U.S. Supreme Court
Beaston v. Farmers' Bank of Delaware, 37 U.S. 12 Pet. 102 102 (1838)
Beaston v. Farmers' Bank of Delaware
37 U.S. (12 Pet.) 102
Priority of the United States. From the language employed in the fifth section of the Act of Congress of March 3, 1797, giving a priority to debts due to the United States, and the construction given to it by the Supreme Court, these rules are clearly established:
First, that no lien is created by the statute.
Second, the priority established can never attach while the debtor continues the owner, and in the possession of the property, although he may be unable to pay all his debts.
Thirdly, no evidence can be received of the insolvency of the debtor until he has been divested of his property in one of the modes stated in the section.
Fourthly, whenever the debtor is thus divested of his property, the person who becomes invested with the title is thereby made a trustee for the United States and is bound to pay the debt first out of the proceeds of the debtor's property.
All debtors to the United States, whatever their character and by whatever mode bound, may be fairly included within the language used in the fifth section of the act of Congress. And it is manifest that Congress intended to give priority of payment to the United States over all other creditors in the cases stated therein. It therefore lies upon those who claim exemption from the operation of the statute to show that they are not within its provisions.
Corporations are to be deemed and considered persons within the provisions of the fifth section of the Act of Congress of 1797, and the priority of the United States exists as to debts due by them to the United States.
An attachment at the suit of the Farmers' Bank of Delaware was issued against the effects of the Elkton Bank on 24 September, 1830, and under it were attached the funds of the Elkton Bank in the hands of one of its debtors. On 8 July, 1831, an attachment was issued at the suit of the United States, the United States being creditors of the Elkton Bank, and it was laid on the same funds which had been previously attached at the suit of the Farmers'
Bank of Delaware. The money thus attached by the Farmers' Bank of Delaware in the hands of a debtor to the Elkton Bank by legal process before the issuing of the attachment in behalf of the United States was bound for the debt for which it was first legally attached by a writ, which is in the nature of an execution, and the right of a private creditor thus acquired, could not be defeated by the process subsequently issued at the suit of the United States. If the district court of the United States has a right to appoint receivers of the property of an insolvent bank which is indebted to the United States for the purpose of having the property of the bank collected and paid over to satisfy the debt due to the United States by the bank, this would not be a transfer and possession of the property of the bank within the meaning of the act of Congress, and the right of the United States to a priority of payment would not have attached to the funds of the bank.
The Legislature of Maryland passed an act authorizing the stockholders of the Elkton Bank to elect trustees, who were to take possession of the funds and property of the bank for the purposes of discharging the debts of the bank and distributing the residue of the funds which might be collected by them among the stockholders. This, had the law been carried into effect, was not such an assignment of all the property of the bank as would entitle the United States to a priority of payment out of the funds of the bank.
No one can be divested of his property by any mode of conveyance, statutory or otherwise, unless at the same time and by the same conveyance the grantee becomes invested with the title. The moment the transfer of property takes place, the person taking it, whether by voluntary assignment or by operation of law, becomes, under the statute, bound to the United States for the faithful performance of the trust.
The cases of United States v. State Bank of North Carolina, 6 Pet. 29; United States v. Amedy, 11 Wheat. 392; 6 Cond. 362; United States v. Fisher, 2 Cranch 358; 1 Cond. 421; United States v. Hooe, 3 Cranch 73; 2 Cond. 458; Price v. Bartlett, 8 Cranch 431; Conrad v. chanrobles.com-red
This suit was commenced in the Cecil County Court of the State of Maryland in September, 1830, by an attachment issued at the instance of the Farmers' Bank of Delaware against the Elkton Bank of Maryland. To this writ the sheriff in October, 1830, returned that he had goods and chattels, rights and credits of the defendants, the Elkton Bank of Maryland, in the hands of George Beaston to the amount of five hundred dollars to the use of the plaintiffs in the attachment.
