*523 transfer the administration of the bank-value of his property was substantially $35,rupt's estate from the Federal district court to the state court. [No. 163.] 000. He was indebted to the bank in the sum of $27,000 for moneys borrowed from time to time for a period of about two years previous to that time. On said day Young Argued January 16 and 17, 1907. Decided executed to the bank a chattel mortgage on אן February 25, 1907. erence. Affirmed. See same case below, 125 Wis. 465, 104 N. W. 98. 2,100,000 feet of saw logs, to secure the sum of $15,900, then owing from him to the bank, N ERROR to the Supreme Court of the and also executed a chattel mortgage, transState of Wisconsin to review a judg-ferring 1,000,000 feet of lumber, about 600,ment which affirmed a judgment of the Cir- 000 shingles, and about 200,000 lath, to se cuit Court of Eau Claire County, in that cure the sum of $11,100, owing by him to state, in favor of a trustee in bankruptcy the bank. This indebtedness existed long in a suit to avoid an alleged unlawful pref- prior to said mortgages, and the property transferred constituted substantially all of the property then owned by Young not exempt from execution, which facts were well known by him and the bank. The effect of the foreclosure of the mortgages would be to enable the bank to obtain a much larger percentage of its debt than would the other creditors of Young in the same class as the bank. The mortgages were given by Young and taken by the bank for the sole purpose of hindering and delaying the other creditors, and were executed and received for that purpose, and the bank, at the time of their execution, had reasonable cause to believe that they were given with the Intention to give it a preference over other creditors. Statement by Mr. Justice McKenna: This action was brought by defendant in error, hereafter called the trustee, in the circuit court of Eau Claire county, state of Wisconsin, against the plaintiff in error, hereafter called the bank, under § 60b of the bankrupt act of 1898 [30 Stat. at L. 562, chap. 541, U. S. Comp. Stat. 1901, p. 3445], to recover the value of property which, it is alleged, was transferred by the bankrupt to the bank, for the purpose of giving the latter a preference over other creditors. Judgment was recovered by the trustee, which, on appeal, was affirmed by the supreme court of the state. 125 Wis. 465, 104 N. W. 98. Thereupon this writ of error was sued out. The complaint of the trustee alleges that on the 7th of June, 1902, John H. Young duly filed his petition in* bankruptcy in the United States district court for the western district of Wisconsin, pursuant to the act of Congress, and was on said day duly declared a bankrupt. Subsequently defendant in error was duly elected and appointed by the creditors of the bankrupt as trustee in bankruptcy, and duly qualified as such trustee. The Waters-Clark Lumber Company is a corporation of the state of Minnesota, and D. S. Clark is the president thereof and also a director in the bank, and W. K. Coffin is the cashier of the latter. On or about the 10th of March, 1902, Coffin, acting or the bank, requested Young to transfer to the lumber company, for the benefit of the bank, all of the property embraced in the mortgages, together with certain other property. Pursu ant to such request Young did, on or about the 10th of March, 1902, transfer, by absolute bills of sale, to the lumber company, all of the property described in the mortgages, and other saw logs owned by him. The propThe plaintiff in error is and was, at all erty transferred was reasonably worth the the times mentioned in the complaint, a na- sum of $35,000. Immediately on the execu tional bank. Young, during the four months tion of the bills of sale the lumber company, immediately preceding the filing of his peti-acting pursuant to the directions by and in tion, was the owner and in possession of certain lumber, shingles, and lath, located at Cadott, Chippewa county, Wisconsin, and certain logs in or near the Yellow river and Chippewa river in Chippewa county, which were reasonably worth the sum of $35,000. The value of all other property owned by him did not exceed the sum of $500. behalf of the bank, took possession of the property transferred, and thereafter sold the same and applied the proceeds to the payment of the indebtedness secured by the mortgages. At the time the bills of sale were made the lumber company and the bank thought the property transferred constituted all of the available assets of Young, On the 10th of February, 1902, Young was and that the result of such transfer and the wholly insolvent, and owed debts which appropriation of the proceeds thereof would largely exceeded the value of his property, result in the other creditors of Young losing which fact was well known to him and the all of his indebtedness to them. The lumber bank. The aggregate amount of his indebt- company, acting as vendee of said property, edness exceeded the sum of $40,000, and the l was in reality acting as trustee for the *526 $525 the said plaintiff may be entitled