SIMONSON v. SINSHEIMER et al., 95 F. 948

TAFT, Circuit Judge (after stating the facts as above). The objection to the petition that it was not properly verified was waived by a tender of the plea and answer on the merits. It is true that the plea and answer were not permitted to be filed, but they were offered and considered on their merits for the purpose of filing, and we think this is quite sufficient to hold that there was a waiver of defect in the form of the petition. The defect alleged • certainly does not affect the jurisdiction. Carriage Co. v. Stengel, 95 Fed. 637.

The second defense to the answer is that of a composition of debts of the bankrupts. The district court held this defense to be insufficient on the ground that there was no accord and satisfaction shown. To this it is replied that the composition itself is a substitute for the original debt, and in that sense is a satisfaction. We do not propose to enter upon a discussion of this not altogether clearly defined exception to the strict rule of accord and satisfaction. It is sufficient for us to say that this petition in bankruptcy is not a suit upon the original debt.

It is a proceeding to have the defendants adjudged bankrupts on the ground that they have committed

an act of bankruptcy. The'proceeding has to be instituted by three creditors with debts of a certain amount. The petitioning creditors are three in number, and have set out their debts; and the defendants seek to impeach their right'to have an adjudication of bankruptcy by saying, “We only owe you one-half as much as you say, because you have agreed to reduce your debt 50 per cent.” But 50 per cent, of the indebtedness alleged is quite sufficient to qualify the petitioners to begin the proceeding.

We think that it would be following a rule of pleading much too strict to hold that where it appears by the admission of the answer that the petitioners are proper persons to file a petition, and have an interest such as to justjfy them in so doing, the petition must be dismissed because they have in their petition stated their claims in too large a sum, and on a somewhat different cause of action.

We come now to the third and last defense, which presents the only serious question in the case; that is, whether petitioners, who, being made parties to judicial proceedings to enforce an assignment for the benefit of creditors, do not repudiate the same, hut file claims thereunder, and take

part in the administration of the assets, seeking payment for their claims out of the proceeds of the assets from sales thereof made by the assignee by virtue of his assignment, are estopped thereafter to file a pel ilion in involuntary bankruptcy against the assignors based solely on the ground of the assignment. We have considered such a defeuse in the case of Carriage Co. v.

Stengel, and refused to sustain the estoppel there claimed, because at the time (he assignment was made tiie statute .did not permit the filing of a petiiion in bankruptcy to avoid the same, and such petition was filed at the earliest moment permitted by law. Moreover, it was not charged there that the petitioners filed claims under the assignment. It is clear from the English authorities lliat such a plea of estoppel would be good against the petitioner in bankruptcy. Indeed, much less than this has been held to work an estoppel. Bamford v. Baron, 2 Term R 594, note; Jackson v. Irvin, 2 Camp. 48; Back v.

Gooch, 4 Camp. 232; Hicks v. Burfitt, Id. 235, note; Ex parte Cawkwell, 19 Ves. 233; Ex parte Alsop, 1 De Gex, F. & J. 289; Ex parte Stray, 2 Ch. App. 374; In re Hawley, 76 Law T. (N. S.) 501; Ex parte Ridgway, 4 Manson, Bankr. Cas. 41; Ex parte Tealdi, 1 Mont., D. & De G. 210; Olliver v. King, 8 De Gex, M. & G. 110; Ex parte Kilner, Buck, 104. The same principle was followed by the federal bankruptcy courts under the United States bankrupt act of 1867. Berry v. Langley, 19 Fed. Cas. 280; In re Massachusetts Brick Co., 16 Fed. Cas. 1067; In re Williams, 29 Fed. Cas. 1,327.

Cases involving a similar principle upon the question of discharge are In re Sawyer, 21 Fed. Cas. 558; Johnson v. Rogers, 13 Fed. Cas. 794; In re Schuyler, 21 Fed. Cas. 760; Judson v. Courier Co., 8 Fed. 426. Loveland, Bankr. 144. Under the present law there have been two eases involving the question, in addition to Carriage Co. v. Stengel, already cited. One (In re Curtis, 5)1 Fed. 737) arose in the Southern district of Illinois, and the other (In re Romanow, 92 Fed. 510) in the district of Massachusetts.

