Court Opinion

ID: 8640397
Source: CourtListenerOpinion
Date Created: 2022-11-24 19:52:14.561299+00
Date Added: 2024-06-11T16:56:04.861669
License: Public Domain

MeKENNAN, Circuit Judge.
Creditors’ petitions were filed in the district court on the 7th September, 1870, against A. G. Fry and Fry, Duerr & Co., who were merchants and traders, and were so proceeded in that they were duly adjudicated bankrupts and the complainant was appointed their assignee. On the 18th August, 1870, judgments were entered in the court of common pleas of Cambria county, on warrant of attorney in favor of the respondents severally, except Weiser, Cresswell, and Keith, executions were issued and levied upon the stock in trade of the bankrupts and their business was stopped.
The bill seeks to avoid these judgments as fraudulent under the bankrupt act [of 1867 (14 Stat. 517)], and to obtain a transfer of the fund produced by the executions to the complainant. By the thirty-fifth section of the bankrupt act any transfer, direct or indirect, of any part of his property, by an insolvent debtor to a creditor who had reasonable cause to believe that he is insolvent, and that such transfer is made in fraud of the provisions of the act, is declared to be void, and the assignee is empowered to recover the property or the value of it, from the persons receiving it or to be benefited by its transfer. Under this section, it was held by this court, after careful consideration, in Hood v. Karper [Case No. 6,664], that the confession of a judgment, the issuing of an execution and a seizure and sale of property under it, constituted an indirect transfer of such property by the debtor. In the same case it was also held that the objectionable transfer and preference were to be considered as made and obtained when the warrant of attorney was executed by the entry of the judgment, irrespective of the date of the warrant; and that when an execution must necessarily stop the debtor’s business, the creditor, in general, has reason to believe the debtor to be insolvent, and must be considered as intending what, if not prevented, would be a fraud on the provisions of the act.
The co-existence of these elements of illegality in the judgments complained of, is clearly established by the proofs in the present case. At the time of their entry the bankrupts were insolvent, within any definition of insolvency, the judgments were en*906tered upon warrants of attorney a few days before the institution of the bankruptcy proceedings, executions were cotemporaneously issued upon them, which were levied upon all the available assets of the bankrupts, and their business was at once entirely broken up. There is no room for doubt, therefore, that these judgments are impressed with all the attributes of fraudulent preferences as the bankrupt law defines them. Nor, as was urged at the argument, is this conclusion inconsistent with the decision of the supreme court in Wilson v. City Bank of St. Paul [17 Wall. (84 U. S.) 473]. In that case the creditor’s judgment was obtained without the aid or co-operation, direct or collusive, of the bankrupt, and so was strictly adverse. The resulting preference lacked the essential element of promotion by the bankrupt to infect it with the taint of fraud. The court, therefore. held that the mere failure of the debtor to file a petition in bankruptcy to prevent the judgment and levy was not sufficient evidence of an intent to give preference, or to defeat the operation of the bankrupt law. P>ut in this case the attitude of the debtors was not passive. The judgments against them were obtained by their own act, because what was done by another by their express authority was done by them, and the preference thereby secured by the creditors is conclusively presumed to have been the intended consequence of that act. There is, then, as broad a distinction between the cases as there is between bona fide passiveness on the part of an insolvent debtor in an adverse proceeding, which is not an element of fraud, and positive promotion of an objectionable px-eferenee, which is.
It was insisted, however, that this court cannot take cognizance of the complaint, because the fund produced by the sale of the bankrupt’s property under the judgment and executions sought to be avoided is in the custody of a state officer, and is subject to distribution under the direction of the state court. The bankrupt law provides the necessary machinery for its complete administration. Ample jurisdiction in law and equity, is conferred upon the federal courts to fulfill all its exigencies. Indeed, the efficient, successful and uniform operations of the system depends upon the adequacy of the means provided for its execution and their prompt availability, as occasion may require. Certainly it was not made dependent upon the optional exercise, by independent tribunals, of the jurisdiction which it confers. While the state courts may exercise concurrent jurisdiction with the federal courts, in certain cases arising out of proceedings in bankruptcy, they are not bound to do so. The latter alone are the appointed instru-mentalities for the execution of the law, and their duty to do it is imperative. A federal court was. therefore, the appropriate tribunal to resort to for the relief sought in the present case. The complainant might have resorted to the state court, but he was not bound to de so. He is necessarily the actor, and until he invoked its cognizance, and thus acquired jurisdiction over the parties and the subject matter of the cause, no rule of comity even is violated by an appeal to the federal tribunal expressly constituted for the adjudication of his complaint.
