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CHAPTER V.

WHAT PROPERTY PASSES TO THE TRUSTEE.

344 346

2.28-474 1864.3.58

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SECTION I.

TIME OF THE TRANSFER.

IN RE ANNIE DE ETTA PEASE.

DISTRICT COURT FOR THE WESTERN DISTRICT OF NEW YORK,
OCTOBER, 1900.

[Reported in 4 American Bankruptcy Reports, 578.]

THE bankrupt, up to November 22, 1899, was doing business at Buffalo, N. Y., under the name of the F. S. Pease Oil Company. On that day the sheriff took possession of her store on executions, and continued in possession until the appointment of a trustee in bankruptcy on February 16, 1900. Certain creditors filed a petition in bankruptcy on December 15, 1899. An adjudication of bankruptcy followed on January 8, 1900. Delays incident to negotiations toward a settlement satisfactory to all creditors delayed the appointment of a trustee until February 16, 1900.

Meanwhile the alleged bankrupt continued business as before, filling orders, as she claims, by purchase of goods outside, and receiving payments on account of goods sold previous to the filing of the petition. as well as in the interval between that date and the dates of the adjudication and the appointment of the trustee, all charges for goods sold and credits for moneys received being entered in her books without opening new accounts or in any other way recognizing the changed condition of affairs. She gave as a reason for this that she expected to settle with her creditors and to resume business through a composition or payment in full, and thus sought to keep the business alive.

On this state of facts the trustee brings the bankrupt in on an order to show cause why she should not turn over the moneys collected by her subsequent to the date of filing the petition, December 15, 1899, for goods sold by her prior to January 8, 1900, the date of adjudication The trustee concedes that he has no claim for moneys received for sales after the adjudication, the sheriff having been in possession until the trustee relieved him, and the stock thus continuing intact; the bankrupt admits that she must account for moneys received for sales prior to the filing of the petition, provided they were from her.

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HOTCHKISS, referee. The only question of law to be determined here is: Under section 70a, what vested in the trustee in bankruptcy, - that which the bankrupt had on the day the proceedings were begun by the filing of the petition, or that which she had on the day she was adjudged a bankrupt? Were this a voluntary case, the question would be unimportant. In involuntary cases, however, there is of necessity an interregnum of from three weeks upward; in this case the two dates are, December 15, 1899, and January 8, 1900. The bankrupt here also insists that, even if the trustee's contention that his title relates back only to the adjudication is true, she is still entitled to retain her collections for goods sold since December 15, 1899, - nay, since November 22, 1899, the day the sheriff took possession,- for the reason that she can show that all of such sales were of goods purchased from other dealers, and not from her stock. But the legal question is raised preliminary to such proof, for the purpose of limiting the testimony if possible. It is also urged that, even if her sales subsequent to the sheriff's possession were of goods purchased elsewhere, her creditors are entitled to the profits thereon during the interregnum, - that is, up to the date of the adjudication, and that for these she must be ordered to account.

This question seems to have been up but once before, and then in a form not entirely alike or necessarily controlling on the decision here. In re Harris, 2 Am. B. R. 360. The trustee relies on several cases as supporting his contention that the date of adjudication, not the day when the proceedings were commenced, is the day of cleavage. In re Gutwillig, 90 Fed. 481; Carter v. Hobbs, 92 Fed. 599; In re Abraham, 93 Fed. 779. To these might be added In re Clute, 1 N. B. N. 386; 2 Am. B. R. 376, In re Becker, 2 N. B. N. 24, 3 Am. B. R. 412. In none of these cases, however, is the exact point at issue, nor do the opinions go further than quote one or both of the seemingly contradictory phrases in section 70a.

In but two cases is there even a hint as to what the judge writing the opinion really thought: (1) Judge Baker, in Keegan v. King, 96 Fed. Rep. 758, says: "After an adjudication of bankruptcy has been made, the title to all of the property of the bankrupt, as of that date, passes to the person who is subsequently chosen trustee," thus seemingly hinting toward the contention of the trustee here; (2) while in In re Yukon Woolen Co., 96 Fed. Rep. 326, Judge Townsend, in discussing section 70a, quite clearly implies that the words "shall be vested by operation of law with the title of the bankrupt as of the date of the adjudication," refer to time merely, while the apparently contradictory words in the subsequent clause, "property which, prior to the filing of the petition, he could by any means have transferred," etc. (section 70a (5)), refer to what title passes, rather than the time of vesting.

