| S.D.N.Y. | Feb 15, 1874
In this matter, an order was made by this court, on the 10th of February, 1872, reciting that Edward B. Wesley, as assignee of the bankrupts, had theretofore filed his petition in this court, setting forth that the Grand Union Hotel, situated at Saratoga Springs, was owned by Warren Leland and Charles Leland, two of the bankrupts constituting the firm of Leland Brothers, and that a sale of the said property was necessary, and praying the direction of the court in regard to a sale thereof, and also reciting that, after the filing of such petition, this court had removed Wesley from his office as assignee, and had appointed John H. Platt as assignee in his stead, and that counsel for the as-signee and for Alexander T. Stewart and others, and D. McMahon as counsel for Edward B. Wesley and D. Randolph Martin, as mortgagees in trust of the premises in question, under two trust mortgages mentioned in said petition, had been heard, and
The premises in question were sold, and the net proceeds of sale were deposited, and the reference so provided for was had, a large body of testimony being taken. The matter was brought to. a hearing on such testifaony. and on the 1st of November, 1873, the court made an order, which recites the provisions of the former order and that the sale had been had and the proceeds had been deposited, and then proceeds: “And all the persons and corporations hereinafter named having attended in person or by counsel upon the said reference before the said register, and the said register having taken all the evidence offered or introduced by them respectively, as to the liens and incumbrances claimed by them respectively, * * * and the said register having reported to this court the testimony so taken, and the matter having been brought on for final hearing before this court * * * andallthepersons and corporations hereinafter named * * * having appeared upon said hearing by their respective counsel, and having, in open court, waived all objections to the form of the proceedings, and submitted all the questions involved herein to the decision and decree of the court * * * and after hearing * * * counsel for Alexander T. Stewart & Company * * * and D. McMahon, of counsel for all the other persons and corporations hereinafter mentioned * * * this court * * * does hereby order, adjudge and decree * * * that the mortgage upon said Grand Union Hotel property, commonly called the second mortgage” (being one of the two trust mortgages mentioned in the order first above mentioned), “dated November 1st, 1870, executed by Warren Leland and Charles Leland to Edward B. Wesley and D. Randolph Martin, in trust to secure certain bonds commonly called second mortgage bonds, was made, executed and delivered by said Warren Leland and Charles Leland, being insolvent, within four months before the filing of the petition in bankruptcy against them, with a view to give a preference to certain of their creditors, and. among others, to * * * A. T. Stewart & Company, Simeon Rouse, Pauld-ing, Kemble & Co. * * * Monteath & Son * * * holders of bonds issued under and purporting -to be secured by said mortgage, the said Edward B. Wesley and D. Randolph Martin receiving such conveyance, and the said bondholders above named to be benefited thereby, having reasonable cause to believe that the said mortgagors were insolvent, and that such mortgage was made in fraud of the provisions of the bankruptcy act, and that said mortgage is not a valid lien upon or security' against said property, nor upon or against said fund in court, and that the boLds issued under the provisions of said mortgage are not liens upon, and are not entitled to be paid out of, said fund, that Edward B. Wesley and D. Randolph Martin, claimants,
The 23d section of the bankruptcy act provides, that any person who, after the approval of this act, shall have accepted any preference, having reasonable cause to believe that the same was made or given by the debtor contrary to any provision of this act, shall not prove the debt or claim on account of which the preference was made or given, nor shall he receive any dividend therefrom until he shall first have surrendered to the assignee all property, money, benefit or advantage received by him under such preference.” The 35th section1 of the same act provides, “that, if any person, being insolvent, * * * within four months before the filing of the petition by or against him, with a view to give a preference to any creditor, * * * makes any * * * transfer or conveyance of any part of his property, * * * the person receiving such * * * transfer or conveyance, or to be benefited thereby, * * * having reasonable cause to believe that such person is insolvent, and that such * * * conveyance is made in fraud of the provisions of this act, the same shall be void, and the as-signee may recover the property, or the value of it, from the person so receiving it- or so to be benefited.” The» 39th section of the same act provides, “that any person residing and owing debts as aforesaid, who, after the passage of this act, * * * being * * * insolvent, * * * shall make any * * * conveyance or transfer of * * * property, * * * with intent to give a preference to one or more of his creditors, * * * shall be deemed to have committed an act of bankruptcy, and, subject to the conditions hereinafter prescribed, shall be adjudged a bankrupt, * * * and, if such person shall be adjudged a bankrupt, the as-signee may recover back the * * * property so * * * conveyed * * * or transferred contrary to this act, provided the person receiving such * * * conveyance had reasonable cause to believe that a fraud on this act was intended and that the debt- or was insolvent, and such creditor shall not be allowed to prove his debt in bankruptcy.”