In the unquestionable and necessary exer-eise of the power conferred by the bankrupt law, it is the practice of the federal courts to inquire into the validity of the judgments entered in the state court, to restrain their enforcement by execution, and, if adjudged to be fraudulent under the act, to set them aside and decree the transfer of the property seized in execution under them, or the proceeds of its sale to the bankruptcy assignee. Even when such proceeds have been received under the order of a state court, by a creditor obtaining a fraudulent preference, the value of the property sold or appropriated has been adjudged to the assignee. And this is not only expressly authorized by the bankrupt act, but has been decided by the supreme court in Shawhan v. Wherritt, 7 How. [48 U. S.] 627, to be a proper method, under the analogous provisions of the bankrupt act of 1841 [5 Stat. 440]. In this circuit the equitable remedies to effectuate these results have been allowed only against the beneficiaries of illegal preferences and transfers of the bankrupt’s property. Possibly a too fastidious interpretation of the act of congress, forbidding injunctions against proceedings instate courts, has induced the exemption of the executive officers of these courts from these remedies; but in some other circuits, at least, this .immunity is not accorded. In the second circuit similar bills to the one in this case are entertained against sheriffs, and in answer to an objection that the authority of the state courts was hereby interfered with, the able judge of that circuit. Mr. Justice Woodruff said: “On behalf of the sheriff it is insisted that he is an officer of the state court and held the property by virtue of their mandate, and that this is an interference with the authority and jurisdiction of the state courts, and therefore the sheriff ought not to be made a party. There is nothing in this. The proceeding no more-interferes with him. or with the state courts, than would an action of trover or replevin, where he levies upon and retains property which he has no right to apply to pay an execution. He is made a party for his own protection, and because he holds the subject of controversy. No decree is sought and none should be made affecting him. otherwise than as the custodian of the fund, and to secure the control of the court over it. He has in-no other sense any personal interest in the controversy, and ought not to be prejudiced in any manner by the decx-ee.” But if only the parties beneficially implicated in the objectionable transfers are to be affected by the decree, there even is less reason for the *907suggestion that there is any encroachment upon the rightful province of the state courts. There was, however, no question of which the state court has assumed cognizance which this hill seeks to withdraw from it.
Pending the levy under the judgments complained of, proceedings in bankruptcy were commenced against the defendants in them. Upon the finding of a jury on an issue demanded by them, they were adjudged bankrupts, and the present suit was thereupon instituted. The property seized by the sheriff was sold, and the proceeds are in his custody without any movement for their distribution, having been made in the state court when this bill was filed. As a distribution of the fund by that court, without the intervention of the complainant, would not affect his right to recover it from those to whom its payment might be decreed, and as he alone could contest the validity of the judgments as fraudulent preferences, the state court had not acquired a jurisdiction of the parties, which would preclude him from resorting to another tribunal invested with full power to decree and enforce the relief to which he might be entitled. There is, therefore, no reason of comity why the complaint should not be entertained. On the contrary, obvious considerations touching the prompt and complete adjustment of the equities of the parties, and the speedy administration of the bankrupt’s estate, required that it should be entertained. The transfer of the book accounts to John A. Weiser is clearly unsustainable. It was made after executions had been issued against the bankrupts to a large amount, when their business was stopped and their insolvency manifest, and avowedly to give Weiser a preferential security for his claim against them.
The supplemental bill against Thos. H. Oresswell and Susan Keith stands upon a different footing. Susan Keith is the bona fide alienee of Oresswell of a small piece of land purchased by him at sheriff’s sale as the property of the bankrupts, under a judgment entered on the day of, presumable under the proofs, before the filing of the petition in bankruptcy. This judgment and the process issued upon it were not void, but only voidable in the bankruptcy court. Although Oresswell had constructive notice of the bankruptcy proceeding, yet the judgment under which he purchased was apparently a valid lien under the state law upon the property, and he had no notice of any infirmity in it. Its subsequent avoidance, as fraudulent preference, by the consent of the plaintiff in'it, in a proceeding to which Oress-well was not a party at the time, can have no effect upon his title. He, therefore, occupies the position of a bona fide purchaser. for value, without notice of the invalidity of the judgment, and bill against him and ¡Susan Keith must be dismissed.
No actual fraud is imputable to any of the j other respondents, and they ought not to be j subjected to the harsh penalty of exclusion from participation in the assets of the bankrupts, which would result from a final decree against them. They should be allowed the choice of the only alternative of escape from it. If, therefore, within thirty days the holders of the objectionable judgments, respondents in the bill, cause the fund produced by their executions with any interest which may have accrued from its use, to be turned over to the complainant less thle sheriff’s commission and costs of sale; if !john A. Weiser account for and pay to the complainant the amount of the book accounts collected by or for him, and transfer to complainant all the accounts remaining unpaid, deducting any sum or sums paid by him for collection: and if all these respondents deliver a writing to the complainant surrendering their alleged liens or preferences, and agreeing that the costs of this suit together with a reasonable compensation to the complainants’ solicitor, to be fixed by agreement of the parties or the allowance of this court, may be deducted from their dividends of the bankrupt’s assets, no final decree will be entered in this case, and they will be allowed to prove their debts before the register.