Opinion
No. 25948
Decided December 16, 1936.
Bankruptcy — Transfer of property within three months of filing bankruptcy petition — Title 11, Section 107(e), U.S. Code. — Inadequate consideration as intent to hinder, delay or defraud creditors.
Where one, having creditors, transfers or conveys property representing virtually his entire estate, within three months prior to the filing of his petition in bankruptcy, for an appreciably inadequate consideration, an intent on his part to hinder, delay or defraud his creditors is thereby established within the provisions of Section 67 e of the National Bankruptcy Act, Title 11, Section 107 ( e), U.S. Code, and his trustee in bankruptcy is entitled to an avoidance of the transfer or conveyance.
APPEAL from the Court of Appeals of Lucas county.
The question presented in this case is whether, under the evidence, there was a conveyance of real estate by a bankrupt within four months prior to the filing of his petition in bankruptcy, with the intent and purpose on his part to hinder, delay or defraud his creditors in contravention of Section 67( e) of the National Bankruptcy Act, Title 11, Section 107( e), U.S. Code.
It was found by the Court of Common Pleas of Lucas county that the section had been violated and the conveyance was set aside. On appeal, and upon a transcript of the evidence offered below, the Court of Appeals reached a contrary conclusion and upheld the validity of the conveyance. This court's allowance of the motion to require the Court of Appeals to certify its record brings the case here for determination.
On October 24, 1934, Paul Noah Howard of Toledo, unmarried, filed his voluntary petition in bankruptcy in United States District Court for the Northern District of Ohio, Western Division, listing as assets a small amount of personalty of negligible value, and as liabilities a judgment of $700 obtained against him by Hanna Heinold in the Court of Common Pleas of Lucas county and $70 court costs in the same action.
Howard was duly adjudged a bankrupt on the same day his petition was filed, and in November of 1934 Carl J. Marlow, appellant herein, was appointed and qualified as his trustee in bankruptcy.
It developed that on August 1, 1934, Howard had executed and delivered to Mary E. Gillen, an attorney at law who had represented him in that capacity, a "warranty deed" for a residence property he owned in the city of Toledo and upon which she held a second mortgage. The deed contained the following provisions:
"The grantee assumes the taxes and the first mortgage of about Eighteen Hundred Dollars, more or less as the amount may be ascertained principal and interest due and payable, and this assumption of this mortgage is taken conditionally that in the event the grantee herein retains the property, but in the event of foreclosure by the owner of the first mortgage or the tax officers, the grantee disclaims any intention to assume this first mortgage as part of the purchase price but does declare that in the event the grantor can procure a Home Owner's Loan within ninety days the grantee will reconvey the said property to the grantor upon the payment of the mortgage note and interest and principal held by the grantee herein as a lien against said property herein conveyed, and it is expressly understood that this deed is given and accepted for the purpose of saving the grantor herein the costs and expenses of foreclosure, and at the expiration of ninety days unless further extensions are granted in writing, the grantee reserves the right of foreclosing the mortgage securing a note herein and offer said property for sale as provided by the law of the land."
This deed was received for record by the Recorder of Lucas county on August 18, 1934, and was subsequently recorded.
It further developed that on the date of the conveyance the actual balance due on the "first mortgage" described in the deed, held by The People's Savings Association, amounted to a little over $163 instead of "Eighteen Hundred Dollars, more or less," having been reduced by payments since 1923 from an original sum of $2300, that the amount then due Mary E. Gillen, grantee, on her second mortgage was about $1080 including interest, and that the taxes due and payable on the property were but a few dollars.
After three appraisers, designated by the referee in bankruptcy, had fixed the true value of the real estate conveyed at $3000, Marlow, trustee, obtained leave to file suit to set aside the conveyance as in fraud of Howard's creditors.
Such suit was commenced in the Court of Common Pleas of Lucas county in April of 1935, and Mary E. Gillen, Hanna Heinold and William Renz, Clerk of Courts of Lucas county, were named as defendants.
The petition, after setting out Howard's adjudication as a bankrupt and the conveyance of his real property to Mary E. Gillen, alleged "that said real estate was of the reasonable value of $3000, and was transferred and conveyed to the defendant, Mary Gillen, for a consideration of approximately $1200 and within four months from the time of said adjudication in bankruptcy; plaintiff says that this consideration was inadequate and said transfer was * * * made for the purpose of hindering, delaying and defrauding said bankrupt's other bona fide creditors, to wit: the defendants, Hanna Heinold, and William Renz, Clerk of Courts."
Mary E. Gillen filed an answer denying that the "conveyance was made to hinder, delay or defraud Paul Howard's creditors," averred "that she is now the owner of said real estate by virtue of said warranty deed aforesaid, subject to the tax liens and the first mortgage herein held by the Peoples' Savings Association," and "that she took title to said real estate by conveyance from Paul Howard to her in satisfaction and payment of her mortgage hereinbefore set forth."
