In re Peacock

• Decision Date: 08 March 1910
• Docket Number: 294.
• Citation: 178 F. 851
• Parties: In re PEACOCK.
• Court: U.S. Court of Appeals — Fourth Circuit

178 F. 851

In re PEACOCK.

No. 294.

United States Circuit Court, E.D. North Carolina.

March 8, 1910

[Copyrighted Material Omitted]

W. C Munroe, A. C. Davis, and Robt. G. Grady, for trustee.

Jacob Battle, for creditor.

CONNOR District Judge.

The material facts are: On April 20, 1909, upon petition of certain of his creditors, R. E. Peacock was adjudged an involuntary bankrupt, and after proper proceeding had E. C Cobb appointed and qualified as his trustee. On May 5, 1909, John N. Vaughan, of Norfolk, Va., trading under the firm name and style of Vaughan & Barnes, filed with the referee proof of debt against the estate of the bankrupt. On May 17, 1909, the trustee filed a petition with the referee to expunge the proof of debt and for other relief.

The grounds of the petition are fully set out and may be summarized as follows: That the creditor had received preferences within the four months next immediately preceding the date of filing the petition, and has not surrendered the preferences so received. The trustee sets out in detail the basis of his contention, both for having the proof of debt expunged and the further relief demanded. He prays: (1) That the proof of debt be expunged from the list of claims proved, etc. (2) 'That Vaughan & Barnes be required to surrender to him the proceeds of certain cotton held in trust for the bankrupt, together with any sum that may have been lost by an unauthorized sale thereof.' (3) 'That Vaughan & Barnes be required to pay to him the proceeds of the cotton shipped to them within the four months next preceding the filing of the petition, in excess of advances during that period,' etc. (4) 'For other and further relief,' etc.

The trustee, with permission of the referee, amended his petition by alleging, in addition to the matters set out:

'That Vaughan & Barnes had not sold the 679 bales of cotton which was in their hands at the time of the bankruptcy, and that it was so mixed with other cotton as to be indistinguishable.'

John N. Vaughan filed an answer to the petition, making a special appearance for that purpose, as follows:

'He appears specially and solely to object to the jurisdiction of the court to compel him to answer so much of said petition as is contained in prayers 2, 3, and 4, and not confessing,' etc., 'pleads to the jurisdiction of this court over him as to the said matters just hereinbefore mentioned, and says that this court has not, under the said petition, jurisdiction over this defendant, nor any right under the law to pass upon any of the matters mentioned in the second, third, and fourth prayers of the said petition, but for the purpose solely of sustaining the proof of claim,' etc.

He thereupon proceeds to answer the allegations pertinent to the validity of his claim, etc. The petition and answer came on for hearing upon testimony and argument, when, after giving his view of the law and citing authorities to sustain him, the referee adjudges:

(1) 'That this court has jurisdiction.' (2) 'That the proof of claim of Vaughan & Barnes be and the same is hereby expunged from the list of creditors. ' (3) 'That Vaughan & Barnes pay over to E. C. Cobb, trustee in bankruptcy, the value of Peacock's cotton as of the date of filing his petition against them, to wit, May 17, 1909, computed on the basis of the weights shown on Peacock's book and the prices computed on the basis of the official value of middling cotton on the Norfolk and Portsmouth Cotton Exchange of the same date, May 17, 1909, together with the cost of this action.' (4) 'That after Vaughan & Barnes have complied with article 3 of this ruling it is adjudged that they be allowed to file a new proof of their claim in this matter.'

Vaughan & Barnes duly filed a petition to the judge to review the conclusions and rulings of the referee, assigning errors therein. The record was certified to the judge and heard upon argument of counsel.

The petition is filed pursuant to the provisions of section 57, subsec. 'k' of the bankrupt act (Act July 1, 1898, c. 541, 30 Stat. 561 (U.S. Comp. St. 1901, p. 3444)), and section 6 of rule 21, General Orders in Bankruptcy (89 F. x, 32 C.C.A. xxiii), which provides that:

'When the trustee, or any creditor, shall desire the re-examination of any claim filed against the bankrupt's estate, he may apply by petition to the referee, to whom the case is referred, for an order, for such re-examination and, thereupon, the referee shall make an order fixing the term for hearing the petition, of which due notice shall be given by mail addressed to the creditor. At the time appointed, the referee shall take the examination of the creditor, and of any witnesses, that may be called by either party and if it shall appear by such examination that the claim ought to be expunged, or diminished, the referee may order accordingly.'

