A bankrupt, nine days before the filing of a petition in
bankruptcy against him, made a general assignment for the benefit
of his creditors which was an act of bankruptcy. After the filing
of the petition in bankruptcy, the assignee sold the property.
After the adjudication in bankruptcy, and before the appointment of
a trustee, the petitioning creditors applied to the district court
for an order to the marshal to take possession of the property,
alleging that this was necessary for the interest pf the bankrupt's
creditors. The court ordered that the marshal take possession, and
that notice be given to the purchaser to appear in ten days and
propound his claim to the property, or, failing to do so, be
decreed to have no right in it. The purchaser came in, and
propounded a claim, stating that be bought the property for cash in
good faith of the assignee, submitted his claim to the court, asked
for such orders as might be necessary for his protection, and
prayed that the creditors be remitted to their claim against the
assignee for the price, or the price be ordered to be paid by the
assignee into court and paid over to the purchaser, who thereupon
offered to rescind the purchase and waive all further claim to the
property.
Held that the purchaser had no title in the
property superior to the bankrupt's estate, and that the equities
between him and the creditors should be determined by the district
court, bringing in the assignee if necessary.
This was a summary petition to the District Court of the United
States for the Middle District of Alabama, sitting in bankruptcy,
for an order to Bryan, the marshal of the district, to take
immediate possession of property of David Abraham, a bankrupt, in
the hands of Louis Bernheimer. The material facts, as appearing by
the record, were as follows:
On October 29, 1898, Abraham made a general assignment of all
his property, consisting of his stock of goods and book accounts,
in a storehouse numbered 106, Dexter Avenue, in Montgomery,
Alabama, for the equal benefit of all his creditors, to one H. C.
Davidson, who had the assignment recorded, and caused to be filed
an inventory, and an appraisement of the
Page 181 U. S. 189
property at the sum of $7,900, in a court of Alabama, according
to the laws of the state (Civil Code of Alabama of 1896, c. 113),
and forthwith took possession of the property.
On November 7, 1898, certain creditors of Abraham filed in the
district court of the United States, sitting in bankruptcy, a
petition alleging that said assignment was an act of bankruptcy,
and praying that he might be adjudged a bankrupt.
On December 12, 1898, Abraham, after due notice to him, was
adjudged a bankrupt. On the same day, the petitioning creditors
presented to the district court a petition alleging the assignment
to Davidson and the adjudication in bankruptcy, and that, upon the
filing of the petition for that adjudication, the court obtained
jurisdiction over Abraham's estate, and it was the duty of
Davidson, as his assignee, to hold all his property subject to the
orders of the court; but that Davidson, disregarding the authority
and jurisdiction of the court, had sold and disposed of the
property at much less than the aforesaid appraisement, and the
purchasers had been in possession of the property for several days,
selling and disposing thereof at retail and at bankrupt prices, and
that, unless the court made an order requiring the property to be
taken immediate possession of, the petitioners and all other
creditors of Abraham would be greatly damaged and their dividends
out of the estate greatly lessened, and praying for an order to the
marshal of the district to take possession of, and to hold until
further order of the court, all the property owned by Abraham at
the time of his assignment to Davidson, wherever the same might be
found, and all property sold by Davidson to Louis Bernheimer or to
anyone else, and being in the storehouse numbered 106, Dexter
Avenue, in Montgomery, and to hold it until the further order of
the court. On the filing of this petition, the district court made
the order therein prayed for, reciting,
"It further appearing from said petition that it is necessary to
the interest of the creditors of the said Abraham that this Court
take possession of all the property and effects of said
Abraham."
And on the same day, the marshal, pursuant to that order, seized
the stock of goods in Bernheimer's possession.
On December 13, 1898, the district court, on a petition of
Page 181 U. S. 190
the marshal for instructions concerning the goods seized by him,
ordered that notice be given to Bernheimer to appear in ten days,
and to propound any claim that he had to the goods so seized, or,
on failing to do so, be decreed to have no claim or right to them,
and directed the marshal to retain possession of the goods until
the further order of the court.
