Opinion
6 Div. 101.
January 14, 1943. Rehearing Denied February 25, 1943.
Appeal from Circuit Court, Jefferson County; E. M. Creel, Judge.
Bill to cancel conveyances as made to defraud creditors and for injunction to preserve the status quo as to income from the property, by W. F. Schaefer, as receiver of the estate of Courtney W. Shropshire, Jr., bankrupt, against Courtney W. Shropshire, Jr., Janet S. Shropshire, John W. Maynor and Perry Etheridge Realty Company, Inc. From a decree denying his motion to dissolve a temporary injunction, respondent Maynor appeals.
Affirmed.
Chas. W. Greer, of Birmingham, for appellants.
The first seven Chapters of the Chandler Act, 11 U.S.C.A. § 1 et seq., were intended to be a codification of the bankruptcy law existing when the act was passed. 83 Cong. Rec. 75th Cong. 3d Sess. Part 8, p. 8682. Under the law existing when the Chandler Act was passed a receiver in bankruptcy was not authorized, and the referee could not by order empower him, to institute a plenary suit to avoid a fraudulent transfer by a debtor adjudged a bankrupt. Neuberger v. Felis, 203 Ala. 142, 82 So. 172; Frost v. Latham Co., C.C., 181 F. 866; In re Eurich's Fort Hamilton Brewery, D.C., 158 F. 644; Guaranty Title Trust Co. v. Pearlman, D.C., 144 F. 550; In re Cox Baking Co., 2 Cir., 77 F.2d 294; 7 C.J. 177; 8 C.J.S., Bankruptcy, § 236, p. 839; 6 Am.Jur. 736, § 355; Boonville Nat. Bank of Boonville, Ind. v. Blakey, 7 Cir., 107 F. 891; In re Smith, D.C., 32 F.2d 386; Meeham v. King, 1 Cir., 54 F.2d 761; In re Kolin, 7 Cir., 134 F. 557; Greenhall v. Hurwitz, 80 Misc. 186, 141 N.Y.S. 914; Spears v. Frenchton B. R. Co., 4 Cir., 213 F. 784; Berry v. Watkins, 158 Ga. 304, 123 S.E. 102; First Nat. Bank v. Clark, 21 N.M. 151, 153 P. 69, L.R.A. 1916C, 33; Moore Mfg. Co. v. Billings, 46 Or. 401, 80 P. 422; Falco v. Kaupisch Creamery Co., 42 Or. 422, 70 P. 286; Trimble v. Woodhead, 102 U.S. 647, 26 L.Ed. 290; Nat. Bankruptcy Act 1898 (as amended prior to 1938) §§ 60, 67, 70, 11 U.S.C.A. §§ 96, 107, 110; Ruhl-Koblegard Co. v. Gillespie, 61 W. Va. 584, 56 S.E. 898, 10 L.R.A., N.S., 305, 11 Ann. Cas. 929; McMahon v. Pithan, 166 Iowa 498, 147 N.W. 920. The old Bankruptcy Act did not expressly provide that a receiver could maintain a plenary action to preserve the estate of the bankrupt from waste or loss, but it was generally held that he could be authorized to institute such a suit when summary proceedings would not lie; the theory being that the duty enjoined upon the receiver by the Act to take charge of and preserve the estate implied the power to resort to plenary actions for that purpose when necessary. In re Dempster, 8 Cir., 172 F. 353; Guaranty Title Trust Co. v. Pearlman, supra; Harrison v. Chamberlin, 271 U.S. 191, 46 S.Ct. 467, 70 L.Ed. 897; In re Quan Weing, 2 Cir., 104 F.2d 112; In re Marcuse Co., 7 Cir., 11 F.2d 513; In re Fixen Co., D.C., 96 F. 748. Property fraudulently transferred by a debtor adjudged a bankrupt is not, until the transfer is set aside, a part of the estate of the bankrupt. 8 C.J. 837, 839; Neuberger v. Felis, supra; Reavis v. Garner, 12 Ala. 661; Bailey v. Baker Ice Mach. Co., 239 U.S. 268, 36 S.Ct. 50, 60 L.Ed. 275; McKee v. West, 141 Ala. 531, 37 So. 740, 109 Am.St.Rep. 54; Cobb v. First Nat. Bank of Livonia, D.C., 263 F. 1000. A trustee's authority to avoid a fraudulent transfer is conferred upon him by express provision of the Bankruptcy Act, and no such authority is given a receiver. Moore v. Bay, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133, 76 A.L.R. 1198; Neuberger v. Felis, supra; 40 Mich.L. and Rev. 107, 39 Mich.Law Rev. 468; 29 Calif. Law Rev. 522; 27 Va.Law Rev. 317; 25 Va.Law Rev. 825; 23 Minn.Law Rev. 215; Connell v. Walker, 291 U.S. 1, 54 S.Ct. 257, 78 L.Ed. 613; In re Empire