US SUPREME COURT DECISIONS

Referees in bankruptcy exercise much of the judicial authority of the court of bankruptcy, and may enter orders to show cause subject to revision by the district court.

Commitment until assets of a bankrupt are surrendered pursuant to order does not constitute imprisonment for debt.

The bankruptcy court has power to compel the surrender of money or other assets of the bankrupt in his possession, or that of someone for him, on petition and rule to show cause.

The filing of a petition in bankruptcy is a caveat to all the world, and in effect an attachment and injunction, and on adjudication and qualification of trustee, the bankrupt's property is placed in the custody of the bankruptcy court, and title becomes vested in the trustee.

The refusal to surrender property of the bankrupt does not, in itself, create an adverse claim at the time the petition is filed.

Edward B. Nugent was adjudicated a bankrupt March 23, 1900, on the petition of the Wayne Knitting Mills and others, his creditors, filed in the District Court of the United States for the District of Kentucky, February 19, 1900, and the matter was referred to a referee. Arthur E. Mueller was appointed trustee of the bankrupt's estate, and on the seventh of April, he obtained an order from the referee requiring the bankrupt to chanrobles.com-red

Page 184 U. S. 2

show cause why he should not pay over the sum of $14,233.45, made up of two items of $4,133.45 and $10,100. The response of the bankrupt was held insufficient; he was ordered to pay over, on failure to do so, was adjudged guilty of contempt, and the matter was reported to the court by the referee, with a recommendation that he be committed. On the suggestion that approaching senile imbecility made the bankrupt an unfit subject of punishment, the court discharged him, without prejudice to a renewal of the matter before the referee if subsequent developments rendered it proper.

April 13, 1900, the trustee filed his petition praying that an injunction might be issued against William T. Nugent, restraining him from disposing of the sum of $14,435.45, or any part thereof, belonging to the estate of the bankrupt, and for an order requiring him to pay the money to the trustee. This petition stated that William T. Nugent was in hiding. The referee granted the injunction, and entered an order that said William T. Nugent show cause within five days from service thereof why he should not be required to pay over.

A copy of this order was served on William T. Nugent, October 8, 1900, and on October 13, he appeared in person and by counsel, and filed a response to the rule. In this respondent set forth that

"neither the court or the referee in bankruptcy herein has any jurisdiction either of this respondent or the matter involved, to make any order or to require this respondent to answer thereto, because he says that said records herein show that, if respondent received said money or any part thereof, it was before the petition in bankruptcy was filed, and in that event neither the court or the referee in bankruptcy can proceed against this respondent as herein attempted by order or rule to pay, and he now hereby asks that this be taken as his response herein, and that said order be set aside and vacated. He says that at no time since the filing of the petition in bankruptcy herein has he received said $14,435.45, or any part thereof."

For further response, he said that he had been indicted in the district court for receiving said $14,435.45, after the filing of the petition, and with retaining the same, and aiding and chanrobles.com-red

Page 184 U. S. 3

abetting in the retention thereof, both after the filing and the adjudication, for the purpose of defeating the bankrupt law, and that he ought not to be required to respond, and his response would tend to incriminate him.

The matter came on for hearing October 16, it being stipulated, without prejudice to the objection to the jurisdiction, that the depositions of Edward B. Nugent and others named (not including William T. Nugent), theretofore taken in the cause, might be read. The referee summarized the evidence, as appears from his certificate, thus:

"The testimony shows, and I so find, that, on the 9th day of February, 1900, the bankrupt, Edward B. Nugent, borrowed from George L. Erbach and Frank Hohmann, executors, the sum of $4,500, and as security therefor executed a mortgage upon the house and lot of land owned by said Edward B. Nugent, in the City of Louisville; that, after paying the taxes and expenses of procuring the loan there remained from said sum so borrowed the sum of $4, 133.45; that, on said day, the said balance of $4,133.45 was delivered to said W. T. Nugent as the agent of the bankrupt, and the said amount has not been accounted for to the trustee in bankruptcy herein."

