Commercial Bank of Manchester v. BucknerAnnotate this Case
61 U.S. 108 (1857)
U.S. Supreme Court
Commercial Bank of Manchester v. Buckner, 61 U.S. 20 How. 108 108 (1857)
Commercial Bank of Manchester v. Buckner
61 U.S. (20 How.) 108
APPEAL FROM THE CIRCUIT COURT OF THE UNITED
STATES FOR THE EASTERN DISTRICT OF LOUISIANA
The circuit court of the United States has no power to entertain an original bill brought by a creditor, who has come in and proved his debt against the bankrupt for the purpose of annulling or vacating a discharge and certificate in bankruptcy, obtained in the district court upon imputations of fraud done in contemplation of bankruptcy by the bankrupt, or to give relief, either at law or in equity, in a suit brought by a creditor who had proved his debt under the commission, who had assented to the bankrupt's discharge and certificate, and who had taken a dividend out of the bankrupt's estate.
The district court which passed the decree in bankruptcy can take cognizance of such a case.
Whether or not such a bill could be filed by a creditor who had not come in and proved his debt, and who was not a party to the decree in bankruptcy, is a question which the court does not now decide.
Nor has the circuit court the power, under its general jurisdiction over frauds, to give relief either at law or in equity in a suit brought by a creditor who had proved his debt under the commission, had assented to the bankrupt's discharge and certificate, and had taken a dividend out of the bankrupt's estate.
A demurrer only admits facts which are well pleaded.
This was a bill filed by the bank upon the equity side of the circuit court against Buckner, under the circumstances fully detailed in the opinion of the Court.
MR. JUSTICE WAYNE delivered the opinion of the Court.
The decision which we are about to give would not be satisfactory, unless it shall be preceded by a statement of the facts of the case as they are disclosed by the pleadings. We shall adopt that which was given by the counsel who argued the cause, with but little alteration or addition.
The appellants allege, in their bill that during the years 1841 and 1842, the defendant, Henry S. Buckner, together with M. B. Hamer, who died in April, 1842, and Frederick Stanton, were partners in trade, doing commercial business in New Orleans, under the firm of Buckner, Stanton & Co., Buckner being the resident partner there, and in Natchez under the firm of Stanton, Buckner & Co., Stanton conducting it, and at Yazoo city under the firm of M. B. Hamer & Co., Hamer being the resident partner at that place. The three firms were distinct and separate, and kept their books and accounts accordingly. It is alleged that the three firms and the three members of them became hopelessly insolvent in the year 1841, and that they continued to transact business together until Hamer's death; that after his death, the two survivors carried on the business of the three firms until their bankruptcy. On the 21st July, 1842, Stanton filed his petition in the United States District Court for the Southern District of Mississippi, both individually and as a member of the three firms, was decreed a bankrupt on the 8th November, 1842, and received his certificate of discharge on the 21st February, 1843. On the 18th July, 1842, Buckner made a similar application to the district court in New Orleans, was decreed a bankrupt on the 5th September, 1842, and received his certificate of discharge on the 5th December, 1842. It is also said that their application for their discharges in bankruptcy were made by Buckner and Stanton in concert, with a view to future business.
It appears at the time of these applications, they were indebted
to the appellants in the sum of $49,020.14, besides interest, on twelve promissory notes and on one bill of exchange, all which had become due in January, 1842. Three of them were payable on or before the 6th January, 1839; three others on the 3d April, 1839; four on or before the 3d March, 1841; and the last in the month of January, 1842, six months before Buckner filed his petition in bankruptcy. Buckner acknowledged the indebtment in his schedule filed with his petition in bankruptcy. The complainants proved a portion of their claim in the bankruptcy proceedings of Stanton. It is admitted that they received a small dividend from the assets of the firm, but they aver they did so in ignorance of the frauds upon the bankrupt law, committed by Buckner and Stanton, of which they knew nothing until the year 1853, when they discovered the frauds. And they further allege that they would not have proved their claim, nor have received a dividend, if they had known the frauds, and they assert that the certificates of discharge are null and void, by reason of the frauds.
