Court Opinion

ID: 8892450
Source: CourtListenerOpinion
Date Created: 2022-11-26 23:25:25.951999+00
Date Added: 2024-06-11T17:07:17.376117
License: Public Domain

KOELSCH, Circuit Judge
(dissenting) :
This court pays lip service to the undoubted proposition that courts of bankruptcy are essentially courts of equity, and after doing so, applies dry legal principles to selected facts and summarily proceeds to decision.1 Such treatment effectively “pulls the curtain” upon much that in conscience would and should be considered in arriving at an equitable conclusion; as a result, Wolverton, the erstwhile bankrupt, is allowed to both eat his cake and have it too.
As I read the opinion, the sole basis for the court’s conclusion is that Time was a “converter” of Wolverton’s property.2 We are told that “ [i] t would be anomalous for this court to allow a converter of security to recover payments for losses attributable to his own actions.” However true that pronouncement might be in a dispute governed by legal principles, it should not be given currency in one tested by considerations of fairness. Wolverton has suffered no losses. To the contrary, he was able to, and in fact did, regain possession of the same property which he now has under a new lease on better terms than the old one. Moreover, by securing the new lease, Wolverton effectively foreclosed Time from recovering the property itself and being able to turn it back to Wolverton.3
Time has compensated Wolverton’s trustee for the value of the property it *367converted. Wolverton now enjoys that property and is not “out of pocket”; indeed, he has profited as a consequence of the conversion. Time is entitled to a return of its money. I would reverse and remand with appropriate directions.

. As succinctly said by the Fifth Circuit in Johnson v. Norris, a case cited by this court in its opinion, “A court of bankruptcy is a court of equity seeking to administer the law according to its spirit and not merely by its letter.”

. The conversion occurred when Time failed to renew the lease which Wolverton had assigned to Time as security and allowed the property to revert to the lessor.
The purpose of the reminder that “Time stands before this court having obtained a preference of the bankrupt’s leasehold interest while having reasonable cause to believe that the bankrupt was insolvent” is not clear to me. The dispute here, of course, is not between the trustee and Time but between Time and Wolverton. The fact that Time was the recipient of a preferential transfer (from Wolverton) should not serve to put Time in a “bad light.” There does exist a tendency to lose sight of the fundamental differences that exist between preferential and fraudulent transfers and indiscriminately to regard the recipients of both types of transfers as cheats or worse: “. . . the underlying theories of preferences and fraudulent conveyances are occasionally forgotten and the transactions so prohibited are accordingly confused. . . . There are however, certain clear distinctions between the two types of prohibited transactions which should be borne in mind constantly. First, of all, it must be remembered that aside from legislative restrictions ... a preference may be a perfectly valid and legitimate business transaction. On the other hand a fraudulent conveyance of transfer aside from statutory interdiction, is almost always invalid. There is no element of moral turpitude connected with the giving (or receipt) of a mere preference; . . . .” 3 Collier on Bankruptcy (14 ed.), Sec. 60.03, p. 763-4.

. In this regard, attention should also be directed, if equitable treatment is to be granted Time, to the strange sequence of events ensuing Wolverton’s transfer of the property to Time. Section 60(b) of the Act provides that “the trustee may recover the property, or, if it has been converted, its value.” The alternative is not available absent a conversion. After Wolverton went into voluntary bankruptcy, Wolverton’s trustee made no effort to reclaim the property while it remained in Time’s possession. Had he done so, then, of course, he would have lost it to the lessor; for, as the referee found, “at no time prior to the expiration of the initial term of the Sunnyvale lease was there suffi*367ment casli to perform the conditions and obligations of the lease.”
Instead, the trustee waited until the “conversion” occurred and then engaged the bankrupt’s personal attorney as special counsel for the purpose of conducting the preference action. The question arises as to the bona fides of the arrangement, for, as the Supreme Court noted in Pepper v. Litton, 308 U.S. 295, 299, n. 4, 60 S.Ct. 238, 242, 84 L.Ed. 281 (1939) :
“On the professional ethics of the conduct of Quillen, the District Court aptly observed: ‘It is generally accepted that an attorney for the bankrupt should not be chosen attorney for the trustee in any case.’ ”