Court Opinion

ID: 9417985
Source: CourtListenerOpinion
Date Created: 2023-08-02 20:46:00.097101+00
Date Added: 2024-06-11T17:21:53.765513
License: Public Domain

Mr. Justice Day, with whom Justices Harlan, Brewer and Brown concurred, dissenting.
I am' unable to agree with the construction given to the sections of the bankruptcy act under consideration, and because of the importance of the questions involved have deemed proper a statement of the conclusions reached.
Notwithstanding the first question propounded by the Court of Appeals presupposes that the $2,000 mortgage was a preference within the meaning of the bankrupt act, it is argued on behalf of the creditors that although the mortgage, made a few days prior to the bankruptcy proceedings and when the bankrupt was insolvent, was void under section 6343 of the Revised Statutes of Ohio, as amended April 26, 1898, 93 Ohio Laws, p. 290, read in connection with section 67, paragraph e, of the bankruptcy act, it did not constitute a preference which must be surrendered, preliminary to proof of the creditor’s claim, because there was no actual transfer of any property to the creditor, and the only thing obtained was a void mortgage.
The Ohio statute makes provision, among other things, as' to sales, etc., in trust or otherwise, in contemplation of insolvency, or with a design to prefer one or more creditors to the exclusion, in whole or in part, of others, and sets forth:
“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, whereupon proof shown, such debtor or debtors was or were actually insolvent at the time of the giving or doing of such act *375or thing, whether he or they had knowledge of such insolvency or not. . . . ”
By section 67, paragraph e, of the bankrupt act, it is provided:
“And all 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, 'shall be deemed null and void under this act against the creditors of such debtor if he be adjudged a bankrupt, and such property shall pass to the assignee and be by him reclaimed and recovered for the benefit of the creditors of the bankrupt,” ,
Under section 60 of the bankruptcy act of 1898 it was provided:
“a. A person shall be deemed to have given a preference if, being insolvent, he has procured or suffered a judgment to be entered against himself in favor of any person, or made a transfer of any of his property, and the effect of the enforcement of such judgment or transfer will .enable any one of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class.
“b. If a bankrupt shall have given a preference within four-months before the filing of a petition, or after the filing of the petition and before the adjudication, and the person-receiving it, or to be benefited thereby, or his agent acting therein, shall have had reasonable cause to believe that it was intended thereby to give a preference, it shall be voidable by the trustee, and he may recover the property or its value from such person.”'
In section. 1, paragraph 25, of the act of 1898, a “transfer” is defined to include the sale and every other and different mode of disposing of or parting with the property or the possession of property, absolutely or conditionally, as a payment, pledge, - mortgage, gift or security.
This definition of a transfer covers a mortgage given for the *376security of a debt in express terms, and section 60 provides that preferences shall include transfers, the effect of the enforcement of which would be to enable any one of the bankrupt's creditors to obtain a greater percentage of his debt than other creditors of the same class.
It is true that if the mortgage is void, it can have no eilect to diminish the estate of the bankrupt, but upon its face the mortgage is good as against the bankrupt and the creditors of the estate.
It is said that the mortgage being void, the creditor had nothing to surrender; but this assumes the invalidity of the security. Until set aside or voluntarily surrendered it is a good encumbrance upon the property, whether regarded as a conditional conveyance or as a mere security for the debt. It could be set aside by the trustee upon proof of insolvency of the bankrupt and other conditions named in the act at the time of giving it; otherwise it would stand as a valid security, unless the creditor should elect to surrender it and make proof of his claim as a general creditor.
There seems to be no question that, upon its face, though void in the light of the facts found, this mortgage was one of the transfers of property which was invalidated by the act, it being given within the time limited, and at a time when the bankrupt was in fact insolvent, and expressly made void by the Ohio statute when read with the bankrupt act of 1898.
The answer to the first question requires a consideration of paragraph 57g of the act of 1898, which, as it stood prior to the amendment of February 5, 1903, 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?-
It was held by this court in Pirie v. Chicago Title & Trust Company, 182 U. S. 438, that a creditor who had received a *377preference, although he did not have reason to believe that one was intended, could only keep the property transferred upon condition of refraining from proof of the balance of his debt.
