Vogler v. Rosenthal

McSherry, C. J., delivered the opinion of the Court. On the seventeenth of July, eighteen hundred and ninety-six, the appellants filed a petition in the Court of Common Pleas praying that Louis Buckner might be adjudged an insolvent debtor. The petition contained numerous paragraphs, each averring some specific act of insolvency on the ⁴¹ part of Buckner. The tenth paragraph alleged that Buckner had, within two weeks prior to the date of the filing of the petition against him, made a fraudulent transfer of personal property to one Hyman Rosenthal; and in the eleventh paragraph it was charged that on the twenty-ninth of June he had made a similar transfer of other personal property to a certain J. Goldman, with intent, in each instance, to hinder, defraud and delay his creditors, and with a design to conceal the said property and to prevent the same from being taken under legal process.

Buckner answered the petition and denied its material allegations, and then prayed that the issues arising on the petition and answer might be tried by a jury. Both Rosenthal and Goldman came into the case and filed answers in which they respectively controverted the averments of the tenth and eleventh paragraphs of the petition. Eighteen issues were thereupon propounded by the petitioning creditors to be passed on by a jury. Subsequently these issues came on to be tried and Buckner, through his attorney, asked leave in open Court to withdraw his answer and prayer for a jury trial, to the granting of which the petitioning creditors objected because the answers of Rosenthal and Goldman would still remain in the case.

Whereupon Rosenthal and Goldman gave notice that as soon as Buckner’s answer and demand for a jury trial were withdrawn and he was adjudicated an insolvent, they would withdraw their answers if. they could do so without prejudice; and the creditors gave notice that they would object. The answer of Buckner and his demand for a jury trial being then withdrawn and there being no further defence made, he was at once adjudicated an insolvent debtor, and preliminary trustees were appointed. Thereupon both Rosenthal and Goldman, pursuant to the notice they had given, filed petitions asking leave to withdraw their respective answers without prejudice; and the Court passed two orders allowing these answers to be withdrawn without prejudice; and to the granting of these orders the creditors objected and from the orders when passed, they have taken ⁴² this appeal. The creditors, both before and after the with-. drawal of Buckner’s answer and prayer for a jury trial, and: before and after his adjudication as an insolvent debtor, claimed the right to have the issues arising out of the answers of Rosenthal and Goldman to the original petition, then and there tried by a jury; but the Judge held that the withdrawal of Buckner’s answer and prayer for a jury trial and his adjudication as an insolvent, coupled with the announcement that Rosenthal and Goldman would retire, left nothing before the Court to try.

Had Rosenthal and Goldman the right to withdraw their answers? This is the sole question in the case. Rosenthal and Goldman were not made parties to the proceeding against Buckner, and no process was asked or was issued against them; but they came in of their own accord, as they were entitled to do, for the purpose of upholding the alleged fraudulent transfers of property made to them by the insolvent. They were under no obligation to appear if they-did not wish to contest these allegations.

Had they failed to appear at all the adjudication of insolvency against Buckner would have conclusively established the invalidity of these transfers, because the unlawfulness of these transfers was one of the very grounds relied on to bring Buckner within the operation of the involuntary feature of the insolvent law. When a transfer, assignment, conveyance or other disposition of property is charged to have been fraudulently made by a person who is insolvent or in contempla- ■ tion of insolvency, with intent to hinder creditors, and the debtor is proceeded against under the provisions of the insolvent law relating to involuntary insolvency, and the transfer, assignment, conveyance or other disposition complained, of is made the basis or ground upon which the machinery-of the Insolvent Court is put in motion and its jurisdiction-is invoked, and there is no contest or denial of the aver-ments of the petition by the debtor or by the individual holding the transferred, assigned, conveyed or otherwise disposed of property; an adjudication that the debtor is an ⁴³ insolvent and that he has committed acts of insolvency by doing the things alleged against him, of necessity, fixes his status and the status of the property and conclusively establishes the fact that the transfer, or other disposition of property assailed or impeached, was fraudulently made with intent to hinder and delay his creditors. It would be an anomaly, indeed, if a debtor could be adjudged an insolvent on the ground that he had made an illegal transfer,' whilst at the same time the transfer thus made is still allowed to stand because, in fact, it is not an illegal transfer' at all. Such a contradictory position would make the assailed transfer, which is denounced only when it conflicts with the insolvent law, sufficiently unlawful to justify an-adjudication of insolvency against the debtor, though sufficiently lawful, under the same law, to protect the person to whom the transfer had been made and to withdraw the transferred property from the reach of the insolvent’s creditors.

