1. Where a pledge, followed by a secret and unfair sale to the
pledgee for much less than value, was part of a general scheme of
the parties to defraud the pledgor's creditors, the remedy of his
trustee in bankruptcy is not merely to set aside the sale and have
a new one ordered, but to set aside the pledge and recover the
property or its value. Bankruptcy Act, § 70(e). P. 289 U. S.
2. Even though one of the creditors of a bankrupt, by accepting
a junior lien, may have estopped himself from attacking a pledge
made by the bankrupt in fraud of creditors, this does not prevent
the Trustee from setting it aside under § 70(e), and recovery will
be for the benefit of all the creditors. Moore v. Bay,
284 U. S. 4
289 U. S.
Page 289 U. S. 228
3. A creditor who takes security on his insolvent debtor's
property subject to a specific lien may be estopped while he
retains the benefit from disavowing the attendant burden, but the
basis for an estoppel is cut away if the transaction is lawfully
disaffirmed and his security is abandoned. P. 289 U. S.
4. The right to object to equity jurisdiction upon the ground of
adequate remedy at law may be waived. P. 289 U. S.
5. A trustee who sells property in fraud of his trust and buys
it back pending suit must account, at the option of the cestui
for the value at the time of sale, with interest,
or for the property itself. Pp. 289 U. S.
6. This duty is the same whether the trust be actual or
constructive, for the implication of a trust is the implication of
every duty proper to a trust. P. 289 U. S.
7. A creditor of a bankrupt is entitled to participate on the
same basis with other creditors in the distribution of assets
recovered from him by the trustee in a suit under § 70(e).
Moore v. Bay, 284 U. S. 4
289 U. S.
61 F.2d 145 reversed.
Certiorari, 288 U.S. 595, to review the reversal of a money
decree secured by Buffum, Trustee, in a suit under § 70(e) of the
Bankruptcy Act to set aside a fraudulent transfer. 51 F.2d 80
modified and affirmed.
MR. JUSTICE CARDOZO delivered the opinion of the Court.
In April, 1926, the bankrupt, Henry Barceloux, was the owner of
2,500 shares of the Peter Barceloux Company, a quarter of the
capital stock. The other three quarters were owned, one by his
brother George, one by his sister Cora, and one by three nephews,
the sons of a deceased
Page 289 U. S. 229
brother. The book value of the bankrupt's shares was over
$90,000, and the actual value over $94,000, but the shares were not
traded in, and had no current value in, the market. The business
was a family affair, and strangers were not welcome within the
A time arrived when the unwelcome stranger seemed likely to
break in. The family combined to maintain its solidarity, and keep
the intruder out. Henry Barceloux had become heavily involved in
debt. A former partner, Freeman, had recovered a judgment against
him for nearly $50,000. Freeman had been lenient, but Freeman was
now dead, and the administrator was asking for security as the
price of delay. There were other creditors too, though they are not
shown to have been importunate. With these intruders visible, the
family set out to build protective barriers. There is testimony
that Henry Barceloux was indebted to the corporation in upwards of
$33,000. On April 27, 1926, he secured part of this indebtedness by
a pledge of 2,499 shares of the Barceloux stock. The agreement was
in writing. We are assured by the family that it was confirmatory
of an oral agreement made some years before, but the testimony as
to this is not persuasive, and might, not unreasonably, be rejected
by the trier of the facts. The movement of events was swift
thereafter. The Freeman administrator had still to be placated. He
was put off in June, 1926, with an assignment of the equity in the
Barceloux shares together with an assignment of an interest in
heavily mortgaged lands. He gave notice to the corporation of his
interest in the shares and made demand upon the secretary for a
statement of the indebtedness secured by the superior lien. He also
asked for an agreement that the corporation give him notice of
ninety days before enforcing its security. His activity aroused the
family to new measures of protection. The request for notice
Page 289 U. S. 230
refused, and the defensive barrier extended. Henry Barceloux was
then the owner of shares of stock in other corporations, his
ownership till then being clear of any lien. On June 29, 1926, he
pledged his interest in these shares (worth about $2,158) as
additional security for the family debt. In so doing, he stripped
himself of the control of all or nearly all his unencumbered
assets. On the same day, or perhaps a few days later, the
corporation cancelled the certificate for 2,499 shares which was in
the name of the pledgor, and took out a new certificate in its own
name as pledgee.