It was pointed out in that case, in the opinion of the court by Mr. Justice McKenna, that section 60 in its various provisions permitted a creditor, who' had innocently received a preference, to hold it if he chose, and it could only be recovered by the trustee in the event that he had reasonable cause to believe that a preference was intended, in which case the trustee might recover the property or its value. But the innocent creditor might keep the property transferred to him, although a preference within the definition of the act, upon terms of non-participation in the bankruptcy estate in the general distribution to the creditors.
Section 23 of the bankruptcy act of 1867 provided:" . . . Any person who, after the approval of this act shall have accepted any preference, having reasonable cause to believe that the same was made or given by the debtor, contrary to any provision of this act, shall not prove the debt or claim on account of which the preference was made or given, nor shall he receive any dividend therefrom until he shall first have surrendered to the assignee all property, money, benefit or advantage received by him under such preference.” Section 57g of the present act, prior to the amendment of February 5, 1903, required broadly that claims of creditors who have received preferences shall be surrendered, and that the same shall not be allowed unless this is done.
Under the former act the surrender was required of creditors who had accepted preferences, having reasonable cause to believe the same contrary to the provisions of the act, and such creditor could not receive any dividend until he had first surrendered the preference. In passing the act of 1898, Congress doubtless had before it prior legislation on the subject, and particularly the act of 1867,- the most recent enactment on the subject.
Section 57g provides that all preferences, whether innocent *378or otherwise, shall be. surrendered before the creditor can prove his claim, and the right of proof is not postponed until the surrender, but claims are not to be allowed unless creditors shall surrender their preferences. The element of time is indicated in the word “until,” which means to the time of, or up to, while the use of “unless” more emphatically denies the right of proving the claim, save or except upon terms of relinquishing the preference.
In-view of the purpose of the bankruptcy act to make an equal distribution of the bankrupt’s estate among creditors of the same class and to avoid preferences made within four months, I think, having in view the first question put by the Circuit Court of Appeals, that the sections of the law in question must be construed to put a creditor who has received a merely voidable preference, which could be recovered from him by the trustee, to his election between striving to retain that which he has received, and voluntarily surrendering his preference, and filing his claim that he may participate with other unsecured creditors in the general distribution of the estate.
The law looks to a prompt, equal and inexpensive distribution of the estate among those entitled thereto, and I do not think it was intended to permit a creditor to take the chances of litigation with the trustee,' and when defeated still have the right to “surrender” his preference and participate in the distribution of the general estate. I think the surrender contemplated by the law is not the capitulation which comes after unsuccessful resistance, but is intended to require the creditor, who must be presumed to know the law, to make a prompt election and to stand or fall upon the choice made. In other words, it was not intended to permit a creditor who holds security liable to defeat under the law to keep it if he can maintain it by successful contest and, if not, to have the same right and privilege as to proof of his debt that he would have if he promptly availed himself of the privilege of surrender which the law gives to one who would place himself upon a general equality with other creditors of the estate.
*379These conclusions are sustained by a consideration of the terms of the law under discussion, as well as the adjudicated cases which have arisen under it. The act of 1898 made important changes when compared with the bankrupt law of 1867. As we have already seen, section 23 of the latter act limited the requirement as to the surrender of preferences to those made or given contrary to the provisions' of the act. Section 35 of the same law gave the right to the assignee in bankruptcy to set aside illegal preferences, and section 39, after enumerating certain transactions which should amount to acts of bankruptcy, including fraudulent conveyances as therein described, provided that whenever the beneficiary had reasonable cause to believe'that a fraud upon the act was intended, or the debtor was insolvent, the assignee might recover the property, and .the creditor should not be allowed to prove his debt in bankruptcy. In 1874, 18 Stat. 178, section 39 of the act was amended, and, instead of .prohibiting a creditor who had received a conveyance in fraud of the act from proving his debt, it was provided that such creditor should not, in case of actual fraud on his part, be allowed to prove for more than a moiety of his debt, and this limitation should apply to cases of voluntary as well as involuntary bankruptcy.
It will not, in my view, aid in the determination of the proper construction of the act of 1898 to review the numerous and conflicting decisions made under the' act of 1867 as to the effect of these various provisions upon the right of the creditor to prove his claim. The great weight of authority is that one who had a voidable preference under the act could not be permitted to prove his claim after a judgment had been rendered against him in a contest with the trustee.
