Source: https://www.law.cornell.edu/supremecourt/text/197/356
Timestamp: 2016-02-14 16:10:40
Document Index: 401095811

Matched Legal Cases: ['§ 67', '§ 39', '§ 39', '§ 39', '§ 39', '§ 39', '§ 39', '§ 23', '§ 39', '§ 39', '§ 39', '§ 57', '§ 60', '§ 67']

GUILFORD B. KEPPEL, Trustee, etc., v. TIFFIN SAVINGS BANK. | US Law | LII / Legal Information Institute
Supreme Court aboutsearch liibulletin subscribe previews GUILFORD B. KEPPEL, Trustee, etc., v. TIFFIN SAVINGS BANK.
197 U.S. 356 (25 S.Ct. 443, 49 L.Ed. 790)
GUILFORD B. KEPPEL, Trustee, etc., v. TIFFIN SAVINGS BANK.
Argued: and submitted January 6, 1905.
[HTML] Charles A. Goetz became a voluntary bankrupt on October 12, 1900. George B. Keppel, the trustee, sued the Tiffin Savings Bank in an Ohio court to cancel two realestate mortgages executed by Goetz, one to secure a note for $4,000 and the other a note for $2,000. The mortgage to secure the $4,000 note was made more than four months before the adjudication in bankruptcy. The mortgage securing the $2,000 note was executed a few days before the bankruptcy, the mortgagor being at the time insolvent and intending to prefer the bank. The bank defended the suit, averring its good faith and asserting the validity of both the securities. In a cross petition the enforcement of both mortgages was prayed. The court held the mortgage securing the $4,000 note to be valid, and the mortgage securing the $2,000 note to be void. The trustee appealed to a circuit court, where a trial de novo was had. At such trial the attorney for the bank stated to the court that the bank waived any claim to a preference as to the $2,000 note, but that he could not assent to a judgment to that effect. A judgment was entered sustaining the security for the $4,000 note and avoiding that for the $2,000 note.
Argument of Counsel from pages 357-358 intentionally omitted
Argument of Counsel from pages 358-359 intentionally omitted
Before we develop the legal principles essential to the solution of the first question, it is to be observed that the facts stated in the certificate and implied by the question show that the bank acted in good faith when it accepted the mortgage and when it subsequently insisted that the trustee should prove the existence of the facts which, it was charged, vitiated the security. It results that the voidable nature of the transaction alone arose from § 67e of the the act of 1898, invalidating 'conveyances, transfers, or encumbrances 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' 30 Stat. at L. 565, chap. 541, U. S. Comp. Stat. 1901, p. 3449, and giving the assignee a right to reclaim and recover the property for the creditors of the bankrupt estate.
The word 'surrender,' however, does not exclude compelled action, but, to the contrary, generally implies such action. That this is the primary and commonly accepted meaning of the word is shown by the dictionaries. Thus, the Standard Dictionary defines its meaning as follows: '1. To yield possession of to another upon compulsion or demand, or under pressure of a superior force; give up, especially to an enemy in warfare; as, to surrender an army or a fort.' And in Webster's International Dictionary the word is primarily defined in the same way. The word, of course, also sometimes denotes voluntary action. In the statute, however, it is unqualified, and generic, and hence embraces both meanings. The construction which would exclude the primary meaning, so as to cause the word only to embrace voluntary action, would read into the statute a qualification, and this in order to cause the provision to be in conflict with the purpose which it was intended to accomplish,equality among creditors. But the construction would do more. It would exclude the natural meaning of the word used in the statute, in order to create a penalty, although nowhere expressly or even by clear implication found in the statute. This would disregard the elementary rule that a penalty is not to be readily implied, and, on the contrary, that a person or corporation is not to be subjected to a penalty unless the words of the statute plainly impose it. Tiffany v. National Bank, 18 Wall. 409, 410, 21 L. ed. 862, 863. If it had been contemplated that the word 'surrender' should entail upon every creditor the loss of power to prove his claims if he submitted his right to retain an asserted preference to the courts for decision, such purpose could have found ready expression by qualifying the word 'surrender' so as to plainly convey such meaning. Indeed, the construction which would read in the qualification would not only create a penalty alone by judicial action, but would necessitate judicial legislation in order to define what character and degree of compulsion was essential to prevent the surrender in fact from being a surrender within the meaning of the section.
