Buttz v. James

156 N.W. 547 | N.D. | 1915

Lead Opinion

Bruce, J.

(after stating the facts as above). The main question for determination in this case is whether the proof shows an unlawful preference-under § 60a of the national bankruptcy act, and, as incident thereto, whether a deed which is executed more than four months prior to the filing of a petition in bankruptcy but which is not recorded until a date which comes within such four months’ period, is an unlawful preference under the provisions of § 60a of the national bankruptcy act.

In the case at bar the deed was dated and delivered on April 6, 1908, but was not recorded until July, 1908. The adjudication in bankruptcy was on August 2, 1908, and this date was some four months .after the date of the delivery and execution of the deed but less than four months after the time of the recording of the instrument.

Section 60a of the national bankruptcy act reads as follows: “A person shall be deemed to have given a preference if, being insolvent, he has, within four months before the filing of the petition, or after the filing of the petition and before the adjudication, procured or suffered a judgment to be entered against himself in favor of any person, or made a transfer of any of his property, and the effect of the enforcement of such judgment, or transfer, will be to enable anyone ■of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class. Where the preference consists in a transfer, such period of four months shall not expire until four months after the date of the recording or registering of the transfer, if by law such recording or registering is required[32 Stat. at L. 799, chap. 487, Comp. Stat. 1913, § 9644.]

There is some conflict in the authorities as to whether the period of four months begins to run at the time of the actual recording in cases where, though the grantee has' not recorded his deed, he has nevertheless entered into open, notorious, and hostile possession of the premises, so that the creditors of the estate and the public generally have adequate notice of his occupancy. Compare Re Hunt, 139 Fed. 283; Re Chadwick, 140 Fed. 674; Meyer Bros. Drug Co. v. Pipkin Drug Co. 69 C. C. A. 240, 136 Fed. 396, with Benner v. Scandinavian-American Bank, 73 Wash. 488, 131 Pac. 1149, Ann. Cas. 1914D, 702; Telford v. Hendrickson, 120 Minn. 427, 139 N. W. 941. It is not necessary, however, for us to pass upon this question, and we prefer not to do so, as it is one which must ultimately be determined by the Federal courts. It is sufficient to say that, even though we hold that the running of the lour months’ period is not required by the statute in all cases to begin with the recording of the instrument, and that, if due notice is given of the conveyance, such recording is not necessary, we must nevertheless hold that the giving of the notice must be clearly established, and that ■the burden of proof of showing the same is on the grantee, who seeks to take advantage thereof. If such notice is based upon the theory of the possession of the grantee under the deed, such possession must be open, notorious, and hostile. There is no such proof in the case at bar. All that we find in the record on the subject is the testimony of the witness Kitsie G. Burdick, who, in answer to the leading question, “She has been in possession of that land ever since ?” — answered, “Yes, sir,” and the testimony of the defendant, Jessie James, the grantee of the deed, who testified as follows: “Q. You farmed the land in 1908 ? A. Which land? Q. This 520 acres that is in question in this lawsuit? A. A part of it. Q. Who farmed the rest of it? A. I guess August Piper had part of it.” This evidence falls far short of showing an ■open, notorious, and hostile possession, and it is to be noticed that to .all of these questions counsel for the defendant strenuously objected, in place of opening up the question and doing all that he could to show the nature of the possession. The evidence shows clearly that the land was situated in different tracts and some distance from the home of the defendant, Jessie James, and there is no evidence whatever of any open and notorious possession thereof which would be notice to the world at large.

“The words ‘open and notorious possession’ as applied to the adverse holding of land by another, mean that the disseisor’s claim of ownership must be evidenced by such acts and conduct as are sufficient to put a man of ordinary prudence on notice of the fact that the land in question is held by tbe claimant as bis own. Tbe mere possession of tbe land is not enough for tbis purpose. An adverse possession entirely excludes the idea of a bolding under tbe true owner. It is tbe knowledge, either actual or imputable, of tbe possession of bis lands by another, claiming to own them bona fide and openly, that affects tbe legal owner thereof” (see 1 R. C. L. 700) ; and tbe same measure of proof of notice of possession which is necessary to acquire title by adverse occupancy as against tbe original owner should, in our opinion and in tbe case of an unrecorded deed, be required of tbe grantee to avoid tbe provisions of tbe bankruptcy act as against tbe trustee in bankruptcy and tbe creditors of tbe bankrupt. A distinction, too-, must be made between acts of possession which would be notice to tbe owner of property and those which would be notice to tbe world at large or totbe creditors of a bankrupt estate.

