In re Jones

• Decision Date: 26 February 1907
• Citation: 151 F. 108
• Parties: In re JONES.
• Court: U.S. District Court — Western District of Michigan

151 F. 108

In re JONES.

United States District Court, W.D. Michigan, Southern Division.

February 26, 1907

C. W Hendryx, for petitioners.

G. M Valentine and Chas. E. Sweet, for trustee and creditors.

KNAPPEN District Judge.

The bankrupt at the time of his adjudication was guardian of 13 Pottawatomie Indian minors, under appointment of the respective probate courts of various counties of Michigan in 9 separate estates; the guardianship funds being moneys paid under congressional appropriations on account of claims held by that tribe against the United States government. At the time of his adjudication the bankrupt, as such guardian, owed to these 9 respective guardianship estates sums ranging from $150 to $770, and aggregating $3,709,54. The bankrupt neither personally nor otherwise, caused any claim to be presented against the bankrupt estate on account of the indebtedness referred to. The sureties upon the respective guardianship bonds given by the bankrupt accordingly filed before the referee proofs of the respective claims, and petitions for the allowance of the same as prior claims-- the grounds of alleged priority being, first, that the debt in question, being one owed by a guardian, is entitled to priority under the laws of Michigan, and therefore so entitled under section 64, subd. b(5), of the bankrupt act (Act July 1, 1898, c. 541, 30 Stat. 563 (U.S. Comp. St. 1901 p. 3448)); and, second, that the bankrupt estate has been increased by the receipt of the guardianship money by the bankrupt-- the allegation in the proof of claim being 'that said sum so obtained of said minor Pottawatomie Indians aforesaid was used by the said guardian aforesaid and mingled with his own property, that said money is now a part of the property which is assets of the said bankrupt in the hands of the trustee in bankruptcy, and that said sum aforesaid, due as aforesaid, swelled the assets of the said estate of said bankrupt to the amount stated herein. ' Attached to each of the petitions for proof of claim and order for priority is a duly authenticated copy of the last account of the bankrupt as guardian, as submitted to the probate court, containing his admission of the amount owing from him to his wards.

No objection was made to the allowance of the claims as general claims, but objection was made by the trustee and several creditors to their allowance as prior claims. No proof was submitted upon the hearing before the referee, aside from the proof of the claim originally filed, and the petitions were heard upon such proofs and arguments of counsel. The referee allowed the respective claims as general claims at the amounts respectively asserted, but in the case of each claim denied priority. The proceedings are brought here under petitions for review of the refusal of the referee to allow the priority claimed. The questions presented are, first, whether the claims are entitled to priority independently of section 64, subd. b(5), of the bankrupt act; and, second, whether they are entitled to priority under that section.

1. The referee rightly refused to allow priority upon the ground that the estate in the hands of the trustee in bankruptcy had been increased by the amount of the guardianship funds, through the mingling of the same by the guardian with his own assets. Had the allegations referred to been proven, the priority claimed might have been established. See Smith v. Township of Au Gres, Mich., 150 F. 257, recently decided by the Circuit Court of Appeals of the Sixth Circuit. But no proofs were introduced in support of the allegations mentioned. The certificate of the referee is express that 'no proof was submitted aside from proof of claim originally filed,' and that the 'claim was submitted upon such proof and argument of counsel.'

It is contended by the petitioner that, as the petition was sworn to, the truth of the allegation in question is prima facie established upon the principle that the sworn proof of claim against the bankrupt is prima facie evidence of its allegations, even if objected to. This is undoubtedly the rule, as applied to the proof of the claim itself as a general claim, considered apart from the question of priority. In re Dresser, 135 F. 495, 68 C.C.A. 207; s.c. Whitney v. Dresser, 200 U.S. 532, 26 Sup.Ct. 316, 50 L.Ed. 584. These decisions do not, to my mind, support the proposition that allegations relating to alleged priority are to be taken as prima facie true, for the purpose of establishing such priority, in the absence of evidence for or against the fact. The proof of claim, as such, is governed by section 57 of the bankrupt act (30 Stat. 560 (U.S. Comp. St. 1901, p. 3443)). The subject of priorities is governed by section 64. The question presented in the Dresser Case related entirely to the proof of claim as a general claim, under section 57 of the bankrupt act, and had nothing to do with the question of priority, under section 64 of the act. This is true of all the cases cited in Whitney v. Dresser, viz.: In re Sumner (D.C.) 101 F. 224; In re Shaw (D.C.) 109 F. 780; In re Cannon (D.C.) 133 F. 837; In re Carter (D.C.) 138 F. 846; In re Felter (D.C.) 7 Fed. 904; In re Doty, 5 Am.Bankr.R. 58. In re Saunders, 2 Low. 444, Fed. Cas. No. 12,371, arose under the bankrupt act of 1867, and related only to the proof of claim, and not to questions of priority.

