Stellwagen v. Clum/Opinion of the Court

This case is here upon certificate from the United States Circuit Court of Appeals for the Sixth Circuit. From the statement accompanying the certificate it appears that Stellwagen, trustee for Margaret Zengerle, filed a petition in the United States District Court to require the surrender and transfer to him of a quantity of white pine lumber and balance due upon a certain open account then in possession of Clum as trustee in bankruptcy of the Georgian Bay Company. The order was denied, the petition dismissed, and appeal taken to the Circuit Court of Appeals.

The questions are whether certain provisions of the statutes of Ohio are suspended by virtue of the Bankruptcy Act of 1898. The facts upon which the questions arise, and in view of which they are to be answered, are thus stated:

'The Georgian Bay Company, an Ohio corporation, was at the     time of the transactions in dispute engaged in the wholesale      and retail lumber business at Cleveland, Ohio. February 2,     1910, the company delivered to appellant's predecessor (A. L.      McBean), as trustee for Margaret Zengerle and the Dime      Savings Bank of Detroit, its bill of sale, describing 433,500      feet of white pine lumber then in the company's yards, and      stating a total price of $14,013; crediting the trustee with      certain promissory notes of the company for a like sum and      payable in different amounts, to the order of Margaret      Zengerle, C. M. Zengerle, agent, and the Dime Savings Bank,      respectively. Neither the bill of sale nor a copy was filed     with the recorder of Cuyahoga county, Ohio; but the lumber so      in terms sold consisted of piles (stacked in the ordinary      way) which were to be and at the time in fact were each distinctly marked: 'Sold to A. L. McB., Agt.' May 3, 1910, the      company with consent of McBean sold this lumber and certain      of its own lumber then in the yards, to Schuette & Co. of      Pittsburgh. Payment was to be made by Schuette & Co., part in     cash, part in notes maturing at fixed times between date of      sale and the following September 10th and the balance in cash      on or before October 1st. Two days later, May 5th, the     Georgian Bay Company transferred to appellant 'the balance,      twenty-five per cent. of in oice value or what may show due     on the 1st of October, A. D. 1910, of the purchase price of      the lumber' (so sold to Schuette & Co.), to secure payment in      full of all moneys that should be advanced by, and 'payment      pro rata of all moneys' then owing to, the Dime Savings      Banks, Mrs. Zengerle and C. M. Zengerle, agent; and any      surplus remaining was to be returned to the company. Schuette     & Co., while owing a balance of $7,500 on portions of the      lumber it had received, rejected the rest; this can be      identified and is worth about $4,000. It was the transfer of     this balance and the surrender of this rejected lumber that      appellant sought in the court below.

'October 31, 1910, the Georgian Bay Company made a general     assignment for the benefit of its creditors, which was      properly filed the following November 7th; and on the 9th of      that month the company was adjudicated a bankrupt. At the     time there remained due from the bankrupt to Mrs. Zengerle      $7,100. C. M. Zengerle is the husband of Margaret Zengerle,     and was the president of the Georgian Bay Company; the notes      payable to his wife represented loans of money belonging to      her; and in negotiating those loans and in the transaction      had under the bill of sale, he acted as her agent and as      president of the company. The theory of the court below was     that the bill of sale (February 2, 1910) was intended merely      as security and, not having been deposited in accordance with      section 4150 (2 Bates' Ann. Ohio Stat. p. 2302) concerning chattel mortgages, was null and void; that the transfer (May      5th) of balance accruing October 1st from Schuette & Co. was      made with intent to hinder and delay creditors, when,      according to the laws and the rule of judicial decision of      the state of Ohio, the Georgian Bay Company was insolvent,      though not according to the Bankruptcy Act; that Margaret      Zengerle was, through her agent, C. M. Zengerle chargeable      with knowledge of such intent and insolvency, and the Savings      Bank was not; that as to Margaret Zengerle the transfer was      null and void and so was set aside, but that the Savings Bank      was entitled to be paid out of the balance of the Schuette      account. No appeal was taken from the portion of the decree     which allowed recovery by the Savings Bank.'