On December 17, 1898, the petitioning creditors presented
another petition to the district court, further alleging that, on
or about November 17, 1898, after the filing of the petition in
bankruptcy against Abraham, and in disregard of the proceedings
thereon pending, Davidson turned over and delivered to Bernheimer
the whole stock of goods, then worth about $10,000, and Bernheimer,
with knowledge of the pending proceedings in bankruptcy, took
possession of the goods, sold large quantities thereof, and
received large sums of money therefor, before the rest was taken by
order of the court into the hands of the marshal, and praying for
an order that Bernheimer file with the referee in bankruptcy an
account of the moneys so received by him.
On December 22, 1898, Bernheimer, in obedience to the order of
December 13, came into the district court and propounded a claim to
the stock of goods. The claim stated the assignment to Davidson and
the petition for an adjudication of bankruptcy, and that the
petitioning creditors afterwards filed a petition in the court of
bankruptcy, praying that Davidson be required to appear and show
cause why he should not be restrained from selling the goods so
assigned to him; that, in obedience to a rule issued on that
petition, Davidson appeared and showed cause satisfactory to the
court, and that the court, on the ground that the petition was not
sworn to nor any bond given, discharged the rule against him,
declined to grant the restraining order, and dismissed the petition
without prejudice. The claim further stated that Davidson thereupon
proceeded to sell the goods by public auction, and the claimant,
acting in good faith and under the advice of counsel, bought the
goods from Davidson at the sale by public auction for the sum of
$3,500, which was a fair and reasonable price, and paid the price
in cash to Davidson, and took and kept possession of the goods
Page 181 U. S. 191
until deprived thereof by the marshal; that the claimant never
intended to interfere in any way with the process of the court, or
with any property of the bankrupt; that, if he was deprived of
these goods, and Davidson was allowed to keep the money paid him by
the claimant as their price, the claimant's position would be one
of great hardship and loss; that Davidson, under the terms of the
assignment to him, would be compelled to pay that money to
Abraham's creditors, and the goods purchased in good faith by the
claimant would also be held and sold again for the benefit of those
creditors. Bernheimer's claim concluded as follows:
"Claimant respectfully submits to the court his claim in this
behalf. He asks the court's protection in the premises, and that it
will issue such rules and orders in the premises as may be
necessary to such protection. He further asks that the creditors of
said bankrupt estate be remitted to the fund derived by said
Davidson from claim for the purchase price of said goods. Claimant
prays also that, in default of such order, or if he is mistaken in
the relief prayed for, your honorable court will issue a rule that
the said Davidson be ordered to pay into this Court the full amount
derived by him from claimant, as purchase money of said goods, and
that same be paid over to claimant, who thereupon offers to rescind
said purchase and to waive all further claim to said goods."
On December 24, Bernheimer, in answer to the petition of
December 17, filed an account as therein requested, showing that he
had received from sales of the goods sums amounting to $2,768.40;
that, at the time of his purchase from Davidson, he also bought the
exemptions allowed to the bankrupt under the laws of Alabama and
the Bankrupt Act of 1898, amounting to the sum of $1,000, and that,
deducting that sum and necessary expenses, he had a net balance in
his hands of $1,434.80.
On the same 24th of December, the petitioning creditors demurred
to the claim of Bernheimer because it showed no title in Bernheimer
good as against their rights; because the alleged sale by Davidson
to Bernheimer was made with knowledge by both of the filing of the
petition in bankruptcy, and after the court of bankruptcy had
acquired jurisdiction of the property; because the deed of
assignment to Davidson was an act of bankruptcy,
Page 181 U. S. 192
void as against the petitioning creditors, and because
Bernheimer asked the court to settle and decide questions between
him and Davidson which it had no jurisdiction to try and
determine.
