In re John L. Nelson & Bro. Co.

HOUGH, District Judge. In August, 1906, a petition in bankruptcy was filed against the corporation above named (hereinafter called the “Nelson Company”), in the District Court for tbe Northern District of Illinois. The alleged bankrupt was an Illinois corporation, and had its principal place of business in Chicago. Shortly thereafter, upon due application, an ancillary receiver was appointed in this court, wdio took charge of the New York office and local business of the Nelson Company, and reduced the assets thereof to cash, of which he now has in his possession upwards of $5,000. Not long after the filing of the original petition in bankruptcy, some parties in interest, doubting whether the alleged bankrupt was such a corporation as came within the purview of the bankruptcy law, advised the Nelson Company to execute on September 17, 1906, a deed of assignment for the benefit of creditors, pursuant to the statutes of Illinois, which deed was, on October 3, 1906, duly filed in the proper office in Chicago. On October 5th the assignee under the Illinois assignment appeared in the bankruptcy court sitting in Chicago, and set forth by petition the nature of the business of the Nelson Company, prayed that the assets in the hands of the bankruptcy receiver be turned over to him, and represented that the court itself was without jurisdiction to adjudge the Nelson Company a bankrupt, or to administer or hold its estate. Upon this petition of the assignee such proceedings were had that on November 21, 1906, an order was entered declaring that “all of the material allegations” in the petition “are true,” settling the account of the receiver in bankruptcy, and directing that the balance in hand be paid over by said receiver to the petitioning assignee. From the exemplification of the bankruptcy proceedings submitted to me, it does not appear that there has ever been, a technical dismissal [592] of the petition.in bankruptcy against the Nelson Company, hut I fin’d that the proceedings of the bankruptcy court in Chicago amount to a - declaration,-. duly contained in the order of November 21st, that the Nelson Company was not subject to the operation of the bankrupt law' owing to the nature of its business, and that, therefore, said District Court declined to proceed further with the matter. Evidently, some New York creditors of the Nelson Company had early information- of the approaching termination of the bankruptcy proceedings in Chicago, and on November 5, 1906, one Ruthenburg began an action in the Supreme Court of New York against the Nelson Company, wherein he procured a warrant of attachment, and on the same date caused the sheriff of New York county to serve a copy warrant upon the ancillary receiver in bankruptcy appointed by this court. On November 22, 1906, divers other New York creditors took the same course. On November 28, 1906, the Illinois assignee served his petition in this court, demanding that the funds in the hands of the receiver of this court be turned over to him. When such receiver took possession of the local business of the Nelson Company, he found certain workmen’s wages due and unpaid. These workmen would be entitled to preferential payment, either under the bankruptcy law or under the assignment statute of Illinois. The rights of these several claimants, to the fund . are now presented for consideration, after ■argument noticed for hearing under the receiver’s petition for instructions. ' It is the duty of this court to distribute the fund in question pursuant to general principles'of law, which duty is cast upon it by Gumbel v. Pitkin, 124. U. S. 131, 8 Sup. Ct. 379, 31 L. Ed. 374. The attachments were apparently sued out under the impression that the bankruptcy proceedings in Illinois were void, wherefore the appointment of an ancillary receiver was also void, and the moneys in the possession of that fecéiver but so much of the assets of the Nelson Company found in' the hands -of a private person. This view is erroneous.The District Court for the Northern. District of Illinois was jurisáictionally empowered, and solely empowered, to decide whether the Nelson Company was. ór was not subject to the operations of the bankruptcy' lawand, - pending, decision on that point,, it had full power to take charge of the property of the alleged bankrupt, from which, right flowed the power of appointing an ancillary receiver. The moneys.now in the hands of that receiver have therefore always been in custodia legis, far more obviously so than in Gumbel v. Pitkin, supra. Just as an .execution cannot be enforced against property in the hands of a receiver (Wiswall v. Sampson, 14 How. 64, 14 L. Ed. 322), so an attachment will not lie against moneys in the hands of a receiver (Adams v. Haskell, 6 Cal. 113, 65 Am. Dec. 491). The reason, is the same, because an enforcement of the levy either of the attachment or -the execution w.puld constitute a contempt of court. But the court óf original jurisdiction on questions affecting bankruptcy-hqving-how.