In re Southern Metal Products Corporation, 6049.

• Citation: 26 F. Supp. 666
• Decision Date: 04 February 1939
• Docket Number: No. 6049.,6049.
• Parties: In re SOUTHERN METAL PRODUCTS CORPORATION.
• Court: U.S. District Court — Northern District of Alabama

26 F. Supp. 666

In re SOUTHERN METAL PRODUCTS CORPORATION.

No. 6049.

District Court, N. D. Alabama, N. D.

February 4, 1939.

Douglass Taylor, of Huntsville, Ala., for receiver.

Griffin & Ford and George P. Cooper, all of Huntsville, Ala., for trustee.

MURPHREE, District Judge.

On the 22nd day of July, 1938, the Southern Metal Products Corporation filed a petition in voluntary bankruptcy in the District Court of the United States for the Northern District of Alabama, Northeastern Division, and was thereupon duly adjudicated a bankrupt. It appears that prior to the time of the filing of the petition and of said adjudication, the bankrupt on the 3rd day of March, 1938, executed a mortgage on all of its property to the Scottish American Company, which mortgage was on that day duly recorded in the Probate Office of Madison County. At the time of the execution of said mortgage the Southern Metal Products Corporation was insolvent, and was at that time indebted to the mortgagee in the sum of $48,471.91, which is recited in the mortgage as being due February 1st, 1938. Thereafter, on the 5th day of July, 1938, the said Scottish American Company, a corporation, filed a bill in Equity in the Circuit Court of Madison County for the foreclosure of its mortgage, and in aid thereof, sought and secured the appointment of a receiver who qualified on July 19th, 1938, and took over the active management and possession of all of the property of the bankrupt. Thereafter, said bankruptcy petition was filed and the trustee in Bankruptcy was appointed and qualified on the 11th day of August, 1938. On the 24th day of August, 1938, the trustee filed a petition before the Referee praying the Court for a summary order against the receiver in the State Court proceedings to show cause why he should not surrender the said mortgaged property of the bankrupt to the trustee. An order to that effect was issued by the Referee on August 30th, 1938, and on that day an answer was filed, by the receiver under appointment of the State Court, setting up prior jurisdiction of the State Court and the bona fide adverse claim of the state court receiver. Thereafter, and on the 23rd day of September, 1938, the Referee granted the prayer of the petition of the Trustee and ordered the immediate turn over and surrender of the property in the possession of the receiver.

Within five days, under rule 17 of Rules of Practice in Bankruptcy, in this Court, (General Orders in Bankruptcy), 11 U.S. C.A. following section 53, and within ten days under the Chandler Act, 11 U.S.C.A. § 75, after the order was entered, the receiver under appointment of the State Court filed a petition for review in his individual capacity. This petition was later sought to be amended by separate paper filed on the 11th day of October, 1938, more than ten days from the date of the Referee's order of September 23rd, 1938. Pretermitting the question as to whether a proper review is presented, which may be well considered a serious one, we will pass on to consider the review on the merits.

From the statement of the facts appearing in the briefs of the parties concerned in the review, and the findings of fact made by the Referee, there is ample basis for the conclusion of the Referee that the mortgage executed by the bankrupt on the 3rd day of March, 1938, was executed during insolvency of the mortgagor, the bankrupt, conveyed all of the property of the bankrupt, and was executed "with intent to hinder, delay or defraud" the other creditors of the bankrupt.

The attorneys for the State Receiver argue, that four months having expired between the execution and recordation of the mortgage and the bankruptcy proceeding, that the Referee has no jurisdiction or power to set aside a mortgage under the provisions of the Bankruptcy Act. The order of turn over by the Referee in this case was signed on the 23rd day of September, 1938, after the Chandler Act became effective. Section 67d of the Chandler Act, 11 U.S.C.A. § 107(d), presents a full and complete remedy for the avoiding and setting aside of transfers or conveyances defined as fraudulent under the Act, executed by the debtor within one year of its bankruptcy. This provision of the Chandler Act is modeled on the Uniform Fraudulent Conveyance Act and is ample authority to sustain the right of the trustee in bankruptcy to avoid the mortgage, the basis of the State Court Receivership, on the facts found by the Referee.

The mortgage was executed long prior to the enactment of the Chandler Act. However, the application of the quoted provision of the Chandler Act involves merely a matter of procedure, and under Chapter 14, Section 6, Subdivision (b), 11 U.S. C.A. § 1 note, the quoted provision of the Chandler Act could well be construed as applicable to procedure begun prior thereto.

