In re Home Discount Co.

147 F. 538 | N.D. Ala. | 1906

JONES, District Judge.

A party to an order made by the referee after hearing on the merits cannot have a review of it, under section 38 of the bankruptcy statute (Act July 1, 1898, c. 541, 50 Stat. 555 [U. S. Comp. St. 1901, p. 3435]), unless he pursues the mode prescribed by General Orders No. 27, 89 Eed. xi, 32 C. C. A. xxvii. He cannot ignore the order until the referee, under section 41 (30 Stat. 556 [U. S. Comp. St. 1901, p. 3437]), certifies his disobedience to the judge, and then bring forward again, in his defense, matter contested before the referee prior to the making of the order, provided the order itself be not void. “The method of correcting error is by appeal, and not by disobedience.” People v. Sturtevant, 9 N. Y. 263, 59 Am. Dec. 536; Passamore Williamson’s Case, 26 Pa. 9, 67 Am. Dec. 374. The hearing “in a summary manner,” for which the latter section provides, has no reference to errors intervening in the proceedings which led up to the order, and cannot be converted into an appellate proceeding to determine their correctness. The court heard evidence as to the contentions of the parties because matters oc■curring subsequently to the making of the order, were set up in defense or abatement of the contempt proceedings. As respondent insists that the matters upon which it seeks to go behind the referee’s order render it void, and the same questions are involved in other cases now pending, the court will consider the correctness, as well as the validity, of the order made in respondent’s case.

1. The assignment of wages was taken in December, 1905, by a money lender in Jefferson county, to secure a loan under $75 in amount. On March 9, 1901, the General Assembly of Alabama passed “An act regulating the business of money brokers and persons who loan money for themselves or others on bills of sale, notes or mortgages or personal property or other personal security in Jefferson, Morgan, Walker and Etowah counties.” Approved March 9, 190.1; Acts 1900-01, p. 2685. It provides, among other things, “that all persons engaged in the business of money brokers or loaning money or taking security therefore by bills of sale, mortgages on or conveyances or liens of any kind on personal property of [or], personal effects or other personal security,” in the counties named, “shall when such loan is made, express in the instrument securing such' loan, the rate of interest at which said loan is made, the date of said loan, the fact that the instrument is taken for a loan of money, a minute description of said property securing the loan, and if household goods from whom purchased, the date when said loan is due, and shall within five days thereof file said instrument for record in the office of the probate judge of the county in which the property or instrument securing said loan is situated.” etc. In one section, the act provides “that all contracts- for the loan of money made in violation of this act, shall be invalid,” and in another “that any contract made for the loan of money in violation of this act shall be void.” Another section provides that the moneylender, if a nonresident, “shall give bond conditioned to pay all damages that any person may sustain by reason of the enforcement, or the attempt to enforce any security taken for a loan in violation of this act.” Another section provides, if the claim is put in the hands of an attorney for collection, the attorney’s fee “shall not exceed ten per cent, of the original loan.” The fifth section provides that "nothing in this act shall apply to the business of banking and loans, when the amount exceeds seventy-five dollars.” The exact scope of this last section is not clear. Does this proviso take loans in the business of ■ banking, no matter how small the amount, wholly without the operation of the statute, and restrict it to loans made by other persons under $75; or does it intend merely that loans over $75 made in that business, as well as all other loans over that amount, no matter by whom made, are excepted from the operation of the act? It is insisted that the first is the true construction, and that the exception of the business of banking renders the statute unconstitutional. Assuming, without deciding, that loans by banks and bankers, though under $75 are excepted, and that all loans by others under $75 are left within the grasp of the statute, we will consider the matter in that aspect.

Perfection is no more to be exacted in legislation than in other human work. The motives and interests animating men, and the economic, industrial, social, and moral conditions which affect the welfare of society, are almost infinite in number and character, so that it is impossible, in practice, without creating evil and injustice, to apply the same unbending rule to all of these varying situations in dealing with concrete human affairs. Legislative power, therefore, must frequently indulge in marked differences between persons and things in its attempts to remedy particular evils. Neither the state nor the federal Constitution exacts perfect equality in the apportionment of the burdens which the state finds it necessary to impose upon men to advance the public weal. Mere want of equality in the burdens imposed, or varying rules for the conduct of different persons, even in relation to the same general subject-matter, will not avail to overthrow a statute, if the differences it makes arc not merely arbitrary. If its distinctions arc based upon some just reason, and it does not attempt, under the guise of regulating an evil, to deprive of liberty or property without due process, or unjustly to confer special or exclusive privileges upon one class at the expense of others, or to put burdens and penalties upon persons beyond the extent to which their conduct and relations to an evil fairly subject them, in view of the principle upon which the regulations are rested, the statute is not objectionable on constitutional grounds.

