Case Name: In re FALCONER
Court: United States Court of Appeals for the Eighth Circuit
Jurisdiction: United States
Decision Date: 1901-06-18
Citations: 110 F. 111
Docket Number: No. 23
Parties: In re FALCONER.
Judges: Before SANBORN and THAYER, Circuit Judges, and ADAMS, District Judge.
Reporter: Federal Reporter
Volume: 110
Pages: 111–119

Head Matter:
In re FALCONER.
(Circuit Court of Appeals, Eighth Circuit.
June 18, 1901.)
No. 23.
Bankuuptov — Exrvptions—Selection.
Tinder the statute of Arkansas (Sand. & H. Dig. c. 78, §§ 3716, 3718), which permits a debtor wlio is married or the head of a family to select and hold as exempt “specific articles,” not exceeding in value the sum of $560, a bankrupt who is a married man may claim his exemption in money as well as in property; and where, at the time of filing his schedule, he claims articles of property of less value than $500, he may amend such schedule to include a sum of money subsequently surrendered to tlie trustee by a creditor, as the proceeds of property transferred to him by the bankrupt and constituting a preference, and may at the same timé claim the remainder of his exemption therefrom.
Sanborn, Circuit Judge, dissenting.
Petition for Review of Order of the District Court of the United States for the Western District of Arkansas, in Bankruptcy.
William A. Falconer, in pro. per.
Homer C. Mechem and Edgar E. Bryant, for respondent.
Before SANBORN and THAYER, Circuit Judges, and ADAMS, District Judge.

Opinion:
THAYER, Circuit Judge.
The petitioner, William A. Falconer, seeks by this proceeding to review an order made by the United States district court for the Western district of Arkansas, allowing J. M. Hamilton, who had previously been adjudged a bankrupt, the sum of $4x4, as an exemption out of certain moneys which had been paid to the petitioner as trustee of the bankrupt's estate, under the following circumstances:
Hamilton was adjudged a bankrupt on March 17, 1899, under an involuntary petition in bankruptcy which was filed against him by three of his creditors. On March 24, 1899, he filed his schedules in bankruptcy, wherein he claimed as exempt certain specific articles of personal property of the aggregate value of $86, and further stated that he was a married man and the head of a family, and a citizen and resident of Johnson county, in the state of Arkansas. Within four months preceding the commencement of bankruptcy proceedings Hamilton had conveyed to the Bank of Clarksville certain personal property to secure an indebtedness which he owed to it, the conveyance being made under such circumstances that it operated as a preference. Prior to the institution of bankruptcy proceedings the personal property so transferred had been sold by the bank, for which it had received the sum of $565.25. At the first meeting of Hamilton's creditors, to wit, on April 10, 1899, the Bank of Clarks-ville presented its claim against the bankrupt amounting to the sum of $983.25, and asked leave to surrender the preference which it had received and to prove the entire amount of its claim as an unsecured debt. Such leave was granted, and the bank thereupon paid to the trustee the sum of $565.25, which it had received from the sale of the personal property aforesaid. On the same day that the money' in question was paid to and received by the trustee, the bankrupt filed an amended schedule of .assets, embracing therein the sum of $565-25 whiph- had been paid to the trustee, and claimed a part thereof, to wit,- $414, as exempt. Such claim on the part of the bankrupt was allowed by the trustee, and the sum so allowed, in addition to the specific articles of -personalty theretofore claimed as exempt, increased his total exemptions to the full amount allowed by law. • Exceptions were taken to the latter allowance of $4x4, by one of the bankrupt's creditors, but the district judge, after a hearing had upon the exceptions, approved the action of the trustee in making the same. It is this latter order which we are called upon to review.
