In re McElwain

• Decision Date: 10 January 1924
• Docket Number: 3032.
• Parties: In re McELWAIN. v. WEAVER. FIRST NAT. BANK OF DELTA, PA.,
• Court: U.S. Court of Appeals — Third Circuit

296 F. 112

In re McELWAIN.

FIRST NAT. BANK OF DELTA, PA., v. WEAVER.

No. 3032.

United States Court of Appeals, Third Circuit.

January 10, 1924

Henry C. Niles, of York, Pa., and Charles A. Hawkins, of Delta Pa., for plaintiff in error.

Donald H. Yost, of York, Pa., for defendant in error.

Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.

BUFFINGTON Circuit Judge.

On October 21, 1920, H. Clay McElwain, a Pennsylvania farmer confessed judgment in a state court for $4,000 in favor of the First National Bank of Delta, Pa.

The Pennsylvania Insolvency Act of June 4, 1901 (P.L. 404; Pa St. 1920, Sec. 779), provides:

'That if any person, * * * being insolvent or in contemplation of insolvency, with a view to give a preference to any creditor * * * suffer or permit any judgment to be entered, by confession, * * * such judgment * * * shall inure to the benefit of all the creditors of such insolvent, if * * * proceedings in insolvency be commenced within four months after such judgment * * * shall have been entered.'

Within such four months, to wit, on February 4, 1921, such proceedings were duly begun in the state court by a petition, wherein it was alleged that McElwain was insolvent; that said judgment was a preference and, by reason of his being a farmer, a petition in bankruptcy could not be filed against him. On February 21, 1921, that court adjudged McElwain insolvent.

In this status of the case, McElwain, on February 25, 1921, which was more than four months after his confession of the judgment in favor of the bank, filed a voluntary petition in bankruptcy, was adjudged bankrupt, a trustee was chosen, and his real estate sold divested of liens. On distribution of the proceeds thereof, the bank claimed preference on its said judgment, which claim was objected to on the ground that it was confessed by McElwain, when insolvent, and within four months of the state insolvency proceeding, and was therefore an unlawful preference.. After hearing proofs, the referee found McElwain was insolvent when he confessed the judgment, that it was confessed with a view to giving a preference, and the bank knowingly received it as such.

Such being the facts, the referee held in effect that when the petition in bankruptcy was filed and the bankruptcy court took possession of McElwain's realty, the trustee, by virtue of section 67b of the Bankruptcy Act, which provides 'that whenever a creditor is prevented from enforcing his rights as against a lien created, or attempted to be created, by his debtor, who afterwards becomes a bankrupt, the trustee of the estate of such bankrupt shall be subrogated to, and may enforce such rights of such creditor for the benefit of the estate,' was subrogated to the right the creditors of McElwain then had (and indeed were proceeding to enforce) to invalidate the bank's preference, and that as such state procedure was begun within four months of the date of the confession of the judgment, such judgment could be adjudged invalid by the court below sitting in bankruptcy, notwithstanding it was confessed more than four months before McElwain filed his petition in bankruptcy. The referee's view was adopted by the court, whereat the bank took this appeal.

After due consideration, we are of opinion the decree below should be affirmed.

The Bankruptcy Act (Comp. St. Secs. 9585-9656) provides for subrogation, and the only contention that can be made why it should not be made is that the insolvency...