Engstrom v. De Vos, Civ. A. No. 724.

• Citation: 81 F. Supp. 854
• Decision Date: 05 January 1949
• Docket Number: Civ. A. No. 724.
• Parties: ENGSTROM v. DE VOS.
• Court: U.S. District Court — Eastern District of Washington

81 F. Supp. 854

ENGSTROM v. DE VOS.

Civ. A. No. 724.

United States District Court E. D. Washington, N.D.

January 5, 1949.

COPYRIGHT MATERIAL OMITTED

Eggerman, Rosling & Williams, of Seattle, Wash., for plaintiff.

Hughes & Jeffers and Sam R. Sumner, all of Wenatchee, Wash., for defendant.

DRIVER, Chief Judge.

Plaintiff brought this action as trustee of Northwest Chemurgy Cooperative, a bankrupt corporation, referred to as "Chemurgy" in this opinion, to recover an alleged unlawful preference. The basic facts, as stated in the complaint, which was filed on May 28, 1948, are as follows:

On May 29, 1947, Chemurgy filed a petition for an arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq., but was unable to consummate the proposed arrangement and was adjudicated bankrupt on December 13, 1947. Plaintiff was appointed trustee on January 6, 1948. For at least four months immediately prior to May 29, 1947, Chemurgy was unable to pay its debts in the ordinary course of business and was insolvent within the meaning of the laws of the State of Washington. During that time, it paid to defendant a certain amount upon an antecedent debt. The prayer is for judgment against the defendant in that amount.

As expressly avowed in the complaint, the action is based upon a Washington statute, which provides that within specified limitations, a receiver (defined to include trustee) may recover a preference, made by an insolvent corporation.¹ The limitations are, first, that the preference must occur within four months prior to the date of application for the appointment of the trustee and, second, that the action to recover the preference must be commenced within six months thereafter. Defendant's motion to dismiss challenges the sufficiency of the complaint to show compliance with the statutory limitations. If a claim, upon which relief can be had, has not been made out in accordance with the statute, the motion should be granted.²

The crucial event on which the reckoning of time is based as to both limitations is the filing of the application for the appointment of the trustee. The first inquiry in the present case, then, logically, should be whether the filing of the petition for an arrangement was equivalent to an application for the appointment of the trustee within the meaning of the Washington Act. Section 376, Chapter 11, of the Bankruptcy Act, 11 U.S.C.A. 776, provides that when an original petition for arrangement is filed and the arrangement is not consummated, the court may, without any further pleading, adjudicate the debtor a bankrupt and carry on the bankruptcy proceedings in the usual way. The petition for arrangement, from its inception, serves the purpose of an alternative petition for adjudication. When the arrangement fails of accomplishment, adjudication and subsequent bankruptcy proceedings, including the appointment of a trustee, follow as a matter of course. The petition for arrangement is the only petition, or application, ever filed, pursuant to which the appointment of the trustee is made. In legal effect, it is the same thing as the application for the appointment of the trustee.

The petition was filed herein on May 29, 1947, and the action was not commenced until May 28, 1948. Obviously, it is barred by the requirement of the State statute that it be commenced within six months, if that statute is applicable and is not superseded by some over-riding provision of the Federal Bankruptcy Act.

The plaintiff earnestly urges that the State statute is not applicable because of the following language (italicized for emphasis) of Section 2, namely: "If not otherwise limited by law," an action may be brought by a trustee "in the courts of this state" to recover a preference within but not after six months from the filing of the petition for the appointment of the trustee. The argument is that the action is "otherwise limited" by the general two-year limitation in Section 11, sub. e of the Bankruptcy Act, 11 U.S.C.A. § 29, sub. e, and, furthermore, that the six months' limitation in the State Act, by its terms, is restricted to State court actions and is wholly inoperative in actions prosecuted in the Federal Courts. I do not so construe the State Act. I think that the words, "if not otherwise limited by law," apply only to the affirmative grant of the right to bring the action within the specified time and should not be construed, as plaintiff's argument implies, to mean "unless otherwise extended by law." The statute says that an action to recover a preference may be brought in six months, but the phrase under consideration makes it clear that the grant is not an absolute one and will not sustain an action barred by some other applicable law. It may have been included in Section 2 in order to avoid all possibility of conflict with the provision of Section 3 (Rem.Rev.Stat. 5831 — 6) limiting recovery of preferences to transactions which occurred within four months prior to the application for appointment of the receiver or trustee. The language of Section 2 makes it clear that if the action is barred by Section 3, the affirmative grant in Section 2 will not revive it.