The statutes of the state of Ohio in question are sections 6343 and 6344 of the Revised Statutes of Ohio as amended April 30, 1908, 99 Ohio Laws, 241, 242. These sections were arranged under the General Code of Ohio approved February 15, 1910, wherein they appear as sections 11102 to 11107 inclusive. (These sections are given in the certificate, as they stood February 2, 1910, and are found in the margin. ) The claim is stated to be that section 6343 when considered in connection with the chapter concerning insolvent debtors is suspended by the Bankruptcy Act. Reliance is had for this contention upon the following portion of section 6343 which provides:

'A receiver may be appointed who shall take charge of all the     assets of such debtor or debtors, including the property so      sold, conveyed, transferred, mortgaged, or assigned, which      receiver shall administer all the assets of the debtor or debtors for the equal benefit of all      the creditors of the debtor or debtors in proportion to the      amount of their respective demands, including those which are      unmatured.'

'(a) Whether the Bankruptcy Act of the United States, in     force on the dates herein mentioned, operated to suspend      section 6343 of the Revised Statutes of Ohio, as such section      stood February 2, 1910.

'(b) Whether the Bankruptcy Act operated to suspend the     sections into which section 6343 was divided and numbered,      February 15, 1910, by the General Code of Ohio, to wit,      sections 11102, 11103, 11104 and 11105 as such sections      existed May 5, 1910.

'(c) If the Bankruptcy Act did not operate to suspend in     their entirety the several sections of the Ohio statutes      mentioned in the preceding questions, whether such suspension      extended only to the portions thereof which in terms appropriated, for the benefit of all the creditors, the      property of the debtor not specifically described in the bill      of sale and transfer of account in dispute.'

The Circuit Court of Appeals also sends an opinion in re the certification aforesaid, in which the court says that it is disposed to hold that if the provisions of the Ohio statutes were suspended, the appellant is entitled in behalf of Margaret Zengerle to recover, otherwise the trustee in bankruptcy is entitled to hold the balance due from Schuette & Co. and the lumber rejected by them, and administer the same as the part of the estate of the bankrupt for the benefit of its general creditors. The court states that as between Mrs. Zengerle and the general creditors of the Georgian Bay Company, there was sufficient delivery of possession of lumber covered by the bill of sale to dispense with the necessity of depositing the instrument with the county recorder. The sale subsequently made to Schuette & Co., upon the consent of Mrs. Zengerle's trustee, was a distinct recognition of the intent and effect of the bill of sale, and the marking of the piles of lumber, and the transfer of account made two days later was manifestly designed at once to execute the transaction involved under the bill, and transfer the rights thereunder of Mrs. Zengerle, as well as of the Savings Bank, to the sales's proceeds. The court further says, upon the hypothesis that the state statutes are suspended, that because more than four months elapsed between the delivery of the bill of sale, as also of the transfer of account, and the bankruptcy, the trustee cannot by virtue of the Bankruptcy Act alone question the validity of either of those instruments. The court adds that if the state statutes were not suspended, the general creditors were not suspended, the instruments in dispute set aside because, under the facts shown, the company was not able to meet its debts as they fell due, and so was insolvent; and, further, the instruments in terms were made to a trustee. The rights so vested in the creditors being enforceable at any time within four years under the Ohio law.

The federal Constitution, article I, section 8 gives Congress the power to establish uniform laws on the subject of bankruptcy throughout the United States. In view of this grant of authority to the Congress it has been settled from an early date that state laws to the extent that they conflict with the laws of Congress, enacted under its constitutional authority, on the subject of bankruptcies are suspended. While this is true, state laws are thus suspended only to the extent of actual conflict with the system provided by the Bankruptcy Act of Congress. Sturges v. Crowninshield, 4 Wheat. 122, 4 L. Ed. 529; Ogden v. Saunders, 12 Wheat. 213, 6 L. Ed. 606.

