Davis v. Gates

• Decision Date: 08 June 1916
• Docket Number: 180.
• Parties: DAVIS v. GATES. In re GATES.
• Court: U.S. District Court — Middle District of Pennsylvania

235 F. 192

DAVIS v. GATES.

In re GATES.

No. 180.

United States District Court, M.D. Pennsylvania.

June 8, 1916

Clarence D. Coughlin and G. Fred Lazarus, both of Wilkes-Barre, Pa for plaintiff.

Thomas D. Shea, of Nanticoke, Pa., and Frank McCormick, of Wilkes-Barre, Pa., for defendant.

BRADFORD District Judge.

The bill in this case was filed October 28, 1913, by B. W. Davis trustee of the estate of Charles B. Gates, a bankrupt, and seeks to have a certain deed of real estate bearing date February 1, 1912, executed by Charles B. Gates, prior to his bankruptcy, to Loretta Gates, the defendant, declared fraudulent as against his creditors and set aside and annulled, and to have the defendant ordered and decreed among other things, to execute and deliver to the plaintiff a deed of conveyance of the real estate, so far as undisposed of, fraudulently transferred to her as alleged, and have an accounting by her to the plaintiff for all moneys received by her from the sale of any portion or portions of the real estate so transferred to her by the bankrupt. In the answer as amended the jurisdiction of this court over this proceeding is challenged on the ground that the deed in question was executed more than four months prior to the filing of the petition in bankruptcy and the defendant has not 'consented in any form or manner to the bringing of this action. ' This position is untenable. The bill is founded on section 70a, section 70e and section 23b of the Bankruptcy Act (Comp. St. 1913, Secs. 9607, 9654). Section 70a provides that the trustee upon his appointment and qualification shall be vested with the title of the bankrupt as of the date of the adjudication to '(4) property transferred by him in fraud of his creditors. ' Section 70e is as follows:

'e. 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 the adjudication. Such property may be recovered or its value collected from whoever may have received it, except a bona fide holder for value. For the purpose of such recovery any court of bankruptcy as hereinbefore defined, and any state court which would have had jurisdiction if bankruptcy had not intervened, shall have concurrent jurisdiction.'

Section 23b is as follows:

'Suits by the trustee shall only be brought or prosecuted in the courts where the bankrupt, whose estate is being administered by such trustee, might have brought or prosecuted them if proceedings in bankruptcy had not been instituted, unless by consent of the proposed defendant, except suits for the recovery of property under section sixty, subdivision b, and section sixty-seven, subdivision e, and section seventy, subdivision e.'

Section 23b as originally enacted concluded with the words 'unless by consent of the proposed defendant. ' The words 'except suits for the recovery of property under section sixty, subdivision b, and section sixty-seven, subdivision e,' were added by way of amendment February 5, 1903. But it was not until 1910 that the further words 'and section seventy, subdivision e,' were added. This suit is not under section 60b or section 67e, and therefore, had it been brought prior to the amendment of 1910, it could not have been maintained without the consent of the defendant. Having been instituted after that amendment, however, it not only appears from the face of the statute, but is to be gathered from the cases, that consent by the defendant was not necessary to the maintenance of the suit. But were it otherwise, the defendant clearly has consented. The bill was filed October 28, 1913, and she, without objecting in any manner, appeared generally November 13, 1913, and about the same time through her solicitor entered into a stipulation for an extension of time for filing her answer, and thereafter filed the same November 17, 1913. All this was done by her without objection or any manifestation of dissent on her part. She must, therefore, under the authorities, be held to have consented to the bringing of this suit against her. She cannot avail herself of her objection made for the first time February 18, 1915. Having consented, it was then too late to object.

An objection has been taken to the jurisdiction of this court over this suit on the ground that there is a complete and adequate remedy at law; but, in view of the character of the suit and the nature of the relief sought, this contention is clearly without merit.