It is argued, however, that courts of bankruptcy are guided by equitable considerations, and should not permit a creditor who has retained a fraudulent preference until compelled by a court to surrender it, to prove his debt, and thus suffer no other loss than the costs of litigation. The fallacy lies in assuming that courts have power to inflict penalties, although the law has not imposed them. Moreover, if the statute be interpreted as it is insisted it should be, there would be no distinction between honest and fraudulent creditors, and therefore every creditor who in good faith had acquired an advantage which the law did not permit him to retain would be subjected to the forfeiture simply because he had presumed to submit his legal rights to a court for determination. And this accentuates the error in the construction, since the elementary principle is that courts are created to pass upon the rights of parties, and that it is the privilege of the citizen to submit his claims to the judicial tribunals,especially in the absence of malice and when acting with probable cause, without subjecting himself to penalties of an extraordinary character. The violation of this rule, which would arise from the construction, is well illustrated by this case. Here, as we have seen, it is found that the bank acted in good faith, without knowledge of the insolvency of its debtor and of wrongful intent on his part, and yet it is asserted that the right to prove its lawful claims against the bankrupt estate was forfeited simply because of the election to put the trustee to proof, in a court, of the existence of the facts made essential by the law to an invalidation of the preference.
'I apprehend the practice to be settled, where a creditor applies to prove a debt, and claims a right to property to which the commissioners think he has no lien, that the commissioners admit the proof, and leave the question to be controlled merely by retention of the dividend. This was settled by the case of Ex parte Ackroyd 1 Rose, 391, where the commissioners had rejected the proof of a creditor, because he had received a portion of his debt, which the assignees contended he was bound to refund; but when the question came before Sir John Leach, as vice chancellor, he decided that the proof of the debt was not to be rejected, because there was a question to be tried between the bankrupt's assignees and the creditor, although it was proper that no dividend should be paid on that proof, until the question was determined.'
And Erskine, Ch. J., p. 74, after assuming that the transaction complained of might have been fraudulent and amounted to an act of bankruptcy, saiditalics mine(p. 75.):
Passing the present consideration of the judicial construction given to the act of 1867, and treating, as we believe should be done, the restriction as to the proof of debts expressed in § 39 as applicable to voluntary as well as involuntary bankruptcy, we think, as a matter of original interpretation, the surrender clause of the act of 1867 not only fortifies, but absolutely sustains, the construction which we have given to the surrender clause of the act of 1898. Whilst the surrender clause of the act of 1867 changed the method of procedure prevailing under the English rule, and presumptively also obtaining under the acts of 1800 and 1841, by which a creditor holding a preference might prove his claim, but was allowed to obtain no advantage from so doing until he had surrendered his preference, it cannot, we think, in reason be considered that this mere alteration in the practice to be followed was intended in and of itself to impose a penalty upon a creditor who did not voluntarily surrender his preference. And this we think is demonstrated when it is seen that, after making the change as to the procedure in the proof of debts by preferred creditors, there was subsequently embodied in § 39 an express prohibition, in the nature of a penalty, forbidding the proof of debt by a creditor who came within the purview of the section. Either that provision solely related to proof of debts embraced in the previous surrender clause or it did not. If it did, then the expression of the penalty in § 39 indicates that it was not deemed that the surrender clause contained provision for the penalty, otherwise § 39 would in that regard be wholly superfluous. If, on the other hand, it be considered that § 39 embraced other debts or claims against the estate than those to which the surrender clause related, then the expression of the penalty in § 39, under the rule of expressio unius, could not by implication be read into the previous surrender clause. That is to say, if § 23 and § 39 of the act of 1867 be considered as not in pari materia, then it follows that the former,the surrender clause,standing alone, did not impose the penalty or forfeiture provided for in the latter. If they were in pari materia, then the penalty, whilst applicable and controlling as to both, because of its expression in the later section, cannot be said to have existed alone in and by virtue of an earlier section, wherein no penalty was expressed.
