In re Billing

145 F. 395, 1906 U.S. Dist. LEXIS 206

• Court: District Court, M.D. Alabama
• Decided: March 29, 1906
• Status: Published

Opinion

JONES, District Judge.

1. The Constitution vests broad power in Congress “on the subject of bankruptcies,” and it has a wide field of discretion as to the modes of procedure for ascertaining and declaring the status of bankruptcy. If a bankruptcy statute provides for proper notice and fair opportunity to the debtor to defend against adjudication in an involuntary proceeding, due process is not denied creditors, although no provision be made for giving them notice, or, for that matter, for allowing them to become parties to the proceeding. Congress, not being bound to provide for notice to creditors of the institution of involuntary proceedings, has made no provision for such notice, other than that which results by operation of law from the filing of the petition. The proceeding is in a large sense in rem. What is done therein is binding upon creditors, whether or not they have actual notice or knowledge of the pendency of the proceeding. The filing of the petition by proper parties, making the jurisdictional allegations, operates as lis pendens, and is notice to all the world. Bank v. Sherman, 100 U. S. 406, 25 L. Ed. 866; Mueller v. Nugent, 184 U. S. 14, 22 Sup. Ct. 269, 46 L. Ed. 405. Moreover, it seldom happens in these days of newspapers, and the activity of collection and commercial agencies, that creditors do not, in fact, have ample knowledge of the filing of the petition, in time to contest the adjudication against their debtor, if they so desire, within the 20 days allowed them, after the filing of the petition, in which to appear and “controvert the facts.”

Section 18, Bankr. Act. July 1, 1898, c. 541, 30 Stat. 551 [U. S. Comp. St. 1901, p. 3429], provides for service upon the alleged bankrupt of the petition with subpoena, etc., and subdivision “b” of the same section declares that any creditor may appear and plead to the petition within five days after the return day. Subdivision “d” provides, if the bankrupt or any of his creditors fail to appear within tlie time limited and “controvert the facts alleged in the petition,” the judge shall determine, as soon as may be, the issues presented by the pleadings without the intervention of a jury, except in cases where a jury trial is given by the act, “and make the adjudication or dismiss the petition.” Subdivision “e” provides if, on the last day within which pleadings may be filed, none are filed by the bankrupt or any of his creditors, “the judge, shall, on the next day, if present, or as soon thereafter as practicable, make the adjudication or dismiss the petition.” Subdivision “f” provides “if the judge be absent from the district or division of the district in which the petition is pending, on the next day after the last day on which pleadings may be filed, and none have been filed by the bankrupt or any of his creditors, the clerk shall forthwith refer the case to the referee.” The statute is mandatory and insistent that the adjudication be had or the petition be dismissed as soon as possible, after the time has expired in which the debtor and creditors may plead. It is quite foreign to its purpose to give the right to notice of the proceeding to a creditor, or to permit one who has not made himself a party, within the time prescribed by law, to be heard as to the adjudication.

The bankruptcy statute carefully selects and specifies the instances in which it intends to give the creditor the right to notice. The only instance in which any right to notice is given tlie creditor, as to the disposition of an involuntary petition, is when it is proposed to 'dismiss the proceeding by consent of parties, or for want of prosecution. Sections 58 and 59, 30 Stat. 561, 562 [U. S. Comp. St. 1906, pp. 31 it, 3445]. Controversies in bankruptcy would never end, and adjudications would amount to little more than mere interlocutory orders, if creditors, who did not make themselves parties, could afterwards come in, claiming they had no notice of the adjudication or petition, and then move to upset the judgment on the ground of error intervening after jurisdiction attached. Aside from this, the theory of the argument that when the bankrupt after making a contest subsequently withdraws it, the creditor has rights which he would not have if the bankrupt had not contested in the first instance, is wholly unfounded. The creditor has no vested interest or property rights in the debtor’s appearance and contest, and cannot prevent the debtor’s withdrawing his contest at any time he sees fit. The adjudication passes the debtor’s title, save as to his exempt property, to the trustee, and imposes certain duties upon the debtor, and may radically affect the rights of creditors as between themselves, and puts certain duties upon them if they desire to share in the insolvent’s estate. The lav/ makes the debtor the sole judge whether he will resist the adjudication, in order to avoid its consequences to him and his rights; and it likewise makes the creditor the sole judge whether he will resist the adjudication, in order to avoid its effect upon him and his rights. A creditor who wishes to prevent an adjudication but fails to contest the petition, is none the less in default, because the debtor, who has appeared and contested the petition, afterwards withdraws his contest, without notice to the creditor. The debtor’s contest, in the eye of the law, is for himself, and not for the creditor. The debtor is not bound to resist the adjudication in the interest of any of his creditors, and has the same right to withdraw a contest once begun, as he has to refuse to contest in the first instance.

