In re Downing

• Decision Date: 05 January 1912
• Citation: 192 F. 683
• Parties: In re DOWNING.
• Court: U.S. District Court — Northern District of New York

192 F. 683

In re DOWNING.

United States District Court, N.D. New York.

January 5, 1912

W. H Maider, for trustee.

Charles B. Sullivan, for petitioner.

RAY District Judge.

More than four months prior to the institution of the bankruptcy proceedings against Augustus S. Downing, he transferred to his wife, Louise B. Downing, certain real estate by deed dated November 27, 1907. Barbara Troutwine obtained a judgment against Augustus S. Downing more than four months preceding the date of the institution of the bankruptcy proceedings, and brought an action in the Supreme Court of the state of New York against the bankrupt and his wife to set aside the said deed on the grounds that it was executed and delivered by the bankrupt, and received by the grantee in fraud of the creditors of the bankrupt. This action was brought within four months preceding the institution of bankruptcy proceedings, and was pending in the Supreme Court of the state of New York when the bankruptcy proceedings were instituted.

The trustee, duly appointed, has not brought any action to set aside the deed as fraudulent, or on any ground, for the reason that the assets of the bankrupt estate are insufficient to more than defray the ordinary expenses of administration exclusive of any litigation, and the creditors have refused to indemnify the trustee. The referee also states, in substance, that, under the circumstances, the trustee should not be compelled to institute and prosecute an action to set aside the said deed as fraudulent at his own expense or risk, or permitted to abandon the claim. Troutwine offered to pay a substantial sum for the interest of the trustee in the said real estate, and a transfer thereof, together with the right of action, vested in the trustee to prosecute an action to set aside such deed as fraudulent as against creditors. The referee made an order authorizing and directing the sale of the interest of the trustee in the real estate mentioned, together with the right to institute and prosecute an action to set aside the deed as fraudulent as against creditors. Mrs. Mrs. Downing has intervened in the proceeding, and seeks to have this order opened, vacated, and set aside on the grounds, among others, that the trustee has no interest in the real estate, inasmuch as it was sold and transferred more than four months prior to the institution of bankruptcy proceedings, and that the bankrupt by such conveyance parted with all his interest therein, and could not have maintained any action to set aside or vacate the deed; that the trustee by virtue of the bankruptcy proceedings and his appointment as trustee took the same right or rights as a judgment creditor, viz., the right to prosecute an action to set aside the said transfer by deed as fraudulent against creditors, and that such right is vested in him by virtue of the statute, and is not the subject of a sale by the trustee, and cannot be sold even by order of the court and transferred to a third party. There is no pretense that the property itself is in the custody or possession of the bankruptcy court or of the trustee.

I have examined the evidence, and find nothing to justify a conclusion that Augustus S. Downing did not deliver possession of the real estate in question to his wife, Louise B. Downing, at the time of the delivery of the deed. The referee does not find or state that possession of the property in question was not delivered to the grantee, Mrs. Downing. The attorney for Mrs. Downing also contends that the transfer of this right of action to Mrs. Troutwine will tend to cast a cloud upon her title.

Under section 67e all conveyances and transfers made by the bankrupt within four months of filing the petition in bankruptcy--

'with intent and purpose on his part to hinder, delay or defraud his creditors or any of them, shall be null and void as against the creditors of such debtor, ' except, etc., 'and be and remain a part of the assets and estate of the bankrupt and shall pass to his said trustee whose duty it shall be to recover and reclaim the same by legal proceedings or otherwise for the benefit of the creditors.'

By section 70:

'The trustee of the estate of a bankrupt, upon his appointment and qualification, and his successor or successors, if he shall have one or more, upon his or their appointment and qualification shall in turn be vested by operation of law with the title of the bankrupt, as of the date he was adjudged a bankrupt, except in so far as it is to property which is exempt to all * * * (4) property transferred by him in fraud of his creditors,' etc.

By subdivision 'b' of the same section:

'Real and personal property shall when practicable be sold subject to the approval of the court.'

And by subdivision 'c':

'The title to the property of a bankrupt estate which has been sold, as herein provided, shall be conveyed to the purchaser by the trustee.'

