Phelps v. Elliott

• Decision Date: 10 July 1888
• Citation: 35 F. 455
• Parties: PHELPS v. ELLIOTT et al.
• Court: U.S. District Court — Southern District of New York

35 F. 455

PHELPS v. ELLIOTT et al.

United States Circuit Court, S.D. New York.

July 10, 1888

H. B Titus, for complainant.

William G. Choate and John Selden, for defendants.

WALLACE J.

This cause has been argued for the complainant upon the theory that the bill of complaint sufficiently avers that he, as the assignee in bankruptcy of one McDonald, became entitled to a claim against the United States for cotton destroyed during the war of the Rebellion; that, by fraudulent concealment and misrepresentation of McDonald, the claim was included among the supposed worthless assets of the bankrupt's estate and sold as such at a public sale, made by order of the bankrupt court, and was bought by one White for the sum of $20 for McDonald himself, and with money furnished by McDonald; that McDonald obtained an award against the United States for the sum of $197,191 in gold, which award he assigned to White; that in September, 1874, the complainant brought an action in the supreme court of the District of Columbia against White and McDonald to restrain them from receiving the sum to be paid upon the award, and to obtain a decree that the fund arising therefrom be adjudged to belong to him; that by certain interlocutory orders or decrees made in the progress of that cause one Riggs was appointed a receiver, and came into the possession of $107,012, part of said fund, and was directed to invest the same in bonds of the District of Columbia, and to hold the fund thus invested subject to the rights of the complainant during the pendency of the suit; that Riggs, as receiver, did invest the sum in such bonds; that the supreme court of the District of Columbia decided the cause adversely to the complainant, but on appeal from the decree to the supreme court of the United States the latter court reversed the decree, and adjudged that the title to the said claim and award was vested in the complainant (99 U.S. 298;) that during the pendency of the suit McDonald, in fraud of the rights of the complainant, obtained possession of the bonds from the receiver, and sold and delivered them to the defendant; and that the defendant, at the time of purchasing the bonds, had full knowledge of the complainant's rights, of the pendency of the suit, and that the sale to them by McDonald was made with intent to defeat the complainant's rights. The prayer of the bill is, in substance, that it be adjudged that the defendants acquired no title to the bonds, and be required to deliver them over to complainant, or account for their value. The defendant is one of the surviving members of the banking firm of Riggs & Co. Riggs, who was a member, died in 1881. Originally Kieckhoefer, another of the surviving members of that firm, was a party defendant; but he demurred to the bill, the demurrer was sustained, and as to him the bill has been dismissed. The suit was commenced as to the present defendant August 20, 1884.

