O'Sullivan's Trustee v. Douglass

Opinion of the Court by Chief Justice O’Bear- — - Beversing. Daniel E. O’Sullivan, an official of tlie- City of Louisville, whose salary was $208.33 per month, being insolvent, and considerably in debt, assigned his salary fop the month of January, 1905, to appellees. He did the same for the month of February, 1905, and for the first 22 days of March, 1905. On the last-named date he filed his petition to be adjudged a bankrupt in.the United States District Court for the Western District of Kentucky. The assignments of the salary for January and February were made about the last of each month. For March the assignments were made daily. O’Sullivan received nothing contemporaneously with the assignments. But after the salary lists for the months had been allowed by the city and its warrants issued, appellees then paid them to O’Sullivan in full, retaining no commission. A few days after the January salary had been assigned, a creditor of O’Sullivan, William Kelday, having a judgment and execution returned no property found, filed his petition in equity for a discovery of assets. The city was made a defendant. It answered, disclosing that O’Sullivan had previously — 246 — assigned his salary for that month to appellees. Thereupon appellees were made parties defendant, it being’ charged that O’Sullivan had assigned the salary claim to them! to hinder and delay his creditors. They answered, claiming that the assignment to them was for full value, and that they were innocent purchasers without notice of O’Sullivan’s unlawful purpose, if he had such, in assigning it. Upon slight preparation that case was submitted, and the judgment was rendered in favor of appellees. When the payments were made by appellees to O’Sullivan, they knew his creditors had attached; knew he was insolvent; paid him nothing, and did not bind themselves, to’ pay him anything, for the salary claims. They were friends of O’Sullivan, and we think the record shows their purpose was to aid him in preventing his creditors from subjecting his salary to their debts. This was a violation of the bankrupt statute. Sub-section “ e ” of section 67 of that statute (Act July 1, 1898, c. 541, 30 Stat, 564 (U. S. Comp. St. 1901, p. 3449) reads: “That all conveyances, transfers, assignments, or encumbrances of property, or any part thereof, made or given by a person adjudged a bankrupt under the provisions of this act, subsequent to the passage of this act and within four months prior to the filing of the petition, with the intent and purpose on his part to hinder, delay or defraud his creditors, or any of them, shall be null and void as against the creditors of such debtor, except as to purchasers in good faith and for a present fair consideration; and all property of the debtor conveyed, transferred, assigned, or encumbered as aforesaid shall, if he be adjudged a bankrupt, and the same is not exempt from execution and liability for debts by the law of his. domicile, be and remain a part of the assets and estate of the bankrupt and shall pass — 247 — to liis said trustee, whose duty it shall he to recover and reclaim, the same by legal proceedings or otherwise for the benefit of the creditors. ’ ’ Where one is insolvent he may sell what he has, of course, but he is not allowed to give it away in prejudice of his creditors’ rights. So, people dealing with an insolvent must bear in mind the policy of the law that a man must pay first and give afterwards. If that is true as to gifts, it ought all the more bear good as to sales for less than- a fair value. They partake of the nature of gifts in that they were without consideration to the extent that the property exceeds in value what is received for it, but they have not even the graciousness that distinguishes a bestowal by voluntary gift. Fkaud enters to vitiate the transaction, for the purpose, in the case of a failing debtor, is, in the eye of the law, to defraud, and the purchaser no less than the seller participates in it — the latter possibly driven by necessity, the former most likely by greed.. Each is charged with liability for the act. It is unlawful and is-denounced by the statutes of the United States and of the State. But where one, to enable a failing debtor to conceal his assets to defeat his creditors, pays full value for the article having notice of the fraudulent purpose- — for that is what the- statute deems it to be — he violates the statute. Huffman v. Leslie, 66 S. W. 822, 23 Ky. Law Rep. 1982. It should be marked that purchasers who are protected by this statute are those who act in good faith and pay a present fair consideration. Three things must concur to protect them: (1) Their own good faith; (2) a consideration passing at the time of their purchase; and (3) it must be a fair equivalent of the- thing purchased. Here appellees were not purchasers in good faith, nor did they pay a present consideration for the thing purchased. They did not then pay anything, or — 248 — bind themselves to pay anything at all events. Their purchases were void as to creditors of O’Sullivan. And furthermore, under the statute, the thing so dealt in remains assets of the bankrupt, and passes to his trustee, whose duty it is to reclaim and recover the asset, unless it was exempt to the bankrupt under