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erty, or where a creditor attempted said (page 576): “Defendants obto attach some of the property to ject to the sufficiency of the comsatisfy his debt. See State Bank plaint, in that, in the interval bev. Cox (1906) 74 C. C. A. 285, 143 tween bankruptcy proceedings instiFed. 91 ; Shawnee County v. Hurley tuted and adjudication, a bankrupt (1909) 94 C. C. A. 362, 169 Fed. 92; in respect to his property has powAcme Harvester Co. v. Beekman er to conduct suits, and, as a corolLumber Co. (1911) 222 U. S. 300, lary, to settle and conclude them. 56 L. ed. 208, 32 Sup. Ct. Rep. 96. This will be granted. Johnson v.
While, in Bailey v. Baker Ice Collier, 222 U. S. 539, 56 L. ed. 306, Mach. Co. 239 U. S. 268, at page 275, 32 Sup. Ct. Rep. 104. But the bank60 L. ed. 275, 286, 36 Sup. Ct. Rep. rupt's property is a trust fund for 50, 54, the Supreme Court of the all creditors, and the bankrupt a United States, considering the effect trustee thereof. In consequence he of the 1910 Amendment, remarked: and it are subject to the law of "When not otherwise specially pro- trusts and to the principles of equity vided, the rights, remedies, and applicable to trusts. Amongst these powers of the trustee are deter is that he, and all parties dealing mined with reference to the condi- with him in respect to the trust tions existing when the petition is property, are bound to the utmost filed”—the opinion is careful not to good faith and fair dealing; and say that the trustee takes title to the though he have power to dispose of property of the bankrupt as of the the trust property, if he does so to date of the filing of the petition. misappropriate the proceeds, the This case, as we read it, only deter- purchaser and all others with reamined that the status given a trus- sonable grounds to believe he intee by the Amendment of 1910 is tends misappropriation, who aid effective as of the date of filing the therein, are participators in his petition. Everett v. Judson (1913) breach or devastavit, and equally 228 U. S. 474, 57 L. ed. 927, 46 with him liable to reimburse the L.R.A.(N.S.) 154, 33 Sup. Ct. Rep. beneficiaries." 568, Acme Harvester Co. v. Beek- Frederick v. Fidelity Mut. L. Ins. man Lumber Co. 222 U. S. 300, 56 Co. 256 U. S. 395, 65 L. ed. 1009, 41 L. ed. 208, 32 Sup. Ct. Rep. 96, and Sup. Ct. Rep. 503 (affirming 75 Pa. Bailey v. Baker Ice Mach, Co. 239 Super. Ct. 77), throws light on the U. S. 268, 60 L. ed. 275, 36 Sup. Ct. question we are considering. There, Rep. 50, in certain of their expres- after the trustee in bankruptcy sions, aid the argument of appellant, qualified, the bankrupt died, and the but none of these cases nor any of insurer, in ignorance of the bankthe others we have examined, decid- ruptcy proceedings, paid the beneed since the 1910 Amendment, hold ficiary in a life policy issued to the that it changed the law as to the decedent the full amount of the intime when the trustee actually takes surance. The trustee had not known title to the bankrupt's property. of the policy, but, learning of it,
In Gunther v. Home Ins. Co. (D. brought action against the company C.) 276 Fed. 575, where the bank- for the amount of the cash surrenrupt, after involuntary proceedings der value thereof. Judgment for commenced, sued out claims against defendant was affirmed, Mr. Justice fire insurance companies, and re- Pitney saying, at page 398 of 256 ceived settlements from them, and U.S.: "Here the question is whethwhere the trustee subsequently er, after the death of the insured brought action and obtained a ver- and payment of the stipulated dict, the latter's right to recover was amount to the beneficiary named in sustained on the ground that the the policy in strict conformity to settlement with the bankrupt was its terms, without notice of the not in good faith. The court there bankruptcy or claim made by the (278 Pa. 400, 123 Atl. 333.) trustee, there is a liability on the tions between the filing of the petipart of the insurance company to tion and adjudication that the words pay to the trustee the surrender val- 'as of the date he was adjudicated ue that, on complying with the a bankrupt' were inserted in the terms of the policy, he might have Act of 1898." demanded. It is not enough to sus- In Johnson v. Collier (1912) 222 tain the trustee's claim to say that U. S. 538, 56 L. ed. 306, 32 Sup. Ct. the filing of the petition in bank- Rep. 104, the bankrupt was allowed ruptcy was a caveat to all the world, to institute an action between the and in effect an attachment and in- time of the filing of the petition and junction, and that, on adjudication, adjudication. The defendant there title to the bankrupt’s property be- attempted to defend against the suit came vested in the trustee. Mueller on the ground that a petition had v. Nugent, 184 U. S. 1, 14, 46 L. ed. been filed, but the court said the 405, 411, 22 Sup. Ct. Rep. 269. The bankrupt was not devested of his asserted right of property arose out property by filing a petition in bankof a contract under which the in- ruptcy, that he was still the owner surance company had rights as well holding in trust pending the apas the insured.
