Toledo Fence & Post Co. v. Lyons

• Decision Date: 06 June 1923
• Docket Number: 3904.
• Citation: 290 F. 637
• Parties: TOLEDO FENCE & POST CO. v. LYONS.
• Court: U.S. Court of Appeals — Sixth Circuit

290 F. 637

TOLEDO FENCE & POST CO. v. LYONS.

No. 3904.

United States Court of Appeals, Sixth Circuit.

June 6, 1923

Charles A. Seiders, of Toledo, Ohio, for appellant.

Gustavus Ohlinger, of Toledo, Ohio, for appellee.

Before KNAPPEN, DENISON, and DONAHUE, Circuit Judges.

DENISON Circuit Judge.

This is an appeal from an interlocutory order appointing a receiver for the appellant corporation. The trustee in bankruptcy of Smith filed the bill in the court below, as commencement of a plenary suit against the corporation, alleging that Smith had been and was its chief and controlling stockholder and general manager; that it had become indebted to him upon various transactions to the amount of about $19,000 net balance; that more than four months before bankruptcy and with the intent to defraud his creditors, Smith had canceled and discharged this $19,000 debt (as to parts of it upon inadequate consideration and as to other parts upon none) that the corporation was in imminent danger of insolvency and praying that the trustee have an accounting and a recovery of the full balance honestly due and that a receiver be appointed. There was no allegation that the corporation owed any debts except this one, or that its assets and business were being mismanaged to its prejudice. The record shows no affidavits in support of the application. Manifestly the mere facts that the bankrupt is the controlling manager and stockholder of the corporation, and that he has increased its apparent assets at his personal expense, do not tend to justify a receivership, taking the corporate management away from the directors. The order appointing the receiver recited that it appeared to the court 'that the grounds for the appointment of a receiver set forth in the bill filed herein exist and that a receiver should be forthwith appointed ' Recital in an order that the propriety of a receivership appeared to the court, even in the lack of any record showing how it appeared, is doubtless entitled to due weight in aid of the presumption that there was no error. Such effect is somewhat weakened in this case by the accompanying reference to the dependence upon the insufficient allegations of the bill; but we think it unnecessary and inadvisable to determine, upon the present unsatisfactory record, the validity of the appointment. Counsel state that proof was taken in open court tending to support the order, and that the position then taken by defendant was such as to excuse more formal allegations or proof. An order will be entered directing that within ten days, or such brief further time as the district court may allow, the trustee may cause to be settled a narrative of the proof which was taken, and, if so advised, may amend his bill, with its prayer for receivership, so as to meet such proof, and that a supplementary return may then be made to this court, whereupon this question will be considered and decided.

However, the permitting of any further steps implies that the jurisdiction of the court below appeared by the bill, or could appear by some amendment which the facts will permit. The appellant denies the existence or the possibility of such jurisdiction; and this subject must therefore be met.

The denial goes, first, to the jurisdiction of the court below as a court of equity; and rests upon the decision of this court in Warmath v. O'Daniel, 159 F. 87, 86 C.C.A. 277, 16 L.R.A. (N.S.) 414, to the effect that the remedy at law may be so adequate as to bar a proceeding in equity, even though a fraud is involved or a conveyance is to be set aside. This attack upon the equity jurisdiction of the court below must be overruled, for this, if for no other, reason: One of the transactions attacked as fraudulent was that by which the bankrupt had received from the corporation assets worth about $4,000, and in exchange had canceled a debt of about $10,000 from it to him. These assets could not now be returned, and a suitable credit on the debt must be made as an equitable condition of rescinding. Fixing the proper conditions of such a rescission is, to say the least, so far within the powers and peculiarly fit for the machinery of a court of equity that, even if the remedy at law were 'adequate,' that objection must be made at the first opportunity or it is waived. Here it was not made, so far as the record shows, until the assignments of error were filed; and then only vaguely.