Coal Sales Corporation, D.C., 45 F. Supp. 974. The Chandler Act as well as the old Bankruptcy Act vests the trustee with all the rights and remedies of a judgment creditor, whether such creditor exists or not, but no such rights and powers are conferred upon a receiver. Therefore, only a trustee can avoid a transfer fraudulent as to one creditor and distribute the proceeds among all of the creditors. Robbins v. Schaefer, 242 Ala. 353, 6 So.2d 415; 11 U.S.C.A. § 110, sub. c; 8 C.J.S. Bankruptcy, § 239, p. 856, § 242, p. 885; Moore v. Bay, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133, 76 A.L.R. 1198. An intent to enlarge creditor control runs through the Chandler Act and it should not be so construed as to defeat that intention. 52 Stat. at L. p. 865, 11 U.S.C.A. §§ 91-96. A receiver is not the representative of creditors of the bankrupt and his duties should not be confused with those of the trustee. T. S. Faulk Co. v. Steiner, Lobman Frank, 5 Cir., 165 F. 861; In re Hine-Watt Mfg. Co., 7 Cir., 290 F. 902; Badders Clothing Co. v. Burnham-Munger-Root Dry Goods Co., 8 Cir., 228 F. 470; In re Marcuse Co., 7 Cir., supra. An order of a court of limited jurisdiction which the court has no authority to make is void even on collateral attack. Wightman v. Karsner, 20 Ala. 446; Hickey v. Stallworth, 143 Ala. 535, 39 So. 267, 111 Am.St.Rep. 57, 5 Ann.Cas. 496; Robertson v. State, 20 Ala. App. 514, 104 So. 561; Greenhall v. Hurwitz, supra; 2 Collier, Bankruptcy, p. 1397. It is not lightly to be considered that Congress intended to depart from a long established policy. Robertson v. Railroad Labor Board, 268 U.S. 619, 45 S.Ct. 621, 69 L.Ed. 1119; Myers v. Matley, 9 Cir., 130 F.2d 775.
Solomon Berkowitz and Sirote Permutt, all of Birmingham, for appellee.
The order of the United States court, challenged by this appeal, was expressly authorized by the statute. Chandler Act June 22, 1938, § 2, sub. a(3), 11 U.S.C.A. § 11, sub. a(3). The suit at bar was directly authorized by the Court of Bankruptcy. The order of the Court attacked on this appeal is res adjudicata. 6 Am.Jur. 557, n 1; Remington, Bankruptcy, 3d.Ed., § 453. The amendment of June 22, 1938 authorizing receivers to sue was passed by Congress to overrule prior conflict in decisions under the Act of 1898. House Committee Report. No. 1409, 75 Congress, First Sess., p. 18. Since Jan. 22, 1938 a receiver in bankruptcy has express authority to commence, on behalf of the bankrupt estate, a bill to set aside a fraudulent transfer of property by the bankrupt and to prosecute such suit until a trustee has been qualified, having been first authorized so to do by the court of his appointment. Chandler Act, §§ 2, sub. a(3), 11, sub. e, § 23, subs. a, b, 11 U.S.C.A. §§ 11, sub. a(3), 29, sub. e, 46, subs. a, b; 1 Collier, Bankruptcy, 14th Ed., 197; 8 C.J.S. 1942, Pocket Part, Bankruptcy, p. 15; Weinstein, Analysis Bankruptcy Laws (1938) pp. 9, 10. Even prior to such date, when directed by order of the court of appointment, as in this case, the receiver had authority to commence and prosecute a suit of this kind. Rivoli Drug Co. v. Lynch, 9 Cir., 50 F.2d 536; In re Dempster, 8 Cir., 172 F. 353; In re Barrett, D.C., 132 F. 362; 1 Collier, p. 198, note 25; 67 A.L.R. 1462; Clark v. Huckaby, 8 Cir., 28 F.2d 154, 67 A. L.R. 1456. Section 2, sub. a(3) of the Chandler Act of June 22, 1938, 11 U.S.C.A. § 11, sub. a(3), is remedial legislation and must be liberally construed. Securities Exchange Commission v. Starmont, D.C., 31 F. Supp. 264; 36 Words Phrases, Perm. Ed., 825. The estate of a bankrupt includes property fraudulently transferred by the bankrupt. In re Rosen, D.C., 15 F. Supp. 516; Chandler Act, §§ 70, sub. a(1, 2, 4), 67, sub. e, 11 U.S.C.A. §§ 110, sub. a(1, 2, 4), 107, sub. e.