When an involuntary petition is filed and proper service made upon the bankrupt, and there is no appearance by the debtor or any of his creditors, the court must thereupon either pass an adjudication of bankruptcy or dismiss the petition. If the petition be unresisted, there is no question before the court except as to the sufficiency of the petition. That raises an issue of law. It must be tested solely by the averments of the petition, and the law does not permit, much less require, the taking of proof on such an issue. When, as here, the petition is filed by the proper parties, in the proper district, and makes all the jurisdictional allegations, and is uncontested, the failure to contest the petition by any person having the right, so to do, establishes the truth of the allegations of the petition. The law, thereupon, demands an adjudication of bankruptcy which, when thus rendered, is binding on all the world. Every creditor was conclusively charged with notice of the pendency of the proceeding and what was being done to bring about adjudication, and no creditor can be heard to -set up want of knowledge or notice of the proceeding as an .excuse for not controverting the petition before adjudication, or as a reason why it shall not bind him.

2. The District Court of the United States is a court of limited, but not inferior jurisdiction. Congress has conferred upon it original and exclusive jurisdiction to adjudge bankruptcies, and its judgments therein are supported by the same presumptions which are indulged in favor of the judgments of all superior courts of general jurisdiction. When jurisdiction is shown to have attached, the indisputable presumption, save when the question is raised by appeal or an attach upon the adjudication for fraud in its procurement, is that there was sufficient evidence to support the judgment. The petitioner here, who has not appeared, cannot, by indirection, by motion to vacate the adjudication, obtain the benefit of an appeal or other revisory writ, and thus compel the court to go behind the petition and the adjudication, and search the evidence to see if it justified the judgment. If, however, the petitioner were in position to raise the question in the way here attempted, it would not avail in the state of this record. The adjudication is based upon a finding of fact, on evidence reported by the referee as a special master. A motion to vacate the adjudication on the ground that the proof did not sustain the 'finding, must, necessarify, stand or fall upon the evidence taken and reported by the referee. Here, the insolvency was admitted. The execution and delivery of the conveyance charged to constitute an act of bankruptcy were proved. The bankrupt did not testify as to this matter. The books of the bank were put in evidence. No entry could be found in the cash account or elsewhere, concerning the receipt of the sum mentioned in the deed. No entry was discovered, which could be traced to the sale or to any transaction relating to it. It may be, as argued, that the bankrupt received the cash consideration mentioned in the deed, and failed to enter- its receipt upon the books of the bank. The absence of such entry is certainly no proof that the money was paid to him; and the burden is upon him, or those claiming under him, to show that the sale was for cash, and that the bankrupt received the money. The recital in a deed of the receipt of the purchase money is a mere admission of the grantor, which is not at all binding upon his creditors. The burden of proving payment of the consideration, named in the deed, is upon the bankrupt, when a creditor of an insolvent grantee assails the transfer as an act of bankruptcy. The bankrupt had been in failing circumstances for many months prior to the making of the deed. He suspended his banking business in January, .1901, for four months, and then resumed after obtaining an extension from his creditors, upon an agreement with them to pay the principal of his debts installments, without interest. Many of these installments were afterwards paid; while a goodly number remain unpaid. The grantee in the deed had rendered professional service to the bankrupt prior to the making of the deed. There was no entry or other reference upon the books as to this indebtedness, or that the grantee had been paid for these services, or that any settlement whatever had been had with him in relation thereto. The presumption that the particular conveyance was made to settle this past indebtedness, and not for a cash consideration as stated in the deed, was not at all unreasonable, under all the circumstances. Neither the grantee nor the bankrupt, upon whom rested the burden to show the payment of a cash consideration for the property, testified upon that point, although both had opportunity and incentive to make the proof, if it were a fact that the consideration named had been paid in cash. The grantor and the grantee lived in the same city. The insolvency of the banking business which Billing conducted had been a matter of general notoriety for months before the deed was made. The situation was such that the parties must have known that the sale of the property mentioned in the deed in satisfaction of an antecedent debt would inevitably give the grantee an unlawful preference. Reasonable men, in view of the known facts, could not have expected or intended any other result, and the law, upon the facts, imputed a purpose and intent to give and receive an unlawful preference, which constituted an act of bankruptcy. It would have been better if the finding had specifically responded to the particular act of bankruptcy charged. Only one act was specified in the original petition, and the general finding of the referee, under the terms of the reference, cannot possibly be referred to, or relate to, any other act. Many of the authorities attach the same effect to the finding of a master on the facts, as to the verdict of a jury. In no event, can such a finding be disturbed, unless it be manifestly erroneous, and that, in view of the facts disclosed in the record, cannot be fairly maintained here.