Rule 27 (89 F. xi, 32 C.C.A. xxvii) provides that the creditor, or trustee, may by petition have the judge review any order made by the referee, etc.

In his rulings, the referee did not find any facts specifically, but proceeded upon the theory that the cotton in controversy, although in the possession of the creditor, in any point of view, passed by the adjudication into the custody of the court, and that the trustee was entitled to have it turned over to him before the questions in controversy were passed upon, or the creditor permitted to prove his debt for which he claimed the right to hold it as security. Having reached this conclusion, he postponed the decision of all questions raised by the petition and answer until the order in respect to the possession had been complied with. He finds that the cotton had been sold since the adjudication in bankruptcy, and that such sale was unauthorized, and charges the creditor with the value of it as of the date of the petition by the trustee. The creditor having, in due season and by proper plea, raised the question of the jurisdiction of the referee to render any affirmative judgment against him, or to do more than either expunge, diminish, or allow the claim proven, the question of jurisdiction is presented, and must be first disposed of.

The facts, appearing on the record and undisputed, material to the decision of this question, are as follows: Vaughan & Barnes, cotton factors and commission merchants, residing and doing business in Norfolk, Va., have for 18 years made advancements in money, accepting and paying his drafts, to R. E. Peacock, a merchant residing and doing business in Fremont, N.C. He sold goods and made advancements 'on time' to farmers and their tenants, and bought in payment therefor and otherwise, cotton, which he shipped to said Vaughan & Barnes to be held by them and sold on commission, applying the proceeds to the payment of his indebtedness for money advanced. He also deposited with Vaughan & Barnes, as collateral security for such advancements, notes, mortgages, crop liens, etc., taken from his customers for advancements made to them. In regard to the terms upon and the purposes for which the cotton was shipped to and held by Vaughan & Barnes, Peacock says:

'I agreed to ship the cotton covered by crop liens, when the cotton was ready for shipment, to Vaughan & Barnes as security for advances made and for such other advances as might be made from time to time.'

He further says that he regarded the cotton as being under lien to Vaughan & Barnes 'for what he owed them.' It appears that settlements were had for each year's transactions and balances brought forward. During the season of 1908-1909 a large quantity of cotton was shipped and drafts drawn and paid. On March 12, 1909, Peacock made an assignment, which was followed by the proceeding in bankruptcy. At that time Vaughan & Barnes had in their possession, stored in warehouse in Norfolk, 679 bales of cotton shipped by Peacock, who owed, approximately, $37,032.90. Vaughan & Barnes had collateral notes, mortgages, and crop liens of considerable amount, the estimated value of which was about $2,500, and a mortgage on real estate valued at $2,000. The cotton was sold April 28, 1909, for the net sum of $30,909.08, which was credited on account, This, together with the estimated value of the collaterals, left a balance of $2,869.77, including interest to April 29, 1909, being the amount for which proof was filed.

The referee does not pass upon the correctness of the amount, but postpones its consideration until the proceeds of the cotton are paid to the trustee. His conclusion is based upon the proposition, maintained by the trustee, that immediately upon and by virtue of the adjudication all of the property of the bankrupt, wherever situate and in whosesoever possession it may be, passes into the custody of the court, and upon the appointment of the trustee vests in him. This is undoubtedly correct, and is fully sustained by the authorities cited by him and in the brief of counsel for the trustee. It is, however, subject to the limitation that such property so passes and vests 'in the same plight and condition that the bankrupt himself held it and subject to all the equities impressed upon it in the hands of the bankrupt,' or, as is sometimes said by the courts, the trustee, in respect to the property of the bankrupt, 'simply stands in the shoes of the bankrupt and has no greater right than he has. ' York Manufacturing Co. v. Cassell, 201 U.S. 344, 26 Sup.Ct. 481, 50 L.Ed. 782; Bryant v. Swofford Bros., 214 U.S. 279, 29 Sup.Ct. 614, 53 L.Ed. 997. This may be regarded as elementary. Of course, if the bankrupt has made a fraudulent transfer of his property or a voidable preference, the trustee, by appropriate proceedings, may recover it, or its value, to be administered in accordance with the provisions of the act.

The...