It is then stated in the bill that the three firms had existed before 1837, in which year they suspended payment, but that they never recovered from their embarrassments, though they had resumed business. It is again alleged that their affairs were hopeless in 1841, and that executions on judgments obtained against Stanton as a member of the firm were in that year returned nulla bona.
That all the indebtment of the firms which made them insolvent was due prior to the 1st March, 1842, at which time the frauds began. That then, Buckner and Stanton had agreed that they would take the benefit of the bankrupt law, and, in contemplation of doing so, committed the fraud stated in the bill.
Twelve different charges of fraud are specified, all of them being payments to preferred creditors, in fraud of the general creditors -- contrary to the provisions of the act of the 19th August, 1841. No charge of any other fraud is made, except a transfer of some property in New Orleans, upon the understanding that Buckner was to have the right to redeem it on payment of the debt, and that the arrangement had secured for him an ultimate profit, in fraud of creditors. They also say that it was because of the fraud of Buckner and Stanton in concealing a knowledge of the facts from them that they were induced to believe the discharges valid, and so they did not proceed to enforce their claims at law or in equity, but that they had found them out only within two years. How or from what source they had made the discovery they do not state distinctly, though to support the charge they file an exhibit of
notes discounted for Stanton, Buckner & Co., by the Commercial Bank of Natchez, which were applied to their credit, and a list of protested notes of Stanton, Buckner & Co., taken up by them in May, 1842 -- two months before Stanton filed his petition in bankruptcy. Two letters from Stanton to Stephen Duncan -- one of them dated at Natchez, on the 14th August, 1842, and the other on the 14th September, 1842 -- are made exhibits; both relate to the affairs of the firm, and to particular transactions of them, which the appellants allege were frauds committed by Stanton and Buckner, in giving preferences to certain creditors, in contemplation of bankruptcy. And they further declare, that since the bankruptcy of Stanton and Buckner, the books of Stanton, Buckner & Co., had, by some means, passed into the possession of Buckner; that if produced, the fraudulent preferences which had been made would be shown, and that they would also disclose other fraudulent preferences made by Stanton for himself and the firm of Stanton, Buckner & Co., in the spring and summer of 1842, in contemplation of bankruptcy.
The bill is closed with a prayer that the first decree of the district court, discharging Buckner, should be declared void and of no validity, as far as the rights of the complainants, as set forth in the bill, could be affected by it, and that Buckner should be perpetually enjoined from setting it up against their rights, and that Buckner should be adjudged to pay them the original sum due by him, with interest thereon, to which is added a prayer for general relief.
The defendant demurred to the bill, and, for causes of demurrer, says:
"I. That the said complainants have not, by their said bill, made such a case as entitles this Court to entertain jurisdiction of this cause under the Constitution and laws of the United States."
"II. That the said complainants have not, by the said bill, made such a case as entitles this Court to entertain jurisdiction, or grant relief in equity; the remedy of complainants, if any they have, being at law, and not in equity."
"III. That the said complainants having, by their own showing in said bill, made proof of their claims, and received dividends therein, in the bankruptcy proceedings which resulted in the discharge of this defendant, are not permitted by law to impeach the validity of said discharge in manner and form as sought by said bill, and having been parties and privies to the judgment of discharge in favor of this defendant, are forever precluded in law from contesting the validity and effect of
said judgment, on any such grounds as are alleged in said bill."
"IV. That the said complainants have not, by the said bill, alleged any cause sufficient in law to authorize this Court to set aside the decree of discharge in bankruptcy in favor of this defendant, rendered by the district court of the United States, as set forth in said bill."
"V. That the said complainants, by the allegations of said bill, show that the claims held by them, if they ever were due to them by this defendant, have become discharged by lapse of time, and barred by the statute of prescription and limitation."
