Opinion
No. 16664.
September 28, 1931.
Guy L. Kretser, trustee, in person.
Blumberg Conley, of Little Falls, N.Y., for Valley Mills Co.
Lee Judson, of Utica, N.Y., for Paul B. Williams.
F.J. De La Fleur, of Utica, N.Y., referee in bankruptcy.
In Bankruptcy. In the matter of Niels Ohr Hein, bankrupt. Proceedings by Guy L. Kretser, trustee, to require the Valley Mills Company and another to turn over certain property of bankrupt. The referee ordered property turned over to trustee, and the creditors bring petition for review.
Order of referee affirmed.
The decision of the referee was as follows:
This is what is known as a turnover proceeding, and is before the referee on petition of the trustee, who has asked that the Valley Mills Company and Paul B. Williams show cause why certain personal property taken and claimed by them should not be turned over to the trustee and sold by him free and clear of all liens and incumbrances. On the return day of the order to show cause, the claimants appeared and filed their answers, after which testimony was offered on behalf of all parties appearing.
From such testimony it appears that the bankrupt was a farmer, who, for several years past, had operated a large dairy farm in the town of Manheim, Herkimer county, N.Y. That this farm in the first instance had been purchased by the bankrupt and one Hans Nicolaison, whose interest the bankrupt later acquired. The farm was known as the Fredericksen farm located a few miles from the city of Little Falls. At the time when the bankrupt and his partner, purchased this farm, they borrowed on a first mortgage from the Federal Land Bank of Springfield, Mass., the sum of $7,500, and gave a second mortgage to the vendor for the sum of $17,550. These mortgages were still on the farm when Hein took over his partner's interest. An action in the Supreme Court of the State of New York was commenced to foreclose the second mortgage, on which there had been a default in payments, during the early part of May, 1930. On May 29, 1930, the referee in the foreclosure action reported that there was due on this mortgage the sum of $16,751.63, and a judgment of foreclosure was entered to that effect in the state court on the 7th of June, 1930. July 26, 1930, this farm was sold on foreclosure sale for the sum of $10,000, it having been bid in by Paul B. Williams, as executor of the mortgagee, and according to the report of sale there was at that time a deficiency due on this indebtedness of $7,673.13. The usual referee's deed was given and deficiency judgment thereafter entered.
During bankrupt's occupancy of the Fredericksen farm he purchased from time to time from the Valley Mills Company merchandise consisting mostly of feed for his stock, and was in the habit of making payments on his account as he received his income from the milk which his dairy produced. During the year preceding his bankruptcy, Hein had made the usual purchases from the claimant, but had been slow on his payments, because the milk yield from his cows had not equaled that of previous years, on account of the drought during the summer of 1930, and his indebtedness to the Valley Mills Company by May, 1930, had reached the sum of approximately $2,000. At that time the bankrupt was requested to reduce his account, but did not do so, and his note was taken for $2,000, which he failed to pay when it fell due. On August 8, 1930, another note for $2,000 was taken from the bankrupt by the Valley Mills Company together with a chattel mortgage on cattle, horses, farm tools, and machinery. In addition to this sum of $2,000 for which note and chattel mortgage were given, it appears that bankrupt owed claimant on open account an additional sum of about $200.
Later, on September 15, 1930, the Valley Mills Company received from the bankrupt what purports to be a bill of sale of all the hay in the cow barn and about two hundred tons of ensilage. The consideration was to be $20 a ton for the hay when baled and delivered, and $600 for the ensilage. This bill of sale was taken by the claimant because, as stated by one of its officers, it was not thought that the security of the chattel mortgage was adequate to cover the whole amount owing by the debtor. The property included in the bill of sale and chattel mortgage covered every known article of personal property which the bankrupt at that time, or thereafter prior to his bankruptcy had.
On October 1, 1930, Hein filed his petition and schedules in a voluntary bankruptcy proceeding in this court, and on October 2d, an order adjudicating him a bankrupt was duly made. October 21, 1930, the first meeting of creditors was held and, Guy L. Kretser, of Little Falls, N.Y., was appointed trustee, and on the 25th of October qualified by filing the required bond.