The mischief which called forth the statute is well known. It arose in the contracting and collection of small loans in dealings with necessitous borrowers and small wage-earners, who as a rule had no security except the pledge or assignment of wages to be earned and household goods. The borrowers agreed to whatever rate of interest was demanded. In this case, the rate was 120 per cent, per annum. As an assignment or hypothecation of wages, generally, without regard to some subsisting contract is not valid here, lenders took an assignment of wages to be earned under some particular contract. When disputes arose between borrower and lender as to the date or amount of payments made, or the date or the amount of the loan, or the borrower was slow in meeting his promises, the lender would file with the employer the instrument assigning the wages. The laborer was thus prevented from receiving his wages, although he continued to work, until the dispute was settled. Cut off from his means of subsistence, the borrower was almost invariably forced to succumb to the demands of the lender. Much suffering ensued among laborers, and great harassment and injury resulted to employers, who could not determine with any certainty how long their employes or laborers would remain in their service under contracts which had already assigned their earnings as to which disputes were likely to arise at any time. Railroad companies, owners of furnaces and mills, and other large employers of labor, made and enforced rules, for their own protection, that employés who had unsettled disputes about an assignment of their wages should be laid off, and if the dispute were long-_continued, should be discharged. Lenders became, in fact, the controllers and dictators of the labor of the borrowers. The differences between lenders and borrowers, and the steps which employers felt compelled to take in consequence, brought on conditions which were yearly reducing hundreds of laborers and other small wage earners to a condition of serfdom in all but name. In the “business of banking,” these small loans were seldom, if ever, made to this class of borrowers on the security named in the statute. The profits from these loans attracted another and different class of lenders, who, as the Legislature knew, monopolized the loans of this class of borrowers and engaged in evil practices, in which banks and bankers did not indulge in the rare instances in which they made such loans. Loans by banks and bankers under $75, and loans over that amount, no matter by whom made, were rarely secured by an assignment of future wages or a lien upon household goods, and were not productive of the evil which the statute seeks to cure. The Legislature knew that the taking of the security named by one class of lenders had almost invariably brought forth evil, while the same loans, on the same security, by another class in “the business of banking,” had seldom, if ever, been harmful to the public welfare. The lawmakers, in devising a remedy, had to consider the different habits and conduct of men in these occupations as to these loans, in order to apply an intelligent and just preventive, and in doing so, necessarily discriminated between these classes, according to ther well-known habits and customs in the matter. No discrimination is made by the statute between those classes as to the' right to contract. All alike are permitted to make these small loans on the security named. No' class is licensed or taxed for anything done in connection with them. All classes are left to stand orí. the same footing in all these respects. The only discrimination is that one class of lenders is required to state, while the others are not, the truth in certain simple particulars as to the actual transaction in the instrument which evidences it and to record that instrument. The statute is a police regulation pure and simple, to check usury and promote fair dealing in loans between one class of money lenders and one class of borrowers on a particular kind of security, by requiring certain statements to be put in their contracts and that they be recorded. If the practice of one class of money lenders makes such precaution necessary as to them, it would be going an unwarranted length to hold that the state police power must either leave them entirely alone or else provide the same regulations, regardless of any need for them, for like loans made by all other classes of money lenders. St. John v. New York, 201 U. S. 637, 26 Sup. Ct. 554, 50 L. Ed. --. Such a contention has met with almost universal disapprobation in the courts, both state and federal. If the court should strike down the statute for the reason here urged, it would be a bald invasion by the judiciary of the legislative prerogative, in a matter over which the Constitution has left the lawmaker almost boundless discretion, simply because the meshes of the statute have not been woven so fine as to gather in every possible offender in every other branch of the money lending business.

