Smith v. Deidrick

Mitchell, J.^*

This is an action brought by plaintiff, a judgment creditor of defendant John Deidrick, in aid of his execution, and to reach, for the satisfaction of his judgment, certain real estate, the' title of which is in defendant Catherine, wife of said John, but which plaintiff claims is, as to creditors, the property of John. The pleadings and findings of the court are very voluminous, containing much that is not here important. ' The following statement of facts, although not full, and possibly not entirely accurate in immaterial details, will be sufficient for the purposes of this appeal. John Deid-rick was justly indebted to his wife, Catherine. Being insolvent, and in anticipation of being adjudged a bankrupt, and within four months of the time when he was on his own petition adjudged a bankrupt, and with a view of giving his wife a preference over his other creditors, he transferred certain property to a third person in trust for the purpose of paying his indebtedness to his wife. This property, or its proceeds, was afterwards, by means not necessary here to state, used in paying for the land in controversy, and securing the title thereto for defendant Catherine. No proceedings were ever taken by the as-signee in bankruptcy to execute the bankrupt law by avoiding this transfer. The ground of the attack upon the transaction is that it was in fraud of the bankrupt act, because made with a view to giving a preference to one creditor contrary to the 35th section of said act. (U. S. Bev. St. § 5128.)

It will be conceded that, leaving out of view the bankrupt act, such transaction was valid under the laws of this state, which at that time permitted a debtor to prefer one creditor to others, if he saw fit. But it is said that a preference, under such circumstances, was void under the provisions of section 35 of the bankrupt act. This is probably true; at least, we may concede it. But we fail to see how plaintiff is in position to raise the question. When the bankrupt act declares such transfers void, it is evident it is only in favor of proceedings in bankruptcy that it undertakes to avoid them. Congress had no power to enact a law governing sales of property as a part of the municipal law of the state, and the language of the stat} ute shows that congress never attempted any such thing. The avoidance of such a sale or transfer, and the right of the assignee in bankruptcy to recover, are dependent. The statute operates upon transfers, not of insolvents, but of bankrupts. If an insolvent, in anticipation of proceedings in bankruptcy against him, which were never, in fact, instituted, makes a transfer within the conditions of this section of the bankrupt act, the law would not avoid the sale. It would remain valid under the state law until avoided by proceedings in bank-ruptey. The true construction of the bankrupt act is that it makes such sales not void but voidable, and only voidable as against proceedings in bankruptcy.

The doctrine of this court as held in Mann v. Flower, 25 Minn. 500, to the effect that state courts will entertain jurisdiction of ordinary actions by an assignee in bankruptcy to recover the assets of the bankrupt, has no bearing upon the question under consideration. It would not necessarily follow from that case that a state court would entertain an action by an assignee to recover property transferred in fraud of the provisions of the bankrupt act, but where the transfer was valid under the state laws. But, conceding that it would, such an action would be in aid of the bankruptcy proceedings, and for the purpose of carrying out the provisions of the bankrupt act. This action is neither. It is simply an action by a judgment creditor to obtain satisfaction of his own judgment.

The appellant, however, makes this suggestion: He says the state law declares void every conveyance made with intent to defraud creditors; that a transfer of property by an insolvent, with intent to give a preference, is, under the bankrupt act, a fraud upon other creditors, because designed to defraud them out of their rightful dividend under the bankruptcy proceedings, and that, therefore, such a transfer in fraud of the bankrupt act is void under the state law, because made with intent to defraud creditors. This reasoning is somewhat specious, but is clearly unsound. When the law of the state declares void conveyances made with intent to defraud creditors, it evidently refers only to those that are designed to accomplish some result that would*be a fraud upon creditors under the municipal law of the state. But, at the time of this transaction, it was permissible undfer the laws of the state to give a preference to one creditor, and hence such preference would not be a fraud against other creditors, and an intent to give such preference would not constitute an intent to defraud, within the purview of the state law.

Judgment affirmed.

* GiKillan, C. J., because of illness, took no part in this case.- .