Frost v. Latham & Co.

• Decision Date: 20 August 1910
• Docket Number: 2,791.
• Citation: 181 F. 866
• Parties: FROST et al. v. LATHAM & CO. et al.
• Court: U.S. District Court — Southern District of Alabama

181 F. 866

FROST et al. v. LATHAM & CO. et al.

No. 2,791.

United States Circuit Court, S.D. Alabama.

August 20, 1910

Percy Benners & Burr and Rich & Hamilton, for complainants.

Howe Fenner, Spencer & Cocke, for defendants.

TOULMIN District Judge.

The grounds of objections by the defendants to this motion are in substance, as follows: (1) That the original plaintiffs were without legal right or capacity to institute or maintain the bill filed by them herein, or to have the relief prayed for. (2) That the original bill herein did not state or show any right or cause of action in the original plaintiffs. (3) That this court has no jurisdiction of the matters and things in said original bill set forth. (4) That there is no privity of title between said trustee and said complainants, and particularly between said trustee and said Joe T. Gibson, one of the complainants. (5) That this court has no jurisdiction to hear and determine the matters and things set forth in said proposed supplemental bill. (6) That the filing of the supplemental bill would cause a change of interest, in that it would substitute in said suit, instead of parties who had no right of action, a different party, who has such right of action in the matters and things in said original bill contained. (7) That said receivers, parties plaintiff to said original bill, are still necessary parties to this suit.

It is well settled that receivers in bankruptcy have no legal right or capacity to maintain a suit of this character or to have the relief prayed for; and the writer, presiding in the District Court for this district, so ruled in a suit of this character brought by said receivers in that court. This court now holds that said receivers are not necessary or proper parties to this suit.

2. Section 64b(2) of the bankrupt act clearly recognizes the right of a creditor to institute proceedings to recover, for the benefit of the estate of the bankrupt, property transferred by him either before or after filing of the petition, wherein it provides that, when such property shall have been recovered by the efforts and at the expense of one or more creditors, the reasonable expenses of such recovery shall be paid out of the bankrupt estate. While the language employed does not expressly vest in a creditor the right to bring suit to recover such property, it implies that right to exist as clearly as language can do so. And it will be observed that the act makes no distinction as to the character of the transfer, whether it be one involving actual fraud, an intent to hinder, delay, or defraud the creditors of the bankrupt, which the law declares to be null and void, or a constructive fraud, 'an act which the law declares to be fraudulent without inquiring into its motive. ' McBroom v. Turner & Rives, 1 Stew. (Ala.) 72.

A preferential transfer is a constructive fraud. It is one which to some extent hinders and delays creditors, but is not necessarily, in and of itself, a fraudulent transfer. It is, however, 'an infraction of that rule of equal distribution among all creditors which is the policy of the law to enforce when all cannot be fully paid. ' Van Iderstine v. Nat. Dis. Co., 174 F. 519, 98 C.C.A. 300. So, then, it makes no difference whether the transfer be one of actual or of constructive and technical fraud, so far as the interest and rights of creditors are concerned. The effect of the transaction is the same. See, also, section 70e, Bankrupt Act.

'A trustee in bankruptcy represents all persons interested in the estate of the bankrupt. ' In re Bothe, 173 F. 597, 97 C.C.A. 547.

He is the representative of the creditors of the bankrupt, and if he in any given case would have the right as their representative to institute a suit to set aside a fraudulent or preferential transfer, it seems to me it follows as a necessary consequence that such creditors are entitled to do so also, in the absence of a trustee, and to maintain the same until such trustee shall have been chosen, when he would be entitled to become a party plaintiff in the suit. The court, in Fourth St. Nat. Bank v. Millbourne Mills Co., 172 F. 177, 96 C.C.A. 629, said:

'Unless the rights of creditors are preserved and protected in some such way, bankruptcy, instead of being in their (creditors') interest, as supposed, is an actual disadvantage.'

Where the transfer is made fraudulent or voidable by the bankrupt act as against creditors, no trustee having been chosen, the creditors have the right themselves to take steps to avoid such transfer.

'If this be so, any creditor would be entitled to sue on behalf of himself and others, either before or after institution of proceedings in bankruptcy; such suit, if after, being ancillary thereto, no trustee having yet been chosen. ' Guaranty Title & Trust Co. v. Pearlman (D.C.) 144 F. 550; In re Schrom (D.C.) 97 F. 760.

'Creditors may institute suits for the recovery of property fraudulently transferred. ' Remington on Bankruptcy, vol. 1, Sec. 399.

'To recover property conveyed by the bankrupt in fraud of the act, either as a preference or a fraudulent conveyance, is not a proceeding in bankruptcy. It must be a plenary suit at law or in equity, according to the nature of the case. Such suit may be an action at law or suit in equity, as a bill to set aside a fraudulent conveyance. ' Loveland on Bankcy. (2d Ed.) 608; Parker v. Black, 151 F. 18, 80 C.C.A. 484.

The Supreme Court of the United States, in Bardes v Bank, 178 U.S. 524, 20 Sup.Ct. 1000, 44 L.Ed. 1175, employs language which indicates that the court...