Ridgeway v. Kendrick

J. B. McPHFRSON, Circuit Judge. A creditors’ petition was filed against Ida G. Kendrick on March 27, 1911, and she was adjudged bankrupt on April 10. The trustee afterwards chosen brought this suit in equity on August 23 to set aside a trust deed and three mortgages, asserting them to be either fraudulent, or preferential. Two of the mortgages were set aside — that part of the decree has been ac [853] quiesced in — but the deed and the other mortgage were sustained, and this action of the court is complained of in the present appeal. We refer to the foregoing opinion of the district judge for a statement of the facts and of the reasons for his action. We agree that no ground exists for setting aside the mortgage to Headley. It cannot he avoided as a preference, because the evidence shows clearly that Headley did not have reasonable cause to believe that a preference was intended. And it cannot be avoided as a fraudulent lien, because the evidence shows that it was recorded according to law, and was both given and accepted “in good faith and not in contemplation of or in fraud upon this act, and for a present consideration.” It is therefore protected by Act July i, 1898, c. 541, § 67d, 30 Slat. 564 (U. S. Comp. St. 1901, p. 3-149), as amended by Act Feb. 5, 1910, c. 487, § 16, 32 Stat. 800 (U. S. Comp. St. Supp. 1911, p. 1509). The consideration was twofold: (1) The surrender by Headley of his right to file a mechanic’s lien against the house on States avenue; and (2) the benefit given to Mrs. Kendrick by relieving her of liability as indorser on notes aggregating $6,000. The trustee does not contend that the consideration for the mortgage was less than the face of that instrument; his position is that the transaction was fraudulent throughout and is therefore wholly void. Indeed, the bill goes so far as to charge (but without support in the evidence) that the mortgage was part of a fraudulent scheme devised more than two years before. But at present we are not prepared to decide that the trust deed conveying the Halcyon Hall property should be adjudged either valid or void. Upon this subject the findings are not satisfactory, and we feel obliged to return the case for further proceedings. Our reasons are as follows: When the deed was made in August, 1908, Mrs. Kendrick owed certain debts, and since that date she has become indebted to other persons. In brief (so far as this deed is concerned) her creditors fall into two classes, existing and subsequent. Section 70e of the Bankruptcy Act clothes the trustee with power to enforce the rights that either class may possess: “The trustee may avoid any transfer by the bankrupt of his property which any creditor of such bankrupt might have avoided, and may recover the property so transferred, or its value, from the person to whom it was transferred, unless he was a bona lide holder for value prior to the (late of the adjudication. Such property may be recovered or Us value collected from whoever may have received it except a bona lide holder for value.” See, also, Crane v. Brewer, 73 N. J. Eq. 558, 68 Atl. 78. But the record shows clearly enough that against subsequent creditors the deed is good. The law of New Jersey allows such creditors to attack a voluntary conveyance, but requires them to prove fraud in fact, and imposes the burden of proof upon them. Mellon v. Mulvey, 23 N. J. Eq. 198; Kinsey v. Feller, 64 N. J. Eq. 367, 51 Atl. 485; Bank v. Beatty, 75 N. J. Eq. 436, 72 Atl. 428. We agree with the District Court that this burden has not been sustained. The transaction was in good faith, and Mrs. Kendrick was solvent at the time. Moreover, we also agree that she did not convey the property in order to remove it from the risks of a hazardous business upon which she was about to [854] enter. In a word, fraud in fact was not proved, but was negatived; and therefore the attack on behalf of subsequent creditors was not successful. But the rights of creditors to whom Mrs. Kendrick owed money in August, 1908, remain to be considered, and it is upon this point that we are not satisfied with the findings of the District Court. The law of New Jersey puts this class of creditors on a different footing from subsequent creditors. As we understand the decisions of that state, a person in debt, even if he be solvent, cannot by a voluntary conveyance put his property out of the reach of creditors then existing; and the presumption of fraud against him in favor of such creditors is conclusive. Haston v. Castner, 31 N. J. Eq. 697; Campbell v. Tompkins, 32 N. J. Eq. 173; Severs v. Dodson, 53 N. J. Eq. 634, 635, 34 Atl. 7, 51 Am. St. Rep. 641; Banking Co. v. Dennis, 56 N. J. Eq. 550, 39 Atl. 689. This being the rule in New Jersey, it is of great importance to know precisely and specifically what debts Mrs. Kendrick owed in August, 1908, and what has become of them since that date. In this respect the findings seem to us inadequate, and perhaps we may fairly speak of them as vague. We think we are entitled to definiteness on this subject in order that we may run no risk of mistake, and we must therefore return this part of the case for further proceedings. We therefore affirm so much of the decree appealed from as refers to the mortgage to Samuel H. Headley; but we reverse so much of the decree as refers to the trust deed of the Halcyon Hall property, and remánd that subject for further proceedings. Three-fourths of the costs on this appeal to be paid by the trustee in bankruptcy, but to be a charge against the bankrupt estate, and one-fourth to be paid by Ida G. Kendrick and Harry M. Geary, trustees for Ellen G. Kendrick.