Western Bank Trust Co. v. Mitchell

These cases are here on appeal. They involve the same legal question and are presented and considered together. They are here on appeal from the overruling of the plaintiff's demurrers to the supplemental answers of Mitchell and Poage, defendants in the cases respectively. To the supplemental answers the plaintiff bank filed demurrers on the ground that they did not constitute a defense to the petition. The trial court overruled the demurrers, and the plaintiff, not desiring to plead further, appealed to this court.

The actions were brought by the Western Bank Trust Company, plaintiff, setting up unpaid promissory notes for money loaned to the defendant Mitchell in the aggregate amount of an unpaid balance of $41,500, and interest.

The petition in case No. 4142 charges that on the 22d day of November, 1928, Mitchell, being the owner of certain real estate described in the petition, and not having sufficient other property to pay his debt to the plaintiff, with intent to defraud the plaintiff, conveyed the real estate described without consideration to the defendant Poage, with the intent to prefer Poage as a creditor to the exclusion of the plaintiff, for which plaintiff seeks to have the conveyance set aside.

The petition in case No. 4141 is a like petition concerning other real estate transferred to Robert Stewart Mitchell, charging like acts of fraud.

The defendants answered denying the charges of fraud, want of consideration, and preference of creditors.

The Eagle Savings Loan Association filed an answer and cross-petition, setting up mortgages on the properties in question.

The petitions were filed March 14, 1929.

On November 20, 1931, supplemental answers were filed by Poage and Mitchell in the cases, respectively, reciting the transpiring of the following facts since the filing of this action:

"Upon the 4th day of December, 1929, the defendant, Carl P. Mitchell, filed his petition in bankruptcy in the United States District Court, Southern District of Ohio, Western Division, Cause No. 7931 on the docket of said Court, and was duly adjudged on said day to be a bankrupt within the true intent and meaning of the Act of Congress of the United States relating to bankruptcy, and upon December 23, 1929, George F. Eyrich, Jr., Esquire, of Cincinnati, Ohio, was appointed Trustee in Bankruptcy of all his assets and effects and took title thereto under said Bankruptcy Act as of the date of the filing of the petition and adjudication; to-wit, December 4, 1929. Said claim of plaintiff herein for forty-one thousand five hundred dollars ($41,500.00) was duly scheduled as the claim of an unsecured creditor in said bankruptcy proceeding. Plaintiff proved its said claim for forty-one thousand, five hundred dollars ($41,500.00) against the bankrupt estate of said debtor, Carl P. Mitchell, and thereafter received a dividend on said claim in the sum of one hundred and ninety dollars and ninety-one cents ($190.91).

"On June 22, 1931, said Carl P. Mitchell was granted a discharge by said United States District Court, discharging him from all debts which were made provable by the Bankruptcy Acts against his estate and of which the claim of the plaintiff upon said notes was one, which existed upon the 4th day of December, 1929, excepting such debts as are by law exempt in the operation of a discharge in bankruptcy. Such excepted debts do not include the claim of plaintiff upon said notes.

"By reason of the foregoing, plaintiff has no present interest in any claim based upon the alleged right to set aside any transfers which Carl P. Mitchell, defendant, made prior to said adjudication in bankruptcy, and plaintiff is not a proper party plaintiff and has no capacity to continue suit in this cause."

As heretofore stated, to this supplemental answer, the plaintiff demurred.

The question for consideration here is on the demurrers of plaintiff to the supplemental answers.

The question for consideration may be stated thus: Does the bankruptcy proceeding deprive the state court of jurisdiction, thereby abating the action from the date of the filing of the petition in bankruptcy?

Counsel against the demurrers argue that, to maintain the action, the plaintiff bank must be a judgment creditor or have a lien prior to the filing of the petition in bankruptcy, and not being a judgment creditor or lienholder at the time has no capacity to maintain the action, since all the property vested in the trustee upon the adjudication in bankruptcy, and counsel cite the case of Huwe v. Knecht, 10 Ohio App. 487, decision by this court, to the effect that a pending suit creates no lien. In our view of the case whether or not plaintiff has a lien at the time of the filing of the petition in bankruptcy does not determine the question under consideration here. The right to bring and maintain the action in the state court is given by the statutes of Ohio.

We, therefore, pass to the consideration of the question whether or not the state court is deprived of jurisdiction by the bankruptcy proceeding.

The plaintiff's petitions were filed more than eight months before Mitchell filed his petition in bankruptcy.

In the proceedings in the court of common pleas, the trustee in bankruptcy, on application, was made a party defendant in the case, with leave to answer. The trustee did not file an answer or any other pleading. In this court, the trustee presents an application to be made a party, and files a cross-petition in which he adopts the allegations of the plaintiff's petitions, and asks the same relief as was sought in the petition, and further asks that the cause proceed upon his behalf as such trustee in bankruptcy, and that he, as such trustee in bankruptcy, is entitled to receive any assets that may result for the benefit of the creditors. We refer to the action of the trustee, in view of the decision of the federal court in the case of In re Buchan'sSoap Corp. (D.C.), 169 F., 1017, where the court states: "When an action on an unliquidated claim is pending in a state court at the time that bankruptcy occurs, and the receiver or trustee applies for an order to stay proceedings in such action, such an order is usually made, in view of the greater simplicity and promptness of a proceeding before the referee; but if a trustee does not apply for a stay, and permits the case to go to judgment, in an action pending in a state court, the claim is thereby liquidated, and the judgment affords proper proof of the amount of the claim as liquidated."