"VI. That the said complainants, by the allegations of said bill, show such laches as by the principles and rules of equity deprives them of any right to claim relief or remedy in this Court."
"VII. That the said complainants have not, by the showing contained in their said bill, made out a case entitling them to relief either at law or in equity."
"Wherefore this respondent demands the judgment of this Honorable Court, whether he shall be compelled to make any other or further answer to the said bill, or any of the matters and things therein contained, and prays to be hence dismissed with his reasonable costs in this behalf sustained."
"[Signed] BENJAMIN, BRADFORD & FINNEY, Solicitors"
"I certify that, in my opinion, the foregoing demurrer is well founded in point of law."
"[Signed] J. T. BENJAMIN, of Counsel"
"Henry S. Buckner, being duly sworn, deposes that the foregoing demurrer is not interposed for delay."
"[Signed] HENRY S. BUCKNER"
"Sworn to and subscribed before me this 1st of October, 1855"
"[Signed] J. W. GURLEY, Commissioner"
The stating part of the bill of the complainants, their prayer for relief, and the demurrer of the defendant suggest that our first point of inquiry in this case should be into the power of the circuit courts of the United States to entertain an original bill to annul or vacate a decree discharging a bankrupt, either in whole or in part, for any of those frauds upon the act of the 1st August, 1841, which would prevent the bankrupt from receiving a discharge. No such jurisdiction is given by the act to the circuit courts. The jurisdiction of these courts
under the act exists in three cases:
First, when a question has been adjourned into a circuit by the district court, under the 6th section of the act.
Second, by appeal, as that is given, under the 4th section, to the bankrupt, when a majority of his creditors in number and value, who shall have proved their debts, shall file their written dissent from his discharge.
Third, the jurisdiction given to the circuit courts by the 8th section, in suits by an assignee of the bankrupt, against any person claiming an adverse interest, or by such person against the assignee for property, or rights of property, transferable to or vested in the assignee under the act. If we cannot find such a jurisdiction in the circuit courts in the Act of 1 August, 1841, it is in vain to look for it elsewhere, for the purposes for which this bill has been brought.
The inquiry then must be if the circuit court has jurisdiction to annul the decree of the discharge given to the bankrupt by the district court, for frauds upon that act, which would have prevented him from receiving a discharge and certificate. In other words, has not the district court of the United States, in which the bankrupt's discharge was given, and that court only, the power to inquire into frauds upon the act discovered after the bankrupt has received his discharge, with a view to annul it, and to give to his creditors who have proved their debts the benefit of the property he may have concealed, or the preferences he may have given, or transfers of property he may have made in contemplation of bankruptcy. It seems to us that the jurisdiction given by the 6th section of the bankrupt act to the district court is plenary and exclusive for such a purpose. The words of the 6th section are:
"That the district court in every district shall have jurisdiction in all matters and proceedings in bankruptcy arising under this act and any other act which may hereafter be passed on the subject of bankruptcy, the said jurisdiction to be exercised summarily in the nature of summary proceedings or equity, and for this purpose the said district court shall be deemed always open. And the district judge may adjourn any point or question arising in any case of bankruptcy into the circuit court for the district, in his discretion, to be there heard and determined, and for this purpose the circuit court of such district shall be deemed always open. The jurisdiction hereby conferred on the district court shall extend to all cases and controversies in bankruptcy arising between the bankrupt and any creditor or creditors who shall claim any debt or demand under the bankruptcy, to all cases and controversies between such creditor or creditors and the assignee of the estate, whether in office or removed, to all cases and controversies between such
assignee and the bankrupt, and to all acts, matters, and things, to be done under and in virtue of the bankruptcy, until the final distribution and settlement of the estate of the bankrupt, and the close of the proceedings in bankruptcy. And the said courts shall have full authority and jurisdiction to compel obedience to all orders and decrees passed by them in bankruptcy, by process of contempt, and other remedial process, to the same extent the circuit courts may here do in a suit pending therein in equity. And it shall be the duty of the district court, in each district, from time to time, to prescribe suitable rules and regulations, and forms of proceedings, in all matters of bankruptcy; which rules and regulations and forms shall be subject to be altered, added to, revised, or annulled, by the circuit court of the same district, and other rules and regulations and forms be substituted therefor."
