In re Baber

119 F. 520, 1902 U.S. Dist. LEXIS 281

• Court: District Court, E.D. Tennessee
• Decided: August 28, 1902
• Docket: No. 104
• Status: Published

Opinion

HAMMOND, J.

(after stating the facts). Counsel for the Bank •of Huntingdon and the trustee have both applied by letter to be heard in argument upon the questions raised by this petition for a review ■of the action of the referee, but the matter can easily be disposed •of without any argument. Technically, the bank has no right to be heard at this stage of the proceedings, and the argument would be ■only a matter of courtesy to the bank and its counsel. The application of the trustee is for advice and a direction of the court as to the propriety of his bringing suit against the bank by petition in this courh In the nature of the thing, the bank is not a proper party to such an application by the trustee. It might become a party, under some circumstances, by a proper order of the court; but this proceeding has not progressed to that extent. Therefore, as the bank cannot be bound by any action taken by the court upon this application of the trustee, strictly speaking it has no right to be heard in argument. The court will be very glad to hear the learned counsel for the bank whenever the questions that may be made against it are ■.to be adjudicated.

Notwithstanding that this is only an application by the trustee ■for instructions, the referee has heard the parties, and taken the proof, and decided the case between the bank and the trustee as if it were presented for final decision. The court cannot approve this action of the referee; nor, if the matters were properly presented for decision, ■is the court quite prepared to say that it would approve the judgment of the referee; but the truth is the questions between the trustee and the bank are not ripe for decision. The application of the trustee for advice and instructions of the court ought to have been denied, and, if a proper application were made by any creditor for the purpose, it is not impossible that the trustee ought to be removed, -and another substituted, who is not so squeamish about the proper discharge of his duties, and not so timid about taking responsibility. That which the trustee should have done was to engage competent ■counsel to advise him, submitted the facts of his controversy with the 'bank to such counsel, and followed his advice in the matter of bringing whatever suit was necessary against the bank, or taking such ■other steps as he might be advised If not in funds to pay counsel, he should have notified creditors of that fact, and, if necessary, ask the referee or court to call a meeting of the creditors to advise •him of their wishes in the premises, and to act accordingly. The -court has a strong suspicion, from the facts shown in this record, that the trustee is acting disingenuously in making this application, and for the purpose of favoring the bank. It appears that the trustee is a brother of the cashier of the bank, who1 acted for the bank in the transaction involved. It is fairly to be inferred that this brother ojE the cashier received his appointment as trustee through the prepon^ derating vote of the bank at the first meeting of the creditors. It would seem singular that he would remain in ignorance from the date of his appointment, in December, 1900, to the 14th day of Au1 gust, 1902, of the fact charged in the petition that the bank had fraudulently concealed its possession of collateral securities for its debt, and that it had during that time carried through the chancery and supreme court of the state a proceeding to enforce the lien of'its collateral securities upon the lands of Hardin. Why did the trustee not proceed against the bank more promptly? The record does not answer this question, except with a suspicion as above indicated. It does not appear whether the learned counsel who prepared the petition of the trustee now offered to be filed was engaged by the trustee to represent him, or is representing creditors seeking to call the bank to account for its alleged fraud in withholding the knowledge of the fact that it held the collaterals, of proving its debt without security, collecting full dividends without disclosing' the truth, and at the same time trying to enforce the lien of the collaterals in the state court. But on the facts as shown in the petition it is preposterous that any trustee understanding his duty should not have proceeded against the bank as soon as the facts came to his knowledge. That he should refuse to sign and file this petition on the advice of this counselor, by whomsoever he was employed, until he should be instructed by the court to do so, seems to be, on the facts as shown by this record, disingenuous, to say the least of it. Undoubtedly, by the very terms of the bankruptcy statute, the trustee acts at all times technically under the direction of the court, and no doubt he has on proper occasions and under proper circumstances, the right to apply to the court for its instructions in the premises. Section 47(2). But this does not mean that he can shovel the administration of his trusteeship into the court, unload his responsibility upon the referee, or judge of the court, and evade or shirk his plain duties by asking the advice and directions of the court. Properly, he should be a man of affairs, ready to act upon his own responsibility and intelligence, as business men do in their own affairs; if necessary, resort to the advice of counsel; and, still more, if thé further necessity exist, resort to the tribunal of the body of the creditors assembled in general or special meeting called for the purpose under the presidency of the referee or judge, as provided in the scheme of the act. It is for such purposes that meetings of the creditors are provided for, and, until resort has been had to these appliances to guide his judgment, and complications of a serious nature have arisen, it is dis-serviceable that a trustee should be applying to the court for its instructions and advice. >