to recover on account of the transactions mentioned in plaintiff's complaint." The Questions were submitted to the jury cov. ering the issues in the case, except the value of the property, which, by stipulation of parties, was reserved for the court. jury, in response to the questions, found that at all the days mentioned in the complaint the property transferred at a fair val bank, and made such pretended purchase | said trustee for all sums of money which with the understanding and agreement with the bank and Young that it would account to the bank for the proceeds of the property transferred to the amount of his indebtedness, and that any sums realized in excess of his indebtedness should be paid to Young. The bills of sale were not executed in compliance with the statutes of the state. Except as to the agreement to pay said indebtedness, no consideration was paid by the lumber company for the prop-uation was insufficient to pay Young's erty, and, at the time of the transfer of the property, nothing was paid to Young therefor. By reason of said transactions the bank, within four months, appropriated to the payment of its claims substantially all of the property of Young, which at said time was and has been ever since worth $35,000. There is no other property in the possession of the trustee, belonging to Young, out of which his other creditors can be paid. debts; that the lumber company, acting for the bank and pursuant to the arrangement between it and the bank, took the legal title to the lumber and logs for the benefit of the bank under an agreement with it and Young to account to the bank for a portion of the proceeds; that it was the intention of Young, by the execution of the mortgages and the transfer of the property, to give the bank a preference, and that the bank and officers and agents had reasonable cause to believe that Young intended to give it such preference and to enable it to obtain a greater percentage of its indebtedness than any other of his creditors of the same class would be able to obtain. The bank demurred to the complaint on the following grounds: The court had no jurisdiction of the subject of the action; the trustee had no legal capacity to sue, in that the complaint did not allege that authority or permission was given him to bring suit; defect of parties, in that Young and the The court found that the lumber which lumber company were not made parties; and was included in the bank's mortgage was that the complaint did not state a cause of worth $3,452.85, and that a note for that action. The demurrer was overruled, and sum and value was given by the lumber the bank, availing itself of the permission company to Young and by him transferred granted, filed an answer, in which it ad- to the bank; that the Cadott logs, included mitted its corporate character and that of in the mortgage and sold by Young to the the lumber company, and the execution of lumber company, were worth $10,077.84; the mortgages and the bills of sale, and that that the up-river logs not included in the the instruments were not executed in the mortgage, but sold to the lumber company manner provided by the statutes of the by Young, were worth $11,055.84; and that state. It denied all the other allegations of a note which was given as the net proceeds the complaint, and alleged that a portion of the sale of both quantities of logs over of the proceeds of the sale of the property and above certain labor liens was worth $2,was paid to the bank to discharge valid and 508.14. This note was given by the lumber existing liens which it held against the prop-company to Young and transferred by him erty. And it alleged that the mortgages to the bank. The trustee contended in the were given for a good and valuable con- trial court that he was entitled to recover sideration, and that neither of them nor the (*for the entire value of the logs and lumber, payments to the bank were made or received and that no credit should be allowed tne for the purpose of giving the bank a prefer- bank for the sums paid by it to discharge ence over other creditors of Young, "con- certain liens on the property for labor claims trary to the provisions of the bankruptcy and unpaid purchase money. The court relaws," and "that, prior to the commence-jected the contentions and gave judgment ment of this action, the plaintiff commenced an action in this court against said WatersClark Lumber Company to recover from said Waters-Clark Lumber Company the purchase price of logs and other material sold by said Young to said Waters-Clark Lumber | Company, and thereby elected to treat and consider said contract between said Young and said Waters-Clark Lumber Company as legal and valid, and elected to look to and hold the said Waters-Clark Lumber Company, instead of this defendant, as liable to for the trustee in the sum of $6,254.99. In this sum was included the value of the notes. The assignments of error are that the supreme court erred in the following particulars: (1) In determining that the complaint stated a cause of action. (2) In determining that the bank was liable