Warner v. Citizens' Bank of Anacortes , 19 F.2d 947 ( 1927 )

NETERER, District Judge

(after stating the facts as above). The trustee may only prosecute actions where the bankrupt might have brought it in the absence of bankruptcy proceedings, unless by consent of the defendant, except for recovery under sections 60b, 67c, and 70e, and Act May 27, 1926 (44 Stat. 662).

Section 70e (Comp. St. § 9654): The trustee may avoid transfer which any creditor might have avoided, and recover the property or its value from the person to whom transferred, unless he is a bona fide holder for value prior to adjudication. This he may do in the federal or state court. Section 67c (Comp. St. § 9651) clearly has no application.

Section 60b (Comp. St. § 9644): If preference has been given toy the bankrupt, the' trustee may recover the property or its value, and federal and state courts have concurrent jurisdiction.

The trustee is not seeking to recover the property, nor its value. He recognizes and confirms the transfer to the assignee Seattle Merchants’ Association by the bankrupt under its common-law assignment deed, and by the assignee to Beck. No recovery or value of property to which right of possession is claimed is sought, nor does the trustee seek to reclaim any property, a part of the bankrupt estate, nor to recover property which any creditor might have avoided, or its value, transferred to a person not a bona fide holder for value. It is agreed that Beck is a bona fide holder for value prior to adjudication.

The defendant bank has neither filed a claim against the bankrupt estate, ner asserted a lien against any property held by the trustee. The Merchants’ Association with knowledge of the bank’s mortgage took the common-law assignment recognized by the state eourt procedure, sold the assets (bakery, etc.) without notice to the bank or opportunity to the bank to buy, or secure a purchaser (there is evidence that the bankrupt had opportunity to sell the property at a prior time for a materially greater sum, but this did not meet the approval of the creditors’ committee). The right, privilege, and opportunity of a mortgagee to buy is a valuable right.

The Merchants’ Association, assignee for the benefit of creditors, took the title of its assignor. As between the parties, the bankrupt and the bank, the mortgage is valid. The assignee stands in the “shoes” of the assignor. See Peet v. Spencer, 90 Mo. 384, 2 S. W. 434; Tufts v. Thompson, 22 Mo. App. 564; Thomas Mfg. Co. v. Huff, 62 Mo. App. 124; Adams v. Lee, 64 N. H. 421,13 A. 786; Warner v. Jameson, 52 Iowa, 70, 2 N. W. 951, and other eases.

The assignment did not change the status of the mortgage. The transfer by the assignee to Beck did not change the relation of the parties. The order of the referee upon the petition of the assignee and the trustee for approval of the acts of the assignee in consummation of transfer, authorizing the trustee to receive the proceeds of sale, and denying the petition in other respects, did not change the conditions. The order of the referee is final until reversed or modified, and may not be collaterally attacked. Jurisdiction may well be challenged.

The Merchants’ Association and plaintiff Warner, trustee, as agent of the Merchants’ Association in the common-law assignment deed, are acting in a dual relation. They have» administered the estate under the assignment, with the exception of receiving the deferred payments on sale of bakery which are still being paid to the Merchants’ Association monthly, and the distribution of the proceeds among the creditors filing claims.

I think the court, assuming jurisdiction, could well say that the plaintiff, as agent of the Merchants’ Association and administrator of the common-law assignment proceeding, having acted under the right conferred by the deed of assignment for the benefit of creditors, not invoking the powers of the bankruptcy court until the property under mortgage was sold without notice to the mortgagee, and as representative of the creditors and upon their authorization adopting the sale to Beck, and on his petition seeking approval by the referee, and the creditors, whose representative he was and is,' stepped into the “shoes” of the assignee in so far as the sale is concerned, and that the plaintiff can claim no greater right on sale without notice to the mortgagee than the assignee, and should not now be permitted by decree of this court to invalidate the mortgage lien of the defendant bank and deprive it of this valuable right or privilege.