pointment and qualification of a pany, having in good faith per- trustee, whose title then relates back formed the contract according to its to the date of the adjudication. terms, without the notice that the A proper conclusion, we think, to contract called for as a condition of be drawn from the cases of Everett changing the terms, cannot be called v. Judson, 228 U. S. 474, 57 L. ed. upon to make the further payment 927, 46 L.R.A.(N.S.) 154, 33 Sup. demanded by the trustee."
Ct. Rep. 568, and Burlingham v. If, as appears in that case, the Crouse, 228 U. S. 459, 57 L. ed. 920, trustee got nothing when death oc
46 L.R.A.(N.S.) 148, 33 Sup. Ct. curred and payment was made after
Rep. 564, is that the trustee's title adjudication, with stronger reason
goes back to the adjudication, but he the trustee here had no valid claim where the loss occurred before peti- the time of the filing of the petition.
takes title to property as it was at tion and payment was made before
If there was nothing in existence at adjudication. In the Zotti Case, the time of adjudiheretofore cited, 106 C. C. A. 196, cation to which he right of trustee
Bankruptcy186 Fed. 84, Ann. Cas. 1914A, 240, could take title, it is it was said: "Whatever else the re- immaterial in what condition any mark [in Mueller v. Nugent, that the property might have been at the filing of the petition is a caveat to time of the filing of the petition. To all the world and in effect an attach- come within the language of Everett ment and injunction] may mean, it v. Judson, where Mr. Justice Day cannot mean, in contradiction of the said, at page 478 of 228 U. S.: express provision of the act, that “While it is true that § 70a provides the title of the bankrupt shall vest that the trustee, upon his appointin the trustee as of the time of fil- ment and qualification, becomes ing the petition.
We think vested by operation of law with the this language was never intended to title of the bankrupt as of the date be applied to a bank which has hon- he was adjudged a bankrupt, there estly paid checks of a depositor are other provisions of the statute without notice that any petition which, we think, evidence the inten... has been filed against him, tion to vest in the trustee the title and who may never be adjudicated to such property as it was at the a bankrupt at all.
It was be- time of the filing of the petition,"cause the Act of 1867 threw doubt there must be property in existence upon the validity of honest transac- at the time of adjudication, so that
effect of pay
the trustee could then take title. In Our conclusion is that the trustee the case now before us, there was no cannot compel the property in existence at the time of defendant to again Bankruptcythe adjudication, because the right pay.
the money ment of insurof action against the insurance com
which it, in entire rupt. pany had ceased prior to that time. good faith, parted
with to its insured, without knowlIt is immaterial, therefore, whether
edge that a petition in bankruptcy there was a right of action at the
had been filed against him. time of filing the petition.
ance to bank
Payment to bankrupt between filing of petition and adjudication as an acquit.
tance under Bankruptcy Act of 1898.
Although, as is stated in the reported amount of the insurance to the trustee case (STONE v. SUPERIOR F. INS. CO. in bankruptcy, although the insured ante, 248), there have been certain has absconded with the money. And declarations by the Federal courts again, in Mersfelder v. Peters Carwhich afford some support for the tridge Co. (1910) 32 Ohio C. C. 187, proposition that payments of the kind where a debtor made a payment to a under consideration in this annota- bankrupt after the petition was filed, tion do not acquit the payer from fur- but long before adjudication, it was ther liability, the question not only held that, the payment having been has not been definitely settled by the made in good faith, the trustee in Supreme Court of the United States, bankrupty, under the Law of 1898, but there have been pronouncements could not recover the amount thereof which seemingly point to a contrary from the debtor. conclusion. In fact the only cases But where the settlement with the which have expressly passed upon the bankrupt is not in good faith, the question since the enactment of the party so paying the bankrupt is not Federal Bankruptcy Act of 1898 are relieved of liability to the trustee. to the effect that a payment made to Thus, in Gunther v. Home Ins. Co. a bankrupt between the filing of the (1923) 286 Fed. 396, reaffirming on petition and the adjudication, if made "rehearing or new trial" (1921) 276 in good faith and without knowledge Fed. 575, it was held that an insurof the bankruptcy, relieve the payer ance company, which, between the filfrom further liability therefor at the ing of a petition in bankruptcy against suit of the subsequently appointed the insured and the date of the adtrustee in bankruptcy.