3. Petitioner also assails the adjudication as collusive. The evidence does not sustain that charge. The provision of the statute giving a creditor a right to resist the petition of other creditors to force their common debtor, into bankruptcy, unless the debtor be insolvent, and has committed an act of bankruptcy, is part and parcel of the same statute which gives that same debtor, whether he be solvent or insolvent, and whether or not he has committed an act of bankruptcy, the absolute right, at his own election, to be adjudged a bankrupt upon his own petition, .whether or not his creditors consent, and whatever may be the effect of the adjudication upon their rights. These provisions are in pari materia. Thus construed, the provision allowing the creditor to contest the involuntary proceeding cannot be held to take from the alleged bankrupt the right or privilege, if he chooses to exercise it, of withdrawing his defense after it is begun, to an involuntary petition, or, for that matter, filing a voluntary petition while the involuntary petition is still pending against him. In re Stegar (D. C.) 113 Fed. 978.

It is often vital to the interests of creditors that the debtor’s business, though in a critical condition, be not taken out of his control. The owner, left to the conduct of the business, may mend his fortunes, and save loss to the creditors, when a trustee or receiver could not take the business and do as well. In recognition of this interest of the creditor in his debtor’s remaining in control of his own affairs, the statute authorizes the creditor to intervene in involuntary proceedings,'to prevent his debtor from being put in bankruptcy, unless he be insolvent and has committed an act of bankruptcy. This provision intended to arm the creditor with effective means, placed directly in his own keeping, of assisting the debtor to resist an improper effort to force him into bankruptcy, and also to give the creditor like effectual means of preventing his debtor and petitioning creditors from colluding to bring about the adjudication, when the debtor is not insolvent and has not committed an act of bankruptcy, and is unwilling to institute voluntary proceedings. It was not within the contemplation of the statute, when the debtor is, in fact, insolvent, and has committed an act of bankruptcy, to give to the creditor the right to contest the adjudication, merely to keep alive a lien or levy, which would be destroyed if the petition be not defeated; for that is contrary to the spirit and purpose of the bankruptcy law. The contest of the petition for the latter purpose is an abuse of the statute. So long as he appears within the time prescribed by law, the creditor may wage his contest as to the insolvency and the act of bankruptcy, whatever his ulterior motive; but when, as here, it is not denied that the bankrupt was insolvent, and has committed an act of bankruptcy, a creditor who has not appeared within the time prescribed by law, ought never afterwards to be allowed to assail the adjudication, for anything short of fraud in its procurement, injurious to creditors generally, or for want of jurisdiction apparent on the face of the record in the court which rendered the adjudication.

It is neither immoral nor illegal nor contrary to public policy for petitioning creditors to urge upon their debtor, who is in fact insolvent, and has committed an act of bankruptcy, not to resist the adjudication in an involuntary proceeding, or for such a debtor to heed the importunity of creditors at any stage in the proceeding against him.. When such a debtor does no more than abandon resistance once begun to an effort to adjudicate him a bankrupt, and consents to be adjudged, because he deems it for the best interest of all his creditors, his conduct whether induced solely by his own volition and judgment, or inspired by the «solicitation of creditors, and whether or not there be any formal agreement between the debtor and the petitioning creditors as to his consent to an adjudication, does not work any fraud or wrong upon creditors. The law' gives the creditors the right to force such a debtor into bankruptcy. Having the right under the law and facts of this case to -force the debtor into bankruptcy, his creditors had a perfect moral and legal right to seek to end the prolonged litigation, by agreement to that end between themselves and the bankrupt. The bankrupt could lawfully consent in advance to a decree, which the law', on the evidence, would surely pronounce against him, if the litigation continued. In such a case the law seeks to bring about the equitable pro rata distribution of his estate among his creditors, according to the provisions of the bankruptcy statute. His consent only aids in carrying out the policy of the statute, and in bringing about a status, which the law, under the circumstances, declares ought to exist. Aside from this, the consent of the bankrupt to be adjudicated was made after the finding of the referee, who took evidence on the subject, that the debtor was insolvent and had committed an act of bankruptcy. The debtor, therefore, neither conceded nor consented to anything which had not already been adjudged against him, in a trial while the proceeding was still adversary. The paper filed by the bankrupt in the clerk’s office, simultaneously with the filing of the referee’s report, was intended to subserve no other purpose than an explanation to the bankrupt’s creditors of his conduct in the premises. The bankrupt, from the beginning, denied his insolvency and the commission of an act of bankruptcy. His iteration of that denial in this paper added no force to the former denial, and could not invalidate or lessen the effect of the referee’s adverse finding on that point. The bankrupt took no exceptions to the adverse report. The. order of adjudication was passed upon the referee’s finding and report, which abundantly supported the adjudication, as well as upon the bankrupt’s consent to be adjudged a bankrupt. The paper could serve no other legal purpose than evidence of consent, and was not authorized as pleading of any sort, at that stage of the proceedings. It was filed without leave. The court might properly have ignored it altogether. In its discretion, it allowed it to remain on file, and treated it as a consent to adjudication, which by no means depended on that consent, because of the conviction that it was for the interest of all concerned to take away all excuse for further protracting this litigation. Whatever else may be said of the paper, or the reasons given by the bankrupt for the course he took, it is clear that it was an unconditional abandonment of the bankrupt’s contest of the adjudication. It put an end to all resistance to the petition by the only, party before the court, and in that state of the case the law demanded the adjudication, even if it rested solely on the consent.

