WOODRUFF, Circuit Judge.
This case involves the consideration of three questions. First Were the mortgages which were held by the defendants valid irrespective of the alleged possession of the goods by Nelson W. Stearns? Second. What effect had the alleged possession of Nelson W. Stearns upon the rights of the parties? Third. How did the delivery or surrender of possession by the bankrupts to the defendants November 12th, ,1870, affect the rights of the assignee? Upon these questions, my conclusions must be very briefly stated:
First. The mortgages were fraudulent and void as against creditors. They were so independently of the bankrupt law. Although it is not in terms so expressed in the mortgages, yet it is dear upon the evidence that the understanding of all parties was, that the mortgagors should continue their business as merchants, as such sell the goods then on hand, buy others, and sell them in turn in their discretion, for the purposes of gain. If they succeeded in making profits enough, or actually applied the proceeds of sales, or the profits, to the satisfaction of the mortgage debt, then the mortgagee would be content, but if not, then all the goods on hand when the mortgage was made, and all . that should thereafter be added thereto, should be swept into the net prepared by the defendants, to gather whatever there might be of value into their possession. Such an arrangement is most clearly void as to other creditors, and has again and again been so adjudged by the courts of this state.
Second. The principal mortgage provided, at the time it was executed, that Nelson W. Stearns, who was surety for the payment to the defendants by the bankrupts, might take immediate possession of all the property in the store, and of all thatmight be thereafter placed therein, as trustee under the mortgage, and that he should retain possession until the mortgage indebtedness should be paid. If the intention was, as is most manifest, that notwithstanding this clause in the mortgage, the mortgagors should, as in fact they did, control the property, sell in their discre- | tion, buy other goods to replenish, receive the | proceeds of sale and appropriate them as they ! saw fit, the suggestion of actual possession and trusteeship becomes absurd; such possession and trusteeship was, at most, a pretense. What Nelson W. Steams did was only to watch the progress of affairs, and as a watchman to observe that the business was regularly conducted agreeably to the obvious intention, viz.: by the bankrupts; they buying and selling and receiving the proceeds under some supervision not very well defined, and not in fact interfering with their actual conduct of the whole business. In this view, there was nothing in this which relieved the transaction from the condemnation first above stated. The ostensible possession and ■the actual possession were in the bankrupts, who were thus held out to the world as the owners of the property. The only alternative possible under this clause of the mortgage, is to treat Nelson W. Stearns as in possession and as trustee for the defendants, holding and controlling the property for their benefit and security. He held the property for them or he did not. If not, then what has been already said applies. If he did, then through and by the aid of the bankrupts he sold and received payment for them in cash, to the amount according to testimony, of between fifty thousand and sixty thousand dollars, a sura more than sufficient to satisfy the whole mortgage debt. If it be nevertheless said, that the bankrupts took the money, and that as among themselves it was competent to permit them to take and use the money, with[542]*542out applying it to the mortgage debt, and so shift the lien from the goods sold to the goods purchased, and thus keep the mortgage alive, this only brings us around again to the exclusion of the idea that the trustee ever had, or was intended to have, any such trusteeship or possession as could add any validity to the ’-mortgages, and they remain liable to the objection that the mortgagors had possession and control, with power to sell and appropriate the proceeds as they saw fit. That Nelson W. Steams was a sort of supervisor or watchman to guard against the carrying off of the property, or its disposal in fraud of the understanding of the parties, does not help the defendants.
Third. Under these views of the rights of the parties and of the validity of the mortgages, how did the delivery or surrender of possession by the bankrupts to the defendants on the 12th of November, 1S70, affect the right of the assignee in bankruptcy. If, as against /creditors, the mortgages and the alleged title of the defendants to the property was fraudulent and void, their taking possession in the mere exercise of their claim of the title would not aid them. Their title remained fraudulent and void still as against creditors. If, on the other hand, the assent of the bankrupts to their taking possession, the delivery of the property and .surrender of the keys were, of themselves, an appropriation of the property to the payment of the mortgage debt, then the bankrupt law pronounces it void for this reason, both parties then knew that the bankrupts were' insolvent; it swept the entire partnership property into the hands of the defendants; it operated, and was clearly intended to operate to give them security and payment to the exclusion of their creditors, and it was within four months next preceding the filing of the petition upon which the defendants were adjudged bankrupts. The defendants can therefore gain nothing from this latter view of the transactions. Nor am I inclined to adopt the last-mentioned construction of the acts done in November. They were, on the part of the defendants, a setting up of their claim to the property, and the acquiescence of the debtors therein, when they supposed resistance would be useless, if not on their part improper. I do not think so ; harsh an effect should therefore be given to j the taking of possession in November. To ; hold it the giving or acceptance of new title to the property, would exclude the defendants from any right to prove their debt against the estate of the bankrupts.