In re Curtis x>resented substantially the same facts as the Leidigh Carriage Co.’s Case, excejit that in the former it appeared that the petitioners had filed claims under the assignment. Judge Allen, in the district court, in an elaborate ojnnion, held that, because the act of 1898 denounced an assignment for the benefit of creditors as

an act of bankruptcy, fhe assignment was absolutely void, and could not be made valid by acquiescence or estoppel; that the proceedings in a state court under an assignment were also avoided by the act, ami nothing occurring therein could he used to defeat the jurisdiction of the federal court in bankruptcy. The circuit court of appeals of the Seventh circuit, on apjieal, affirmed the order of Judge Allen (In re Curtis, 94 Fed. 630), but did not find it necessary to discuss the question whether the assignment was utterly void.

They affirmed the order on the ground that when the assignment was made the law did not permit a petition in involuntary bankruptcy to be filed, and before it could be filed it was probable, or at least possible, that all the assets of the assignor might be distributed; and on the further ground that it did not appear that the filing of the claims had misled any person to his prejudice into reliance upon the assignment. This conclusion is in exact accord with our decision in the Leidigh Carriage Co.’s Case. Judge Lowell, in Ee Bomanow, followed Perry v.

Langley, and holds that an assignment consented to and participated in by the petitioning creditor estops him from relying upon that as a ground for seeking to have the assignor adjudged a bankrupt. ' After an examination of the foregoing cases and the statutes under which they were decided, we are unable to concur with Judge Allen in his conclusion that a petitioning creditor may not be es-topped to set up an assignment for the benefit of creditors as a ground for adjudging the assignor a bankrupt.

Could one who had induced and abetted another to convey to him property in fraud of creditors file a petition against his fraudulent grantor, basing his petition on the fraudulent conveyance? It seems to us clear that he ought not to be permitted thus to take advantage of his own wrong. To hold otherwise would enable the unscrupulous to entrap a person into involuntary bankruptcy.

This has been the view of the courts under all previous bankrupt laws, and any person conniving in the alleged act of bankruptcy, whether it be actually fraudulent or only constructively so, has always been denied relief asked on the ground of such act. Are the provisions of the present law upon this point so different from the earlier laws of this country and the English law as to justify a different holding? The present law declares the assignment for the benefit of creditors to be

an act of bankruptcy, but this is only what was uniformly held to be the effect of the act of 1867 and of the English bankrupt laws. George M. West Co. v. Lea, 19 Sup. Ct. 836; In re Gutwillig, 90 Fed. 475. Under the law of 1867, an assignment for the benefit of creditors was valid if not impeached by a petition in bankruptcy within four months after its execution. Mayer v. Hellman, 91 U. S. 496. Nothing in the law of 1898 has been called to our attention that will justify a different construction.

It is entirely true, as Judge Allen points out, that it would defeat the object of the bankruptcy law to hold that bankruptcy proceedings do not supersede and avoid the proceedings in the state court under an assignment law. But the estoppel we are considering, if recognized and enforced, does not affect or detract from the paramount character of bankruptcy proceedings, when properly begun, but only prevents the institution of such proceedings,by persons who were privy to the act of which they complain, and on which they found their prayer for an adjudication.

While, however, the same general principles of estoppel against petitioning creditors ought to apply to proceedings under the law of 1898 as under the law of 1867 and the English act, there are certain distinctions between cases arising under the acts , that should be noted, and which should have weight in applying the doctrine of es-toppel to proceedings under the present law. In England the question of estoppel arises upon common-law assignments. Such an assignment does not take effect until assented to by some of the creditors in whose behalf it is executed.

The assent may he expressed either formally or by very trivial acts in pais, hut it must affirmatively appear, lienee the slightest assent to an assignment expressed by a creditor verbally or otherwise becomes important, as essential to the taking effect of the deed at all. The creditor who assents, therefore, in effect takes

part in the execution of the deed, and is, so to speak, an accessory before the fact. This explains what seems, in reading ihe English cases, to he unnecessary and unjustifiable strictness in holding creditors to he estopped to base a bankruptcy proceeding on an assignment which they certainly did not induce, and in which they gave hut the slightest signs of acquiescence.

In this country deeds of assignment are usually given effect by filing them in some public office, or are presumed to be accepted, and thej' do not generally require an affirmative expression of assent on the part of any creditor to give them legal efficacy. Hence in this country the assent of the creditors is not so important as in England, and is chiefly material here in that it. may mislead others to their prejudice, if afterwards the assenting creditors attack the assignment, and avoid transactions enteied into on the faith of its not being so impeached.