Presumably with the provisions of the act of 1867 before it, providing that in certain cases of fraudulent conveyance the creditor could not prove his claim in bankruptcy, first as to the whole, and later as to a half of the debt, and the limitations of the requirement to surrender preferences to those made in violation of the act, Congress laid aside these requirements, *380and broadly provided in section 57g of the act of 1898 that all preferences • must be surrendered as a condition of proof of claims against the estate. The innocent holder of a preference could not be deprived of his right of election between proof of his debt and the surrender of- his preference. He who had a voidable preference might surrender it and prove his debt. If he did not “surrender,” the trustee could recover the preference, and the privilege of proof which was conditioned upon surrender no longer existed.
Prior to the amendment of 1903 this court, in the. case of Pirie v. Trust Company, already referred to, decided that the requirement extended to all manner of preferences, whether innocently received or otherwise, and this'was the law until the amendment of 1903.
Therefore the sole question here is: What is meant by the term “surrender” as used in the act of .1898?
We have been referred to four cases 'decided under this law before the passage of the amendment of 1903. Before passing to them I may refer to- a decision of Judge Dillon at the circuit, In re Richter, 1 Dill. 544, rendered in 1870 under the act of 1867, but in defining the word “surrender” and pointing out its meaning, the language of the learned judge is as pertinent now as it was then. Having before him the construction of the term “surrender” as used in section 23 of the act of 1867, and speaking of 'the right of a creditor to prove the balance of a claim which had been illegally preferred, the judge said:
• “The statute is that they shall not prove up the debt or claim on account of which the preference was given. It was this precisely wnich, by the motion under consideration, they sought to have done, and which the court refused to. allow.
“It is urged by the claimants that this refusal was erroneous because they had, before the time when" they made their motion, surrendered to the assignee all property received by them under the preference. This devolves upon us the duty of interpreting the meaning of the word surrender, as it is here used. And it is' our opinion that a creditor, who receives *381goods by way of fraudulent preference, and who refuses the demand therefor which the assignee is authorized to make (section 15), denies his liability, allows suit to be commenced by the assignee, defends it, goes to trial, is defeated and judgment passes against him, which he satisfies on execution, cannot be said within the meaning of the statute, to have surrendered to the assignee the property received by him under such preference.'
“He has surrendered nothing. He accepted a fraudulent preference and defended it to the last. Paying a judgment which he stoutly resisted, and from which he could not escape, is not such a surrender as the statute contemplates. To hold that it was would be against the spirit of the-statute, which is to discourage preferences. Such a holding would manifestly encourage them, for if the transaction should be upheld the creditor would profit, if overthrown, he would lose nothing, and stand upon an equal footing with those over whom he had attempted to secure an illegal advantage, and whom he has, by litigation, delayed in the collection of their claims.”
The question, under the act of 1898, came before the United States District Court for the Northern District of Iowa, in the case of In re Keller, 109 Fed. Rep. 118; 6 Am. B. R. 334, where the subject is discussed by Judge Shiras. Summing up the matter, the learned judge said:
“It would certainly be wholly inequitable to hold.that a creditor who has received a preference from an insolvent debtor can refuse to account therefor, and after causing.the other creditors the delay, cost, and expense of litigation, after being defeated therein, can still prove up his claim, and take an equal share in the proceeds of the estate after depleting the same in the manner stated. Contesting the claim of the trustee, and paying back the preference in obedience to the process of the court, is not a surrender, within the meaning of clause ‘g’ of section 57. Therefore there is this difference between a preferred creditor who surrenders the preference and a preferred creditor from whom the preference is recovered by the trustee; *382The former, having voluntarily surrendered the preference received, is entitled to prove up his entire claim, and share with the other creditors. The latter, having refused to surrender, cannot prove the claim or share in the estate.”
To the same effect is In re Owings, 109 Fed. Rep. 623, and in In re Greth, 112 Fed. Rep. 978 ; 7 Am. B. R. 598, the cases are reviewed and the same conclusion reached.
In Collier on Bankruptcy, third edition, section 319, that author says:
“The question what constitutes a surrender has received much discussion. It is admitted by all that if the assignee is compelled to bring an action to invalidate a transfer, and if he recovers and enters up a judgment, no subsequent payment of that judgment by the preferred creditor and no subsequent compliance by him with its terms can be considered a surrender. By his judgment the trustee has ‘recovered’ the property. In legal effect the transferee no longer has anything to surrender.”