On the same day, the district court sustained the demurrer, and,
Bernheimer declining to plead further, adjudged and decreed
"that the said Louis Bernheimer acquired no title to the said
goods or to the proceeds of the sales thereof made by him, under
the purchase of said goods from H. C. Davidson as assignee of said
bankrupt, superior to the title of said bankrupt estate,"
and that Bernheimer pay over to the marshal, to await the
further order of the court, all the proceeds, to be ascertained by
a referee in bankruptcy, of the sales made by him of those
goods.
Bernheimer appealed to the circuit court of appeals, which,
considering the case as if before it on a petition for revision of
the decree of the district court, reversed that decree and ordered
the cause to be remanded to that court with instructions to dismiss
the petition against Bernheimer, to vacate all orders made thereon,
and to restore to him the goods taken from his possession, and
further ordered that all costs, counsel fees, expenses, and damages
occasioned to him by the marshal's seizure and detention of the
property be fixed and allowed by the court of bankruptcy, and paid
by the petitioning creditors. 93 F. 767.
The marshal, in behalf of the petitioning creditors, thereupon
obtained a writ of certiorari from this Court.
175 U.
S. 724.
MR. JUSTICE GRAY, after stating the case as above, delivered the
opinion of the Court.
The general assignment made by Abraham to Davidson did not
constitute Davidson an assignee for value, but simply made
Page 181 U. S. 193
him an agent of Abraham for the distribution of the proceeds of
the property among Abraham's creditors. This general assignment was
of itself an act of bankruptcy, without regard to the question
whether Abraham was insolvent. Bankrupt Act of July 1, 1898, c.
541, § 3;
West Co. v. Lea, 174 U.
S. 590.
Nine days after this assignment, certain creditors of Abraham
filed a petition in the district court of the United States to have
him adjudged a bankrupt, alleging this assignment as an act of
bankruptcy. After the filing of that petition, Davidson sold the
property to Bernheimer, and the district court, after the
adjudication of bankruptcy and on petition of the same creditors
alleging that, unless the court made an order requiring the
property to be taken immediate possession of, the petitioners and
all other creditors of Abraham would be greatly damaged and their
dividends out of the estate greatly lessened, and praying for an
order to the marshal to take possession of the property, ordered
the marshal to do so, and on his petition for instructions as to
the property so seized, ordered notice to Bernheimer to appear in
ten days and to propound any claim that he had to the property, or,
on failing to do so, be decreed to have no right to it. In
obedience to that order, Bernheimer came into court and propounded
a claim to the property under the sale by Davidson to him, alleging
that, if he was deprived of it, and Davidson was allowed also to
keep the price paid, his position would be one of great hardship,
submitting his claim to the court and asking it to make such orders
as might be necessary for his protection and praying that the
creditors be remitted to their claim against Davidson for such
price, or, if the claimant was mistaken in the relief he prayed
for, for an order that such price be paid by Davidson into court
and paid over to the claimant, who thereupon offered to rescind the
purchase and to waive all further claim to the property.
The district court sustained a demurrer of the petitioning
creditors to this claim, and decreed that Bernheimer had no title
superior to the title of the bankrupt estate. On his appeal from
that decree, the circuit court of appeals reversed it and ordered
the property to be restored to him, with costs, counsel fees,
expenses, and damages occasioned to him by the seizure.
Page 181 U. S. 194
The marshal, in behalf of the petitioning creditors, thereupon
obtained this writ of certiorari.
The case, as the opinion of the circuit court of appeals states,
presents this question:
"Did the district court, as a court of bankruptcy, have
jurisdiction to try the title to the goods involved in this
controversy by summary proceedings, seizing the goods, and
requiring Louis Bernheimer, the purchaser at the assignee's sale,
by a rule entered against him, to appear before that court within
ten days and propound any claim he had to the goods or any part
thereof; or, failing therein, that he be decreed to have no claim
or right thereto?"