Section 6a of the bankrupt act of July 1, 1898 (30 StatJ c. 541, p. 548), declares that "this act shall not affect the allowance to bankrupts of the exemptions which are prescribed by the state laws in force at the time of the filing of the petition in the state wherein they have had their domicile for six months, or the greater portion thereof, immediately preceding the filing of the petition"; and the laws of Arkansas on the subject of exemptions, which were in force when the bankruptcy proceedings against Hamilton were inaugurated, declare, in substance (vide Sand. & H. Dig. Ark. c. 78, § 3716, 3718), that any resident of the state who is married or the head of a family may select specific articles, not exceeding in value the sum of $500, in addition to his wearing apparel and that of his family, and that the same shall be exempt from seizure on attachment or sale on execution or other process emanating from any court, to enforce a debt created by contract. They also provide, in substance, that' whenever any resident of the state, upon the issuance against hini; for the cdllection of a debt created by contract, of an execution or other process against his property, shall desire to claim any of the exemptions allowed by the constitution and laws of the state, he shall prepare a schedule, verified by affidavit, of all of his property, including moneys, rights, credits, etc., and specify the particular property which he claims as exempt, and that, after giving five days' notice in writing to the opposite party, his agent or attorney, he shall file the same with the justice or clerk issuing the process, and that the justice or clerk shall thereupon issue a supersedeas staying any sale or further proceeding under such process against the property of the debtor in such schedule described, and that no alias execution shall be levied on property which has been so relieved from seizure until one year after the date of the filing of the aforesaid - schedule of exemptions.
It is insisted by the petitioner that the bankrupt should have made his claim to be allowed the amount of his statutory exemption out of the proceeds of the property which had previously been conveyed to the Bank of Clarksville, when he filed his schedule on March 24, 1899, and that because he failed to make such a claim at that time he thereby waived his right to resort to that fund for his exemption. We think, however, that this position is untenable. When the bankrupt filed his original schedule it was not known that the proceeds of the property previously conveyed to the bank would ever become a part of the bankrupt's estate. The bankrupt himself could not challenge the validity of that conveyance, and whether the fund would become a part of his estate in bankruptcy depended altogether upon such action as the trustee might take to recover it, and upon the outcome of litigation brought for that purpose, if the fund was not voluntarily surrendered by the preferred creditor. Under these circumstances, we think that the bankrupt was under no obligation at the time he filed his original schedule to claim his exemption out of the fund in controversy, or to indicate his intention to do so if the fund should be recovered by the trustee or surrendered voluntarily by the creditor. In making his claim for exemption in the first instance his choice was necessarily confined to such property as he could himself lay claim to, at the time, as forming a part of his estate. His right to select other property then held by third parties, whose title could only be challenged by the trustee, arose, and in the nature of things could be exercised only, when the title by which it was held was vacated, and the property became actually, as well as potentially, a part of his estate. It was not until then that the bankrupt court could exercise dominion over the fund in controversy by directing a part thereof to be paid to the bankrupt on account of his exemption; and, as the bankrupt acted promptly 11 in making his claim upon the fund as soon as it was surrendered to the trustee, we perceive no substantial reason for rejecting the claim because it was not interposed at an earlier date or when the original schedule was filed.