And in the fifth edition of the same work, p. 420, it is said:
“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.”
The only case, decided under the act of 1898, which has come to my attention sustaining a contrary view is In re Richard, 94 Fed. Rep. 633; 2 Am. B. R. 506, in. which it was decided that, notwithstanding the preference was set aside, after a fruitless fight with the trustee, the creditor might prove his claim.
We are cited to Streeter v. Jefferson County Bank, 147 U. S. 36, as sustaining the contrary view of the meaning of the term *383“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):
“To sustain the contention that the bank did not surrender its preference, it is urged that the bank did not at once, on demand of the assignee, turn over the goods levied on, but litigated the matter with the assignee in both the District and the Circuit Courts, and that the proceeds of the executions were not relinquished until final judgment was entered against the bank.
“It was the opinion of the state court that, as the sheriff, having custody of the goods seized on execution was, with the consent of the bank’s attorneys, appointed special receiver, and was ordered to sell the goods and pay the proceeds into court, to await the result of the litigation between the bank and the assignee in bankruptcy, and that as the proceeds were finally turned over to the assignee, and thus became subject to distribution as bankruptcy assets, the transaction amounted to a surrender under section 5084. In so holding we think the state court was right.”
We are also cited to the meaning of the word “surrender” as given in the Standard Dictionary:
“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.”
This definition is given in support Of the contention that a surrender may sometimes be made involuntarily. This is doubtless true, and obviously the term may have different meanings when used in different connections. It may be that an army may surrender a fort after a most vigorous contest, while there is still the choice between further resistance and *384yielding the fortress to an enemy, but the most liberal meaning of the térm could hardly describe as a surrender the occupation which a victorious army has gained of a fort after it has ejected the enemy from its walls and is securely intrenched therein without leave of those who have been forcibly driven out.
The bankrupt law contemplates that a secured creditor, who holds a security voidable under the law and which he should put into the common fund as a condition of the right to participate with other unsecured creditors in the division of the estate, must make his choice while he has yet something to give for the privilege of being taken from the class of those who have a security which may be taken from them, and placed in a class, always favored in the bankrupt law, who shall share in the equal distribution of the bankrupt’s estate, freed from fraudulent conveyances and voidable preferences.
The complete answer to the argument that one who has received a preference which he must give up before proof as a general creditor has the right to try out with the trustee the question of the validity of the preference and then surrender, is that when the judgment of the law has taken the preference from him he has nothing left to surrender, and if then so disposed the creditor cannot surrender a thing which has been wrested from him by the strong hand of the law.
In this case the Ohio statutes, when read with the bankrupt law, distinctly avoid preferences, and the trustee, by bringing the action, diminished the estate and delayed its distribution. The creditor, before the litigation, had his election as to the course he would pursue. While he had something to surrender he might give it up, prevent costs, delay and litigation, and aid the speedy and equal distribution of the bankrupt’s estate. After two judgments against him, and when he had absolutely nothing to give up to the bankrupt’s estate, it is, in our view, too late to “surrender.”
I think the construction here given comports with the purposes and carries into effect the design of the act as expressed *385by its terms. It is true that in the present case, after resisting the attack upon the $2,000 mortgage in the Court of Common Pleas, and when the judgment had gone against the bank it did not appeal, and its counsel in the Circuit Court disclaimed intention to insist upon the preference of the $2,000 mortgage, but even then refused consent to a decree against the mortgage, and in our opinion the time of election was before judgment in the court of original jurisdiction wherein the mortgage was contested and defeated. It is unnecessary to consider whether an election to .surrender the preference can be made after issued joined and before judgment. In this case a trial was had upon the merits. The judgment rendered was vacated by the appeal and in the appellate court, notwithstanding the qualified disclaimer of counsel for the bank, a final judgment was rendered against the mortgage.
These considerations lead to the conclusion that the first and second questions should be answered in the negative.
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 section 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 *386with this construction, and therefore dissent from the judgment and reasoning of the majority of the court.
I am permitted to state that Mr. Justice Harlan, Mr. Justice Brewer, and Mr. Justice Brown concur in this dissent.