Martin v. Globe Bank & Trust Co. of Paducah

WARRINGTON, Circuit Judge (after stating the facts as above). The question presented for our decision is whether the order of distribution is correct. The order provides that the proceeds, $16,-146.58, derived from the sale of property conveyed by the bankrupt, shall be paid pro rata upon the claims alone of the three banks. While the order was made in the matter of the bankruptcy of T. J. Atkins, two cases nominally are docketed in this court by the trustee; — 845 — one on appeal and the other by petition to revise in matter of law. Since the cases are based on the same order and no objection is made by either side touching the remedies so chosen to bring the question into this court, we need not concern ourselves with any question of remedy or jurisdiction. Beiser v. Western German Bank, 167 Fed. 486, 93 C. C. A. 122 (C. C. A. 6th Cir.); In re Worcester County, 102 Fed. 808, 811, 42 C. C. A. 637 (C. C. A. 1st Cir.). Was the court below, as respects its order of distribution, bound by the judgments of the state courts, or did those courts intend them to have such effect? The Court of Appeals held that the judgment of the McCracken circuit court did not undertake to dispose of the proceeds of sale, and it had no doubt that, when that court came to make an order concerning the disposition of the proceeds, it would direct that they be paid over to the trustee in bankruptcy “to be administered as a part of the estate of the bankrupt in the bankruptcy court”; and, in anticipation of what the Court of Appeals assumed that the court below would do, it declared that it might “with propriety in this opinion, direct that it make such orders.” It was then stated: “If the court (below) in the judgment had undertaken to divert (divest) (he trustee of the control of this fund, we would upon this point reverse the judgment, with directions to proceed as indicated.” It is true that, when passing upon the appeal of the grantees in the deed in question, the court did say that only those creditors whose debts were created prior to the delivery of the deed were entitled to participate in the proceeds realized from the sale of the property. The court, of course, did not know at that time whether the aggregate claims of the banks would or would not exhaust the property covered by the deed, for the property had not been sold. The essence of this portion of the opinion, as it seems to us, is a statement of the extent to which the Atkins land, or the proceeds derived from a sale, could he seized and applied to the payment of creditors, and of the disposition that should be made of any surplus that might remain. We arc unable to perceive any other way to reconcile the position taken by the court when stating its reasons for not reversing (he judgment upon the appeal of the trustee, with its conclusion that the surplus should be turned over to Atkins’ grantees. Alien we come to consider the judgment entered by the state circuit court under the decision of the Court of Appeals, ordering, among other things, that the proceeds of sale should be held by the trustee in bankruptcy as special commissioner of the state court unT der the terms of its former judgment “until disposed of and distributed as directed in such judgment,” we are brought to an inquiry into the meaning of its former judgment. The commissioner was directed by that judgment to hold the proceeds subject to the final orders of the court— “or subject to the District Court of the United States * * * under its final distribution of tiie entire assets of the estate of such bankrupt * * * and the rights of all creditors in such bankrupt proceedings in the distribu — 846 — tlon or disposition of such proceeds by the bankrupt court are hereby reserved and not determined but left open for final adjudication among them in such proceedings in bankruptcy.” We are disposed to believe that the true construction of these two judgments of the state circuit court is the same as that which the Court of Appeals placed on the first judgment. This is made clear by what has been done. The trustee on June 20, 1910, reported to the bankruptcy court that he had in his hands the balance for distribution of cash and sale bonds received from the sale of this property, and prayed the court to adjudge to whom he should pay the proceeds, whereupon the court ordered the bonds into his hands to be collected and the proceeds to be held by him subject to the future orders of the court. [1] Now, in determining how this fund must be distributed in the bankruptcy court, it will not do simply to consider the statute of the state of Kentucky on which reliance is placed by the banks. We must also consider the authorities which hold that the bankruptcy law is a law in that state, as also in the several states, and is just as binding on the citizens and courts thereof as are the state laws. Thompson v. Ragan, 117 Ky. 577, 581, 78 S. W. 485; Bank of Columbia v. Overstreet, 10 Bush (Ky.) 148, 150, 151; Claflin v. Houseman, Assignee, 93 U. S. 130, 136, 23 L. Ed. 833. Indeed the bankruptcy law is paramount;' and the jurisdiction of a bankruptcy court as regards matters rightly brought therein is exclusive. In re Watts & Sachs, 190 U. S. 1, 27, 23 Sup. Ct. 718, 47 L. Ed. 933; Acme Harvester Co. v. Beekman Lumber Co., 222 U. S. 307, 32 Sup. Ct. 96, 56 L. Ed.