A. T. Stewart & Co., Rouse, Paulding, Kemble & Co., and Monteath & Son, the persons named in the above order, now present for determination the question whether they are or are not entitled to prove, in bankruptcy, the debts for which they received as security the bonds referred to, secured by such mortgage. They all of them have valid debts, but, by said order, the mortgage is declared to have been made in fraud of the act, and not to be a valid lien on the property or on the fund in court, and the bonds' issued under the mortgage are declared not to be liens on the fund, and the terms of the order declare the existence of facts which, under the 35th and 39th sections of the act, give the assignee the right to recover back the property transferred.
The proper construction of the 39th section $áems to me to be, not that it gives power to the assignee to recover back property conveyed contrary to the act, only when the bankrupt is adjudged an involuntary bankrupt because of the conveyance of such property asvan act of bankruptcy, or even-only when he is adjudged an involuntary bankrupt, but that it gives such power to recover back in all cases where a person has conveyed property contrary to the act, and is afterwards adjudged a bankrupt. Under such construction, it is of the same scope, in regard to the recovery or recovery back of property, as the 35th section. But, the 39th section contains the further provision, not found in the 35th section, that “such creditor shall not be allowed to prove his debt in. bankruptcy.” This means, the creditor to whom the preference was given by the conveyance, when the assignee recovers back the property transferred contrary to the act. The entire provision of the 39th section is to the effect, that, if a person has conveyed property contrary to the act, and if he is after-wards adjudged a bankrupt, the assignee (as to transactions within the times limited by the 35th section) may recover back the property, and that, if the conveyance is one for preference to a creditor, and if the as-signee recovers back the property conveyed, because it was conveyed by the bankrupt with intent to prefer such creditor, and because such creditor had reasonable cause to-believe what is specified in that regard in the section, such creditor shall not be allowed to prove his debt in bankruptcy. This provision is to be construed in connection, and in harmony, with the provision of the 23d section, before cited. If, under the 23d section, the preferred creditor were allowed to surrender to the assignee the property received in preference, even after it had been recovered back by the assignee, as mentioned in the 39th section, so as to be able to prove his debt, no creditor taking a preference would ever be debarred from proving his debt. If, under the 39th section, it were held that the mere taking of a preference by a creditor would debar him from proving his debt, without the precedent necessity for a recovery back by the assignee of the property conveyed in preference, there never could be any scope for the operation of the 23d section in respect to a surrender. The interpretation heretofore
It is contended, for the creditors, that a direct suit by the assignee against them is necessary, and a recovery of property from and out of their possession by a decree to that effect in such suit, in order to constitute the recovery referred to in the statute. This is not so. The assignee, in this ease, has recovered back the property. He has recovered it back free and clear from the preferences, and against the efforts of these creditors to establish such preferences, in a litigation instituted and carried through by him, with a view to recover back the property. In order to recover back the property, it was necessary for him, not merely to obtain possession of the real estate, so as to be able to turn it into money, but to go further and obtain an adjudication that he was to enjoy the fruits of the sale free from any lien of the preferences. Until the latter adjudication, his recovery back was not complete. By the 35th section, it is declared, that the preference shall be void and the assignee may recover the property. Until there is substantially an adjudication as to the invalidity of the preference, there can be no recovery of the property free from the preference. Mere possession of the property by the assignee is not a recovery of it, unless he obtains such an adjudication as to the preference. This is the case under both the 35th and 39th sections, although the latter section says nothing as to any preference being void, but only speaks of a recovery back by the assignee. But the two sections are substantially one, and are to be construed together in regard to the invalidity of transfers and a recovery by the as-signee of property transferred.
