WESTALL et al. v. AVERY, 171 F. 626

DAYTON, District Judge (after.stating the facts as above).

In view of the anomalous proceedings had in this cause, whereby an action at law was started in the Circuit Court, by consent, considered and determined in the District Court, first submitted to a jury, then by consent withdrawn, by like consent referred to an arbitrator, and finally adjudicated by a decree in equity, whereby so much doubt has arisen that it has been brought here and docketed under a combined writ of error and appeal, it would seem both pertinent and necessary to state that it is well settled that bankruptcy proceedings themselves are purely equitable in their character, and, within the limits prescribed by the bankruptcy acts and the special rules of practice prescribed by the Supreme Court, are to be administered in accord with the general principles and practices of equity; but, independent of this, it is also well settled that a proceeding instituted by a bankrupt’s trustee to set aside fraudulent conveyances or illegal preferences is not a proceeding in bankruptcy, but, while ancillary to such proceeding and authorized by the bankrupt act to be instituted in either the federal District Court or in a state court of competent jurisdiction, it must be governed, so far as pleading and practice is concerned, by the laws and rules of the court wherein it is instituted.

Loveland, Bkcy. (3d Ed.), 618; Pond v. N. Y. Nat. Ex. Bank (D. C.) 124 Fed. 992. And, further, it is to be borne in mind that the equity practice of the federal courts is independent of, and unaffected by, state laws as to procedure in state courts. Payne v. Hook, 7 Wall. 430, 19 L. Ed. 261; Scott v. Neely, 140 U. S. 106, 11 Sup. Ct. 712, 35 L. Ed. 358.

In federal courts the rules of the High Court of Chancery in England are recognized as “the common law of chancery” and an authoritative exposition of the principles, rules, and usages belonging to courts of equity, except so far as they may be modified by federal statute and by rules promulgated by the Supreme Court. Penn’a v. Wheeling, etc., Bridge Co., 13 How. 563, 14 L. Ed. 249.

Finally, it is to be observed that federal courts, both when exercising general jurisdiction and also when exercising the special one conferred by the bankruptcy act in this particular, require suits to set aside deeds and contracts as fraudulent to be instituted in equity. Wall v. Cox, 101 Fed. 403, 41 C. C. A. 408; Horner-Gaylord Co. v. Miller & Bennett (D. C.) 147 Fed. 295; Pond v. N. Y. Ex. Bank (D. C.) 124 Fed. 992; Rogers v. Palmer, 102 U. S. 263, 26 L. Ed. 164; Grant v. Bank, 97 U. S. 80, 24 L. Ed. 971; Stucky v. Masonic Bank, 108 U. S. 74, 2 Sup. Ct. 219, 27 L.

Ed. 640.; It therefore follows that, while this proceeding might have, under the Code practice of North Carolina, been instituted as a law action in its own courts, having been instituted in the federal courts there, it necessarily had to be instituted in equity, and the “complaint” could only be considered and maintained as a bill in equity. The effort therefore to try by jury the matters involved was unwarranted, and this application to this court must be regarded as an appeal, and not a writ of error.

Regarding it as such, the question for us to determine is whether or not the court below was justified in entering the decree complained of, modifying the findings of fact and the conclusion of law ascertained by Burwell, to whom the matter had been referred by consent of parties. We are constrained to hold that such decree was not am thorized for two reasons: First, because, under all the circumstances and anomalous proceedings had, it would seem clear that the parties by consent constituted Burwell in practical effect an arbitrator to settle and determine the matters in controversy.

It is to be remembered that after at least four days of taking testimony before the jury upon the theory that the proceeding was one at law, and after the court had directed a verdict as to the two essential issues favorable to defendants Westall and Abernathy, the parties in open court agreed that: “Said case and all other issues arising upon the pleadings be, and the same are no-w hereby referred to A.