The scene was now ready. The time for action was at hand. On
August 16, 1926, there was the gesture of a public sale. A printed
notice had been posted on a telegraph pole and perhaps elsewhere.
There was no other notice either to Freeman or to anyone else. At
the appointed time, the members of the family, accompanied by a
lawyer, went through the form of an auction on the steps of the
courthouse. The debtor's sister Cora, who was a director of the
corporation, read the notice of sale and asked for bids; all the
collateral, both the Barceloux shares and the others, being offered
as a single lot. The brother George, who was then the president,
made a bid for the entire lot in the name of the Barceloux
corporation, the bid being for the amount of its claim against the
debtor and a fee for its attorney. No sooner had the corporation
bought than it sold back again to George. In payment for what it
sold, it took his promissory note with a pledge of the shares as
collateral security. About two years later, it cancelled the
resale, gave back the promissory note, and thereafter held the
shares as owner. In the meanwhile, a few scraps of property
retained by Henry Barceloux had been put out of his name. He still
held one share in the Barceloux Company. He sold it to his sister.
He had equities in other properties, lands, and shares of stock. He
sold part to his sister and part to his
Page 289 U. S. 231
wife. The value in each instance was in excess of the price. The
equity in collateral pledged with a bank in San Francisco went to
the Barceloux Company, which assumed the payment of the debt. All
that was then left to him was his office furniture and fixtures,
and this he transferred to his attorney. By October, 1926, he had
stripped himself of everything. He waited four months, and became a
The trustee in bankruptcy has brought this suit under § 70e of
the National Bankruptcy Act *
to recover from
the Barceloux Company the value of property pledged by the bankrupt
with fraudulent intent. At the filing of the bill, the company had
resold the shares to George Barceloux, its president, and the
prayer for relief, adapting itself to the situation then existing,
was for the value of the shares on August 16, 1926, with interest
at 7 percent, the statutory rate of interest in the State of
California. There was also a prayer for an accounting and for any
other relief consistent with equity. The District Court found that
the fraudulent intent had been made out; that both pledgor and
pledgee were sharers in it, and that there should be an appointment
of a master to take and state an account and to report the value of
the property covered by the pledge. Upon the coming in of the
report, there was a final judgment for $106,409.44, with costs, in
favor of the trustee. 51 F.2d 80.
An appeal by the defendant followed, with the result that the
decree was reversed, one judge dissenting. 61 F.2d 145. The Court
of Appeals held that the Freeman
Page 289 U. S. 232
administrator was estopped from contesting the validity of the
pledge by reason of the fact that he had accepted a pledge of the
equity in the shares, subject, by its terms, to the pledge already
made. Finding no sufficient evidence that other creditors were
aggrieved, it refused to pass upon the question whether the pledge
as to them was good or bad. It held, however, that the sale under
the pledge had not been fairly made, and that a resale should be
ordered. Upon the argument, the defendant had made profert of the
Barceloux certificate, and had left it with the court to be
disposed of in any way consistent with equity and conscience. The
shares in other corporations it could not produce, having disposed
of them again. The court held that there could be no recovery of
the value of the Barceloux shares in view of the willingness of the
defendant to submit to a resale. Judgment was therefore ordered
that the shares be resold under the direction of the court of
bankruptcy; that, out of the proceeds, the Barceloux Company be
paid its indebtedness with interest (less the value of the shares
that it was unable to surrender), and that only the surplus, if
any, be paid to the trustee. A writ of certiorari brings the case
1. The evidence sustains the finding of the District Court that
the pledge to the defendant was made in fraud of creditors.
More is here than a mere preference. If that and nothing else
had been intended, the pledge would be proof against attack, for it
was made more than four months before the bankruptcy petition. But,
in truth, there was much besides. The pledge was a step in a
general plan which must be viewed as a whole with all its composite
implications. Dean v. Davis, 242 U.
, 242 U. S. 444
Coder v. Arts, 213 U. S. 223
213 U. S. 244
The principal assets of the debtor were his certificates of stock
in the family corporation. There was to be a delivery of these
certificates as security for an indebtedness much less than the
Page 289 U. S. 233
the collateral deposited. There was to be a delivery of other
security to make sure that all the assets of the debtor, not
otherwise incumbered, would be within the control of the pledgee.