The Bankrupt Act of 1898, § 2, invests the courts of
bankruptcy
"with such jurisdiction at law and in equity as will enable them
to exercise original jurisdiction in bankruptcy proceedings, in
vacation in chambers, and during their respective terms,"
to make adjudications of bankruptcy, and, among other
things,
"(3) appoint receivers or the marshals, upon application of
parties in interest, in case the courts shall find it absolutely
necessary for the preservation of estates, to take charge of the
property of bankrupts after the filing of the petition and until it
is dismissed or the trustee is qualified,"
"
* * * *"
"(6) bring in and substitute additional persons or parties in
proceedings in bankruptcy when necessary for the complete
determination of a matter in controversy,"
"(7) cause the estates of bankrupts to be collected, reduced to
money, and distributed, and determine controversies in relation
thereto, except as herein otherwise provided."
The exception refers to the provisions of section 23, by virtue
of which, as adjudged at the last term of the Court, the district
court can, by the proposed defendant's consent, but not otherwise,
entertain jurisdiction over suits brought by trustees in bankruptcy
against third persons to recover property fraudulently conveyed by
the bankrupt to them before the institution of proceedings in
bankruptcy.
Bardes v. Hawarden Bank, 178 U.
S. 524;
Mitchell v. McClure, 178 U.
S. 539;
Hicks v. Knost, 178 U.
S. 541.
The present case involves no question of jurisdiction over a
suit by a trustee against a person claiming an adverse interest in
himself.
Page 181 U. S. 195
Nor is it a petition under § 3
e or § 69 of the Bankrupt
Act of 1898, each of which relates to applications to take charge
of and hold property of a bankrupt after the petition and before
the adjudication in bankruptcy. The provisions of those sections
requiring the applicants to give bond for damages have no
application to a case where there has been an adjudication of
bankruptcy, and the property thereby brought within the
jurisdiction of the court of bankruptcy.
But it is a petition filed after an adjudication of bankruptcy
and before the appointment of a trustee, and must rest on the
authority given to the court of bankruptcy by clause 3 of section
2, to
"appoint receivers or the marshals, upon application of parties
in interest, in case the courts shall find it absolutely necessary
for the preservation of estates, to take charge of the property of
bankrupts after the filing of the petition and until it is
dismissed or the trustee is qualified."
Does this include property of the bankrupt in the hands of third
persons?
The Bankrupt Act of March 2, 1867, c. 176, § 40, provided that,
upon the filing of a petition for an adjudication of involuntary
bankruptcy, if probable cause should appear for believing that the
debtor was about to remove or conceal, or to make any fraudulent
conveyance of, his property, the court might issue a warrant to the
marshal commanding him "forthwith take possession provisionally of
all the property and effects of the debtor, and safely keep the
same until the further order of the court." 14 Stat. 536; Rev.Stat.
§ 5024. It was held by the Court of Appeals of New York that this
did not authorize the marshal to take possession of the goods of
the bankrupt in possession of third persons claiming title thereto.
Doyle v. Sharpe, 74 N.Y. 154. But that decision was
overruled by this Court, and Mr. Justice Miller, in delivering its
opinion said:
"The act of Congress was designed to secure the possession of
the property of the bankrupt, so that it might be administered
under the proceedings in the bankrupt court. Between the first
steps initiating proceedings in the bankrupt court and the
appointment of the assignee, a considerable time often passes.
During that time, the property of the bankrupt, especially in a
case commenced by creditors, may be surreptitiously conveyed
Page 181 U. S. 196
beyond the reach of the court or of the assignee, to whose
possession it should come when appointed. If the bankrupt does not
voluntarily aid the court, or is inclined to defeat the
proceedings, he can, with the aid of friends or irresponsible
persons, sell his movable property and put the money in his pocket,
or secrete his goods, or remove them beyond the reach of his
assignee or the process of the court, and defy the law. The
evidence in this case shows the manner in which this can be done.
