
    JOHN KECK, et al. v. JOHN WERDER.
    
      Judgment—when set aside to albw assignee in bankruptcy to come in and defend.
    
    This action was brought for dissolution of the copartnership between plaintiffs and defendant, and for an accounting; also for damages for inducing plaintiffs by false representations to enter into said co-partnership; upon the issue of fraud a verdict was rendered for plaintiffs, and the referee before whom the accounting was had, reported that the amount thereof should be paid out of the individual interest of the defendant in the partnership assets which had been collected and paid into court. Prior to the confirmation of the referee’s report, the defendant was adjudged a bankrupt, and two years after entry of final judgment upon the report and payment to plaintiffs thereunder, defendant's assignee petitioned that the judgment be set aside and that he be substituted in place of defendant, and be allowed to come in and defend.
    It appeared that plaintiffs were ignorant of the proceedings in bankruptcy till after entry of final judgment and payment of the funds thereunder.
    
      Held, that the prayer of the petition was properly denied; that the relief asked for must be sought in an independent action.
    Before Sedgwick and Freedman, JJ.
    
      Decided November 22, 1880.
    Appeal by assignee in bankruptcy from order denying the prayer of a petition made by him, that the judgment entered be set aside, and that the assignee be substituted in place of- defendant, and allowed to serve answer and defend.
    On the hearing of the petition the following appeared to be the facts: The plaintiffs, being partners in business with defendant, brought, this action for a dissolution of the copartnership, and an accounting. Their complaint also claimed damages against the defendant, for inducing, by fraud, the plaintiff to enter into the copartnership. The defendant, among other things, in his answer, denied the fraud and the damage. The issue as to the fraud was tried by jury, and there was a verdict for plaintiffs in the sum of $6,355.41. A receiver was appointed in the action. Interlocutory judgment was entered for an accounting, and a reference for that purpose. The referee reported that the parties were entitled individually to amounts to bG paid out of the assets that had been collected by the receiver, and by him paid into court. The referee also reported that the amount of the verdict should be paid to the plaintiffs out of the individual interest of the defendant in the funds in court. Before the report was confirmed, and before final judgment in accordance therewith was entered, the defendant was, upon petition of his creditors, declared a bankrupt, in the United States district court in bankruptcy for the District of New Jersey. Assignees were appointed, of whom the petitioner, was survivor. The plaintiff and his attorney, and the defendant’s attorney, were ignorant of the proceedings in bankruptcy, and remained ignorant of them until long after entry of final judgment. Final judgment was entered, and under its provisions the plaintiffs demanded and received from the clerk of the court an amount which included the amount of the verdict. More than two years after this, the appellant filed his petition, asking that he should be admitted to -defend, that the action should be continued by the plaintiff, that the judgment entered and all proceedings taken after the commencement of the bankruptcy proceedings be vacated for irregularity, upon the ground that such proceedings were in violation of the bankrupt act, and that the moneys which had been taken out of court under the judgment should be returned. The petition claimed relief on the ground of collusion, but there was no evidence of collusion, and on the argument of the appeal, that ground was abandoned. The court denied the motion to grant the relief asked.
    
