NEWMAN
District Judge.
The
question before the court is on a review of the action of the
referee denying the bankrupt the exemption allowed by the
Constitution and statutes of Georgia.
An
involuntary petition in bankruptcy was filed against J. K
Cochran on January 7, 1910. As a part of the schedule filed
by him in this proceeding he claimed the exemption of
$1,442.25. The referee disallowed the exemption of all the
articles claimed except certain household and kitchen
furniture. The report, and supplemental report asked for by
the court, of the referee are as follows:
'Within
the legal time, the trustee, R. J. Ragan, set aside
property to J. K. Cochran, bankrupt, to the amount of
$1,442.25. To this report the trustee filed objections,
alleging that the bankrupt was not entitled to a homestead,
for various reasons, and asking that the trustee's
report be disapproved. A hearing was had and evidence
offered by both the trustee and the bankrupt, in support of
their respective positions, and the case was fully argued
by counsel for both sides.
'After
hearing and considering the case fully, it is ordered that
the objections be sustained, and the report of the trustee
disapproved, except as to one set of bedroom furniture,
valued at $15; one hall tree, $5; one clock, $5; three
rockers, $4; one set of bedroom furniture, $20; one
sideboard, $8; one stove, $15; cooking utensils, $5;
tables, $6; wearing apparel, $20-- making a total of $103.
'The
referee thinks that this property should be allowed the
bankrupt in any event, it consisting of personal effects
and wearing apparel, and coming within the $300 allowed the
bankrupt, and which could not be waived by him in any
event.
'As
to the balance of the property set aside by the trustee to
J. K. Cochran, as before stated, the report of the trustee
is disapproved and the homestead disallowed.
'One
of the main reasons for sustaining the objections raised by
the trustee was a mortgage given by J. K. Cochran to O. F.
Morris, for $1,500, in September, 1909. The bankrupt admitted
that he never got but $60 on said mortgage, and testified on
general examination in effect that it was made and recorded
to deceive his creditors as to his financial condition, and
to save himself from being put in bankruptcy; that is, if the
creditors found that he had any property, that they would put
him into bankruptcy, and he believed that this lien would
demonstrate to his creditors that he had no valuable property
and that it would consequently benefit them nothing to throw
him into bankruptcy.
This,
in the opinion of the referee, was not dealing fairly with
his creditors, and should operate to deny him his homestead.
'There
are a number of other features, taken in connection with this
matter, that have the effect of strengthening the position of
the objecting creditors. One of them is the fact that after
the fire, which destroyed the bankrupt's store and
contents, he collected $1,500 insurance money, and applied
but a small portion of it to the payment of his unsecured
debts, appropriating a large part of it to a note on which
his father was indorser; that he turned over $750 of the
insurance money to his brother, J. W. Cochran, out of which
he paid the note referred to. Out of the other half the
bankrupt claims to have paid some of his unsecured creditors.
'After
taking all the evidence in this case, and analyzing it
carefully, there is no doubt in the mind of the referee that
the bankrupt does not make such a showing as would entitle
him to a homestead under the laws of Georgia.'
'Supplemental
Report.
'On
August 31, 1910, the referee filed his opinion and findings
in this matter, holding and ruling that the bankrupt was not
entitled to his homestead for a number of reasons set out in
the objections to the homestead filed by the creditors. The
referee stressed the two propositions of the Morris mortgage
and the use by the bankrupt of the insurance money; but the
opinion and the finding of the referee was based also on the
other grounds urged by the creditors.
'It
occurs to the referee that it may be well, at the present
time, to give additional reasons for his opinion and finding,
and he therefore submits the following:
'The
entire business transactions of this bankrupt were before
the referee from a period prior to September 13, 1909, at
the time he took his brother, J. W. cochran, into
partnership. The evidence discloses to the satisfaction of
the referee that the bankrupt was insolvent at that time,
and that he was diverting his stock of goods, which had not
been paid for, into his house and lot at Rockmart, and that
he was doing this for the purpose of subsequently
defrauding his creditors.