-; Mondou v. N. Y., N. H. & H. R. Co., 223 U. S. 1, 32 Sup. Ct. 169, 56 L. Ed.-. It will be borne in mind that the banks in whose favor the .order of distribution was made commenced their actions and caused attachments to-be levied within four months of the filing of the petition in bankruptcy against Atkins. The only liens that any of these banks ever secured upon the property described in the deed in dispute were obtained within that period or during the pendency of the bankruptcy proceedings. It is not claimed that the statute (quoted in the statement) under which the deed was set aside, created a lien. The most in this respect that can be said of Atkins’ delivery of the deed of gift is that it created in each of the banks- a right of action. In re Huxoll, 193 Fed. 851, decided by this court February 13, 1912, and cases there cited; Carroll’s Ky. Stat. 1899, § 1907a, p. 756. Section 67f of the bankruptcy act provides : “That all levies, judgments, attachments, or other liens, obtained through legal proceedings against a person who is insolvent, at any time within four months prior to the filing of a petition in bankruptcy against Mm, shall he deemed null and void in case he is adjudged a bankrupt, and the property affected by the levy, judgment, attachment, or other lien shall be deemed wholly discharged and released from the same, and shall pass to the trustee as a part of the estate of the bankrupt, unless the court shall, on due notice, order that the right under such levy, judgment, attachment, or other lien — 847 — shall bo preserved for the benefit of the estate; and thereupon the sama may pass to and shall be preserved by the trustee for the benefit of the estate as aforesaid.” Paragraph “c” of that section also treats of liens created by attachment on mesne process and provides for their preservation, and in the last clause enacts: “ s. * * if the dissolution of such lien would militate against the best interests of the estate of such person, the same shall not be dissolved, but the trustee of the estate of such person, for the benefit of the estate, shall be subrogated to the rights of the holder of such lien and empowered to perfect and enforce the same in his name as trustee with like force and effect as such holder might have done had not bankruptcy proceedings intervened.” The court below made an order providing that any right or lien acquired by attachment, lis pendens or otherwise, “be and the same shall, until the further order of the court herein, be preserved for the benefit of the bankrupt’s estate as provided in section 67f of the bankruptcy act.” Thus the effect of the bankruptcy proceedings to dissolve the attachments was avoided. None of the attaching creditors made any objection to’ the order, and indeed the Globe Bank had (as appears in the statement) asked for an order for its benefit, and also that of the trust estate. In First National Bank v. Staake, 202 U. S. 141, 146, 26 Sup. Ct. 580, 582 (50 L. Ed. 967), Justice Brown, having occasion to consider the portion of section 67f under which this order of the court below was made, said: “ * * * So much of the value of the property attached as is represented by the attachments passes to the trustee for the benefit of the entire body of creditors, that, is, ‘for the benefit of the estate’; in other words, the statute recognizes the lien of the attachment, but distributes the lien among the whole body of creditors.” This court followed that construction in Re Kohler, 159 Fed. 871, 874, 87 C. C. A. 51, 54. After referring to First National Bank v. Staake, Judge Richards, speaking for the court, said: “Here certain attachments had been levied within four months. The court held they couldHie annulled, or the lien of the attachments could be preserved under the bankruptcy act for the benefit of the estate. There was no method suggested of passing over the property covered by these attachments to the creditors who had secured them.” See, also, First National Bank v. Guaranty Title & Trust Co., 178 Fed. 187, 192, 101 C. C. A. 507 (C. C. A. 3d Cir.); Rock Island Plow Co. v. Reardon, Trustee, 222 U. S. 354, 32 Sup. Ct. 164, 56 L. Ed.