Court Opinion

ID: 6122570
Source: CourtListenerOpinion
Date Created: 2022-02-04 20:07:34.060611+00
Date Added: 2024-06-11T08:23:52.649262
License: Public Domain

BooKEs, J.
(dissenting):
It is insisted, in the first place, that the defendants Henry and Betsey Moyer have not well pleaded the proceedings in bankruptcy taken by Eldredge, so as to entitle them to the defense urged, to wit: that the right to maintain the action vested in the assignee in bankruptcy only. Those defendants allege in their answers, in substance, that a decree was duly made in the United States District Court, at a time and place named, by which the defendant Eldredge was discharged from his debts ; and further, as follows: “ of all which proceedings in said court in bankruptcy for such discharge, the plaintiffs had due notice.” The discharge of the bankrupt was alleged, as was also knowledge by the plaintiffs of the proceedings in bankruptcy .on which the discharge was based; the matter of defense intended to be interposed was distinctly and plainly set forth in the answers, and no objection for informality was raised until on the trial. If the objection was that the answers *484were indefinite and uncertain in their averments, it should have been put forward by motion. (Code, § 160.) No objection having been interposed to the pleadings until on the trial, the case stands upon the sufficiency of the defense set up in the answers, and evidence in its support was admissible ; even if it were true that those pleadings were obnoxious to objection, had it been raised by motion under section 160 of the Code, or by special demurrer. Again, the United States District Court is not a court of inferior jurisdiction (8 N. Y., 254), nor a foreign tribunal; special averments with a view to show jurisdiction were not, therefore, necessary. Thus it seem that the answers were sufficient under the Code (§ 161) to admit proof of every necessary step required by law to establish the adjudication set forth therein. One of the requisite steps, according to the provisions of the bankrupt law, before a discharge could be granted, was the appointment of an assignee; and the assignment to him, by the judge or register vested in such assignee, the title to all the bankrupt’s property by operation of law. It is urged that the averment of the decree for the bankrupt’s discharge did not include an allegation of an assignment, or change of the title; the decree of bankruptcy, appointment of an assignee, and the assignment to the latter, were necessary incidents of the discharge; no discharge could be granted without‘compliance with these formalities ; they were therefore within the purview of the answers which averred the discharge, with knowledge to the plaintiffs of the proceedings on which it was based, because a necessary ..concomitant of it. What is necessarily understood or implied in a pleading, forms a part of it as much as if it were expressed. (Partridge v. Badger, 25 Barb., 170.) It seems, also, that the referee admitted the evidence as competent under the pleadings; the plaintiffs cannot now insist that this ruling was wrong, and ask that the evidence as admitted be stricken from the case, or be disregarded, for if the evidence had been excluded as incompetent under the pleadings, the defendant could have moved for an amendment. The evidence, however, was received as competent, not in part, but in its entirety, 'and it was taken into consideration by the referee in his decision of the case ; for he finds expressly “ that under the pleadings and proofs the plaintiffs have a perfect right to maintain this action and further, “ that the defendant, Eldredge, having waived his discharge *485in bankruptcy, sucb discharge is, under the pleadings in this action, unavailable to the other defendants as a defense, and neither it (discharge) nor the assignment connected therewith, furnishes any bar to the plaintiffs’ right of recovery in this action.” It does not lie with the plaintiffs now, as I think, to insist that the evidence received by the referee as competent, was inadmissible by reason of informality in the pleadings, hence now to be disregarded on the appeal; but in point of fact the banlcrugptey of Eldredge was pleaded, and this was the alleged defense. It was proved before the referee, but was held “unavailable” .because not interposed by Eldredge himself. We are bound, as I think, to accept the case on the pleadings and proofs as it was made before the referee, and accepted by him, and see whether his conclusion (that under the pleadings and proofs the plaintiffs have a perfect right to maintain the action) was sound in law.