The proofs show that McDonald was adjudged a bankrupt by the district court of the United States for the Southern district of Ohio December 10, 1868; that the complainant was appointed assignee, and received, February 12, 1869, an assignment in due form of all the bankrupt's estate; that McDonald, who was a British subject, had at the time a claim against the United States for cotton destroyed by the army, which he was aware was one of strong equity and in respect to which he entertained a hope of obtaining relief and compensation; that he described it so vaguely in his schedule of assets in the bankruptcy proceeding as to conceal its real character from the complainant; that in September, 1869, the complainant petitioned for and obtained an order from the court in bankruptcy to sell all the uncollected accounts belonging to the estate of the bankrupt at public sale, and on or about September 27th sold them at such sale to one White for the sum of $20; that this purchase was made for McDonald; that McDonald was enabled to and did prosecute his claim against the United States before the joint British and American commission organized under the treaty of May 8, 1871, between the United States and Great Britain, as though he had never been divested of it; that the claim was adjudged to be valid, and the commission awarded him the sum of $197,190, to be paid in gold by the government of the United States; that upon learning of the award the complainant brought a suit in the supreme court of the District of Columbia against McDonald and White to recover the amount, and to restrain them from collecting it; that one Riggs, a member of the banking firm of Riggs & Co., was appointed a receiver in that suit, and as such receiver was directed to invest $107,012, part of the award which came ot his hands, in District of Columbia bonds, and to hold the same thus invested subject to the rights of the parties in the suit; that the receiver did invest in the bonds as directed; that McDonald and White demurred to the bill filed by the complainant, and the court sustained the demurrer, and dismissed the complainant's bill, and by its decree directed that the bonds-- 'the funds belonging to the cause'-- be delivered by the receiver to McDonald and White; that the complainant caused an appeal to be entered in the cause, but did not give security or obtain any order suspending its operation; that McDonald called upon the receiver and demanded the bonds; that the receiver was aware that the appeal had been entered, and being in doubt as to his duty went to the judge who decided the cause for instructions, and was instructed that his functions were at an end, and that it was his duty to deliver the bonds to McDonald; that the receiver delivered the bonds, and thereupon McDonald applied to Riggs & Co. to purchase them; that Riggs & Co. were informed of what had taken place in reference to the decree, the appeal, the instructions by the judge to the receiver, and, after consulting with the receiver, concluded that McDonald could rightfully sell the bonds, and thereupon, June 28, 1875, bought them, paying the full market price at which they were then selling; that the complainant, by his attorney, had full knowledge of the transaction at the time it took place; that subsequently the appeal taken in the cause was heard by the supreme court of the United States, and that court, in May, 1879, ordered by its mandate that the decree of the court below be reversed, and the cause be remanded for further proceedings in the court below 'in conformity with the opinion;' that afterwards, the complainant filed a supplemental bill in the cause in the supreme court of the District of Columbia, setting forth the sale of the bonds by the receiver and the payment of the proceeds thereof to McDonald and White, and praying for a money decree against McDonald and White for the sum received by them; that subsequently McDonald was adjudged in contempt for not restoring the fund to the court, and a decree pro confesso upon the original and supplemental bill was ordered, and July 8, 1880, a final decree was entered in the cause adjudging that McDonald and White pay the complainant the sum of $58,735.

The proofs sufficiently show that the purchase by McDonald, in the name of White, at the assignee's sale of the claim against the United States, and his subsequent prosecution of the claim to an award, were acts in consummation of an original fraudulent design to conceal the real character of the claim from the complainant, and appropriate the fruits to himself in fraud of the creditors represented by the complainant. The documentary evidence exhibits substantially every fact averred in the bill which was considered by the supreme court of the United States upon the demurrer; and as that court held the facts alleged sufficient to establish prima facie the fraudulent character of McDonald's acts that character must be attributed to them now upon the documentary evidence. The bill, however, contained allegations which are not in the present bill, and which were doubtless considered by the court as sufficiently averring a concealment by McDonald of the true value and character of his claim against the United States from his assignee in bankruptcy which was constructively if not actually fraudulent. It detailed the particulars of the transaction out of which the claim arose, and set out literally the description of the claim as it was inserted by McDonald in his schedule in the bankruptcy proceedings, and thus, by contrasting the real character with the described character of the claim, enabled the court to see that McDonald had not only omitted to give such a description of it as it was his duty to give to his trustee, but had given one which was misleading. In the present bill there is no averment of any fraudulent suppression of the character or value of the claim by McDonald which led or was intended to lead the complainant as assignee in bankruptcy to believe that the claim was worthless or of little value, or of any fact from which a fraudulent intention to conceal the real character or value of the claim from the assignee on the part of McDonald can be implied. The averment is that the 'claim was imperfectly described by said bankrupt in his schedule of assets and designated as worthless,' without more. There is no averment of a fraudulent purchase of the claim by him, or that the title to the claim did not pass by the sale made by the assignee; nor is there any averment which by any implication is inconsistent with the theory that McDonald purchased the claim, through the instrumentality of White, at the sale of the assets, believing it to be one of little or no value, or which suggests any bad faith in the transaction upon his part. There is no averment that the complainant was misled or...