Morris v. Neumann

• Decision Date: 02 November 1923
• Docket Number: 6374.
• Parties: MORRIS v. NEUMANN. In re STEWART.
• Court: U.S. Court of Appeals — Eighth Circuit

293 F. 974

MORRIS v. NEUMANN.

In re STEWART.

No. 6374.

United States Court of Appeals, Eighth Circuit.

November 2, 1923

John F Simms, of Albuquerque, N.M. (H. C. Denny, of Gallup, N.M. on the brief), for plaintiff in error.

J. W Chapman, of Gallup, N.M., for defendant in error.

Before LEWIS, Circuit Judge, and VAN VALKENBURGH and KENNEDY District Judges.

VAN VALKENBURGH, District Judge.

Plaintiff in error was the owner of certain notes, and a chattel mortgage securing the same, executed by Louis Stewart and wife, of Gallup, N.M., on the 10th day of December, 1918. Default having been made, plaintiff in error, on the 23d day of March, 1921, filed suit in a district court of the state of New Mexico, for the proper county, for the foreclosure of said chattel mortgage, and for the establishment of a landlord's lien against the mortgagees. A receiver pendente lite was prayed and was appointed. The defendant Stewart waived the issuance of service and process, filed answer confessing the allegations of the complaint, and thereafter, on the same day, to wit, March 23, 1921, the state court entered judgment in the sum of $43,765.91, and for foreclosure of the mortgage and lien. Said judgment was made up of the following items: $31,000 upon the principal of the notes; $6,001.47 interest thereon; rentals in the sum of $1,458.33; insurance premiums in the sum of $897.11 attorney's fees, $4,399; and court costs in the sum of $10-- all in accordance with the report of the receiver, to whom said items had been referred for audit and report. Upon sale under the judgment, plaintiff in error became the purchaser for a sum equaling the amount of the judgment and the expenses of the receivership.

April 5, 1921, a petition in involuntary bankruptcy was filed against said Stewart in the district of New Mexico. May 4 1921, the adjudication was made, and thereafter defendant in error was elected trustee and duly qualified as such. September 13, 1922, the trustee brought this action at law, setting up substantially the facts above stated, and charging that the property thus coming into the hands of plaintiff in error was reasonably worth the market value of $75,000; that the bankrupt was insolvent, as evidenced by the fact that his indebtedness greatly exceeded all his property of any nature, including that passing under foreclosure; that included in the judgment of the state court, on account of interest, attorney's fees, and rental, was an aggregate amount of $5,229.49 in excess of the actual amount owed; that this was known, both to the bankrupt and to plaintiff in error; that plaintiff in error, by his agents and attorneys, falsely and fraudulently represented to the court that this amount was due, and thereby committed a fraud upon the court, and induced the court to render judgment for the excessive amount; that the said bankrupt, by consenting to the judgment, knowingly aided the plaintiff in error to procure this excessive judgment; that plaintiff in error was at the time also a creditor, of the class of unsecured creditors of the said bankrupt, with unsecured claims aggregating over $26,000; that the effect of this excessive judgment would be to grant a preference to plaintiff in error over other creditors similarly situated; that this was known and intended by the bankrupt and by plaintiff in error, with full knowledge of the insolvency. He prayed judgment for the full sum of $75,000, alleged to be the reasonable market value of the property sold under foreclosure sale, together with interest and costs of suit.

After the issues were framed, by answer, following demurrer and motion to dismiss for want of jurisdiction, plaintiff in error on its part moved the court for judgment on the pleadings, on the ground that defendant in error had failed to deny, by his answer or otherwise, any of the allegations of the complaint. This motion was by the trial court sustained, and judgment was rendered for the sum of $5,229.49, the amount of excess in the judgment of the state court alleged in the complaint of defendant in error.