Our reflections upon this section as a whole, and particularly upon that clause or sentence of it which extends the jurisdiction of the court to all controversies between the bankrupt and a creditor, who shall claim any debt or demand under the bankruptcy -- to all cases between creditors and the assignee of the estate, whether the latter continues in office or has been removed, and to all controversies between the assignee and the bankrupt -- have brought us to the conclusion that it was meant to give jurisdiction to the district court, either at the suit of the assignee or of the creditor, just in such a controversy as the complainants have made by their bill, with the power in the court, in a suit of either the assignee or the creditor, or both combined, to inquire into the fraudulent preferences alleged to have been given by the bankrupt in contemplation of bankruptcy, and when they shall have been satisfactorily proved, to revoke the decree of discharge which had been given to him, to prevent it thereafter from being pleaded as a bar to any suit which may be brought against him, for any demand which was provable under the act. Or the assignee alone may sue the bankrupt and his accomplices in the district court, for any preferences he may have given to creditors in contemplation of bankruptcy, to recover the amount of such preferences, as a part of the bankrupt's estate for distribution among his creditors who have proved their debts under the act, and with the additional object of revoking the bankrupt's discharge by a decree of the court. In either suit for the latter purpose, the assignees and the creditors who have proved their debts under the act, may be the parties on the one side, and the bankrupt and those who conspired with him to commit the fraud upon the act, should be made parties on the other. If it be intended only to recover the amounts of fraudulent
preferences, as a part of the bankrupt's estate, the assignee may sue the bankrupt and those who have received them, or the latter alone, giving to the bankrupt prior reasonable notice, specifying in writing the fraud or concealment which it is the object of the suit to investigate, so that he may be present at the trial to defend himself, or to petition the court to be made a party defendant to the suit, for the same purpose. And in such a case, the jurisdiction of the district court should be exercised summarily, in the nature of summary proceedings in equity, such being the direction in the sixth section of the act, for all proceedings in bankruptcy under it.
These conclusions are verified into unquestionable certainty, by considering in connection other parts of the bankrupt, bill.
By the third section of it, the property of the bankrupt, of every kind whatever, from the time of his discharge, by mere operation of law, is deemed to be divested out of him, and becomes vested by force of the decree in the assignee who may be appointed for the benefit of such of the bankrupt's creditors who have come in and proved their debts, for the purpose of becoming distributees equally of the bankrupt's estate, to the exclusion of all creditors who have not done so. Then, by the second section, the amount of preferences which may have been given in contemplation of bankruptcy, are declared to be a part of the bankrupt's estate. It is the duty of the assignee to sue for them, and the bankrupt who has made them, when they have been proved, cannot be allowed a discharge under the provisions of the act. And that this disability to receive a discharge was meant to apply prospectively to preferences which might be given, and retroactively to such as had been given in contemplation of bankruptcy, or to such preferences, whether given before the decree of discharge or after it, is manifest from the whole language of the fourth section, particularly that part which makes a bona fide surrender by the bankrupt of all his property and rights of property, for the benefit of his creditors, one of the prerequisites of his being discharged from all of his debts, and declares, that if the bankrupt shall be guilty of any fraud or willful concealment of his property or rights of property, or shall have preferred any of his creditors, contrary to the provisions of the act, or, if he admits a false and fictitious debt against his estate, that he shall not be entitled to such discharge or certificate. Further, the 5th section declares, that no creditor or other person, coming in and proving his debt or other claim, shall be allowed to maintain any suit at law or in equity therefor, but shall be deemed thereby to have waived all right of action and suit against such bankrupt, which, while it excludes such a creditor from bringing a suit at law or in
