Davis v. Pullen, 1527.

• Citation: 277 F. 650
• Decision Date: 06 January 1922
• Docket Number: 1527.
• Parties: DAVIS, Director General of Railroads, v. PULLEN et al.
• Court: U.S. Court of Appeals — First Circuit

277 F. 650

DAVIS, Director General of Railroads, v. PULLEN et al.

No. 1527.

United States Court of Appeals, First Circuit.

January 6, 1922

Arthur W. Blackman, of Boston, Mass., for appellant.

H. C Dunbar, of Boston, Mass., for appellee.

Before BINGHAM and ANDERSON, Circuit Judges, and BROWN, District judge.

ANDERSON Circuit Judge.

On April 29, 1918, on a so-called creditors' bill, alleging solvency, but temporary embarrassment, a receiver was, with the defendant's assent, appointed to take possession of the assets of the D'Arcy & Sons Company, with general power to carry on the business as a going concern until further order of the court. The bill, although alleging solvency, prayed that the debts might be established and be ordered 'to be paid out of the assets of the respondent corporation, or that the assets of the respondent corporation may be equitably applied as the court may direct in satisfaction thereof.'

As usual, the attempt through an equity receivership to save the business as a going concern failed; liquidation was found necessary, and certain disputed claims referred to a master. The master found the corporation indebted in the aggregate amount of about $1,400 (details are not here important) for freight transportation furnished on the New York, New Haven &amp Hartford Railroad, Boston & Albany Railroad, and Boston &amp Maine Railroad. These claims all, except for a negligible amount, arose between January 1 and March 21, 1918.

The Director General of Railroads contended that these claims were entitled to priority under R.S. Sec. 3466 (Comp. St Sec. 6372), as debts due the United States.

The master ruled that they were debts due the United States, that the appointment of a receiver did not constitute an act of bankruptcy, and that therefore these claims were not debts due the United States from an insolvent person within the meaning of section 3466. He also found that when the bill was filed, the respondent corporation was and at all times subsequent thereto had been insolvent, in that the aggregate of its property at a fair valuation was not sufficient to pay its debts; that neither the complainant nor the respondent, when the bill was filed, knew that the corporation was insolvent, but believed it to be solvent; and that the receiver was not appointed because of the insolvency of the respondent corporation.

The District Court confirmed both rulings-- that the claims constituted debts due the United States, and that they were not entitled to priority.

The case comes here on the appeal of the Director General, contending that the court below erred: (1) In confirming the master's report; (2) in ruling that the defendant had committed no act of bankruptcy; and (3) in denying priority.

1. It may be doubted whether such assignments of error bring here the ruling as to these claims being debts due the United States. But both counsel have argued the case on the theory that that question is properly here. Under such circumstances, we may as well say that we have no doubt that that ruling of the District Court was correct. In that respect we accord with the view of the Circuit Court of Appeals for the Seventh Circuit in In re Hibner Oil Co., 264 F. 667, 14 A.L.R. 629. See also Northern Pacific R.R. v. North Dakota, 250 U.S. 135, 39 Sup.Ct. 502, 63 L.Ed. 897, where the statutes and proclamations as to federal control of railroads are in large part set forth. Missouri Pacific R. Co. v. Ault, 256 U.S. . . ., 41 Sup.Ct. 593, 65 L.Ed. . . . .

It seems to us plain that when, in the exercise of the war powers, the government found it necessary to take over the railroads as transportation systems, they were taken over as going concerns, including, of course, sums due and daily becoming due for transportation furnished, as well as the cash and other quick assets absolutely essential for daily use in carrying on an enormous business for the war. Without such quick assets as working capital, until Congress had legislated and provided a revolving fund with an appropriation of $500,000,000, it would have been almost impossible for the President to have operated the railroads as a going business. Compare Northern Pacific Ry. v. North Dakota, 250 U.S. 135, 148, 39 Sup.Ct. 502, 63 L.Ed. 897; United States v. Kambeitz (D.C.) 256 F. 247; Haubert v. B. & O.R. (D.C.) 259 F. 361; Biscoe v. Tax Com., 236 Mass. 201, 128 N.E. 16.