The petitioner further insists that, under the Arkansas statute relating to exemptions, the bankrupt was required to select specific •articles of personalty to make up his exemption, and that under no circumstances can he be permitted to take the proceeds of property, once a part of his estate, but which has been sold and reduced to money. This contention appears to be based wholly on two decisions of the supreme court of Arkansas, namely: King v. Ruble, 54 Ark. 418, 16 S. W. 7, and Surratt v. Young, 55 Ark. 447, 18 S. W. 539. In the first of these cases (King v. Ruble), it was held that the reservation by an insolvent assignor from the proceeds of personal property assigned, of a sum of money equal to his exemptions, is an unlawful benefit to the assignor at the expense of his creditors, and that such a reservation will not be allowed. In the other case (Surratt v. Young) it was decided that when personal property is attached the debtor, if he has an opoortunity to do so, must select those articles of personalty which he chooses to hold as exempt, and that he cannot claim his exemption out of the proceeds of the sale after the attached property has been sold under judicial pr'ocess. The reasons assigned for these decisions were that it would operate to the prejudice of the creditors if debtors were allowed to stand by and suffer their property to be sold at the expense of their creditors, and subsequently claim their entire exemption out of the proceeds. Neither of these decisions holds, however, nor does the local statute so declare, that a debtor may not claim his exemption in money as well as in property, and the present case seems to be one in which the bankrupt should receive his exemption in money. If he had himself sold the property, as he had an undoubted right to do at the time it was sold by the Bank of Clarksville, and had had the proceeds of the sale in his possession when he was adjudicated a bankrupt, he could doubtless have claimed $500 thereof as exempt, and we can perceive no substantial reason for denying his right to claim a part of the fund in controversy when it appears that prior to the commencement of bankruptcy proceedings the property out of which the fund arose had been sold by a third party, to whom he had transferred it as security for an honest indebtedness, and such third party has surrendered the fund to the trustee. In the state of Arkansas it is held that when land in which a homestead right inheres is conveyed by a debtor in fraud of his creditors, and the conveyance is subsequently annulled at the instance of creditors, the debtor does not thereby forfeit his exemption, but may assert his right thereto, and may have his homestead set apart out of the land, even as against creditors who have succeeded in annulling the fraudulent conveyance. Carmack v. Lovett, 44 Ark. 180. A similar doctrine prevailed under the bankrupt law of 1867. It was uniformly held, in controversies arising under that act, that, if the assignee recovered property which had been conveyed in fraud of the provisions of the act, the bankrupt could successfully assert any homestead exemption right which he originally possessed in the* property recovered by the assignee, and that the right was not forfeited by the debtor's fraudulent conduct. Cox v. Wilder, 2 Dill. 45, Fed. Cas. No. 3,308; In re Detert, 7 Fed. Cas. 545 (No. 3,829); McFarland v. Goodman, 16 Fed. Cas. 90 (No. 8,789); Penny v. Taylor, 19 Fed. Cas. 194, (No. 10,957); In re Poleman, 19 Fed. Cas. 918 (No. 11,247). ^he same doctrine has been approved by the cirr cuit court of appeals for the Sixth circuit in a case arising under the present bankrupt law (In re Tollett [C. C. A.] 106 Red. 866), wherein it was held that the conveyance of property without fraud in fact, even though there was constructive legal fraud, does not bar the right of the bankrupt to claim a homestead in the property when it is recovered by the trustee.
We are of opinion, therefore, that Hamilton did not forfeit his right to claim his exemption out of the personal property transferred to the Bank of Clarksville, although such transfer at the time it was made operated as a preference. It was not fraudulent in fact, the conveyance having been made to secure an honest indebtedness due to the bank, but was simply voidable under the provisions of the existing bankrupt law. It ought not to be held, we think, that a transfer of personal property which is affected with no other vice than that it falls within the prohibition of the bankrupt law against preferring creditors, operates as a forfeiture or waiver of the bankrupt's right to claim such exemption as the law allows out of such property or its proceeds when it has been restored to his estate and comes into the possession of his trustee. It would certainly be a harsh rule, and one that is not consonant with the humane purpose which has led to the enactment of exemption laws, to hold that if a bankrupt makes a payment or transfers property by way of security to one of his creditors, and such money or property is subsequently recovered by his trustee and becomes a part of his estate which the bankrupt court is called upon to administer, no part of the money or property so recovered can be set apart to the bankrupt to satisfy his claim for exemptions, although he may have no other property out of which the amount of his statutory exemption can be paid. The present bankrupt law does not make it a ground for refusing a discharge that the bankrupt has transferred property to one or more of his creditors which operates as a preference, and we perceive"no adequate reason for holding that such a transfer of property places the same, or the proceeds thereof if it has been sold by a creditor, beyond the reach of a claim for exemptions when it is restored to his estate. No bankrupt should be deprived of his exemptions by a narrow and strict interpretation of laws which were passed for his benefit and prompted by a wise and humane public policy. The order made below -was; in our judgment, a proper order, and the petition to review the same is accordingly dismissed.