The rule of equity, “He who seeks equity must do equity,” should apply to the plaintiff, as it would apply to the assignee, and, exercising the power under the deed of assignment, equity requires that the bank be afforded opportunity by timely notice to protect itself. Such is the rule of the bankruptcy court. See In re Kohl-Hepp Brick Co. (C. C. A.) 176 F. 340; In re Reading Hat Mfg. Co. (D. C.) 224 F. 786. While failure of notice of sale to the bank did not affect the validity of the sale (Hurwitz v. Starwich, 130 Wash. 1, 226 F. 122), it did deprive the defendant of a valuable right.

Nor is the defendant collaterally attacking the sale or objecting to the sale. It merely contends that the association, as assignee, stands in the “shoes” of the bankrupt, and that having sold the property, as it had a right to do, without notice, as was likewise the right of the bankrupt while he was owner, the trustee, adopting the sale and securing the qualified approval of the referee, has not now the right to foreclose the bank in this proceeding of a valuable privilege recognized by the bankruptcy court, and that this court must leave the parties and the mortgage in the status where it finds them.

It may well be stated that a party may not pursue two remedies at the same time,' or conjunctively one remedy in two forums, and, as testified in substance by the trustee, the as-signee would not deliver or pay over the estate, or proceeds thereof, until relieved of obligation under'its warranty of title to Beck. This action, jn effect, is an action to quiet title • to personal property not in possession of the trustee, but in Beck, who has possession of the property, the grantee of the assignee, who is still receiving the monthly deferred payments, instead of an action to recover property or its value, or avoid transfer which a creditor might have avoided and recover the property or its value.

It may be further said upon the merits that the burden is upon the plaintiff to show insolvency on the 3d day of September, 1925, and that the defendant bank had knowledge thereof, or should be charged with knowledge. The financial statement made by the bankrupt to the bank June 10,1925, shows: Accounts receivable, cash on hand and in bank, automobile equipment, furniture and fixtures, machinery, merchandise, and tools and equipment, $16,558.55; life insurance, $10,000; insurance on machinery, merchandise, etc., $9,-300. Liabilities — accounts payable, contracts, notes to the defendant bank, trade acceptanc-' es, total $5,722.66. Of this $2,600 was due to the bank. There was practically no change, of which the bank had knowledge, in the status on September 3, when the mortgage was taken at the request of the bank examiner, except that the indebtedness to the bank had been reduced approximately $300.

Was the aggregate of the bankrupt’s property on September 3, at a fair valuation, sufficient in amount- to pay his debts, or had the bank reason to presume that the aggregate of his property was not, at a fair valuation, sufficient in amount to pay his debts?

The bankrupt was doing a successful business. The average monthly bank deposit in the defendant bank for nine months previous was a little less than $2,000. After the filing of the mortgage on September 3, nine new creditors to the amount of $850 were made, and the old creditors extended credits to the additional amount of $853.49. While the bankrupt in some previous months had required time to pay some trade acceptances, they had all been paid. The bank also had in June declined to advance an additional amount of $1,000, and at another time, $100, but under all of the evidence no knowledge of insolvency can be attributed to that. Nor did the bank-know that some of the larger creditors had declined to extend further credit. At the end of September the bank balance was $404.80, and on October 7, $490.87. The. business continued satisfactorily until the bankrupt began drinking and gambling, and neglecting his business, and became sick, and was confined to. his bed, and was there when the common-law assignment was made. The creditors did not question the bankrupt’s solvency until November 10, when a conference was had. The bankrupt by reason of dissipation was neglecting his business, and of course the creditors were concerned.

After considering the entire record and weighing all of the evidence with relation to indebtedness and value of assets on the 3d day of September and of the conduct of all parties, and relation of the defendant bank to the bankrupt, and its knowledge, the court cannot say that the plaintiff has sustained the burden and established knowledge, or conditions from which knowledge to the defendant bank of insolvency on September 3 should obtain. Dean v. Davis (C. C. A.) 212 F. 88, and 242 U. S. 438, 37 S. Ct. 130, 61 L. Ed. 419, has no application.

Economy of time suggested that every issue contended for be disposed of by this court, so that in the event of review by the Circuit Court of Appeals the matter determined may be final. From any view of approach the action must be dismissed.