There was no such difficulty under the law of 1867. By section 14 of that statute the assignee's title vested by relation as of the date the

proceedings were commenced.

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As a result, a merchant against whom

a petition in bankruptcy was pending could not do business, the title being in the air until adjudication or dismissal. There seems little doubt that the insertion of the words "as of the date of the adjudication in the present law was intended to meet the difficulty Collier on Bankruptcy, p. 405; Analysis of Torrey Bankrupt Bill, Senate Bill 1035, 55th Congress, p. 76. Two of the text-book writers incline to the belief that as to title a new day of cleavage has been established. Compare Bush on Bankruptcy, p. 385; Loveland on Bankruptcy, pp. 284, 327. Mr. Brandenburg is noncommittal, merely quoting the law (p. 414); while Mr. Collier (pp. 405, 406) and Mr. Lowell (p. 508) incline to the belief, to put it tersely, that the words "prior to the filing of the petition" refer to what passes, and the seemingly antagonistic words earlier in the section refer only to when it passes.

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This latter view seems the more reasonable. It meets the difficulty complained of under the law of 1867, and applies to business the doctrine that the debtor is innocent of bankruptcy until proven guilty. It protects ad interim purchasers and keeps going concerns alive, for the benefit of the creditors if adjudications follow, and the henefit of the debtors themselves if dismissals result. Nor can it be said that, by recognizing a valid title in the bankrupt until adjudication, creditors may be at the mercy of a dishonest debtor. Congress, foreseeing that, also enacted section 69, by which creditors may take possession of the property of debtors likely to take advantage of the situation, a privilege emphasized by the almost identical words of section 3e.

This view also comports with well-established principles of bankruptcy legislation in the United States. Our policy has been to estab lish a day of cleavage, that is, a day before which the relation of debtor and creditor exists, but after which, at the debtor's option, it ceases; a day before which all the debtor has becomes his creditors, but after which that which he acquires is mis, subject only to his new trusteeship to new creditors. With us that day has always been the day proceedings are commenced, and the present law repeatedly recognizes it. Compare sections 1 (10), 3b, 6, 9b, 11a, 29b (4), 60b, 63a (1), (2), (3), (5), 64b (4), 67c-e-f, 68b. Where a point of time is indicated by the words the date of the adjudication," the impracticability of using the other date is apparent. Compare sections 7 (8), 14a, 55a, 65a, and even 70a, as previously explained.

The English Bankruptcy Act distinguishes sharply between the time. of vesting and the property which vests. Section 54 vests the title in the trustee "immediately on a debtor being adjudged bankrupt." But by section 44 the property divisible among the creditors is defined as "all such property as may belong to or be vested in the bankrupt at the commencement of the bankruptcy, or may be acquired by or devolve on him before his discharge; " while by section 43 "the commencement of the bankruptcy" is defined as the day on which the voluntary peti

1 In his second edition the doctrine of Re Pease is stated as representing the law.

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tion is filed, or, if involuntary, the day on which the first act of bankruptcy (not earlier than three months prior) relied on was committed. In other words, in England, while the title vests on the date of the adjudication, it may relate backward to three months before the petition, and may also include everything acquired before the discharge. It is a little difficult to understand the justice of this, especially as by sections 30 and 37 of the same act a discharge operates only on debts existent or obligations created prior to the date of the "receiving order," i. e., in actual practice the date of filing the petition. In other words, it would seem that in England creditors may share in afteracquisitions prior to the discharge, though their debts post-date the beginning of the proceeding, and yet, if not paid in full, still have undischarged debts for the deficit But the point to which attention is called is that, in spite of this period of probation, during which the English bankrupt must continue to surrender all that he may acquire, the English law, like ours, and probably for the same reason, distinguishes between the time of vesting and the title which vests, and further fixes the time on the day we fix it.'

1 This is an error. Section 30 (2) provides that a discharge "shall release the bankrupt from all other debts provable in bankruptcy." The exceptions stated are debts due the crown, created by fraud, etc. By section 37 (3) debts “to which the debtor is subject at the date of the receiving order, or to which he may become subject before his discharge by reason of any obligation incurred before the date of the receiving order, shall be deemed to be debts provable in bankruptcy." A creditor whose debt is incurred after the receiving order, therefore, cannot prove his debt; and as the property acquired by the bankrupt up to the time of his discharge passes to his assignees (Re Roberts, [1900] 1 Q. B. 122), such a creditor cannot share in any property until after the discharge.