In the present case, the assignee, by petition, instituted the proceedings for a' sale of the real estate, which have resulted in such sale, and, through the order of reference and the litigation thereunder, in the order of November 1st, 1873. The mortgagees in trust surrendered to the assignee their claim to the possession of the premises, but they surrendered nothing else, and they surrendered that, as the order of February 10th, 1872, expressly states, ior the purpose of enabling the property to be lawfully sold, and proper title therefor given, without relinquishing or in any manner affecting the validity and lien of their trust mortgage on the proceeds of sale; and the lien and encumbrance of such trust mortgage was, by. such order, transferred to the net proceeds of the sale, and it directed that the fund produced by the sale should stand in place of the real estate for all purposes, so far as respected such lien and encumbrance, and subject thereto. The reference to ascertain the liens on the property and the fund, and marshal the fund, under the power given to the court by the 1st section of the act, was, to all intents and purposes, a litigation to which the bondholders were parties, if they consciously came in, either directly or through the mortgage trustees, asserting and maintaining, against the resistance of the assignee, their right to maintain their preference. Undoubtedly, even after the order of reference was made and the property was sold, they might have surrendered their preferences. But, if they were parties to the litigation in the reference, they are bound by the order of November 1st, 1873, and it is too late for them now to surrender their preferences, because the terms of that order make it res adjiidieata between them and the assignee, that the facts existed, as respects them, which gave the assignee the right to recover back the property and its proceeds, and that he has so recovered it back, so that it must follow that they must be debarred from being allowed to prove the debts in respect of which they accepted the preferences. That order recites that the four creditors attended in person, or by counsel, upon the reference, that the register took all the evidence offered or introduced by them respectively as to the liens and encumbrances claimed by them respectively, that they appeared by their respective counsel upon the final hearing of the matter before the court, and waived, in open court, all objections to the form of the proceedings, and submitted all the questions involved to
As to A. T. Stewart & Co., it is not alleged that they did not appear on the reference, or that they did not endeavor, by testimony introduced by them, to maintain their preference, or that they did not 'so contend, by counsel, on the hearing, or that they did not continue their resistance to the asserted claims of the assignee until after the final order was made. The same is true as to Monteath & Son, and Paulding, Kemble & Co. The motion of A. T. Stewart & Co., for leave to withdraw their former proof of debt, and file in place thereof a new proof of debt, without security, must be denied. The assignee has done nothing to waive the .benefit of the final order, or to debar himself of the right to insist that A. T. Stewart & Co. shall not be allowed to prove their debt. The motion of Monteath & Son, for leave to surrender their bonds, and to have their proof of debt, which has been stricken out, restored, and then amended, so as to be an ordinary proof of debt, without security, or for leave to prove their claim anew, as an unsecured claim, is denied. As to Paulding, Kemble & Co., the issues certified are determined in favor of the assignee, and their second proof of debt must be expunged.
As to Rouse, the case comes up on issues as to whether he can be allowed to prove the debt for which he received the mortgage bonds as security, and whether the proof he has made, and which is under re-examination before the register, should be diminished by rejecting such debt. He also applies, by petition, for the opening of the order of November 1st, 1873, and its modification, so as to give him the right to claim a dividend on such debt, and to be paid such dividend as upon an unsecured debt. The facts in the case of Rouse are somewhat peculiar. He resides in Syracuse, N. Y. On the 1st of January, 1872, he went before the register in bankruptcy at Syracuse, and signed and swore to, before him, a proof of debt against Charles Leland and Warren Leland, two of the bankrupts, based on two drafts, for $3,-000 each, drawn on the said two bankrupts, as Leland Brothers, and accepted by them (being the two acceptances for which he held the mortgage bonds as collateral security), and also on a promissory note for $632.06, made by the said two bankrupts, as Leland Brothers. The proof set forth that Rouse had not received any security for the drafts or note. The. original drafts and note were annexed to the proof. The said register certified on the proof that it was satisfactory to him. The proof found its way into the hands of the assignee, but when does not appear. The reference as to the disposition of the proceeds of sale of the property commenced on the 22d of May, 1872, the record for that day stating that Mr. D. McMahon appeared for the trustees under the mortgage, and for certain named claimants of the fund, the