The presumption is that the Legislature acts in good faith. The statute shows beyond peradventure that the lawmaker had a bona fide purpose to cure a wrong and had no design to unjustly discriminate, and has not done so, between the class whose conduct it regulates and those whose conduct it leaves unregulated, as regards these small loans. The Legislature could well regulate the conduct of one class and leave the other unregulated, and discriminate between loans under and those over $75. Commonwealth v. Danziger, 176 Mass. 290, 57 N. E. 461. This statute clearly does not fall- within the principle which vitiates legislation forbidding one set of men to take usury and at the same time permitting others to do so. The laws regarding usury are not changed by the local statute, and still bear alike on all classes, whether they fall within or without the regulations of the statute, and it does not give any class any advantage whatever over the other in this respect. The statements exacted in the written contract and that it be registered are not burdensome, and do not deprive the. lender of any right or property. They are only reasonable regulations of a right. Save as denied by the express prohibitions or necessary implications of state and federal Constitutions, the Legislature has boundless power over such matters. Dorman v. State, 34 Ala. 216; M. K. & T. Ry. Co. v. May, 194 U. S. 267, 24 Sup. Ct. 638, 48 L. Ed. 971; Fidelity Mutual Life Association v. Mettler, 185 U. S. 308, 22 Sup. Ct. 662, 46 L. Ed. 922; Davis v. State, 68 Ala. 58, 44 Am. Rep. 128; Holden v. Hardy, 169 U. S. 391, 18 Sup. Ct. 383, 42 L. Ed. 780.

2. The effect of the assignment, without regard to its infirmities under the local statute, is avoided by the provisions of the bankruptcy law as to wages earned after the filing of the petition. The power or ability of the debtor to earn wages in the future under a subsisting contract, standing apart from anything which it has brought into existence as property, is the mere right of the debtor to create property in the future. One dominant purpose of the bankruptcy statute is to prevent creditors from seizing, directly or indirectly, upon this right of the bankrupt, after his adjudication, by applying its subsequent fruits to anterior obligations. This right of the bankrupt falls neither under the head of lands, chattels, nor dioses in action, and it is not vendible. It is not subject to seizure on execution at law, or equitable attachment, and equity will not appoint a receiver to intercept the expected fruits of its exercise. Specific performance, of a contract as to future personal services will not be decreed. In a broad sense, the right of a man to render personal services under an existing contract may be said to be his property; but the nature of the right is such that no one can compel him to exercise it, or get title to or lien upon it. The law, except as a punishment for crime, can never take this right away from a man, or confer any property in the right itself upon another man. It can affect the right only by dealing with the property it brings into existence. Whether it can then be taken depends upon the man’s status' at the time, and whether the law then givps a remedy for the enforcement of his contract concerning the thing his labor has brought into existence. The debtor’s right to earn wages in the future and to dispose of the fruits of his labor is not “property” in any sense in which the bankruptcy statute uses the term, but constitute rather rights and privileges which go to make up a man’s liberty and freedom. The plain purpose of the statute is that the title and right to all things and rights which do not fall within the vesting words of section 70 of the bankruptcy statute (30 Stat. 565 [U. S. Comp. St. 1901, p. 3451]) shall remain in the bankrupt, and that as to the rights or things thus saved to him he shall be released from all liability to answer for prior debts and contracts, with certain exceptions not here material. The right of the debtor to work and contract for future service is not mentioned, directly or inferentially, in the rights or things required to be sold, appraised, or scheduled, or which pass to the trustee for the benefit of creditors. The studied enumeration of the particular rights and things which the Bankrupt is required to surrender takes all other rights and things not named without the definition, thus fixed, of the “property” which the statute intends to take from the bankrupt or to pass to his creditors. Whatever he is not required to surrender is his absolutely, freed from the enforcement of the obligation of his prior contracts, unless at the time of the filing of the petition it has taken the form of property, upon which a lien has fastened. In that event only does he take it subject to the performance of prior contracts concerning it. If a debtor should solemnly contract for.a present valuable consideration not to avail himself of the benefit of a discharge against the enforcement of a contract as to wages to be earned when they do actually come into existence, his undertaking would be void on-grounds of public policy. Nelson v. Stewart, 54 Ala. 115, 25 Am. Rep. 660. Equity, therefore, cannot import into the obligation of the assignment any promise of the assignor, upon which to build an equity to a lien, that the power will be exercised after the adjudication, to bring wages into existence to satisfy the terms of a prior assignment, or that the bankrupt will not avaií himself of a release from the obligation, when it is sought to enforce it after his discharge. The adjudication of a debtor, followed by a discharge, takes away all remedy for the enforcement of the obligation of the contract concerning wages earned after his bankruptcy, precisely as the discharge releases the debtor from the performance of the obligation of his promissory note made prior to the adjudication. Clark v. Clark, 17 How. 315, 15 L. Ed. 77; In re West, 11 Am. Bankr. Rep. 782, 128 Fed. 205. As well said by Judge Bellinger, In re West, supra.

“The discharge in bankruptcy operated a discharge of these obligations as of the date of the adjudication, so that the obligations were discharged before the wages intended as security were in existence. The law does not continue an obligation in order that there may be a lien, but does so becau.se there is one. The effect oí the discharge upon the prospective lien was the same ns though the debt had been paid before the wages were earned.”