The decisions of the lower Federal courts interpreting the sections in question, as they stood prior to the amendment of § 39 by the act of 1874, hereafter to be referred to, were numerous, and we shall not attempt to review them in detail. They will be found collected in a note contained in the eleventh edition of Bump on Bankruptcy, pp. 550 et seq. Disregarding the discord of opinion shown by those decisions concerning what constituted an involuntary surrender,that is, whether it was involuntary if made at any time after suit brought by the assignee, or was only so after recovery by the force of a judgment or decree,and putting out of view also the differences of opinion which were engendered by the fact that the forfeiture imposed by § 39 was found in that portion of the act of 1867 which related to involuntary bankruptcy, we think the decisions under the act of 1867, prior to the amendment of 1874, may be classified under four headings.
'And every such sale, conveyance, transfer, mortgage, or assignment made, . . . by any debtor or debtors, in the event of a deed of assignment being filed within ninety (90) days after the giving or doing of such thing or act, shall be conclusively deemed and held to be fraudulent, and shall be held to be void as to the assignee of such debtor or debtors, where, upon proof shown, such debtor or debtors was or were actually insolvent at the time of giving or doing of such act or thing, whether he or they had knowledge of such insolvency or not. . . .'
The answer to the first question requires a consideration of § 57g of the act of 1898, which, as it stood prior to the amendment of February 5, 1903 (32 Stat. at L. 797, chap. 487),
read: 'The claims of creditors who have received preferences shall not be allowed unless such creditors shall surrender their preferences.' May a creditor who has received a preference, voidable by the act, contest the validity thereof, and, if it is declared invalid, still prove his debt upon surrender of his preference as though no contest had been had?
'What is a surrender.Here the doctrines declared under the law of 1867 seem at least somewhat applicable. The phrasing of that statute undoubtedly colored some of the decisions under it. But, under well-recognized principles of law, a surrender that is compulsory is not a surrender. The element of fraud is usually present, but may be lacking; the test is Was the act a voluntary one? Each case turns on its own facts, and there is some conflict, but the weight of decision under the present law supports this view.'
We are cited to Streeter v. Jefferson County Nat. Bank, 147 U. S. 36, 37 L. ed. 68, 13 Sup. Ct. Rep. 236, as sustaining the contrary view of the meaning of the term 'surrender' as used in this act. The case was under the act of 1867. But in that case the contest was over a stock of goods, and the creditorthe bankhad consented through its attorneys to the appointment of a special receiver, who was ordered to sell the goods and pay the proceeds into court. Of this feature of the case Mr. Justice Shiras, who delivered the opinion of the court, said (p. 45, L. ed. p. 71, Sup. Ct. Rep. p. 238):
The importance of the ruling just made is shown in its application, not only to the act of 1898 as it originally stood, but to the act as it now stands since the amendment of February 5, 1903, which only requires a surrender of preferences when the same are in violation of subdivision b of § 60, or void or voidable under § 67, subdivision e. The reasoning of the majority of the court permits the holder of a preference, no matter how fraudulent, to contest with the trustee when his preference is attacked, and, when convicted of fraud and an intention to defeat the purposes of the law, to 'surrender' that which the law has declared he cannot hold, and prove his debt as a general creditor. To permit this seems to me to defeat the purpose of the act, and to encourage the very thing the surrender clause was intended to promote,a prompt and inexpensive distribution of the estate. The fraudulent transferee, although he has lost his suit, has taken no risk, and may still prove his claim on an equality with unpreferred creditors over whom he has sought an illegal advantage. I cannot agree with this construction, and therefore dissent from the judgment and reasoning of the majority of the court.