name of Rouse not being among them. On the 8th of July, 1872, Mr. McMahon, subscribing himself as “counsel for the trustees,” sent a letter to the Syracuse National Bank at Syracuse, saying that he understood it held bonds of the Grand Union Hotel at Saratoga, and that preparation was being made to distribute the fund arising from the sale of the property, and asking the 'bank to cause the bonds held by it to be presented at his office on the 11th of July, with the checks given in payment therefor, and evidence of ownership, as the inquiry in relation to said bonds would be proceeded with at that time. The bonds intended were those held by Rouse, and the bank communicated to Rouse the contents of the letter. Rouse, on the 10th of July, sent the bonds by express to Mr. McMahon, with a letter, saying: “Inclosed find bonds of Le-lands, held by me. After paying expenses on them, send me my dividend, to my ad-, dress, in draft or certified check.” The bonds, six in number, were received by Mr. McMahon on the 12th or 13th of July, and the express charges, $4.50, not having been prepaid, were paid by him. The record, under date of November 26th, 1872, contains this entry: “Counsel for trustees, on their behalf, and on behalf of S. Rouse, a claimant under second coupon bond mortgages, produces and offers in evidence on behalf of said Rouse the following second mortgage bonds, which are read in evidence and marked as follows,” being six bonds of $1,000 each. On the 30th of November, Mr. McMahon, subscribing himself as “counsel for the trustees,” sent a letter to Rouse, saying that the reference would be proceeded with on the 6th of December, and adding: “Please attend at that time with your notes or account for which the bonds now in my hands are held by you.” Rouse went to New York, and,- on the 5th of December, had an interview with Mr. McMahon. As part of it, Mr. McMahon gave to Rouse a letter to the assignee, dated December 5th, saying: “Mr. S. Rouse, one of the creditors of Leland Bros., wishes to get his proof of debt and to exhibit it to me. Please to let him have it, so as to see me about it.” Rouse presented this letter to the assignee, and received from him the proof of debt, with the drafts and note attached, and gave a receipt therefor to the assignee, dated December 5th. The proof of debt and the attached papers were given by Rouse to Mr. McMahon, and remained in the hands of the latter until the 16th of December, 1873, the
Bouse now takes the ground, that he proved his debt as an unsecured debt, intending thereby to surrender the bonds and all claim under them to any preference; that he supposed and believed he had done all that was necessary to that end; that in this he acted in good faith, under the advice of the register in bankruptcy in Syracuse; that he never has claimed, or intended to claim or secure, any preference on the bonds, but fully intended to surrender them and all claims upon or under them; that the undertaking by the trustees to establish the validity of the bonds, and to secure a lien thereunder, and the employment by them of counsel for that purpose were without his concurrence or consent; that, in sending his bonds to Mr. McMahon, as counsel for the trustees, he supposed that Mr. McMahon had a right to ask for them, and considered them as of no further use or value; that the testimony he gave was given at the request of the • counsel for the trustees, to show the good faith of the transaction on which he received the bonds and of his debt; that he
Mr. Gott, the register in bankruptcy in Syracuse, testifies, that Rouse came before him with the acceptances and the note, and stated that he had some mortgage bonds which he had taken as security for his debt, but which he did not consider of any value; that, at the request of Rouse, he, the register, wrote to a correspondent in New York, to ascertain the value of said security, and was advised by him that such bonds were of no value; that he, the register, thereupon advised Rouse to prove his debt as an unsecured debt, and told him, at the same time, that, by so proving his claim as an unsecured debt, he would, according to the law as held in the Northern district of New York, thereby relinquish his security on the bonds; that thereupon Rouse proved his debt as an unsecured debt; and that he, the register, understood that Rouse thereby intended to relinquish all claim upon the bonds as security. Rouse confirms this testimony of Mr. Gott, and says that he concluded to prove his debt as an unsecured debt, understanding that the effect of so proving it would be to surrender all claim upon the bonds; that he sent the bonds to Mr. McMahon without any instructions in regard to them, supposing that he had authority to ask for them, and was the proper person to send them to, and not considering them of any value; that he supposed the object of his examination on the reference was to establish the validity and honesty of his claim as a general creditor of Leland Brothers, and did not understand that it was to establish a claim for a preference over other creditors; that he never knew that any such claim was to be made in his behalf, and never authorized it; that he never intended to employ Mr. McMahon to act on his behalf to secure any preference for his debt, or to act for him in any way as his counsel; and that he did not know that Mr. McMahon