IN RE O'CONNOR.

943

In re O'CONNOR. (District Court, E. D. New York. August 7, 1899.)
1.

BANKRUPTOy-LIENS-REOEIVERSHIP.

Where a creditor brings a suit to avoid a fraudulent sale of chattels by his debtor, and procures the appointment of a receiver therein, the lien acquired thereby dates from the appointment of the receiver; but, if the action was begun more than four months before the filing of a voluntary petition in bankruptcy by the debtor, the lien will be recognized and protected in the bankruptcy proceedings according to section 67, c1. c,of the bankruptcy act, though the receiver was appointed within the four months, and did not qUalify until after the institution of the proceedings in bankruptcy. Bankruptcy Act 1898, § 67, c1. f. providing that "all levies, judgments, attachments, or other liens obtained through legal proceedings agalnst a person who is insolvent, at any time within four months prior to the filing of a petition in bankruptcy against him, shall be deemed null and void in case he is adjudged a bankrupt," applies only to involuntary proceedings against a debtor, not to proceedings on his voluntary petition.

2.

SAME-VOLUNTARY AND INVOLUNTARY CASES.

3.

SAME-LIENS.

'Vhere proceedings supplementary to execution against a debtor are suspended by his adjudication in bankruptcy on his voluntary petition, but their continuance is afterwards permitted by the bankruptcy court, and a receiver then appointed by the state court, the creditor acquires no lien upon, or specific interest in, the property of the bankrupt; for, the entire estate being under the control of the court of bankruptcy at tbe time of the appointment of the receiver, no title vests in the latter which could relate back to a time when the supplementarypl'oceedings were begun.

In Clinton T. Boe,for Pratt & Lambert, lienors. P. Q. Eckerson, for Goodman, lienor. Chll:rles A. Kipling, for trustee in bankruptcy. James J. Conway,' Goeller, Shaffer & Eisler, Story & Stratton, and Howard Sperry, for opposing creditors.
THOMAS, District Judge. On }fay 2d O'Connor .filed a petition in bankruptcy. More than four months priorthel'eto Goodman began Ii creditor's action to avoid a fraudulent sale of chattels by O'Conno'l', Wherein, on}fay 1st, was appointed a receiver, who qualified after May 2d.D1d, the creditor thereby acquire a' lien? The inception of the cteditor'saction created no lien as against asubse· quent levy in favor of other creditors, but the appointment of the receiver operated as an equitable levy and sequestration of the chattels for the' bene1it Of the plaintiff in the action, and perfected the lien. Bankv. Shuler, 1.53 N. Y. 163,172, 47 N. E. 262. The commencement of a creditor's 'action to reach equitable assets does ereate a lien thereon, but this rule does not extend to chattels subject to be taken on execution. Brown v. Nichols, 42 N. Y. 26. In the present case the property was subject to levy on execution. Daven· port v. Kelly, Id. 193; Kitchen v. Lowery, 127 N. Y. 53, 27 N. E. 357. Therefore no lien attached until one day preceding the filing of the petition. }fay this be avoided under the bankruptcy act? This de· pends tipon the true constrnctionof section 67, cIs. c, f. Section 67