equity in any other court for his original debt, which had been proved against the bankrupt, cannot be construed to mean that he could not resort to the district court, which had been deceived into granting the discharge, for the purpose of investigating the frauds which may have been committed by the bankrupt before a discharge had been granted to him, but not discovered until afterwards, and for the further purpose of obtaining from the district court an annulment of the discharge which had been obtained from it by perjury and fraud. In this we do not differ from the counsel of the complainants, for much of his argument was intended to show that the creditors of a bankrupt are not without a remedy for frauds committed by him, but not discovered until after he had received his certificate of discharge. That was the case of Haxton v. Corse, 2 Bar.Ch. 507, decided by Chancellor Walworth. The chancellor's language is that he could not conclude,
"notwithstanding the general language contained in the fifth section of the act, that the creditors who come in and prove their debts shall not be allowed to maintain any suit at law or in equity therefor, and that the lawmakers did not intend that the proving of debts by creditors should be an absolute abandonment of all claim against the future acquisitions of their debtor, if his discharge was refused, or if it was void for any of the frauds specified in the act."
We admit the principle that creditors so circumstanced have a remedy, but not that they may use it in any suit at law or in equity in the circuit court. The bankrupt law has given to the district court a plenary and exclusive jurisdiction in all matters and proceedings in bankruptcy. We say plenary and exclusive jurisdiction in the district court. This Court has said so in Shawhan v. Wherritt, 7 How. 643. Besides, on the authority of the same case, we say, as all the proceedings in all cases in bankruptcy are made matters of record by the thirteenth section, that a party to one of them cannot be permitted to impeach it collaterally in another suit in another court, brought by him there to recover from the bankrupt his original debt, whilst he continues to occupy his relation to the assignee and the bankrupt, under the discharge of the latter, as one of the creditor distributees of his estate. The district court has by the act plenary and exclusive jurisdiction of the matter, and no other court can annul the decree of the bankrupt's discharge, either partially, for the benefit of a particular creditor, or wholly, to deprive the bankrupt of its operation.
This we say, with direct reference to the parties in this suit, who were parties to the decree of the bankrupt's discharge, who proved their debts, and who have taken a dividend from
his estate. We do not mean to say anything of the circuit court's jurisdiction in a suit brought by a creditor who had not come in and proved his debt, and who is not a party to the decree in bankruptcy. These are points which will no doubt be well considered by counsel before a suit shall be brought, directly in connection with the power given to such a creditor to impeach the discharge, when the bankrupt shall plead it in bar of a suit. But the manner of bringing such a suit by such a creditor, how, when, or in what court it should be brought we shall not decide until such a case shall be brought regularly here for adjudication.
We will now consider another point in the case, necessarily arising from the frame of the bill, which was argued by the counsel for the complainants, with some earnestness. It is whether the circuit court had jurisdiction of the subject matter of the bill, on account of the frauds alleged against the defendant.
The complainants in their bill state minutely the original indebtment of the bankrupt to them, particularize the fraudulent preferences he had given to other creditors in contemplation of bankruptcy, admit that they were parties to the bankrupt's discharge, and had taken a dividend. and then they ask for the intervention of the circuit court in equity, to set aside the bankrupt's discharge as to them, because it had jurisdiction in cases of fraud, and that it would adjudge that the defendants shall pay to them their original debt, with interest, on account of their ignorance of the frauds of which they complain, until within two years before they brought their bill. And for the same cause they say that they had not brought their action at law upon their original cause of the defendant's indebtment.
