Smith v. Brinkerhoff et al.

Smith v. Brinkerhoff et al. Set-off against assignee in bankruptcy. In a suit by an assignee in bankruptcy, the defendant cannot set off a claim against the bankrupt, purchased after the commencement of the proceedings in bankruptcy. Under the bankrupt act of. 1841, the filing of a petition in bankruptcy, by one of several copartners, in behalf of himself, and of the firm, will prevent the pinchase of a firm obligation by a firm debtor, to' be used as a set-off, against the assignee. Smith v. Brinkerhoff, S Barb. 519, affirmed. Appeal from the general term of the Supreme Court, in the first district, where a motion to set aside the report of a referee had been denied, and judgment perfected thereon in favor of the plaintiff. (Reported below, 8 Barb. 519.) This was an action of assumpsit, brought by the plaintiff, as assignee in bankruptcy of the firm of Preston & Pomeroy, to recover a balance of account alleged to be due from the defendants to the bankrupts. The defendants claimed -to set off the amount of a promissory note, made by the bankrupts, on the 16th June 1842, for the sum of $459.44, at six months, payable to the Oakdale Manufacturing Company, and indorsed by them, which had been purchased by the defendants, when over due ; and their right to use this note as a set-off was the only question in the cause. Preston & Pomeroy, merchants, in the state of Connecticut, became insolvent in December 1842. On the 23d January 1843, Pomeroy, individually, and as a member of the firm, presented a petition in bankruptcy, to the district court of the United States, for the district of Connecticut; an order of publication was made, pur suant to the statute, on the same day; and *was .. ^ published as early as the 10th February. On the 2d March, the petitioner was declared a bankrupt, and the plaintiff was appointed his assignee. On the 27th February, Preston, the other member of the firm, presented a similar petition; and on the 9th August, was declared a bankrupt, and the plaintiff appointed his assignee. Both the bankrupts subsequently obtained a discharge. On the 13th February 1843, the defendants commenced negotiations with the holder of the note in question, for the purchase thereof; the purchase was completed on the 17th; they obtained possession of it, on the 23d; and between that day and the 30th March, paid the consideration. Prior to the purchase of the note, the defendants were informed of the insolvency of the makers, but had no actual notice of the proceedings in bankruptcy. The referee before whom the cause was tried, disallowed the note as a set-off, to which the defendants excepted. He reported a balance due by the defendants to the plaintiff of $487.54, for which judgment was entered; and the court, at general term, having denied a motion to set aside the report of the referee, the defendants took this appeal. Sandford, for the appellants. Hill, for the respondent. [MAJORITY — Gardiner, J. *Edmonds, J.] Gardiner, J. — The first section of the bankrupt law (5 Statutes at Large 440), provides, that the persons therein mentioned, who shall, by petition, setting forth, <fec., apply to the proper court, and therein declare that they are unable to meet their debts, shall be deemed bankrupts, within the act, and may be so declared by decree, &c.; by this section, the presentation of the petition is an act of bankruptcy. By the seventh section, upon every such petition, notice is to be published in manner therein stated, that all persons interested may appear, &c. * qrv7 i *In this case, the petition of Pomeroy was pre- ^ sented and filed on the 23d of January 1843; the order of. publication of notice was made on the same day, and published as early as the 10th of February following. The note which is now attempted to be set off by the defendants, was not purchased, conditionally, until the 13th of February; and the conditional agreement then made, was not ratified ■ until the 17th of that month; the cash part of the consideration was not paid until the 24th, and the note of the manufacturing company was not sent to the holder of the note against the bankrupts, until the 3d of March, the day following the one upon which Pomeroy was declared a bankrupt by the decree of the district court. In Shawhan v. Wherritt (7 How. 643), it was held, that the proceedings were in reto, or in the nature of proceedings in rem, to which all the creditors were parties.; that “the public notice required by the act having been given, the creditors must be treated as having notice of the proceedings.” Here, the negotiation with Cone, the holder of the note, did not commence, until after the first publication of the notice; he must be deemed to have had notice, according to the above decision; and the defendants, on the instant of their purchase, became creditors, and, of course, affected with constructive notice of all the proceedings. They cannot be deemed bond fide purchasers for value, without notice, and must, I think, be considered as having succeeded to the rights of Coiie, as a creditor of the bankrupt, and to have acquired no other or different equities. It was also held in the case cited, that any payment or security, although not made by the bankrupt, but acquired through legal proceedings in the state courts, after notice of the act of bankruptcy, was a fraud upon the statute. To allow the set-off in this case, would be to permit a payment to be received, and preference thereby obtained, by these defendants, to the prejudice- of other creditors, who are entitled to a pro rata dividend of the bankrupt’s estate. The judgment of the supreme court should be affirmed.. *Edmonds, J. — It. is unnecessary for us to follow the counsel on the argument in their ex- *- tended examination of the doctrine of relation under the bankrupt law, for there is another rule, founded both upon principle and authority, which is decisive of this case. It is well stated by Kent, O. J., in Ogden v. Cowley (2 Johns. 278): “ It would be unjust, if one person, who happened to be indebted to another, at the time of his bankruptcy, was permitted, by any intrigue between himself and another person, so to change his own situation as to diminish or totally destroy the debt due to the bankrupt, by an act ex post facto ; such an act would be a fraud on the equality of the bankrupt act.” See also, Dickson v. Evans (6 T. R. 57), Bull. N. P. 180. where it is said, the assignee ought not to be in a better condition than the assignor, who would only have come in as a creditor under the commission. It is the same principle, on which, it "H® been bold; that the debtor of intestate cannot se! - -f1’ m, debt d from the intestate, ¡n n,.based by the cttJvi>h, :ai;~ar the death of the j nteiate. (Root v. Teyler, J- Johns. 137.) In that case, Ogden v. Cowley and Dickson v. Evans (supra) were cited and commented upon, as settling the question, not so much on the ground of the enactments in the bankrupt law, as on those of the statute of set-off ; and the case in 6 T. It. was regarded as applicable to the English statute of set-off, and consequently to our statute. I conclude, by adopting its language, that this is not a case within the statute; that the bankrupt and the defendants never were indebted to each other, and had not demands arising on contracts or credits against each other, and that it would be unjust, and against the whole policy of the statute, to allow a set-off acquired against the estate of á bankrupt, after his petition in bankruptcy. See also Wells v. Stewart (3 Barb. 40), where the principle is recognised. Judgment affirmed.