Within four months prior to the filing of the petition in
bankruptcy against it, the bankrupt made a general assignment for
the benefit of creditors to two trustees, one of whom, H., was the
president of a bank to which the assignor was then indebted on a
promissory note, and with which it carried a deposit account. The
account was transferred, after the assignment, to the names of the
trustees, as such, and afterwards augmented by deposits of money
collected by them in carrying on the assignor's business. Partly
before the date of the bankruptcy petition and partly thereafter,
H., having control of the account, caused it to be applied to the
note, with the tacit consent of the other assignee. The bank, as
well as the assignees, had executed the creditors' agreement under
which the assignment was made, providing for a
pro rata
distribution among all creditors and expressly extending the time
of payment of all indebtedness of the assignor for the period of
one year.
Held, that the assignees were properly directed
by the Bankruptcy Court, in a summary proceeding, to pay over to
the trustee in bankruptcy an amount equal to the deposits,
including the part paid the bank before the filing of the petition
as well as the part paid thereafter. P.
268 U. S.
115.
289 F. 192 reversed.
Certiorari to a judgment of the circuit court of appeals, on
petition to revise, reversing a judgment entered
Page 268 U. S. 112
by the district court summarily in a bankruptcy proceeding which
required the present respondents to pay over a sum of money to the
trustee in bankruptcy.
MR. JUSTICE STONE DELIVERED THE OPINION of the Court.
This is a writ of certiorari to the Circuit Court of Appeals for
the Ninth Circuit to review its action (reported as
Henderson
v. May, 289 F.192) on a petition to revise an order of the
district court confirming the order of a referee in bankruptcy
summarily directing the respondents to pay over a sum of money to
the trustee in bankruptcy.
On September 15, 1920, prior to, but within four months of, the
filing of the petition, the bankrupt made to respondents, Henderson
and Scannell, a general assignment for the benefit of creditors. At
the time of the assignment, the assignor was indebted on a
promissory note in the sum of $15,000 to the Ft. Sutter National
Bank, of which respondent Henderson was president, and in which the
assignor carried a deposit account. The referee found, on
sufficient evidence, that the respondents accepted the trust under
the assignment to them and continued the business of the assignor
until the appointment of the receiver in bankruptcy on November 4,
1920, the petition in bankruptcy having been filed on October 9,
1920. In the meantime the deposit account of the assignor with the
bank, with the knowledge and assent of the assignees, was changed
from the name of the assignor to the names of the assignees, as
"trustees," and further deposits were from time to time made by
them to the
Page 268 U. S. 113
credit of the account, in the course of their management of the
business of the assignor. The assignor was duly adjudicated a
bankrupt, and thereafter the trustee in bankruptcy petitioned the
bankruptcy court for an order directing the respondents, as
assignees, to account for and pay over all moneys received by them
from the date of the assignment to the date of the appointment of
the receiver. Proceedings on the petition resulted in the order of
the district court directing respondents to pay over to the trustee
an amount which would have stood to the credit of the assignees in
their deposit account with the bank had the account not been closed
in the following manner:
On September 30, 1920, 10 days before the filing of the
petition, the deposit account of the assignees with the bank was
debited with the sum of $4,516.43, which amount was credited on the
note of the bankrupt held by the bank, and on October 13, 1920,
subsequent to the filing of the petition and on various dates
thereafter to and including October 25, 1920, further debits were
made in the account which were credited on the note. These credits,
including the first mentioned, amounted to the sum of $12,883,81,
which was the amount directed to be paid over by respondents by
order of the district court. These debits and credits were made by
direction of the respondent Henderson, who, throughout the period
in question, acted as one of the assignees and was also president
of the bank. Although there was no explicit finding on the subject,
the debits appear to have been made with the tacit assent of
Scannell, the other assignee, who, in any event, appears to have
left the management of the financial operations of the assignees to
Henderson, and made no objection or protest with respect to this
use of the account standing to his credit as an assignee. We think
that the finding of the circuit court of appeals
Page 268 U. S. 114
that this application of the bank deposit on the note of the
bankrupt constituted a "partial payment of the note as fully as if
the assignees had given their check or withdrawn the money from the
bank and paid it over the counter" is correct, and that both the
assignees must be held legally responsible for this result. Where
one of two co-trustees assents to a breach of trust by the other
without objection, he is legally chargeable with liability for the
breach.