Mallin v. Wenham, 209 Ill. 252, 70 N. E. 564, 65 L. R. A. 602, 101 Am. St. Rep. 233, reaches a contrary conclusion. Clearlv it disregards the plain policy of the statute. It is not supported by the weight of authority. The theory of that decision is that, as the assignee has a right under his contract to take the wages when they do come into existence, the right so to take them, though the wages are not then iti existence, amounts to an equitable lien, at the time of the adjudication, which the bankruptcy statute preserves against the all-solutions of the discharge. But what was then in existence upon which a lieu could fasten? Certainly nothing but the right to work under the contract in the future. That right cannot be the subject of any lieu whatever, either at law or in equity. Caption of the fruit: of that work after bankruptcy cannot be sustained on the theory that the assignee had a prior lien on the right to work, which can be extended to the fruits of that labor. The wages not being in existence at the time of the adjudication, and the right to earn them not then being subject to a lien, there was no property or thing in existence, at that time, upon which a lien could attach, or he preserved. The most the assignee had, at the time of the adjudication, was an executory contract to turn the wages over to him when they did come into existence in the future. East Lewisburg v. Marsh, 91 Pa. 96; Christian & Craft Grocery Co. v. Michael & Lyons, 121 Ala. 87, 25 South 571, 77 Am. St. Rep. 30. This equity cannot be made to ripen into a lien upon the. wages until they come into existence after the adjudication, and then only by enforcing against the bankrupt the obligations of a contract for whose enforcement the law denies all remedy, and from which the discharge releases the bankrupt of all liability. The upholding and enforcement of the claim of the creditor, under such circumcumsianees, is not the preservation of a valid lien, which the bankruptcy statute saves, but the creation outright of a lien in violation of the provisions of that statute.

Mitchell v. Winslow, 2 Story, 630, Fed. Cas. No. 9,673, upon which Mallín v. Wenham is really rested, does not sustain it. In the former case the owner of a manufacturing plant mortgaged it, together with such tools and stock as might be acquired in the next four years, during which the debt was to be paid. Upon default the mortgagee took possession of the mortgaged property and the tools and "stock in trade acquired in the business since the making of the mortgage, and the contest as to the title to the acquisitions of the mortgaged property was between the purchaser from the mortgagee and the assignee for creditors. The bankruptcy statute of 1841 provided, among other things, that nothing therein shall be construed “to annul, destroy, or impair any lien or mortgage or other securities on property, real or personal, which may be valid liens by the laws of the states, respectively, and which are not inconsistent with the second and fifth sections of the act.” The present bankruptcy statute preserves valid liens upon property in actual existence at the time of the adjudication, but does not save the right to create liens in the future on something to come into existence in the future, by enforcing executory contracts made concerning it, when the subject-matter has not come into existence at the time of the adjudication, where a discharge destroys all remedy for the enforcement of the bankrupt’s liability under such contract. Justice Story was speaking of an accretion or increase in the form of “personal property,” to quote the expression of the statute of 1841, as to the subject-matter upon which it saved liens, which had come into existence and passed into the possession of the creditor before adjudication, and not of a subject-matter, like wages to be earned, the mere fruit of the bankrupt’s personal.exertions, when they are earned and it is sought to seize them after adjudication. He was dealing with no such right, and was not giving the law as to the proper construction of a bankruptcy statute like the present as to such right. Moreover, under Mallín v. Wenham, the bankrupt must quit his former employer during the period covered by his assignment, else the obligation of his contract as to wages is enforced against him. The discharge destroys the remedy for the enforcefnent of the obligation of the contract, and it cannot be revived except upon a new promise. .Continuing to work for the former employer does, not constitute a new promise to pay the debt, and does not revive the remedy or avoid the release of the discharge. In many callings and occupations, which will readily suggest themselves, there is frequently only one employer in a village, town, or locality. Forcing the bankrupt to pay, or move away to get work in his usual vocation, interferes with the bankrupt’s liberty, and deprives him of some of the most valuable rights the discharge vests in him. Very plainly that decision thrusts into the statute an exception which the statute does not make as to-the liabilities from which a discharge shall not release the bankrupt.

The English courts have repeatedly held under their statutes, which are fully as broad as ours, regarding the preservation of liens and as to what passes to creditors, that the earnings of the bankrupt after the making of the vesting order, and before the order of discharge, cannot be recovered by the assignee, but pass to the bankrupt. The reason is tersely stated by Lord Denman, when he says, “The bankrupt must live.” In Williams v. Chambers, 69 E. C. L. 337, Lord Denman said:

“It is claimed Upon the pleading, as a debt directly due -the assignee for personal labor of the insolvent. If the plaintiff were entitled to recover in respect of such a claim, we must go the length of deciding that the assignee, in the words of Lord Mansfield, in Chippendale v. Tomlinson, 1 Co. Bank. L. 432, let the insolvent out to hire and contract' himself for his personal services.”

