William Openhym & Sons v. Blake

HOOK, Circuit Judge (after stating the facts as above). It is clear that the bankrupt induced the appellants to sell and part with the possession of their goods by false and fraudulent representations. The appellants, though diligent in seeking information as to the bankrupt’s financial standing, were deceived. The first statement submitted by the bankrupt was pronounced unsatisfactory. A second one, more in detail, was furnished, and it was supplemented by oral representations. The statement of July 13th of a . surplus of $63,-161.65 is irreconcilable with the confession of insolvency, on August 19th, there being no noticeable business losses in the interim. A specific instance of deception was the intentional suppression of information of outstanding notes for borrowed money aggregating $14,-000. The excuse afterwards offered that the holders of the notes intended to take that amount of additional stock in the company is insufficient, As the case stood, the notes constituted indebtedness, and the appellants were entitled to know the facts. The notes were afterwards allowed as demands against the bankrupt’s estate. Another specific instance was the intentional suppression of the fact that the bankrupt owed $5,000 on past due accounts. There were sufficient grounds for rescission. Turner v. Ward, 154 U. S. 618, 14 Sup. Ct. 1179, 23 L. Ed. 391. Upon learning of the fraud practiced upon them, the appellants promptly rescinded the sale. The bankrupt’s, entire stock of'goods was then in the possession of a receiver appointed" by a state court. He was engaged in selling it. Certain creditors of the bankrupt had six days previously filed a petition in bankruptcy, but no injunction against the continued .sales was obtained, no receiver in bankruptcy was appointed, and no adjudication was had until a month afterwards. The rescission was properly effected by the assertion of appellants’ purpose, the demand of the state court receiver for possession, and the replevin action begun with the permission of the state court. The right of rescission was not affected by the pendency of the bankruptcy proceedings. In Donaldson v. Farwell, 93 U. S. 631, 23 L. Ed. 993, the following instruction was approved: “If the bankrupt retained the property at the time of the filing of the petition in bankruptcy, the title passed to the assignee, and, as we think, the weight of authority is it passed as a defeasible and not as an absolute title, with the right still on the part of the vendors to reclaim the property, provided it was done within a reasonable time after the sale, and after knowledge of the fraud which had been perpetrated.” The rights of the assignee in bankruptcy were as defined by the-act of 1867 (Act March 2, 1867, c. 176, 14 Stat. 517), but they were no greater than the rights of the trustee under the present act. It is contended that appellants’ replevin action in the state court, begun after the commencement of bankruptcy proceedings, made for nothing. In other words, it is said the state court had no jurisdiction to entertain such an action. In Skilton v. Codington, 185 N. Y. 80. [539] 77 N. E. 790, 113 Am. St. Rep. 885, it was held that, where a trustee in bankruptcy sold personal property which was covered by a chattel mortgage and reserved from the proceeds an amount sufficient to pay liens that might be established against the property, the holder of the chattel mortgage was entitled to sue the trustee in a state court to establish his claim. The doctrine of that case was approved by the Supreme Court in Frank v. Vollkommer, Trustee, 205 U. S. 521, 27 Sup. Ct. 596, 51 L. Ed. 911, which was a suit by the trustee in a state court to set aside as fraudulent a chattel mortgage given by the bankrupt. But neither of these cases goes so far as to hold that while proceedings in bankruptcy are pending an action may be maintained in a state court to deprive the bankruptcy court of the physical possession of property or funds. On the contrary, it was said in Skilton v. Codington: “Of course, we do not mean to assert that, under the judgment of the state court, a fund or property could be taken from the possession of the bankruptcy court. The contrary Is the law. It may also be that the bankrupt court could have enjoined the prosecution of this action, but it has not done so. Apparently it has permitted the plaintiff to assert his claim by a plenary suit in a court of general jurisdiction, and we may assume that the bankrupt court will give effect to any judgment recovered therein.” Though the replevin action may not have been maintained to the extent of depriving the bankruptcy court of its right to possession whenever asserted, it served the appellants in two ways — it was an act of rescission indicative of their purpose, and it resulted in the definite ascertainment of the identity of such of their goods as were then in the hands of the state court. While the bankruptcy court refrained from taking possession of the goods, the appellants should not suffer. The goods were in the custody of the law, and the acts of the state court and its receiver were presumably for the benefit of the estate. Such of appellants’ goods as went into the possession of the state court were clearly identified, and their value established. The same goods or their proceeds in the form of customers’ accounts finally went into the possession of the bankruptcy court. Under these circumstances, it was not incumbent on appellants to show what portion of those identified had been sold by the state court receiver and what portion was turned over to the receiver in bankruptcy. The order of the bankruptcy court of September 23d directing its receiver to apply to the state court for possession recognized the virtue of the prior proceedings by requiring him to assume and pay the liabilities of the state court receiver, among which was the liability upon the redelivery bond given in the replevin action. This order was made by a judge of another district temporarily officiating in the Western district of Missouri, and it does not appear to have been called to the attention of the judge who made the final order from which this appeal was taken. . We do not think appellants should be denied relief because they delayed intervening in the bankruptcy court until after a partial dividend was declared. The fraud was practiced on appellants and the goods obtained July 13th, the sale was rescinded August 21st, and the intervening petition was filed in the bankruptcy court December 21st. At all times after the rescission of the sale the purpose of [540] appellants to rely theréon was manifest. They were fairly diligent in the assertion of their rights, and no one seems to have been prejudiced by the short delay that occurred. That the filing of the intervening petition was delayed until after the dividend injured no one. The trustee and the court were aware that appellants had rescinded the sale, and the dividend took but a part of the funds on hand. There remained more than enough to pay the appellants, and had the intervening petition been presented and allowed much earlier the same dividend would probably have been declared. At least no reason appears-why it should not have been. The order appealed from is reversed, with direction to allow appellants’ claim as prayed for.