Searle v. Mechanics' Loan & Trust Co.

GILBERT, Circuit Judge (after stating the facts as above). [1] The appellants contend that the trust agreement never went into operation and effect, for the reason that 90 per cent, of the creditors of the Lumber Company failed to sign it. We may take it to be true that 90 per cent, of all the creditors of the bankrupt never signed the agreement. But the fact which controls decision here is that the trustee and all the creditors who did sign assumed that upon obtaining the signature of Mrs. Tolerton the assent of 90 per cent, would have been secured. They knew that the trustee took it for granted, as did they, that the conditions on which the agreement was to go into effect had been complied with. They knew that the trustee, acting on that assumption, was advancing funds to carry on the business. There is nothing to impugn the good faith of the trustee. The trustee was permitted to conduct the business for a period of five months, during which no creditor suggested that there had been failure of the necessary percentage of creditors to sign the agreement. Under those conditions we think the'court below clearly was justified in holding that the creditors were estopped to make the objection which they now present. [2] The appellants contend that the court below was without jurisdiction to order that dividends due and payable to -the creditors who signed the trust agreement be applied to the satisfaction of the appellee’s claim, and they cite cases, such as the decision of this court in Re Argonaut Shoe Co., 187 Fed. 784, 109 C. C. A. 632, to the proposition that dividends in the hands of the trustee, being a part [945] of the estate of the bankrupt in the custody of the court, cannot be reached by attachment, or on any process from another court, and they especially rely .on In re Girard Glazed Kid Co. (D. C.) 136 Fed. 511, as sustaining the rule that a claim of indebtedness from one creditor of a bankrupt to another, growing out of transactions not connected with the bankruptcy proceeding, cannot be litigated in the bankruptcy court, or adjusted in the distribution of dividends. But those decisions do not answer the question which the record here presents. In the case last mentioned there was no equitable lien of one creditor upon any portion of a fund out of which a dividend was payable to another creditor. Judge McPherson said: “It is an independent controversy, about the ownership of money that is not a part of the fund for distribution, and this court cannot take jurisdiction of the dispute, and decide it in the roundabout maimer that has been suggested.” In tl e case at bar the appellants expressly stipulated by the terms of the trust agreement that the claim of the appellees should be first paid out of the assets of the bankrupt. Owing to. the. fact that not all of the creditors of the bankrupt signed the trust agreement, the appellees’ lien was not enforceable against the whole of the fund realized on the disposition of the bankrupt’s estate. But clearly the creditors who actually signed the agreement thereby created an equitable lien on their interest in the funds which thereafter came into the control of the bankrupt court for administration. That court had jurisdiction to protect the lien claimants in the distribution of the funds payable as dividends. In Whitney v. Wenman, 198 U. S. 539, 552, 25 Sup. Ct. 778, 781 (49 L. Ed. 1157), the court, in consideration of its own prior decisions, and the broad powers conferred in section 2 of the Bankruptcy Act to collect the bankrupt’s estate, reduce it to money, and distribute the same, and to determine controversies in relation thereto, held: “That, when, the property has become subject to the jurisdiction of the bankruptcy court as that of the bankrupt, whether held by him or for him, jurisdiction exists to determine controversies in relation to the disposition of the same, and the extent and character of liens thereon or rights therein” —citing, among other cases, In re Antigo Screen Door Co., 123 Fed. 249, 59 C. C. A. 248, in which the court said; “We take it that any court, whether one of equity, common law. admiralty, or bankruptcy, having in its treasury a fund, touching which there is dispute, may, by virtue of its inherent powers, determine the right to the fund ibus in its possession. Jurisdiciion in that respect is an incident of every court.” [3, 4] We find no merit in the contention that, because the trustee did not make the advances from its own funds, hut obtained the same from the Exchange National Bank, neither the trustee nor the hank can have a preference claim. The trustee and the bank were affiliated corporations, and the directors of both were substantially the same. Coman, the president of the bank, was a director of the trust company, and the president of the trust company was the vice president of the hank. The capitalization of the trust company was but $10,000. At [946] the time when the Minneapolis contract was discussed and signed, question was made of the responsibility of the trustee, and Coman stated to the creditors that, while the capital was only $10,000, yet through an arrangement with the bank the trustee could get money to carry out the terms of the contract. No objection was made to that proposition. The right of the trustee to this preference claim, however, does not depend upon that understanding, for it can make no difference to the rights of the appellants whether the trustee advanced its own funds or obtained the money from the bank. The bank filed its separate petition, stating the amount of its advances, and asking that the preference lien of the trust company be allowed. All the parties to the transaction knew that the money was advanced with the understanding that a lien was thereby created, both upon the trust property and upon the interests of the consenting creditors therein to the amount of the advancements. The administration and distribution of estates in bankruptcy is a proceeding in equity, and the property in the custody of the court is held by it in trust for those to whom it rightfully belongs, and its distribution should be conducted on equitable principles. Bardes v. Hawarden Bank, 178 U. S. 524, 535, 20 Sup. Ct. 1000, 44 L. Ed. 1175; In re Rochford, 124 Fed. 182, 59 C. C. A. 388; and Atchison, T. & S. F. Ry. Co. v. Hurley, 153 Fed. 503, 82 C. C. A. 453. The contention is made that the trustee acted in bad faith, and that therefore its preferential claim should be denied. We have carefully examined the evidence, and we find no ground to disturb the conclusion of the court below that the trustee acted in good faith, used reasonable care, and conducted the trust in accordance with the letter and spirit thereof. The order of the court below is affirmed.