In re Blount

| E.D. Ark. | Jan 6, 1906

TRIEBER, District Judge

(after stating the facts). The main object of the bankruptcy act is to secure an equal distribution of the assets of an insolvent among all his creditors and prevent preferences. Pirie v. Chicago Title & Trust Co., 182 U.S. 438" court="SCOTUS" date_filed="1901-05-27" href="https://app.midpage.ai/document/pirie-v-chicago-title--trust-co-95511?utm_source=webapp" opinion_id="95511">182 U. S. 438, 449, 21 Sup. Ct. 906, 45 L. Ed. 1171" court="SCOTUS" date_filed="1901-05-27" href="https://app.midpage.ai/document/pirie-v-chicago-title--trust-co-95511?utm_source=webapp" opinion_id="95511">45 L. Ed. 1171. The duty of the courts is to carry this intention of Congress into effect to the extent which the language oí the act justifies. Mere schemes and artifices to avoid the letter and •spirit of the law will not be tolerated. In Leighton v. Kennedy, 129 F. 737" court="1st Cir." date_filed="1904-04-14" href="https://app.midpage.ai/document/leighton-v-kennedy-8754222?utm_source=webapp" opinion_id="8754222">129 Fed. 737, 64 C. C. A. 265, a scheme was resorted to for the purpose ■of keeping alive the claims of 12 creditors so as to prevent proceedings ••of involuntary bankruptcy being instituted by 1 creditor, but the District Judge, and upon appeal the United States Circuit Court of Appeals for the First Circuit, refused tó sanction such attempted frauds •on the law, and sustained the petitioning creditors. Judge Putnam, in ■delivering the opinion of the Appellate Court in that case, aptly said:

“An attempt to create such a condition, and thus by indirect methods to defeat the scheme of the statute, is unlawful and void, and so clearly so that we need not elaborate the proposition.” 129 Fed. 741, 64 C. C. A. 269.

Section 59b of the bankruptcy act (Act July 1, 1898, c. 541, 30 Stat. 561 [U. S. Comp. St. 1901, p. 3445]) provides:

“Three or more creditors who have provable claims against any person which amount in the aggregate, in excess of the value of securities held by them, if any, to $500.00 or over; or if all of the creditors of such person are •less than twelve in number, then one of such creditors whose claim equals •such amount may file a petition to have him adjudged a bankrupt.”

That the bankrupt committed an act of bankruptcy is admitted, but -it is strenuously insisted that there are more than 12 creditors, and for this reason it requires at least 3 creditors to file a petition to adjudicate one a bankrupt.

The finding of the referee on that point, and it is based solely on the evidence of the bankrupt and the beneficiary of the conveyance made by the bankrupt, is:

. “That Blount on the 31st day of March, 1905, sold the entire business, including stock, book accounts, etc., to M. H. Ford for $4,845.53. Blount was indebted to Ford in the sum of $2,600, which was to be taken as part of the purchase price, and for the balance Ford was to assume and pay Blount’s ■creditors, a list of whom, with the amounts due them, was made-out, and formed a part of the transaction; the total amount being $2,245.53. * * * From the list of Blount’s creditors filed with Ford’s testimony, and from the •evidence of both Ford and Blount, it would appear to have been the purpose of both to pay all the creditors of Blount except the petitioner Johnston.”

If the contention of counsel for the bankrupt is to be sustained, an insolvent debtor owing debts to 12 or more creditors can assign or convey his property for the benefit of some of his creditors, leaving some unprovided, provided the creditors thus discriminated against do not exceed two; and the bankruptcy courts are powerless to prevent this wrong, because they say that until the preferred creditors are •actually paid put of the proceeds of the insolvent’s estate they are still his creditors. The reasoning of the referee, as well as the authorities cited by him, fully meet that contention and are approved by the court. When Mr. Ford, in consideration of the transfer to him of all the assets of the bankrupt, assumed the payment of. all of.the bankrupt’s debts except that of the petitioning creditor Johnston, he not only became a trustee for the benefit of those preferred creditors, but under the laws of the state of Arkansas, as construed by its highest •court, he became absolutely liable to them for their claims. Patton v. Adkins, 42 Ark. 197" court="Ark." date_filed="1883-11-15" href="https://app.midpage.ai/document/patton-v-adkins-6541458?utm_source=webapp" opinion_id="6541458">42 Ark. 197; Dismukes v. Halpern, 47 Ark. 317" court="Ark." date_filed="1886-05-15" href="https://app.midpage.ai/document/dismukes-v-halpern-6541935?utm_source=webapp" opinion_id="6541935">47 Ark. 317, 1 S. W. 554. And this rule of law established by the Supreme Court of the state is conclusive on the national courts in actions arising in that state. Willard v. Wood, 164 U.S. 502" court="SCOTUS" date_filed="1896-11-30" href="https://app.midpage.ai/document/willard-v-wood-94566?utm_source=webapp" opinion_id="94566">164 U. S. 502, 17 Sup. Ct. 176, 41 L. Ed. 531" court="SCOTUS" date_filed="1896-11-30" href="https://app.midpage.ai/document/willard-v-wood-94566?utm_source=webapp" opinion_id="94566">41 L. Ed. 531.