Bermingham v. Wilcox, 120 Cal. 467, 472;
Adair
v. Brimmer, 74 N.Y. 539;
Matter of Niles, 113 N.Y.
548;
Hill v. Hill, 79 N.J.Eq. 521.
The referee found that respondent Henderson was at all times
from September 24, 1920, until the appointment of the receiver in
bankruptcy, in control of the assignee's deposit account, and that
he was the only officer of the bank who at any time exercised any
control over the account, and that, as president of the bank, he at
all times, and until the filing of the referee's report, had
personal control of the funds deposited in the account; that the
original ledger sheet of the bank, showing the account standing in
the names of the respondents as assignees, was destroyed by
officials of the bank some time after the filing of the petition in
bankruptcy, and then an attempt was made to restore this account to
the name of the bankrupt by rewriting the ledger sheets. He also
found that, on and after September 24, 1920, both the respondents
and the Ft. Sutter National Bank, which with respondents had on
that date executed the creditors' agreement under which the
assignment to respondents for the benefit of creditors was made,
had actual knowledge of the insolvent condition of the
bankrupt.
On the petition to revise, the circuit court of appeals held
that, when the money on deposit with the bank was applied on the
note of the bankrupt,
"the money passed into the possession and under the control of
the bank, and out of the possession and beyond the control of the
respondents;
Page 268 U. S. 115
. . . that the funds in the bank are not the funds of the
president, nor are they subject to his order and control, and an
order directing him to pay over the money is not an order against
the bank, and is not binding upon the bank."
The court accordingly held that the bank, which was not a party
to this proceeding, held the funds received by it in its own right
adversely to any claim of the assignees or the trustee in
bankruptcy, and could not be reached by a summary proceeding, and
it reversed the judgment and order of the district court.
It is well settled that property or money held adversely to the
bankrupt can only be recovered in a plenary suit, and not by a
summary proceeding in a bankruptcy court.
Louisville Trust Co.
v. Comingor, 184 U. S. 18;
First National Bank of Chicago v. Chicago Title & Trust
Co., 198 U. S. 280;
Galbraith v. Vallely, 256 U. S. 46. But
property held or acquired by others for account of the bankrupt is
subject to a summary order of the court which may direct an
accounting and a payment over to the trustee or receiver appointed
by the bankruptcy court.
White v. Schloerb, 178 U.
S. 542;
Mueller v. Nugent, 184 U. S.
1;
Babbitt v. Dutcher, 216 U.
S. 102;
Chicago Board of Trade v. Johnson,
264 U. S. 1. Such is
the rule with respect to assignees for the benefit of creditors
within four months of filing of the petition.
In re
Stewart, 179 F. 222;
In re Rathman, 183 F. 913;
In re Neuburger, Inc., 240 F. 947;
In re Diamond's
Estate, 259 F. 70, 74.
And see Bryan v. Bernheimer,
181 U. S. 188.
See Louisville Trust Co. v. Comingor and
Galbraith v.
Vallely, supra, where, however, the jurisdiction was defeated
by the adverse claim of the assignee arising before the filing of
the petition.
And see Randolph v. Scruggs, 190 U.
S. 533, as to the nature of the title of the assignee
for the benefit of creditors when bankruptcy ensues.
See also
Taubel, etc., Co. v. Fox, 264 U. S. 426,
264 U. S. 433,
and note. Courts of bankruptcy do not permit themselves to be
Page 268 U. S. 116
ousted of jurisdiction by the mere assertion of an adverse
claim. The court has jurisdiction to inquire into the claim for the
purpose of ascertaining whether the summary remedy is an
appropriate one within the principles of decision here stated.
Mueller v. Nugent, supra; Schweer v. Brown, 130 F. 328,
195 U. S. 195 U.S.
171;
Hebert v. Crawford, 228 U. S. 204;
In re Ellis Bros. Printing Co., 156 F. 430. It may
disregard the assertion that the claim is adverse, if on the
undisputed facts it appears to be merely colorable.
In re
Weinger, Bergman & Co., 126 F. 875;
In re Rudnick
& Co., 158 F. 223;
In re Ransford, 194 F. 6580;
In re Michaelis & Lindeman, 196 F. 718.
