Brown Bros. v. Smith Bros.

FOSTER, District Judge. In this matter the Commercial-Ger-mania Trust & Savings Bank filed a petition, praying that the trustees turn over to it a fund of $4,153. Issue was joined, and the matter was referred to Hon. William A. Bell, referee, as special master. There was an exception to the jurisdiction of the court, on the theory that petitioner should file a plenary suit, and could not intervene in the bankruptcy proceedings.' By waiver and agreement the question of jurisdiction was also submitted to the master. In due course the master filed his report, stating the case and reviewing the law, and found in favor of the petitioner on the question of jurisdiction and [477] also on the merits. The trustees have excepted specifically to his findings, but I do not consider it necessary for the disposition-of the case to review the exceptions in detail. [1] The exception to the jurisdiction is not well taken and was properly overruled. The fund upon which the petitioner claims a lien is in the possession of'the court, and it would for that reason alone have jurisdiction, and the proper and most convenient method is by ancillary bill filed in the bankruptcy proceedings. [2,3] The facts are substantially as follows: On May 28, 1913, the bankrupt executed a demand note, and as collateral security assigned to the petitioner an account against J. S. Brown & Bro. Mercantile Company, of Denver, Colo., arising from the sale of 263 bags of coffee. The coffee was shipped on an open bill of lading, which, together with the invoice, was turned over to the bank and transferred by it to the purchasers, with request to remit direct to the bank. When the hill became due, Brown & Bro. Company by mistake remitted the amount of the invoice direct to the bankrupt, which was even then insolvent. The bankrupt received the remittance, said nothing about it to the bank, and deposited it in another bank. The same day it was checked out and used to pay the debts of the bankrupt, causing an overdraft in that bank. At the time of bankruptcy there were no funds in that particular bank to the credit of the bankrupt, but, on the contrary, there was a debit. The trustees therefore contend that the fund never came into their possession. It'is shown, however, that large assets, of which the cash alone was $177,143.15, more than ample to pay the claim, came into the possession of the trustees after their election. In my opinion, it is immaterial whether the identical money received from Brown & Bro. Company actually went into the possession of the trustees; the fund was clearly traced into the possession of the bankrupt, and there was an ample amount of other moneys to make it good. The bankrupt, when it parted with the coffee, received the value thereof, and there was no change in amount of assets. When it received payment direct from Brown & Bro. Company, and wrongfully converted the money to its own use, this amount entered into and became part of the assets subsequently passing to the trustees, and a trust ex maleficio was thereby created, by virtue of which the petitioner has a lien on all of the assets of the bankrupt, whether money or other property. [4] The trustees further contend that by virtue of the amendment of 1910 (section 47a), giving them the lien of a creditor holding an unsatisfied judgment, they are in a superior position to the bankrupt itself with regard to the fund, in the event it should be held they received it into their possession. With regard to this, it is of course clear that a creditor holding an unsatisfied execution could not attach the property of a third person accidentally in the possession of the bankrupt, and therefore it is equally clear that with regard to this fund the trastees take nothing by the amendment. [5] It is also urged that, as petitioner has received a dividend as a creditor on a claim including this debt, with other accounts, and [478] the sum has been paid out of assets including the fund herein claimed, it is estopped to set up any right or title to the said fund. The trustees have lost nothing by the other claim. Petitioner should not be estopped by any action on its part in receiving dividends as a creditor, though of course there should be a deduction of any dividend based on the amount herein claimed. [6, 7] The trustees make the point that petitioner sets out that it purchased the invoice, while the facts show that the account was pledged as collateral security of a note. They also say that as a pledge it is technically defective for want of notice of the pledge to the debtor. Under the facts of the case, there could be no doubt that the account was transferred to the bank absolutely and irrevocably, the bankrupt retained no contingent interest in it, and it was not contemplated the note would be taken up, except by the remittance from the debtor. The notice given to the debtor that the remittance was to be made direct to the bank was substantially the same as notifying it that the account had been pledged. The exceptions to the master’s report will be overruled, and there will be judgment in favor of the petitioner in accordance with these views.