In re Bailey

• Decision Date: 21 February 1910
• Docket Number: 1,254.
• Citation: 176 F. 990
• Parties: In re BAILEY.
• Court: U.S. District Court — District of Utah

176 F. 990

In re BAILEY.

No. 1,254.

United States District Court, D. Utah.

February 21, 1910

Joseph Chez, for bankrupt.

Agee &amp McCracken, for petitioning creditors Florence H. Bailey Florence J. Hearst, and Ethel L. Turner.

A. E Pratt, for First Nat. Bank of Ogden.

C. R Hollingsworth, for trustee.

MARSHALL District Judge.

The bankrupt was entitled to a homestead exemption in the amount of $2,000. He owned two parcels of land each of the value of $1,250, and claimed his exemption in the entirety of parcel No. 1, and the further sum of $750 of the value of parcel No. 2. Within four months next preceding the filing of the petition in bankruptcy, he had executed a mortgage of parcel No. 2 to his wife, Florence H. Bailey, and to Florence J. Hearst and Ethel L. Turner to secure a pre-existing debt of $600 and interest, and with intent to unlawfully prefer those creditors. The mortgagees proved their claim as general creditors, and tendered a release of the mortgage, admitting the unlawful preference. Their claim was approved by the referee. Subsequently, a general creditor, and also the trustee, filed petitions with the referee to re-examine this claim, and asked that its allowance should be vacated; and that the value of the security should be credited on the claim to the extent of the exempt property mortgaged, or else that the trustee, for the benefit of the general creditors, should be subrogated to the rights of the mortgagee with respect to the exempt property, as a condition to the allowance of the claim as unsecured. The referee denied these petitions; and the present petitions for review seek a reconsideration of his action.

Since the trustee acted in the matter, it is unnecessary to consider whether a general creditor whose rights were not exceptionally affected could ask the re-examination of this claim. Certain principles of law applicable to this situation are beyond dispute, and may be stated briefly. The title to the homestead property did not pass to the trustee. The fact that it was mortgaged to certain creditors did not make it assets to be administered in bankruptcy. Lockwood v. Exchange Bank, 190 U.S. 294, 23 Sup.Ct. 751, 47 L.Ed. 1061; In re Nye, 133 F. 33, 66 C.C.A. 139. The surrender of the preference contemplated by section 57, subd. 'g,' of the Bankruptcy Act (Act July 1, 1898, c. 541, 30 Stat. 560 (U.S. Comp. St. 1901, p. 3443)), must be a surrender to the trustee and not to the bankrupt or to any other person. In re Currier, Fed. Cas. No. 3,492, 2 Lowell, 436. A mortgage constituting an unlawful preference, where it includes both exempt and nonexempt property, is only voidable by the trustee as to the nonexempt property, and remains a valid mortgage as to the exempt property. In re Tollett, 106 F. 866, 46 C.C.A. 11, 54 L.R.A. 222; Vitzthum v. Large (D.C.) 162 F. 685; In re Eash (D.C.) 157 F. 996. It follows that the mortgage in question was not required to be released so far as the exempt property was concerned as a condition to the proof of claim on the debt secured by it, but it was necessary to surrender it so far as the assets of the bankrupt were a fund for creditors.

The question presented by the petitions for review may then be considered as if the mortgage creditor had only surrendered all claims under their mortgage to priority in the distribution of the bankruptcy estate, but had preserved their mortgage in respect to the exempt property. Under this state of facts, were they to be considered as secured creditors and only entitled to be paid a dividend on the unpaid balance after converting the security held by them and crediting the proceeds on their debt under the provisions of section 57, subd. 'h,' of the Bankruptcy Act. Section 1(23) of the act defines 'secured creditors' as follows:

''Secured creditors' shall include a creditor who has security for his debt upon the property of the bankrupt of a nature to be assignable under this act, or who owns such a debt for which some indorser, surety, or other persons secondarily liable for the bankrupt has such security upon the bankrupt's assets.'

As the exempt property was not of a nature to be assignable under the act, it follows that these creditors, after the surrender of their unlawful preference, were not secured creditors, as the term is there used. There is no express provision of the act which precluded them from proving their entire claim as unsecured creditors against the bankrupt's estate. But it is argued that the equitable principle of marshaling is applicable; that the mortgage creditors had a right to resort to two funds for a satisfaction of their claim, while the general creditors are restricted to the one, and hence, the former will either be required to first exhaust the fund applicable to their debt alone before resorting to the other or, the general creditors will be subrogated to their right as to such fund. The rule of marshaling rests on equitable principles and will only...