Hanna Heinold's answer set out "that on or about August 28, 1929, she recovered a judgment against Paul Noah Howard and others in cause No. 117067, in the Common Pleas Court of Lucas county, Ohio, in the sum of $515, with interest at 6% per annum," and "that she filed her proof of claim in the said bankruptcy proceedings as provided by law."
On the trial the facts already related were disclosed. It also appeared that Howard had continued in occupation of the property after the conveyance, at an agreed rental of $10 per month, which he did not pay.
In addition, Marlow, trustee, offered as witnesses two dealers in real estate. One of them testified that the real estate in controversy "ought to market for at least $3000," and the other testified that its true value on August 1, 1934, was $3500. In opposition to this testimony Mary E. Gillen produced a real estate dealer who stated that in his opinion the real estate was worth not more than $2000 on the basis of a cash sale.
Since Hanna Heinold's judgment had been secured August 28, 1929, and no execution had been sued out thereon so far as Howard was concerned, it became dormant in five years' time and ceased to operate as a lien on his real estate under the provisions of Section 11663, General Code, but her status as a creditor was not thereby destroyed.
Mrs. Eva Epstein Shaw, for appellant.
Mr. Frank A. Carabin and Miss Mary E. Gillen, for appellee.
On the record, we face a situation where within three months of the filing of his petition in bankruptcy, Paul Noah Howard, having creditors, made a conveyance of realty representing virtually his entire estate, and probably worth in the neighborhood of $3000, for an actual consideration of about $1250.
Appellant relies entirely in this court on Section 67( e) of the National Bankruptcy Act, Title 11, Section 107( e), U.S. Code, which provides:
"All conveyances, transfers, assignments, or incumbrances of his property or any part thereof, made or given by a person adjudged a bankrupt under the provisions of this title within four months prior to the filing of the petition, with the intent and purpose on his part to hinder, delay, or defraud his creditors, or any of them, shall be null and void as against the creditors of such debtor, except as to purchasers in good faith and for a present fair consideration; and all property of the debtor conveyed, transferred, assigned, or encumbered as aforesaid shall if he be adjudged a bankrupt, and the same is not exempt from execution and liability for debts by the law of his domicile, be and remain a part of the assets and estate of the bankrupt and shall pass to his said trustee, whose duty it shall be to recover and reclaim the same by legal proceedings or otherwise for the benefit of the creditors. And all conveyances, transfers, or incumbrances of his property made by a debtor at any time within four months prior to the filing of the petition against him, and while insolvent, which are held null and void as against the creditors of such debtor by the laws of the State, Territory, or District in which such property is situate, shall be deemed null and void under the provisions of this title against the creditors of such debtor if he be adjudged a bankrupt, and such property shall pass to the assignee and be by him reclaimed and recovered for the benefit of the creditors of the bankrupt. For the purpose of such recovery any court of bankruptcy as hereinbefore defined, and any State court which would have had jurisdiction if bankruptcy had not intervened, shall have concurrent jurisdiction."
To avoid a transfer under the above subdivision, an intent to hinder, delay or defraud creditors on the part of the transferor must, of course, be proved. But such intent may be shown by the facts and circumstances surrounding the transaction as well as by direct evidence.
"It is a general rule of law that gross disparity between the consideration and the actual value of the property conveyed is a badge of fraud. A debtor in failing circumstances cannot give his property away, nor relinquish it for an inadequate consideration." 19 Ohio Jurisprudence, 752, Section 75.
So, in a number of cases, an appreciable inadequacy of consideration for the transfer of property, under suspicious surroundings, has been held to establish an intent to hinder, delay or defraud creditors within the meaning of the Bankruptcy Act, and to void the transfer. Sherman v. Luckhardt, 67 Kan. 682, 74 P. 277, 11 Am. B. Rep., 26; Morris v. Flenner, 25 F.2d 211; Ramsey v. Baske, 266 Mich. 264, 253 N.W. 291; Charlesworth v. Levy Meat Co. (C.C.A. 8), 73 F.2d 953.
To secure a just distribution of the bankrupt's property among his creditors is a primary object of the National Bankruptcy Act. 5 Ohio Jurisprudence, 136, Section 2.
The proposition has been well put in Webb's Trustee v. Lynchburg Shoe Co., 107 Va. 807, 60 S.E. 130: "The purpose of the bankrupt act was two-fold — first, the relief of the bankrupt from his debts and, second, an equal distribution of his assets among his creditors. The several provisions of the act must be read in the light of these, two objects. When this is done, the conclusion cannot be escaped that it was intended to provide a remedy against every act by which a failing debtor seeks an unequal distribution of his assets among his creditors. Every such act is condemned as being against the spirit and purpose of the bankrupt law."
Mr. Justice Brandeis, rendering the opinion in Dean v. Davis, 242 U.S. 438, 37 S.Ct., 130, 61 L.Ed., 419, 38 Am. B. Rep., 664, makes the flat statement:
"A transfer, the intent (or obviously necessary effect) of which is to deprive creditors of the benefit sought to be secured by the Bankruptcy Act 'hinders, delays or defrauds creditors' within the meaning of Section 67 e."