It is insisted, and the referee so held, that the discharge of Eldredge was 'personal to himself: a personal privilege which he alone could set up or waive as he might elect. This may be, and probably is so, as regards the right to use the discharge as a protection against legal proceedings, having in view the appropriation of his own property to the payment of his debts. Here, however, the ease is different and of much broader import. The contest here relates to property to which, he has no title whatever — property all right to which has passed to his creditors by operation .of law. In this particular ease, indeed, he could not claim the aid of the court in requiring its application to his debts pursuant to the bankrupt law, nor could he claim any surplus that might remain, arising therefrom, after satisfaction of all his debts, for he has concluded himself, by his fraudulent confederation with the Moyers, from all advantages to himself which otherwise might, by a remote possibility, result to him. Now the discharge must be'considered with reference to all rights given to his creditors, in its acquirement through the proceedings in the bankruptcy court. Those rights exist, beyond his control, by virtue of those proceedings. They are settled and definitely determined by law. As regards the creditors’ rights, he is put aside. To adopt the language of Judge Stoby, the bankrupt act “ manifestly contemplates that as to all property and rights of property of the bankrupt, and as to all suits in law and *486equity pending, in which the bankrupt is a party, the bankrupt is to be treated as if he were civiliter mortwus, and all his property and rights of property were vested in the assignee, as his executor or administrator.” So he has no longer any power for good or harm to the creditors. Therefore, whether he waive or assert his privilege, it can in no way affect any person in his claim to the property liable to his debts, hence cannot deprive even a fraudulent holder of his right to show where the title rests, to the end that he may continue in its enjoyment until called upon to surrender it by the person or persons to whom it by law belongs. So the fraudulent grantees in this case may set up and show that the right sought to be enforced by the plaintiffs does not belong to them to exercise. This defense inheres to them. They cannot be deprived of it by any thing that Eldredge may do or may omit to do. They will stand or fall by their own pleading, and the matters of defense therein alleged. So whether Eldredge assert this privilege and set up his discharge, or omit to do so, it in no way affects either his creditors or the Moyers in their rights. And it follows that his confessions of judgment for the debts barred by his discharge cannot operate to their disadvantage. • I understand it to have been repeatedly decided that the debtor’s bankruptcy may be pleaded in bar to a creditor’s bill brought by individual creditors, after bankruptcy, by any of the defendants ; or, which is the same thing, that such defense is available to defeat the action; and this brings us to consider the real and true question in this case. Eldredge’s bankruptcy was pleaded and proved in this action, and it stands certified in the record as a fact found by the referee. Did such fact bar this action by the creditors ? Did the right to maintain this action rest with the assignee in bankruptcy only? The referee held that Eldredge’s bankruptcy did not bar the action by his creditors.- He held that, neither the discharge of Eldredge from his debts under the bankrupt law, nor the assignment connected therewith furnished any bar to the plaintiffs’ right of recovery, as prayed for in the complaint. In this conclusion of law, I think, the learned referee was in error. The.plaintiffs had no lien on the property held by the Moyers in fraud of the rights of the creditors of Eldredge, and by this action sought to be reached and applied in satisfaction of their demands, when the assignment was *487made to the assignee in bankruptcy, and the transfer became effectual to vest in the latter all the bankrupt’s property, including the right to this property in suit. Now, all rights in regard to this property having vested in the assignee for the benefit of the creditors generally, the latter became, to all intents and purposes, the trustee for all; and it rested with him alone, as assignee to take proceedings against the fraudulent transferees of Eldredge’s property to obtain it and its avails for general and equal distribution. It was well said in Goodwin v. Sharkey (5 Abbott [N. S.], 64, 68), that by force of the bankrupt law, and in virtue of the proceedings taken under it, the assignee represents and has become a trustee for all the creditors of the bankrupt, as well as for the bankrupt himself, and is vested with every right which was possessed either by the bankrupt or the creditors in respect to fraudulent conveyances ; and it was also stated in the same case, that if the property, or the right to recover it, be vested in the assignee in bankruptcy for the epual benefit of all the creditors, it needs no argument to prove that no one creditor can, through the agency of the State laws, obtain a preference over other creditors, or the application of any part of the bankrupt’s property for his exclusive benefit. These views are, undoubtedly, sound, and they are the universal expression of the courts on the subject. (Lowry v. Coulter, 9 Penn. St. Rep., 353; Thurmond v. Andrews, 13 N. B. Reg. Rep., 157; McCabe v. Cooney, 2 Sandf. Ch. [m. p.], 314; 10 B. Mon., 452; Ocean National Bank v. Olcott, 46 N. Y., 12.) The cases all hold that, by virtue of the bankruptcy proceedings, the bankrupt’s property, as well as all rights of creditors touching property fraudulently transferred by him, are brought within the exclusive custody and control of the bankruptcy court. In this way only can an equal distribution among all the creditors be secured. The bankrupt law is based on the principle that “ equality is equity,” and whatever countervails .the object and policy of the law operates as a fraud upon its provisions. So it was laid down in principle by Judge Stoet in Ex parte Foster (2 Story, 131), that if a creditor, knowing of the proceedings in bankruptcy, should, by a proceeding in a State court, appropriate the property of the bankrupt, or its avails, to his individual debt, it would be a fraud upon the law, and he would not be allowed to hold the money *488thus acquired. . It seems, therefore, well settled, both on principle and authority that, after the debtor is in bankruptcy, no one but the assignee can maintain an action to set aside a fraudulent conveyance made by the bankrupt, or to reach property held by third parties in fraud of the creditors’ rights. This being the settled rule of law, the referee was in error in holding that the proceedings in bankruptcy put in evidence in this case did not bar the action.