Many years ago the Supreme Court of Alabama, in Mosby v. Steele & Metcalf, 7 Ala, 301, declared:

“It is entirely reasonable, in the interval which must elapse between the decree and the final hearing for the bankrupt’s discharge, that he shall be permitted to hold property subsequently acquired, as otherwise he would ■not be able to support himself and family.”

Accordingly, holding that under the bankruptcy act of 1841 the federal courts had no power to interfere with the proceedings of the state courts, it enjoined the sheriff, who had made a levy, from selling under execution goods of the insolvent, acquired subsequently to the filing of the petition, and ruled, if a discharge were granted, that the injunction be made perpetual.

Lastly, the Supreme Court of the United States has declared that the “liberation” of the bankrupt “from incumbrance on future exertion” is one of the main objects of the statute. Hanover Nat. Bank v. Moyses, 186 U. S. 192, 22 Sup. Ct. 857, 46 L. Ed. 1113. We do not doubt, therefore, that the right and title to the wages earned by Rose after the filing of the petition passed to the bankrupt, released from any claim or right growing out of the assignment.

3. There is no aspect of the case in which the company can complain of the order to withdraw the notice of the assignment of wages, and no foundation in law for its insistence that the court could not compel it to do so in a summary proceeding. The contract of loan, under which the assignment was taken, being in violation of public policy, the assignment could not give any possession of the wages, either actual or constructive, or any title whatever. In the nature of things the respondent could not have any actual possession of the unearned wages, for they had not come into being. Prior to the adjudication the company took no steps which could reduce the wages to its constructive possession, even if it be conceded that its contract authorized it to take possession when the wages did come into existence. It did not notify the employer, and the latter made no promise. It had done nothing but take the assignment, which was a legal nullity. Whatever of actual possession there was of the wages, as between the lender and the employer and the bankrupt, when the latter filed his petition, was certainly not in the lender. The employer laid no claim to-the wages, and was a mere stakeholder. This was the state of affairs existing at the time of the adjudication. The filing of the petition, to say nothing of the adjudication, operated as an attachment and injunction, as of the date of the filing of the petition, and put the wages already earned in the custody of the court, and fixed the status and rights as to the unearned wages. International Bank v. Sherman, 101 U. S. 407, 25 L. Ed. 866. Even if the assignment had been valid, no step taken by the lender subsequent to the adjudication could have been effective to vest him with possession. All the steps the lender subsequently took were invasive of a possession which was already in the court; and in that posture of the case the court could summarily compel the lender to restore, that status quo as to these wages, by withdrawing notice of the assignment, even if the assignment had been valid, and to prosecute its claim, if it insisted on it, in the court of bankruptcy. The Home Discount Company not only interfered with the wages, after they were in the custody of the court, hut the only contract or instrument under which it claimed title or right to interfere was, as matter of law upon the undisputed facts, an absolute nullity. It was, therefore, a mere naked intermeddler. The authorities are unbroken, under such circumstances, that the court may interfere summafily to compel the intermeddler to desist and restore the status quo. Mueller v. Nugent, 184 U. S. 1, 22 Sup. Ct. 269, 46 L. Ed. 405; White v. Schloerb, 178 U. S. 542, 20 Sup. Ct. 1007, 44 L. Ed. 1183; In re Tune (D. C.) 115 Fed. 906. Apart from the wages being already in the possession of the court, in consequence of the adjudication, the law, under the circumstances, gave the bankrupt the right to enjoy, pending discharge, certain privileges, immunities, and benefits, in the free exercise of which the statute imposes the duty upon the court to protect him. Among them is the right to enjoy the benefit of a discharge, if the bankrupt complies with the provisions of the statute, and, in order that the practical good of such discharge shall not be taken from him, that he shall not be coerced, pending discharge, by any device of- creditors, into the payment of a debt from which the discharge would free him, or which would operate upon his rights to any particular property, if the effect of such discharge would pass such property either to himself or to the estate, as against a creditor who claimed it for himself. The jurisdiction of the court to protect the bankrupt in the enjoyment of such rights, whether ancillary or original, is abundant and its exercise is justified to conserve to the fullest -extent the court’s original jurisdiction, which had already attached in the particular case. Before the assignment was filed, the bankrupt, his estate, and privileges which he was entitled to enjoy in consequence of the adjudication, had been drawn into the cognizance of the court of bankruptcy. It was under duty, and had undoubted authority, to prevent any intermeddling with the administration of the estate, already begun in the court, and to prevent the taking "of any steps which would defeat the application of the assets according to law or frustrate the bankrupt’s right to the practical enjoyment of the privileges the statute confers upon him, in event of discharge. The filing of the assignment of the wages with thé bankrupt’s employer the day after the adjudication was an effort to embarrass the administration of the estate, and to force the bankrupt by the sore pressure caused by withholding the wages to pay an illegal demand, from which a discharge would free him. It was nothing more than an effort to starve him into abandonment of his right under the law, in defiance of the orders made to enforce those rights. If a court of bankruptcy has no power to prevent creditors from making such use" of assignments of wages,- it had as well shut its doors, and abandon all effort to vindicate the rights which the statutes commit to its protection. The law does not make such weaklings of courts of bankruptcy. They have ample power to protect the bankrupt in the enjoyment of all his rights, and to frustrate the efforts of those who seek to defeat the practical enjoyment of them. In re Hicks (D. C.) 133 Fed. 739; section 2, subd. 15, of the bankruptcy statute (Act July 1, 1898, c. 541, 30 Stat. 546 [U. S. Comp. St. 1901, p. 3421]); Collier on Bankruptcy (5th Ed.) p. 26.

