Neuberger v. Felis

• Decision Date: 15 May 1919
• Docket Number: 1 Div. 73
• Citation: 82 So. 172,203 Ala. 142
• Parties: NEUBERGER v. FELIS et ux.
• Court: Alabama Supreme Court

82 So. 172

203 Ala. 142

NEUBERGER v. FELIS et ux.

1 Div. 73

Supreme Court of Alabama

May 15, 1919

Appeal from Circuit Court, Mobile County; Norville R. Leigh, Jr. Judge.

Bill by Samuel G. Neuberger against Nicholas Felis and wife to set aside a conveyance as a fraud on creditors. From a decree sustaining demurrers to the bill, complainant appealed. Affirmed.

Complainant alleges insolvency of Nicholas Felis, the fact of his voluntary bankruptcy, and the purchase by complainant from the trustee in bankruptcy of the estate of Nicholas Felis of certain property, among which was the house and lot in question; also, the confirmation of the sale by the referee in bankruptcy. The bill further alleges the transfer of the house from the husband to the wife prior to the bankruptcy but within one year thereof. The bill alleges, also, other facts common to a bill to set aside and annul the deed as a fraud on creditors.

R.H. &amp R.M. Smith, of Mobile, for appellant.

D.B Cobbs and G.H. Kruempel, both of Mobile, for appellees.

THOMAS J.

The question presented by this appeal is whether a trustee in bankruptcy may sell and convey the right of action, under the state statute, to set aside a fraudulent conveyance not executed within the four months' period.

In Barrett v. Kaigler, 76 So. 320, this court declared that, under the Bankruptcy Act of July 1, 1898, c. 541, § 70 subd. a (4), 30 Stat. 565 (U.S.Comp.St. 1916, § 9654), the trustee in bankruptcy is vested with the title which the bankrupt had in the property transferred by him in fraud of creditors; that the trustee takes the title and also the right of action of the creditors, and may assail the fraudulent conveyance to the same extent as the creditor and as though the debtor had not been declared a bankrupt; that such rule applies to all property transferred by the bankrupt at any time in fraud of creditors existing at the time of the bankruptcy; and that it is the duty of the trustee to reduce to possession all of the property of the bankrupt subject to the payment of debts for distribution among creditors. The justice writing said:

"The trustee is vested, not only with the title of the property, but also with the creditors' right of action with respect to the property of the bankrupt theretofore conveyed by him in fraud of such creditors; and the trustee may assail such transfers or conveyances to the same extent as the creditor, as though the debtor had not been declared a bankrupt. In re Rodgers, 125 F. 169, 60 C.C.A. 567; In re Butterwick (D.C.) 131 F. 371; Thomas v. Roddy et al., 122 A.D. 851, 107 N.Y.Supp. 473, 476. That a trustee in bankruptcy may sue to set aside a fraudulent conveyance made by the bankrupt more than four months prior to the filing of the bankruptcy petition, 'without showing that some creditor of the bankrupt between the disposition of the property and the filing of the petition in bankruptcy had placed himself in position to attack the fraudulent transfer by obtaining a judgment and issuing execution and having the same returned unsatisfied,' has been declared to be the right of the trustee vested with the title under section 70, 30 Stat. 565 (U.S.Comp.St. 1916, § 9654)."

In Watson v. Motley, 75 So. 147, it was held that, after a bankrupt has been discharged, he may sue for and recover property not administered, and an attorney who prosecutes such suit and pays over to the bankrupt money received in such litigated action, in the absence of fraud, is not liable for the amount "so paid on estate being reopened."

