Phelps v. McDonald

APPEAL from the Supreme Court of the District of Columbia.

This was a bill filed Sept. 8, 1874, by Thomas J. Phelps against Augustine R. McDonald. By an amendment, William White was made a defendant. It alleges that McDonald was on his petition declared a bankrupt by the District Court of the United States for the Southern District of Ohio, Dec. 10, 1868; that Phelps was appointed assignee, and received, Feb. 12, 1869, in due form the assignment of all the bankrupt's real and personal estate; that in the schedule of assets filed by the bankrupt appears this item: 'Claim against General Osborne, of U.S. Army, and others, for burning, in January and February, 1865, from one to two thousand bales of my cotton in Arkansas and Louisiana;' that this is the only description of the claim, except that in the duplicate schedule filed in the office of the register of said court the amount is stated at seven thousand to eight thousand bales, and the claim, with others, is designated as 'worthless;' that McDonald, March 17, 1869, received his discharge from the court, and that thereafter Phelps, having petitioned for and obtained and order to sell certain accounts, notes, and judgments of the bankrupt, sold them at public sale, White becoming the purchaser of the uncollected accounts belonging to the estate for the sum of twenty dollars; that the purchase was made for McDonald, with money furnished by him, and the claim transferred to him by White.

The bill further alleges, that, prior to the filing of his petition in bankruptcy, McDonald had a just and valid claim against the United States for certain cotton destroyed by the army during the late civil war; that being a British subject, although for many years a resident of this country, he prosecuted the claim before the joint British and American commission organized under the treaty of May 8, 1871, between the United States and Great Britain; that the claim was finally adjudged to be valid; and that, Sept. 25, 1873, the commission awarded the sum of $197,190 'to be paid in gold by the government of the United States to the government of her Britannic Majesty in respect of the above claim.'

To the bill of complaint is annexed as an exhibit McDonald's memorial to the joint commission, which shows his claim as one arising from purchases of cotton made by him in the insurrectionary States under permits from the Secretary of the Treasury and letters from the President of the United States, and alleges the subsequent repeal of the laws authorizing such permits before he could remove the cotton, and its final destruction by the Federal army.

The complainant insisted that this claim, thus arising from an alleged breach of an obligation of the United States to protect McDonald in the possession of the cotton destroyed, is not that described in the schedule of the assets which were sold by the assignee to the defendant White, and afterwards assigned by him to McDonald; that the schedule did not describe a claim against the United States arising from a violation of permits given by the President, and that the designation of it as 'worthless' added to the description given was well calculated to mislead; that the rules of the joint commission required all assignments of claims to be stated, which McDonald did not do, but prosecuted his claim upon his original title; that the award was made to him on that title, and not on that derived by purchase through White from the assignee in bankruptcy; and that said award ought rightfully to be paid to the complainant as assignee for the benefit of the creditors of said bankrupt, whose claims, as stated in his schedule, amount to $177,380, the only sum ever realized from his estate being the twenty dollars derived from the sale to White.

The bill then alleges that McDonald assigned said award to White, 'who took the same with full knowledge that said McDonald had no valid title thereto;' that the United States paid to the agent of the British government in the city of Washington said award, and he is about to pay the same to McDonald. The bill prays for an injunction restraining McDonald and White, or either of them, from receiving said award, and for a decree that said fund be held in trust for the creditors of said McDonald, and be subject to the complainant's rights as assignee in bankruptcy.

Process was personally served on both defendants. They answered, and the complainant filed a replication. A temporary injunction was awarded. Subsequently, by consent of parties, as decree was made that one half of the amount of the award be received by the defendants to pay the expense of prosecuting the claim before the joint commission, and the other half placed in the hands of George W. Riggs, as receiver, to await the final action of the court; and that McDonald execute all orders, receipts, and acquittances necessary to enable the receiver to obtain the fund.

The defendants withdrew their answer and filed a demurrer, the grounds whereof are, in effect, that the court below had no jurisdiction of the case, but that the exclusive jurisdiction remained with the District Court of the United States for the Southern District of Ohio; that the bill was not filed within two years from the time when the cause of action accrued; that the claim against the United States did not give any right of action either to McDonald or to the complainant as his assignee in bankruptcy; that if it did, such right was in tort, and did not pass to the assignee; that it appears by the bill and the said treaty that no ground or right of action against the United States ever existed in favor of said assignee by virtue of the assignment in bankruptcy.

The special term of the court sustained the demurrer, and decreed that the bill be dismissed, and that the receiver pay over to the defendants the money in his hands. The complainant having appealed to the general term, where the decree was affirmed, he brought the case here.

Mr. F. P. Stanton and Mr. George F. Appleby for the appellant.

An assignee in bankruptcy may sue in any court of competent jurisdiction to recover the assets of the bankrupt. Johnson's Assignee v. Bishop, 1 Woolw. 326; Lathrop, Assignee, v. Drake et al., 91 U.S. 516; Eyster v. Gaff et al., id. 521; Burbank v. Bigelow et al., 92 id. 179; Claflin v. Houseman, Assignee, 93 id. 130.

The suit was not barred by the Statute of Limitations. The right of the assignee as against McDonald did not accrue until the award was made. Clark v. Clark el al., 17 How. 315.

McDonald had at the date of his petition in bankruptcy a claim against the United States for the destruction of his cotton. Its validity is averred in the bill, and is conclusively established by the decision and award of the commission. Comegys et al. v. Vasse, 1 Pet. 193. Such a claim passes by the register's deed to the assignee in bankruptcy (Rev. Stat., sect. 5046), although it be incapable of enforcement by legal proceedings. Comegys et al. v. Vasse, supra; Milnor et al. v. Metz, 16 Pet. 221; Clark v. Clark et al., supra; Sheppard v. Taylor, 5 Pet. 707; Frevall v. Bache, 14 id. 95. Even if the fund arising from the allowance of the claim had been in England and in the hands of the British government, that fact would not defeat the jurisdiction of the court below, to which the parties were amenable, and against whom a decree could be rendered and enforced by process in personam. 2 Story, Eq. Jur., sect. 899 et seq.

Mr. William A. Cook and Mr. C. C. Cole, contra.

The assets of the bankrupt, including the claim in question, were purchased by White, who transferred it to McDonald, in whom was thus vested a perfect title as against the assignee. There having been no concealment of the condition or the supposed value of the claim, the case is not within the principle of Clark v. Clark et al., 17 How. 315.

At the time of the sale by the assignee this claim was worthless, having only a possibility of a value.

As the fund must be considered as being in England, the interest in, or the title to, a claim thereon did not by the assignment in bankruptcy pass to the assignee. Oakey v. Bennett, 11 How. 33; Lawrence's Wheaton (2d ed.), pp. 162, 163; Perry v. Barry, 1 Cranch, C. C. 204; Blaine v. Drummond, 11 Brock. 62; Hunt v. Jackson, 6 Blatchf. 349.

The fund was under the control of the British government to be distributed, and the decree of a court in this country could not operate upon it. Treaty of 1871, art. 12; Story, Eq. Pl, sect. 489. Were the law otherwise, the court below could have no jurisdiction, except on the ground of fraud, trust, or contract, and neither is alleged in the bill. Blake's Case, 1 Cox, 393; Penn v. Baltimore, 1 Ves. 444; Massie v. Watts, 6 Cranch, 148.

MR. JUSTICE SWAYNE delivered the opinion of the court.