      Nelson Smith, for appellant, urged :
    I. The proceedings in this case, after the adjudication of the defendant bankrupt and the appointment of his assignees, and the assignment to them by Judge Nixox, were irregular, (a) The title of the assignees in bankruptcy of the defendant relates back to December 29, 1876, when the petition for his adjudication was filed against him (U. S. Rev. Stat. § 5,044; Sutherland v. Davis, 10 Bank. Reg. 424; Hampton v. Rouse, 11 Id. 472 ; Layton v. Harwood, 12 Id. 360 ; Blumenstiel Bankr. 178-188). (b) The bankrupt was, upon his adjudication on February 2, 1877, so far as related to his property, to be regarded as civilly dead ; and no proceedings after the appointment of his assignees, and the assignment to them, affecting his property could be taken until they were brought in (Herndon v. Howard, 9 Wall. 664; S. C., 4 Bank. Reg. 212; Lowery v. Morrison, 11 Paige, 327, 329 ; Requa v. Holmes, 16 N. Y. 196 ; Russell v. Sharp, 1 Ves. & Beame, 500; Story’s Eg. Pl. 158, A ; Storm v. Davenport, 1 Sandf. Ch. 135, 138; Penniman v. Horton, 1 Barb. Ch. 246 ; Deas v. Thorn, 3 Johns. 543). (c) Intermediate to the commencement of proceedings in bankruptcy and the assignment to * the assignees, neither the debtor nor any person can do any act in any way affecting the title of such assignee. The bankrupt is to all intents and purposes as regards his property oiviliter mortuus, and every agreement made by him in relation to his estate while in that condition, is void (In re Anderson, 9 Bank. Reg. 360 ; Sparhawk v. Drexel, 12 Id. 450 ; Blumenstiel, 179-182; Miller v. O’Brien, 9 Bank. Reg. 26). (d) Third parties are deemed to have constructive notice of the filing of the petition and of the proceedings thereunder, and they cannot, by any act on their part, after such proceedings have been commenced, alter or change the condition of the estate as against the assignee. A debtor to the bankrupt, who in good faith, without actual knowledge of the proceedings, pays Ms debt to the bankrupt, is nevertheless liable to the assignee (Howard v. Crompton, 14 Blatchf. 328; Mays v. Manufacturers’ Nat. Bk., 4 Bank. Reg. 446; Stevens v. Mechanics’ Savings Bk., 101 Mass. 109 ; Blumenstiel, 181, 182). (e) The bankrupt being regarded by Ms adjudication, as respects his property, civilly dead, such death works the same legal results as if he had actually died, and consequently operates as a revocation of the authority of the attorney in the suit (Gleeson v. Dodd, 4 Met. 333 ; Weeks on Attys-at-Law, § 192). No order after the death of a party can be made in-the cause until his executor, administrator or assignee in bankruptcy is brought in (Holmes v. Requa, 16 N. Y. 196). (f) The only instances in which a suit pending in favor of or against a person who is afterwards adjudicated a bankrupt is allowed to proceed, after his assignees are appointed, without bringing them in, are : 1. Where the bankrupt has no interest in the property to be affected by the final decree ; or when the suit is on a contract made in the name of the bankimpt, as agent for another (Rhodes v. Blackstone, 106 Mass. 334) ; or where the bankrupt had assigned the claim in suit before the bankruptcy (Sucally v. Taylor, 33 Tex. 668). 2. In the cases provided for by section 5,106 U. S. Rev. Stat., which allows actions to proceed for certain purposes, namely, if the amount due to a creditor is in dispute, a suit, by leave of the court in bankruptcy, may proceed to judgment for the purpose of ascertaining the amount due, which may be then proved in bankruptcy. 3. So, too, in a suit to foreclose a mortgage, a judgment for the sale may be taken if done before assignees are appointed, the suit having been commenced previously to the filing of the petition (Lenihan v. Hamman, 55 N. Y. 652). The reason of this is, that until the assignees are appointed, the title of the property remains in the bankrupt (Hampton v. Rouse, decided by U. S. Supreme Court, 11 Bank. Reg. 472).
    II. The judgment or decree entered herein, May 31, 1877, was by default, no exceptions having been filed to the referee’s report; the plaintiffs proceeded upon the theory that it stood confirmed under rule 30 of the courts, for want of exceptions. Upon the theory that the authority of the defendant’s attorney was revoked by his adjudication as a bankrupt, and the appointment of his assignees, he had no right to file exceptions ; but whether he had or not, it is certain that the failure to "file exceptions was suffering a default, and the decree entered upon the report as confirmed for want of exceptions is a decree, in fact, by default.
    III. The appellant was entitled as matter of right to be admitted to defend this action upon his requiring it, under the provisions of section 5047, United States Revised Statutes, (a) That section first provides, that if, at the time of the commencement of the proceedings in bankruptcy, an action is pending in the name of the debtor for the recovery of a debt or other thing, which might or ought to pass to the assignee, the assignee shall, if he requires it, be admitted to prosecute the action in his own name, and if any suit at law, or in equity, in which the bankrupt is a party in his own name, is pending at the time of the adjudication of the bankrupt, the assignee may defend the same in the same manner, and with like effect as it might have been defended by the bankrupt. (5) This being a suit for the distribution of certain property owned by the bankrupt and the plaintiffs jointly together, the defendant has the same status as the complainant, it being immaterial in such cases which party commences the suit; it is, as respects the division of the property, for the benefit of both.
    IV. The verdict of the jury, no judgment having been entered upon it before the appointment of the appellant as defendant’s assignee in bankruptcy, is not even evidence of debt. Issues in equity cases are framed and sent to the jury simply to inform the conscience of the court, and their verdict can be used only upon the final hearing as evidence (Black v. Shreeve, 3 Beasley Ch. [N. J.] 469). The court will exercise its discretion upon- the final hearing as to how far it is to be controlled by the findings of the jury, and is not precluded even then from, rejecting the verdict, or from finding the questions of fact itself contrary to the verdict (Hegeman v. Cantrell, 8 J. & S. 386 ; Wallace v. Am. Linen Thread Co., 16 Hun, 404). The practice upon feigned issues was fully' considered in Snell v. Loucks (12 Barb. 385) by Willard, J., approved in 16 Hun, 406.
    V. The appellant, as assignee in bankruptcy of the defendant, was entitled to have the action continued against the plaintiff, John Keck, Jr., as survivor, and Katrina Keck, as the executrix of John Keck, Sr., deceased, under Civil Code, § 758. That section authorizes the action to be continued against the surviving partner, and the court to make an order bringing in the proper representative of the deceased, when it is necessary so to do, for the proper disposition of the matter. Here it is necessary that the representative of the deceased Keck should be brought in, so as to dispose of the whole matter, and especially for the return of the money which has been taken out of court.
    VI. The appellant being entitled to have the judgment set aside, and to come in and defend, it follows, as matter of course, that he is entitled to have the money taken, out of court returned.
    VII. All of the persons who participated in taking the money out of court had constructive notice of the assignee’s rights. Constructive notice is in legal effect conclusive evidence of notice. Constructive notice arises from legal inference so strong, that the presumption of notice, when it arises at all, is conclusive "even against the truth of the fact (Wild v. Gibson, 1 H. L. 605; Plumb v. Flewitt, 2 Anstr. 432; Kennedy v. Green, 3 M. & K. 719 ; Wade on Notice, § 37; Bird-sail v. Russell, 29 N. Y. 220). Judge Story defines constructive notice as knowledge imputed by the court, on presumption too strong to be rebutted ; that the knowledge must have been communicated (Story Eq. Juris. § 399).
    