judication, settled a claim and paid Thus, in the reported case (STONE over the amount to the bankrupt, havv. SUPERIOR F. INS. Co.), it was ex- ing at the time reasonable grounds pressly held that, in view of the pro- for believing that he intended to convisions of the Act of 1898, which vert the same, was not relieved from gives the trustee title as of the date liability to the bankrupt's estate. of the adjudication (rather than as This was upon the ground that the inof the date of the filing of the petition, surance company was a party to the as was the fact under the Bankruptcy conversion. Act of 1867), a fire insurance company For cases involving the closely which in entire good faith, and with- analogous question of the liability of out notice that a petition in bank- a bank which pays checks after the ruptcy has been filed against the in- filing of a petition in bankruptcy sured, has paid a loss to him prior to against the drawer, see annotation folthe actual adjudication in bankruptcy, lowing Citizens' Union Nat. Bank v. cannot be compelled again to pay the Johnson, post, 256.
G. J. C.
(286 Fed. 527.)
CITIZENS' UNION NATIONAL BANK, Appt.,
V. C. W. JOHNSON, Trustee, etc., of Kentucky Automotive Company,
United States Circuit Court of Appeals, Sixth Circuit
February 16, 1923.
(286 Fed. 527.)
Bank — payment of bankrupt's checks — liability.
A bank is not liable to the bankruptcy trustee for the payment made in good faith of checks in regular course of business to third persons from its depositor's account between the filing of a petition in bankruptcy against him and actual adjudication, without notice of the bankruptcy proceedings.
[See note on this question beginning on page 256.]
APPEAL by the bank from an order of the District Court of the United States of the Western District of Kentucky (Evans, J.) requiring it to pay to the trustee in bankruptcy money deposited in the bank and withdrawn therefrom by the bankrupt after the filing of the petition in bankruptcy. Reversed.
The facts are stated in the opinion of the court. Argued before Knappen, Denison Per Curiam: and Donahue, Circuit Judges.
The sole question presented is Messrs. William Marshall Bullitt, whether a bank which, between the Leo T. Wolford, and Bruce, Bullitt & Gordon, for appellant:
filing of petition for adjudication The bankrupt retained title to its
of bankruptcy and actual adjudicaproperty after the filing of the peti
tion, received deposits from the tion in bankruptcy, and, since no re
bankrupt to the credit of the latter's ceiver was appointed, a transfer of checking account and made payment title made by the bankrupt before the therefrom to third parties upon deadjudication was not necessarily
void. positors' checks, but without knowlEdison Electric Illuminating Co. v. edge or notice of the pendency of Tibbetts, 154 C. C. A. 300, 241 Fed.
bankruptcy proceedings, is liable to 468; Johnson v. Collier, 222 U. S. 538, 56 L. ed. 306, 32 Sup. Ct. Rep. 104;
the trustee in bankruptcy for the New York County Nat. Bank v. Mas
payments so made. No receiver had sey, 192 U. S. 138, 48 L. ed. 380, 24 Sup.
been appointed and no question of Ct. Rep. 199; Re Perpall, 271 Fed. 466;
preference under $ 60 of the Act Studley v. Boylston Nat. Bank, 229 U. (Comp. Stat. § 9644, 1 Fed. Stat. S. 523, 57 L. ed. 1313, 33 Sup. Ct. Anno. 2d ed. p. 1004) is involved. Rep. 806.
The district court was of opinion The trustee had no right to proceed that the bank was so liable, basing in a summary manner to enforce his
its conclusion on the decision of this claim against the bank, and the referee had no jurisdiction over the case.
court in Toof v. City Nat. Bank, 124 Bardes v. First Nat. Bank, 178 U. S.