Constructive notice has been defined in § 7290 of tbe Compiled Laws-of 1913, which reads as follows: “Every person who has actual notice of circumstances sufficient to put a prudent man upon inquiry as to a particular fact and who omits to make such inquiry with reasonable diligence is deemed to have constructive notice of tbe fact itself.” Although it may be true that tbe owner of land which is lying at some distance from bis residence might be deemed to have constructive notice of tbe claims and occupancy of a third person who has plowed or cultivated such land, and tbis from tbe very fact of seeing tbe land after cultivation and knowing that be himself has not done tbe work, yet we can hardly bold that tbis would be true of a third party or of a creditor, especially in a state like North Dakota where large areas of land are cultivated, through agents, by nonresidents, and by merely putting teams-upon them in tbe springtime and in tbe fall, and without any tenancy dr occupancy whatever being involved. Section 5594 of tbe Compiled Laws of 1913, being § 5038 of the Devised Codes of 1905, amends § 3594 of tbe Devised Codes of 1899, § 671, Civil Code 1877, and places attachment creditors in tbe same position as good-faith purchasers, so that tbe recording of tbe deed is as necessary to cut off their rights as-it is to cut off those of tbe latter, and in tbis respect tbe statute overthrows tbe ruling of tbis court in Leonard v. Fleming, 13 N. D. 629, 102 N. W. 308, in which it was beld that “a purchaser of real estate at a sheriff’s sale under attachment proceedings acquires no title as against a deed delivered before the levy of the attachment, but recorded after the attachment and before the judgment.” Mott v. Holbrook, 28 N. D. 251, 148 N. W. 1061. It is perfectly clear to us, therefore, that although the bankruptcy act may possibly not require recording as an absolute prerequisite to the validity of a deed as against a creditor, where such creditor has actual or constructive notice of the execution and delivery of the same, and on this point we express no opinion, it •does require that such recording shall be necessary in all cases where it would have been necessary to cut off the rights of a subsequent purchaser or of an attachment creditor. Under the holdings of this court an unrecorded deed is of no value against a purchaser or attachment creditor who purchases or levies in good faith and without knowledge, actual or constructive, of a prior deed; and, as we have before said, the record in this case does not show any possession on the part of the defendant which would amount to constructive notice to such persons nor any actual notice to them of the real facts in the case. The deed, therefore, is entirely inoperative as far as the trustee in bankruptcy is concerned.

Such being the case, it is not necessary for us to determine whether the evidence in this case justifies a holding that the transfer was in fraud of the rights of creditors under the laws of North Dakota. It is well, however, to say that the court is unanimous in the opinion that the subsequent transfer to Aaker was in fraud of creditors, and to also add that, in the opinion of the majority of the court, though not in the opinion of the writer of this opinion, the evidence is such as to warrant the holding that the transfers of the 520 acres of land to the defendant and of the 240 acres of land to Aaker were part of the same fraudulent scheme, and that fraud was at the base of and invalidated both transfers.

The judgment of the DistricDOourt is therefore reversed, with directions to the trial court to enter a judgment adjudging to be null and void the conveyances of the said 520 acres of land to the said Jessie James, and quieting the title in the plaintiff as against the claims of the said defendant, Jessie James, and awarding the possession of the said premises to the said trustee. The costs and disbursements of this appeal will also be taxed against the defendant and respondent.

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Rehearing

On Petition for Rehearing.

Bruce, J.

Counsel for respondent files a petition for a rehearing in this case on which he asserts that this court has in its principal opinion entirely overlooked the second and third points:

“Second. That the appellant did not prove (a) that the grantor was insolvent at the time the transfer was made, or (b) that the grantee had reasonable cause to believe it was intended to give a preference.

“Third. That the question of a preference was not within the issues presented by the pleadings, nor a theory on which the case was tried in the district court.”

He also states that the court overlooked this point:

“That plaintiff is not entitled to recover in such action as this, unless he proves that claims of creditors have been filed and allowed in the bankruptcy proceedings, and that the assets of the bankrupt estate, outside of the property alleged to have been fraudulently conveyed, is insufficient to pay such claims. We submit (he says) that there is no evidence in this case of any claim proved or allowed in the bankruptcy case of Kitsie Gr. Burdick; nor as to the assets of the estate, unless the schedules in bankruptcy, exhibit 1, are held to be competent evidence in this case, a question before referred to.”