for the value of the logs and lumber to the extent of the chattel mortgage interest of the bank therein. (3) In determining that the bank was liable for having received a preference contrary to §§ 60a and 60b of the bankrupt $527 394 manner. act of July 1, 1898, as "a portion of its chat- I questions presented by the pleadings, it is tel mortgage interest in said logs, the sum urged, were, did the bankrupt give the bank of $1,335.62 as the proceeds of the sale of a preference, and did the bank accept it intended? the portion of said logs known as the 'up- with reasonable grounds to believe that a The supreme river logs,' on which logs said defendant preference was never held any chattel mortgage, and which court, however, considered the pleadings to logs were never transferred to said defend- have broader meaning, and answered some of the contentions of the bank by the conant." (4) In determining that the bank was liable for the value and moneys it received struction it gave to the bankrupt act. The as a preference, although the trustee had case, therefore, comes within the ruling in not elected to avoid such preference by Nutt v. Knut, 200 U. S. 12, 50 L. ed. 348, It was there said: bringing suit to recover the same, and had 26 Sup. Ct. Rep. 216. not elected to avoid such preference in any "A party who insists that a judgment can(5) And in holding that, in de- not be rendered against him consistently termining a question of preference, it was with the statutes of the United States may immaterial, under the bankrupt act, whether be fairly held, within the meaning of § 709 the bank and the other creditors were of (U. S. Comp. Stat. 1901 p. 575), to assert a right and immunity under such statutes, the same class, and in refusing to reverse the judgment because of the error of the although the statutes may not give the circuit court in charging the jury that all party himself a personal or affirmative right of the creditors were of the same class. (6) that could be enforced by direct suit against In its construction of the bankrupt act in his adversary." See also Rector v. City Dethe following particulars: (a) In holding posit Bank Co. 200 U. S. 405, 50 L. ed. 527, that a transfer made within four months of 26 Sup. Ct. Rep. 289. the bankruptcy proceedings, which enabled a creditor to obtain any portion of his debt, (b) That, alconstituted a preference. though the effect of the transfer in question did not operate to give the bank a greater percentage of its debts than other creditors of the same class, such transfer constituted a preference. (c) In determining, by such rules of construction of the bankrupt act, that the evidence was sufficient to establish that the bank had reasonable cause to be(7) lieve that a preference was intended. (8) (9) In holding that the bank was liable Messrs. James Wickham, Burr W. Jones, Mr. Justice McKenna, after stating the case as above, delivered the opinion of the court: the A motion is made to dismiss on ground that the record presents nothing but questions of fact. It is contended that neither in the pleadings of the bank nor in any way was any right, privilege, or immunity under a Federal statute specifically set up or claimed in the state courts. The only On the merits of the case we start with the facts established against the bank, that the property of Young, at the time he executed the chattel mortgages and when he executed the deed to the lumber company, at a fair valuation, was insufficient to pay his debts, and that, by the execution of those instruments, and the transfer of his property effected thereby, he intended to give the bank a preference over his other creditors, and that the bank had reasonable cause to believe that he intended thereby to give it a preference, and to enable it to obtain a greater percentage of its debt than any other creditor of Young of the came class. These, then, are the prominent facts, and seemingly justified the judgment. Against this result what does the bank urge? It urges, first, that there is included in the judgment the sum of $1,335.62, the net proceeds of the sale of certain logs, called the "up-river-logs," which, it is con-c tended, were not covered by either of the mortgages, and that the supreme court, in its opinion, apparently supposed that those logs were covered by the mortgages, and erred in giving judgment therefor. This is a misunderstanding of the opinion. While the court did not explicitly distinguish between the mortgages and the deed to the lumber company, we think it is clear that the court regarded the deed, and what was to be done under it, as the consummation of the "legal wrong," to use the language of the court, which went back to the time of the mortgages. In other words, that the upriver logs as well as the other property were conveyed to the lumber company for the purpose of giving a preference to the bank. The bank also attempts to urge against *532 *531 *534 this conclusion the different views expressed | der 57g depend upon the action of the by the trial court and the supreme court trustee. Counsel say: upon the finding of