The question on this appeal is whether a receiver appointed by a court of bankruptcy after an adjudication in bankruptcy, under section 2, sub. a(3), as amended by the Chandler Act of June 22, 1938, 11 U.S.C.A. § 11, sub. a(3), may by authority of the court appointing him, commence and prosecute a suit in equity in a state court to set aside a conveyance made by the bankrupt to a third person not a party to the bankrupt proceeding within one year before the petition in bankruptcy was filed, on the asserted ground that the conveyance was made without consideration and to defraud creditors existing at the time of the conveyance who were such also at the time the bill was filed.
The answer to this question depends upon an interpretation of amended section 2, sub. a(3), supra. To do so, it is necessary to compare it with section 2(3) of the Act before the amendment in 1938, and the interpretation which had been put on it by the courts then outstanding, and refer to other related features of the acts respectively.
Section 2 (3) prior to the amendment was as follows:
"Courts of bankruptcy [may] * * * (3) appoint receivers * * * upon application of parties in interest, in case the courts shall find it absolutely necessary, for the preservation of estates, to take charge of the property of bankrupts after the filing of the petition and until it is dismissed or the trustee is qualified."
Section 2, sub. a (3) as amended:
"(a) * * * (3) Appoint, upon the application of parties in interest, receivers * * * to take charge of the property of bankrupts and to protect the interests of creditors after the filing of the petition and until it is dismissed or the trustee is qualified; and to authorize such receiver, upon his application, to prosecute or defend any pending suit or proceeding by or against a bankrupt or to commence and prosecute any suit or proceeding in behalf of the estate, before any judicial, legislative, or administrative tribunal in any jurisdiction, until the petition is dismissed or the trustee is qualified: Provided, however, That the court shall be satisfied that such appointment or authorization is necessary to preserve the estate or to prevent loss thereto."
Section 67, sub. d(2) of the Chandler Act, 11 U.S.C.A. § 107, sub. d(2), declares that every transfer made by a debtor within one year prior to the filing of the petition in bankruptcy is fraudulent as to existing creditors if without fair consideration, and on certain other conditions as to future creditors, Title 11 U.S.C.A. § 107, sub. d(2); and sub. d(3), if executed within four months prior to filing the petition, it is fraudulent as to existing and future creditors if made with the intent to use the consideration to effect a preference to a third person, etc.
And in, sub. d(6), that a fraudulent transfer under section 67, sub. d, against creditors shall be null and void against the trustee. Likewise is section 70, sub. e(1), 11 U.S.C.A. § 110, sub. e(1), of the new act.
The old act section 67, sub. e, Title 11 U.S.C.A. § 107, sub. e, provided that transfers made in four months before the petition, with the intent to hinder, delay or defraud his creditors, are null and void against the creditors, and such property shall pass to the trustee, and be by him reclaimed and recovered for the benefit of the creditors.