C. C. A. 118, 206 Fed. 250. The 524, 44 L. ed. 1175, 20 Sup. Ct. Rep. district court was in error in so con1000; Re Howe Mfg. Co. 193 Fed. struing the opinion in that case.
. 524; Jaquith v. Rowley, 188 U. S. 620, The Toof Case did not involve the 47 L. ed. 620, 23 Sup. Ct. Rep. 369; Re
question of good-faith payments by Midtown Contracting Co. 155 C. C. A.
the bank to third persons, but only 586, 243 Fed. 56; Re Radley Steel Constr. Co. 212 Fed. 462.
the bank's right to apply deposits Messrs. Benjamin S. Washer and upon its note against the depositor Emile Steinfeld for appellee.
by way of set-off. We held (following New York County Nat. Bank v. vester Co. v. Beekman Lumber Co. Massey, 192 U. S. 138, 146, 48 L. ed. 222 U. S. 300, 56 L. ed. 208, 32 Sup. 380, 383, 24 Sup. Ct. Rep. 199, and Ct. Rep. 96; Everett v. Judson, 228 Studley v. Boylston Nat. Bank, 229 U. S. 474, 57 L. ed. 927, 46 L.R.A. U. S. 523, 527, 57 L. ed. 1313, 1316, (N.S.) 154, 33 Sup. Ct. Rep. 568; 33 Sup. Ct. Rep. 806) that the bank Toof v. City Nat. Bank, supra. But had the right of set-off as to the ex- we think that both on principle and isting deposit balance when the pe- authority the rule referred to does tition in bankruptcy was filed. We not make the banker liable for goodfurther held that the right of set-off faith payments to third persons did not extend to subsequent de- made before adjudication upon deposits.
positors' checks in the regular We think a conclusion that the course of business and without bank is liable for payments made to knowledge or notice of bankruptcy. third parties in good faith and in Re Zotti (C. C. A. 2) 108 C. C. A. ignorance of the bankruptcy pro- 196, 186 Fed. 84, Ann. Cas. 1914A,
ceedings is not well 240, certiorari denied in 223 U. S. Bank-payment of bankrupt's
founded. Its effect 718, 50 L. ed. 628, 32 Sup. Ct. Rep. checks-liabil
would be that the 522. And see Johnson y. Collier, ity.
bank could not pro- 222 U. S. 538, 56 L. ed. 306, 32 Sup. tect itself against liability to a trus- Ct. Rep. 104; Re Perpall (C. C. A. tee in bankruptcy subsequently ap- 2) 271 Fed. 466, 468. For its genpointed, on account of payments eral bearing, see Frederick v. Fidelmade in good faith and in the reg- ity Mut. L. Ins. Co. 256 U. S. 395, ular course of business, and in ig- 398,65 L. ed. 1009, 1011, 41 Sup. Ct. norance of the bankruptcy proceed- Rep. 503.
. ings-except through the impossible
The order of the District Court is course of keeping itself advised not
reversed so far as it required the only daily, but momentarily, of the filing of petitions for adjudication
bank to repay to the trustee in bankof bankruptcy against its depositors ruptcy any sum beyond the moneys in any competent jurisdiction. In
received on deposit by the bank aftour opinion the bankruptcy works
er bankruptcy proceedings were beno such result. True, broadly gun, and which were applied by the speaking, the adjudication when
bank upon its own note against the made relates back to the commence
bankrupt, and the record remanded ment of bankruptcy proceedings for for further proceedings not inconthe purpose of adjudicating rights sistent with this opinion. Appellant and equities generally. Acme Har- will recover its costs of this court.
ANNOTATION. Liability of bank which pays checks after filing of petition in bankruptcy
against drawer. The closely analogous question of bank is not liable to the bankruptcy payment between the filing of a peti- trustee for the payment of a check tion in bankruptcy against the one to made in good faith in the regular whom payment is made and his ad- course of business, and without notice judication, in bankruptcy as an ac- of the prior filing of a petition in quittance of the one making the pay- bankruptcy against the drawer, but ment is treated in the annotation fol- before the actual adjudication,-is lowing Stone v. Superior F. Ins. Co. supported by the only other case ante, 254,
which a search reveals as having The decision in the reported case passed squarely upon the question. (CITIZENS' UNION NAT. BANK V. JOHN- Thus, in Re Zotti (1911) 108 C. C. A. SON, ante, 255), to the effect that a 196, 186 Fed. 84, Ann. Cas. 1914A,