Case 39 — Action by L. R. Porter’s Assignee against Delia Downer; and Others to Subject Certain Real Estate to the Payment of Creditors.

Oct. 8.

#### Downer, &c., v. Porter, &c.

APPEAL FROM WARREN CIRCUIT COURT.

Judgment for Plaintiffs and Defendants Appeal.

Affirmed.

Assignment for Benefit of Creditors — Action by Assignee — National Bankruptcy Act — Limitation of Actions — Attorney and Client — Notice to Attorney — Effect on Client.

Held: 1. Kentucky Statutes, 1899, section 84, provides that if an assignor for the benefit of creditors, before making the deed, shall have made a preferential or fraudulent transfer of any of his property, it shall vest in the assignee, who shall have thd remedies of a creditor. Act 1856 (Kentucky Statutes, 1899, section 1910) enacts that every sale made by a debtor in contemplation of insolvency, and with a design to. prefer one creditor, shall operate as an assignment for the benefit of his creditors; and by section 1911 such transferís arel subject to the control of equity on petition of any one interested. The national bankruptcy act makes it an act of bankruptcy for1 a debtor to make an assignment for the benefit of his creditors,- or to -prefer one creditor over another. Held, that the fact that when an insolvent made a conveyance of real estate and when he subsequently made an assignment for the benefit of creditors the national bankruptcy act was in force did not preclude the assignee from suing to bring the property conveyed into the trust fund, the act of 1856 not being an insolvency act which' could he superseded by the bankruptcy actj, and the transaction being within the jurisdiction of the State courts under its statutes until attacked in the Federal courts as an act of bankruptcy.

2. Kentucky .Statutes, 1899, section 1911, makes a transfer by a debtob in contemplation of insolvency subject to the control of equity on a petition of any one interested who -filéis a petition within six months after the «delivery of the property. Held, that “delivery of the property” means a visible change of possession, and, where a house was conveyed, the mere fact *423tnat the tenant therein attorned to the grantee, and thereafter paid her rent, did not constitute a delivery sufficient to set the statute in motion.

3. Where the attorneys for an insolvent learned from him that he had conveyed certain land, and subsequently they were employed by the insolvent’s assignee for the benefit of creditors, their knowledge of the deed was not chargeable to the assignee.

W. B. GAINES, ATTORNEY I’OR APPELLANT.

POINTS AND CITATIONS.

1. Appellfee took no title to. the property in controversy by the deed of assignment from D. R. Porter, because:

(a) The Kentucky assignment act is superseded and- suspended by the bankrupt act of 1898, Sec. 75, Ky. Stats.; Bankrupt Act, sec. 3, subsecs. 4 and 1; Parmenter Mfg. Co. v. Hamilton, 172 Mass., 178; Harbaugh v. Costello, 56 N. K, 363,'111.; Ketcham v. McNamarra, 50 D. R. A., 641 (Conn.).

The act of 1856 is certainly superseded and suspended. Ketcham v. McNamarra, supra; Bankrupt Act, sec. 60.

(b) If the deed had any force it was a common law deed! of assignment and the assignee took only such property as the assignor had at the date of the assignment. Boese v. King, 108 U. S„ 507.

2. The law of 8167 is radically different from the law of 1898 when Ebersole & McCarty v. Adams, 10 Bush, 83, and Linthicum v. Fenley were decided in this (a) every deed! of assignment is a fraud upon the Bankrupt Act (sec. 3, snbsec. 4) and proceedings to wind up insolvent are forbidden to the State courts :by the concluding clause of the act of 1898.

3. The conveyance not being acknowledged or) a recordable instrument possession by appellant for mors tthun six! months before the institution of the suit barred the action. Ky. Statsi., sec. 1911; Temple Barker & Co. v. Poyntz, 2 Duv., 276; Cogar v. Stewart, 78 Ky., 59.

4. Appellee, as a matter of fact, knew of the transfer for more than six months before the institution of' the suit. On March 4, 1901, appellant’s attorneys knew1 of the transfer and their knowledge is the knowledge of the appellant. Harrington v. U. S., 11 Wall., 356; May v. LeClaire, 11 Wal., 217.