Notwithstanding this requirement as to uniformity the bankruptcy acts of Congress may recognize the laws of the state in certain particulars, although such recognition may lead to different results in different states. For example, the Bankruptcy Act recognizes and enforces the laws of the states affecting dower, exemptions, the validity of mortgages, priorties of payment and the like. Such recognition in the application of state laws does not affect the constitutionality of the Bankruptcy Act, although in these particulars the operation of the Act is not alike in all the states. Hanover National Bank v. Moyses, 186 U.S. 181, 188, 189, 190, 22 Sup. Ct. 857, 46 L. Ed. 1113. True it is that general assignments for the benefit of creditors are acts of bankruptcy, Act of 1898, section 3, clause 4, and since the amendment of 1903, 32 Stat. 797, a receivership of an insolvent debtor with a view to distribution of his property for the benefit of creditors will have the like effect. 1 Loveland on Bankruptcy (4th Ed.) § 153. In such cases the bankruptcy proceedings, taken within four months, displace those in the state court and terminate the jurisdiction of the latter. R ndolph v. Scruggs, 190 U.S. 533, 537, 23 Sup. Ct. 710, 47 L. Ed. 1165; In re Watts & Sacks, 190 U.S. 1, 31, 23 Sup. Ct. 718, 47 L. Ed. 933. But it does not follow that state statutes intended to avoid conveyances actually or constructively fraudulent and thereby to promote the equal distribution of insolvent estates may not be availed of by the trustee. Section 70e of the Bankruptcy Act provides:

'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, unless he      was a bona fide holder for value prior to the date of the      adjudication. Such property may be recovered or its value     collected from whoever may have received it, except a bona      fide holder for value. 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.'

This section as construed by this court gives the trustee in bankruptcy a right of action to recover property transferred in violation of state law. Security Warehousing Co. v. Hand, 206 U.S. 415, 425, 426, 27 Sup. Ct. 720, 51 L. Ed. 1117, 11 Ann. Cas. 789; Knapp v. Milwaukee Trust Co., 216 U.S. 545, 548, 30 Sup. Ct. 412, 54 L. Ed. 610.

And a right of action under this subdivision is not subject to the four months' limitation of other sections (60b, 67e) of the Bankruptcy Act. Under this subdivision if a creditor could have avoided a transfer under a state law, a trustee may do the same. In re Mullen (D. C.) 101 Fed. 413 (opinion by Judge Lowell); 1 Loveland on Bankruptcy (4th Ed.) 786, 787; Collier on Bankruptcy (11th Ed.) p. 1178, and cases cited in note 439.

Turning now to the sections of the Ohio laws in question-the right to proceed by due course of law to recover particular property transferred as prohibited in section 6344, and to cause the same to be administered for the equal benefit of creditors, as in cases of assignment to trustees for the benefit of creditors, has long been part of the statutory law of Ohio. The part in section 6343 wich enables the court to appoint a receiver to take charge of all the assets of the debtor or debtors, including the property conveyed, and administer the same for the equal benefit of creditors, is the new feature of the law.

It is apparent that this section intends to permit the appointment of a receiver to take charge of all the assets of the debtor when the provisions of the statute apply as to the debtor and his transferee, and the latter is required to know of the fraudulent intent on the part of the debtor.

Creditors are not thereby deprived of rights, but in case of bankruptcy proceedings within four months of a general assignment for creditors, as was the case here, the property may be brought into the bankruptcy court, or, as in this case, may be in its possession and be retained in that court to be administered for the benefit of general creditors. This state statute is not opposed to the policy of the bankruptcy law or in contravention of the rules and principles established by it with a view to the fair distribution of the assets of the insolvent. It is only state laws which conflict with the bankruptcy laws of Congress that are suspended; those which are in aid of the Bankruptcy Act can stand. Miller v. New Orleans Fertilizer Co., 211 U.S. 496, 29 Sup. Ct. 176, 53 L. Ed. 300.

This view of the sections in question was taken by the Circuit Court of Appeals, Sixth Circuit, in Re Farrell, 176 Fed. 505, 509, 510, 100 C. C. A. 63, wherein in the opinion it was said that the changes made by the new statutes were in harmony with the policy of the Bankruptcy Act and in aid of its purposes.

There is much discussion in the books as to what constitutes a bankruptcy act as distinguished from an insolvency law. It is settled that a state may not pass an inso vency law which provides for a discharge of the debtor from his obligations, which shall have the effect of a bankruptcy discharge as to creditors in other states, and this although no general federal bankruptcy act is in effect. And while it is not necessary to decide that there may not be state insolvent laws which are suspended although not providing for a discharge of indebtedness, all the cases lay stress upon the fact that one of the principal requisites of a true bankruptcy law is for the benefit of the debtor in that it discharges his future acquired property from the obligation of existing debts.