On October 9, 1930, eight days after the bankrupt had filed his petition in bankruptcy and turned his property over to the custody of the court, claimant, without any authority or permission from the court in whose custody the property was, and without its knowledge, took possession of all the property mentioned, in its chattel mortgage, except one electric pump, sold the same for the sum of $1,787.50, and now has this sum in its possession. Of this amount the trustee concedes $17 were expenses of sale and $167 were received from the sale of property which might have been set off to the bankrupt as exempt, and to those sums the trustee makes no claim. The electric pump, mentioned in the chattel mortgage, was taken by claimant against the protest of Paul B. Williams, the owner of the farm, on October 21st, the day on which the first meeting of creditors was held. After deducting the expenses of the sale and amount received from exempt property, there is the sum of $1,603.50, and the electric pump, the ownership of which is to be determined in this proceeding.
That the claimant wrongfully took and disposed of this property there can be no question, as it was taken after the petition in bankruptcy had been filed, when in the jurisdiction and custody of the bankruptcy court. It is a well-established rule of law that when a court of competent jurisdiction takes possession of property, such property is withdrawn from the jurisdiction of all other courts. If this rule applies to other courts, it with greater force applies to individuals and corporations. The court originally acquiring such jurisdiction has the right to hear and determine all questions of title, possession, and control of such property. Claimant by taking possession of this property and retaining the proceeds received from its sale has sought forcibly to deprive the bankruptcy court of its possession and control. Such conduct on claimant's part cannot be considered other than wrongful. B.K. Isaacs, Trustee, etc., v. Hobbs Tie Timber Company, 282 U.S. 734, 51 S. Ct. 270, 75 L. Ed. 645, 17 A.B.R. (N.S.) 273.
The trustee is entitled to the return of all the property taken by the Valley Mills Company from the bankrupt. But, as claimant sold the property at what has been conceded a fair and reasonable price, the trustee is entitled to the proceeds of the sale, less the expenses of sale and the amount received from the exempt property or the sum of $1,603.50.
Had it not been for the stipulation entered into by all the parties to this proceeding, to the effect that the referee should decide the validity of the alleged lien of the Valley Mills Company under its chattel mortgage, the decision of the referee would end with a direction that the claimant turn the sum mentioned over to the trustee. But following this stipulation we will consider the claim of the Valley Mills Company and the validity of the chattel mortgage given by bankrupt on August 8, 1930.
If claimant had left this property undisturbed, as it should have done, until the trustee was chosen, and the trustee had taken possession of this property of the bankrupt, claimant would have come into court for the purpose of proving its secured claim and demanded possession of the property. If its lien had been held valid, an order would have been made directing the trustee to turn it over to the creditor. In that case the burden of proving its secured claim would rest on the claimant. Although claimant contends the burden is on the trustee of proving facts that would invalidate its lien, I am of the opinion that this contention is without merit and that the burden still rests on claimant to establish its lien. This is not a plenary suit in equity by the trustee against claimant, but a proceeding by trustee to force claimant to turn over property to which the trustee has the right of possession, after which, if claimant has a valid lien, it must be proved. To reverse the rule and throw the burden of proof on the trustee as creditor seeks to do, because claimant happens to have possession of the property by having wrongfully taken it, would be to allow claimant to profit by its wrongful act. Had this property been taken prior to bankruptcy, and claimant's interest had been adverse to the interest of the trustee, then it would have been necessary for the trustee to resort to a plenary action, in order to divest claimant of its possession, and the burden of proof would have been on the trustee, as on any plaintiff; but we cannot permit claimant any advantage over the trustee, by changing the rule as to burden of proof, because of its forcibly wresting property from the trustee's rightful possession. To do so would be to encourage this sort of conduct from all claimants of this kind, who would be led to believe that in taking property in this manner they either had the court's sanction, or that the court would feebly and indifferently proceed against them, in the assertion of its rights.