-. [f these decisions arc applicable to the instant case, it is plain that the rights of the hanks under their suits and attachments were, through section 67f and the order of the bankruptcy court, passed to the trustee for the-benefit of the bankrupt’s estate, subject to the power of the bankruptcy court to cause either the property or the — 848 — proceeds of sale to the extent that they were affected by the suits and attachments, as well as the judgments, to be administered for the equal benefit of all the creditors of the bankrupt. [2] It is insisted, however, that these decisions are not relevant, because under section 1907 of the statutes of Kentucky the deed was valid, except as to those creditors whose debts were existing at the date of its delivery; and that, since the banks were the only creditors of that class who obtained liens through the commencement of suits and levies of attachments^ the benefits of such liens cannot be extended to any one else. The portions of the bankruptcy act which we have quoted, and which were passed on in the decisions cited, do not make any such distinction as this. Those provisions of the act are broad and comprehensive. Section 67c embraces “a lien created by or. obtained in or pursuant to any suit * * * including an attachment upon mesne process which was begun against a person within four months * * and section 67f includes “all levies, judgments, attachments, or other liens, obtained through legal proceedings against a person who is insolvent, at any time within four months. * * * ” As respects liens so acquired within the four months, it is difficult to conceive of language of wider scope than this. It is not claimed that Atkins was not insolvent at the time these suits were commenced and the attachments levied, and the reason for this is obvious. Atkins was adjudicated a bankrupt within the next succeeding four months, and the present controversy leaves no room for doubt as to his insolvency at the date of the suits and attachments. If the distinction urged on behalf of the banks were sound, it is hard to perceive why it would not be applicable to every case where some of a body of creditors, who all admittedly have equal rights, are more diligent than the others in securing liens through attachments or' any of the other means stated in 67c and 67f; for all the practical results and hardships among the creditors would in that event be identical with those complained of here. It is plainly within the power of Congress to ■ enact that liens, so acquired within a specified period shall, through bankruptcy proceedings, be applied to the common benefit of all the creditors of a bankrupt. As Justice Brown said in First National Bank v. Staake, 202 U. S. 148, 26 Sup. Ct. 583, 50 L. Ed. 967: “To what extent liens obtained by prior judicial proceedings shall be ree•ognized is a matter wholly within the discretion of Congress.” The learned justice answered an argument that section 67f refers only to liens upon property which, if such liens were annulled, would pass to the trustee of the bankrupt. The basis of the argument was that but for the attachment the property covered by the unrecorded deed of Baird to the Roanoke Furnace Company would pass to the company; and, after recognizing that the argument was perhaps justified by the decision in Hewitt v. Berlin Machine Works, 194 U. S. 296, 24 Sup. Ct. 690, 48 L. Ed. 986, the justice said (Staake Case, 202 U. S. 149, 26 Sup. Ct. 584, 50 L. Ed. 967): “But the extent to which the bankruptcy court shall recognize the rights obtained by creditors upon property attached as the property of the bankrupt, — 849 — though in fact such property had been conveyed by an unrecorded contract, is a matter solely within the discretion of Congress. The liens acquired in this ease were liens upon property, which as to attaching creditors was the property of the bankrupt, and Congress may lawfully insist that it shall be reckoned as a part of his estate, and pass to the trustee.” So the insistence that Atkins’ deed was operative as against him is futile in a case like this. It is admitted that the deed was'voidable from its inception as against Atkins’ then existing liabilities, although it was not necessarily so as to creditors whose debts were thereafter contracted. The property and the deed conveying it were in this plight at the time the banks commenced their suits and caused their attachments to be levied; and consequently the liens acquired through the suits and the attachments were upon property which, as to the attaching creditors, was the property of the bankrupt, and so fell within the provisions of section 67f. We must therefore reckon with the operation and effect of the provisions ,of section 67f upon the property which was held under these conditions; and Atkins' grantees and the three creditor banks were, from the time of the registration-of the deed, chargeable with knowledge of the operation and effect of these provisions of the bankruptcy act. Conceding that the banks could through legal proceedings have secured the exclusive application of the property and its proceeds 'toward the payment of their debts four months or more prior to the beginning of bankruptcy proceedings, still, since those creditors chose to delay the exercise of their rights until they reached a time within the four months’ period, they are met with the difficulty that through those proceedings their rights respecting the property or its proceeds passed to the trustee for the benefit of all the creditors. In Clarke v. Larremore, 188 U. S. 486, 489, 23 Sup. Ct. 363, 364 (47 L. Ed. 555), conditions similar in principle to those we are now considering were passed upon. There a sheriff had sold property on execution, hut before paying the money to the judgment creditor, though still within the