Pertinent provisions of the Bankruptcy Act are sections 70a, 70e; U.S.Comp.St. 1916, § 9654. Collier on Bankruptcy (11th Ed.) p. 1106 et seq. Speaking generally of the title that vests in the trustee, under the former bankruptcy acts there was doubt as to when such official took title. Under the present act, the insertion of the words "The trustee of the estate of a bankrupt, upon his appointment and qualification, *** shall *** be vested by operation of law with the title of the bankrupt, as of the date he was adjudged a bankrupt," met the former difficulties. Matter of Zotti, 26 Am.Bankr.Rep. 234, 186 F. 84, 108 C.C.A. 196, Ann.Cas.1914A, 240; In re Mertens et al., 142 F. 445, 73 C.C.A. 561. While the trustee's title is only that which exists at the date of adjudication, of necessity such title relates back to the time of filing the petition. Everett v. Judson, 228 U.S. 474, 33 Sup.Ct. 568, 57 L.Ed. 927, 46 L.R.A. (N.S.) 154; Toof v. City National Bank, 206 F. 250, 124 C.C.A. 118; In re Mertens, supra. Thus was fixed the status of the bankrupt estate as of the time at which the petition was filed, and the property which vested in the trustee at the time of the adjudication was that property which the bankrupt owned at the time of the filing of his petition in bankruptcy. Acme Harvester Co. v. Beekman Lbr.Co., 222 U.S. 300, 32 Sup.Ct. 96, 56 L.Ed. 208; Bailey v. Baker Ice Machine Co., 239 U.S. 268, 36 Sup.Ct. 50, 60 L.Ed. 275; In re Continental Coal Corporation, 238 F. 113, 151 C.C.A. 189; Everett v. Judson, supra. We may further observe that, by the general rule, the trustee takes all the property of the bankrupt whether in possession or in action at the time the petition was filed (In re Burka [[D.C.] 104 F. 326; In re Pease, 4 Am.Bankr.Rep. 578), and is not confined to the property that is described in the bankrupt schedules, but extends to any property owned by him and passes to the trustee on adjudication (Jones v. Barnes, 107 Miss. 800, 66 So. 212, 35 Am.Bankr.Rep. 64).

By subdivision 4 of section 70a of the act in question, property transferred in fraud of the bankrupt's creditors passes to the trustee, which is the converse of the doctrine that the trustee takes the title of the bankrupt subject to equities; that is to say, the trustee takes title to property transferred by the bankrupt to defraud his creditors. In re Yukon Woolen Co. (D.C.) 2 Am.Bankr.Rep. 805, 96 F. 326; Cowan v. Burchfield (D.C.) 180 F. 614; Lovell v. Latham & Co.

(D.C.) 211 F. 374. This is the effect of the act as to all property transferred by the bankrupt at any time in fraud of his creditors. In re Kohler, 159 F. 871, 87 C.C.A. 51; Barrett v. Kaigler, supra; Sparks v. Weatherly, 176 Ala. 324, 58 So. 280; Cowan v. Staggs, 178 Ala. 144, 59 So. 153; McCrory v. Donald, 192 Ala. 312, 68 So. 306.

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, when a creditor could have avoided the same under the statute. Barrett v. Kaigler, supra; McMahon v. Pithan, 33 Am.Bankr.Rep. 125, 166 Iowa, 498, 147 N.W. 920; 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.

The trustee alone has the power to exercise this right to sue. This is the rule for the recovery of property transferred fraudulently by the bankrupt and belonging to the trustee; and, on the failure of the trustee to sue, it has been held that the right may not be transferred by him to a creditor. Ruhl-Koblegard Co. v. Gillespie, 22 Am.Bankr.Rep. 643, 61 W.Va. 584, 56 S.E. 898, 10 L.R.A. (N.S.) 305, 11 Ann.Cas. 929; McMahon v. Pithan, 33 Am.Bankr.Rep. 125, 166 Iowa, 498, 147 N.W. 920; In re Barker, 20 Am.Bankr.Rep. 674; 3 Remington on Bankruptcy, § 996 1/2. This is the policy of the act; for it is by virtue of the statute that the trustee represents all of the creditors, and the avails of a suit to recover property fraudulently conveyed belongs to the bankrupt estate for equal distribution among creditors--those of the class to whom it belongs. That is to say, the right of suit for recovery of such fraudulently conveyed property is statutory and conferred on the office of trustee--as an officer of the court--to be exercised in the interest of and for the benefit of the creditors of the bankrupt. Collier on Bankruptcy (11th Ed.) 1917, pp. 722, 723. There is only one case to the contrary, authorizing a sale by a trustee of such a right of action to a creditor, much less to a stranger. In Re Downing (D.C.) 192 F. 683, the argument against such transfer was to the foregoing effect, and the conclusion was that a sale by a trustee of such right of action may be ordered. We are unable to reconcile the statement of the rule said to govern in such matters with the conclusion there announced by the district court.

In the case at bar, more than four months before his bankruptcy, the bankrupt conveyed his homestead to his wife, reciting a consideration of $5,000. If it was a fraudulent conveyance it was the duty of the trustee to subject such property to the claim of the creditors, or rather subject the difference between the exemption allowed by the Alabama statute and the real value of the property at the time of the conveyance. This the trustee in bankruptcy did not undertake to do, but attempted to sell such right of action and to invest the purchaser with the right. If he may not sell the right of action to one of the creditors of the class having a right, claim, or lien in, to, or upon said excess valuation over the exemption, it would follow that the warrant of the statute does not exist in the trustee to sell the right of action for a pittance, or, as for that, for its true value, to a third party purchasing either at public or private sale. Loveland on...