This pronouncement indicates that the person to challenge the action in the state court is the referee or trustee in bankruptcy, and unless the bankruptcy procedure ipso facto destroys the jurisdiction of the state court in the case, the objection to the state court proceeding must be taken by the trustee or referee in bankruptcy, and the defendants would have no right to challenge the right of the plaintiff to maintain the action in the state court.

The petition was filed under favor of Section 11104 of the General Code of Ohio, which was formerly Section 6343, Revised Statutes.

Section 11106 is supplemental to Section 11104, and provides that any creditor may bring such an action as is provided for in Section 11104, General Code. The plaintiff was such a creditor. The petition charges the things listed under Section 11104. The state court had jurisdiction of the subject-matter of the suit, and secured jurisdiction of all the parties. Eight months later the petition in bankruptcy was filed.

We are of opinion that the case of Stellwagen, Trustee, v.Clum, Trustee, 245 U.S. 605, 38 S. Ct., 215, 62 L. Ed., 507, determines the question in favor of the demurrant, the plaintiff bank in these cases.

In the Stellwagen v. Clum case the questions involved were a contest between the authority of the trustee in bankruptcy and the state court, and the question whether the provisions of the Ohio statute in question were suspended by virtue of the Bankruptcy Act of 1898 (Title 11, U.S. Code). After an extended discussion, the opinion of the court, rendered by Justice Day, refers to the Revised Statutes of Ohio, Sections 6343 and 6344, and subsequent sections, and considers these sections in connection with the chapter concerning insolvent debtors. The court in the opinion, at page 611, sums the question up under three heads:

"(a) Whether the Bankruptcy Act of the United States, in force on the dates herein mentioned, operated to suspend section 6343 of the Revised Statutes of Ohio, as such section stood February 2, 1910.

"(b) Whether the Bankruptcy Act operated to suspend the sections into which section 6343 was divided and numbered, February 15, 1910, by the General Code of Ohio, to-wit, sections 11102, 11103, 11104 and 11105, as such sections existed May 5, 1910."

The court, in concluding, answers both these questions as follows: "From what we have said it follows that Questions A and B should be answered in the negative."

In the course of the opinion, at page 617, the court stated: "If the Ohio statutes in the feature now under consideration be suspended, it would follow that a person in Ohio might successfully claim a part of the estate which is being administered in bankruptcy, although the conveyance under which the property is claimed is voidable under the laws of the State where it was made and the alleged right in the property secured. We think that Congress in the Bankruptcy Act did not intend any such result, but meant to permit the trustee in bankruptcy to have the benefit of state laws of this character which do not conflict with the aims and purposes of the federal law. And certainly, in view of the provisions of § 70e of the Bankruptcy Act, Congress did not intend to permit a conveyance such as is here involved to stand which creditors might attack and avoid under the state law for the benefit of general creditors of the estate."

Quoting further, the court states, at page 615:

"The part in § 6343 [now Sections 11104 and 11106, General Code] which enables the court to appoint a receiver to take charge of all the assets of the debtor or debtors, including the property conveyed, and administer the same for the equal benefit of creditors, is the new feature of the law.

"It is apparent that this section intends to permit the appointment of a receiver to take charge of all the assets of the debtor when the provisions of the statute apply as to the debtor and his transferee, and the latter is required to know of the fraudulent intent on the part of the debtor.

"Creditors are not thereby deprived of rights, but in case of bankruptcy proceedings within four months of a general assignment for creditors as was the case here, the property may be brought into the bankruptcy court, or, as in this case, may be in its possession and be retained in that court to be administered for the benefit of general creditors. This state statute is not opposed to the policy of the bankruptcy law or in contravention of the rules and principles established by it with a view to the fair distribution of the assets of the insolvent. It is only state laws which conflict with the bankruptcy laws of Congress that are suspended; those which are in aid of the Bankruptcy Act can stand" — citing Miller v. New Orleans Fertilizer Co.,211 U.S. 496, 29 S. Ct., 176, 53 L. Ed., 300.

While we incline to the view that objection to the jurisdiction and procedure in the state court is a right limited to the trustee or referee in bankruptcy, it is not necessary to rely on that proposition to determine the question.

Our conclusion is that the bankruptcy proceeding did not suspend the jurisdiction of the state court, nor abate the action brought by the plaintiff under the state law. The bankruptcy proceeding, set up in the supplemental answers, presents no defense to the petitions.

The demurrers will be sustained, and the causes are remanded to the court of common pleas for further proceedings according to law.

Demurrers sustained and causes remanded.

ROSS, P.J., and CUSHING, J., concur.