In April, 1834, the counsel for the plaintiffs and for Mr. George Beaston agreed on the following statement of facts:
"It is agreed that in 1828 the United States instituted suit against the Elkton Bank in the circuit court of the United States; at the December session, 1829, a verdict and judgment were rendered in said suit in favor of the United States for twenty-one thousand two hundred dollars, on which judgment a fi. fa. was issued to April term, 1830, and returned nulla bona, but it is admitted that at that time, the said president and directors of the Elkton Bank had a large landed estate, which has since been sold and applied to satisfy in part the said judgment, which landed estate, together with all other effects or property belonging to the bank, would not enable the bank to pay its debts, and that the said property and effects are insufficient to pay the said debt due to the United States, and it is admitted that the bank was then unable to pay its debts. An appeal to the Supreme Court of the United States was prosecuted, but no appeal bond given, and the judgment was affirmed in the Supreme Court
at the January term, 1832. At the April term, 1830, of the circuit court, a bill in equity was filed against the said bank at the suit of the United States, and Nathaniel Williams and John Glenn were appointed, by an order of court, receivers, with authority to take possession of the property of the said bank, to dispose of the same, and to collect and debts due to it."
"The proceedings by the United States against the Elkton Bank, and the acts of the receivers, Mr. Williams and Mr. Glenn, were made a part of the agreement as to the facts of the case."
"At December session, 1829, application was made to the Legislature of Maryland by the several persons who were the acting presidents and the acting directors of the said bank for the act which was passed at that session, ch. 170, which, with all other acts relating to said bank, are to be considered as part of this statement."
"The act of the Legislature of Maryland authorized the appointment of trustees by the stockholders of the Elkton Bank on certain notice of the meeting of the stockholders being given, who were to take possession of the whole of the property of the Elkton Bank and to proceed to the adjustment of its concerns. A meeting of the stockholders was convened on 17 May, 1830, which was the third Monday of said month, but without the publication of the notice mentioned and required in the act incorporating the bank and its supplements, and at the said meeting a majority of the stockholders appointed two trustees, in conformity to the provisions of said act, who declined accepting, and no trustees have ever been since appointed, nor has there since been an annual or other meeting of the stockholders or an election of directors, nor have there been any banking operations carried on by any persons professing to be the corporation of the Elkton Bank since March, 1829. At September term, 1828, the Elkton Bank obtained a judgment against George Beaston for the sum which is attached in this suit, which, at the time of the issuing and service of this attachment, had not been paid by Beaston. At April term, 1830, the Farmers' Bank of Delaware obtained, in Cecil County Court, a judgment against the resident and directors of the Elkton Bank for five thousand dollars, with interest 9 December, 1825, till paid, and costs, and before the appointment and bonding of the receivers as aforesaid, and on 24 September, 1830, upon that judgment, issued this attachment, and attached in the hands of said Beaston the sum of five hundred dollars, and after this attachment was issued and served, and after
the affirmation of the judgment of the circuit court by the Supreme Court, an attachment was issued by the United States, and the other proceedings had, as appeared by the records of the circuit and Supreme Courts of the United States, which were made part of the case. Beaston has actually paid, and satisfied the United States, the amount for which judgment of condemnation was rendered against him in the circuit court. It is admitted that up to the time of the decision in the Supreme Court, the said receivers never had collected or received, or by any process of law attempted to collect or receive the said debt attached in this case. The question for the opinion of the Court is whether the plaintiff can sustain the present attachment."
"By the record of the proceedings in the Circuit Court of the United States for the District of Maryland, it appeared that upon the judgment obtained in December, 1829, against the Elkton Bank of Maryland, the United States, on 2 July, 1831, issued an attachment against the effects of the Elkton Bank, which attachment was laid on the effects of the bank, in the hands of George Beaston, on 19 October, 1831."
