In re Walsh Bros.

• Decision Date: 06 August 1908
• Docket Number: 596.
• Citation: 163 F. 352
• Parties: In re WALSH BROS.
• Court: U.S. District Court — Northern District of Iowa

163 F. 352

In re WALSH BROS.

No. 596.

United States District Court, N.D. Iowa, Eastern Division.

August 6, 1908

Walsh Bros., a copartnership, dealers in farm implements and machinery, were adjudged bankrupts by this court January 18 1908, upon their own petition filed that day, and a trustee of their estate was afterwards duly appointed. About March 7 1908, the trustee filed with the referee an application setting forth that the bankrupts on December 17 and 18, 1907 transferred certain of their stock of farm implements and machinery, of the value of more than $625, to Burns Bros., a copartnership, in payment of debts assumed by the bankrupts that such transfer was made while the bankrupts were insolvent; that Burns Bros. so knew, or had reasonable cause to believe; and that the same was intended as, and was in fact, a preference by the bankrupts to said Burns Bros., and accepted by them as such. A summary order is asked that Burns Bros. be required to return the property to the trustee, or for such order in the premises as the referee may deem proper. March 16th Burns Bros. appeared before the referee and filed an answer, in which they admit that the property was transferred and delivered to them by the bankrupts December 17 and 18, 1907, but allege that it was in payment in good faith of a valid debt owing them by the bankrupts, and deny that the transfer was a preference, or intended as such, or that they knew of the insolvency of the bankrupts, or had reasonable cause to believe them to be insolvent, at the time of the transfer. They ask that they be dismissed, with their costs. Upon a hearing of the issues so joined evidence was offered by both parties, and the referee denied the application of the trustee upon the ground alone that it was not made to appear that Burns Bros. had reasonable cause to believe that Walsh Bros. were insolvent at the time the property was transferred and delivered to them. The Sandwich Manufacturing Company and other creditors of Walsh Bros. appeared at the hearing before the referee and participated therein, and they petition for a review of the order. The trustee does not petition for a review, nor join in that of the creditors.

F. Lingenfelder, Ellis & Ellis, and Eggert & Lockwood, for creditors.

P. W. Burr, for Burns Bros.

REED District Judge (after stating the facts as above).

The jurisdiction of the referee to pass upon the merits of the controversy arising upon the application of the trustee and the answer of Burns Bros. thereto was not raised before the referee, other than by the facts alleged in the application of the trustee and the answer of Burns Bros., and the request of the latter that they be dismissed with their costs. But the jurisdiction of a federal court to determine a matter presented to it is a question that asserts itself, and the court will notice it, though it is not raised by the parties. The application of the trustee is for a summary order requiring Burns Bros. to return to him property alleged to have been transferred and delivered to them by the bankrupts a month before the bankruptcy proceedings were instituted. This property, therefore, has never come into the custody of the court of bankruptcy. Burns Bros. appeared before the referee and made claim to the property, and alleged facts plainly showing their title and right to it. The claim so made and asserted is not a mere colorable one, but is one that arose before the bankruptcy proceedings, and clearly appears from the allegations of the answer to be one that is adverse to the bankrupts, though it may be voidable at the election of the trustee. The application of the trustee is in the nature of an independent action by him against Burns Bros., who are not parties to the bankruptcy proceedings, to avoid the transfer because, as he alleges, it is a voidable preference. Such a suit is not a part of the 'proceedings in bankruptcy,' but is a controversy either at law or in equity between the trustee and a third party, within the meaning of section 23, cls. 'a' and 'b,' of the bankruptcy act (Act July 1, 1898, c. 541, 30 Stat. 552 (U.S. Comp. St. 1901, p. 3431)). Bardes v. Bank, 178 U.S. 524, 20 Sup.Ct. 1000, 44 L.Ed. 1175; Jaquith v. rowley, 188 U.S. 620, 23 Sup.Ct 369, 47 L.Ed. 620; Bush v. Elliott, 202 U.S. 477, 26 Sup.Ct. 668, 50 L.Ed. 1114; In re Rochford, 124 F. 182, 59 C.C.A. 388.