SUMS *&*GRIDER, ATTORNEYS 3TOR APPELLEES.

POINTS AND AUTHORITIES'.

1. National bankrupt law does not suspend State assignment law, and where an assignment is made' under the State law, all *424steps -taken, thereunder are valid andl binding, in case there is no petition filed in bankrupty. Boese v. King, 108 U. S., *379;*Simonson v. Sinscheiner, 95 Fed. Kep., 948.

2. Knowledge of attorney as to any fact before relation! of attorney and client existed is not deemed the knowledge of the client. Am. *&*Eng. Ency. of Law, vol. 3, p. 322 (2d ed.).

3. Where possession for more than six months is relied on to defeat an action to set aside a fraudulent! conveyance) that possession must be open and ostensible and such as ta put creditors upon inquiry as to the ownership'of the property. Brown V. Early, 2 Duv., 311.

Opinion of the court by

JUDGE HOBSON

Affirming.

L. R. Porter, who was at the time insolvent, conveyed on February 10, 1901, to appellant Downer, a house and lot in consideration of a pre-existing debt. On March 4, 1901, Porter assigned to appellee for the benefit of his creditors, and he subsequently brought this suit on October 22, 1901, to have the property brought into the trust fund for the equal payment of all the creditors of Porter under section S4, Kentucky Statutes, 1S99: “If the assignor before making the deed shall have made a preferential or fraudulent transfer, conveyance or gift of any of his property or a fraudulent purchase of any property in the name of another, the property so fraudulently transferred, conveyed or purchased shall vest in the assignee, and it shall be Ms duty to institute such proceedings as may be necessary to recover the. property so conveyed or disposed of, and to this end he shall have the remedies which the creditors or any of thorn might exercise. If the assignee upon demand shall refuse to institute such proceedings, any creditor may do so, and property so recovered shall become a part of the estate, and be distributed as other assets.” Section 1910, Kentucky Statutes, 1899, commonly known as the “Act of 1856,” further provides that every sale made by a debtor in contemplation of insolvency, and with the design to prefer one or *425more creditors to others, shall opérate as an assignment of all of the property of the debtor, and shall inure to the benefit of 'all his creditors. By section 1911 such transfers are subject to the control of courts of equity upon the petition of any person interested, filed within six months after the transfer is lodged for record or the delivery of the property. When the transaction in question took place, the United States bankruptcy act was in effect. By that statute it is made an act of bankruptcy that the debtor has made an' assignment for the benefit of his creditors, or has preferred one creditor to others. It is insisted for appellant .that, the United States bankruptcy statute being in effect when the transaction took place, and making it an act of bankruptcy, the State statute was superseded by the act of Congress, and no action can now be maintained under the State statute. In support of this position we are referred to a number of decisions in other States to the effect that all State insolvency laws are suspended .when the paramount jurisdiction of Congress has once been exercised. See 5 Cyc., 240. But our act of 1856 is not an insolvency law within the meaning of this rule. The precise question was presented in Ebersole v. Adams, 73 Ky., 83, where the court, speaking of the act of 1856, said: “This act is not a bankrupt law,- nor an insolvent act. It has none of the • characteristics of either, except that it provides for the appropriation of the property of the debtor to the payment *fro tanto*of all his creditors. An assignment or transfer made in contemplation of insolvency and to prefer creditors is an act of bankruptcy under the act of Congress, but this fact does not deprive creditors of the right to apply to the State courts for relief in case they choose to do so. Notwithstanding the Federal bankrupt act, the State courts have full and complete power to relieve against all frauds, *426actual o,r constructive, except in cases in which a court of bankruptcy has first taken jurisdiction, or where the relief asked in the State courts is subversive of the rights of parties to a pending proceeding in bankruptcy subsequently instituted.” This was reiterated in Linthicum v. Fenley, 74 Ky., 131. In Simonson v. Sinsheimer, 95 Fed., 948, 37 C. C. A., 337, it was held by the United States Circuit Court of Appeals that an assignment for the, benefit of creditors is