By subdivision 'e' of section 70, it is also provided:

'The trustee may avoid any transfer by the bankrupt of his property which any creditor of such bankrupt might have avoided and may recover the property so transferred, or its value, from the person to whom it was transferred, unless he was a bona fide holder for value prior to the date of the adjudication. Such property may be recovered or its value collected from whoever may have received it, except a bona fide holder for value.'

By section 47, as amended by Act June 25, 1910, c. 412, Sec. 8, 36 Stat. 840, it is provided that trustees--

'as to all property not in the custody of the bankrupt court shall be deemed vested with all the rights, remedies and powers of a judgment creditor holding an execution duly returned unsatisfied.'

It would seem clear that the trustee in bankruptcy as to real property conveyed by the bankrupt in fraud of his creditors more than four months prior to the filing of the petition in bankruptcy, and found in the possession of the transferee or grantee, has the same rights and remedies that a judgment creditor of the bankrupt would have had if bankruptcy had not intervened. He has the right to bring and prosecute an action to set aside the fraudulent conveyance, and have the property sold for the satisfaction of the debts owing by the bankrupt. The right of the trustee to prosecute such an action must be for the benefit of the creditors. The setting aside of the fraudulent transfer would leave the title to the property of record in the bankrupt, and by operation of the provisions of the bankruptcy act such title would vest in the trustee as of the date of the adjudication. If the transfer was in fraud of creditors, the trustee has not only an interest to set aside the transfer, but an interest in the property. Is this an interest which the trustee may convey under the order of the court? Would the purchaser at a sale take, not only the interest of the trustee in the real estate, if any, but the right to bring and maintain an action to set aside the fraudulent transfer? And possibly the inquiry is resolved into this: May the court order a sale of, and may the trustee in bankruptcy sell and transfer to a third person the right to prosecute such an action?

Section 70 says that the trustee shall be vested by operation of law 'with the title of the bankrupt * * * to all * * * (4) property transferred by him in fraud of his creditors. ' I do not think this refers solely to property transferred by the bankrupt in fraud of his creditors within the four-month period. But has the bankrupt any title whatever which he can assert in property transferred by him in fraud of his creditors more than four months prior to the filing of a petition in bankruptcy? As to himself clearly not. He could not prior to bankruptcy set aside such a transfer for his own benefit. He would have no right of action. By virtue of the deed title (legal title) is transferred to the fraudulent vendee. Having transferred in fraud of creditors, being guilty of a wrong, he cannot be heard to assert his own wrong for his own benefit. But, conceding this to be so, may not Congress provide that the real title in such a case shall be deemed to remain in the bankrupt for the benefit of creditors or estate and be recoverable by the trustee and transferable by him, together with the right of action given by the statute to recover such property? As to the recovery of property transferred within four months of bankruptcy, this is what Congress has expressly done.

A judgment creditor may sell his judgment and his assignee may bring suit to set aside a conveyance made in fraud of such judgment, or of the rights of such assignor of the judgment. Wait on Fraudulent Conveyances (3d Ed.) Sec. 92, p. 185; Warren v. Williams, 52 Me. 349; Cook v Ligon, 54 Miss. 655; 1 Moore on Fraudulent Conveyances, 203, Sec. 11; In re Cornell, 110 N.Y. 351, 18 N.E. 142; Bostwick v. Scott, 40 Hun (N.Y.) 212; Morgan v. Abbott, 148 Mass. 507, 20 N.E. 165; Freeland v. Freeland, 102 Mass. 475. But it would seem that, in case of an assignee having the right to elect whether or not he will treat the conveyance as fraudulent, he must so elect to consider it fraudulent before assigning the claim and cause of action. If then the trustee is vested 'with all the rights, remedies, and powers of a judgment creditor holding an execution duly returned unsatisfied,' why may he not sell such interest and rights when authorized so to do by the court? It seems true that the trustee in bankruptcy had the right on taking whatever he did take from the bankrupt to affirm or disaffirm the deed in question. If he affirmed it, or did not disaffirm it, he would convey nothing on the sale ordered by the referee. If he has disaffirmed for the alleged fraud, he can, within the authorities cited,...