4. There are other reasons equal!v fatal to the petitioner’s right to maintain this petition. The proceeding had been pending for nearly two years before the intestate died. Aside from the fact that the law conclusively charged the intestate with notice of the filing of the petition and what was being done in the proceeding, it is a just inference from the facts that the intestate had actual .knowledge. The proceeding related to a large banking business which had failed in January, 1901, and then started up again, and was carried on for some months before the bankruptcy proceedings were instituted. .The intestate, who lived in another state, must have heard-of the suspension, for the claim was afterwards put in the hands of a leading resident attorney here, and he corresponded with his client about the status of the claim. It is certainly a fair, if not an irresistible, inference, from the facts that the intestate actually knew of the bankruptcy proceeding, and what was being done therein, months before the adjudication. The intestate had ample time and opportunity to become a party and contest the adjudication if she so desired, but remained content to stand aside and watch the proceeding, and leave the final direction it should take to the bankrupt, so far as she was concerned. The diligence of the .personal representative, after his appointment, cannot excuse intestate’s negligence in failing to become a party ánd. controvert the petition. The effort to vacate the adjudication was not made until hundreds of creditors had proved their claims, and had elected a trustee, who qualified and entered upon the discharge of his duties. The bankrupt had been examined. Property had been sold. Orders had been made and rights had attached on the faith of the adjudication, and the bankrupt had proposed a composition,'which had been accepted by the great majority of his creditors, and was then awaiting the action of the court. If the adjudication be now set aside, contest of the petition would have to be gone over anew. If the petition be not dismissed on a second trial, nothing would result from vacating the adjudication but vexatious delay, and additional and fruitless expense. On the other hand, if the adjudication be vacated, and the petition be finally dismissed, it would result in the saving of preferences to a few, to the detriment of the great body of creditors. If this creditor ever had the legal right to put the other creditors to delay and expense, by insistence upon his legal right to oppose adjudication, in order to save preferences by defeating the 'petition, it was incumbent upon him to see to it that his right was promptly asserted, in the time and mode prescribed by law, before the adjudication was made. A creditor cannot sit still until an adjudication is. made, if he might have obviated it by timely objection, and then complain of a situation which has grown up in consequence of an unresisted adjudication, which cannot now be undone, without prejudice to the bankrupt estate, and rights which have grown up on the faith of the adjudication and the orders made thereunder.

5. Again, the prime object of the statute is the speedy disposition of involuntary proceedings, and the prompt distribution of the estate of persons who are found to be insolvent. To that end, the statute exacts speedy decision upon the petition, and specifically requires that appeals from adjudications shall be taken within ten days. It would,be a palpable evasion of the letter, and a plain nullification of the spirit, of this provision to entertain a motion made to vacate months after the adjudication by a creditor wlio never made himself a party to the proceeding. Moreover, if we concede, which was clearly not the case here, that the adjudication passed without proof of an act of bankruptcy, upon the wrongful consent of the debtor to the adjudication, and that a creditor who had not made himself a party because ignorant of the pendency of the proceeding, could upon being advised promptly raise the question by a motion to vacate the adjudication, the petitioner is still met with the objection that the conduct of the intestate in this matter was such as necessarily led the court to believe, so far as she was concerned, that there was no objection to the adjudication, and that she was content that the proceeding take such course as the bankrupt might elect to give it. It is too late, after the bankrupt has abandoned resistance, and the court lias acted on the view that petitioner did not desire to contest, for petitioner to come forward now, for the first time, and object to the adjudication, because the court failed to take proof, which it was not required to exact, except when the petition is resisted. A litigant cannot put a court in error in that way.

For all these reasons the petition must be dismissed.