Court Opinion

ID: 6904407
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:58:20.216802+00
Date Added: 2024-06-11T16:06:17.105437
License: Public Domain

Mr. Justice Burnett
delivered the following dissenting opinion:
In this case the plaintiff instituted an action against the defendant March 19, 1913, and on the same day caused an attachment to be levied upon the defendant’s real property. The next occurrence in the order of events was an assignment by Sheridan of all his property on November 7, 1913, for the benefit of his creditors, under the provisions of the state assignment law found in Sections 7540-7555, L. O. L. This deed was recorded in the county, where the real property was situate, November 11, 1913. In pursuance of a petition filed in the United States District Court January 28,1914, Sheridan was adjudged a bankrupt in that court February 17, 1914. On March 3d of that year the state Circuit Court entered a judgment in the ac*187tion with an order to sell the attached property. April 16, 1914, the trustee in bankruptcy moved in the state court to set aside the order for the sale of the attached property, which motion was denied, and the trustee appeals, after having been substituted for- the defendant in the case.
It must be conceded that the courts of the United States, in the exercise of jurisdiction under the federal law, did not acquire any authority over the property of Sheridan until the petition in bankruptcy was filed. Prior to that time Sheridan could deal with his property as he chose. This being true, he had a right to make an assignment under the provisions of and with the results declared by the law of this state on that subject. An important effect of such an assignment is to discharge any and all attachments on which judg-' ment shall not have been taken at the date of such assignment: Section 7540, L. O. L. This transaction of Sheridan remained valid for all purposes, according to its original design, until the operation of the Federal Bankrupt Act was set in motion by the petition to adjudge him an involuntary bankrupt. As said by Mr. Justice Holmes in Randolph v. Scruggs, 190 U. S. 533, 537 (47 L. Ed. 1165, 23 Sup. Ct. Rep. 710, 712):
“The assignment was not illegal. It was permitted by the law of the state, and cannot he taken to have been prohibited by the bankruptcy law absolutely in every event, whether proceedings were instituted or not. * * It had no general fraudulent intent. It was voidable only in case bankruptcy proceedings should be begun. At the time when it was made, the institution of such proceedings was uncertain. It seems to us that it would be a hard and subtle construction to say, as seems to have been thought in Bartlett v. Bramhall, 3 Gray (Mass.), 257, 260, that when they were instituted they not only avoided the assignment but made it *188illegal by relation back to its date, when, if they had not been started, it would have remained perfectly good.”
In that case the Supreme Court of the United States so far recognized the validity of the assignment under the state law as to sanction payment of some of the expenses connected therewith. In Johnson v. Crawford et al. (C. C.), 154 Fed. 761, it was held that:
“A voluntary assignment for the benefit of creditors, though forming part of the general insolvency system of a state being valid at common law, may be carried out, notwithstanding the Federal Bankruptcy Act, unless such assignment is directly called in question by a petition in bankruptcy. ’ ’
In re Chase, 124 Fed. 753 (59 C. C. A. 629), contains a lengthy examination of the authorities on this subject, and the court there concludes that:
“Nothing in these expressions * * declares that general assignments, honestly made, are contrary to the policy of the bankruptcy statutes; and, on the other hand, they are declared to be in harmony therewith.”
Commenting upon such a situation, the court said in Thompson v. Shaw, 104 Me. 85, 90 (71 Atl. 370, 372):
“Nothing appears in the assignment to indicate fraud. It is in the usual form of a common-law assignment for the benefit of creditors. By it all the assignor’s property, not exempt from attachment and execution, was conveyed to be divided pro rata among all of her creditors who should assent thereto, and reasonable time for such assent was provided for. Such an assignment, if bona fide, is lawful. It is not contra bonos mores. Until assailed by some one claiming rights against it, under the provisions of the bankruptcy law, it stands as a valid transfer of the property described as conveyed therein.”
*189By subdivision E of Section 67 of the Bankrupt Law (U. S. Comp. Stats. 1913, § 9651, 1 Fed. Stats. Ann., p. 692), all conveyances, transfers, assignments or encumbrances, made by the bankrupt with the intent on his part to hinder, delay or defraud his creditors are declared void. It is the element of fraud alone which works out this result, although Section 3 of that law makes a general assignment for the benefit of his creditors an act of bankruptcy that does not make it necessarily void. In view of the fact that that statute has elsewhere made the intent to defraud a necessary feature of a void assignment, we ought not to enlarge Section 3 in that manner as against an assignment made in good faith, as we must presume this one to have been.
The tendency of the federal decisions on this point, of which Randolph v. Scruggs, 190 U. S. 533, 537 (47 L. Ed. 1165, 23 Sup. Ct. Rep. 710, 716), is an example, seems to be to treat the assignment as valid and recognize it so far as it is an aid of the purpose of the law and beneficial to the bankrupt’s estate. In its effect of dissolving the previous attachment in the state court, the assignment was advantageous to the bankrupt’s estate and efficient in carrying out the general design of the law to provide an equal distribution of his estate for the benefit of all his creditors in proportion to the amounts of their respective claims. When the federal court assumed jurisdiction of the matter in pursuance of the petition in bankruptcy, it took the estate of Sheridan as it found it, and was bound to administer it on that basis, excepting, of course, the provisions for setting aside sales or transfers of property made within four months of the filing of the petition or in fraud of creditors. In a certain sense the federal court assumed charge of what might be called a going *190concern in the shape of a proceeding lawfully initiated in the state court to accomplish a fair division of a debtor’s property among his creditors. The new management had the right to avail itself of all that was advantageous to it in the doings of the former concern. It is nothing more than a question of administration, which, of course, goes to the federal court under the bankrupt law, but only when and not until its jurisdiction is asserted.
The situation, then, was that the federal court found an estate of- Sheridan free from the previous attachment, and, when it assumed jurisdiction, this circumstance did not revive the attachment. In other words, the making of the assignment, while constituting an act of bankruptcy, within the meaning of the federal statute, was not void when made, but carried with it the effect declared by our state law. If no creditor of Sheridan had initiated the bankruptcy proceedings in the federal court, it would have been perfectly legitimate for his assignee under the state law to have wound up his affairs and paid his creditors, resulting in Sheridan’s discharge from his debts, provided his estate had paid 50 per cent or more of his indebtedness. In disregarding the effect of the assignment, valid at least at the date of its execution, and, in spite of it, making the order to sell the attached property, the Circuit Court violated the rules of procedure prescribed for it by the state of whose judicial system it is a part. It was in error in refusing to retrace its steps on the motion of the trustee in bankruptcy.
The general purpose, both of the federal bankrupt act and of our state assignment law, is to provide for a ratable distribution of a debtor’s estate among his creditors, according to the amount of their respective claims. Upholding the attachment, under the circum*191stances of this case, is at variance with this policy and secures to one creditor a preference by reason of his attachment, which was dissolved by the assignment under the state law, while the opposite determination of the issue will give effect to the intent of both state and federal legislation.
The judgment should he reversed.