In conclusion he says: “The record discloses that the satisfaction of the debt due the defendant was not the only consideration, one part of the consideration being the assumption of mortgages of considerable amount. In case the defendant has paid any of these mortgages, it would seem that she should be duly protected. It would also seem clear that if the value of the land is more than enough to satisfy in full all claims against the bankrupt estate, which appears quite probable, the residue should belong to Jessie James, and not to Ehtsie Gr. Burdick, on the ground that the conveyance was valid as between the parties, and the trustee’s rights are limited to the satisfaction of the bankrupt estate. If the transfer were in fact both intended as a preference and to defraud creditors of the grantor, still the grantor clearly could not have sueceeded, by action in her own name, to have the property restored to her. The order of this court would do that indirectly, provided there is a surplus value in the land above the needs of the claims against the bankrupt estate.”

The order referred to was that the district judge “enter a judgment adjudging to be null and void the conveyances of the said 520 acres of land to the said Jessie James, and quieting the title in the plaintiff as against the defendant, Jessie James.”

The majority of this court, as stated in the principal opinion, are of the opinion that the evidence is such as to warrant the holding that the transfers of the 520 acres of land to the defendant and of the 240 acres of land to Aaker, and the giving of the mortgage to the defendant on the latter property, are part of the same fraudulent scheme, and that fraud was at the basis of and invalidated both transfers. They hold, in short, that the allegation of the plaintiff is sustained which states that “said conveyance . . . [in fact, both conveyances were] executed by the said Kitsie G\ Burdick without consideration and with intent to hinder, delay, and defraud the creditors of the said Kitsie G. Burdick, . . . and that the defendant, Jessie James, accepted and received said deed and conveyance of all of said property of said Kitsie G. Burdick, with knowledge of said fraudulent intent on the part of the said Kitsie G. Burdick and with intent on her part to assist the said Kitsie G. Burdick in her said fraudulent purpose, and to hold said lands and other property as a secret trust for said Kitsie G. Bur-dick.”

Such being the holding of the majority of this court, it is immaterial whether at the time of the conveyance of the 520 acres of land now in question to the said Jessie James the said Kitsie G. Burdick was insolvent or not. The schedules in bankruptcy which were signed by Kitsie G. Burdick disclosed that she had eight unsecured creditors with an aggregate of $649.10 of claims, and that these debts were contracted between the years of 1904 and 1908; the largest single item being $260 contracted in 1905, and the next largest item being $217 for money contracted in 1908. On the 6th day of April, 1908, Kitsie G. Burdick was the owner of 760 acres of land, which was encumbered for the aggregate sum of $4,800, and the value of which was stated in such schedules at the aggregate sum of $14,700. The majority of this court holds that these equities, and which alone could have satisfied the unsecured debts, though conveyed in two separate deeds, were conveyed as a part of the one and the same transaction, and with the same fraudulent intent, and for the purpose of hindering, delaying, and defrauding the unsecured creditors. If this was the case, and the majority of this court holds it to be the case, the fact of the actual insolvency of the said Kitsie G. Burdick at the time of the first conveyance is not material.

It is true that the schedules in bankruptcy were the only specific evidence of the indebtedness of the said Kitsie G. Burdick, and that the admission of the schedules was objected to as being “incompetent, irrelevant, and immaterial, and as having nothing to do with the issues in this case.” These schedules, however, were, under the pleadings and issues in the case, competent, relevant, and material.

The answer specifically admitted the first paragraph of the complaint. That paragraph alleged that “on the 22d day of August, 1908, one Kitsie G. Burdick, of Graham Island, Benson county, North Dakota, duly filed a petition in the United States District Court for the district of North Dakota, praying that she be adjudged a bankrupt pursuant to the act of Congress, and that pursuant to such petition the said Kitsie G. Burdick was by said court on said date duly adjudged a bankrupt,” etc. No matter what may be the holdings of the cases where no adjudication in bankruptcy has been had, the cases, so far as we can learn, are practically unanimous that where such adjudication has been had and bankruptcy has been determined, that the schedules in bankruptcy are competent evidence of the bankrupt, both as against those holding under an unlawful preference and those holding by fraudulent conveyances. See Hackney v. Hargreaves Bros. 68 Neb. 624, 99 N. W. 675, 13 Am. Bankr. Rep. 164; Re Docker-Foster Co. 123 Fed. 190, 10 Am. Bankr. Rep. 584; Bank of State v. Southern Nat. Bank, 170 N. Y. 1, 62 N. E. 677; Utah Asso. v. Boyle Furniture Co. 39 Utah, 518, 119 Pac. 800, 26 Am. Bankr. Rep. 867.

