Bryant's Trustee v. Stephens

• Decision Date: 23 March 1934
• Citation: 253 Ky. 573
• Parties: Bryant's Trustee in Bankruptcy v. Stephens et al.
• Court: United States State Supreme Court — District of Kentucky

253 Ky. 573

Bryant's Trustee in Bankruptcy v. Stephens et al.

Court of Appeals of Kentucky.

Decided March 23, 1934.

1. Bankruptcy. — Trustee in bankruptcy may avoid fraudulent conveyance by bankrupt if creditor could have avoided it under state law (Ky. Stats., secs. 1910, 1911; Bankr. Act. sec. 70e, 11 USCA sec. 110 [e]).

2. Mortgages. — Mortgage of land in Kentucky, where mortgage was acknowledged, delivered, and recorded by mortgagees who lived there, though mortgagor lived in Tennessee where mortgage was made, held governed by Kentucky laws relative to its validity (Ky. Stats., secs. 1910, 1911).

3. Deeds. — Validity of conveyance is determined by the law of state where land lies.

4. Bankruptcy. — Trustee in bankruptcy could maintain action to avoid fraudulent mortgage executed by bankrupt, since trustee is a "person interested" within statute making preferential mortgage by debtor in contemplation of insolvency subject to control of equity courts upon petition of any person interested (Ky. Stats., secs. 1910, 1911; Bankr. Act sec. 70e, 11 USCSA sec. 110 [e]).

Appeal from Whitley Circuit Court.

TYE, SILER, GILLIS & SILER for appellant.

STEPHENS & STEELY for appellees.

OPINION OF THE COURT BY HOBSON, COMMISSIONER.

Reversing.

L.E. Bryant, a resident of Tennessee, filed his voluntary petition in bankruptcy at Knoxville, Tenn., and was adjudged a bankrupt on December 5, 1932. Appellant, H.M. Barnett, was duly appointed and qualified as trustee in bankruptcy of L.E. Bryant's estate. On July 23, 1932, L.E. Bryant had executed a mortgage to the appellee E.L. Stephens and Nellie C. Steely on a large acreage owned by him in Kentucky, to secure the payment of ten past-due notes for $9,086. The mortgage was recorded in Whitley county on July 25, 1932, and was again recorded on October 3, 1932. The reason for this was that Bryant, in Scott county, Tenn., had on July 25, 1932, acknowledged the mortgage before a notary public in Williamsburg, Ky., over the telephone. On January 18, 1933, Barnett as trustee in bankruptcy for L. E. Bryant, brought this action against E.L. Stephens and Nellie C. Steely, alleging that the mortgage executed to them by Bryant was fraudulent and made with the design to prefer one or more creditors, in whole or in part, to his other creditors, and with the intent to delay, hinder, and defraud his other creditors; that at the time he was absolutely insolvent and unable to pay his debts; and that the making of the mortgage was done by him for the purpose of giving preference to said mortgagees over his creditors. He prayed that the mortgage be adjudged preferential under the statute and all proper relief. The defendant filed a special demurrer to the petition on the ground that the plaintiff had no legal capacity to sue, and that the Bankruptcy Act (11 USCA) is exclusive and supersedes all state acts touching insolvency and bankruptcy. The circuit court sustained the special demurrer to the petition and dismissed the action. The plaintiff appeals.

Section 70e of the Bankruptcy Act (11 USCA sec. 110 (e), provides:

"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 date of the adjudication. ***

"For the purpose of such recovery any court of bankruptcy as defined in this title, and any State court which would have had jurisdiction if bankruptcy had not intervened, shall have concurrent jurisdiction."

Under this provision the following rule is well settled:

"If a creditor could have avoided a fraudulent conveyance under the state law, the trustee in bankruptcy may also avoid it. Stellwagen v. Clum, 245 U.S. 605, 38 S. Ct. 215, 62 L. Ed. 507; Campbell v. Calcasieu National Bank (C.C.A.) 12 F (2d) 981."

In the late case of Collett v. Adams 249 U.S. 545, 39 S. Ct. 372, 374, 63 L. Ed. 764, the rule was thus stated:

"The amendments are couched in plain words and effect a material change in the jurisdiction of suits by trustees to avoid preferential transfers and recover the property or its value under section 60b [11 USCA sec. 96 (b)]. The exception ingrafted on section 23b [11 USCA sec. 46 (b)] takes such suits out of the restrictive provisions of that section; the sentence added to section 60b makes them cognizable in the courts of bankruptcy, as well as in such state courts as could have entertained them if bankruptcy had not intervened."

Sections 1910 and 1911, Kentucky Statutes (known as the act of 1856), provide:

"Every sale, mortgage or assignment made by debtors, and every judgment suffered by any defendant, or any act or device done or resorted to by a debtor, in contemplation of insolvency, and with the design to prefer one or more creditors to the exclusion, in whole or in part, of others, shall operate as an assignment and transfer of all the property and effects of such debtor, and shah inure to the benefit of all his creditors. ***

"All such transfers as are herein declared to inure to the benefit of creditors generally shall be subject to the control of courts of equity, upon the petition of any person interested, filed within six months after the mortgage or transfer is legally lodged for record, or the delivery of the property or effects transferred."

Under these statutes this court thus stated the rule in Finan v. Finan's Trustee, 247 Ky. 659, 57 S.W. (2d) 644:

"Section 1910, Kentucky...