There being no diversity of citizenship, the right of the trustee to sue in the District Court of the United States must be founded upon the jurisdiction conferred by the Bankruptcy Act, to wit, sections 60b and 67e as amended (Comp. St. Secs. 9644, 9651). These sections have to do primarily with transfers made and judgments rendered within the four months period upon claims which have no preferential standing. Counsel for plaintiff in error calls attention to the fact that a clear distinction exists between such and judgments which arise out of the enforcement of a valid and subsisting lien, which has priority over the claims of general creditors, and against which the trustee cannot assert a paramount right. If no vice inheres in the claim of the lienor, which impairs the validity of his lien, he would have a right to prosecute that lien to judgment and to secure the full fruits of his priority. The mortgage lien is not attacked in this action; but it is asserted that included within the judgment is a substantial amount in excess of the legitimate lien claim, that this excess amount was not covered nor protected by the mortgage, that this was known both to the bankrupt and to plaintiff in error, and that the ultimate effect is to give to plaintiff in error a preference over other general creditors upon his unsecured claim filed with the referee, and amounting approximately to $26,000; that such was the intention both of the bankrupt and of plaintiff in error.

The known insolvency of the bankrupt at the time is admitted. The first question, then, is whether an amount thus recovered by legal proceedings within the four months period, and forming part of a judgment in other respects responding to the lien claim, is a preference within the meaning of the sections of the Bankruptcy Act to which reference has been made? In our opinion, it is. While it arises in an unusual manner, nevertheless the language of the statute is broad enough to include any money or property received or recovered during the statutory period, which is not covered and protected by some prior lien, and which may not prevail otherwise against the right of the trustee to the estate of the bankrupt. That the preference arises in this indirect way in no wise alters its standing under the law, nor the general right of the trustee to reclaim it. Otherwise an avenue of fraud, broad and easy of access, would be open to designing bankrupts, acting in collusion with equally designing creditors. Let us suppose that a mortgage debt had been paid in full, but not released from record, and that within the statutory period by connivance the mortgagee should institute foreclosure proceedings for the full amount specified in the mortgage, that the bankrupt should appear and confess the claim, and that, no reason to the contrary appearing, judgment should be entered accordingly. It cannot be supposed that the trustee would be left without remedy to recover a substantial part of the estate thus fraudulently withdrawn by such apparently regular proceedings. Where, as here, the alleged fraud is not so far-reaching, nevertheless the remedy of the trustee would be equally available.

It is, however, necessary to plead a state of facts which presents such a situation. This the trustee has done in the instant case, by charging that the acts complained of were done with knowledge and in collusion between the bankrupt and the mortgagee. He points out the items and the amounts of the excess recovery. He states that the purpose was to give a preference, and that such a preference would accrue to the plaintiff in error; that the total claims against the estate are largely in excess of the assets, even if the property passing by sale under the judgment be included in those assets. It would seem, then, that a case is made under the act, provided the trustee is in position to assert it and does so in the proper forum and by proper pleadings. So much, then, for the abstract right conferred by the act of bankruptcy.

We are next met by the question whether this remedy can be prosecuted in the federal court, and, if so, whether in equity or at law? It would seem that the District Court has jurisdiction, because, if it is a preference, the right of the trustee to sue in that court is expressly conferred by the act. In this case, however, the preference claimed is embodied in a judgment, regular on its face, procured in a state court of competent jurisdiction-- a jurisdiction which embraces the parties and the subject-matter, and includes the right to decide and determine the issues upon competent evidence produced. Such a judgment must stand in its entirety, unless set aside or modified by appropriate proceedings in the same court, or in some other court having jurisdiction to assail it at the instance of proper parties and under sufficient allegations.

The trustee has undertaken to meet this situation by charging that the action of the state court was brought about by the false and fraudulent representations of the plaintiff in error, through his attorneys and agents, with the connivance and aid of the bankrupt, whereby that court was induced, by fraud and imposition, to render a judgment which otherwise it would not have entered, and which is in direct conflict with the rights of the trustee under the paramount act of bankruptcy. Such action by the parties, if established, is such extrinsic fraud as would warrant setting aside or modifying the judgment, either in the court in which it was rendered or in some other court of competent jurisdiction, such as this court of bankruptcy, under the powers conferred by the act.

It is here interposed by counsel for plaintiff in...