The distinction between the practice under sections 57 and 64 seems clear. There is no requirement that a priority should be claimed in the petition for the proof of claim. This priority is matter of administration, and may be asserted at any time, in connection with or before the payment of dividends. While the statute expressly provides what the proof of claim shall contain (and general order No. 21 imposes some additional requirements), no requirement is made as to the contents of a petition for priority. The language of the clause relating to 'debts which have priority' is:

'(b) The debts to have priority, except as herein provided, and to be paid in full out of bankrupt estates, and the order of payment shall be,' etc.

The distinction between the proof of a claim and the establishment of priority is pointed out by the Circuit Court of Appeals for the First Circuit in Re Worcester County, 102 F. 808, 813, 42 C.C.A. 637. The Supreme Court based its decision in Whitney v. Dresser upon the language of the statute relating to proofs of claim, viz., section 57, saying:

'The words of the statute suggest, if they do not distinctly import, that the objector is to go forward, and thus that the formal proof is evidence even when put in issue. The words are: 'Objections to claims shall be heard and determined as soon' etc. Section 57f. It is the objection, not the claim, which is pointed out for hearing and determination. This indicates that the claim is regarded as having a certain standing already established by the oath.'

No such provision is contained with reference to priority, the practice regarding which, as already stated, is not provided by statute. The reasons for the rule of prima facies applicable to proofs of claims do not apply to petitions for priority. In my opinion the allegations relating to priority were not prima facie evidence of their truth.

2. Are the claims entitled to priority under section 64b (5) of the bankrupt act? The priority section provides:

'(b) The debts to have priority, except as herein provided, and to be paid in full out of the bankrupt estates, and the order of payment shall be * * * (5) debts owing to any person who by the laws of the States or the United States is entitled to priority. ' Bankrupt Act, Sec. 64.

Chapter 265 of the Compiled Laws of Michigan of 1897, under the title 'Of the Powers, Duties, and Obligations of Assignees of Insolvent Debtors under This Title,' contains this provision:

'(9675) Sec. 31. In making such distribution the assignee shall first pay all debts that may be owing by the debtor as guardian, executor, administrator, or trustee; and if there be not sufficient to pay all debts of the character above specified, then the distribution shall be made among them in proportion to their amounts respectively.' 3 Comp.Laws Mich. 1897, Sec. 9675.

The general title, referred to in the title of the chapter quoted from, is 'Of the Punishment of Fraudulent Debtors and the Relief of Insolvent Debtors. ' Is this statute such a 'law of the state' of Michigan as entitles the claims in question to priority under the bankrupt act? It may be conceded that, if this statute is applicable to the settlement and distribution of the estates of insolvent debtors generally under the Michigan laws, it is such a 'law of the state' as will entitle the claims in question to priority.

The federal courts have construed with a fair degree of liberality the priority provisions of the bankrupt act. The cases of City of Chattanooga v. Hill, 139 F. 600, 71 C.C.A. 584, and State of New Jersey v. Anderson, 27 Sup.Ct. 137, 51 L.Ed. . . . , fairly illustrate this tendency. In the case first cited, the Circuit Court of Appeals of the Sixth Circuit held that, under section 64a of the bankrupt act, taxes assessed against land have priority, although the land on which the taxes were assessed never came into the hands of the bankruptcy trustee. In the second case cited, the Supreme Court held that, under the same section 64a, franchise fees owing by a corporation to the state of New Jersey, under whose laws it was created, have priority as taxes owing to a state, although the bankrupt corporation did no business in New Jersey, and although by such construction of the bankrupt act preference was given to the state of New Jersey over creditors who dealt with the corporation at its place of business.

It...