Davis v. Michigan Trust Co.

• Decision Date: 11 November 1924
• Docket Number: No. 4028.,4028.
• Citation: 2 F.2d 194
• Parties: DAVIS, Director General of Railroads, v. MICHIGAN TRUST CO.
• Court: U.S. Court of Appeals — Sixth Circuit

2 F.2d 194 (1924)

DAVIS, Director General of Railroads, v. MICHIGAN TRUST CO.

No. 4028.

Circuit Court of Appeals, Sixth Circuit.

November 11, 1924.

George Douglas Clapperton, of Grand Rapids, Mich. (Clapperton & Owen, of Grand Rapids, Mich., on the brief), for appellant.

W. Devere Bryant, of Grand Rapids, Mich. (Knappen, Uhl & Bryant, of Grand Rapids, Mich., on the brief), for appellee.

Before DENISON and MACK, Circuit Judges, and SATER, District Judge.

MACK, Circuit Judge.

This is an appeal from the decree of the District Court denying priority to the claim filed by the Director General for freight, demurrage, and switching charges, in the distribution of the assets in the hands of the receiver in equity of the Rathbone Manufacturing Company.

The receiver had been appointed, with the consent of the company, on the usual creditor's bill, alleging the inability of the company to pay its liabilities in due course. The bill did not allege insolvency in the bankruptcy sense; on the contrary, it alleged, on information and belief, that the going concern value of the defendant's assets exceeded the amount of its liabilities, and that, if the assets of the company were properly handled and conserved by a receiver, creditors could probably be paid in full, with a possible surplus for stockholders. It is now admitted by stipulation that at the time of the appointment of the receiver the company was in fact insolvent in the bankruptcy sense, in that the aggregate of its property and assets at a fair valuation was then insufficient in amount to pay its debts; it is not admitted or shown, however, that at that time either the company or the plaintiff creditor knew of such insolvency.

The claim of the Director General for priority is based upon section 3466 of the United States Revised Statutes (Comp. St. § 6372), which reads as follows:

"Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or administrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; and the priority hereby established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed."

In U. S. v. Oklahoma, 261 U. S. 253, 43 S. Ct. 295, 67 L. Ed. 638, the state bank commissioner had taken over assets of a bank under a state law permitting such action if he should become satisfied of its insolvency in the sense of its inability to pay its depositors in ordinary course of business, and to continue as a going banking concern. The Supreme Court, in denying the claim of the government for priority in the payment of the assets in the hands of the bank commissioner, said:

"Section 3466, relied on by the government, is a re-enactment and extension of section 65, Act of March 2, 1799, 1 Stat. 676; and the same or equivalent language, so far as the question here involved is concerned, is found in earlier statutes. Act of March 3, 1797, c. 20, § 5, 1 Stat. 515; also, Act of May 2, 1792, c. 27, § 18, 1 Stat. 263; Act of August 4, 1790, c. 35, § 45, 1 Stat. 169; Act of July 31, 1789, c. 5, § 21, 1 Stat. 42. It has been considered in a number of cases in this court. The claim of the United States to the asserted priority rests exclusively upon the statute. No lien is created by it. It does not overreach or supersede any bona fide transfer of property in the ordinary course of business. It establishes priority, which is limited to the particular state of things specified. The meaning of the word `insolvent,' used in the act, and of the insolvency therein referred to, is limited by the language to cases where `a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment,' etc. Mere inability of the debtor to pay all his debts in ordinary course of business is not insolvency, within the meaning of the act, but it must be manifested in one of the modes pointed out in the latter part of the statute, which defines or explains the meaning of insolvency referred to in the earlier part. United States v. State Bank of North Carolina, 6 Pet. 29, 35; United States v. Fisher, 2 Cranch, 358, 390; United States v. Hooe, 3 Cranch, 73, 90; Prince v. Bartlett, 8 Cranch, 431, 433; Conard v. Atlantic Insurance Co., 1 Pet. 386, 439; Brent v. Bank of Washington, 10 Pet. 596, 611; Field v. United States, 9 Pet. 182, 201. Where the debtor is divested of his property in one of the modes specified in the act, the person who becomes invested with the title is made trustee for the United States, and bound first to pay its debt out of the debtor's property. Beaston v. Farmers' Bank of Delaware, 12 Pet. 102, 133-135. * * *