time allowed for return of the execution, bankruptcy proceedings were begun against the judgment debtor. It was held that the money did not belong to the judgment creditor, and that under .67 f the right to it passed to the trustee in bankruptcy. In the course of the opinion Justice Brewer said respecting the effect of the bankruptcy proceedings: “They took away the foundation upon which the rights of the creditor, obtained by judgment, execution, levy, and sale, rested. The duty of the sheriff to pay the money over to the judgment creditor was gone and that money became the property of the bankrupt, and was subject to the control of his representative in bankruptcy.” The only perceivable difference between that case and the present case is that the trustee in bankruptcy there was not as the trustee here was a party to the case in which the judgment was recovered. Does this difference amount to a material distinction? We think that the mission and authority of the trustee to enter the McCracken circuit court were simply to recover the portion or the proceeds of the bankrupt’s estate that were open to recovery on the part of creditors of the bankrupt, and that the — 850 — proceeds recovered in virtue of the rights of such creditors were to be brought into possession of the bankruptcy court for distribution according to the bankruptcy act. Indeed, with the commencement of the bankruptcy proceeding, the control of the property and the purpose to which it should be applied were fixed and declared by the bankruptcy act itself, so far as the property was affected by the liens in dispute. Acme Harvester Co. v. Beekman Lumber Co., supra, 222 U. S. 307, 32 Sup. Ct. 300, 56 L. Ed.-; First National Bank v. Staake, supra. The fact, therefore, that the trustee was a party to the state suit, cannot operate to change these conditions. In Miller v. New Orleans Fertilizer Co., 211 U. S. 496, 505, 29 Sup. Ct. 176, 180 (53 L. Ed. 300), a question arose in a bankruptcy proceeding against a copartnership touching the distribution of assets belonging to one of the individual members of the firm. It was pointed out by the present learned Chief Justice that, while under the law of Louisiana the creditors of a partnership are as to firm assets given preference over creditors of individual members of a firm, yet that partnership creditors and creditors of the individual partners have equal rights in the individual assets. Of course, this last feature is opposed to the corresponding feature of the bankruptcy act. The trustee in bankruptcy brought an action in a state court to annul any transactions affecting the property of the bankrupts, and to recover judgment for the benefit of the bankrupt estate. Certain other actions were then pending in the state court to recover upon claims held against the firm and for the further purpose of having, certain sales of property set aside and the proceeds applied to the payment of their claims, which sales had been made by one member of the firm of his individual property. The trustee was by order of the state court substituted as party plaintiff in those suits in his capacity as trustee of the bankrupt estate. In the course of the opinion it was said: “Assuming, therefore, that the trustee was properly authorized, it follows that he was entitled to preserve and enforce the privilege or lien, which arose in favor of the creditors, resulting from their, pending action, even although the cause of action arose from the state law, and the application of that law was essential to secure the relief sought.. To the accomplishment of this end, the bankrupt law was cumulative, and did not abrogate the state law.” Recalling the difference between the law of Louisiana and the bankruptcy act touching the distribution of assets belonging to individual members of a partnership, the following we think is controlling (211 U. S. 506, 29 Sup. Ct. 181, 53 L. Ed. 300): “In view of the distinction between the estates of partnerships and the estates of the members of the firm, which is made by the bankrupt law, and the method of distribution for which that law provides, of course, the trustee will hold the fund as an asset of the estate of the individual member, and primarily for the benefit o;f his creditors.” Further, upon the question of distribution, the learned justice recognized the power of the state court to pass upon the question of preference, but denied its right to determine what creditors were to — 851 — participate in the distribution. He said (211 U. S. 506, 29 Sup. Ct. 181, 53 L. Ed. 300): “The one (the question of preference) was within the province of the state court for the purpose of the case before it. Tbe other (the matter of distribution) ivas a different question, depending upon independent considerations exclusively cognizable in the bankruptcy court.” And since the state court had itself so decided its judgment was affirmed. It is not necessary to pass upon any of the other questions presented. We are constrained to hold that the order must be reversed, and the cause remanded for further proceedings consistent with this opinion.