2. A more difficult question is whether the District Court, affirming the master, was correct in holding that these claims, though debts of the United States, were not entitled to priority, because the present proceeding is not a bankruptcy or insolvency proceeding within the meaning of section 3466, which is 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 effect, the District Court held that, as such appointment of a receiver was not an act of bankruptcy within the meaning of the Bankruptcy Act of 1898, being Comp. St. Secs. 9585-9656 (In re William S. Butler & Co., Inc., 207 F. 705, 125 C.C.A. 223), the priority statute was not applicable.

In support of this contention, reliance is placed on such cases as Prince v. Bartlett, 8 Cranch, 431, 3 L.Ed. 614, the headnote of which reads:

'In case of insolvency, the United States are not entitled to priority of payment, unless the insolvency be a legal and known insolvency, manifested by some notorious act of the debtor, pursuant to law.'

The same general proposition is more elaborately stated by Chief Justice Shaw in Commonwealth v. Phoenix Bank, 11 Metc. (Mass.) 129, 151:

'It is established by a series of authorities that insolvency alone, incapacity to pay all the debts which the debtor owes, is but one circumstance only to bring the case within the statute. It must be insolvency, accompanied with the circumstance that there has been a general assignment by the voluntary act of the debtor, or a legal bankruptcy or insolvency. It is not sufficient that a debtor is incapable of paying his debts, and that the winding up of his affairs is effected, in whole or in part, by legal proceedings. Under the attachment laws of Massachusetts, the whole of a debtor's property might be attached at the suits of various creditors, and be insufficient to satisfy all his debts. It might be sold and converted into money, in a course of legal proceedings, by the sheriff, and the whole of the money, thus in the custody of the law, be paid out to creditors, and yet the United States can assert no priority.'

In Beaston v. Bank, 12 Pet. 102, 9 L.Ed. 1017, decided in 1838, it was held that a prior attachment by a private creditor could not be defeated by a subsequent attachment by the United States. The court said:

'From the language employed in this section, and the construction given to it, from time to time, by this court, these rules are clearly established: First, that no lien was created by the statute: secondly, the priority established can never attach while the debtor continues the owner and in the possession of the property, although he may be unable to pay all his debts: thirdly, no evidence can be received of the insolvency of the debtor, until he has been divested of his property in one of the modes stated in the section: and, fourthly, whenever he is thus divested of his property, the person who becomes invested with the title, is thereby made a trustee for the United States, and is bound to pay their debt first out of the proceeds of the debtor's property. United States v. Fisher, 2 Cranch, 358; United States v. Hooe, 3 Cranch, 73; Prince v. Bartlett, 8 Cranch, 431; Conard v. Atlantic Insurance Company, 1 Pet. 439; Conard v. Nicoll, 4 Pet. 308; Brent v. Bank of Washington, 10 Pet. 596.'

But it does not, we think, follow that the priority statute can be construed as limited to cases of technical statutory bankruptcy under the act of 1898; for when we look into the history of the Priority Act, we find that, when enacted substantially in its present form as early as 1797, there was no Bankruptcy Act. Indeed, the statute in many of its material provisions harks back to the Act of July 31, 1789, c. 5, Sec. 21, 1 Stat. 42, passed by our very first Congress.

Now, as there were no Bankruptcy Acts at that time, we are necessitated to put some sensible construction upon the words 'insolvent' and 'bankruptcy' as used in this statute.

Compare United States v. Clark, Fed. Cas. No. 14,807, 1 Paine, 629, 640, where it was said by Mr. Justice Thompson: 'There is no difficulty in the construction of the act until we arrive at the last phrase 'legal bankruptcy.' What is 'legal bankruptcy'? In 1797, when the act of Congress was passed, we had no bankrupt law; and therefore these words can have no reference to bankruptcy under a bankrupt law. The words seem in their connection to have reference to the previous cases put in the section, and to point out some legal insolvency or some mode of proceeding by which the property of the debtor is taken out of his hands and to be distributed by others.'

Moreover, in Prince v. Bartlett, supra (1814), relied upon by the appellee, the court said:

'At present there is no existing bankrupt law in the United States; but in many of

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