      Chauncey Sliafer, attorney, in person, and for John Keck.
    
      Hamilton dole, for respondents, urged :
    I. Section 5047 of the United States Revised Statutes, under which this relief is sought, is as follows: “The assignee shall have the like remedy to recover all the estate, debts and effects in his own name as the debtor might have had if the decree in bankruptcy had not been rendered and no assignment had been made. If, at the time of the commencement of the proceedings in bankruptcy, an action is pending in the name of the debtor for the recovery of a debt, or other "thing, which might or ought to pass to the assignee by the assignment, the assignee shall, if he requires it, be admitted to prosecute the action in his own name, in like manner and with like effect as if it had been originally commenced by him. And if any suit at law or in equity in which the bankrupt is a party in his own name is pending at the time of the adjudication in bankruptcy, the assignee may defend the same in the same manner and with like effect as it might have been defended by the bankrupt.” The statute only gives the assignee a right to interpose in pending suits, and hence an effort is made in this case to set aside the judgment and final orders so as to make a pending action in which the assignees may intervene.
    II. The assignees have no right to make this motion. In making this motion, the most they can claim is that they stand in the shoes of John Werder. If he could not make this motion, the assignees cannot. Now, so far as the parties to the suit in this court are concerned, there is nothing in the papers showing, or tending to show, any collusion, or that, the action of the court was in any way irregular or improper. If, in fact, a third person not before the court was the owner of the subject-matter, this does not authorize him to come before the court in an action to which he is not a party, and seek to set aside its process. His remedy is by an independent action.
    III. Unless there have been proceedings taken in this suit which would authorize the defendant to come in and have these orders set aside, the matter seems to stand precisely as though these moneys had been paid without the orders of the court. Unless there was collusion on the part of the parties before the court, the fact that the payments were actually made under the orders of the court does not change the situation in favor of Werder’s assignees. How,.if the plaintiffs, with full knowledge of the bankruptcy, received property from the bankrupts belonging to the assignees, they did so at the risk of being compelled to restore it if the assignees took proceedings within the proper time, and this was the only penalty to which they subjected themselves.
    IV. The plaintiffs owed no duty to the assignees of Werder. They were entitled to obtain the money owed to them, if they could get it. The gravamen of the complaint on the part of the assignees is that the plaintiffs, and their attorney, and the referee, have obtained property belonging to them. If so, and the assignees are not prevented by the statute of limitations, the courts are open to them to establish their rights. But if at one time the assignees were entitled to this property, this furnishes no reason why this court should revive an action upon which the remedy may now be cut off by granting the order asked for here. '
    V. There was no fraud or collusion of any kind practiced upon the court in this case. It was not incumbent upon any of the parties to notify the court of the bankruptcy proceedings. This court was in no way thereby deprived of jurisdiction either over the parties or the subject-matter. If the assignees saw fit to come in they might have done so. They could, if they saw fit, refuse to father the action begun. If the court had had knowledge of all the facts, it would have been entirely proper for it to have proceeded in the suit without any regard to the assignees, if they did not choose to assert their rights. And if the assignees-did not discover their rights in time to assert them, this is their misfortune.
    VI. Besides, the fund in question being in court in the action constituted a special fund for the purposes of the action. ¡No outsider could touch it until the determination of the action. The fund was before the court for distribution among the parties to the action, and, being there, the court- would proceed to administer the fund in spite of bankruptcy proceedings (Clark v. Binninger, 38 How. Pr. 341; Same v. Same, 39 How. Pr. 363). And the fact that the action was by one partner against another, does not change the true principle underlying the case. If the Kecks, for any cause of action, had had a receiver appointed, the funds in his hands would be subject to the orders of the court appointing the receiver, and only that portion which might ultimately be found due to Werder would pass to his assignee in bankruptcy. The receiver was appointed in 1872, and the plaintiffs’ lien upon the moneys in his hands was not affected by the bankruptcy proceedings. The assignees might have been entitled to a part of the fund if it had turned out that Werder was entitled to any portion of it, otherwise not. They could not touch the fund as against the plaintiffs. There is nothing in the papers here which shows that the judgment and orders which it is sought to set aside are in any way incorrect, and without such proof this motion should not, in any event, be granted.
    VII. The court, in the exercise of its discretionary power, should not set aside this judgment and these orders, and revive the action, in the entire absence of fraud and collusion.
    VIII. I know of no case under the bankrupt law of 1867 which holds that the bankruptcy of a party is an abatement of the suit.
   By the Court.—Sedgwick, Ch. J.