Bankruptcy, however, or insolvency at the time of the conveyance, was not necessary to be shown in order to prove the transfer.fraudulent and made for the purpose of hindering and delaying the creditors; and as we understand our statute, provided there is fraud and an intent to hinder and delay the creditors, and such fraud and intention is known to the grantee, the transfer may be set aside, even if there is no actual insolvency at the time of its making. Section 6637 of the Revised Codes of 1905, § 7220 of the Compiled Laws of 1913, reads: “Every transfer of .property or charge thereon made, every obligation incurred and every judicial proceeding taken with intent to delay or defraud any •creditor or other person of his demands is void against all creditors of the debtor and their successors in interest and against any persons upon whom the estate of the debtor devolves in trust for the benefit of others than the debtor.”

Nor as long as there are creditors is insolvency at the time of the making of the instrument necessary to the setting aside of a fraudulent ■transfer, even under the Federal Bankruptcy act. “The trustee,” says the Federal act, “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.” [30 Stat. at L. 566, chap. 541, § 70e, Comp. Stat. 1913, § 9654.] In construing this act, the court, in the case of Bush v. Export Storage Co. 136 Fed. 918, said: “Transfers which are deemed fraudulent in bankruptcy, and so declared by the bankruptcy act itself, are, first, conveyances and transfers by which a creditor obtains a preference of his claim over other creditors; second, conveyances which are intended to hinder and delay or defraud creditors ; and, third, . . . transfers void as to creditors under the local law of the several states; but these transfers are prohibited, and authority vested in the trustee to set them aside, only when made within the ■four months’ limitation. But besides this class of transfers made void by the bankruptcy act itself, as being against its policy of equal and fair distribution, the bankruptcy law (§ 70a, subsec. 4, 30 Stat. at L. 566, chap. 541) provides that the trustee shall be vested by operation of law with any property transferred by the bankrupt in fraud of his creditors, the precise language of the act being, Transferred by him in fraud of his creditors.’ There is no four months’ limitation on this class of transfers, and this- provision includes fraudulent conveyances which are so by the common law, by statute law, and by any other recognized rule of law of the state.” See also Loveland, Bankr. 2d ed. § 158; Re Scrinopskie, 10 Am. Bankr. Rep. 221.

Nor do we believe that there is any basic merit in counsel’s objection to the language used by this court in its former opinion, in which it directed the trial court to enter judgment adjudging to be null and void the conveyance of the said 520 acres of land to the said Jessie James,, and quieting the title in the plaintiff as against the claims of the said defendant, Jessie James, and awarding the possession of the said premises to the said trustee. The title, however, will, of course, be quieted and the possession rendered to the trustee merely for the purposes of the-trust The title of the trustee is and will be that of a trustee for the creditors and parties interested in the estate after the debts are paid. After the said debts are paid the remainder will be turned over to whomsoever it belongs, whether that remainder be real estate or personal property, These matters, however, are for the bankruptcy court to-determine. All that we have to do is to give the trustee complete control of the property for the purposes of his trust.

“By subdivision 4,” says Collier on Bankruptcy, 10th ed. on p. 1002,. “property transferred by the bankrupt in fraud of his creditors passes to his trustee. This is the converse of the doctrine that trustees take-title subject to equities : they also take title to property which the bankrupt has fraudulently transferred and in which, therefore, the creditors have equities. The trustee’s interest in such property is stronger than, was that of the creditors in whose stead he stands, for he has a title. The trustee is vested, not only with the title of the property, but also-with the creditors’ rights of action with respect to property of the bankrupt fraudulently transferred or encumbered by him, and he may assail in their behalf all of such transfers and encumbrances to the same extent as though the debtor had not been declared a bankrupt. . . _ It is apparent that this provision applies to all property transferred by the bankrupt at any time in fraud of his creditors.”

The petition for a rehearing is denied.