In re J. C. Winship Co.

JENKINS, Circuit Judge,

after stating the facts, delivered the opinion of the court.

The questions argued at the bar or suggested by the record are interesting, and of moment to the profession and to the administration of the bankruptcy law. These are: (i) Whether the lease, so-called, of the printing presses, can be impugned, and shown to be in effect but a chattel mortgage. (2) Whether, if to be considered a chattel mortgage, and void as to creditors for failure to record it, the transaction may be attacked by any one other than a purchaser in good, faith or an execution or attaching creditor. (3) Whether an adjudication of bankruptcy is such a sequestration of the property of the bankrupt that it clothes the trustee and general creditors with the rights of. execution or attaching creditors or of a bona fide purchaser; and therein, incidentally, whether the trustee could avoid the instrument in. favor of the general creditors, or only of execution or attaching creditors. (4) Whether the filing of a petition in bankruptcy in the absence-of adjudication and appointment of trustee works such sequestration,, so that a receiver can assert the rights either of general or of execution or attaching creditors.

The considerations which constrain our judgment render unnecessary, at this time, a determination of the important questions suggested. The property in dispute passed to the possession of the receiver. It is in custodia legis. The court, whether one of common-law, of equity, of admiralty, or of bankruptcy, having such possession, has the right, and it is its duty, to restore that possession to-whomsoever it lawfully belongs. No determination of that question was made by the court below until this decree of July 30, 1902. Prior to that time a sale had been made by the receiver under the order of the court of the property of the alleged bankrupt, as recited in the statements of facts, which authorized the sale of “the right, title, and interest of the receiver” in the three printing presses, subject, however, to the final determination by this court of their ownership. The purchaser bought with knowledge of the situation, and was carefully protected against loss by provision in the order confirming the sale that he should return the presses if so directed, and receive from the court the amount of his bid, which was and is retained by the court. Prior, also, to this decree of July 30, 1902, the alleged bankrupt compounded with his creditors as provided by the act (30 Stat. c. 541, § 12 [U. S. Comp. St. 1901, p. 3426]). The composition was confirmed by the bankruptcy court, which act discharged the debts (30 Stat. c. 541, § 14c [U. S. Comp. St. 1901, p. 3427]), and all creditors who had proved their claims received the amount to which they were entitled. There was then no one before the court but the receiver, the appellant, and the alleged bankrupt. The property remaining, with the exception of the three printing presses, or the amount bid therefor, had, by order of the court, been returned to the alleged bankrupt. The creditors had ceased to have any interest in the estate, and the question remaining for determination by the court was with respect to the disposition by the receiver of the three printing presses, or the amount bid for them. Either the appellant or the alleged bankrupt was entitled. The receiver had no interest. He was a mere care-taker. He had no title. “If in any sense a trustee, he is trustee for the bankrupt, in whom is the title to the property until it passes by operation of law, as of the date of adjudication, to the trustee selected by the creditors.” Bank v. Blakey, 47 C. C. A. 43, 48, 107 Fed. 891._ There was here no adjudication of bankruptcy, no passing of title by operation of law. The title remained in the alleged bankrupt, the possession of the property in the court. The contention here for the possession of this property is manifestly between the appellant and the alleged bankrupt. Beyond all controversy, as between these two parties the appellant is entitled to the property. The instrument in question, whether it be deemed a lease or a chattel mortgage, placed the_ title to the printing presses in the appellant. Assuming — but not deciding —that it could have been avoided by general creditors, it was valid between the parties. It would be mockery of justice to say that the alleged bankrupt may claim through and in the right of creditors whose debts have been paid and discharged; that he may avoid a transaction, valid as to himself but voidable as to creditors, in the right of nonexisting creditors. The court below proceeded upon the theory that the appellant could not avail itself of the fact of composition with creditors, and is only entitled to be placed in the position it would have occupied had the decree dismissing the original petition been entered at the time of the overruling of the exceptions to the master’s report. Therein we think the court erred. Having this property in possession, with no claim upon it except that of the appellant and the alleged bankrupt, the question arose as to its disposition by the court at the time the decree was actually entered; not what the rights of the appellant might have been at the time of the report of the referee, when there were creditors before the court. The question is not one of technical pleading. It is one concerning the disposition of property in custodia legis, taken for the benefit of creditors, and which it was no longer necessary to hold for them. It is a question whether the alleged bankrupt, having compounded with its other creditors, should be permitted to assert their rights to enable it to defraud the appellant out of property held under an instrument valid as between the parties thereto. It is a matter to be determined by a summary showing of the situation, and no technicality should be permitted to intervene to prevent a just determination of that question. The court of bankruptcy is a court of equity. It should have acted sua sponte, the facts being manifest upon its record. If formality was essential, the supplemental intervening petition of the'appellant setting forth the facts apparent upon the record should have been allowed to be filed, and should have been effectual to prevent the entry of the final decree dismissing the original intervening petition.

It is suggested by the receiver that the appellant could not determine the lease after default by the lessee, and be entitled to take possession of the property without a tender of the notes representing the rental for the presses. If this be matter of which the receiver can avail himself, it is sufficient to say that by the composition the debt represented by the notes is discharged, or, if otherwise, that the court below, in carrying into effect the mandate of this court, can, as a condition of the return of the printing presses to the appellant, require the surrender of such of the notes as in amount are in excess of the rental accrued and accruing to the date of the final decree to be rendered in pursuance of the mandate.

The decree is reversed, and the cause is remanded, with a direction to the court below to enter a decree, at the election of the appellant, that the three printing presses be returned to it, and that the $4,500 in the registry of the court be returned to the bidder at the sale; or that the appellant, if it shall elect to confirm the sale, be paid the $4,500.