There is no provision in our bankruptcy statute, as in the English statute, specially authorizing trustees in bankruptcy to apply to the court in manner prescribed for direction in relation to any particular matter arising under the bankruptcy. William, Bankr. 294, 467. But there is no doubt that such authority may be implied from the general scheme of the act of congress,, and especially from section 47(2), where the duty is prescribed of collecting and reducing to money the property of the estate “under the direction of the court”; but, as before remarked, this does not mean that the trustee may devolve the administration of the estate upon the court by such applications. There was a similar provision as to all general trustees under Lord St. Leonard’s Act (22 & 23 Viet. c. 35, § 30), but it was held under that act that the court would not adjudicate in that way upon doubtful points of fact or law, the decision of which would materially affect the rights of parties interested. When the trustee asked, under that act, for instructions, the court would require notice to be given to the parties interested, and, if it required formal suit between the trustee and the adverse parties, the court would remit the trustee to such action as he ought to bring under the advice of counsel. Lewin, Trusts, 352, § 28; Id. 618, § 18; Id. 620, § 23. We have the same rule in this country, which is thus expressed: “The trustee will not be permitted to seek the advice' of the court upon a mere question of law about which he should have consulted an attorney, or, if necessary, tested the question by an action at law.” 27 Am. & Eng. Enc. Law (1st Ed.) 153, citing Greene v. Mumford, 4 R. I. 313.

It is not necessary to particularly inquire in this place as to the limitation upon that authority in the practice of giving advice or instructions by courts of equity to trustees by contract or private appointment, such as donees of powers, executors, and the like, quasi official trustees,—as administrators, guardians, and the like; for a trustee in bankruptcy is not that kind of a trustee. Neither is he quite the same .as a receiver of a court, although there is more analogy here than in the cases of trustees by contract applying to a court of equity for instructions. The rule of practice as to such applications by a receiver is laid down in Fost. Fed. Prac. (3d Ed.) p. 549, § 248, where the author quotes from a decision in the case of Missouri Pac. Ry. Co. v. Texas & P. Ry. Co. (C. C.) 31 Fed. 862, as follows:

“If there are parties in interest, and they have their day in court, the advice may be decisive. But if the matter is ex parte, the value of the. advice depends largely upon the information and the ability of the judge, and is probably binding only on the receivers, for the judge may change his mind on hearing full argument.”

See, also, Fost. Fed. Prac. (3d Ed.) 542, 557, and Bates, Eq. Prac. § 614.

It will be seen from these and other authorities that the privilege of trustees to apply for advice cannot be abused by running to the court to settle every question that may appear to an irresolute trustee to be desirable to have settled without responsibility of action on his part. Nor can this practice be resorted to for the purpose of carrying on litigation between himself and adverse parties in such an informal and irregular way as has been done in this case. Trustees in bankruptcy are sui generis. As was said by Judge Purnell in the case of McLean v. Mayo (D. C.) 113 Fed. 106, 7 Am. Bankr. R. 115:

“While the bankruptcy act creates the office of trustee in bankruptcy, such trustee is a quasi officer of the court in a qualified sense. He is in reality elected by, and represents the creditors of, the bankrupt, under the provisions of the bankruptcy act. The bankruptcy court will protect the trustee in the discharge of his quasi official duties; but as the representative of the creditors his duties as such representative must be discharged, not as an officer of the court, strictly speaking, but as provided in the bankruptcy act.”

He is not, like a receiver, a mere caretaker and manager of the estate to execute the orders of the court in the progress of administration, but he is the agent of the creditors, selected by them as a man of affairs to conduct the business of collecting the assets and ■distributing the proceeds among the creditors. The statute invests him with the title of the bankrupt, and makes him not only quasi owner, but the owner pro hac of all the property and rights of action belonging to the bankrupt. The management of the estate is committed to his discretion, and he is expected to exercise his powers and discharge his duties with the same intelligence that an owner would do, subject, of course, primarily, to the supervision of the creditors in their meetings called for the purpose, and the whole administration subject to the supervision of the court of bankruptcy. The proceedings are not conducted, like insolvency proceedings in the chancery courts of Tennessee, by a receiver, under the constant orders of the court, and who can do nothing, scarcely, without the previous direction of the chancellor; but the proceedings in bankruptcy are to be conducted according to the specific directions of the bankruptcy statutes and the rules and the forms prescribed by the supreme court. It is a comprehensive scheme of administration by the creditors through their trustee, with which the court interferes as little as possible. Tie may employ counsel, using such judgment as an ordinary man would use in the transaction of his own business (In re Abram [D. C.] 103 Fed. 272, 4 Am. Bankr. R. 575); and he may apply to the creditors for authoritative advice and instructions, and for assistance with money if in the conduct of litigation he be without funds (In re Arnett [D. C.] 112 Fed. 770). Under such a statutory system as this the necessity for applications to the court for its instructions and advice should be very rare, and would arise only under somewhat extraordinary circumstances.