"The answers to the interrogatories filed on behalf of the United States by George Beaston stated"
" That prior to the time of laying the attachment in this cause, he was indebted to the Elkton Bank of Maryland in the sum of five hundred dollars or thereabout, with interest from sometime in 1828 (the period not now exactly recollected); that in October in the year 1830, an attachment at the suit of the Farmers' Bank of Delaware against this deponent, as garnishee of the Elkton Bank of Maryland aforesaid, was served on him, returnable to Cecil County Court, where the said attachment last mentioned is still depending; that at the time of the service of the attachment in this cause at the suit of the United States, the said sum of five hundred dollars and interest was in the hands of deponent, and still remain so, who claims to retain the same, as he is held liable to the payment of the attachment first served on him, at the suit of the Farmers' Bank of Delaware aforesaid, and as he considers himself entitled to a setoff as is hereinafter stated. Deponent further says that he does not exactly recollect the time when said debt was contracted, as he has had various negotiations with said bank, but that at the time he received money from said bank as a consideration for his debt, it was received in the notes of the said Elkton Bank, which were then, as he believes, in a state of depreciation of from ten to twenty percent on their nominal value. "
" That since the service of the summons in this cause, he has not paid to the Elkton Bank aforesaid or to any other person for the use of said corporation any part of the money aforesaid, nor has he made any transfer of goods, property, or effects to secure the payment thereof or any part thereof; that he is the bona fide holder and owner of notes of the Elkton Bank aforesaid, of the value nominally of eight hundred and forty-two dollars and thirty-one cents, and he claims to setoff against any demand made in this, or any other proceeding against him, for the debt aforesaid so many of the said notes at their nominal value as may be equal to the sum claimed from him in this attachment as garnishee of said bank."
"George Beaston also filed a plea of nulla bona, in the following words:"
" That the said United States of America, condemnation of the said sum of money in the attachment aforesaid, and return thereof specified in the hands of him, the said George Beaston, as of the goods, chattels and credits of the said president and directors of the Elkton Bank of Maryland, ought not to have, because he saith that the said George Beaston, at the time of laying the said attachment in the hands of him, the said George Beaston, he had not, nor at any time since hath had, nor now hath, any of the goods, chattels, or credits of them, the said president and directors of the Elkton Bank of Maryland in his hands, and this he is ready to verify. Wherefore he prays judgment whether the said United States of America, condemnation of the said money in the attachment aforesaid, and return thereof specified, as of the goods, chattels, and credits of the said president and directors of the Elkton Bank of Maryland, in the hands of him, the said George Beaston, to have, ought, and so forth."
"The United States filed a replication to this plea, and issue being joined, the parties went to trial on the pleadings, and a verdict was found by the jury in favor of the United States for six hundred and eighty-five dollars and sixty-six cents."
On the case thus agreed on and the matter set forth and referred to in the same, the Cecil County Court gave a judgment in favor of George Beaston, and the plaintiffs appealed to the High Court of Appeals of the State of Maryland. The judgment of the Court of Cecil County was reversed by the Court of Appeals of Maryland, and the defendant prosecuted this writ of error to the Supreme Court of the United States.