Fourth. It is not then on the ground that these instruments are made void by the bank-rapt law itself, but because they are fraudulent and void as against creditors, and might be set aside at their instance independently of the bankrupt law. that the complainant is entitled to a decree. That an assignee; in bank- ¡ raptcy can set aside such fraudulent conveyance,- and recover property so fraudulently held, is not, I think, doubtful. On general principles, without express words in the act, I should hold the assignee to represent creditors who, after adjudication, can no longer obtain judgments, and so place themselves in the position to attach fraudulent conveyances. But section 14 expressly declares “that all property conveyed by the bankrupt in fraud of his creditors shall be at once vested in such assignee.” The proviso in the 39th section, which requires that the petition of a creditor who asks that a debtor be adjudged a bankrupt against his will, must allege some act of bankruptcy committed within the six months next preceding, does not per se determine what property shall vest in the as-signee.
Suppose the act of bankruptcy alleged be, suffering commercial paper to remain unpaid for more than fourteen days. If the creditors allow six months to pass they cannot make that a ground of adjudication.
Free access — add to your briefcase to read the full text and ask questions with AI
WOODRUFF, Circuit Judge.
This case involves the consideration of three questions. First Were the mortgages which were held by the defendants valid irrespective of the alleged possession of the goods by Nelson W. Stearns? Second. What effect had the alleged possession of Nelson W. Stearns upon the rights of the parties? Third. How did the delivery or surrender of possession by the bankrupts to the defendants November 12th, ,1870, affect the rights of the assignee? Upon these questions, my conclusions must be very briefly stated:
First. The mortgages were fraudulent and void as against creditors. They were so independently of the bankrupt law. Although it is not in terms so expressed in the mortgages, yet it is dear upon the evidence that the understanding of all parties was, that the mortgagors should continue their business as merchants, as such sell the goods then on hand, buy others, and sell them in turn in their discretion, for the purposes of gain. If they succeeded in making profits enough, or actually applied the proceeds of sales, or the profits, to the satisfaction of the mortgage debt, then the mortgagee would be content, but if not, then all the goods on hand when the mortgage was made, and all . that should thereafter be added thereto, should be swept into the net prepared by the defendants, to gather whatever there might be of value into their possession. Such an arrangement is most clearly void as to other creditors, and has again and again been so adjudged by the courts of this state.
Second. The principal mortgage provided, at the time it was executed, that Nelson W. Stearns, who was surety for the payment to the defendants by the bankrupts, might take immediate possession of all the property in the store, and of all thatmight be thereafter placed therein, as trustee under the mortgage, and that he should retain possession until the mortgage indebtedness should be paid. If the intention was, as is most manifest, that notwithstanding this clause in the mortgage, the mortgagors should, as in fact they did, control the property, sell in their discre- | tion, buy other goods to replenish, receive the | proceeds of sale and appropriate them as they ! saw fit, the suggestion of actual possession and trusteeship becomes absurd; such possession and trusteeship was, at most, a pretense. What Nelson W. Steams did was only to watch the progress of affairs, and as a watchman to observe that the business was regularly conducted agreeably to the obvious intention, viz.: by the bankrupts; they buying and selling and receiving the proceeds under some supervision not very well defined, and not in fact interfering with their actual conduct of the whole business. In this view, there was nothing in this which relieved the transaction from the condemnation first above stated. The ostensible possession and ■the actual possession were in the bankrupts, who were thus held out to the world as the owners of the property. The only alternative possible under this clause of the mortgage, is to treat Nelson W. Stearns as in possession and as trustee for the defendants, holding and controlling the property for their benefit and security. He held the property for them or he did not. If not, then what has been already said applies. If he did, then through and by the aid of the bankrupts he sold and received payment for them in cash, to the amount according to testimony, of between fifty thousand and sixty thousand dollars, a sura more than sufficient to satisfy the whole mortgage debt. If it be nevertheless said, that the bankrupts took the money, and that as among themselves it was competent to permit them to take and use the money, with[542]*542out applying it to the mortgage debt, and so shift the lien from the goods sold to the goods purchased, and thus keep the mortgage alive, this only brings us around again to the exclusion of the idea that the trustee ever had, or was intended to have, any such trusteeship or possession as could add any validity to the ’-mortgages, and they remain liable to the objection that the mortgagors had possession and control, with power to sell and appropriate the proceeds as they saw fit. That Nelson W. Steams was a sort of supervisor or watchman to guard against the carrying off of the property, or its disposal in fraud of the understanding of the parties, does not help the defendants.