Moreover, I think the language in Section 2 "in the courts of this State," should not be construed as a legislative declaration that if the action to set aside a preference is brought in a Federal Court, or in a court of a foreign state, the six months' limitation does not apply. The statute is a further modification of the trust fund doctrine, a long-standing Washington rule that the assets of an insolvent corporation constitute a trust fund for the benefit of its creditors and that transactions, which prefer one creditor over another, are voidable.³ The Washington Supreme Court had described the doctrine as "our court-made rule."⁴ It was a natural thing for the Legislature, in restricting it, to use the expression, "in the courts of this state". The six months' limitation in Section 2, since it is an integral part of the statute granting the right of action, by a generally accepted rule, is not an ordinary limitation of the remedy, but a limitation of the right, which must be accepted and applied by the courts of any other state where an action to enforce the right may be brought.⁵ It would, indeed, be a violent assumption that the Legislature, by the mere use of the phrase, "in the courts of this state," intended to set aside the well known rule and make its express, special limitation of the right of action, which it had created, operative only in the courts of Washington and not in any other courts.

Plaintiff argues that even if the six months' limitation, set up by the Washington statute, is applicable in Federal Court actions, the limitation, never-the-less, is superseded by Section 11, sub. e of the Bankruptcy Act, 11 U.S.C.A. § 29, sub. e, which provides, in part:

"A receiver or trustee may, within two years subsequent to the date of adjudication or within such further period of time as the Federal or State law may permit, institute proceedings in behalf of the estate upon any claim against which the period of limitation fixed by Federal or State law had not expired at the time of the filing of the petition in bankruptcy."

I think that there is merit in the argument. The language of the section is clear and unambiguous. It specifically authorizes a trustee to bring an action, within two years after adjudication, on a claim which would have expired by State law between the date of the filing of the petition and the date of adjudication. The legislative history of § 11, sub. e, moreover, indicates that such was the intention of Congress.⁶

Prior to the passage of the Chandler Act, 52 Stat. 840, in 1938, Section 11, sub. d of the Bankruptcy Act of 1898, 30 Stat. 544, 549, 11 U.S.C.A. § 29, sub. d, barred actions brought by or against trustees subsequent to two years after the bankrupt estate had been closed. There was a sharp conflict among the courts as to whether it took precedence over State statutes of limitation in cases inherited by the trustee from the bankrupt or from his creditors. One of the main reasons for the enactment of the new Section 11, sub. e, was to settle that conflict by giving the trustee the right to bring any type of action, whether acquired by inheritance or otherwise, within two years after adjudication if the limitation under applicable Federal or State law had not expired at the time of the filing of the petition for adjudication.⁷

Defendant argues, however, that since the six months' limitation is contained in the same State statute, which creates the right of action, compliance with its requirements is a condition precedent to the bringing of the action and that the plaintiff must take the statute with the condition or not at all.

As stated above, the six months' limitation in the State statute is not an ordinary limitation that a defendant may assert as a remedial bar, but is a condition upon the substantive right to recover a preference under the statute. It has, in fact, been so construed by the Washington Supreme Court.⁸ Congress, however, under the Federal Constitution, has the broad power to establish uniform laws on the subject of bankruptcies. U.S.Const., Art. I, Sec. 8, Clause 4. That subject has been defined by the Supreme Court as "the relations between an insolvent or nonpaying or fraudulent debtor, and his creditors extending to his and their relief." Wright v. Union Central Life Ins. Co., 304 U.S. 502, 513, 58 S.Ct. 1025, 1032, 82 L.Ed. 1490. This broad power of Congress, when it comes into conflict with State law, is not limited to the procedural field. It may, and, in practice, frequently does, affect substantive rights as well. The discharge of a debtor directly and vitally affects the substantive rights of his creditors.

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