It would seem self-evident that when one possessing creditors deliberately disposes of practically all of his property for considerably less than its true value and within three months of filing his petition in bankruptcy (as in the present case), he does so with the definite purpose in mind of hindering, delaying or defrauding his creditors.
Thus, in Lovett v. Faircloth (C.C.A. 5), 10 F.2d 301, 7 Am. B. Rep. (N.S.), 308 (Certiorari denied, 270 U.S. 659, 46 S.Ct., 355, 70 L.Ed., 785), the court said:
"We think that proof of intent to hinder or delay is proof of actual fraud * * *. A conveyance made with intent to hinder or delay creditors is as much within the terms of Section 67 e as is a conveyance made with intent not to pay them at all."
Of like tenor is the pronouncement of this court in First National Bank of Chicago v. Trebein Co., 59 Ohio St. 316, 325, 52 N.E. 834:
"When one conveys all his property to another with the intention of hindering and delaying his creditors, or a part of them, in pursuing their legal remedies against him and his property, his conduct in law is deemed fraudulent * * *. The good faith of a party under such circumstances must be determined by the legal effect of what he deliberately does."
Howard did not testify in this case, but Mary E. Gillen did. Her testimony in substance was that preceding the conveyance no examination of the title to the real estate was made, and that she relied entirely upon Howard's statement as to the balance due on the first mortgage. Furthermore, she testified that Howard made no mention of the Hanna Heinold judgment and that she was not aware of its existence until shortly before the bankruptcy petition was filed, but that he did say "he owed in the neighborhood of a thousand dollar doctor bills, and he asked me to take this property over."
Counsel for appellee maintain that the evidence showed no fraud or bad faith on the part of appellee and that the conveyance, having been made upon a valuable consideration, cannot be set aside under the holding of this court in Bobilya v. Priddy, Assignee, 68 Ohio St. 373, 67 N.E. 736, with which compare Carruthers v. Kennedy, 121 Ohio St. 8, 166 N.E. 801, of the same portent.
The decisions in these cases were predicated upon Section 11105, General Code (formerly Section 6343, Revised Statutes), to the effect that a fraudulent transfer of property may not be vitiated unless the person to whom such transfer is made knew of the fraudulent intent. 19 Ohio Jurisprudence, 747, Section 71 et seq.
But is knowledge by the transferee of a fraudulent intent essential under Section 67(e) of the National Bankruptcy Act?
This question is interestingly discussed in the case of In re Brown, 291 F., 430, 433, 1 Am. B. Rep. (N.S.), 344, where the court says:
"With the knowledge on the part of Congress that by general interpretation or by statute the Statute of Elizabeth was invocable only when knowledge of the fraud was had by the grantee, it could not have by mere oversight omitted from section 67 e the requirement that knowledge of the fraud should rest upon the grantee in order to avoid the conveyance * * *.
"It is now nearly 20 years since the case of Sherman v. Luckhardt, 67 Kan. 682, 74 P. 277, 11 Am. Bankr. Rep. p. 26, was decided, holding that notice of the fraud was not necessary to avoid any act intended by the debtor in fraud of his creditors, and no amendment to the act in this respect has been adopted * * *.
"The very act itself seems to definitely limit the fraudulent intent to the debtor himself, when it says: 'With the intent and purpose on his part to hinder, delay, etc.' "
The prevailing interpretation of Section 67( e) appears to be that intent to hinder, delay or defraud creditors need not be shared by the transferee to make a transfer within four months of bankruptcy proceedings void. Edward Hines Western Pine Co. v. First National Bank of Chicago (C.C.A. 7), 61 F.2d 503, 22 Am. B. Rep. (N.S.), 226; Moore v. Bowman, 151 Va. 434, 145 S.E. 421, 18 Am. B. Rep. (N.S.), 741; Sherman v. Luckhardt, supra; Webb's Trustee v. Lynchburg Shoe Co., supra; Gilbert's Collier on Bankruptcy (2d Ed.), 1089. Contra, Irving Trust Co. v. Chase Nat. Bank (C.C.A. 2), 65 F.2d 409 .
Without pursuing the discussion further, a majority of the members of this court are of the opinion that the undisputed evidence in this case shows a violation of the object and spirit of Section 67(e), that the conveyance was "null and void" as against Howard's neglected creditors, and that the trustee is entitled to the property.
No one can successfully dispute the fairness of such result. Upon a sale of the real estate, the first and second mortgages as valid and subsisting liens will of necessity have to be satisfied first from the proceeds, and the reasonable certainty exists that a substantial balance will remain for distribution to general creditors.
The judgment of the Court of Appeals is reversed and final judgment is entered for appellant.
Judgment reversed.
WEYGANDT, C.J., STEPHENSON and WILLIAMS, JJ., concur.