In re Kohler

• Decision Date: 15 February 1908
• Docket Number: 1,716.
• Citation: 159 F. 871
• Parties: In re KOHLER.
• Court: U.S. Court of Appeals — Sixth Circuit

159 F. 871

In re KOHLER.

No. 1,716.

United States Court of Appeals, Sixth Circuit.

February 15, 1908

W. A Slabaugh, for petitioner.

T. H Bushnell, for respondents.

Before SEVERENS and RICHARDS, Circuit Judges, and KNAPPEN, District judge.

RICHARDS Circuit Judge.

On July 2, 1903, George W. Crouse was adjudicated a bankrupt. Prior to this time, on August 22, 1901, Crouse transferred to his wife, without consideration, shares of stock in certain corporations. At that time the then existing indebtedness of Crouse aggregated $461,108.69. Additional debts contracted after August 22, 1901, and now existing, amount to $1,300,000. After Crouse was adjudicated a bankrupt, certain creditors who existed at the time of the transfer of the stock from Crouse to his wife applied to the trustee in bankruptcy to bring suit to set aside this transfer on the ground it was fraudulent as to them, and when the trustee declined to do so they brought suit themselves. Afterwards authority was given by the court below to the trustee and the parties interested to compromise and settle this suit for the sum of $29,100. This was paid to the trustee, and the controversy now is over its distribution, whether it should be divided pro rata among all the creditors of the bankrupt or only among those who were creditors at the time the transfer of the stock was made, on August 22, 1901. The matter was referred to a special master, who held that the distribution should be pro rata among all the creditors. Exceptions to his report were taken before the court below who held that the distribution should be limited to those who were creditors at the time of the transfer-- on the 22d of August, 1901. Thus, the question has reached us.

The argument in favor of the conclusion reached by the court below seems to be based largely upon what is claimed to be the law of Ohio in such case, while the master, in holding the distribution should be made pro rata among all the creditors, plants himself squarely upon what he contends are the policy and provisions of the present bankruptcy law. The court below pointed out that, under the finding of facts as he reads it, the transfer was only 'to the detriment of his (bankrupt's) then existing creditors,' which he regards as controlling. The court thinks it 'not harmonious with justice that persons whose legal rights have in no wise been invaded may participate in funds arising out of a transfer, which did result in the invasion of the rights of others. ' And it cannot believe that the bankruptcy law, in distributing an estate, intended to give any more rights to certain creditors than they had prior to its enactment.

It is apparent from the reading of the bankrupt law that one of its chief objects was to prevent fraudulent preferences and conveyances by providing means for setting them aside and distributing the proceeds equally among all the creditors. Special provisions are made with respect to preferred creditors. Bankr. Act July 1, 1898, c. 541, Secs. 60a, 60b, 30 Stat. 562 (U.S. comp. St. 1901, p. 3445). Such provisions are also made with respect to liens. Sections 67a, 67b, 67c, 67d, and 67e. All these relate to preferences or liens taken within four months prior to the filing of the petition in bankruptcy. In all these cases it is provided that the property covered by the conveyance or lien 'shall pass to the trustee as a part of the estate of the bankrupt, unless the court shall, on due notice, order that the right to such levy, attachment, judgment or other lien shall be preserved for the benefit of the estate. ' In section 70 it is broadly provided that the trustee shall be vested, by operation of law, with the title of the bankrupt, to all 'property transferred by him in fraud of his creditors. ' It is apparent this provision applies to all property transferred by the bankrupt at any time in fraud of his creditors.

The record does not show that the Ohio court, in which the suit was brought to have the transfer to the bankrupt's wife declared fraudulent, made any finding as to the precise nature of the transfer. In fact, there was no finding; the suit was settled by a compromise approved by the court below. It appears clearly enough, however, in the record, that at the time of the transfer Crouse was indebted $461,108.69; and in the time succeeding that, before his petition in bankruptcy was filed, his indebtedness was increased by $1,300,000. We have a right, therefore, to say that the findings of the master commissioner are not open to the construction placed upon them by the court below. The finding that the 'stock was transferred without consideration and to the detriment of the then existing creditors' did not, in our opinion, amount to a finding that the transfer was to the detriment of his then existing creditors alone. If his indebtedness increased so rapidly after this transfer was made that in three years it was quadrupled, we have a right to conclude that the transfer was 'to the detriment' not only of his existing, but his future, creditors, and it was fraudulent in the sense that it was made not only in view of his existing but his future creditors.

One object of the bankruptcy law is to prevent preferences and secure equality. The letter of the law, from which we have quoted, provides for an equal distribution. All the estate of a bankrupt is to go to the trustee. This includes preferences and property fraudulently conveyed. In our view, the strong objection to the construction of the lower court is that it provides a ready method of effectuating preferences. A man heavily in debt, and likely to go in deeper, in other words, insolvent, but yet in business, may convey a large part of his property to his wife. Having thus put out an anchor to windward, he has the satisfaction of knowing that, if the conveyance stands, his wife is taken care of, but, if it is set aside, the creditors existing then will be preferred over the later ones. There may be reasons why the bankrupt would like to prefer his earlier over his later creditors. If so, here is a method ready at hand for the purpose.

The construction of sections 67f and 67c will be found in the case of First National Bank v. Staake, 202 U.S. 141, 26 Sup.Ct. 580, 50 L.Ed. 967. Here, certain attachments had been levied within four months. The court held they could be annulled, or the lien of the attachments could be preserved under the bankruptcy act, for the benefit of the estate. There was no method suggested of passing over the property covered by these attachments to the creditors who had secured them. But they could be held by the trustee 'for the benefit of the entire body of creditors; that is, 'for the benefit of the estate'-- in other words, the statute recognizes the lien of the attachment, but distributes the lien among the whole body of creditors.' 202 U.S. 146, 26 Sup.Ct. 580, 50 L.Ed. 967.

We have examined a number of Ohio decisions, but have...