The opinion of the Court of Appeals of Maryland states the reasons chanrobles.com-red
which induced that court to reverse the judgment of the Court of Cecil County. It was as follows:
"Exemption is claimed by the defendant from the operation of the attachment in this case. Having had judgment of condemnation passed against him for the amount he stood indebted to the Elkton Bank of Maryland at the suit of the United States, and having paid the money under such judgment, he rests his defense upon an alleged priority given by the acts of Congress to the government and upon certain proceedings of the government had in the Circuit Court of the United States for the District of Maryland for the recovery of his claims against the Elkton Bank of Maryland. The priority of the United States is supposed to be founded on the just construction of the laws of Congress making provision for the collection of her debts. We have been referred in the argument to the law of 1789, ch. 5, sec. 21; 1790, ch. 35, sec. 45: 1792, ch. 27, sec. 18: 1797, ch. 74, sec. 5, and the collection law to be found in the 3d vol. of the Laws of the United States, ch. 138, sec. 65. Interpretations of various decisions of the Supreme Court of the United States and of the circuit courts have been given to these acts of Congress which leave no doubt as to their construction. It will be therefore only necessary to refer to them. The two first acts above cited had reference to bonds given for duties, and the third act above referred to made provision in relation to the securities in such bonds. These acts gave a preference to the United States in all cases of insolvency or where any estate in the hands of executors or administrators shall be insufficient to pay all the debts of the deceased, and it was declared that the case of insolvency referred to should be deemed to extend to all cases in which a debtor, not having sufficient property to pay all his debts, should have made a voluntary assignment thereof for the benefit of his creditors, or in which the estate and effects of an absconding, concealed, or absent debtor, shall have been attached by process of law, or to cases in which an act of legal bankruptcy shall have been committed: and, by the two subsequent laws, the same provision was made securing the priority of the United States and applying them to all other debts due to the United States. In the year 1805, the Supreme Court was first called upon to put a construction upon these laws, and it was adjudged in 7 U. S. 3 Cranch 73 that the United States would gain no priority in case of a partial bona fide transfer of his property by the debtor, but could only obtain it by such a general divestment of property as would in fact be equivalent
to insolvency in its technical sense. In 1810, the same court decided that the term 'insolvency,' as used in the first acts, and 'bankruptcy,' as used in the latter acts, are synonymous terms. That priority must be confined to the cases of insolvency specified in the act, and that insolvency must be understood to mean a legal, known insolvency, manifested by some notorious act of the debtor pursuant to law, not a vague allegation which, in adjusting conflicting claims of the United States and individuals against debtors, it would be difficult to ascertain. 12 U. S. 8 Cranch 431. The same construction has been maintained in 15 U. S. 2 Wheat. 396 and 29 U. S. 4 Pet. 386, and in a very recent case, MR. JUSTICE THOMPSON says:"
"The act looks to a legal insolvency, where the property is taken up by the law for distribution among the creditors of the debtor. There is no difficulty in the construction of the statute until we arrive at the last phrase, 'legal bankruptcy.' What is legal bankruptcy? In 1797, when the act of Congress was passed, the United States had no bankrupt laws. The words, in their connection, seem to have reference to the previous cases put in the section, and to point out some legal insolvency or some mode of proceeding by which the property of the debtor is taken out of his hands to be distributed by others; Paine's C.C.R. 629. Such being the construction of the acts of Congress giving the government a preference, we proceed to inquire whether the Elkton Bank was in such a situation as to impart to the United States this preference."
"The above facts demonstrate the inability of the Elkton Bank to pay her debts, as admitted in the statement, they could not per se give to the United States the preference contended for. It must, in the language of the authorities, be a known and legal insolvency, the former of which is not admitted and the latter could not be predicated of such a condition."
"Does the Act of 1829, ch. 170, with the proceedings consequent thereon, give rise to the priority contended for? This act provided for the election, at the next annual meeting of the stockholders held in pursuance of their charter, of two trustees to settle all the outstanding debts and credits of the bank, and further provided that they should be elected in the same manner as the president and directors have been heretofore elected. By referring to the charter of the bank, it will be found that one of its fundamental laws required the president and directors to give one month's notice in the most public places in the county and in some public print in the City of Baltimore
of the time and place of holding the election of directors annually, and it was furthermore, by a supplement to the said charter, required that the election for directors should take place on the fourth Monday of May."