There is no dispute that the chattel mortgage, under which the lien on bankrupt's property is claimed, was executed on August 8, 1930, less than two months prior to bankruptcy; and that the property, except the electric pump, was actually taken and sold on October 9, 1930, or eight days after the petition had been filed. The pump was taken on October 21st, or twelve days later.
The insolvency of debtor on August 8, 1930, and that the transfer of that date would enable claimant to obtain a larger percentage of its debt than other creditors of the same class, is not admitted by claimant.
Though Hein continued to reside on this farm that he had occupied during his transactions with claimant, and remained there up to the time of his bankruptcy, there was a prior chattel mortgage on forty-one head of his cattle. The foreclosure action had been commenced, on the second real estate mortgage in May, 1930, and on July 26th, following, the farm was sold at foreclosure sale to the mortgagee for the sum of $10,000. This left, after the security had been converted into money, a deficiency on the mortgage indebtedness of $7,673.13, which on that date would have been a provable claim against Hein had he then been in bankruptcy. This indebtedness was still unpaid when on August 8, 1930, the Valley Mills Company obtained its chattel mortgage, and the Fredericksen estate was consequently then a creditor of the same class as this claimant. The claims on file and proved in this proceeding, before the referee, show that on or before August 8th Hein owed a further sum to unsecured creditors of $329.04, which would bring the then total unsecured indebtedness, less the $2,200 to which he was indebted to claimant, to $8,002.17. To pay this sum and the expenses of the bankruptcy proceeding, trustee has approximately $750, and this amount was obtained from assets claimed by the Valley Mills Company, but surrendered to trustee after the service of the order to show cause. From the property covered by the chattel mortgage, without placing any value on the electric pump taken but not accounted for, claimant received $1,787.50 to apply on its debt. Of this amount the trustee concedes that costs of sale of $17, and $167, received from exempt property, may be deducted, so that claimant would be left the balance of $1,603.50 to apply on its claim of approximately $2,000.
We must therefore find from the foregoing that Hein was insolvent on August 8, 1930; and that the transfer of property made by him to the Valley Mills Company on that date would enable it to obtain a larger percentage of its claim than would other creditors of the same class.
The next question for consideration is whether this creditor had knowledge of this insolvency at the time the transfer was made.
Of course, it is practically impossible to definitely show what claimant or its officers actually knew as to the solvency or insolvency of this debtor and whether it knew that the enforcement of this transfer would effect a preference. However, it is possible, from the facts which were brought to the knowledge of claimant's officers, to conclude what should have been known.
The evidence discloses that the bankrupt, over a period of several years, had been a customer of this creditor, and that, during this time, he had purchased feed and grain in considerable quantities, for which claimant extended credit and received payments when he, in turn, was paid for his milk. During the winter of 1929 and 1930, bankrupt had continued these purchases; and in the spring of the latter year, his indebtedness to claimant was upwards of $2,000. During this winter and spring no payments had been made by him on account, so on May 8, 1930, his note was taken by the creditor for $2,000. No payment was made on this note when it became due. The season had been dry, and farmers in his neighborhood were not getting the usual amount of milk. This fact was known to some of the officers of the claimant. That the Federal Land Bank had a mortgage on the bankrupt's farm was also known. The attorney for claimant had previously brought suit against Hein for one of his clients. A foreclosure action had been commenced by the Fredericksen estate to foreclose its second mortgage on Hein's farm and the sale had taken place. Of this latter claimant's officers deny any knowledge, but the usual lis pendens was filed in the office of the Herkimer county clerk, and notice of sale was published in one of the newspapers of that county. Mr. Harry Van Allen, treasurer of claimant, when he obtained the chattel mortgage and note on August 8th, testified on page 4 of the stenographer's minutes that he went to Hein and asked him for a payment on the note telling him that it took lots of money to carry on the feed business. That Hein told him a hard-luck story, but said he appreciated the way they had carried him along. Such facts as the foregoing we believe were amply sufficient to put creditor on inquiry as to bankrupt's financial condition when the transfer was made. It has been held that "notice of facts, which would incite a person of reasonable prudence to an inquiry under similar circumstances is notice of all the facts which a reasonably diligent inquiry would develop." In re Farmer's State Bank v. F.F. Freeman, Trustee of Jones Bros. Co., bankrupt (C.C.A.) 249 F. 579, 583, 41 A.B.R. 286; Thomas J. McGee v. Branan Carson Company (D.C.) 2 F.2d 758, 5 A.B.R. (N.S.) page 60.