"I further certify that, on the 19th day of February, 1900, before the hour of 2 o'clock P.M., being more than three hours before the petition praying for an adjudication of said Edward B. Nugent as bankrupt was filed in the clerk's office of said court, the stock of merchandise belonging to the bankrupt was sold to one Hermann Straus for the sum of $12,000, and on said 19th day of February, 1900, and before the hour of 2 o'clock P.M., the said $12,000 was paid to said bankrupt by said Hermann Straus, in the form of a check on the German Bank of Louisville, Ky.; that said bankrupt indorsed his name across the said check and delivered the same to said W. T. Nugent, his son, as his agent; that said W. T. Nugent received the cash upon said check on that day before the hour of 2 o'clock P.M., and paid therefrom the sum of $1,900 for rental on the building where said stock was located and the expenses of making the sale, leaving the sum of $10,100, which then and there still remained in the hands of said W. T. Nugent as the agent of said bankrupt. "

Page 184 U. S. 4

"I further find that both of said balances, to-wit, $4,133.45 and $10,100, belonged to the said bankrupt, and became and still are the property of Arthur E. Mueller, trustee in bankruptcy in this cause, and that said W. T. Nugent holds the same as agent or bailee only, and that he has not accounted for any part of said sums."

The referee entered an order on the same day, October 16, 1900, omitting preliminary recitals, as follows:

"And after hearing counsel, now therefore it is ordered and adjudged that the said response to the rule aforesaid be and the same is hereby held insufficient, and it appearing from the evidence in this cause that there came to the hands of W. T. Nugent $4,133.45, being the net proceeds realized from the mortgage executed by the bankrupt upon his house and lot in the City of Louisville, and that there also came to the hands of said W. T. Nugent the further sum of $10,100, being the net proceeds from the sale of the stock of merchandise sold to Hermann Straus -- the first of said sums having come to the hands of said W. T. Nugent as the agent of the bankrupt on February 9, 1900, and the second sum, to-wit, $10,100, having come to the hands of the said W. T. Nugent as the agent of the bankrupt on February 19, 1900, before the hour of 2 o'clock P.M., on said day -- and it further appearing that the petition of the Wayne Knitting Mills and others, praying that the said Edward B. Nugent may be adjudged a bankrupt, was filed in the office of the clerk of the above-styled court on February 19, 1900 at 5 o'clock P.M., and it appearing that said W. T. Nugent has failed to pay over said sums, or any part thereof, to the trustee in bankruptcy herein, and that said sums are the property of the bankrupt, Edward B. Nugent, and belong to said trustee as part of said estate, it is ordered that said rule be and the same is hereby made absolute to the amount of said two sums aggregating the sum of $14,233.45."

"It is further ordered that said W. T. Nugent be and he is hereby required to pay to Arthur E. Mueller, trustee in bankruptcy in this cause, on or before 9.30 o'clock A.M., on October 17, 1900, the said aggregate sum of $14,233.45."

Thereupon, October 17, William T. Nugent filed his petition chanrobles.com-red

Page 184 U. S. 5

that the order of October 16 might be reviewed by the district judge, and the referee made his certificate of the proceedings and the foregoing summary of the evidence, the depositions put in before him being returned therewith, concluding:

"And the said question, to-wit, the validity of the said order of October 16, 1900, above set forth in full, is certified to the judge for his opinion thereon."

The referee also reported that William T. Nugent had failed to comply with the order in whole or in part; that he was in contempt of court, and recommended "that he be punished for contempt, and committed to prison until he shall have paid to the said trustee the said sum of $14,233.45."

The record of the district court shows that, on the first day of November the cause came on to be heard on the petition of William T. Nugent for a review of the order of court entered by the referee requiring said Nugent to pay over, and the certification of the referee, and his recommendation that said Nugent be punished for contempt, and that the court, being fully advised, delivered a written opinion, which was ordered filed, whereupon William T. Nugent moved the court to postpone the entry of judgment until November 3, and it was so ordered.

The district judge stated the facts at length; pointed out that the response was put upon two grounds; namely, that the court and referee were without jurisdiction, and that respondent had been indicted; held that as to the indictment it was not an indictment for disobedience to the order, but under § 29 of the Bankrupt Act; that exculpation could not criminate; that he could have denied receiving or concealing the money, or paid it into court, but he had done neither; that he had the money, and that it belonged to the estate; that the response really rested on the denial of jurisdiction, and that the referee had the power to order the money to be surrendered. The matter was summed upon these words:

"The respondent has the money in his hands as agent or bailee only. His possession is that of his principal. His principal was his father up to a certain stage of these proceedings, but whether up to the filing of the petition or up to the adjudication we need not stop to inquire, as it is immaterial in this

Page 184 U. S. 6

case. At one or the other of those times, his principal, by operation of law, was changed, and an officer of this Court was substituted for his father. That change in no way lessened the duty of paying the money to the proper principal upon notice and demand. After the change, however, the money was potentially in the custody of the law in these proceedings, and subject to the orders of the court. The rule and its service constituted sufficient notice and demand. The order made was that the respondent should pay the money to the proper officer. Disobedience of that order is made punishable as a contempt by the express provisions of the act."