There was to be a sale so secret that none of the creditors would
be likely to know anything about it, with the result that other
bids would be forestalled and embarrassing inquiries as to
preferences averted. Finally, to make the job a thorough one, the
odds and ends of other assets were to be conveyed to friends or
relatives. As the outcome of these manoeuvres, the Barceloux
Company cancelled an indebtedness of about $33,000 and became the
owner of stock certificates worth triple that amount. The
unconscionable sale is not to be viewed in isolation, as something
disconnected from the pledge, an accident or afterthought. It was
the fruit for which the seed was planted, or so the trier of the
facts might look at it. The Barceloux Company set out to do
something more than secure the payment of a debt. It became a party
to a plan to appropriate a surplus and in combination with its
debtor to hold his creditors at bay. Dean v. Davis, supra;
Shapiro v. Wilgus, 287 U. S. 348
the District Judge interpreted the transaction, viewing the events
consecutively as stages of an unfolding plot. We discover no
sufficient reason for rejecting his conclusion. Indeed, the Circuit
Court of Appeals held nothing to the contrary. It refrained from
approving or condemning the purpose of the pledge, being led to
that course by the application of the doctrine of estoppel. The
finding therefore stands.
2. The trustee is not subject to the bar of an estoppel in his
effort to undo the fraud.
The argument for the defendant is that the Freeman administrator
is estopped by force of his acceptance of a junior lien upon the
shares, and that the trustee as his champion enjoys no better
right. To overcome the supposed estoppel, it is enough to recall
the fact that, at the
Page 289 U. S. 234
time of the unlawful pledge, the Freeman administrator was not
the only creditor. The uncontradicted evidence is that there were
many other creditors whose claims are still unpaid. What the
trustee recovers will be for the benefit of all. Moore v.
Bay, 284 U. S. 4
The result would not be different, however, if the administrator
stood alone. Neither in his own name nor indirectly through the
trustee is he building any rights upon the pledge or claiming any
preference over others. He has rejected the security, and claims as
a general creditor. There may have been obscurity as to this at the
beginning of the suit. The bill of complaint which was a
declaration by the trustee, and not by the administrator, gives
recognition to the junior pledge as valid and subsisting. There has
been no obscurity, however, since the trial and the interlocutory
judgment. The pledge to the administrator is disregarded, and he is
left in the same position with reference to any general creditors
as if the transaction putting him ahead of them had been undone
from the beginning. One who takes a mortgage or an assignment of an
interest in property subject to a specific lien may be estopped
while he retains the benefit from disavowing the attendant burden.
Freeman v. Auld,
44 N.Y. 50, 53; Matter of Oakes,
248 N.Y. 280, 284, 162 N.E. 79. He either takes the security upon
the terms conditioning the offer or does not take it at all. The
basis for an estoppel is cut away if the transaction is lawfully
disaffirmed and the security abandoned. Old National Bank v.
148 Ind. 490, 507, 47 N.E. 953. Cf. Bybee v.
Oregon & Cal. R. Co., 139 U. S. 663
139 U. S.
Disaffirmance and abandonment in this instance rested on
sufficient grounds. The Freeman administrator, though informed of
the fact that there was a pledge superior to his, had no knowledge
of anything else. He was not informed of the circumstances
essential to an
Page 289 U. S. 235
understanding of the fraud. He did not even know, so far as the
evidence discloses, whether the pledge was new or old. Only through
later events was the collusive plan exhibited in all its sinister
significance. There can be no irrevocable estoppel when the truth
has been withheld.
3. The repurchase of the certificates by the fraudulent grantee
during the pendency of the suit did not make it error for a court
of equity to render judgment for the value.
There is no occasion to consider what relief would have been
proper if the certificates had been owned by the defendant at the
filing of the bill, and had been continuously retained thereafter.
We may assume, though we do not decide, that the trustee, suing in
such circumstances for an accounting in equity, would have had the
shares, and not the value. See Dunphy v.
11 Wall. 610; Wasey v.
141 App.Div. 336, 125 N.Y.S. 1087; 206 N.Y. 708, 99
N.E. 1119, and compare
American Law Institute, Restatement
of Law of Trusts, Tentative Draft No. 3, § 199, and cases cited,
pp. 157-158. The fact is, however, that at the filing of the bill,
the defendant had assigned the certificates to another, who was not
a party to the suit. The assignment is alleged in the complaint and
admitted in the answer. Not till May 11, 1928, after the answer had
been filed, did George Barceloux return his certificates to the
defendant and thus reinstate its title. This being so, the suit in
its inception was properly framed as one for money relief, the
value of the shares at the time of the foreclosure of the pledge.