4. The referee’s order was not erroneous in any degree, because the proceeding, which resulted in the order, was begun at the instance of the bankrupt. The court administers the property. It is its duty to see that the assets are administered according to law. -The transaction upon which respondent relied being violative of public policy, respondent had no right, title, or real claim to the wages, and in attempting to apply, and afterwards applying, them to its void claim, it was, we repeat, a mere naked intermeddler. The court could rightly interfere, of its own motion or upon complaint of the bankrupt or any other interested person. In re Tune (D. C.) 115 Fed. 906. It is the statutory duty of the bankrupt to inform the trustee of violations of the act. The court is not bound to delay proceedings when the matter is brought to its attention, and insist upon the circumlocution of having the bankrupt go first to the trustee, and then having the trustee come to the court. Moreover, the assignment filed with the employer covered not only wages earned at the time of the bankruptcy, but those to he earned. The earned wages, not having been claimed as exempt and the assignment of them being void, were assets of the bankrupt’s estate. The wages earned after the filing of the petition, as we have seen, in event of discharge, passed to the bankrupt in his own right. The assignment purported to cover both, and keeping 'it on file, although it was a nullity, had the practical and inevitable effect to prevent the employer from paying the earned wages into court, as he should have done, and detained the wages earned after the adjudication from the possession of their lawful owner. The bankrupt had a direct personal interest in moving for the order.

5. There is no legal basis whatever for the theory that the court has no power to interfere here, because the loan was obtained by a false pretense by the bankrupt, whereby a debt was created which could not be affected by a discharge. The agreement under which the loan was effected and the assignment taken, being the offspring of a transaction offensive to public policy, are utterly powerless to create a debt, or to confer any rights upon the lender, which a court can recognize. The borrower and the lender are in no sense in pari delicto,, and the borrower, therefore, may have relief against the transaction which the lender could not. Smith v. Bromely, 2 Douglass, 670; Browning v. Morris, 2 Cowper, 793; Turner v. Merchants’ Bank, 126 Ala. 415, 28 South. 469. This would be true, even if the marshaling of the assets, according to the provisions of the statute, could be said to be administering equitable relief to the bankrupt against the contract. The local statute puts no duty upon the borrower, and does not restrain him from doing anything. It was enacted to protect the borrower against the lender. Moreover, if it be conceded, in view of the prohibitions of the statute, which the lender plainly violated, that the bankrupt could by false pretense create a debt which the court could recognize; and which could not be affected by a discharge, the fact remains that the bankrupt denied the making of the false pretense, and the referee who saw and heard the witnesses, decided the issues of fact in favor of the bankrupt. In view of the circumstances of the case, the court thinks the bankrupt’s version most probably the true one, and, if it doubted, could not disregard the finding of the referee-on this jpoint, unless reasonably convinced that it was erroneous.

