 N. B. R., 108, and in Re Migel, 2 U. B. R.). Mr. justice Blatchford, at pages 482 and 483, uses the following emphatic language upon the question now presented:
    “ The proceedings in the supreme court in this case, consisting of the order of arrest and the affidavit on which it was made, although such order was, as is the practice, made ex parte, must, for the purposes, of this application, be considered as an adjudication by the state court that the debt was created by the fraud of the bankrupts.”
    Section 21 of the act was in Re Rosenberg (2 B. R. 81), held not to include such debts as by section 33 are not dis-chargeable, and a debt contracted by fraud is not dischargeable.
    The remedy open to the debtors is most simple and easy the moment it is inquired into, if they are improperly charged in the state court; there they have a complete remedy — go there and disprove the charges made against them and not apply to this court in this summary manner; if there is any honesty in them the state court is the court at which to prove it; and the state court having adjudicated that they have been guilty of the fraud charged, this court will not interfere to relieve the debtors from the consequences of their wrong.
   Blatchford, J.

after hearing the above arguments, issued the following injunction order. Ho opinion written.

At a stated term of the district court of the United States of America for the southern district of New York, held at the United. States court rooms, in the city of New. York, on Monday, the 5th day of March, in the year of our Lord 1877.

Present — Hon. Samuel Blatchfobd, district judge.

In the Matter of Isidor Gold-stein and Abraham Goldstein, bankrupts.

No. 5725.

A motion having been made by David Leventritt, counsel for the above named bankrupts, for a perpetual injunction enjoining and restraining Richard E. Haines, Francis M. Bacon, Benjamin E. Haines and William Harrington, composing and comprising the firm of Haines, Bacon & Co., from prosecuting and attempting to prosecute a certain action and proceeding instituted by them against the above named bankrupts in the supreme court of the state of New York county of New York, and upon reading and filing notice of motion thereof, the petition of said bankrupts and copies of the papers in said action and proceeding, and after hearing David Leventritt, couns'el for said bankrupts, in support of said motion, and Biehard S. Newcombe, Esq., counsel for said creditors, in opposition thereto, it is ordered that the said Richard E. Haines, Francis M. Bacon, Benjamin E. Haines and William Harrington, composing the firm of Haines, Bacon & Co., they and each of them, their and each of their agents, servants and attorneys, are hereby restrained, prohibited and enjoined from further prosecuting a certain action instituted by them in the supreme court of the state of New York, on February 2, 1877, for the recovery of the sum of §1,050.10 against the above named bankrupts; and they and each of them, their and each of their agents, servants and attorneys are hereby restrained, prohibited and enjoined from further prosecuting a certain proceeding heretofore adopted by them against said bankrupts, under an act, as “An act to. abolish imprisonment for debt, and to punish fraudulent debtors,” passed April 26, 1831, and the acts amending the same, and under which proceeding said bankrupts were arrested on the 2d day of February, 1877. Said action and proceeding, and each of them, are hereby stayed until the final determination of this court upon the question of the discharge of said bankrupts, but this order is not to operate to discharge said bankrupts from said arrest, or to affect the order of arrest.

Witness the Hon. Samuel Blatohfobd, judge of the said [l. s.] court, and the seal thereof, at the city of Hew York, in said district, this 5th day of March, a. d. 1877.