The Chandler Act, section 70, sub. a(4), Title 11 U.S.C.A. § 110, sub. a(4), provides that property assigned in fraud of his creditors vests in the trustee by operation of law as of the date of filing the petition in bankruptcy (the old act said as of the date he was adjudged a bankrupt); and in the Chandler Act, section 70, sub. e(2), 11 U.S.C.A. § 110, sub. e(2), it is provided that property fraudulently conveyed shall be and remain a part of his assets and estate, and may be avoided by the trustee for the benefit of the estate. This provision was not in the prior act, except that the trustee could avoid the transfer and recover the property.
The trustee when appointed can sue in equity to reach such property. After his appointment no one else is authorized by the bankrupt law to proceed in that respect. In re Southern Metal Products Corp., D.C., 26 F. Supp. 666; Neuberger v. Felis, 203 Ala. 142, 82 So. 172.
Prior to the amendment, the courts were substantially agreed that such a suit as this was not authorized by the Bankruptcy Act. The reason assigned was that under the Act then outstanding his appointment was authorized only when it was found to be absolutely necessary for the preservation of the estate to take charge of the property of the bankrupt, and that after the bankrupt had made a fraudulent conveyance of property, that property was not his, and was not a part of his estate, notwithstanding the fraudulent character of his conveyance: that only creditors (or the trustee when appointed) could have it vacated; that it was not therefore within the terms of the authority of a receiver of the bankrupt's property. Boonville Nat. Bank v. Blakey, 7 Cir., 1901, 107 F. 891; Frost v. Latham Co., 5 Cir., 181 F. 866; Guaranty Title Trust Co. v. Pearlman, D.C., 144 F. 550; Berry v. Watkins, 158 Ga. 304, 123 S.E. 102; In re Cox Baking Co., Inc., 2 Cir., 77 F.2d 294; In re Kolin, 7 Cir., 134 F. 557. But compare McGlue v. Loudon, 251 Mass. 173, 146 N.E. 255, declaring that a receiver should take possession of all the property of the bankrupt which the trustee could reach, and could act "solely in the interest of the bankrupt's creditors, who before bankruptcy could have attached, seized and held the property." The court was dealing with an unrecorded mortgage valid as to the mortgagor bankrupt, but void as to certain creditors. A bill in equity by the receiver was sustained. This does not seem to be in accord with a majority of the cases. And In re Rosen, D.C., 15 F. Supp. 516, 517, it is said that "the cause of action to recover property fraudulently transferred is an asset of the estate" of the bankrupt (by District Judge Patterson of New York), and so it is under the Chandler Act.
Some few courts had held that a receiver so appointed was but a passive custodian of such property as was in possession or control of the bankrupt or in the custody of the court and had no power to recover property by suit against one in the adverse possession of it. In re Kolin, 7 Cir., 134 F. 557; In re Hill Co., 7 Cir., 159 F. 73; In re Marcuse Co., 7 Cir., 11 F.2d 513, 515.
But a majority of the courts held that to take charge of the property of the bankrupt in order to preserve it, the receiver could sue for it by authority of the court especially after adjudication. This is upon the theory that the duty to take charge of it carries with it the power and duty to take active steps in court when necessary to obtain its possession. In re Barrett, D.C., 132 F. 362; In re Dempster, 8 Cir., 172 F. 353; In re Fixen Co., D.C., 96 F. 748. Compare Rivoli Drug Co. v. Lynch, 9 Cir., 50 F.2d 536, criticised in Re Cox Baking Co., 2 Cir., 77 F.2d 294. That a receiver after adjudication is more than a mere custodian of the property in the course of administration. Clark v. Huckaby, 10 Cir., 28 F.2d 154, 67 A.L.R. 1456, note 1462.
Such being briefly the status of the cases which dealt with the subject when the amendment of 1938, supra, was enacted, and there being no decision of the United States Supreme Court on the subject either before or since the amendment, and apparently no decision of any court on it since then, nor textbook interpretation, we are now treading on untouched ground with no precedent directly in point to help.
The ruling of the trial court sustained this power of a receiver when the court of bankruptcy had given its authority by an order manifesting a finding that it was satisfied that such authorization of the receiver is necessary to preserve the estate or to prevent loss thereto.
The bankrupt court made an order prior to the filing of this suit authorizing it to be begun without expressly finding that it was necessary to preserve the estate or to prevent loss to it. This order cannot be collaterally attacked. 6 Amer. Jur. 557, note 1. But it does not serve to add to the statutory power of the receiver.