As a result the transfer would be unlawful as respects the debtor, but lawful as respects the person to whom it was made; and thus the same act would at one and the same time be both lawful and unlawful, denounced and upheld. Singular as this result may seem, it would nevertheless be entirely possible for it to occur if the adjudication of the debtor in involuntary»proceedings does not determine that the allegations upon which the adjudication is founded are incontestably true. For the purpose of illustration assume a case: Suppose the debtor in this case had been proceeded against solely on the ground that he had transferred property to Rosenthal with intent to hinder and delay creditors and with a view to conceal it and place it beyond the reach of legal process; and without contest Buckner had-for that cause been adjudicated an insolvent. Would not that adjudication establish the truth of the averment that he did make such a transfer "with such intent?

And would it not further determine that as respects the person to- whom the transfer was made, the transfer was unlawful ⁴⁴ because of the absence of good faith on his part? If, however, it would still be necessary for the trustee subséquently appointed to go into a Court of Equity, for the purpose of having the transfer annulled, and that Court should decree that the transfer was not made with a fraudulent intent but was bona fide both as respects the debtor and the transferee, you would have two flatly contradictory decisions on the. same subject by two separate tribunals; and you would have this anomaly that Buckner had been declared an insolvent because he had done an act which the Insolvent Court adjudged unlawful but which the Equity Court decreed to be lawful; and therefore, either he was wrongly adjudged an insolvent or the decree sustaining the transfer was erroneous. If the transfer or conveyance, when made, is not a prohibited transfer, it is not a ground for an adjudication against the debtor; but if, when made, it is a ground for such an adjudication, then it is so because it is an inhibited, transfer. But whether it be or be not such a transfer must be determined before the debtor can be adjudged an insolvent.

When, therefore, a Court having the jurisdiction to decide whether the debtor has, by a given transfer or disposal of his property to another, committed an act of insolvency, does in fact determine that the debtor did by that particular specified transfer make an unlawful disposal of his property and in consequence further adjudges the debtor to be an insolvent, the transfer or disposal decided to be unlawful and made the foundation of the insolvency proceedings and the adjudication, must of necessity fall because the adjudication itself involves and is based on the invalidity of the impeached transaction. If the individual who holds what is alleged to be an unlawful transfer of the debtor’s property washes to rescue the transfer from condemnation in an involuntary insolvency proceeding, he must interpose and make defence in the Insolvent Court or he will be forever barred by the adjudication there pronounced upon that transaction; because the Court having ⁴⁵ jurisdiction to determine whether the thing alleged to be unlawful was or was not a fraudulent transfer or disposal of the debtor’s property, having once decided that it was, its adjudication being in rem, or in the nature of an adjudication in rem, binds all the world until reversed on appeal or set aside by the tribunal that pronounced it. This has been the uniform ruling of this Court when the transaction or instrument assailed in the petition in involuntary insolvency has been one that created a prohibited preference, whether the preference was one that was apparent on the face of the instrument or was disclosed by extrinsic evidence. Thus in Brown v. Smart et al., 69 Md. 320 , affirmed in 145 U. S. 457 , where a deed of trust for the benefit of creditors, reciting the grantor’s insolvency and giving preferences, wás made the basis of an involuntary insolvency proceeding, it was held that the adjudication of the grantor to be an insolvent debtor struck down the deed of trust under the 13th sec. of Art. 48 of the Code of i860 (now sec. 14 of Art. 47 of the Code of 1888 as amended by the Act of 1896, ch. 446). “ The statute,” we said, “ by force of its own terms operates upon the deed and * * * strikes it down from the moment the debtor is adjudicated an insolvent, the illegal preference being the basis of the adjudication; and in such case no defence could be interposed to rescue the deed from the fate declared for it by the statute.”.

And so in Baker et al v. Kunkel, 70 Md. 392 , the mortgage executed by the insolvent was made the basis of the proceedings against him and when he was adjudged to be within the insolvent law because he executed it, it was stricken down by the Insolvent Court. The mortgagee could have saved the mortgage from condemnation only by appearing to the insolvent proceedings and resisting the adjudication of the debtor to be an insolvent. In Willison v. First Nat. Bk. of Frostburg, 80 Md. 196 , the fraudulent preferences attacked were payments, and upon the adjudication of the debtor to be an insolvent, it was held that the payments were void and the trustee to be after- ⁴⁶ wards elected was ordered to recover the money back.

In Dumler v. Bergman, 79 Md., “unreported cases,” 29 Atl. Rep. 826 , a bill of sale was attacked as a preference. The debtor filed no answer, but the grantee in the bill of sale did. It appeared from the evidence and finding of the jury on the issues submitted to them that part of the expressed consideration was an antecedent debt, and the Court upon adjudicating the grantor to be an insolvent struck down and