In re Wilson

• Decision Date: 18 May 1903
• Docket Number: 903.
• Citation: 123 F. 20
• Parties: In re WILSON.
• Court: U.S. Court of Appeals — Ninth Circuit

123 F. 20

In re WILSON.

No. 903.

United States Court of Appeals, Ninth Circuit.

May 18, 1903

Joseph C. Meyerstein, for petitioner.

A. B Ware, for respondents.

Before GILBERT and ROSS, Circuit Judges, and HAWLEY, District Judge.

GILBERT Circuit Judge.

The appeal in this case is taken from an order of the District Court sustaining the ruling of the referee in bankruptcy whereby the bankrupt's homestead was held exempt. In November, 1886, the bankrupt acquired the homestead property. On October 12, 1899, his wife filed for record a declaration of homestead upon the same. On February 5, 1902, while the bankrupt was in business as a grocer, he sold out his stock of merchandise for $4,250, which was its fair value. At the time of the sale a loan association held a mortgage on the homestead property for $1,950. On February 6, 1902, the bankrupt, out of the proceeds of the sale of his grocery business, paid off the mortgage and paid certain other creditors, but made no payment to the creditors who had sold him goods for his grocery business, and others, whose claims amounted to $4,843.11. On February 11, 1902, a petition in bankruptcy was filed against him by certain creditors, and on March 4, 1902, he was adjudged an involuntary bankrupt. On February 14, 1902, he filed his declaration of homestead on the same premises declared upon by his wife. It is the object of the trustee by the present proceeding to set aside the order of the referee allowing the exemption of the said homestead, and to subject said homestead to a lien of $1,950 for the benefit of the creditors.

The question here presented is one upon which there is some conflict of authority. In Pratt v. Burr, 5 Biss. 36 Fed.Cas.No. 11,372, decided by Miller, District Judge of the District of Wisconsin in 1857, a firm of merchants in the possession of a stock of goods replenished their stock by the purchase of goods upon credit. After acquiring possession of the goods so purchased, they transferred their whole stock in fraud of their creditors, and took in exchange therefor the premises which they claimed as homesteads. Said the court:

'The mere statement of the facts decides the case in the conscience of every honest man. * * * A party cannot turn that which is furnished him for the comfort of himself and family into an instrument of fraud.'

To the same effect is In re Wright, 3 Biss. 359, Fed.Cas.No. 18,067, decided by the same judge in 1872; holding that an insolvent merchant who sold his homestead for cash could not invest the proceeds and other of his property in another homestead, to the prejudice of his creditors. But in Palmer v. Hawes, 80 Wis. 474, 50 N.W. 341, the Supreme Court of Wisconsin held that where a debtor greatly embarrassed and insolvent had changed her homestead to other property, and had used her means in paying off an incumbrance thereon, the transaction was not fraudulent as to creditors; the evidence failing to show any fraudulent purpose on her part. Again, in the case of In re Boothroyd, 3, Fed.Cas. 892 (No. 1,652), Mr. Justice Brown, then the District Judge of the Eastern District of Michigan, held that where a member of a copartnership took notes belonging to the firm, and therewith purchased a homestead three days before the bankruptcy of the firm, and with knowledge of its insolvent condition, he was not entitled to retain the homestead as exempt. That was a case, it is true, involving equitable considerations arising out of the diversion of partnership assets, but the learned judge proceeded to say:

'Indeed, if the facts in this case called for it, I think I should be prepared to go much further, and to hold that a debtor, knowing himself to be insolvent, has no right, upon the eve of bankruptcy, to take his property and invest it in a homestead.'

But the Supreme Court of Michigan, in a case decided later (Meigs v. Dibble, 73 Mich. 101, 40 N.W. 935), held that there was no rule of law of that state to prevent a person whose indebtedness is in excess of his resources from using a portion of his property to purchase a homestead, and that such action is not a fraud upon creditors. Recently, in Re Joel v. Boston, 3 Am.Bankr.Rep. 388, 98 F. 587, Munger, District Judge of the District of Nebraska, affirmed, without discussion or the citation of authorities, the ruling of a referee in bankruptcy, that where the bankrupt, a few days before filing his voluntary petition, disposes of his property, and applies the proceeds in partial payment of a mortgage on his homestead, such payment will be regarded as in fraud of the bankruptcy laws, and the creditors will be subrogated to the mortgage creditors upon the homestead, to the extent of the payment so made thereon.

But the decided weight of authority sustains the doctrine that, where a homestead exemption is allowed by state law, an insolvent debtor may, out of the proceeds of a failing business, either purchase a homestead, or pay off an existing incumbrance thereon, and hold the same against the claims of his creditors, whether proceedings to subject the same to his debts be instituted under the state laws or under the national bankruptcy act. The reason assigned for this rule is that all persons dealing with or giving credit to such a debtor must be presumed to do so with a knowledge of the homestead exemption law, and in view of the right of the debtor to place his property in the form of such homestead and thereby beyond the reach of their demands. Kelly v. Sparks (C.C.) 54 F. 70; Backer v. Meyer (C.C.) 43 F. 704; First National Bank of Humboldt v. Glass, 25, C.C.A. 151, 79 F. 706; In re Tobias (D.C.) 103 F. 68; Randall v. Buffington, 10 Cal. 491; Fitzell v. Leaky, 72 Cal. 477, 14 P. 198; In re Henkel, 2 Sawy. 305, Fed. Cas. No. 6,362; Jacoby v. Distilling Co., 41 Minn. 227, 43 N.W. 52; Sproul v. Bank, 22 Kan. 336; Cipperly v....