As appears from this record, the real question in this case is whether or not, upon a proper application by the trustee, the bank should not have its proof of claim entirely expunged and disallowed because of the alleged fraud set forth in petition offered to be filed, and be required to refund the whole of the dividends which it has received, and be not allowed to participate in the assets at all, leaving the collaterals in its hands for what they may be worth; or, if the creditors shall so determine, they might direct the trustee to compromise this demand upon the bank by allowing it to surrender its collaterals and prove its whole debt, as the bank offers to do in this record by the tender that was made to assign the decree for the collateral notes to the trustee; or to make any other settlement that may be agreed upon between the bank and the creditors, notwithstanding the alleged fraud. It is not impossible that the bank may be able satisfactorily to explain the circumstances, and relieve itself of the imputation of fraud such as would justly forfeit its right to prove its claim under section 57 of the bankruptcy statute. And what is here said has been said with a full understanding that the bank has not yet been heard to make such explanation. It is open to the bank and to the creditors to settle these matters through the action of the trustee under the guidance of the creditors’ meeting by any compromise they may agree upon. Or the creditors may instruct the trustee to proceed to expunge the claim of the bank, and insist upon the right of forfeiture of any share in the assets. The referee undertook, without any application by the trustee to that end, or without his consultation with the creditors, to accept the informal tender of the bank of its recovery against the landholder to enforce the lien of the collateral notes, and leave the bank to retain its dividends already received, and to take such other dividends as may be coming to it on such a settlement. There are no proceedings before the referee that would authorize him or the court to take such action. The trustee did not ask the court for instructions generally as to what he should do with this controversy with the bank, but only to be instructed whether he should sign a proposed petition in his behalf, prepared by his counsel or the counsel for the creditors ; and that was the only question before the referee. It did not yet present a case, nor any occasion for an adjudication of the rights of the trustee against the bank; and the decision of the referee should have gone no further than to,advise the trustee whether he should take the particular proceedings against the bank as suggested. And that was a question that ought to have been left by the referee’s decision to the trustee’s own discretion, under his responsibility to the creditors and the court for the wrongful exercise of that discretion; or else he should have been advised to apply for a meeting of the creditors to submit to them the decision of the question as to what steps should be taken against the bank, or whether a compromise should be made, and, if so, what compromise, just as was done in the case of Arnett, supra, to the rulings of which in such matters I desire to adhere, where the estate is of sufficient value to justify the expense.

It may be remarked that the theory of the petition propounded by the trustee, also that indicated by the tender of the bank, and possibly the theory accepted by the referee, namely, that the bank was under an obligation to surrender its securities, does not certainly appear upon the facts shown in the record to be tenable. The petition, on the face of it, does not set up any facts showing a fraudulent preference, and the assignment of the collateral notes to the bank appears to have been more than four months before the bankruptcy, and, if the circumstances were such that the assignment of the col-laterals to the bank was a fraudulent preference outside the four-months limitation, the petition has not been definitely drawn to show or plead that fact. It is, however, unnecessary, in the view the court has taken of the case, to consider that question, as it will be open to the trustee to shape any petition he may hereafter file against the bank as he may be advised, and claim any relief to which he may possibly be entitled. Much may depend in the exercise of his discretion upon the value of the recovery that has been hid upon the collateral notes by the decree of the chancery court in its relation to the value of the land. It may be worth less than the amount of the decree, and very little, after paying the expenses of the litigation, including the attorney’s fee as provided in the tender of the bank. It may be a mere empty offer on the part of the bank. This matter requires careful attention by the trustee and his legal adviser, and by the creditors at any meeting that may be called to consider the proposals made by the trustee, under the guidance of his legal adviser, to the creditors. Also it will require that the trustee and his legal adviser shall carefully determine whether this offer of the tender by the bank is one of mere compromise, or one of obligation on the bank to make and the creditors to accept. It will require, too, the careful attention of the trustee and his legal adviser to determine whether the trustee can claim for the creditors both a return of the dividends and a surrender of the collateral notes, now in the form of the decree recovered in the chancery court; or whether the trustee’s remedy, outside of a mere compromise with the bank, is not strictly confined to a demand for a return of the dividends paid to the bank, and the expunging of the bank’s proof of debt alleged to have been fraudulently made, and the consequent total disallowance of any share in the assets by the bank because of that alleged fraud. The holding of the referee that the petition proposed does not sufficiently plead any fraud on the part of the bank might be met by the fact that the circumstances showing the fraud are pleaded, and it is not necessary to use mere epithets to properly plead it. The petition states the facts of concealment, and it would be for the bank to show by its answer how the concealment could be otherwise than intentional. And, if intentional, it would be fraudulent, whether the bank knew it "to be so or not, as all are presumed to intend the consequences of their unlawful act. Ignorance is not always a defense against unlawfulness; nor are good motives; and cannot always condone the injury done to the victim of the wrong that was done.

The court' is of opinion that the referee was not authorized to decide any of these questions as the record was made before him, and that their decision here would be premature. They can only be made upon proper pleadings, issues, and proof, in a litigation between the trustee and the bank by petition and answer in the bankruptcy proceedings. An order will be entered to set aside the rulings of the referee, and dismissing the application of the trustee for the advice and instructions of the court in the premises, leaving him to take such action as he may be advised by counsel or a meeting of the creditors. Any creditor aggrieved by any neglect or refusal of the trustee to properly discharge his duty in the premises may apply to the court for his removal and the substitution of a trustee who will not hesitate to perform his plain duty under the bankruptcy statute.

Ordered accordingly.