Case ID: ad_53/html/0494-01.html
Source: Caselaw Access Project
Author: {"author": "Adams, P. J.:", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

E. Willard Jones, as Trustee of the Estate of John N. Beaton, a Bankrupt, Appellant, v. John M. Schermerhorn and John N. Beaton, Respondents.
    
      Jurisdiction of State courts and United States District Courts, respectively, over suits by trustees in bankruptcy to set aside fraudulent transfers by the bankrupt.
    
    The Supreme Court of the State of New York has jurisdiction over an action brought by a trustee in bankruptcy to set aside a transfer of real and personal property alleged to be fraudulent under subdivision e of section 67 of the Bankruptcy Law of 1898 (30 TJ. S. Stat. at Large, 564).
    Subdivision b of section 23 of the Bankruptcy Law, under which “ Suits by the trustee shall only be brought or prosecuted in the courts where the bankrupt, whose estate is being administered by such trustee, might have brought or prosecuted them if proceedings in bankruptcy had not been instituted, unless ,by consent of the proposed defendant,” controls and limits the jurisdiction of the District Courts of the United States, over suits to set aside transfers of property to third persons alleged to be fraudulent as against creditors, to cases in which the consent of the proposed defendants therein is given to such jurisdiction.
    Appeal by the plaintiff, E. Willard Jones, as trustee of the estate of John N. Beaton, a bankrupt, from a judgment of the Supreme Court in favor of the defendants, entered in the office of the clerk of the county of Oneida on the 27th day of April, 1900, upon the decision of the court, rendered after a trial at the Oneida Special Term, sustaining the defendants’ demurrer to the complaint and dismissing the complaint.
    
      P. O. J. De Angelis, for the appellant.
    
      Edwin 3. Risley, for the respondents.
   Adams, P. J.:

This is a bill in equity brought by the plaintiff, as trustee m bankruptcy of one John N. Beaton, to set aside an alleged fraudulent transfer of real and personal property pursuant to subdivision e of section 67 of the Bankruptcy Act of 1898 (30 U. S. Stat. at Large, 564).

The defendants demurred to the complaint upon two grounds, viz.: (1) That the courts of this State have no jurisdiction of the subject-matter, and (2) that the complaint does not state facts sufficient to constitute a cause of action.

The sufficiency of the complaint not being challenged upon this appeal, the sole question with which we have to deal is a jurisdictional one, the determination of which necessarily calls for a construction of certain provisions of the Kational Bankrupt Act.

By subdivision 8 of section 1 of that act it is provided that “ ‘ Courts of Bankruptcy ’ shall include the District Courts of the United States and of the territories, the Supreme Court of the District of Columbia, and the United States Court of the Indian Territory and of Alaska.” (30 U. S. Stat. at Large, 544.)

Section 2 of the act provides, among other things, “ That the Courts of Bankruptcy as hereinbefore defined, viz.: The District Courts of the United States in the several states, the Supreme Court of the District of Columbia, the District Courts of the several territories and the United States courts in the Indian Territory and the District of Alaska, are hereby made Courts of Bankruptcy and are hereby invested within their respective territorial limits as now established, or as they maybe hereafter changed, with such jurisdiction at law and in equity as will enable them to exercise original jurisdiction in bankruptcy proceedings, in vacation, in chambers and during their respective terms, as they are now or may be hereafter held, to (1) adjudge persons bankrupt who have had their principal place of business, resided, or had their domicile within their respective territorial jurisdictions for the preceding six months; '* * * (7) cause the estates of bankrupts to be collected, reduced to money and distributed, and determine controversies in relation thereto, except as herein otherwise provided; * * * (15) make such orders, issue such process, andnnter such judgments in addition to those specifically provided for as may be necessary for the enforcement of the provisions of this act; * * * (18) tax costs whenever they are allowed by law, and render judgments therefor against the unsuccessful party, or the successful party, for cause, or in part against each of the parties, and against estates in proceedings in bankruptcy. "x" * * Kothing in this section contained shall be construed to deprive a Court of Bankruptcy of any power it would possess, were certain specific powers not herein enumerated.” (30 U. S. Stat. at Large, 545, 546.)

It will be observed that by the 7th clause of this section jurisdiction is conferred upon the District Courts of the United States to “ cause the estates of bankrupts to be collected, reduced to money and distributed, and determine controversies in relation thereto except as herein otherwise provided” and it is this language upon which the defendants mainly rely to sustain their contention that the jurisdiction thus conferred embraces controversies arising out of alleged fraudulent transfers by the bankrupt, and that it is exclusive in its character.

Were there nothing in the succeeding provisions of the act which tended to modify or qualify the language of clause 7 we are quite free to say that it would be a difficult matter to controvert the defendants’ contention; but by reference to section 23, which expressly defines the “Jurisdiction of United States and State Courts,” as follows :

a. The United States Circuit Courts shall have jurisdiction of all controversies at law and in equity, as distinguished from proceedings in bankruptcy, between trustees as such and adverse claimants, concerning the property acquired or claimed by the trustees, in the same manner and to the same extent only as though bankruptcy proceedings had not been instituted and such controversies had been between the bankrupts and such adverse claimants.
l). Suits by the trustee shall only be brought or prosecuted in the courts where the bankrupt, whose estate is being administered by such trustee, might have brought or prosecuted them if proceedings in bankruptcy had not been instituted, unless by consent of the proposed defendant.
“ c. The United States Circuit Courts shall have concurrent jurisdiction with the courts of bankruptcy, within their respective territorial limits, of the offenses enumerated in this act.” (30 U. S. Stat. at Large, 552.) it will be seen that suits by the trustee of a bankrupt can only be brought in the courts where the bankrupt, whose estate is being administered, might have brought them if proceedings in bankruptcy had not been instituted.

The apparent conflict in the language of these two sections has engaged the attention of both State and Federal courts ever since the enactment of the Bankrupt Law, with the result of incumbering the reports with a number of decisions which are quite as discordant as the language which they undertake to interpret. Fortunately, however, this chaotic condition of affairs has been recently brought to the attention of the Supreme Court of the United States, and that court, in an elaborate and exhaustive opinion, has settled the question now under review in such a manner as to relieve this court of the necessity of any further discussion or consideration thereof. (Bardes v. First National Bank of Hawarden, 20 U. S. Sup. Ct. Repr. 1000.)

This decision holds, Fvt'st, that the provisions of the 2d clause of section 23 of the Bankrupt Ac', 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 ; and, second, that is only by the consent of the proposed defendants that the United States District Courts can acquire jurisdiction over suits brought by trustees in bankruptcy to set aside fraudulent transfers of money or property, made by the bankrupt to third parties before the institution of the proceedings in bankruptcy.

It follows, therefore, that in this case the Supreme Court of this State has jurisdiction of the subject-matter in controversy, and that the judgment appealed from should, consequently, be reversed.

All concurred.

Interlocutory judgment reversed and demurrer overruled, with costs, with leave to the defendants to withdraw their demurrer and answer upon payment of the costs of the demurrer and of this appeal.