"If it were conceded to the legislature that it possessed power to wind up the concerns of this particular institution by such an act, it must be admitted that the leading provisions of the act, calculated to apprize all interested of the fundamental changes about to be operated in its government that they might have an opportunity of protecting their interests by their presence, should have been complied with in order to give legal efficacy to the acts done under it. So far, however, from this, we are informed by the statements that no notice was given and that two persons were elected by a majority of the stockholders, on a different day from the day of the annual election of directors, as the trustees, who never accepted. So that the law was in truth never executed, but the proceedings held under it were undoubtedly inoperative and void, and could therefore not in any manner have operated as a general divestment of property within the contemplation of the acts of Congress, as upon this ground to have given the United States a preference, but, on the contrary, the charter still thereafter continued to exist, and its affairs were or ought to have been rightfully managed and controlled by its then directors, who would continue in office for its government, and the exercise of its corporate functions, until such election should take place. Although no priority may exist on the part of the United States, it has been argued that the appointment of receivers by the circuit court of the United States to take charge of the property and effects of the Elkton Bank of Maryland placed the debt due from the defendant so under the control of that court as a court of equity that it could be reached legally by no process of execution or attachment. It is true that money and effects in the hands of the assignee of a bankrupt or the trustee of an insolvent debtor cannot be attached, not only because such property stands assigned by operation of law, but because the allowance of such attachments would utterly defeat the whole policy of the bankrupt or insolvent laws; nor can money taken by a sheriff in execution, or money paid into court. Serg. on Attach. 99. But we apprehend that the appointment and bonding of receivers does not work such disability. The property, by the order, is not taken under the protection of the court, and until taken in charge by the receivers, its summary jurisdiction could not be interposed to
punish such as might cover it, or portions of it, by execution or attachment. The period when it might and ought legally to be considered as under the mantle of legal protection should be the time when a court of chancery would interpose by attachment for disturbing or interfering with the possession of the receiver."
"Innocent third persons might be previously affected by extending this doctrine further. It has been argued, and we think with much force, that there is and ought to be an analogy in this respect between the law applicable to receivers and sequestrators. As regards the letter, the Court of King's Bench has decided that when a sequestration is awarded to collect money to pay a demand in equity, if it is not executed -- that is, if the sequestrators do not take possession and a judgment creditor takes out execution notwithstanding the sequestration awarded -- there may be a levy under the execution. East's Rep. 9 vol. 335."
"So here, the receivers never obtained possession of the credits of the Elkton Bank of Maryland, its books and papers, or its evidences of debt. On the contrary, so far as we are enabled to collect the fact in this respect from the record, they were held adversely, the Circuit Court of the United States giving their aid and assistance to the receivers to enable them to obtain the possession, with what effect we know not except that we are left to infer, from the fact of the attachment subsequently issued against the defendant by the United States, that they never did obtain possession. We are not informed by the record that the receivers ever took any steps whatever to assume control over the debt which the defendant owed the Elkton Bank. On the contrary, they take out an attachment in the name of the United States and serve it on the defendant as garnishee long after the attachment issued, and served by the plaintiff in this case, and indeed the statement admits that they never attempted to exercise a control over this debt. Lastly it is urged that the judgment of condemnation obtained against Beaston by the United States should operate as a bar against the recovery by the plaintiff in this case. It is undoubtedly a hardship on the defendant to be compelled twice to pay the same debt, but it must be recollected that the plaintiff had a prior attachment, which operated as a lien, and it would be a still greater hardship that such plaintiff should lose his lien thus legally acquired by the judgment of a court in cause to which he was no party and of which we have no evidence that he had in any manner any notice. If the defendant failed to take the proper
steps, in the predicament in which he was placed, to defend and protect his interests, it is but fair that he should suffer the consequences. Had notice been given of this attachment by the United States, the plaintiff might have vindicated his rights and had an opportunity of asserting his anterior lien and of obtaining the decision of the appellate court, had it become necessary. Nor is it prescribed why it would not have been competent for the defendant, in this conflict of claims against him, to have brought the conflicting parties into chancery, where the rights and priority of each might have been adjudicated without prejudice to him. But, last of all, would the defendant be entitled to avail himself of the judgment of the United States recovered against him, since, from the examination of the record of that suit, it appears that his defense was taken solely on the plea of nulla bona -- a defense which could certainly have been of no avail when it appeared, by the answers filed in the interrogatories of the United States, that he was indebted to the Elkton Bank of Maryland, although in the answers he adverts to the attachment issued against him by the Farmers' Bank of Delaware, he has not plead such prior attachment as pending against him, whereby he could obtain the opinion of the court in relation to its priority. In every aspect, therefore, in which we can view the decision below, we are brought to the conclusion that it cannot be sustained."
"Judgment reversed, and judgment on the case stated for appellant. "