the jury as to the rela a preference, and it also contemplates that the creditor receiving such alleged preference must exercise an election as to what course he shall take. Until the trustee exercises his election, no cause of action accrues. The creditor is not called upon to elect what course he shall take until the trustee has acted. It therefore follows that the trustee should exercise his election and make his demand before commencing suit." And this, it is argued, is more than a "The bankrupt act, therefore, contemtion which the lumber company stood to the plates that the trustee shall exercise his bank. The jury found, in answer to ques-election as to whether or not he shall avoid tions 4 and 5, that the lumber company, acting for the bank, took the legal title for the benefit of the latter under an agreement with Young and the bank to account to it for a portion of the proceeds. The trial court said that this was not a finding "that the lumber company was the agent of the bank." The supreme court thought that the jury "pretty clearly decided" that the bank was a principal and the lumber company "a mere agent" in the matter. It is true the supreme court immediately added: "How-mere question of state practice, and inever, the evidence seems to clearly establish volves the question whether the property that the lumber company purchased the consisting of the alleged preference is any property from Young in the regular course part of the trust estate. If it be intended of business, without any understanding with by this to assert that the action of the the defendant, other than that its interest creditor under 57g is to wait upon or dein the property as mortgagee and claimant pends upon the action of the trustee under under numerous statutory labor liens should § 60, we do not assent, and nothing can be be recognized, and the equivalent thereof in deduced, therefore, from the supposed relamoney delivered to it out of the proceeds." tion of those sections as to the necessity of [125 Wis. 478, 104 N. W. 102.] And this a demand before suit. We do not see how was deemed sufficient to accomplish the such a demand can even be an element in preference which Young intended to give the the consideration of the creditor, whether he bank. The court passed over, as not impor-will surrender the preference and prove his tant, the distinction between the notes debt. The right of surrender exists as well given by the lumber company to Young as after suit as before suit. Keppel v. Tiffin the purchase price of the lumber. Sav. Bank, 197 U. S. 356, 49 L. ed. 790, 25 Sup. Ct. Rep. 443. * These minor matters out of the way, we come to the more important contentions of the bank. These contentions are expressed in the form of questions, the first of which is: "Can a trustee in bankruptcy, under the provisions of the bankruptcy act, law fully maintain a suit to recover the value of a voidable preference without first electing to avoid such preference by notice to the creditor receiving such preference, and by demand for its return?" Independently of such considerations, whether the election by a trustee to avoid a preference should be exercised by a demand before suit or can be exercised by the suit itself might be difficult to determine if it were necessary on the record. 1 Chitty, Pl. 176, and cases cited; Shuman v. Fleckenstein, 4 Sawy. 174, Fed. Cas. No. 12,826; Brooke v. McCraken Fed. Cas. No. 1,932; Wright v. Skinner, 136 Fed. 694; Goldberg It is urged by the bank that it cannot, and v. Harlan, 33 Ind. App. 465, 67 N. E. 707. to sustain this contention, that a preference But we do not think it is open to the bank is not void, but voidable. And voidable sole- to urge the first. The bank, it is true, dely at the election of the trustee, who must murred to the complaint and urged as a indicate a purpose to do so. The argument ground of demurrer the absence of an alleis that, a preference being voidable, the cred-gation of a demand. But the bank did not itor receiving it is not in default until he stand on the demurrer. It answered, and fail to or refuse to surrender it on demand. not only traversed the allegations of the Prior to that time his possession is rightful | plaintiff, but set up an independent defense, and lawful, and he is not guilty of any and showed that a demand would have been wrong, tort, or conversion. And the de- unavailing, and a demand is not necessary mand, it is further urged, must be made where it is to be presumed that it would before suit, for, it seems also to be con- have been unavailing. Davenport v. Ladd, 38 tended, that the creditor must be given an Minn. 545, 38 N. W. 622; Bogle v. Gordon, opportunity to exercise the election given 39 Kan. 31, 17 Pac. 857. Besides, it appears him by subdivision g of § 57 of the bankrupt that a demand was made before suit. In act to surrender the preference and prove his determining from what date interest should claim. We say, "seems to be contended," be- be given the trial court said: "There is cause we are not clear that counsel for the evidence of a demand, but I think only a bank