Third. Under these views of the rights of the parties and of the validity of the mortgages, how did the delivery or surrender of possession by the bankrupts to the defendants on the 12th of November, 1S70, affect the right of the assignee in bankruptcy. If, as against /creditors, the mortgages and the alleged title of the defendants to the property was fraudulent and void, their taking possession in the mere exercise of their claim of the title would not aid them. Their title remained fraudulent and void still as against creditors. If, on the other hand, the assent of the bankrupts to their taking possession, the delivery of the property and .surrender of the keys were, of themselves, an appropriation of the property to the payment of the mortgage debt, then the bankrupt law pronounces it void for this reason, both parties then knew that the bankrupts were' insolvent; it swept the entire partnership property into the hands of the defendants; it operated, and was clearly intended to operate to give them security and payment to the exclusion of their creditors, and it was within four months next preceding the filing of the petition upon which the defendants were adjudged bankrupts. The defendants can therefore gain nothing from this latter view of the transactions. Nor am I inclined to adopt the last-mentioned construction of the acts done in November. They were, on the part of the defendants, a setting up of their claim to the property, and the acquiescence of the debtors therein, when they supposed resistance would be useless, if not on their part improper. I do not think so ; harsh an effect should therefore be given to j the taking of possession in November. To ; hold it the giving or acceptance of new title to the property, would exclude the defendants from any right to prove their debt against the estate of the bankrupts.
Fourth. It is not then on the ground that these instruments are made void by the bank-rapt law itself, but because they are fraudulent and void as against creditors, and might be set aside at their instance independently of the bankrupt law. that the complainant is entitled to a decree. That an assignee; in bank- ¡ raptcy can set aside such fraudulent conveyance,- and recover property so fraudulently held, is not, I think, doubtful. On general principles, without express words in the act, I should hold the assignee to represent creditors who, after adjudication, can no longer obtain judgments, and so place themselves in the position to attach fraudulent conveyances. But section 14 expressly declares “that all property conveyed by the bankrupt in fraud of his creditors shall be at once vested in such assignee.” The proviso in the 39th section, which requires that the petition of a creditor who asks that a debtor be adjudged a bankrupt against his will, must allege some act of bankruptcy committed within the six months next preceding, does not per se determine what property shall vest in the as-signee.
Suppose the act of bankruptcy alleged be, suffering commercial paper to remain unpaid for more than fourteen days. If the creditors allow six months to pass they cannot make that a ground of adjudication. But on the other hand, if they do proceed in due time and obtain an adjudication, declaring the debt- or a bankrupt, the effect, and the determination of the question what property vests in the assignee, is to be ascertained by the 14th section, as well as the 35th, 39th, and others. It may be that transfers which are otherwise lawful and valid, and which can in no wise be impeached, except upon the ground that they are expressly made acts of bankruptcy by the bankrupt law itself, cannot be impeached by the assignee if they are made more than six months before petition filed. The creditors may in such case be deemed to waive the illegality created by that act, and be not only forever barred to allege that they are acts of bankruptcy, but that they are invalid under that law. Although no transfer made more than six months before the filing of the petition, can be made the ground of adjudicating the debtor a bankrupt, it in no sort follows that when the debtor has upon lawful ground therefor been decreed a bankrupt, the assignee cannot impeach any conveyance and recover any property' which, were there no bankrupt law, the. creditors (having first obtained judgment) might impeach and recover on the ground that it was conveyed or transferred to defraud them. On the contrary, the 14th section expressly, and the general rules of equity, with equal certainty, do permit it.
The mortgages must be declared void, and the defendants must be decreed to account for the property of which they took possession on the 12th day of November, 1870. It-appears that the defendants proceeded from that date to sell from the store, according to the usual course of business, down to the 12th of January, 1S71, at or about which time the petition in bankruptcy was filed, and that they then sold out the residue in gross. I think that justice will be satisfied by charging the defendants with the proceeds of sales made in the exercise of reasonable diligence and discretion, and allowing them just and reasonable expenses of such sales, down to the said 12th day of January, 1S71, and then charging them [543]*543with the fair market value of the property then on hand. As to that final sale, the as-signee should not he concluded hy the fact that they sold out in gross for fifty-five per cent, of the cost, if he can show that the property was worth more.
Let a decree for the complainants he entered in conformity with this view, with costs to the complainant, and let a reference be ordered for the taking of the account.