It is urged that the assignee has not intervened to obtain the property from the fraudulent holders, and non constat that he ever will take proceedings for that purpose; and that if he does not, or will not, then the fraudulent holders will continue unmolested in the fraud, and the creditors of Eldredge will be wholly remediless in the premises. But this is a mistaken view of the case, as regards the latter branch of the proposition.' In the first place, even if the assignee has omitted his duty, it is enough for the defendants to show that the plaintiffs have no ground of action on the facts charged and proved. However groundless the defendants’ position may be when the righful party demands the property, it is sufficient for them to show that the plaintiffs have no right to it under the proceedings which they have adopted for redress. But while it is held, that the right to proceed to set aside a fraudulent transfer of property by a bankrupt, rests with the assignee, and with him alone in the performance of his proper and lawful trust obligations, still, when he violates those obligations by an inexcusable neglect, or willful omission of duty in that behalf, the creditors have an ample and efficient remedy. Their position is like that of creditors of a deceased debtor. It is the duty of an executor or administrator of a deceased debtor, whose estate is insolvent, to impeach the sale of personal property made by the deceased with intent to defraud creditors, and recover the same from the fraudulent vendee; and ordinarily a creditor of the estate cannot maintain an action against such fraudulent vendee alone, or against him and the executor or administrator to set aside the fraudulent transfer and have the property held under it, administered as assets to pay debts. Yet, if the executor or administrator collude with the fraudulent vendee, or after reasonable request refuse to take proceedings to impeach his title and reach the property in his hands, a creditor may maintain an action against him and the executor or administra*489tor for that purpose. (Bate v. Graham, 11 N. Y., 237.) There-was a similar ruling in the early case of Sands v. Codwise (4 Johns., 536), which, in many of its features resembles- the one in hand. That was an action in equity by the creditors of Comfort Sands to set aside various fraudulent transfers of property, and to have the property and its avails applied on their claims and demands. Sands had been put in bankruptcy, and one Kibbe had been appointed assignee, in whom all rights of property pertaining to the bankrupt and his estate, had vested. In that case, unlike this one at bar, the assignee, Kibbe, was made a party defendant; and in order to give the case standing m court, it was charged against Kibbe, that the complainants had applied to him for permission to use his name in such proceedings at law or in equity, as should be necessary for the creditors of Sands to obtain justice, and to have the property, which had been fraudulently conveyed or concealed, applied to the payment of his debts, and had offered, in case he would consent, to indemnify him against all costs and expenses; but that Kibbe declined, and took no steps to get possession of the property so conveyed. Kibbe appeared in the suit and answered the complaint. He admitted that upon application of the complainants, he had refused to prosecute the suit, but insisted that if the deeds should be set aside, then the proceeds of the estate should be paid to him, to be distributed according to law. The court sustained this claim of the assignee. It was decided, (1) that the creditors could maintain the action, but only through the assignee’s title by making him a party, and on the ground that he had neglected or violated his duty as assignee in refusing to prosecute the action himself ; and (2) that the avails of the property obtained under the proceeding should be paid over to him for general distribution among all the creditors, according to the provisions of the bankruptcy act. In this case the objection that the action could not be maintained, because the creditors could not be admitted to substitute themselves for the assignee, was answered by the chancellor thus: that being interested in the fund intrusted to the management of the assignee, and the latter having neglected or refused to do the duties legally imposed on him, the creditors might pursue their interests by bringing the action themselves at the peril of costs, and he puts the right to maintain the action by the creditors expressly on this *490ground. In another part of the opinion the chancellor further remarked as follows: “If the defendant, Kibbe, had not grossly neglected bis duty as assignee, the latter must, of course, as the legal organ, constituted under the laws of the United States to manage the interests of the creditors, retain the power of managing it in his discretion for the benefit of those creditors generally; for the right of the complainants (creditors) to prosecute, must originate in some palpable neglect or positive refusal of the assignee to perform a duty apparently in advancement of the trust, as to the precise subject in which the creditors collectively seek to establish their rights;” and he adds, “ it was not pretended that the Court of Chancery could change the assignee; all that could be expected was to enable the parties in interest to enforce the rights which the assignee was disinclined, either from negligence or sinister motives, to give, effect to;” so the action was upheld on the ground of necessity, in order to prevent a failure of justice. This was also the basis