claims that the rights of a creditor un- | short time elapsed until action was com *536 396 27 SUPREME COURT REPORTER. menced, so that it will make little difference | obtain a greater percentage of its debt than all were, they were represented by the trus- other creditors of the same class. The bank, in its brief in this court, says, "certain other claims were filed and allowed in the The trial court instructed the jury sub- bankruptcy proceedings as preferred claims. stantially, in the words of subdivision a of These were probably claims for wages after the time of the transfers in question." In § 60 of the bankrupt act, as to when a debtor should be deemed to have given a the list of claims referred to some only are preference, and, in explanation of the in-marked preferred. But, granting that they tention of the debtor, said to "intend to prefer would be to make a transfer for the purpose of enabling the bank to obtain a greater percentage of its debt than any other debtors of the same class." And, defining this class of creditors, said further: "So far as creditors' rights are involved in this action, they are all of the same class, by which is meant they would receive the same percentage of their claims. Claims for taxes or wages within certain times, so as to be preferred, would be of a different class. But claims of general creditors, like those approved in the Young bankruptcy proceedings, are all of the same class." The bank excepted, and assigned as error the charge that all of the creditors were of the same class. Disposing of the assignment the supreme court said: "Whether that is right or wrong does not seem to in any way concern the case. This action, as we have indictated, is simply one in trover to recover the value of property which, as is alleged, was, in fraud of the bankrupt act, wrongfully converted by defendant to its own one or more Whether there was classes of creditors, and in what manner the property sought to be recovered would, if the suit were successful, be administered, did not vary in the slightest degree the legal rights of the plaintiff. If the property was obtained by the defendant in fraud of the bankrupt act, plaintiff was entitled to recover the same, and this is the only question involved." use. But The other questions propounded by the bank are based on the sixth assignment of We will not examine the arguments error. of counsel for the bank in detail. Their fundamental contention is that the transfers to the bank were not invalid as a preference if their enforcement would not operate to give the bank a greater percentage of its debt than other creditors of the same class would receive. And such, it is further contended, was not the result, and it is intimated that claims of possible and fictitious creditors were in effect considered. But this contention encounters the facts found by the jury and the trial court. We have already seen what, in the opinion of the trial court, the evidence established as to the effect of the transfers, and the jury found that Young was insolvent at the time they were made, and that the purpose of their execution was to give the bank a preference and to enable it to obtain a greater percentage of its debt than other creditors of Young of the same class. These findings were not disturbed by the supreme court, and we must accept them as stating the facts established by the evidence, although counsel seem to invoke an examination by us of the record against them. Taking them as true, they show a case of preference and grounds to set it aside. The bank also contends, in effect, that in such suit the validity of all other claims against the bankrupt can be litigated, and whether they have received voidable preferences and have not been required to surrender them. The broad effect of the contention repels it as unsound. To yield to it would transfer the Judgment affirmed. The bank contests this view, and contends that, if accepted, "it would be impossible to ascertain whether or not the preference had been received without first determining the question of whether the enforcement of the transfer would enable the bank to re-administration of a bankrupt's estate from cover a greater percentage of its debt than the United States district court to the state court. other creditors of the same class." there is a question of fact to be considered. It was a question of fact what claims were proved against the estate. At the trial the learned judge who presided described them in his instructions as claims of general creditors. In his memorandum opinion he said that, from his minutes and the statements of the evidence in the briefs of counsel, he was inclined to believe that the point was not well taken that the evidence did not show that the effect of the enforcement of the transfer would be to enable the bank to V. (204 U. S. 538) JOHN C. HAMMOND, Plff. in Err. der the Will of Solon O. Richardson, deWILLIAM W. WHITTREDGE, Trustee unceased, et al. Error to state court-Federal question. in 1. A decision of a state court in a case which rights under a statute of the *537 889. |