Has a referee in bankruptcy jurisdiction to determine such a controversy, even with the consent of both parties? If the subject-matter of a controversy is not within the jurisdiction of a referee, of course, consent will not confer it, and the court upon a petition for review will acquire none, except to determine the jurisdiction of the referee. First Nat. Bank v. Title & Trust Co., 198 U.S. 280, 25 Sup.Ct. 693, 49 L.Ed. 1051. That the court of bankruptcy would not have had jurisdiction of such a suit prior to the amendment of 1903, without the consent of the proposed defendant, is settled by the cases of Bardes v. Bank and Jaquith v. Rowley, above. Section 60b of the bankruptcy act as amended in 1903 is as follows (Act Feb. 5, 1903, c. 487, Sec. 13 32 Stat. 799 (U.S. Comp. St. Supp. 1907, p. 1031)):

'If a bankrupt shall have given a preference, and the person receiving it or to be benefited thereby, or his agent acting therein, shall have had reasonable cause to believe that it was intended thereby to give a preference, it shall be voidable by the trustee, and he may recover the property or its value from such persons.

And, for the purpose of such recovery any court of bankruptcy, as hereinbefore defined, and any state court which would have had jurisdiction if bankruptcy had not intervened, shall have concurrent jurisdiction.'

The words in italics were added by the amendment: What courts, then, since the amendment, have jurisdiction of a suit by a trustee to recover such a preference? Plainly only a 'court of bankruptcy,' or 'any state court which would have had jurisdiction if bankruptcy had not intervened. ' Courts of bankruptcy, as defined by the act, are:

'The District Courts of the United States in the several states and territories, the Supreme Court of the District of Columbia, and the United States Court of the Indian Territory, and of Alaska. ' Section 1 (8) and section 2 of the bankruptcy act.

The courts of bankruptcy as above defined are invested, within their respective territorial limits--

'with such jurisdiction at law and in equity as will enable them to * * * (6) bring in and substitute additional parties in proceedings in bankruptcy when necessary for the complete determination of a matter in controversy; (7) cause the estates of bankrupts to be collected, reduced to money and distributed, and determine controversies in relation thereto, except as otherwise provided. ' Section 2.

The exception is of the controversies and suits referred to in section 23, cls. 'a' and 'b,' as originally enacted, and in sections 60b, 67e, and 70e, as amended. In re Rochford, 124 F. 182-185, 59 C.C.A. 388. The word 'court' may include the referee. Section 1 (7). But this obviously means the referee when acting upon a matter of which he is given jurisdiction by the act. The jurisdiction of the referee is prescribed by section 38, as follows:

'Referees respectively are hereby invested * * * with jurisdiction to (1) consider all petitions referred to them by the clerks and make the adjudications or dismiss the petitions; (2) exercise the powers vested in courts of bankruptcy for the administering of oaths to and the examination of persons as witnesses and for requiring the production of documents in proceedings before them, except the power of commitment; (3) exercise the powers of the judge for the taking possession and releasing of the property of the bankrupt in the event of the issuance by the clerk of a certificate showing the absence of a judge from the judicial district, or the division of the district, or his sickness, or inability to act; (4) perform such part of the duties, except as to questions arising out of the applications of bankrupts for compositions, or discharges, as are by this act conferred on courts of bankruptcy, and as shall be prescribed by rules or orders of the courts of bankruptcy of their respective districts, except as herein otherwise provided. * * * '

Rule 11 of this court confers upon referees in this district the power to exercise the duties conferred upon courts of bankruptcy by clauses 2, 3, 5, 6, 7, 11, and 18 of section 2 of the act. While much of the authority of the court of bankruptcy is exercised by the referee, and rightly so in proceedings in bankruptcy proper, none of these clauses, nor any other provision of the act, confers upon a referee any authority or power to act except in such proceedings. It is easier to state what are not 'proceedings in bankruptcy' than to definitely name all that are; and it is perhaps not advisable to now attempt to accurately distinguish between such proceedings and 'controversies at law and in equity between trustees as such and adverse claimants concerning the property claimed by the trustees.'

It is sufficient for the present to know that it is definitely settled by the Supreme Court in the cases before cited that an action by a trustee to recover property from a third party which is alleged to have been transferred by the bankrupt prior to the bankruptcy as a preference is not a 'proceeding in bankruptcy,' within the meaning of the bankruptcy act. If the application of the trustee in question can be upheld as a part of the proceedings in bankruptcy then a suit to set aside a conveyance of real estate, or an action to recover real property, or any action at law or suit in equity against a third party claiming to own the...