It is further contended by the defendant that the bill cannot be sustained for the reason that she is not charged in the pleadings to have been a participant in the fraud alleged against the bankrupt, Charles B. Gates, her son. The bankrupt became such September 23, 1913, on his own petition, and the deed assailed as fraudulent was executed either in February or in May, 1912. Under these circumstances it is undoubtedly true that if the defendant accepted the deed from him for a valuable and adequate consideration moving from her and was not a party to and was wholly innocent of any fraud intended or practised by him against his creditors, then or thereafter existing, it would be necessary to dismiss the bill. The bill alleges that 'the conveyance aforesaid of the bankrupt to the defendant was voluntary and was without consideration'; that at that time 'the bankrupt was engaged in or was about to engage in a hazardous business'; that the plaintiff verily believed and expected to be able to prove that the defendant 'is not an innocent purchaser for value of said estate of Charles B. Gates, bankrupt, and that the transfer of said interest unto the defendant by the bankrupt was fraudulent and was made with an intent to hinder, delay and defraud the creditors of the said Charles B. Gates, then existing, as well also as all subsequent creditors'; and that the deed in question transferred 'all of the bankrupt's right, title, and interest in all of the property, real or otherwise, situated in Luzerne County, said district, devised and bequeathed and which the said bankrupt inherited in and under the wills of his grandfather, John R. Gates, and his grandmother, Mary A. Gates.' But while the bill charges fraud against the bankrupt, it nowhere alleges that the conveyance was procured or received by the defendant with an intent or understanding on her part that creditors should thereby be defrauded. To justify the setting aside of the deed there must have been fraud on the part of the grantor participated or acquiesced in by the grantee. Gottlieb v. Thatcher, 151 U.S. 271, 14 Sup.Ct. 319, 38 L.Ed. 157; Horbach v. Hill, 112 U.S. 144, 148, 5 Sup.Ct. 81, 28 L.Ed. 670; Jones v. Simpson, 116 U.S. 609, 6 Sup.Ct. 538, 29 L.Ed. 742; Lloyd v. Williams, 21 Pa. 327; Reehling v. Byers, 94 Pa. 316; Knower v. Cadden Clothing Co., 57 Conn. 202, 17 A. 580. Fraud is not to be presumed. Not only must it be satisfactorily proved, but particularly alleged. Not having been charged against the defendant, on the pleadings as they now stand there could be no decree against her. Notwithstanding the omission to plead fraud on her part no exception or objection was during the production of evidence taken or made by her on that ground, and both parties have gone into evidence on the subject of the existence or non-existence of fraud as fully to all intents and purposes as if fraud had been properly charged against her; and if the proofs clearly show fraud on her part in the transaction the exercise of sound judicial discretion should require that leave be granted the plaintiff to so amend the bill as to make it harmonize with the case as made on the evidence, to the end that a decree may be made in accordance with the merits.

The broad question involved is whether on the evidence and the principles of equity as administered by this court and by the courts of Pennsylvania the deed bearing date February 1, 1912, should be permitted to stand as against the trustee in bankruptcy. But aside from this central question a number of points have been raised in the case, to some of which reference has been or will be made.

It is urged in behalf of the defendant that no decree can be made against her as it has not been affirmatively shown that, if she was guilty of fraud, injury has thereby resulted to the plaintiff or any creditor or creditors represented by him. It is a general rule that a decree setting aside a fraudulent conveyance will not be made at the instance of those who have suffered or will suffer no injury from the fraud. But the cases establishing the rule have no application here. The plaintiff is trustee in bankruptcy of the grantor in the deed, and an essential ground or condition of the adjudication is the existence of insolvency on the part of the bankrupt. Section 1a, cl. 15 (Comp. St. 1913, Sec. 9585), defines insolvency as follows:

'A person shall be deemed insolvent within the provisions of this act whenever the aggregate of his property, exclusive of any property which he may have conveyed, transferred, concealed, or removed, or permitted to be concealed or removed, with intent to defraud, hinder or delay his creditors, shall not, at a fair valuation, be sufficient in amount to pay his debts.'

It is therefore, to be assumed in the absence of proof to the contrary that the trustee as representing creditors has been injured by a conveyance executed by the bankrupt in fraud of his creditors. It is not necessary that the extent to which he has been so injured should be equal to the entire value of the property conveyed. Section 70a provides that a trustee upon his appointment and...