Bush v. Export Storage Co.

Decision Date11 August 1904
Docket Number808.
Citation136 F. 918
PartiesBUSH et al. v. EXPORT STORAGE CO. et al.
CourtU.S. District Court — Eastern District of Tennessee

[Copyrighted Material Omitted]

Williams & Lancaster and John P. Tillman, for plaintiffs.

Granbery & Trabue, for defendant warehouse companies.

Laurence Maxwell, Jr., for receipt holders.

CLARK District Judge.

This bill is brought by trustees in bankruptcy to have certain warehouse receipts declared invalid and set aside, so far as they are made the basis of a claim to material found on the premises of the bankrupt at the time the bankruptcy proceedings were instituted.

It may be important in this case, in the very outset, to determine the right which the trustees are undertaking to assert and enforce in this case, and the sources from which the trustees derive the right and remedy.

Section 70a of the bankruptcy law (Act July 1, 1898, c. 541, 30 Stat 566 (U.S. Comp. St. 1901, p. 3451)) provides:

'The trustee of the estate of a bankrupt, upon his appointment and qualification, * * * shall * * * be vested by operation of law with the title of the bankrupt, as of the date he was adjudged a bankrupt, * * * to all * * * (5) property which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process against him.'

The trustee, upon his appointment and qualification, is thus vested, by operation of law, without any deed of conveyance, with the title of the bankrupt, 'as of the date he was adjudged a bankrupt. ' In re Engle (D.C.) 105 F. 893; Hewit v. Berlin Machine Works, 194 U.S. 302, 24 Sup.Ct. 690, 48 L.Ed. 986. In relation to a right or title thus derived by operation of law from the bankrupt himself, it is very true, and is well settled, that the trustee takes just such title as the bankrupt had, and no better or greater title, and subject to estoppel and to all liens or equities to which the title was subject in the hands of the bankrupt. Loveland on Bankruptcy (2d Ed.) pp. 367, 368; Hewit v. Berlin Machine Works, supra.

But this proposition, although well settled, does not meet or dispose of the contention here presented, for the right which is asserted by the trustees in the present suit was not derived by operation of law from the bankrupt, and the remedy being pursued is not one which was available to the bankrupt. The right here asserted, and the remedy adopted to enforce that right, passed, by operation of law, not from the bankrupt itself, but from creditors of the bankrupt; and the trustees are undertaking to enforce the right in the interest of the creditors of the bankrupt, and in their right, and not by virtue of any right or remedy which passed, by operation of law, from the bankrupt. And so this suit does not involve those provisions of the bankruptcy statute which vest in the trustee the right to avoid certain defined transfers declared invalid by the bankruptcy act itself, and to recover the property fraudulently conveyed. Transfers which are deemed fraudulent, in bankruptcy, and so declared by the bankruptcy act itself, are, first, conveyances and transfers by which a creditor obtains a preference of his claim over other creditors; second, conveyances which are intended to hinder and delay or defraud creditors; and, third (section 67e, cl.

3, 30 Stat. 564 (U.S. Comp. St. 1901, p. 3449)), transfers void as to creditors under the local law of the several states; but these transfers are prohibited, and authority vested in the trustee to set them aside, only when made within the four-months limitation.

But besides this class of transfers made void by the bankrupt act itself, as being against its policy of equal and fair distribution, the bankruptcy law (section 70a, subsec. 4, 30 Stat. 566), provides that the trustee shall be vested by operation of law with any property transferred by the bankrupt in fraud of his creditors, the precise language of the act being, 'transferred by him in fraud of his creditors. ' There is no four-months limitation on this class of transfers, and this provision includes fraudulent conveyances which are so by the common law, by statute law, and by any other recognized rule of law of the state. Loveland on Bankruptcy (2d Ed.) Sec. 158, and cases cited. Of course, the fraudulent bankrupt is without right to set aside a conveyance made by him in fraud of his creditors. It is valid between the parties, but, by operation of the very terms of the act, the right which before bankruptcy belonged to the creditors passes from them, and is vested in the trustee.

Fraud, actual or constructive, is a necessary element to give the trustee in bankruptcy a right of action; and the trustee may avoid any transfer by the bankrupt of his property which any creditor of such bankrupt might have avoided, and may recover the property so transferred, or its value, from the person to whom it was transferred, unless he was a bona fide holder for value prior to the date of adjudication.

