Court Opinion

ID: 8774947
Source: CourtListenerOpinion
Date Created: 2022-11-26 12:58:01.27151+00
Date Added: 2024-06-11T17:02:28.972395
License: Public Domain

HANFORD, District Judge
(after stating the facts as above). The two transactions whereby the assets of the bankrupt were transferred must be severed, and the rights of the parties must be adjudicated, separately, by the rules of law and equity applicable to the distinct facts of each of them. In the matter of the execution sale, there was no intention on the part of the bankrupt to make the transfer of its property,, no intention to aid the American Paper Company in gaining a preference over other creditors, and the execution creditor did not have any reason to suspect any such intention on the part of the bankrupt. Therefore section 60b of the bankruptcy law (Act July 1, 1898, c. 541, 30' Stat. 562 [U. S. Comp. St. 1901, p. 3445]) does not authorize a suit by the trustee to recover that property or its value. Nor did the bankrupt intend by the execution sale to hinder, delay, or defraud any of its creditors, that transfer of its property was effected by coercive proceedings, whereby its active opposition was overruled. In this state the trust fund theory governs the rights of creditors of insolvent corporations in litigation concerning their conflicting claims, in equity. The rule deducible from the decisions of the state Supreme Court is this: The assets of an insolvent corporation constitute a trust fund for the payment of its debts, in which all of its creditors are entitled to share ratably; and preferences given voluntarily by an insolvent corporation are void as to nonpreferred creditors. Thompson v. Huron Lumber Co., 4 Wash. 600, 30 Pac. 741, 31 Pac. 25; Conover v. Hull, 10 Wash. 673, 39 Pac. 166, 45 Am. St. Rep. 810; Nixon v. Hendy Machine Works, 51 Wash. 419, 99 Pac. 11.
In the case of Compton v. Schwabacher, 15 Wash. 306, 46 Pac. 338, the opinion of the court contains dictum denying the right of a creditor of a corporation, having knowledge of its insolvency, to gain a preference by any means. The case, however, only involved the validity of an attachment lien and contentions based upon a judgment by confession, and the preceding decisions of the same court, cited as authorities, do not support the broad proposition stated. Therefore, that part of the opinion cannot be regarded as a solemn judgment establishing, by its authority, a local rule of law. The courts of the state afford protection to nonpreferred creditors of insolvent corporations to the extent of annulling liens created by levying writs of execution issued at the instance of creditors for the purpose of gaining preferences; but the decisions do not warrant the assumption that a consummated execution sale is “held null and void as against the *140creditors of” an insolvent corporation by the laws of this state. Therefore, this case, as to the property sold under execution to the American Paper Company, is not within the purview of subdivision “e” of section 67 of- the bankruptcy law. Subdivisions “c” and “f” of the same section refer only to existing liens created by legal proceedings, and are not applicable to a'case in which such a lien has become merged into a title by the consummation of an execution sale. In re Bailey (D. C.) 144 Fed. 214. The property did not belong to the bankrupt, and could not have been levied upon under an execution against it at the time of the initiation of the bankruptcy proceedings. Therefore, the title did not become vested in the complainant by operation of law as expressed in section 70 of the bankruptcy law.
This court does not have the chancery power of a court of unlimited jurisdiction. The whole of its jurisdiction over this case is conferred by the bankruptcy act, and, inasmuch as the specific provisions of that act do not authorize a decree in favor of the complainant, the case as to all of the property transferred by the execution sale and as to the American Paper Company must be dismissed. To that extent the defendant’s exceptions to the legal conclusion contained in the report of the master in chancery are sustained.
Referring now to the second branch of the case, the findings as modified by the court contain all the elements necessary to a decree in favor of the complainant, based upon subdivision “e” of section 67 of the bankruptcy law. Although the purchasers of the property involved paid full value for it, their plea that they are purchasers in good faith is not valid as a bar to a recovery by the representative of creditors of the bankrupt corporation, because it is not true in a legal sense. Their purchase of that property was not an ordinary transaction in due course of a regular business, in which the authority of the manager who sold it to them might be reasonably presumed. Here the trust fund theory, which is an established rule of law in this state, has an important bearing, for by that rule the manager was deprived of authority to sell the remnants of the assets of the corporation without the consent of all of its creditors. The circumstances and conditions of the sale were sufficient to apprise the purchasers of such lack of authority and they must suffer the consequences of their imprudence in dealing with an unauthorized agent.
The exceptions, in so far as they refer to the second branch of the case, áre overruled.