The petition upon which this proceeding was initiated was in the
usual form and prayed that the respondents be required to account
for all moneys and properties coming into their hands as assignees
or trustees under the assignment for the benefit of creditors. Such
was their duty. Having assumed to take possession of the property
of the bankrupt for its account, it was their legal duty to turn
the property or its proceeds over to the trustee in bankruptcy or
to account for their inability to do so by showing either a
disposition of it in performance of a legal duty assumed toward the
bankrupt or the bankrupt's trustee or by clothing themselves with
the protection of a claim adverse to the bankrupt which was not
merely colorable. As found by the court, respondents came into the
possession of moneys of the bankrupt which were by them placed on
deposit to their credit as trustees or assignees for the benefit of
creditors. The result of this transaction was that neither the bank
nor the assignees held any specific money for account of the
bankrupt and his creditors. They were creditors of the bank and the
bank was their debtor.
Marine Bank v. Fulton
Bank, 2 Wall. 262;
Phoenix Bank v. Risley,
111 U. S. 125. We
are not therefore dealing with money in the possession
Page 268 U. S. 117
of the assignees or the bank in any literal sense, but the
credit as a mere chose in action was held by the assignees for
account of the bankrupt and they were bound to account for its
property disposition as for any other property coming into their
hands.
The several amounts debited to the account, with the assent or
connivance of the assignee subsequent to the filing of the
petition, fall clearly within the rule that as to property in the
hands of the bankrupt, or held by others for his account, "the
filing of the petition is a caveat to all the world and in effect
an attachment and injunction."
Mueller v. Nugent, supra;
Lazarus v. Prentice, 234 U. S. 263;
Knapp & Spencer Co. v. Drew, 160 F. 413;
In re
Denson, 195 F. 854;
In re Leigh, 208 F. 486;
Gunther v. Home Ins. Co., 276 F. 575;
Matter of R.
& W. Skirt Co. et al., 222 F. 256;
Reed v. Barnett
Nat. Bank, 250 F. 983,
and see Acme Harvester Co. v.
Beekman Lum. Co., 222 U. S. 301.
See Babbitt v. Dutcher, 216 U. S. 102. In
consequence, any person acquiring an interest in property of the
bankrupt or his assignees for the benefit of creditors adverse to
the creditors, after the filing of a petition with notice of it,
may be directed to surrender the property thus acquired by summary
order of the bankruptcy court.
In re Denson, supra; In re
Rudnick, supra, and see White v. Schloerb, supra.
The rule is the same when a creditor secures payment of his debt
from the bankrupt's estate after the filing of the petition. A
summary order may be made directing repayment of the money to the
trustee in bankruptcy.
Knapp & Spencer Co. v. Drew; In re
Leigh; Matter of R. & W. Skirt Co., supra; In re Columbia Shoe
Co., 289 F. 465. A like rule has been applied where a bank
secures payment of its debt by setting up its lien or right of
counterclaim against a deposit account of the bankrupt or the
bankrupt's assignee, created subsequent to the filing
Page 268 U. S. 118
of the petition.
In re Michaelis Lindeman, 196 F. 718;
Reed v. Barnett Nat. Bank, supra. See Farmers' &
Mechanics' Bank v. Wilkinson, Trustee, 266 U.
S. 503. Any other rule would leave the bankruptcy court
powerless to deal in an effective way with those holding property
for the bankrupt who, pending the bankruptcy proceedings, willfully
dispose of it by placing it beyond the reach of the court.
Bryan v. Bernheimer, 181 U. S. 188,
181 U. S.
196.
We do not think, however, that respondents stand in any better
position with respect to the first debit of $4,516.43 which was
made a few days before the filing of the petition. The creditors'
agreement, under which respondents were appointed assignees, and
which was signed by them and by the Sutter National Bank, provided
for only a
pro rata distribution among creditors and
expressly extended the time of payment of all indebtedness of the
bankrupt for one year from the date of the creditors' agreement,
which was dated September 15, 1920. The findings of the referee and
the supporting evidence leave no doubt that Henderson, who with the
assent of the co-assignee, Scannell, was in active control of the
account both as an assignee for the benefit of creditors and for
the bank as its president, directed this and all later debits to be
made in the account, in fraud of the rights of creditors whom he
assumed to represent.