The language of section 70e (30 Stat. 566 (U.S. Comp. St. 1901, p. 3452)) is as follows:

'The trustee may avoid any transfer by the bankrupt of his property which any creditor of such bankrupt might have avoided, and may recover the property so transferred, or its value, from the person to whom it was transferred, unless he was a bona fide holder for value prior to the date of adjudication. Such property may be recovered or its value collected from whoever may have received it, except a bona fide holder for value.'

It is quite obvious enough that the bankruptcy statute has vested in the trustee this comprehensive power to set aside, in favor of creditors, conveyances which the creditors of the bankrupt might have avoided, subject to the qualification or limitation found in section 70e, which provides, in terms, that the trustee 'may recover the property so transferred, or its value, from the person to whom it was transferred, unless he was a bona fide holder for value prior to the date of adjudication. Such property may be recovered or its value collected from whoever may have received it, except a bona fide holder for value. ' (Italics mine.) Loveland on Bankruptcy (2d Ed.) Sec. 158; Crooks v. Stuart (C.C.) 7 Fed. 800; Trimble v. Woodhead, 102 U.S. 647, 26 L.Ed. 290.

It seems open to the trustee, under the above statute, to follow the property fraudulently conveyed, or the proceeds of such property, into the hands of whoever may have received it, until a bona fide purchaser is reached, and that the statute makes this a limit, beyond which the trustee may not go, as the bankruptcy act in this respect re-enacts the exception found in the English statute against fraudulent conveyances (13 Eliz.c. 5). In re Mullen (D.C.) 101 F. 413, at page 416; Lansing Boiler & E. Works v. Joseph T. Ryerson & Son, 128 F. 701, 63 C.C.A. 253; Loveland on Bankruptcy (2d Ed.) Sec. 158, and cases cited.

It may be affirmed to be true, as a general proposition, that under any state system of jurisprudence it is necessary, in order to set aside a conveyance or transfer of property as fraudulent against creditors, that the fraud must have been participated in by the vendee or purchaser as well as the vendor. If there are some exceptions, or apparent exceptions, they are not important. This rule that, to render a transfer or conveyance fraudulent as to creditors, it is necessary that the transferee or vendee should have participated in the fraud, is the law both of Tennessee and Alabama. But however this may be, as I have just said, the creditor's right is passed to and vested in the trustee by operation of the bankruptcy law, subject to the limitation that the right of a bona fide purchaser or holder must not be disturbed or divested. The purpose to guard the rights of a bona fide purchaser or holder is everywhere manifested on the face of the bankruptcy act, as amended by the act of 1903. This protection of the rights of a bona fide purchaser is necessary in order to uphold sound commercial policy and confidence, and to avoid inflicting upon the innocent the unnecessary and harsh disadvantage of frequent and serious loss. The right which the trustee may enforce in a suit like this is such right as the creditor would have had in regard to the same transaction as it stood at the time of filing the petition in bankruptcy, and prior thereto, and is subject to the limitation found in the common law, and expressly declared in the bankruptcy act-- that the transfer may not be set aside, and the property or its value recovered from an innocent purchaser or holder. This is manifestly the doctrine under which the present bill is proceeding and must proceed, and under which the result must be determined.

These preliminary observations have seemed necessary in order to clear away some confusion as to the ground on which the trustee is standing in the assertion of the right here presented, and the remedy which is being pursued under express authority of the bankruptcy statute.

I do not conceive that section 70, subsec. 5, is materially in point in regard to any question here to be considered or decided. That section is concerned only with furnishing a definition and prescribing a test to determine what property shall pass by operation of law from the bankrupt to the trustee, so as to become a part of the estate for administration and distribution among the creditors. Its purpose is to distinguish between what passes and what does not pass, as regards specific property and property rights without regard to the condition of the property-- whether in possession or in action. With reference to its condition the property might be found in adverse possession of a third person, or to have been fraudulently transferred, or under...

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    ...and to proceedings under Section 67e, of the act, in which transfers are declared to be void if made within the time limited ( Bush v. Export Sto. Co., 136 F. 918; Collier Bankruptcy, 11th Ed. p. 1062 and cases), and not to the right of action of the trustee under Section 70e to set aside a......
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