"The facts set forth in the complaint do not constitute an act of bankruptcy as defined by the federal Bankruptcy Act (section 3a). There is not alleged any conveyance to defraud, or preference through transfer or through legal proceedings, or general assignment for the benefit of creditors. Nor is the case within the meaning of the last clause of section 3a (4), `or because of insolvency a receiver or trustee has been put in charge of his property under the laws of a state. * * *' The allegations do not show insolvency, within the meaning of section 3466 or of the Bankruptcy Act. * * *

"As insolvency, within the meaning of section 3466, was not necessary for the taking of possession by the bank commissioner, and is not shown to exist, and as no act of bankruptcy as defined by applicable federal legislation on the subject of bankruptcies, or as defined by any law of Oklahoma, is shown to have been committed, and as the debtor bank was not divested of its assets in one of the modes specified in section 3466, the case is not within that section."

We proceed to a consideration of the questions raised or suggested by this record:

First. Does the phrase, "because of insolvency," as used in the amendment of February 5, 1903, to section 3a (4) of the Bankruptcy Act (Comp. St. § 9587), require that the appointment of a receiver in an ordinary creditor's suit be made solely, or at least in part, on the ground of a then existing insolvency, as defined in the Bankruptcy Act (Comp. St. §§ 9585-9656), or does it suffice for the act of bankruptcy that such insolvency as so defined then exist irrespective of whether or not the appointment of the receiver was based thereon?

Prior to the amendment by which the lasts clause of subdivision 4 of section 3a was added thereto, this court held in Vaccaro v. Security Bank of Memphis, 103 F. 436, 43 C. C. A. 279 (see, too, 1 Collier, Bankruptcy 13th Ed. p. 164, and cases cited), that the appointment of a receiver for an insolvent corporation was not equivalent to the making of "a general assignment for the benefit of creditors," the only act of bankruptcy then specified in subdivision 4. The authorities are in conflict in their construction of the amendment. The earlier cases deem it essential that the appointment be based in whole or in part upon such insolvency. In re William S. Butler & Co., 207 F. 705, 125 C. C. A. 223 (C. C. A. 1); In re Valentine Bohl Co., 224 F. 685, 140 C. C. A. 225 (C. C. A. 2). The later cases, however, consider the act of bankruptcy established by proof that the debtor was in fact insolvent, as defined in the Bankruptcy Act, at the time of the appointment of a receiver, even though the order of appointment was made pursuant to allegations and findings of insolvency, not as so defined, but in the sense that the debtor was unable to pay his obligations in due course. Davis v. Pullen, 277 F. 650 (C. C. A. 1); Davis v. Miller-Link Lumber Co., 296 F. 649 (C. C. A. 5); Hilb v. American Smelting & Refining Co. (D. C.) 275 F. 384; Re Sedalia Farmers' Co-operative Packing & Produce Co. (D. C.) 268 F. 898. These cases stress the argument that to hold otherwise would practically annul the amendment; for, inasmuch as it is ordinarily and usually unnecessary and uncommon, in a creditor's bill, to allege more than the debtor's inability to pay his obligations as they mature, and the need of a receiver to conserve the assets, such appointments are rarely, if ever, based upon a finding of insolvency, as defined in the Bankruptcy Act. United States v. Oklahoma, supra, is not decisive of this conflict, for in that case insolvency, within the Bankruptcy Act, was "not shown to exist."

We find it unnecessary in the instant case to decide this question, because, assuming the interpretation of this clause of section 3a (4), as held in the later cases, to be correct, we come to the consideration of a second question, namely:

Second. By the phrase, "cases in which an act of bankruptcy is committed," in R. S. § 3466, is the assertion of the government's claim to priority over other creditors limited, in addition to proceedings in which by action of the state, through insolvency or analogous laws, a debtor is divested of his property, for its distribution to his creditors, to those under a federal Bankruptcy Act, when such exists, or does it extend as well to equity proceedings wherein a receiver has been appointed in circumstances sufficient to make such appointment an act of bankruptcy, even though no creditor has availed himself thereof within the time limit — four months, by section 3b of the Bankruptcy Act now in force — to throw the debtor into actual bankruptcy under a petition wherein the appointment of such receiver is alleged as the, or one of the, acts of bankruptcy committed?

Again there is conflict in the authorities. In Davis v. Pullen, supra, and Davis v. Miller-Link Lumber Co., su...