The bill of the complainants, then, is a suit to recover from the defendant the debt which they had proved in bankruptcy. It has generally been thought, and has been frequently decided judicially, that the fifth section of the bankrupt act was a bar to a suit where a party proves his claim and takes a dividend. In England, though such suits were attempted in the earlier administration of her bankrupt laws, such an action would not be thought of now for a moment. The words of our statute are
"and no creditor or other person, coming in and proving his debt or other claim, shall be allowed to maintain any suit at law or in equity therefor, but shall be deemed thereby to have waived all right of action and suit against such bankrupt, and all proceedings already commenced, and all unsatisfied a judgments already obtained thereon, shall be deemed to be surrendered thereby."
How, then, can it be that a creditor, coming in and proving his debt and receiving a dividend, can be
allowed to sue the bankrupt for it afterwards, either at law or in equity, when it is declared, in positive and unmistakable words, that if the creditor, before proving his debt, had commenced an action for it, or had obtained a judgment for it, he shall be deemed to have surrendered it, and to have waived all right of action and suit, either in law or in equity, against such bankrupt, for the debt which he has proved? It cannot be done, and the disability of such a creditor to sue the bankrupt is in perfect harmony with every other part of the statute of the 19th August, 1841, and with all the rights of creditors which are meant to be secured by it.
Moreover, the exclusion of such a creditor to sue the bankrupt, is sustained by all of the decisions in the courts of England upon the statutes of bankruptcy.
Lord Hardwicke said, in ex parte Groome, 1 Atk. 119 -- when such a right was claimed by a creditor upon a similar provision in the statute of George II, chap. 30, sec. 7, by no means so expressive as that just cited from the act of the 19th August, 1841 --
"I think that the privilege of creditors to come in, and of bankrupts to be discharged from debts, is coextensive and commensurate, and very equitable, for it would otherwise make an irregularity among the creditors, for a creditor whose debt was due before the taking out of the commission shall, perhaps, have more than five shillings in the pound, and the creditor whose debt was not due till a second distribution shall come in and have as much as the other creditor, and likewise have a remedy open to him for the rest against the bankrupt."
Therefore a creditor shall not prove his debt, receive a dividend, and proceed afterwards in an action at law against the bankrupt. In such cases in England, the creditor is put to his election whether he will come in and prove his debt or pursue his remedy at law. With us he has the same privilege. In Ex Parte Goodwin, 1 Atk. 152, Lord Hardwicke said:
"This Court will not suffer a petitioning creditor to arrest a bankrupt, and for this reason -- because a commission of bankruptcy is considered both as an action and an execution in the first instance; and after the petitioning creditor had laid hold of all of the bankrupt's effects, it would be a great absurdity for the same person to be permitted to arrest him likewise."
In regard to the creditor having made an election, his Lordship ruled, in Ex Parte Ward, 1 Atk. 153, that a petitioning creditor determines his election by taking out a commission, and cannot sue the bankrupt at law, though for a debt distinct from what he proved.
In Ex Parte Ward, 1 Atk. 153, it was also ruled that a petitioning creditor's right of election does not exist after the bankrupt has received his certificate, and when the creditor has
already proceeded at law, he is not at liberty to come in and prove his debt under the commission, without relinquishing his proceedings at law, unless by order of the great seal, for the purpose of giving his assent or dissent to the certificate. In Capon's Case, 1 Atk. 219, Lord Hardwicke declared,
"It was by no means to be done that a creditor was to receive a proportionable benefit under the commission, and still pursue the bankrupt's person at law,"
and he would not permit the creditor, in that case, who had proceeded at law after he had received two dividends, to assent to or dissent from the bankrupt's certificate, until he had refunded the dividends he had taken under the commission. In Lindsay's Case, 1 Atk. 220, he petitioned to be discharged from a commitment at the suit of his creditor, Henkle, who had proved his debt. The Lord Chancellor said the creditor must either waive his proof under the commission, or make his election to proceed under it; but, notwithstanding, if he elects to proceed at law, he may still assent or dissent to the certificate.
In Dorvillier's Case, his creditor had proved a debt for