There was no objection at any stage of the controversy that the
case was triable by a jury. Schoenthal v. Irving Trust
Co., 287 U. S. 92
United States v. Bitter Root Co., 200 U.
. In saying this, we do not intimate that the
objection would have prevailed if seasonably urged. There were
entanglements that may have called for discovery and
Page 289 U. S. 236
at least in possible contingencies. The point will not be
labored, for, at the trial, the defendant did not argue to the
contrary (Reynes v. Dumont, 130 U.
, 130 U. S. 395
American Mills Co. v. American Surety Co., 260 U.
, 260 U. S. 363
Schoenthal v. Irving Trust Co., supra,
at p. 287 U. S. 96
and does not even now. By common consent, the suit was tried as one
in equity, the fraudulent grantee being held to account as a
trustee ex maleficio
for the value of the shares which it
had fraudulently acquired and then conveyed to someone else.
United States v. Dunn, 268 U. S. 121
Independent Coal & Coke Co. v. United States,
274 U. S. 640
274 U. S. 647
Newton v. Porter,
69 N.Y. 133; Hamilton National Bank
134 N.Y. 520, 527, 31 N.E. 900. A like recovery
would have been permitted if the suit had been at law.
The defendant being chargeable with the value upon the filing of
the bill, the question for us now is whether it could change its
liability by buying back the shares. The answer is supplied by the
opinion of Story, J., in Oliver v.
3 How. 333, 44 U. S. 401
landmark in the law of trusts. The trustee who misapplies the
subject matter of a trust becomes accountable at once for the
proceeds or the value. Cf. Hamilton National Bank v. Halsted,
Nothing that he can do afterwards in buying the
property back will affect that liability, except at the option of
the beneficiary complaining of the wrong.
"This right or option of the cestui que trust
which positively and exclusively belongs to him, and it is not in
the power of the trustee to deprive him of it by any subsequent
repurchase of the trust property, although in the latter case the
cestui que trust may, if he pleases, avail himself of his own
right, and take back and hold the trust property upon the original
trust; but he is not compellable so to do."
Oliver v. Piatt, supra, and cf. Bunnel v. Stoddard,
Fed.Cas. pp. 667, 683; Miles v. Coombs,
120 Me. 453,
Page 289 U. S. 237
115 A. 249; Burwell v. Burwell's Guardian,
78 Va. 574,
582; Bate v. Scales,
12 Ves. 402; American Law Institute,
Restatement of Law of Trusts, supra.
Any other rule, it
was said, would enable the wrongdoer to take advantage of his own
wrong; to let the transaction stand, if the investment showed a
profit, and by aid of a repurchase to charge the beneficiary with
an intermediate decline. Cf. 57 U. S.
16 How. 535, 57 U. S. 543
The standard of duty is no different whether the trust to be
enforced is actual or constructive. United States v. Dunn,
supra; Independent Coal & Coke Co. v. United States, supra;
Newton v. Porter, supra.
The implication of a trust is the
implication of every duty proper to a trust. Equity has its
distinctive standards of fidelity and honor, higher at times than
the standards of the market place. Meinhard v. Salmon,
N.Y. 458, 468, 164 N.E. 545. Whoever is a fiduciary or in
conscience chargeable as a fiduciary is expected to live up to
4. The ruling of the trial court whereby the highest value of
the property up to the time of the decree was made the measure of
the recovery was not harmful to the defendant.
The recovery would have been larger if the value at the sale
with legal interest thereafter had been adopted as the measure.
5. The defendant may participate on the same basis with other
creditors in the distribution of the assets.
The decree of the District Court is erroneous insofar as the
claim of the defendant is postponed to those of others. Moore
v. Bay, supra.
The decree of the Circuit Court of Appeals is reversed, and that
of the District Court modified in accordance with this opinion, and
as modified affirmed.
"The trustee may avoid any transfer by the bankrupt of his
property which any creditor of such bankrupt might have avoided,
and may recover the property so transferred, or its value, from the
person to whom it was transferred, unless he was a bona
holder for value prior to the date of the
National Bankruptcy Act, § 70e, July 1, 1898, c. 541, 30 Stat.
565, 11 U.S.Code, § 110(e).