The fact that none of the creditors thus preferred have consented to release the bankrupt does not change the result, for the same reason that a creditor whose debt has been secured by a mortgage or pledge can still hold the debtor liable and maintain an action against him without resorting to the security. The fact that none of the creditors has consented to this arrangement, or had consented thereto at the time these proceedings were instituted (for the referee’s findings of fact show that since then most of them have been paid in full by Mr. Ford), is immaterial, for, in the absence of any dissent on their part, the transaction being for their benefit, the law presumes an acceptance. Ft. Leavenworth R. R. Co. v. Lowe, 114 U.S. 525" court="SCOTUS" date_filed="1885-05-04" href="https://app.midpage.ai/document/fort-leavenworth-railroad-v-lowe-91400?utm_source=webapp" opinion_id="91400">114 U. S. 525, 528, 5 Sup. Ct. 995, 29 L. Ed. 264" court="SCOTUS" date_filed="1885-05-04" href="https://app.midpage.ai/document/fort-leavenworth-railroad-v-lowe-91400?utm_source=webapp" opinion_id="91400">29 L. Ed. 264; Ewing v. Walker, 60 Ark. 503" court="Ark." date_filed="1895-05-04" href="https://app.midpage.ai/document/ewing-v-walker-6543410?utm_source=webapp" opinion_id="6543410">60 Ark. 503, 31 S. W. 45; Breathwit v. Bank of Fordyce, 60 Ark. 26" court="Ark." date_filed="1894-12-08" href="https://app.midpage.ai/document/breathwit-v-bank-of-fordyce-6543329?utm_source=webapp" opinion_id="6543329">60 Ark. 26, 28 S. W. 511, and authorities there cited.

That by virtue of this conveyance to Ford and his covenant to pay these creditors their debts in full their claims are secured for the full amount is too clear for argument, and as under the bankruptcy act, creditors can only join in a proceeding of this kind for claims “in excess of the value of the securities held by them,” there are no other creditors than Johnston who could join in this proceeding, even if inclined to do so. But it is insisted that there are 16 other creditors besides Johnston to whom Blount was indebted on the 18th of July, 1905, the day of the filing of the petition, and who were not secured by the Ford transfer, or in any other manner. The names of these creditors are fully set out in the response to the petition, and it is unnecessary to copy the list in this opinion. Of these claims it was admitted at the hearing that the indebtedness alleged to be due to C. J. Cross, one of the 17 persons named, had been paid off before July, thus leaving 16 creditors, including the petitioning creditor Johnston, and therefore that three creditors must join in the petition.

In order to understand fully the claims of some of these parties, which will be hereafter more fully set forth, it is proper to state that, after the sale made by Blount to Ford, the business was carried on in the same manner as if there had been no change, except that the firm name was changed from W. F. Blount to M. H. Ford Grocery Company, although there was no corporation. Blount remained in •charge of the business as manager, Ford being the sheriff of the county, and for this reason unable to give the business any attention. All transactions connected with the business were attended by Mr. Blount, and a number of those creditors named by Blount in his response to the petition state that they did not know whose business it was, whether Blount’s or Ford’s, and that all orders for the business sent by Blount were charged to him. Among the debts claimed to be owing by Blount and set forth in his response are the following:

G. R. Leary is alleged to have been a creditor on July 18th for the sum of $12.15. Of, this amount $10 was a cash loan made to Biount for a customer of the store; Ford being absent, and the money taken in that day having been deposited in the bank. The money was charged on the books of Ford to the customer and paid back by the store. This clearly was not an indebtedness of Blount, but rather of the Ford store. The balance due consisted of 85 cents for laundry incurred during that month and $1.30 for newspaper subscriptions, for two months, all of- which were paid by Blount- the first part of August, as it was customary in that city to have all bills of that kind, including groceries, dry goods, drug, laundry, newspaper, ice, and other neccessaries for the use of the family, charged during the month and paid upon presentation of the bill the first part of the succeeding month. The indebtedness due David & Simms was $1.50-for a baby cap bought by Mrs. Blount for their baby on July 7th and paid the first part of August. The account of James R. Roane was $16.50, of which $1.50 was for guarantying the hiring of a horse and buggy for a drummer, who settled for it with the store, and the other $15 was a verbal guaranty for debts due the livery stable keeper from customers of the store. These debts being liabilities of the store, of which Mr. Ford was then the owner, cannot be treated as liabilities of Blount; but, aside from that fact, as the guaranty of these debts of other persons was not in writing, but only verbal, it is void under the statute of frauds of this state, and upon objections by the trustee in bankruptcy, if the respondent is adjudicated a bankrupt, could not be proven against the estate. The claim of Chandler & Harrington, druggists, amounting to $1.50, was for some prescriptions for the family of Blount incurred July 7th and settled in the usual course of business in August. The bill of Dr. Deaderick was for $2, less a discount of 40 cents. This was for a visit and prescription on the night of July 17 to one Thomas, an employé of the Ford store, and was paid by the store out of his wages. The claim of J. N. Schichtl is for 10 cents for a bridle bit bought by respondent on the 12th of July and paid as usual in August. The claim of H. Mixon is alleged to be for the rent of the dwelling from the 1st day of July until the 18th of that month, the date of the filing of the petition. The evidence shows that, under the contract, the rent was due on the first day of each succeeding month, and was always promptly paid by Blount. The rent for June had been paid the first part of July, and the July rent was paid in August. The claim of Julius Benham was for ice delivered during July and charged as delivered and payable on the first of the next succeeding month. Up to the 18th of July the bill for ice delivered amounted to $2.40. He continued to deliver during July after these proceedings were instituted, and the first part of August collected the bill for the entire month. Dr. Hall’s bill is for a small doctor’s bill due from a colored boy and verbally assumed by Blount, in violation of the statute of frauds. Mixon & McClintock’s bill is 30 cents for some millet seed bought for use in the house in July and paid upon presentation of the bill in August.

To treat the holders of such claims as creditors to be considered in determining the number existing for the 'purpose of preventing a bona fide creditor to institute proceedings of this nature, when an insolvent conveys all of his property, with the avowed intention of preferring all of his creditors except one, would be a violation, if not of the letter, certainly of the spirit, of the bankrupt law, and cannot be tolerated. In fact, if the contention of the respondent is to be sustained, the involuntary feature of the bankruptcy act would be a dead letter, for any insolvent who desired to prefer some of his creditors, leaving out one or two, could always manage to have as many as twenty creditors by purchasing for his personal use and that of his family small things amounting to sums ranging, as in the case at bar, from 10 cents to $2, and having them charged. By paying them the succeeding month, after he had made some small purchases, to be charged again, it would always leave a number of creditors ready to be used whenever proceedings of this kind are instituted against bim. It is hardly reasonable to suppose that creditors of that kind, who feel secure in having their bills promptly paid, would want to incur the risk of losing a good customer in order to join a bona fide creditor to institute proceedings in bankruptcy. All laws must be given a reasonable construction, and for this reason the claims hereinbefore recited must be disregarded in determining the number •of the creditors of Mr. Blount at the time these proceedings were instituted, and if this is done it clearly appears that there were less than 12 creditors. The fact that most of these creditors could have maintained an action and recovered judgment against Blount cannot change the rule, for a creditor whose debt is fully secured may •maintain an action and recover judgment without surrendering his security, but he cannot prove his claim in bankruptcy proceedings •unless he surrenders the same. The maxim “De minimis non curat lex” may also be properly applied.

The finding of the court is that on July 18, 1905, the day these proceedings were instituted, there were less than 12 creditors of the respondent who had provable claims, within the meaning of the bankruptcy act relative to involuntary proceedings.

It is further claimed that Johnston, the petitioning creditor, is a preferred creditor by reason of the fact that he is the holder of a life insurance policy assigned to him by Blount as security. It is claimed that the policy had a cash surrender value of $2G0 at the time these proceedings were instituted. The policy was issued on the 10th •day of February, 1903, and shows that it has a surrender value of $260, but only at the end of the third year. As the three years will not end until the 10th of February, 1906, it follows as of course that it had no surrender value on July 18, 1905, but only a speculative value depending upon the death of the assured. As stated by this court in Gould, trustee, v. New York Life Insurance Co. et al. 132 F. 927" court="E.D. Ark." date_filed="1904-11-02" href="https://app.midpage.ai/document/gould-v-new-york-life-insurance-8755481?utm_source=webapp" opinion_id="8755481">132 Fed. 927, a life policy, being at the time of the adjudication of bankruptcy of no actual value to the estate, would not pass to the trustee as an asset.

An order will be entered adjudicating Mr. Blount as a bankrupt, •in conformity with the prayer of the petition.