2 The sections of the English Bankruptcy Act of 1863 in regard to the transfer of the bankrupt's property are as follows:

43. The bankruptcy of a debtor, whether the same takes place on the debtor's own petition or upon that of a creditor or creditors, shall be deemed to have relation back to, and to commence at, the time of the act of bankruptcy being committed on which a receiving order is made against him, or, if the bankrupt is proved to have committed more acts of bankruptcy than one, to have relation back to, and to commence at, the time of the first of the acts of bankruptcy proved to have been committed by the bankrupt within three months next preceding the date of the presentation of the bankruptcy petition; but no bankruptcy petition, receiving order, or adjudication shall be rendered invalid by reason of any act of bankruptcy anterior to the debt of the petitioning creditor.

44. The property of the bankrupt divisible amongst his creditors, and in this act referred to as the property of the bankrupt, shall not comprise the following particulars:

(1) Property held by the bankrupt on trust for any other person.

(2) The tools (if any) of his trade and the necessary wearing apparel and bedding of himself, his wife and children, to a value inclusive of tools and apparel and bedding, not exceeding twenty pounds in the whole.

But it shall comprise the following particulars:

(i) All such property as may belong to or be vested in the bankrupt at the commencement of the bankruptcy, or may be acquired by or devolve on him before his his discharge; and,

(ii) The capacity to exercise and to take proceedings for exercising all such powers in or over or in respect of property as might have been exercised by the bankrupt

I am satisfied, therefore, that, though the words are confusing, Congress has accomplished what it intended, namely, that for the protection of these who deal with the bankrupt in the interval between the filing of the petition and the adjudication, he shall have a title capable of transfer; but that the day of cleavage, both as to provable and dischargeable debts, and as to property with which to pay these debts, is the day when the petition is filed. The other view would mark an innovation contrary to settled principles in this country neither intended by Congress nor warranted by the words of the statute.

for his own benefit at the commencement of his bankruptcy or before his discharge, except the right of nomination to a vacant ecclesiastical benefice; and,

(iii) All goods being, at the commencement of the bankruptcy, in the possession, order, or disposition of the bankrupt, in his trade or business, by the consent and permission of the true owner, under such circumstances that he is the reputed owner thereof; provided that things in action other than debts due or growing due to the bankrupt in the course of his trade or business shall not be deemed goods within the meaning of this section.

45. (1) Where a creditor has issued execution against the goods or lands of a debtor, or has attached any debt due to him, he shall not be entitled to retain the benefit of the execution or attachment against the trustee in bankruptcy of the debtor, unless he has completed the execution or attachment before the date of the receiving order, and before notice of the presentation of any bankruptcy petition by or against the debtor, or of the commission of any available act of bankruptcy by the debtor.

(2) For the purposes of this Act, an execution against goods is completed by seizure and sale; an attachment of a debt is completed by receipt of the debt; and an execution against land is completed by seizure, or, in the case of an equitable interest, by the appointment of a receiver.

47. [See ante, p. 200, n. 1.]

48. Every conveyance or transfer of property, or charge thereon made, every payment made, every obligation incurred, and every judicial proceeding taken or suffered by any person unable to pay his debts as they become due from his own money in favour of any creditor, or any person in trust for any creditor, with a view of giving such creditor a preference over the other creditors shall, if the person making, taking, paying, or suffering the same is adjudged bankrupt on a bankruptcy petition presented within three months after the date of making, taking, paying, or suffering the same, be deemed fraudulent and void as against the trustee in the bankruptcy.

(2) This section shall not affect the rights of any person making title in good faith and for valuable consideration through or under a creditor of the bankrupt.

49. Subject to the foregoing provisions of this Act with respect to the effect of bankruptcy on an execution or attachment, and with respect to the avoidance of certain settlements and preferences, nothing in this Act shall invalidate, in the case of a bankruptcy

(a) Any payment by the bankrupt to any of his creditors,

(b) Any payment or delivery to the bankrupt,

(c) Any conveyance or assignment by the bankrupt for valuable consideration, (d) Any contract, dealing, or transaction by or with the bankrupt for valuable consideration,

Provided that both the following conditions are complied with, namely (1) The payment, delivery, conveyance, assignment, contract, dealing, or transac tion, as the case may be, takes place before the date of the receiving order; and

(2) The person (other than the debtor) to, by, or with whom the payment, delivery, conveyance, assignment, contract, dealing, or transaction was made, executed or entered into, has not, at the time of the payment, delivery, conveyance, assignment, contract, dealing, or transaction, notice of any available act of bankruptcy committed by the bankrupt before that time.

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