In re Schenkein

HAZEL, District Judge. On November 7, 1901, a petition was filed by a creditor to adjudge Samuel Schenkein and Martin A. Coney, copartners, bankrupts. At the same time an application was made by the petitioner for a warrant to the marshal, directing him to bring the alleged bankrupts forthwith before the court for examination, as provided for by section 9b of the bankruptcy act. In obedience to the warrant the alleged bankrupts were brought into court by the marshal, and, by counsel, objected to the jurisdiction of the court on the grounds (1) that petitioner and the alleged bankrupts were partners; (2) that petitioner had obtained a preference in the state court in the nature of an attachment upon property of the alleged bankrupts, and, therefore, the attachment not being surrendered, the petitioning creditor has no provable debt; (3) that the petition to have debtors adjudged bankrupts does not disclose insolvency. The future appearance for examination of the alleged bankrupts whenever required having been satisfactorily arranged by counsel for petitioner and for debtors, an order of reference was made to Referee Hotchkiss, as special master, to decide and determine the. objections to the jurisdiction of the court, and to continue the examination of the bankrupts if such objections were found untenable. The alleged bankrupts are therefore in the custody of the court pursuant to the warrant of arrest. The special master, after due deliberation, overruled all the objections urged to the jurisdiction. His reasons therefor are submitted in an opinion, wherein he exhaustively reviews the authorities under the bankruptcy act of 1867, bearing on •the proposition presented, and disagrees with the holding of In re Burlington Malting Co., 6 Am. Bankr. R. 369, 109 Fed. 777, under the present act. The opinion accompanies.the allowance of a peti [427] lion for review of his ruling upon the three preliminary objections raised by respondents. I concur with the special master in his decision, for the reasons stated in his opinion, upon the first and third of these questions. The special master found that the agreement entered into between the petitioner herein and the partnership proceeded against was not a copartnership; that, while there was evidence oí a copartnership based on agreements between the parties, yet’such evidence, standing alone, was not sufficient to negative contrary elements on a preliminary objection to the jurisdiction. The arrangement between the parties was very properly held to be a subject going to the merits of the controversy, and therefore net determinable at this time. The special master, however, found that, inasmuch as the act of bankruptcy charged was removal am* concealment, the burden of pleading and proving solvency is on the bankrupts. This finding is also approved. f am unable to approve the finding and conclusion on the second question certified for review. I am of opinion that a creditor who obtains an attachment has, in substance and effect, a lien upon the property covered thereby, until such attachment is vacated or becomes null and void by the adjudication. To this extent, and up to that period, the attaching creditor must be deemed to have a preference such as would give him a greater percentage of his debt than any other creditor not similarly secured or protected in his claim. Here we have a petitioner who has applied for, and obtained from the state court, a provisional remedy, which, if allowed to prevail, secures his indebtedness, or a part of it, to the exclusion of other creditors. A lien is created upon property of the alleged bankrupts to the detriment and hindrance of general creditors. The claim of the petitioner through legal proceedings is permitted to become a lien on tiie property attached. He holds an attachment on the property of the alleged bankrupts in one hand, and comes into this forum in the present case, seeking another provisional remedy, while maintaining his attachment as an anchor to windward in case of an adverse ruling. One remedy availed of inures to the petitioner’s sole benefit. It may be quite true that a lien on property attached in a state court cannot strictly be construed as a transfer of property, within the contemplation of section 60 of the act, whereby a preferential transfer is created. Pirie v. Trust Co., 182 U. S. 438, 21 Sup. Ct. 906, 46 L. Ed. -. Section 67, however, specifically provides that a lien created by attachment upon mesne process, begun within four months of filing the petition, shall be dissolved by the adjudication whenever “it appears that said lien was obtained and permitted while the defendant was insolvent and that its existence and enforcement will work a preference.” This section, construed with the other provisions of the bankrupt act bearing on the rights of an attaching creditor, and the provableness of his claim without formal release of any preference obtained, is strongly persuasive of the soundness of Judge Seaman’s decision in Re Burlington Malting Co., supra, where the contention was similar to that presented here. It was there held ♦hat an attachment was a preference, within the meaning of the bankrupt act; that it was a lien 'sought and permitted in fraud of the pro [428] visions of section 67c. The claim thus secured to the creditor by attachment was held not to be provable unless the preference created thereby was surrendered, as required by section 5yg. The spirit of the Pirie Case would seem to strengthen the position of Judge Seaman, rather than that of the referee, when all the applicable sections of the law are considered together. The opinion of Judge Seaman further points out that the failure by congress to recognize an attachment lien as belonging to that class of securities made valid and unaffected by an adjudication in bankruptcy gives force to his interpretation and conclusions. I concur in this view. The lien of an attachment, undoubtedly, by operation of law, creates a preference which enables the attaching creditor to obtain a superior right to the property levied upon. The referee views the proposition somewhat doubtfully. After stating that an attachment is neither a “judgment” nor a “transfer,” and cannot, therefore, be a “preference,” and that “it may coexist with a petitioning creditor’s debt,” he says: “Looked at from tike broader ground of tbe policy of the law, the question is close, — so close that, were it urged on the merits, and not preliminarily to prevent an examination to which this petitioning creditor has some right, the decision here might be the other way.” I am unable to take this view of the contention. The objection to the jurisdiction was made in due time to prevent an examination of the debtors, to which the petitioning creditor, under certain conditions, is entitled. By section 9, under which the petitioning creditor proceeds, it is provided that a bankrupt, under certain circumstances, shall be exempt from arrest upon civil process. Under certain circumstances, the judge may order the marshal to keep the bankrupt in custody not exceeding xo days, but not imprison him, until he shall be examined and released, or give bail for his appearance for examination from time to time, not exceeding, in all, 10 •days. On an application of this character, it must clearly appear upon satisfactory proof, by the affidavits of at least two persons, that the bankrupt is about to leave the district for the purpose of avoiding examination. Under section 2, subd. 15, it was held that the court may, issue an order in the nature of a writ of ne exeat. In re Lipke (D. C.) 98 Fed. 970. The drastic remedy provided by section 9 is one directed against the liberty of a citizen, and tlxere'fore should be strictly construed and carefully applied. Manifestly, the rights of the petitioning creditor and the rights of the alleged bankrupts under this particular section must be determined at the very threshold of the proceeding. The language of Judge Seaman in the Burlington Malting Co. Case, supra, in reference to the dual •position of a petitioner in involuntary bankruptcy, who also pursues á remedy to maintain an. invalid lien against the same person in another forum, aptly applies. He says: “Instead of the single proceeding on the part and for the benefit of the general creditors intended by this act, to save the assets of an insolvent debtor from spoliation by preferences, and secure equality in their distribution, this petitioner appears, with a claim disputed and fairly disputable, seeking, on the one hand, to obtain a preference by enforcing» it through an attachment against the property, and, on the other, invoking the Inconsistent remedies of bankruptcy.” [429] In no sense can it be urged as a justification for the continuance of the attachment that the bankrupt act does not afford complete machinery for the conservation of the bankrupt’s estate. Simultaneously with the filing of the petition, the property of the alleged bankrupts might have been taken into the custody of this court. The petitioner did not adopt this course. He rests on his attachment, and must therefore be denied the equitable relief he now seeks of this court. The ruling of the referee on the second question submitted for review is reversed, and the order of arrest is vacated.