In re Quackenbush , 102 F. 282 ( 1900 )

COXE, District Judge

(after stating the facts as aboye). The careful examination bestowed upon this case by the referee, evidenced by an elaborate and painstaking report upon all the issues of law and fact, renders it unnecessary at this time to do more than indicate the conclusion of the court upon the fundamental question of law involved. Broadly stated the referee has found that the proceedings by which, years prior to the present law, the bankrupt’s property, real and personal, was transferred to his confidential adviser and to his wife, were instituted for the purpose of defrauding his creditors and putting his property beyond their reach. The referee finds that the transfers, though cunningly and ingeniously devised, were in fact without consideration and were null and void as to creditors. He finds further that though the legal title is in the wife the property is actually owned and controlled by the bankrupt himself, lie having exercised the same dominion over it since the transfers as before. The conclusion follows that, upon his qualification, the property vested in the trustee by virtue of section 70, par. a, subd. 4, of the act, or that it belonged to the bankrupt under a secret trust for his benefit. The principal facts found by the referee are unquestioned and it is enough to say that his findings are supported by the evidence. There is no reason why they should not be accepted by the court.

The pivotal question of law arising upon these facts may be stated briefly and broadly as follows: Can a discharge be refused upon the ground that the bankrupt has concealed his property from his trustee where he transferred it in fraud of creditors years prior to the act, but in such circumstances that he continues to control it and enjoy the benefits of it himself? The law, so far as applicable to this condition, provides that the judge, after duly investigating the merits, shall discharge the bankrupt unless he has committed an offense punishable by imprisonment as provided in section 29b of the act, namely, — knowingly and fraudulently concealed, while a bankrupt, from his trustee property belonging to his estate in bankruptcy. In order to warrant the refusal of a discharge under this section it is necessary that the creditors shall establish the following propositions beyond a reasonable doubt: First. That the bankrupt has concealed property from his trustee in bankruptcy. Second. That the property so concealed belongs to the bankrupt’s estate. Third. That the concealment occurred while he was a bankrupt or after his discharge. Fourth. That the concealment was made knowingly and fraudulently. In other words, it is necessary to show that Quacken-bush since he has been adjudicated a bankrupt has knowingly and fraudulently concealed from his trustee property which belongs to his estate and should be divided by the trustee among his creditors. If the fraudulent transfers complained of, occurring as they did long prior to the act of 1898, had culminated at the time they were made so that the bankrupt’s interest in the property passed forever beyond his control and became vested legally and beneficially in the transferees, there can be no doubt that he would be entitled to his discharge no matter how preferential and fraudulent the transfers may have been as to creditors at the time. A fraud committed prior to the law making it a crime cannot bar a discharge. In re Webb (D. C.) 98 Fed. 404. In 1891 the bankrupt could have transferred his entire property to a single creditor to the exclusion of all the rest and the transaction, had it ended there, would not have affected his right to a discharge in the remotest degree. If, however, the creditor holds the property in trust for the bankrupt a very different proposition is presented. The difficulty with the bankrupt’s contention is that the transaction did not end in 1891. By virtue of transfers made prior to July 1, 1898, the bankrupt is still enjoying property which equitably belongs to his creditors. The referee, after seeing and hearing the witnesses, has found that the transfer of the personal estate, which vested absolutely in the bankrupt upon the death of his first wife, was merely a juggle by which the legal title was temporarily vested in another to prevent the property from being reached by creditors. In short, this property was the property of the bankrupt. It is used and enjoyed by him as fully as if the legal title were in his name. The referee is of the opinion that the bankrupt acquired over it absolute ownership and control, that his attempts to hide it have proved abortive and that at any moment he can transfer it to the trustee if he desires so to do.

It is argued that there is no concealment because the facts regarding transfers to Waterman and to the bankrupt’s present wife were made known to the creditors. It is thought that this is too technical a view to take of the statute. Although the present act is more liberal than former acts in permitting discharges it cannot be doubted that the purpose of the lawmakers was to grant this privilege only to the honest bankrupt who surrenders all that he possesses to his creditors and not to one who by a process of legal necromancy is living in luxury upon an estate which equitably belongs to them. It would be an exceedingly narrow construction to hold that the bankrupt avoids the charge of concealment because he informs the trustee of the plan adopted to effectuate the fraud. This information in no way aids the trustee so lorig as the property is beyond his reach. Should a party in contemplation of bankruptcy convert his assets into gold and place it in the hands of a trusted agent who immediately embarks for some Patagonian port, it is thought that the bankrupt could hardly escape the charge of fraudulent concealment by giving a detailed account of the steps taken to get the property beyond the jurisdiction of the court. He might recite in his schedules the amount and value of-the property abstracted and the name of the ship, of the agent and of the destined port; but all this would not condone an act which every honest man must regard with abhorrence. Again, a bankrupt conveys all his property to his wife for his own benefit and without consideration and the next day flies his petition and schedules in which the deed of transfer is fully described. Can it be maintained that the accusation of concealment is met by such a disclosure? In each instance the property is gone, the creditors have lost it, the trustee cannot reach it, the bankrupt alone can call it back. The character of the fraud is not altered because it is admitted by the perpetrators. Disclosure of the fraud is not inconsistent with concealment of the property. The essence of the offense is the concealment of the property with intent to keep it from the creditors; the time when the scheme was concocted, which makes the concealment possible, is not material. Neither does it avail the bankrupt that the concealment has proved unavailing; the trustee may recover the entire amount and still the discharge must be withheld. The offense is consummated if the bankrupt with fraudulent intent conceals for a single day his property from the trustee. The law does not say that the fraud must be successful. One who attempts such dishonesty is deemed unworthy of a discharge and he is none the less unworthy because the attempt is or may be frustrated.

Leaving the real estate out of consideration, if the referee’s facts and conclusions be correct, the bankrupt to-day has in his possession and under his control at least $5,000 which belongs to the trustee. This property was transferred to the bankrupt’s confidential friend by a mere legal shuffle for the purpose of keeping it from his creditors. The transferee parted with no consideration and understood the transaction as undertaken for the benefit of the bankrupt and to baffle his creditors. The court inclines to the opinion that the referee’s findings of fact and conclusions of law are correct. It is this feature of continuous concealment, extending beyond the date of bankruptcy, which distinguishes this case from most of the cases cited under the present act. The question is a novel one, so far as the law of 1898 is concerned, and the argument has been presented with great learning and ability on both sides. The decisions arising under the act of 1867 deal with language so nearly similar that they are entitled to great weight as interpreting the present law. Every important proposition now discussed is carefully considered in the Hussman Case, 2 N. B. R. 437, Fed. Cas. No. 6,951. This case cannot be successfully distinguished, on principle, and the reasoning of the able opinion of the district judge fully sustains the determination reached in the case at bar.

The court cannot resist the conclusion that some part, at least, of the property in question belongs equitably to the trustee. The bankrupt, if not the actual owner, is the beneficial owner thereof and by reaffirming the fraudulent transfers, though made prior to the act, as a cloak to hide and cloud the title, is guilty of the concealment contemplated by the law. It is true that he has admitted some facts, but he has neither restored the property nor confessed the fraud. The result is that he is to-day enjoying property which should be divided among his creditors. It cannot be that congress intended to sanction and reward such conduct. It is not the intention of the law to release a dishonest debtor. Unless a bankrupt deals fairly with his creditors he cannot expect the court to give him a receipt in full of their debts. Discharge refused.