It has also been held when a debtor's check has been returned to a creditor dishonored, a creditor has sufficient notice of insolvency to render subsequent payment preferential. Williams v. Plattner (D.C.) 46 F.2d 467, 17 A.B.R. (N.S.) 227.
If a returned dishonored check is sufficient notice of insolvency, failure to make payments for a considerable time on account, and, finally, the giving of a note, because, when asked for a payment on account, the debtor said he was unable to make a payment and his later failure to pay the note, or any part of it when it fell due, seem sufficient knowledge of facts to put claimant on inquiry, which would have disclosed insolvency.
We therefore find that claimant, on August 8, 1930, had sufficient cause to believe that Hein was then insolvent and that the enforcement of the transfer would effect a preference.
We yet have to determine the right of the Valley Mills Company to the electric pump taken by Harry Van Allen, one of its officers, on October 21, 1930. This pump was included in the chattel mortgage of August 8th, and if personal property, with the other items of personal property, except those exempt, should be turned over to the trustee.
There was on this farm a water system for cooling milk, the supply of water for the stock in their stables, and the supply of the house. In connection with the system, and as a part of it, was an electric pump which forced the water to its various parts. A pump was on the farm for this purpose when it was purchased by Hein, and was then a part of the same water supply system. About a year prior to the foreclosure sale, a new pump had been installed. This new pump took the place of the original pump which was on the farm when the bankrupt purchased it and was after installing an integral part of the same water system.
From these facts, we believe it reasonable to conclude that this water supply system was part of the realty, and the pump as a part of this system was also a part of the realty, though severable without material injury to it. In re Kohler Co. v. Brasun, 249 N.Y. page 224, 164 N.E. 31, it was held that a light and power plant which had been affixed to the real estate was a part of the freehold. The same principles and reasoning we believe apply to a water supply system and all its integral parts.
Our conclusion therefore is that this electric pump does not belong to the trustee, but was a part of the real estate, and passed to the purchaser of the farm on July 26, 1930.
When the Valley Mills Company has complied with the foregoing it may then prove its claim as unsecured for the balance owing.
An order will be made in conformity with the foregoing.
June 5, 1931. F.J. De La Fleur, Referee in Bankruptcy.
A motion having come on to be heard before me on the 28th day of September, 1931, for review of the referee's decision and order, herein, on the petition of the Valley Mills Company, of Little Falls, N.Y., dated June 5, 1931, it was decided and ordered, by the referee, that the Valley Mills Company pay, and turn over, to Guy L. Kretser, of said Little Falls, trustee herein, the sum of $1,603.50.
Now, after hearing Blumberg Conley, of Little Falls, N.Y., attorneys for Valley Mills Company, Lee Judson, of Utica, N. Y., attorneys for Paul B. Williams, and Guy L. Kretser, of Little Falls, N.Y., trustee and attorney in person, and having read the evidence, herein, the referee's decision and order, and all other papers certified by the referee, the notice of argument, dated September 15, 1931, together with proof of service thereof:
It is ordered that the referee's decision and order, made herein and dated June 5, 1931, be and the same hereby is in all respects ratified and confirmed.
It is further ordered that the Valley Mills Company of Little Falls, N.Y., forthwith pay to the trustee pursuant to the order of the referee the sum of $1,603.50, together with interest thereon from the date of service of said order on said appellant.