The denial goes, second, to the jurisdiction of the court as a federal court. The argument is that when a suit is merely one by a trustee to recover by adverse proceedings a debt from defendant to the bankrupt, and where there is no diverse citizenship, a federal court has no jurisdiction. This result, in a case where there is no consent, is plainly required by Bankruptcy Act, Sec. 23(b) (Comp. st. Sec. 9607), unless this case is within that provision, (e), of section 70 of the Bankruptcy Act (section 9654) which provides that--

'The trustee may avoid any transfer by the bankrupt of his property which any creditor of such bankrupt might have avoided, and may recover the property so transferred, or its value, from the person to whom it was transferred. * * * 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.' Whatever doubt may have existed as to whether the seeming effect of this grant of jurisdiction was limited by the apparently inconsistent restriction of section 23 (Harris v. Bank, 216 U.S. 382, 30 Sup.Ct. 296, 54 L.Ed. 528) has been removed by the 1910 amendment of section 23, bringing the two sections into harmony; and since the court below is a court of bankruptcy under section 1(8) (section 9585), as well as the successor of the Circuit Court, it follows that there was jurisdiction, if the suit is one to recover from the person to whom it was transferred, property or its value, which had been transferred by the bankrupt to defraud his creditors. It is not to be doubted that the debt from the corporation to Smith was 'property,' capable of being transferred by conveyance or transaction which his creditors could avoid. Such difficulty as there is in the application of this statute, 70(e), lies deeper. While it is said for the trustee that this action is one to recover 'property so transferred,' it is said in reply that such descriptive language is unfit and inappropriate to point out a mere release or discharge from the creditor to the debtor, where the action brought does not involve any third person to be bound or any evidence of debt to be reinstated or any conveyance which must be set aside; and that the fraudulent character of the cancellation is not the basis of such an action, but will be the reply when the defendant undertakes to set up the discharge as a defense. In other words, the trustee says the suit is to recover property fraudulently transferred; the defendant says that it is to recover property which never had been transferred. ^[1]

We will not undertake to decide the question, because we think the jurisdiction sufficiently otherwise appears. It is to be inferred from the record that the defendant corporation received due notice of the filing of the bill and the application for receivership. It appeared before the court at the time fixed for the motion and obtained a postponement of the hearing to get time to complete an expected adjustment. Upon the adjourned day it reported that the adjustment had failed, and it then was heard as far as it desired upon the merits of the application. It made no objection to the jurisdiction of the court, but tacitly acquiesced therein. Such conduct is clearly a waiver of objection and a consent to the jurisdiction, unless the defects therein so pertain to subject-matter that they cannot be waived. Detroit Co. v. Pontiac Co. (C.C.A. 6) 196 F. 29, 32, 115 C.C.A. 663; Twin Lakes Co. v. Dohner (C.C.A. 6) 242 F. 399, 402, 155 C.C.A. 175. The question, therefore, is: With defendant's consent, under section 23(b), can the trustee sue in a federal court to recover a debt due the bankrupt, where the amount is more than $3,000 but there is no diversity of citizenship?

By section 70(a) the trustee becomes vested, by operation of law, with the entire title of the bankrupt to all his nonexempt property and rights of action, and thereby undoubtedly acquires the right, and under section 47 (section 9631) becomes charged with the duty, to bring in his own name any action which may be necessary to reduce to possession all the bankrupt's property, including debts due to the bankrupt. Under section 24(1) of the Judicial Code (Comp. St. Sec. 991), the District Courts have jurisdiction of all civil suits which arise under the Constitution or laws of the United States and where the matter in controversy exceeds $3,000. Under these provisions we cannot doubt that, if they alone were to be considered, the District Court of that district where the defendant might reside (or in certain cases be found) would have jurisdiction of an action by a trustee to recover a debt of more than $3,000 which had been due to the bankrupt. The action would be one arising under the laws of the United States, since the trustee would sue by virtue of a title created by the bankruptcy law. The trustee must allege and prove that valid proceedings were taken under the Bankruptcy Act, leading to a valid adjudication, whereby title passed, and that by valid proceedings under the act he was chosen as trustee. If the proof fails in any of these particulars, the suit fails. The suit is one step in the collection of assets in the execution of the Bankruptcy Act. That such a case would be one 'arising under the laws of the...