Burwell, Esq., who will take and state the evidence and his conclusions of law and fact thereon to the next term of this court for further action of the court.” It will be perceived that this reference was not to Burwell as either a referee or master of the court, nor did the order constitute him a special master pro ha^c vice. The whole case was referred to him as a private individual and gave him power to “conclude” as to both the law and the facts involved. He was to report his conclusion to the court, it is true, “for further action of the court.” What further action by the court was contemplated?

Was it any other or further than that usual in cases of arbitration where the award is provided to he entered up as the judgment of the court unless it should be properly assailed and set aside for fraud, misconduct, or other well-settled legal reasons? We think not. On the contrary, it was, at least, fully within the scope of the ruling in Kimberly v. Arms, 129 U. S. 512, 9 Sup. Ct. 355, 32 L.

Ed. 764, where, by consent, a special master was constituted to “hear the evidence and decide all issues between the parties and make his report to this court, * * * which report shall be subject to like exceptions as other reports of masters.” In that case, notwithstanding the last provision subjecting the special master’s report “to exceptions' as other reports of masters,” it was held: It is not within the general province of a master to pass upon all the issues in an equity case, and the court cannot refer to him the entire decision of a case without the consent of the parties; but when the parties consent to a reference of a case to a master to hear and decide all the issues therein, and such reference is entered as a rule of the court, his findings cannot be disregarded at the mere discretion of the court, but . are to be taken as presumptively correct — subject, however, to be reviewed under the reservation contained in the order of the court for manifest error.

But suppose, as in this case, no reservation to review is contained in the order. Does not such unqualified reference, by consent of parties/to a private individual, constitute him an arbiter? We think so. But, second, if there be any- doubt as to this, we are satisfied that the independent additional findings of fact bjr the court below were not warranted by the evidence, and, in view of the finding as to issues “Nos. 1 and 4” practically by the court itself, were wholly immaterial and did not justify the decree against Westall for the two items set forth in the decree.

By finding No. 1 the deed of trust- was held not to be fraudulent. By finding No. 4, the other material contract assailed by the “complaint” was held to have been made orally on the same day as the deed of trust and to have been subsequently reduced to writing on July 4th following. The deed of trust and the contract were therefore found to have been consummated more than four months before the bankruptcy proceeding. The “lumber on the yard at Hildebrand, N.

C., not embraced in the deed of trust,” for which the court below found Westall responsible to Townsend’s trustee in bankruptcy, was clearly there, in its manufactured state, by reason of this last contract so upheld by the court.

By reason of its terms and conditions, the timber from which this lumber was manufactured had been purchased with Westall’s money furnished to Townsend for the purpose, and it was always to be in Westall’s name, “in whom the title thereto shall always be and remain.” This contract simply constituted Townsend a purchasing agent for Westall of timber which Westall permitted him to saw and manufacture into lumber at agreed prices and ship to him (Westall) in this manufactured state. The original timber and the lumber manufactured therefrom was at all times Westall’s.

By advancements made, Westall had more than provided for Townsend’s compensation for sawing and shipping it. Townsend’s trustee in bankruptcy under this valid contract not impeachable for fraud, could take no better title or have any better right than the bankrupt had. What matter it then what efforts Westall made to get possession of his own property, and what misconduct on the part of Townsend could effect his right thereto in the interest of his trustee?

As to the Cook notes, the value of which constitutes the second item charged by the court against Westall, it is clear that property in these notes was acquired by Townsend through the unauthorized application thereto of WestalFs money, by reason whereof they were assigned without fraud by Townsend to Westall. In view of these facts, we are fully convinced that the court below erred in modifying the finding or award of Burwell, but that the conclusion of the latter that “the plaintiff trustee is not entitled to recover of the defendant, W. H.

Westall, anything in this action,” was entirely justified in law and by the evidence. The decree of the court below must therefore be reversed, and the cause remanded, with instructions to dismiss the bill, with decree for all costs incurred in this court and the court below in favor of Westall and Abernathy, trustee, against the plaintiff, A. C. Avery, Jr., trustee of the bankrupts, but payable only out of the assets of said bankrupts in his hands as such trustee to be administered. Reversed.