It was the purpose of the act of Congress to prevent this evil. It
therefore provides that, as soon as the petition in bankruptcy is
filed, the court may issue to the marshal a provisional warrant
directing him to take possession of the property and effects of the
bankrupt, and hold them subject to the further order of the court.
To have limited this right or duty of seizure to such property as
he might find in the actual possession of the bankrupt would have
manifestly defeated in many instances the purpose of the writ.
There is therefore no such limitation expressed or implied. As in
the writ of attachment or the ordinary execution on a judgment for
the recovery of money, the officer is authorized to seize the
property of the defendant wherever found, so here it is made his
duty to take into his possession the property of the bankrupt
wherever he may find it. It is made his duty to collect and hold
possession until the assignee is appointed or the property is
released by some order of the court, and he would ill perform that
duty if he should accept the statement of every man in whose
custody he found the property which he believed would belong to the
assignee when appointed, as a sufficient reason for failing to take
possession of it.
Sharpe v. Doyle, 102 U. S.
686,
102 U. S. 689-690. A like
decision was made in
Feibelman v. Packard, 109 U. S.
421."
These consideration are equally applicable to an application,
after the adjudication in bankruptcy and before the qualification
of a trustee, for an appointment of the marshal, under clause 3 of
section 2 of the Bankrupt Act of 1898, to take charge of "the
property" of the bankrupt "after the filing of the petition and
until it is dismissed or the trustee is qualified." It is true
that, under this provision, the appointment is only to be made "in
case the courts shall find it absolutely necessary for
Page 181 U. S. 197
the preservation of estates." But that condition of things is
shown in the present case by the allegation of the application and
the finding of the court of bankruptcy, that it was necessary to
the interest of the creditors of the bankrupt to take immediate
possession of his property.
In the opinion in
Bardes v. Hawarden Bank, 178 U.
S. 524,
178 U. S. 538,
it was indeed said:
"The powers conferred on the courts of bankruptcy by clause 3 of
section 2, and by section 69, after the filing of a petition in
bankruptcy, and in case it is necessary for the preservation of
property of the bankrupt, to authorize receivers or the marshals to
take charge of it until a trustee is appointed, can hardly be
considered as authorizing the forcible seizure of such property in
the possession of an adverse claimant, and have no bearing upon the
question in what courts the trustee may sue him."
But the remark, "can hardly be considered as authorizing the
forcible seizure of such property in the possession of an adverse
claimant," was an inadvertence, and upon a question not arising in
the case then before the court, which related exclusively to
jurisdiction of a suit by the trustee after his appointment.
Moreover, the consent of the proposed defendant, Bernheimer, to
this mode of proceeding is shown by the terms of his claim, in
which, not protesting against the jurisdiction of the court of
bankruptcy, he expressly submitted his claim to that court, and
asked for such orders as might be necessary for his protection.
Considering that the property was not held by Davidson under any
claim of right in himself, but under a general assignment which was
itself an act of bankruptcy; that no trustee had been appointed;
that the sale by Davidson to Bernheimer was made after and with
knowledge of the petition in bankruptcy, and that Bernheimer
consented to the form of proceeding -- we are of opinion that
Bernheimer had no title superior to the title of the bankrupt's
estate; that the district court, as a court of bankruptcy, was
authorized so to decide in this proceeding, and that the decree of
the circuit court of appeals directing the goods to be restored to
Bernheimer must be reversed.
Page 181 U. S. 198
The question remains what further order should be made? It is
manifestly inequitable that Bernheimer should lose both the goods
themselves and the price which he had paid to Davidson for them.
His equities in that respect, and the rightful claim of the
bankrupt's creditors against him, may depend upon many
circumstances, and can be best settled in the district court, which
has authority, under clause 6 of section 2 of the Bankrupt Act of
1898, to bring in Davidson, if necessary for the complete
determination of the matter.
Judgment of the circuit court of appeals reversed, and case
remanded to district court for further proceedings in conformity
with this opinion.