-decided that no trustee can ever become entitled to the fund in question, and the Illinois assignee having, claimed and [593] obtained the Illinois fund from the bankruptcy court in that state, the same assignee must now claim the New York find, not against the ancillary receiver, who offers no opposition at all, but against the rights of the New York attaching creditors. This coitrt is bound to consider and respect the rights of such creditors growing out of the situs of the property in question within the state of New York, as well as its custody by this court. Gumbel v, Pitkin, supra. Such rights are governed by the law of New York, and depend upon principles of comity as between New York and Illinois. If the Illinois statute of assignments be regarded as an insolvent law, it is clear that a claimant thereunder cannot prevail against the subsequent attaching creditor. Security Trust Co. v. Dodd, 173 U. S. 624, 19 Sup. Ct. 545, 43 L. Ed. 835; Barth v. Backus, 140 N. Y. 230, 35 N. E. 425, 23 L. R. A. 47, 37 Am. St. Rep. 545_ _ I do not find it necessary to enter upon this question, and, arguendo, considering the transfer in Illinois as voluntary and lawful by the laws of that state, it must be regarded as lawful in New York unless opposed to the policy of that state. Ockerman v. Cross, 54 N. Y. 29, as cited in Warner v. Jaffray, 96 N. Y. 258, 48 Am. Rep. 616. It appears to be firmly established in Illinois that, even in the case of a voluntary foreign assignment, it is contrary to the. policy of Illinois law ‘ho allow the property or funds of a nonresident debtor to be withdrawn from this state before his creditors residing here have been paid, and thus compel them to seek redress in a foreign jurisdiction.” Woodward v. Brooks, 128 Ill. 227, 20 N. E. 685, 3 L. R. A. 702, 15 Am. St. Rep. 104. See, also, Heyer v. Alexander, 108 Ill. 385; Smith v. Lamsen, 184 Ill. 71, 56 N. E. 387. And these decisions have been recognized by the federal courts sitting in Illinois. Sheldon v. Wheeler (C. C.) 32 Fed. 773. It thus appears that, were the situations reversed, a New York assignee would not be permitted to recover funds of his assignor situated in Illinois as against attaching creditors in that state. The rule of granting to assignments for the benefit of creditors extraterritorial vitality rests upon principles of comity. Faulkner v. Hyman, 142 Mass. 54, 6 N. E. 846. It involves reciprocity, and it appears to me to be clearly against the policy of any state to grant to the citizens of another jurisdiction a privilege from which its own citizens are debarred by the repeated decisions of the highest court of said jurisdiction. I am therefore of opinion that, upon principles -of public policy, the claims of the attaching creditors are to be preferred to that of the assignor. The claims of the wage earners of the Nelson Company would be preferred under the bankruptcy statute and also under the statute of Illinois, but there is no 'power in the court to apply either statute. These men are in the same position that they would have been in had no petition in bankruptcy been filed, and the attachments had nevertheless issued. Under existing circumstances, I know of no provision at all which entitles them to a preference. On behalf of the junior attaching creditors, it is urged that, when the senior attachment was issued,, there had been no decision by the bankruptcy court in Illinois adjudging that the Nelson Company 'was [594] not subject to bankruptcy proceedings, and that therefore a distinction should be drawn between their attachments which were issued after the entry of the order of November 21, 1906, and that of Ruthenburg, which was taken out earlier. This distinction is not substantial. The moneys in the hands of the ancillary receiver are just as much in custodia legis now as they ever were. The receiver is not only now, but wás at all times, merely a custodian of funds, the title to which was in the Nelson Company, so far as the bankruptcy law is concerned, for that company was never adjudged a bankrupt, and title, therefore, remained in it. The effect of the appointment of a receiver “is not to oust any party of his right to the possession of the property, but merely to retain it for the benefit.of the party who may ultimately appear to be entitled to it; and when the party entitled to the estate has been ascertained, the receiver will be considered his receiver.” Wiswall v. Sampson, 14 How. 64, 14 L. Ed. 322. Thus the service in attachment of the copy warrant is to be regarded as a notice of claim addressed to this court through its receiver; and when, as here, followed by appearance and demand herein, it is obviously unjust that the court, whose power rendered the levy ineffective, should use that power to insure the delivery of what would otherwise have been actually seized, to an assignee who would never have gotten it, nor had an opportunity of asserting his right thereto, but for the mistake of certain creditors in instituting bankruptcy proceedings. As no infirmity in the senior attachment has been pointed out except the date of its issue, the fund is awarded to Ruthenburg; but if the juniors in attachment desire to move to set aside Ruthenburg’s claim upon grounds other than the one above considered, I will hear argument upon due notice. Let the ancillary receiver file his account in this court, and give notice to all attorneys who have appeared herein. • Exceptions to the account may be filed within five days after the service of such notice, and within that time, also, the junior attaching creditors must move if they are so advised. If no exceptions are filed and no motion made upon new grounds to set aside Ruthenburg’s attachment, an order will be signed directing the receiver to pay over to Ruthenburg the net fund, upon receiving from him a satisfaction of his judgment pro tanto. In the order allowances will be fixed for the receiver and his attorneys. If exceptions are filed, let the matter be brought to my attention, and I will either hear the exceptions or refer the account