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Houghton v. Stiner

87 N.Y.S. 10 Court N.Y. App. Div. Decision date 1904-03-11 English

Delivered by O’BRIEN, J.

Contents

Majority

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(92 App. Div. 171.)
HOUGHTON v. STINER.
(Supreme Court, Appellate Division, First Department.
March 11, 1904.)

Headnote

1. Bankruptcy—Transfer by Bankrupt—Setting Aside—Action by TbusTEE.
The bankrupt law (Act July 1, 1898, c. 541, § 60b, 30 Stat. 562 [U. S. Comp. St. 1901, p. 3445]) provides that if a bankrupt give a preference, etc., “it shall be voidable by the trustee, and he may recover the property or its value.” Held, that the trustee’s action under the statute should be one in equity for an accounting.
Appeal from Special Term, New York County.
Action by Jos. G. Houghton, as trustee in bankruptcy for Alfred T. Simms, against Max Stiner. From a judgment overruling a demurrer to the complaint, defendant appeals. Affirmed.
Argued before VAN BRUNT, P. J„ and McLAUGHLIN, PATTERSON, O’BRIEN, and LAUGHLIN, JJ.
Wm. Jno. Barr, for appellant.
Walter Large, for respondent.

The action is brought by a trustee in bankruptcy to recover, the value a of goods alleged to have been to the defendant, a creditor, by the bankrupt, when insolvent in fact, and known by the bankrupt and the defendant to be so, within four months of the filing of the petition in bankruptcy, the purpose and intent of the transfer being to give an illegal preference. The defendant demurred to the complaint, and from the interlocutory judgment overruling the demurrer he appeals.

In form, taking the allegations of the complaint and the prayer for relief, the plaintiff brings this action in equity for an accounting; and the specific ground of the demurrer is that the plaintiff has an adequate remedy at law, and an action in equity upon the facts cannot be maintained. The precise question, therefore, is whether a trustee in bankruptcy, who, by appropriate allegations and prayer for relief seeks his remedy, can maintain an action in that forum, or, as contended by the defendant, is exclusively confined to an action at law. The section of the bankrupt law (section 6ob, Act Cong. July 1, 1898, c. 541, 30 Stat. 562 [U. S. Comp. St. 1901, p. 3445]), so far as material, is as follows:

“If a bankrupt shall have given a preference within four months before the filing of a petition * * * and the person receiving it * * * shall have had reasonable cause to believe that it was intended thereby to give a preference, it shall be voidable by the trustee and he may recover the property or its value from such person.”

There is nothing in this language, nor is there any provision of the bankrupt law, which prescribes the remedy or the form of action that a trustee is authorized to maintain to enforce the rights invested in him by the section quoted. If we are to be controlled by the weight of precedent, we might multiply indefinitely the citation of cases brought in equity wherein relief such as is here sought was accorded. Schreyer v. Citizens’ Nat. Bank, 74 App. Div. 478 , 77 N. Y. Supp. 494 ;

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Pearsall v. Nassau Nat. Bank, 74 App. Div. 89 , 77 N. Y. Supp. 11 ; Bardes v. Hawarden Bank, 178 U. S. 524 , 20 Sup. Ct. 1000 , 44 L. Ed. 1175 ; Jones v. Schermerhorn, 53 App. Div. 494 , 65 N. Y. Supp. 999 ; Stackhouse v. Holden, 66 App. Div. 423 , 73 N. Y. Supp. 203 ; Perry v. Booth, 67 App. Div. 235 , 73 N. Y. Supp. 216 . On the other hand, we have in support of the appellant’s contention the case of Garrison v. Markley, Fed. Cas. No. 5,256, which was an action brought in Michigan under the act of 1867 (Act March 2, 1867, 14 Stat. 517 ). With respect to that case, however, two criticisms are justified. The first is that under the act of 1867 transfers made within four months were absolutely void, whereas under the present bankrupt law it will be noticed that they are only voidable. The second criticism is that we have no means of determining from that case itself whether the law governing the transfer of title and possession of property and the forms of action that may be resorted to are or are not the same as in our own jurisdiction or that of Connecticut, in which latter state it is alleged the property here in question was transferred. If, however, disregarding these distinctions, it should be held that the Michigan case is directly in point, then, in view of the uniformity with which a contrary practice has been followed in our own jurisdiction, we would not be justified because of an old decision, which does not seem to have been applied or followed under the present bankrupt law, in departing from the practice which has been established in our own jurisdiction. Aside, however, from precedents or cases, we think that, were this an original proposition, the right to maintain in equity such an action as this can be sustained by good and sufficient reasons. The transfer made by the debtor to the creditor was entirely valid when made, and the title to the property passed to the creditor, together with the right to possession. We do not understand that an action at law could be maintained in trover or replevin by one who neither had the title to the property nor the right to possession. It is true that where the trustee elects to avoid the transfer because giving a preference he is entitled to recover the property which has been transferred or its value; but this is quite distinct and different from divesting the creditor of the title and right to possession by the fact merely that the trustee in bankruptcy elects to rescind the transaction. When such election is signified either by demand or,, the bringing of an action in equity for an accounting, the creditor then stands in the position of one who holds the title and the right of possession to the property, or its value if sold, as quasi trustee for all the creditors, and as such he can be compelled to account in equity to the one entitled on behalf of the creditors to the property.

Another consideration, as bearing upon the form of action, lies in the fact that it may well be that the transfer from the debtor to the creditor has been evidenced by a deed in writing if it relates to real estate, or by a bill of sale in writing if it has reference to personal property. And as these instruments, valid when made, must necessarily be destroyed and set aside, a phase of litigation is presented of which equity has usually assumed jurisdiction. In other words, the muniments of title under which the creditor holds the title to the property may be an obstacle in the way of the trustee in bankruptcy

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reaching it, and to that end it may in form be necessary, if not in fact, to have the written muniments of title held to be void. Such relief is granted in an action in equity, and not one at law.

We are not unmindful of the fact that there is no element of fraud in this form of action, and that the theory upon which relief is accorded is, not that the creditor has done anything wrongful in obtaining payment for his debt, because that he could legally do, but the right is given to the trustee in bankruptcy by statute to set aside such payment for the purpose of preventing a preference to any particular creditor within four months of the adjudication in bankruptcy. Apart, however, from the question of fraud, thinking, as we do, that the trustee with respect to- property so transferred to a creditor is not, by the mere force of his appointment, invested with the legal title or the right to possession of the property, but that he is permitted in the proper action to regard the transfer as voidable at his election, it follows, we think, that the mere fact of electing does not destroy the rules affecting title, ownership, or possession; and as under them the title and right to possession is in the creditor until such time as he either voluntarily surrenders the same to the trustee in bankruptcy or is deprived thereof by a valid adjudication the trustee in bankruptcy is not, at the outset or the beginning of an action, in a position to maintain an action at law either in trover or in replevin. If neither of these actions will lie— and they are the only ones at law that can be suggested—then seemingly the remedy of the trustee would be in equity.

We have been referred neither to principle nor binding authority which should, after the long and uniform practice to which we have referred, incline us to decide for a change; and we think that the disposition made by the learned judge at Special Term in overruling the demurrer was right, and that the judgment appealed from should be affirmed, with costs. All concur.

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