Appellant insists that as respects section 2(3), supra, the amendment was only intended as a codification of the old law as it had been construed, and cites a statement from the Congressional Record made by Senator O'Mahoney, Chairman of the Senate Committee, to the general effect that the first seven chapters of the bill deal with a codification of the old bankruptcy law. He was discussing senate amendments proposed by his committee to the bill as reported and passed by the House without detailed debate (No. 8046, Congressional Record, August 10, 1937, Vol. 81, part 8, pages 8646-8649). That report did not propose to amend section 2, sub. a(3), as passed by the House, but did make some change in the first paragraph of that section. No where is any reference made in the record to the purpose and effect of the amendment as contained in the house bill to subsection a(3) of section 2, here material. But the Senate did make amendments to the first seven chapters in several respects, but they were not controversial, and did not relate to the clause here involved.
Collier on Bankruptcy, 14th Ed., p. 197, says that the 1938 Act removes previous doubt concerning the courts' power to permit a receiver to sue for the recovery of property held by third persons or to institute other necessary actions, and on page 186, that the amendment completely alters the provisions of clause 3 in which no prior changes had been made since the inception of the Act of 1898; and is intended to broaden the right of the court to appoint receivers, and (on page 187) dispels previous doubt as to the receiver's power to commence and prosecute actions on behalf of the estate.
The forewords to the Fourteenth Edition of Collier, supra, and the remarks by Senator O'Mahoney show that the whole subject was reconsidered after surveys and studies extending over a period of nine years. An interesting commentary by George Q. Johnson of the Chicago Bar is also found in Pocket Part of 8 Corpus Juris Secundum, Bankruptcy, pages 15, 17, and in Title 11 U.S.C.A., last volume, page XI, stating that the duty of receivers is "to preserve the estate for the protection of creditors or to prevent loss to the estate." See, also, pages 19 et seq., Collier, supra.
We cannot find where any authority has explicitly declared that the amendment does or does not extend to receivers the duty or authority to commence or prosecute a plenary suit to reach property fraudulently conveyed, so as to secure and preserve it for the trustee to administer to creditors whose right to subject it existed in equity. The case of Connell v. Walker, 291 U.S. 1, 54 S.Ct. 257, 78 L.Ed. 613, cited by appellant, does not so hold.
The Act of 1898 did not expressly authorize a receiver to commence or prosecute any sort of a suit. The amendment authorizes him to do either or both, when the court so directs to preserve or protect the estate. This clears one doubt as to the construction of the old act. The old act authorized the appointment of a receiver when it was "absolutely necessary, for the preservation of estates, to take charge of the property of bankrupts." And the new act took out the words "absolute necessity" and made the appointment a matter of judicial discretion, and he was appointed not only "to take charge of the property of bankrupts," as before, but also the additional duty "to protect the interests of creditors." But the court of bankruptcy must be satisfied that its authority to the receiver thus to act is necessary "to preserve the estate or to prevent loss thereto."
Appellant argues in substance that this authority is limited to a purpose to preserve the estate of the bankrupt, meaning his property rights, or losses to it, not embracing the property rights and estates which creditors only may reach, even though such rights vest in the trustee as of the date of the petition in bankruptcy, and that the duty "to protect the interests of creditors," as set out in the amendment, relates only to the property of the bankrupt or his estate, by virtue of the last clause in the amendment, supra.
But we think that an intention to extend the duty and authority to receivers to reach out for property subject to the debts of creditors when an emergency exists, so that it is about to be lost, and preserve, protect and add it to the estate for distribution by the trustee to the creditors, is a fair interpretation of the amendment as a whole, considering especially the enlargement of the duty of receivers "to protect the interests of creditors." To construe it as appellant contends would be without giving substantial effect to that added clause. The inclusion of it by the amendment adds emphasis to its significance.
It seems to us that the "estate" to be preserved and protected from loss for the benefit of creditors was intended to include property which had been conveyed in fraud of creditors, thereby becoming a part of the estate as of the date of the petition in bankruptcy to be subject to the rights of creditors.
The decree of the trial court was in accord with our views, and it is affirmed.
Affirmed.
All the Justices concur.