" cl. c, avoids all liens obtained in actions begun within four months of the filing of a petition by or against the debtor, provided the lieJ;l" was ,9btained and permitted while, the defe,ndant was insolvent, etc., or (2) the party to be benefited had reasonable cause to believe the defendant was insolvent, and in contemplation of bankrliptcY,or (3)' such lien was sought and permitted in fraud of the act. Two general G,haracteristics must pertain to the lien to bring it within thissectio:u: {l) The commencement: of the action therefor within the limited time; (2) the sufIeranceof the debtor, or knowledge by the creditor of! the debtor's insolvency-and contemplated bankruptcy. The present case does not fall within::tlJ,e purview or anJ' of the provisos of section 67, cI. c. The subdivision generally refers to liens obtained by the acquiescence or connivance of the debtor, or in yiew of his known' insolvency and contemplated bankruptcy in actions begun within four months of his petition. The section is meritorious, although it may admit of some modification. It protects a creditor whom vigilance and thrift have prompted to effort to collect debts. The bankruptcy act does not intend to paralyze the activity of credit· ors, nor to wrest from them the rewards of their energy after achieve· ment,except within fixed statutory limits. If the creditor's suit was initiated more than four months before t4e filing of the petition, and his lien has been perfected before such filing, he should reap the benefit of his diligence in business. Congress has deemed it just to go beyond this, and to protect his lien, even though it was acquired before the filing, of the petition in an actiollbegun within four months thereof, if the facts show that he had not knowledge of the debtor's insolvency and contemplated bankruptcy, and that the debtor !lad not suffered his property to be taken prefereptially, or in fraud of the act. How should subdivision 67, cI. f,be construed? It sweeps away all liens procured in proceedings against an insolvent debtor within fourl)l()nths of, the "filing of a petition in bankruptcy against him." It has been held t4at this subdivision is applicable to voluntary as well as to involuntary cases. Such an interpretation leaves and elimipates it from the statute. A subdivisi{)n c . court should. hesitate to construe a statute so as to deprive a substantial porti()n thereof of any force or office. It is asserted that section 1 (subdivision,I), which provides that" 'a person against whom a filed' shall include a person who has filed a volunpetition bas tary petition,"makes section 67, cI. f,appli;eable to voluntary as well as to words of section 1 (subdivision 1) al· though of an equivalent meaning, are not those used in section 67, cl. f.X4e differentiation of the langu::tge is narro;w, and technical, but it should,be deemed sufficient to prevent a GOll/:ltruction which voluntary cases, with the would make l'I.ection 67,cI. f" result of literally expunging from the statute such considerable portion thereof as is contained ill; section 67, cI. c. But it seems to have be,entaken for granted tIlatthere is llO sufficient reason for limiting 67, d, f, to involuntary cases: . ' To this it may be replied that tb,e,questionis.not one of the of the statute, but rather of of the legi,slative aut4ority, To some it might well appear that section 67, cl. f, should have no existence, but in any case

944-

95

FEDERALREPORT;l!JR.

IN RE O'CONNOR.

945

it is considered that it is sufficiently extended when it permits creditors to defeat all liens, however obtained, accruing within four months. If the vigilant creditor has used the energy of a good business man to obtain by means of legal proceedings security for his debt, the bankrupt should not be permitted, save as provided in section 67, cl. c, to defeat his creditor by taking advantage of the bankruptcy act. That would furnish a last refuge for a contumacious debtor. If creditors are willing to leave their fellow creditor to the enjoyment of his advantage, there is no reason for the intervention of the bankrupt in their behalf. The other creditors may prefer to come in under a receivership acquired by the moving creditor, and take what they may in subjection to his prior claim. The privilege is given clearly to the creditors to choose their course. The statute does not leave the option to the debtor, and should not. It is true that in involuntar;y cases the creditor does not need the protection of section 67, cl. c, as the provision of section 6'7, cl. f, is more comprehensive, in this: that there is no limitation upon his right to avoid the lien. But it is preferable to construe the statute so that section 67, cl. c, shall have some effect, rather than in such manner that it shall be ineffective in all its parts. The construction here adopted seems to accord more nearly with Rev. St. § 5128 (Act 1867). While the matter is not free from perplexity, it is considered that the present holding gives greater force and usefulness to each section involved, and accords more nearly with the precise reading of the statute. An excellent discussion of the subject by :Mr. Grayson (Chi. Leg. N., July 29, 1899), leads to a contrary conclusion. It may be consulted for an analysis of the previous decisions, and for the arguments supporting a construction other than the one here presented. Pursuant to the foregoing ascertainment, the Goodman claim must be allowed, because on :May 1, 1899, the supreme court appointed a receiver of the bankrupt's property in an action begun on December 24, 1898, whereas the petition in bankruptcy was not filed until 2, 1899. It is not regarded as important that the receiver did not qualify until May 27th. This resulted from the fact that on the 3d day of May, 1899, this court enjoined all further proceedings, which suspended the ability of the receiver to qualify, although the same has been permitted. The supreme court appointed the receiver in an action adjudged by it, and its action should not be disturbed by a mere technicality., The Gode of Civil Procedure of New York (section 2468) provides: "The property of the judgment debtor is vested in a receiver, who is duly qualified, from the time of filing of the order of appointmen,t and extending the receivership as the case may be." The claim of Pratt & Lambert involves some further consideration. No creditor's action was, begun duly upon the judgment recovered by them against the debtor on November 10, 1898, but what was equivalent thereto,-proceedings supplementary to execution were taken on December 12, 1898. These proceedings were suspended by order of this courtrmade on the 3d day of May, 1899, but their continuance was afterwards permitted, and on July 7, 1899, a receiver therein was appointed by the supreme court. The lien did not exist until the appointment of the receiver, and was subsequent to the undertak95F.-60