There cannot, we think, be any pretense that the bank could
assert a lien or counterclaim before the filing of the petition, in
the face of its extension of its note by the creditors' agreement
(
Fifth National Bank v. Lyttle, 250 F. 361;
Heyman v.
Third National Bank, 216 F. 685), or at any time, in view of
its transfer of the account to trustees for the benefit of
creditors under the agreement signed by it.
Fitzgerald v.
Bank, 64 Minn. 469;
Lynman v. Bank, 98 Me. 448. The
findings of the referee and the evidence leave no doubt that the
surrender or abandonment of their bank account to the bank by the
assignees
Page 268 U. S. 119
and its attempted application by the bank to the payment of its
note was collusive and without any substantial basis of legal
right. At most, it was a clumsy, ineffectual, and fraudulent effort
to divert the funds of the bankrupt to the payment of a favored
creditor. While it is now settled that the claim of an assignee for
the benefit of creditors, of the right to charge in his account
expenses incurred or expenditures made prior to the filing of the
petition in bankruptcy, is an adverse claim which cannot be
adjudicated in a summary proceeding (
Louisville Trust Co. v.
Comingor, 184 U. S. 18;
Galbraith v. Valley, 256 U. S. 46), we
think the rule cannot be extended to a case such as this where the
claim is merely colorable and on its face made in bad faith and
without any legal justification.
Nor is it any answer to such a proceeding that the diverted
assets are no longer under the control of the assignees. They do
not discharge the duty to account by showing that they assented to
a cancellation of their bank account as assignees, and its
application on an indebtedness of the bankrupt to the bank. The
duty of a fiduciary to account for property intrusted to his care
is fulfilled by delivery of the property, but, if he has put it out
of his power to deliver it, he may nevertheless be compelled to
account for its worth.
United States v. Dunn et al., post,
268 U. S. 121. He
is subject to the summary order of the bankruptcy court to restore
the property to the bankrupt's estate. If he has sold it or mingled
it with his own, he may be compelled by summary order to restore
the value of the property thus wrongfully diverted.
In re
Denson, supra, and see Bryan v. Bernheimer, supra at
181 U. S.
197.
For that reason, it is not necessary for us to inquire into the
legal consequences which to show that the bank account was at all
to show that the bank account was at all times under the control of
Henderson, acting in
Page 268 U. S. 120
the dual capacity of assignee of the debtor and president of the
creditor bank, or to ascertain whether such a situation falls
within the rule that one acting in one capacity, subject to a
summary order of the court, may not relieve himself from the duty
to pay over money on a summary order by setting up that, although
the money is still under his control, he holds it in a different
capacity.
See Smith v. Longbottom & Sons, 142 F. 291.
We rest our decision rather on the duty of assignees for the
benefit of creditors to account in a summary proceeding for the
property which they have received within four months of the
bankruptcy and to make restitution of the value of the property of
the bankrupt which they have dissipated without a colorable claim
of right.
On the argument, respondents relied upon numerous cases in the
district courts and circuit courts of appeals to the effect that
the court will not in a summary proceeding make an order requiring
a bankrupt to pay over money to his trustee unless the bankrupt's
ability to comply therewith is plainly and affirmatively shown.
American Trust Co. v. Wallis, 126 F. 464;
In re
Berman, 165 F. 383;
In re Sax, 141 F. 223;
In re
Goldfarb Brothers, 131 F. 643;
Epstein v. Steinfeld,
210 F. 236;
In re Nisenson, 182 F. 912;
In re
Stern, 215 F. 979. But we think that a bankrupt who is shown
to have turned over generally his assets and property to the
receiver or the trustee in bankruptcy is in a different situation
from one not a bankrupt who is under a duty to account in a summary
proceeding. A court of bankruptcy should not make useless orders.
If the bankrupt has turned over his property generally to the
bankruptcy court, and is not shown to possess or control the
specific property which is the subject of summary order, there may
be a presumption that any order will be groundless. No such
presumption obtains with respect to respondents. They have not
shown that they are insolvent or in other
Page 268 U. S. 121
respects are unable to comply with the order of the district
court.
The judgment of the district court was proper. The judgment of
the circuit court of appeals is
Reversed.