'Let
it be remembered that under the rule laid down in Re
Waxelbaum (D.C.) 101 F. 228, and other cases, the
bankrupt must come into court with clean hands if he
desires a homestead. Let it also be remembered that under
section 2827 of the Civil Code of Georgia, 1895, a
homestead will not be permitted against the purchase money,
and if it appears from the record, by sufficient evidence,
that the bankrupt, in August and September, 1909, and
subsequently thereto, was insolvent, and that he was
attempting to divert assets in the form of a stock of goods
for which he had not paid into a house and lot, and if his
purpose was to then claim a homestead, the referee is
confident that he does not come into this court with clean
hands, and he finds that the property of the creditors
diverted from the stock of goods into the said real estate
constitutes purchase money under the Georgia statute.
'Was
the bankrupt insolvent in August, 1909, and subsequent
thereto? The referee finds that he was.
'The
bankrupt admits in his examination that for two years he
had never made a financial report when asked for it; that
he would answer, 'You can just put it down if you want
to, but I won't answer any.' The Rockmart Bank
required him to close out his account on August 27th. The
cashier testified: 'His account gradually ran down and
overdrafts, and I told him the bank didn't want his
account. While he had an account there (prior to September,
1909), drafts came on him. He paid some, not all. We
usually returned them.' These are some of the direct
evidences of insolvency; but the entire record discloses to
the satisfaction of the referee, from all the
circumstances, that the bankrupt was insolvent prior to
September, and was constantly attempting to divert his
creditors' goods into a homestead.
'One
of the instances of diverting his property into his
homestead was the following: On September 13, 1909, he sold
a one-half interest of his stock of goods to his brother
and received $600. This $600 he used in paying construction
accounts on the building on which he now claims a
homestead. His
brother was insolvent, but he thereby became a partner, and
this bankrupt again diverted property which should have
been to pay the creditors by turning over $750 of the
insurance money to his brother.
'The
record discloses that he was building his house by
employing men who owed him in the store and settling their
accounts in that way; that he was making contracts for the
purchase of the land, for the construction of the house,
for the purchase of the material, and paying for the same
out of the stock of goods. He said: 'I got the money to
build that house out of the business. I paid for part of
the labor with goods from the store; part of the money to
build the house I got from what people in Temple paid me.
It is true that to a great extent I built the house with
money from goods from the store, and money for which such
goods were sold. I owed for a larger part of the goods that
I turned over to the people constructing my house.'
'The
house set aside in the homestead was paid for with the
insurance money. The 84 bags of cotton seed hulls set aside
in the homestead was paid for from the insurance money. The
notes set aside in the homestead were nearly all of them
for goods sold from the stock, and the stock was not paid
for.
'The
referee finds from the evidence that the payments made for
the house and lot and for the personal property came from
the stock of goods. Under the rule in Re Williams,
114 F. 190, where circumstances of fraud appear, the
referee could not permit a homestead to be set aside in
goods themselves, recently purchased, and which were not
paid for. Under the same rule, the referee is certain that
where the bankrupt has persistently changed his stock of
fresh goods into a house and lot, and into personal
property, that the homestead should be refused.
'It
may be well to call attention to the fact that there are
two different bankruptcy proceedings in this same cause. On
the 7th day of January, 1910, involuntary proceedings were
filed against J. K. Cochran, and he was adjudicated on the
17th day of January, 1910. In making out his schedule, he
claimed a homestead. On the 4th day of April, 1910,
involuntary proceedings were filed against Cochran Bros.,
and they were adjudicated on the 20th day of April, 1910.
General examination on both these proceedings had been had
before the exceptions to trustee's action, setting
aside the homestead, were heard. A great deal of evidence
from these examinations was introduced in the hearing of
this matter. The evidence was voluminous, and only an
abstract brief of material evidence was ever
certified.'
The
referee, in denying the exemption, except as to the household
and kitchen furniture, evidently acted under section 3380 of...