6. The insistence that the court has no right to make any rule for securing the costs on the petitions for review of the referee’s order. and that it-is powerless to exact bond or other indemnity for the protection of the opposite party during the stay of the order, pending the review, is wholly unfounded. In the absence of statutory provisions or rules of court, a petition to review or revise an order of the referee does not in and of itself operate a supersedeas of the order, and whether or not it shall have that effect, rests in the discretion of the reviewing- or reviewed authority in the particular case. It has few of the properties of an appeal.- Primarily, at least, -it does not contemplate a trial de novo. It removes nothing out of the District Court into any other court. The petition, though filed with the referee, is really addressed to the District Court, and asks action by that court on a record which remains in' that court. It is no more than a petition for a rehearing, or a motion for a new trial, in the court of original jurisdiction, while the judgment or decree remains in the power of the court during the term, and does not stay execution, unless in-pursuance of rules or by special order. Aside from the inherent power of courts to provide rules for administering of justice therein, the court has abundant statutory authority to make all reasonable regulations, not inconsistent with those prescribed by law and the rules made by the Supreme Court, which it deems needful to prevent abuses of frivolous petitions for review. One of the rules in force, when the referee’s order was made, provided “that on hearings before referees in bankruptcy, and on nisi proceedings when the rule is made final, the filing of a petition for review shall not act as a supersedeas, unless the unsuccessful party shall file bond, with surety, in such amount as may be required by the referee or judge, conditioned to pay.any damages growing out of said appeal, in event the'same is not successfully prosecuted. Failure to comply with the order of the referee, unless petition for review and bond be filed and allowed by the referee, may be treated as a contempt of court.” The only regulation in the statute regarding the revision of orders of referees is that they are “subject always to review by the judge.” No. 37 of the General Orders in Bankruptcy prescribes only the form in which the matter for review shall be presented to the judge, and does not deal with any question of costs or the effect of the filing of the petition as a supersedeas. Nearly every order the District Court makes is subject to revision on appeal or writ of error. Yet it has never been heard that the party aggrieved can have a supersedeas, or avoid giving security for costs, in disregard of the rules of the court, merely because the law gives a writ of error or appeal as a matter of right. There is nothing in the regulations made by the District Court which runs counter to the statute or rules of the Supreme' Court. With the volume of business in the Middle and Northern Districts presided over by a single judge, whose time is constantly engaged with the common law, criminal, and equity dockets, as well as the bankruptcy business, in five different places of holding court, from four of which the judge is always ■absent, it would be an intolerable abuse if a suitor, no matter how frivolous his objections, could, by the simple expedient of filing a petition for review, stay the execution of every order until finally confirmed by the District Court, and then, if the petition be determined advcrsely to him, escape all liability for damage done by the delay to the adverse party. In cases like this, which are constantly arising, such a doctrine would starve nearly every bankrupt into submission to demands of creditors. It would convert orders of referees into mere recommendations, to which no one need pay any heed until they are confirmed by the District Court, and would vest in the irrevisable discretion of disappointed suitors a power and discretion which the law lodges only in the court.

7. This is not one of the cases in which reliance upon the advice of counsel can shield a party from the consequences of a deliberate disobedience. Here there was a purpose not to perform an act which the order exacted — an order so precise and definite that no man could read it and fail to know what it demanded. Respondent .does not claim that it misconstrued the order, or that it did not intend to disobey it. On the contrary, it admits that it knew precisely what the order required and that it did not intend to obey it. It concluded to disobey on the advice of counsel, on the theory that the referee had no authority to make the order and that the court had no power to compel obedience to it before the court itself first passed on the petition for review. Having ability to comply, and having intentionally and designedly disobeyed the order, realizing fully what it enjoined, the company cannot be heard to say that it did not intend disobedience to the process of the court. The intent is shown by the act, which speaks for itself. Agnew v. United States, 165 U. S. 50, 17 Sup. Ct. 235, 41 L. Ed. 624. This is not a case where the disobedient party did a forbidden act, honestly, though mistakenly, believing that its conduct was not forbidden by the order, and therefore, although it knowingly did the forbidden thing, yet had not any actual intent to disobey the command. Under such circumstances there is no moral intent to defy the order, though there is disobedience to its command. The principle has no application here, where a party knowingly and intentionally refused to perform a specific act, which he knew the order commanded him to do. The law prescribes the extent of the duty of obedience to a judgment or decree. If the order be void, any person may disregard it with impunity. If it be not void, though it abound in error, it must be respected, until reversed or suspended in some appropriate proceeding. The advice of counsel cannot make an order void, if it be not void; and it cannot lessen its requirements, or relieve a party from the duty of conforming to them. The rights of the disobedient party are exactly the same, whether he acts with or without the advice of counsel. Whosoever intentionally defies an order, whether upon his own judgment, or in reliance upon the advice of counsel, takes upon himself the peril of making a right decision, and if he make a wrong decision he must bear the consequences. It will seldom happen, if sufficiently diligent search be made, that some attorney cannot be found who will advise a discontented suitor, and honestly too, that a distasteful order is wholly without warrant of law, and therefore may be safely disobeyed. To. recognize the advice of counsel as a justification or an excuse for a willful defiance of a valid order of the court would go a long ways towards sanctioning anarchy. The process of the court would be robbed of the sanction which the law gives it, and depend, instead, upon the varying views of counsel in each particular case, no matter how erroneous they might be. Such a doctrine finds no countenance in our jurisprudence.