However, Section 70e of the Bankruptcy Act of 1898, as amended, 11 U.S.C.A. § 110(e), reads as follows: "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. For the purpose of such recovery any court of bankruptcy as hereinbefore defined in this title, and any State court which would have had jurisdiction if bankruptcy had not intervened, shall have concurrent jurisdiction."

It may be seen upon a reading of the above quoted provision that Section 8038 of the Code of Alabama was applicable and available to the trustee in his effort to avoid the mortgage.

The Supreme Court of Alabama construed the two sections as follows: "We may say further of transfers that are fraudulent under state statutes that such transfers may be avoided by the trustee, by authority of subdivision (e), § 70, of the Bankruptcy Act 11 U.S.C.A. § 110(e), when a creditor could have avoided the same under the statute. Barrett v. Kaigler, supra 200 Ala. 404, 76 So. 320; McMahon v. Pithan, 166 Iowa, 498, 147 N. W. 920, 33 A.B.R. 125; Manning v. Evans (D.C.) 156 F. 106. The trustee is subrogated to the rights of the creditor and may avoid conveyances which a creditor may have avoided, although such conveyance was executed and delivered beyond the four months' period immediately preceding the adjudication of bankruptcy. In re Mullen (D.C.) 101 F. 413; Manders v. Wilson (D. C.) 230 F. 536; Cartwright v. West, 173 Ala. 198, 202, 55 So. 917; Sherrill v. Hutson, 187 Ala. 189, 65 So. 538; McCrory v. Donald, supra 192 Ala. 312, 68 So. 306." Neuberger v. Felis, 203 Ala. 142, 82 So. 172, 174.

The Supreme Court of the United States construed a similar Ohio statute in the following words:

"Section 70e of the Bankruptcy Act 11 U.S.C.A. § 110(e) gives the trustee in bankruptcy a right to recover property transferred in violation of state law, without reference to the four months' limitation; if a creditor could have avoided the transfer under the state law, the trustee may do the same."

"The federal system of bankruptcy is designed not only to distribute the property of the debtor, not by law exempted, fairly and equally among his creditors, but as a main purpose of the act, intends to aid the unfortunate debtor by giving him a fresh start in life, free from debts, except of a certain character, after the property which he owned at the time of bankruptcy has been administered for the benefit of creditors. Our decisions lay great stress upon this feature of the law — as one not only of private but of great public interest in that it secures to the unfortunate debtor, who surrenders his property for distribution, a new opportunity in life. Neal v. Clark, 95 U.S. 704, 709, 24 L.Ed. 586; Traer v. Clews, 115 U.S. 528, 541, 6 S.Ct. 155, 29 L.Ed. 467; Hanover National Bank v. Moyses, 186 U. S. 181, 192, 22 S.Ct. 857, 46 L.Ed. 1113; Wetmore v. Markoe, 196 U.S. 68, 77, 25 S. Ct. 172, 49 L.Ed. 390, 2 Ann.Cas. 265; Burlingham v. Crouse, 228 U.S. 459, 473, 33 S. Ct. 564, 57 L.Ed. 920, 46 L.R.A.(N.S.) 148.

"This feature of a bankruptcy law is wholly wanting in the Ohio statutes under consideration. Indeed, there is not now, any more than when Mayer v. Hellman, supra 91 U.S. 496, 23 L.Ed. 377, was decided, any attempt in the Ohio laws to provide for the discharge of the debtor from his existing debts.

"If the Ohio statutes in the feature now under consideration be suspended, it would follow that a person in Ohio might successfully claim a part of the estate which is being administered in bankruptcy, although the conveyance under which the property is claimed is voidable under the laws of the state where it was made and the alleged right in the property secured. We think that Congress in the Bankruptcy Act did not intend any such result, but meant to permit the trustee in bankruptcy to have the benefit of state laws of this character which do not conflict with the aims and purposes of the federal law. And certainly, in view of the provisions of section 70e of the Bankruptcy Act, Congress did not intend to permit a conveyance such as is here involved to stand which creditors might attack and avoid under the state law for the benefit of general creditors of the estate." Stellwagen v. Clum, 245 U.S. 605, 38 S.Ct. 215, 218, 62 L.Ed. 507.

From the reasonings set out above, it may well be concluded that the mortgage under consideration was subject to attack by the trustee in bankruptcy for the benefit of the other creditors in bankruptcy. The State Court, a short time prior to bankruptcy, had appointed its own receiver and had through the receiver taken possession and jurisdiction over the property of the mortgagor, who was later to become the bankrupt. The State receiver denies the right of the Bankruptcy Court in a summary proceeding to try...