946

95 FEbERAL REPORTER.

Of thilii 'c6tirt tt> administer the estate. The 'coiIrtdoes not-merely. sue'ceed'to the interest the 'bankrupt; but is vested with power over all the bankrul?t's property, unless tights have theretofore vested in others; No interest vested in Pratt & Lambert, nor in the receiver, who i was' created· pursuant to their 'judgment, after this court ,had interposed. The doctrine of relation under the New York statute may prevent the intervention of liens intermediate the order and the vesting of the property iuthe receiver, but it cannot thwart the jurisdiction of this court to take possession of the property, and administer the same according to rights as they existed when the jurisdiction was invoked. Under the New' York statute (Code Civ. Proc. §§ 2468, 2469), "when the receiver's title to personal property has become vested," "the title 'relates back so as to include the personal property of the judgment debtor at the time of the service of the ,order" of examination.' But the receiver's title in this case had not vested. Before such another court, with a different law of distribution, had seized the property, and assumed its administration. The receiver's'title cou!d not vest thereafter. The very judgment on which it was predicated was directed by the statute to be suspended by, and was dischargeable in, the banliruptcy court, and it is not conceivable that such jUdgment could continue so potent in its operation as to oUl3t,this court of its jurisdiction, because a receiver was appointed by'virtue,of,itafter such jurisdiction was gained., It follows from these views' that the Pratt & Lambert claim may not be allowed. Some of theqnestions contained herein are so involved that a proper· ordet will be granted to permit a review nf,the present proceedings", if desired. '.

or·

In re WOOD.. ,, (DIsh-lct Court, E. b. CaroUria. ' Augtist 1,
I " ' " ' : ' .'.) , ',I " ; ' ; "" ' ; ' ' :

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: :'

1.

BA.NKRUP'rCV.....SECURED,(JREDI'l'ORS-JUDGMENT LIENB.i :

2. SA.'M'E."

a bp;nJ,{I;uptclaim.s priority out of llis estl;lte by an on of the estate, the. burden Is on such cll\..1matt t<r shoW that he ha:sdone. everythingreby statute to makehisjudgnient attach as a Hem.' :" ,' ;

'

North Carolina; it judgmelit rendered· by aju:sticeof the Peace is ,not a li4;1non perl\onal property 1JlltiI tMre .levY, up,der,l1:; nor .on, real, " estate until docketed s:uperior and ,a etedrtor or a bankrupt, Who. has. recovered. judgment' agalnst him In. a justlce's' court, but not docketed the same' Inthe'sliperiot coUrt, no'!' issued any'writ ,upon it, .Is not entitled, merely by virtue" Qf.·his ,judgment, to ptiorit3" .of,payment out of. ,dheestate, Qut must share pro rata w;lth,

, In

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Bankruptcy. 'Onreviewo,t

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referee'iribankruptcy,.'

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l · · ".:}

LPURNELL, District Judge. This iseertified,for review on objl'!ctionby creditors to the decisioniof the referee that Boone & Jenkins are entitled to priority, to have their debtpaid in full by the
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