the laws of the State. The salary for February assigned to appellee passed to the trustee upon the debtor’s becoming bankrupt within four months thereafter, and it should have been adjudged to appellant, although it had been previously paid over to the debtor by his assignee. As to the March salary (that part earned prior to the filing of the petition in bankruptcy), it-was not paid to O’Shllivan till after he filed his petition in bankruptcy. Nor had appellee then paid -him anything on it, although it had been frequently assigned by the debtor to appellees. But whether it was owing by the city or appellees to O’Sullivan, it passed to the trustee in bankruptcy upon the filing of the petition, and neither could subsequently pay it save to the trustee s.o as to discharge the liability. Appellees in fact collected it from the city. They then held it as the property of the trustee, and should have paid it only to him. The rule on this subject is thus laid down in International Bank v. Sherman, 101 U. S. 407, 25 L. Ed. 866 (and confirmed recently in Mueller v. Nugent, 184 U. S. 1, 22 Sup. Ct. 269, 46 L. Ed. 405): “The filing of the petition was a caveat to all the world. It was, in effect, an- attachment and injunction. Thereafter all the property rights of the debtor were ipso facto in abeyance until the final adjudication. Those who dealt with his property in the interval between the filing of the petition and the final adjudication did so at their peril. ’ ’ — 249 — Nor was O’Sullivan entitled to any of this money or property as an exemption, so far as this record shows. It is true, he testified that he was a citizen of this Commonwealth, with a family of three persons. But he did not show what other property he had. In order for this to have been exempt, he would have had to show that he was entitled to it under the statute in lieu of something else that was specifically exempt, but was not on hand, and for which the law allowed a substitution. Money is not exempt under the statute; neither is a chose in action. Certain enumerated articles are exempt, including enough provisions to support the family of the debtor for one year, but, if not on hand,, then other property to the value of not exceeding $40 for each member of the family may be set apart to make up the deficiency of exempt provisions. There is no evidence in the record as to what provisions this debtor had on hand, or as to what other personal property he then had; nothing to entitle him to the exemption in this case, beyond the fact that he was a resident with a family and said he needed this money to keep them up. Furthermore, there was no plea of exemption in the cáse. True, O’Sullivan pleaded that his salary was exempt from attachment or execution, because the salary of a public official could not be attached.' This was upon the supposed ground that public policy forbids the attachment of such salaries. And, if true, it would be so without reference to what property such debtor-official may have owned. But the proposition is not true. The salary of a city official may be attached for his debts. Bridgeford v. Keenehan, 8 Ky. Law Rep. 268; Speed v. Brown, 10 B. Mon. 109; Rodman v. Musselman, 12 Bush, 355, 23 Am. Rep. 724. There was no plea of exemption on the ground that the debtor had — 250 — not enough provisions on hand to support his family one year. There was, therefore, neither pleading nor proof to support an adjudication of any exemption in his favor. The court is of the opinion that, for the salary of February ($208.33), and for March up to the filing of the petition in bankruptcy $152.70), the trustee is entitled to recover of appellees. But for the January salary a different question is presented: The liability of appellees to account to 0 ’Sullivan, and to his creditor, Kelday, for this sum on the ground that it did not belong to appellees, had been litigated in a court of competent jurisdiction, and adjudged in favor of appellees. The litigation was not collusive. The judgment of the court' settled the title to this fund as between the parties, and decided the identical questions of fraud, valuable consideration, and notice of the debtor’s intent that are involved in this case. We think the judgment is conclusive. Ordinarily one judgment is not a bar to another proceeding unless it not only presents the same subject-matter of the litigation, or cause of action, but is between the identical parties and in the same right. Appellant, the trustee, was not a party to the Kelday suit, but the bankrupt was. There was then no trustee in bankruptcy; hence the title was in the bankrupt himself. The judgment of the court divested him of it — at least adjudged that he did not have it and that appellee did. The subsequent bankruptcy of the debtor and appointment of his trustee cannot open up that question for litigation again, in the absence of an allegation of collusion among the parties to obtain the former judgment in the State court. The trustee is a privy in the estate to the debtor, and takes liis property subject to such rights as the debtor himself had, barring his own frauds. — 251 — Wherefore, tlie judgment of the circuit court is reversed, and cause remanded, with directions, to enter judgment in conformity herewith. Whole court sitting except Justice Barker.