In re Kellogg

• Decision Date: 12 March 1903
• Docket Number: 23.
• Citation: 121 F. 333
• Parties: In re KELLOGG.
• Court: U.S. Court of Appeals — Second Circuit

121 F. 333

In re KELLOGG.

No. 23.

United States Court of Appeals, Second Circuit.

March 12, 1903

Before LACOMBE, TOWNSEND, and COXE, Circuit Judges.

TOWNSEND Circuit Judge.

Clara E. Kellogg on June 6, 1900, executed a usurious mortgage for $25,000 on certain real estate of Una R. Goslin, who afterwards assigned the same to Sophie La Grave, the petitioner herein. On January 29, 1901, said Kellogg transferred said real estate, subject to said mortgage, to the C. E. Kellogg Company. On February 14, 1901, involuntary bankruptcy proceedings were begun against said Clara E Kellogg. On March 1st she filed a voluntary petition in bankruptcy, and was adjudicated a bankrupt, and a receiver was appointed, who immediately took actual possession of the mortgaged property; and on March 22, 1901, the receiver was duly made trustee. On March 20, 1901, a summons, complaint and notice of pendency of a suit by petition to foreclose said mortgage was filed in the office of the county clerk. On April 2, 1901, said trustee commenced a proceeding to have said transfer to the Kellogg Company set aside as in fraud of creditors. On the same day the corporation rescinded said transfer on the ground that said claim of fraudulent transfer had been made, and said action had been begun by the trustee, and reconveyed said property to the trustee. It does not appear that the summons in the foreclosure suit had at that time been actually served on any defendant. Thereafter, upon due hearing, the referee entered an order declaring said mortgage void on the ground of usury and directing that said property be sold free and clear of incumbrances. The petitioner then filed a petition to review, and the referee certified the following questions to the District Judge:

'First. Is the defense of usury available to a trustee in bankruptcy, as against an obligation of the bankrupt?

'Second. Can the question of validity and amount of a mortgage lien upon property in the bankrupt estate be determined in a summary proceeding before a referee?

'Third. Did the Supreme Court of the state of New York acquire jurisdiction of the property, to the exclusion of the United States District Court, by the filing of the summons, complaint, and notice of pendency of action of foreclosure, before the trustee was appointed; the bankruptcy court having previously acquired jurisdiction by the filing of the petition in bankruptcy and the appointment of a receiver, who had qualified and taken possession of the property prior to the commencement of said action and foreclosure?

'Fourth. Where the mortgagor, with intent to hinder and delay her creditors, conveys the mortgaged property to a corporation participating in such intent, and the trustee repudiates such transfer on account of such fraud, and takes possession of the property, and by mutual consent the fraudulent grantee and the trustee rescind such conveyance, does the fact that the property upon which the mortgagor has an apparent lien was transferred by the mortgagor to the said corporation after the recording of the mortgage, and subject to the lien thereof, before the beginning of the bankruptcy proceedings, preclude the trustee from pleading usury?

'Fifth. Was the mortgage void for usury, as a matter of fact?'

The District Court affirmed the report, decision, and order of the referee, and answered the first, second, fourth, and fifth questions in the affirmative, and the third question in the negative; and the petitioner now brings these orders and decisions, except the answer to the fifth question, before this court for review, and assigns the following errors:

'First. In that said court, and the judge thereof, did determine in said proceedings that the defense of usury was available to this trustee in bankruptcy against the bond and mortgage held by Sophie Marchias La Grave, the appellant, against said bankrupt and her property.

'Second. In that said court determined that the question of the validity and amount of the said bond and mortgage could be determined in the summary proceeding instituted before the referee in bankruptcy herein.

'Third. In that said court determined that the Supreme Court of the state of New York did not acquire exclusive jurisdiction of the property covered by said mortgage by the filing of the summons, complaint, and notice of the pendency of action in foreclosure before the trustee was appointed.

'Fourth. In that said court determined that although the property in question had been transferred by the bankrupt to the C. E. Kellogg Company, subject to the lien of the said mortgage, and thereafter transferred by the said corporation to the trustee in bankruptcy, the defense of usury was still available to said trustee.'

The first assignment of error is the decision that defense of usury was available to the trustee.

That a trustee who takes title solely by the operation of the bankrupt law is a privy in estate with the borrower, and stands in the same relation to the mortgagee as the bankrupt, so far as the defense of usury is concerned, seems to be pretty well settled. The general rule, as stated in Knickerbocker Life Insurance Company v. Nelson, 78 N.Y. 150, is as follows:

'All privies to the borrower, whether in blood, representation, or estate, may, both in law and equity, by appropriate legal and equitable defenses, attack or defend against contract or security given by the borrower, which is tainted with usury, or on the ground of such usury, where such contract or security affects the estate derived by them from the borrower.'

Under Bankr. Act, Sec. 70a (U.S. Comp. St. 1901, p. 3451), the trustee is vested by operation of law with the title of the bankrupt to all 'powers which he (the bankrupt) might have exercised for this own benefit. ' The plaintiff, as trustee, stands in the shoes of the bankrupt. Wheelock v. Lee, 15 Abb. Prac. (N. S.) 28; Id., 64 N.Y. 243. He is the legal representative of the bankrupt. Wright v. First Nat. Bank, Fed. Cas. No. 18,078; Tamplin v. Wentworth, 99 Mass. 63; Gray v. Bennett, 3 Metc. (Mass.) 522; Moore v. Jones, 23 Vt. 739, Fed. Cas. No. 9,768; Tiffany v. Boatman's Institution, 18 Wall. 390, 21 L.Ed. 868.

But counsel for petitioner, in his fourth assignment of errors relies on the fact that the trustee secured title by virtue of a conveyance from the Kellogg Company, bankrupt's grantee, to which the bankrupt had previously conveyed the property subject to the lien of the mortgage, and contends, therefore, that the trustee cannot avail himself of the defense of usury, which is...