"The court therefore has jurisdiction of the person and of the subject matter. The rulings of the referee appear to be right, and are approved and confirmed, and his recommendation as to punishing the respondent for the contempt adjudged will be acted upon with appropriate vigor. . . ."

"The judgment of the court, in the exercise of its statutory discretion, will be that the respondent, W. T. Nugent, for his contempt aforesaid, be imprisoned in the county jail until he shall deliver to Arthur E. Mueller, the trustee, said sum of $14,233.45, and the court will reserve the right to suspend or set aside this judgment and sentence upon the delivery and payment of the money as ordered."

104 F.5d 0.

On the third of November the respondent Nugent asked leave to filed an amended response, stating that he had not made full response as to the entire facts because the referee had held he could not be examined as to transactions involved in the indictment, and denying that the $14,233.45, or any part thereof, was now in his possession or under his control, or was on October 8, 1900, and saying

"that neither at the time of the filing of the petition in bankruptcy herein against E. B. Nugent, or at any time subsequent thereto, did he have in his hands any amount of money belonging to said Nugent which he held as his agent or bailee. He says that whatever money came to his hands on February 19, 1900, belonging to said E. B. Nugent, or any such money at any subsequent date thereto, was not received or held by this respondent as agent or bailee, or in any

Page 184 U. S. 7

trust capacity whatever, but was held adversely to said E. B. Nugent."

The district court would not permit the proposed amendment to be filed, and entered this order:

"Came William T. Nugent, respondent herein, and tendered an amended response, and moved to file same, and the court, not having postponed the imposing of the sentence for that purpose, and being of opinion that it is not discreet or admissible practice to permit amendments upon hearings such as this, especially after the delivery of an opinion of the court, declines at this stage of the proceedings to permit a further response to be filed."

"And thereupon, pursuant to the opinion of the court, filed herein on the 1st instant, it is the judgment of the court that William T. Nugent, for his contempt aforesaid, be imprisoned and confined in the county jail of Jefferson County, Kentucky, until he shall deliver or pay to Arthur E. Mueller, the trustee herein, said sum of $14,233.45, or otherwise satisfy the said trustee with respect thereto, and the court reserves the right and power to suspend or set aside the judgment and sentence upon the delivery, payment, or satisfaction aforesaid."

Thereafter William T. Nugent filed a petition for review under subdivision b, section 24, of the act, in the circuit court of appeals, praying

"that the orders, judgments, and sentence of the district court be reviewed and revised in the matters of law, so as to adjudge that your petitioner be released and discharged,"

or "that he be permitted to further respond in said matter."

This petition alleged error in that the district court held that the referee and the court had jurisdiction to proceed against petitioner in a summary way; that the court had jurisdiction on the proceedings and recommendations of the referee to punish petitioner for contempt; that the referee had power to grant the injunction against petitioner, or to proceed on rule to show cause; that the response was insufficient; that the facts were that the money belonged to the bankrupt's estate, and was held by petitioner as the bankrupt's agent, and was not claimed adversely; that the amended response should not chanrobles.com-red

Page 184 U. S. 8

be filed; that the petitioner was properly before the court, and that the contempt proceedings should not be dismissed and petitioner discharged.

The amended response was attached as an exhibit to this petition, although it had not been filed in the district court, or made part of the record there by certificate of exceptions or order of identification, and the petition also set up several matters and exhibits which apparently were not before the referee or the district court in the proceeding. The trustee moved to expunge these various matters and exhibits.

To expedite the hearing this motion was reserved, and it was stipulated that

"such affirmative allegations of said petition for review as properly should be denied be treated as controverted of record without prejudice to the hearing of said motion."

The circuit court of appeals, December 13, 1900, filed a memorandum opinion, and entered judgment reversing the decree of the district court, with directions to that court to vacate the order of the referee on respondent to show cause and his order adjudging respondent to be in contempt thereof, and that respondent be discharged from imprisonment. An extended opinion was subsequently filed. 105 F.5d 1.

The writ of certiorari was then granted by this Court. 180 U.S. 640.