Another distinction b<*1 ween the English cases and those arising here is in the fact that: in England one creditor may file a petition in involuntary bankruptcy. This was the case originally under the law of 1867, though it was changed by the amendment, of 1874, whicli required that a petition in involuntary bankruptcy should he joined in by creditors who were one-fourth in number of all the creditors, and had one-third in amount of all the debts.

When a man has the option himself of impeaching an assignment at any time, failure to do so, accompanied by silent acquiescence in the assignment proceedings, is much stronger evidence of his ratification of the assignment., and ought to weigh much more against him, on a question of estoppel, than under a law where he cannot: impeach the assignment except, by securing joint action with himself of enough creditors to make tiie petitioners one-fourth in number of all the creditors, and then-debts one-third in amount of the entire indebtedness.

He may very well have grave doubt of his ability to secure the necessary co-petitioners, and meantime he ought: not to lose his rights under the assignment by failing to put himself in a position where, if he cannot im-Xieach iíie assignment, lie may share its benefits.

It is not, and ought not to be, the policy of the law, or the result of any construction of the statute, to put a creditor, who is only seeking to collect as much as he can properly on a jusi debt, in a puzzling dilemma, in whicli lie may, by merely protecting himself against total loss, cut himself off from an efficient remedy which the law intended to secure him and his fellow creditors.

This was a consideration dwelt upon by Judge Choate in Re Kraft, 3 Fed. 892, as furnishing- reasonable ground for distinguishing cases of estoppel under the English acts and the act of 1867, on the one hand, and those under the amendment of 1874, on the other; and a similar’suggestion is made by Judge Jenkins, in speaking for the circuit court of appeals of the Seventh circuit, in Re Curtis, supra, in reference to the act of 1898. The argument has not so much weight under the present law, however, because only three creditors are required to sign the petition, and their claims need aggregate only $500.

A single creditor may much more easily assure himself as to the possibility of his securing the needed joint action to institute bankruptcy proceedings now, than under the amendment of 1874. The doctrine of election of remedies has been invoked in this controversy by counsel for the appellant, and is referred to by Judge Jenkins in Re Curtis, but we doubt whether it has here full application, if for no other reason, because, when a man’s selection of a remedy depends on the will of others, he cannot be said to have a complete right of election.

While the doctrine may have originally rested wholly on estoppel, it would be difficult now to explain thus all the cases of election. We think the only just ground for refusing to allow a man to complain of

an act of bankruptcy is that he induced the act, or after its commission he so acted with regard to it that he gave others the right to act on the faith of its validity so far as his subsequent conduct would affect it. On the one hand, it Avould be gross inequity to allow him to subject the debtor to judgment for

an act he induced; and, on the other, it would be equally unjust to allow him to repudiate, as invalid, a transaction, when by his conduct he had induced others to change their position on the faith of its validity. Further than this we do not think we should go, under the present act. Coming to apply our conclusions to the case at bar, we cannot doubt that the answer tendered made a case of estoppel against the petitioners.

They are alleged to have become parties to the assignment proceedings, to have filed their claims under the assignment, to have requested a reference to pass upon the claims, the accounts of the assignee, and the questions of distribution. They waited three months and a half before filing their petition. By their acquiescence they certainly induced the assignors, the assignee, and the purchasers of the assets from the assignee to believe that they would not seek to set aside the assignment.

Were the assignment to be set aside now, it would avoid every sale the assignee has made, and revest in the trustee in bankruptcy the title of the assignors. It is conceded that the distribution under the assignment would be exactly the same as under the bankruptcy proceedings. The bankruptcy proceedings will only increase the costs,, and possibly defeat the payment of the costs already earned in the state court proceedings.

Had these creditors filed their petition soon after the assignment, all the unjust results of their delay pointed out would have been avoided, for then the assignee would not have sold the assets, and the state. officers would not have rendered the services, and the creditors would not have distribution delayed by four months. As it is, we think the answer stated a good defense, and that the court erred in not allowing it to he filed.

On the filing of the answer, the petitioners will, of course, he given an opportunity, by amendment of the petition or otherwise, to show any facts which should prevent the operation of an estoppel against them. The judgment of the court is reversed, with directions to take further proceedings not inconsistent with this opinion