valid under the present bankruptcy statute if not impeached by a petition in bankruptcy filed within four' months after its execution, and in that case the validity of the proceedings of the State court under the deed of assignment which had not been impeached by a petition in bankruptcy was recognized. This was the rule under the former bankrupt act, and there is nothing in the new act to show that Congress intended to change it. Mayer v. Heilman, 91 U. S., 496, 23 L. Ed., 337. The- provision of the present statute that “proceedings commenced under State insolvency laws before the passage of this act shall not be affected by it” has no application, for the reason that it was only intended to take such pending proceedings out of the operation of that act; and, besides, the act of 1856, as shown, is not a State insolvency law. Any fraudulent conveyance of property is an act of bankruptcy under the Federal statute, no less than the making of a deed of assignment for the benefit of creditors, or the preferring of one creditor to others'. And if the act of Congress making- these things acts of bankruptcy supersedes the State laws giving remedies therefor, then it would follow that since the passage of the bankruptcy act a creditor can not take out an execution in the State courts on a judgment, and subject property thus fraudulently conveyed, or subject it in an attachment proceeding or upon a return of no *427property, although no petition in bankruptcy had been filed in the Federal court impeaching the transactions as acts of bankruptcy. This was not the meaning of the act of Congress, and, the matters complained of having never been impeachéd as acts of bankruptcy, the State courts have jurisdiction to take charge of the property and distribute the proceeds ratably among all the creditors. It is fairly settled by the authorities that the State courts may do this in the case of a voluntary assignment for the benefit of creditors which has not been attacked as an act of bankruptcy. The statute quoted above vests in the assignee not only the property conveyed to him by the assignor, but also all the property conveyed away by the assignor by a preferential or fraudulent transfer. The circuit court, in adjudging the property in contest to the assignee, only carried out the statute. If the State courts may enforce voluntary assignments for the benefit of creditors, they may certainly enforce a statute like this, merely regulating what property shall vest in 'the assignee under the deed of assignment. See Louisville Trust Co. v. Comingor, 184 U. S., 18, 22 Sup. Ct., 293, 46 L. Ed., 413; Beese v. King, 108 U. S., 379, 2 Sup. Ct., 765, 27 L. Ed., 760; *In re*Scholtz (D. C.), 106 Fed., 834; *In re*Worcester County, 102 Fed., 808, 42 C. C. A., 637; *In re*Romanow (D. C.), 92 Fed., 510; Patty-Joiner, etc., Co. v. Cummins, 93 Tex., 598, 57 S. W., 566; Armour Packing Co. v. Brown, 76 Minn., 465, 79 N. W., 522; Binder v. McDonald, 106 Wis., 332, 82 N. W., 156.

At the time the conveyance was made the house was rented out, and the tenant attorned to appellant, and thereafter paid her the rent; but there was no visible change of possession, and the deed was not recorded. The delivery of the property, within the meaning of the statute defining the time within which tlfe action must be brought, means *428a visible change of possession, and the mere fact that the tenant paid rent to the vendee is not sufficient to set the statute in motion.

Sims & Grid'er were Porter’s attorneys, and advised him not to make the conveyance. He, however, made it, contrary to their advice. After the assignment was made, they were employed by the assignee, but did not inform him of the deed to appellant, as they had acquired knowledge of this deed from Porter while he was their client. It is urged that the assignee must be charged with the knowledge of his attorneys as to the existence of the deed. This would be true' if Sims & Grider had learned of the deed as his attorneys, but he is not chargeable with knowledge thereof which they acquired as the attorneys of Porter, and before their employment by him. An attorney is not required to disclose to one client the secrets' of another intrusted to him professionally by the other client in the transaction of his business. Were the rule otherwise, a man could not safely advise with his attorneys, because he could not foresee by Whom they might be thereafter employed, or what use might be made of the facts communicated to them. On the questions of fact involved we can not, under the evidence, disturb the chancellor’s conclusion.

Judgment affirmed.