claimed to be acting as counsel for him, until the bill for counsel fees was sent, which he declined to pay on the ground that he had never employed Mr. McMahon. On cross-examination, Rouse testifies that Mr. Gott did not inform him, nor did he know or think, that proving his debt as a secured debt would in any manner, or in any event, injure him or prejudice his claim; and -that he had no other reason for proving his debt as an unsecured debt, than that he and Mr. Gott thought the bonds as of no pecuniary value. After Rouse had so testified, Mr. McMahon was examined. He says, that when Rouse came to New York, and before he was examined on the 6th of December, 1872, he, McMahon, read over to Rouse a series of questions which he had put to witnesses who held secured mortgage bonds, relative to his intent to gain a preference (being substantially the same questions before referred to which were put to him on his direct examination), and asked him whether he could answer ‘latem truthfully, and he said he could. He also says: “I complained to Mr. Rouse about his sending me his six bonds, and putting me to the expense of $4.50. He said to me, ‘Why, you can collect the bonds, and pay yourself out'of it, and for your trouble also.’ I told him the trustees had no money belonging to the estate in their hands, and, in case nothing was collected, X saw no fund out of which I was to be paid for my services. He said he had been beat out of a good deal of money, but he had a just and honest claim, and he was held for what X did for him. Within ten minutes after, we commenced the examination, and I acted as his counsel during the whole of that examination.” After this Rouse was re-examined, and testifies that he did not at any time promise to pay Mr. McMahon for his services as his counsel, and did not ever employ him as counsel.
Irrespective of the proof of debt made by Rouse on the 1st of January, 1872, it is impossible to hold, on the foregoing evidence, that Rouse did not, at least, allow the trustees and their counsel to present and prosecute, on his behalf, his claim, on the bonds, to share in the fund, as a holder of the bonds, and do so consciously, and give testimony to aid such claim. His testimony that he owns and holds the bonds is wholly inconsistent ' with his having surrendered them. His testimony that the amount for which he holds them is $6,000 and interest, is wholly inconsistent with his having surrendered all claim on them. He had not given them up physically to the assignee. The questions as -to a preferential intent, read over to him beforehand, and put to him on the examination, and answered, could — in view of his having testified that he still held and owned the bonds which he had taken, and that he still held them for $6,000 dollars and interest —mean nothing else, to a rational mind, than that he was aiding in an attempt to maintain the validity of unsurrendered bonds, as against an allegation that they were invalid because preferential. His testimony clearly shows that, in proving his debt, without saying anything in the proof about the bonds, he had no idea or information that, if he named the bonds in the proof as security, he could suffer prejudice as to his debt; and that his only reason for saying nothing, in the proof, about the bonds, was, that he regarded them as of no pecuniary value. He
Rouse now claims that the proof of debt he filed was per se a surrender, made understandingly and advisedly, and that he could not, if he would, afterwards withdraw the proof and claim as a secured creditor. When he came to the reference, if the proof of debt had been brought up by the assignee as an estoppel against the assertion of a claim on the bonds by Rouse, Rouse might very well have applied to the court for leave to prove the debt as one secured by the bonds, or to withdraw the proof as made, on the ground that the debt had inadvertently been proved as an unsecured claim, in the belief and on the assurance that the bonds were of no pecuniary value, even if valid bonds, and that that was a mistaken belief, and that the bonds, if valid, were likely to be of pecuniary value, and that he wished to maintain the bonds as valid. His case, on the very evidence now presented, would have been a. proper one for the granting of such application. As between himself and the assignee, he has substantially had that application made and granted, for the purpose of allowing him to attempt to maintain the validity of the bonds as against an objection that they were void as preferential. The assignee waived the objection which he might have taken, arising out of the proof of debt, and Rouse has had the benefit of attempting to maintain the bonds. He stood, in such attempt, as if he never had filed any proof of debt. He must take the risk with the benefit. Having attempted to maintain the bonds, notwithstanding the proof of debt, and having failed because the bonds were preferential, he must incur the consequences which the statute visits on such attempt and failure, and cannot now set up the proof of debt as doing away with such consequences.
The case of Rouse, therefore, is brought within the principles laid down as to the other cases. He cannot be allowed to prove the two acceptances, the proof under re-examination should be diminished by rejecting such acceptances, and the prayer of his petition must be denied.