I am of opinion that the prayer of the petition was properly denied. The judgment, which it was asked should be set aside, had been carried into effect. The fund, which the Bankruptcy assignee now claims, had been paid over to the plaintiff. It is not necessary now to ask what would have been the remedy of the bankruptcy assignee, if the fund had been in existence at the time of the petition, either in court or in the plaintiffs’ hands. The fund had become part of the general property of the plaintiffs, and there was not any attempt to trace it.

It was not claimed that the plaintiffs had practiced any deception upon the court or abused its process, or •even acted fraudulently as to the petitioner. There was, therefore, no ground that the court, acting upon the motion of the assignees, should assert its power by order and proceedings for contempt, to compel a wrong-deer to place matters in statu quo.

The plaintiffs could not have been compelled to replace the fund on the principles that apply to orders of restitution ; because, although the judgment might have been set aside, it would not have been set aside for the reason that it then appeared that the plaintiff had no right to the fund, or owed the petitioner the .amount of it; but simply to allow a new litigation as to who was entitled to it. To justify an order of restitution, it must at the time appear that the prevailing party was not entitled to the judgment which has been set aside.

Under these circumstances, an order that the plaintiffs should pay the amount into court would express an adjudication as to his obligation to the petitioner to do so, and could not be enforced by proceedings to put them in contempt, or by execution.

It is clear, that unless the fund was restored, the rest of the relief prayed for would be useless. The thing claimed by the answer of the petitioners, if they were allowed to make one, or by any proceeding they might take, would be, that they were entitled to that part of the fund that represented the individual property of the bankrupt in the partnership assets. Such a claim could have no object if there were no fund. Any claim they might make that the plaintiffs wrongfully took and were not entitled to take that part of the fund, inasmuch as the assignee was its true owner, would, if the position was valid on the law and the facts, entitle the assignee to a judgment for damages. This, however, is a substantive cause of action, which must be asserted in an action. In advance of a judgment determining such a cause of action in petitioner’s favor, there can be no adjudication in his favor that would allow setting aside the judgment which the plaintiffs have obtained in this action. In effect, the assignee asks a decision in his favor upon the merits, in a proceeding where the plaintiffs are not, by law, called upon to frame an issue as to the merits.

The order should be affirmed, with costs, and the disbursements to be taxed.

Freedman, J., concurred.  