8. After the referee made his order the respondent took no step either to obey it or to supersede it. Notwithstanding the rule nisi from this court to its managing agent about three weeks after the referee’s order, respondent continued to tie up the wages of the bankrupt until in the end it was enabled to coerce him to make a settlement out of court, the effect of which, in defiance of the provisions of the bankruptcy statute and the orders of the court was to make valid a void assignment and kill all enjoyment by the bankrupt of rights which the laws secure to him in the interval between his adjudication and discharge. This private settlement, which it was enabled to effect only by its persistent disobedience, was never brought to the attention of the court until it called for explanation; and then it is boldly brought forward, not only as a determination of all matters at issue between the respondent and the bankrupt, but as foreclosing all right of the court to take notice of the issues respondent raised with the court by its persistent defiance of its process. Respondent urges that this settlement was voluntary on the part of the bankrupt, and made at his instance, and that as an inducement to it he promised to dismiss the contempt proceedings, in order to obtain what respondent seems to consider a personal favor to the bankrupt. The settlement, though, perhaps, not made under such duress as would enable the bankrupt to avoid it was far from a favor to him. The respondent had tied up the wages of the bankrupt for weeks. For what purpose? Did not the bankrupt yield to the company’s exactions in order to obtain a part of his wages, rather than to face the worse situation which confronted him if he held out? The settlement was a favor to the bankrupt only in the sense that a captor’s acceptance of an offer of a ransom is a boon to his helpless captive, because it relieves him from greater evils. The bankrupt could not bargain away any right of the court. He could condone violations of the orders of the court only in so far as they affected his civil and pecuniary rights. The disobedience here involved much more than disregard of the personal rights of the bankrupt, because that result was accomplished and could be accomplished only by persistent and flagrant defiance of the authority of the court. The court is compelled to notice respondent’s conduct, because, in the language of Blaclcstone, it demonstrates “that gross want of regard and respect, which when courts are once deprived of, their authority, so necessary for the good of the kingdom, is entirely lost among the people.” Bessette v. W. B. Conkey Co., 194 U. S. 329, 330, 24 Sup. Ct. 665, 48 L. Ed. 997. Respondent was charged with knowledge, and doubtless actually knew, since it was advising with counsel, that the nature of the step of the court should or might take to rebuke and punish the defiance of its orders could not be a matter of barter and sale with the bankrupt. When analyzed, the excuse here set up, notwithstanding the’ formal protestations of respect for the authority .of the court and want of any intent to contemn its process, is nothing more nor less than the assertion that the respondent had a right to do what it did, and that, having forced the bankrupt to settle the controversy in defiance of the orders of the court, it is now none of its • business how that result was brought about. Such conduct “is utterly inadmissible in any community professing to be governed by law." In re Swan, 150 U. S. 652, 14 Sup. Ct. 225, 37 L. Ed. 1207. All respect would be lost for the orders of a tribunal which would receive the excuse here tendered, or allow it to go unrebuked and unpunished.

The abuses resulting from these loans, taken in violation of the local statute, and the methods resorted to for their enforcement, the bankruptcy law and all other law to the contrary notwithstanding, have grown so great that the number of insolvents who fice to the court of bankruptcy for refuge is larger in the Northern District of Alabama than in any other district of the United States, with two or three exceptions. It is high time that an end was put to this state of things, if a firm enforcement of the law can bring it about. The Home Discount Company is the real offender. Its disobedience was willful. It persisted in its lawless conduct to promote its own gain and to effect its own unlawful ends. The court, under the circumstances, will not consider how far it ought to deal with the mere agent, a woman who was misled by the advice of counsel, and perhaps thought she was only doing her duty to her employer, but will visit the penalty upon the real author of the disobedience. While the advice of counsel cannot be received as a justification or excuse for resistance to a valid order, the court may in its discretion consider it in mitigating the penalty for disobedience, and it does so now in imposing a fine of $500.

Case Details

Case Name: In re Home Discount Co.

Court Name: District Court, N.D. Alabama

Date Published: Jul 3, 1906

Citation: 147 F. 538

Court Abbreviation: N.D. Ala.