In the case of Mayer v. Hellman, 91 U.S. 496, 23 L. Ed. 377, this court had before it, while the Bankruptcy Act of 1867 was in force, the question of the validity of the assignment of an insolvent, in Ohio, to trustees for the benefit of all his creditors executed six months before the proceedings in bankruptcy had been taken, and it was held that the assignment was good and the assignees in bankruptcy not entitled to the possession of the property. Mr. Justice Field in delivering the opinion of the court said:

'In the argument of the counsel of the defendant in error,     the position is taken that the Bankrupt Act suspends the      operation of the act of Ohio regulating the mode of      administering assignments for the benefit of creditors,      treating the latter as an insolvent law of the state. The     answer is, that the statute of Ohio is not an insolvent law      in any proper sense of the term. It does not compel, or in     terms even authorize, assignments; it assumes, that such      instruments were conveyances previously known, and only      prescribes a mode by which the trust created shall be      enforced. It provides for the security of the creditors by     exacting a bond from the trustees for the discharge of their      duties; it requires them to file statements showing what they      have done with the property; and affords in various ways the      means of compelling them to carry out the purposes of the      conveyance. There is nothing in the act resembling an     insolvent law. It does not discharge the insolvent from     arrest or imprisonment; it leaves his after-acquired property      liable to his creditors precisely as though no assignment had      been made. The provisions for enforcing a trust are substantially such as a court of     chancery would apply in the absence of any statutory      provision. The assignment in this case must, therefore, be     regarded as though the statute of Ohio, to which reference is      made, had no existence. There is an insolvent law in that     state; but the assignment in question was not made in      pursuance of any of its provisions. The position, therefore,     of counsel, that the bankrupt law of Congress suspends all      proceedings under the insolvent law of the state, has no      application.'

The federal system of bankruptcy is designed not only to distribute the property of the debtor, not by law exempted, fairly and equally among his creditors, but as a main purpose of the act, intends to aid the unfortunate debtor by giving him a fresh start in life, free from debts, except of a certain character, after the property which he owned at the time of bankruptcy has been administered for the benefit of creditors. Our decisions lay great stress upon this feature of the law-as one not only of private but of great public interest in that it secures to the unfortunate debtor, who surrenders his property for distribution, a new opportunity in life. Neal v. Clark, 95 U.S. 704, 709, 24 L. Ed. 586; Traer v. Clews, 115 U.S. 528, 541, 6 Sup. Ct. 155, 29 L. Ed. 467; Hanover National Bank v. Moyses, 186 U.S. 181, 192, 22 Sup. Ct. 857, 46 L. Ed. 1113; Wetmoer v. Markoe, 196 U.S. 68, 77, 25 Sup. Ct. 172, 49 L. Ed. 390, 2 Ann. Cas. 265; Burlingham v. Crouse, 228 U.S. 459, 473, 33 Sup. Ct. 564, 57 L. Ed. 920, 46 L. R. A. (N. S.) 148.

This feature of a bankruptcy law is wholly wanting in the Ohio statutes under consideration. Indeed, there is not now, any more than when Mayer v. Hellman, supra, was de ided, any attempt in the Ohio laws to provide for the discharge of the debtor from his existing debts.

If the Ohio statutes in the feature now under consideration be suspended, it would follow that a person in Ohio might successfully claim a part of the estate which is being administered in bankruptcy, although the conveyance under which the property is claimed is voidable under the laws of the state where it was made and the alleged right in the property secured. We think that Congress in the Bankruptcy Act did not intend any such result, but meant to permit the trustee in bankruptcy to have the benefit of state laws of this character which do not conflict with the aims and purposes of the federal law. And certainly, in view of the provisions of section 70e of the Bankruptcy Act, Congress did not intend to permit a conveyance such as is here involved to stand which creditors might attack and avoid under the state law for the benefit of general creditors of the estate.

From what we have said it follows that questions A and B should be answered in the negative, and it is unnecessary to answer question C.

So ordered.