of the decision in Bate v. Graham (supra); these views of the chancellor received the sanction of all the members of the Court of Errors who took part in its decision. Judge SeeNoee, in a few terse sentences, put the case in a clear light; he observed, “ that whenever an assignee declines to act, the creditors have a right to institute a suit for the benefit of all the creditors; by the law of the United States, the property of the bankrupt is vested in his assignees; the conveyances being adjudged fraudulent and void, the property remained in Comfort Sands, and by the bankrupt law became vested in his assignees; the conveyances were void at common law, but the Court of Chancery had a concurrent jurisdiction, it being a case of fraud, and the application to that court was merely for the purpose of avoiding the conveyances. It does not follow that because the Court of Chancery had this cognizance of the cause, it is to take the property out of the hands of the assignee and place it in the hands of a master; having disencumbered the estate of the conveyances, the property remained as if those deeds had never existed, and being vested by the law of the United States in the, assignee, no court cam divest it.” I have quoted freely and perhaps needlessly from this case, but it seemed to me that the great similarity between that and the one in hand, on the facts, gave pertinency and directness here to the remarks and line of *491reasoning of the distinguished jurist who had the case under consideration. The only difference between the two cases on the facts is this, that here the bankrupt confessed judgment on the discharged debts. But this, as we have seen, could not in any way affect his creditors in their rights, secured to them by the bankruptcy law. As said by Judge Stoey, as to those rights he was cwiliter mortuus ; hence, the galvanizing of him into activity, was impotent to defeat the provisions of the law. It is urged that in the ease now before the court, the absence of the assignee from the record only raises a question of defect of parties plaintiff, or defendant, and the objection that there is a defect of parties must be deemed waived because not raised by answer. But it must be held in mind (the bankruptcy proceedings being in evidence) that the plaintiff’s claim or right to the property, sought to be reached in this action, is solely and only through the assignee. This is the defense in the action. The defendants set up and prove the bankruptcy proceedings to establish the defense, to wit: that the plaintiffs have no right of action save through the assignee and under his title or right. This was held in the case above cited (Sands v. Codwise.) It was there held that the creditors of the bankrupt might maintain the action, but only through the assignee and his title; and bn distinct and issuable averments in the complaint that he had neglected or violated his duty. Therefore, in the absence of the assignee from the record, and without such averment, the plaintiffs fail to show any right in themselves, to take the proceeding. The chancellor said, and sustained the right of action on this ground, that the right of the creditors “ to prosecute must originate in some palpable neglect or positive refusal of the assignee to perform his duty.” This is the doctrine laid down in Bate v. Graham. It was there held, in substance, that the action could not be maintained by the creditors, except upon the fact proved or admitted by the pleadings, that the administrator was acting collusively, or in some way in violation of his duty, and to save the case, force and effect was given to his answer, wherein he denied that the assignment sought to be impeached, was made or executed with fraudulent intent. The difficulty in this case is therefore of a more serious character than is one resting simply on a defect of parties. It reaches the plaintiffs’ right to take the proceeding; goes to their *492right to maintain the action; such right, under the proof in this case as it now stands, rests with the assignee solely. Until it be made to appear that he has refused to prosecute, or has in some way so conducted that the right to prosecute has been cast over to the creditors, they are without right of action, and it may be here added that if the right had been so cast over to them, they must effectuate their purpose of reaching the property in controversy throagh the assignee and his title or right. There is nothing in the pleadings, or in the'proof, showing a transfer to the creditors of a right of action; nor was the case tried, nor is it now presented for our consideration, on any such hypothesis. As above suggested, the difficulty is not merely one growing out of a defect of parties plaintiff or defendant, but it reaches the right of the plaintiffs to maintain the action on the theory of the complaint, on which theory it was tried and decided by the referee. The conclusions herein above reached, if sound, require a reversal of the judgment appealed from. I am of the opinion that on the facts here proved, the creditors of Eldredge could not maintain this action to reach the property in controversy, or its avails, except through the assignee in bankruptcy, under his' title and rights as assignee, on the ground that he had neglected or refused to perform his duty in that behalf; and further, that the avails resulting from a successful prosecution of the suit would belong to all the creditors, for distribution according to the provisions of the bankrupt law.
Judgment should be .reversed and a new trial ordered, with costs to abide the event.
Judgment affirmed, with costs.