193 F. Supp. 948 (1961) | Cited 0 times | S.D. Illinois | May 8, 1961

Petitioner, Roy O. Schiebel, Jr., a judgment creditor of thebankrupts, filed his petition to review an order entered by theReferee on May 19, 1960, overruling his objections to theallowance of the claims of Joseph E. Sersig1 and Ethel B.Sersig, sometimes hereinafter referred to as claimants, againstthe bankrupts' estates and an order entered on the same dateoverruling his objections to the discharge of each of thebankrupts.

On Objections to Sersig Claim.

Joseph and Ethel Sersig are the parents of the bankrupt, EileenM. German. Over a period of time from 1949 through 1958, JosephSersig advanced various sums of money to the bankrupts, which wasused both in the furtherance of unsuccessful business enterprisesof John German and for payment of personal bills and expenses ofthe bankrupts. The aggregate sum of such advancements was$35,734.08. On September 4, 1958, at a time, as the Refereefound, when the bankrupts were insolvent in that theirobligations exceeded their assets, the bankrupts executed apromissory note in the principal amount of $35,734.08, payable toJoseph E. Sersig and Ethel B. Sersig jointly. The Sersig's fileda claim against each bankrupt's estate upon that promissory note.

The Trustee, by petitioner, filed objections to allowance ofthe Sersig claim on the grounds (1) that the claims were in wholeor in part barred by the Illinois Statute of Limitations, (2)that the consideration for the claims was fictitious in that thesums advanced to the bankrupts by Mr. Sersig were gifts oradvancements, not loans, and (3) that the creditors received apreference from the bankrupts by virtue of a conveyance to themby Eileen German of a parcel of real estate in Moline, Illinois,which the claimants had failed to surrender as a condition to theallowance of their claims.

The issue whether the sums paid by Mr. Sersig to the bankruptswere gifts or advancements, or loans is wholly a question offact. The Referee found upon uncontradicted testimony that thetransactions which were the consideration for the Sersig notewere loans. The court cannot say that that finding is clearlyerroneous, and the finding is, therefore, binding upon the court.Chatz v. Morris, 7 Cir., 152 F.2d 178; Lines v. Falstaff BrewingCo., 9 Cir., 233 F.2d 927; Elbert v. Johnson, 2 Cir.,164 F.2d 421.

The Referee correctly determined that the Illinois Statute ofLimitations is not a bar to the Sersig claim. The running of thelimitations statute must be measured from the date of executionof the note, which was well within the ten year statute. I.R.S.1959, c. 83, § 17. Although the bankrupts might, at the time whenthe note was given, have claimed the benefit of the five yearstatute, I.R.S. 1959, c. 83, § 16, as a defense to a demand orsuit for a part of the sums advanced by Mr. Sersig, that defensewas waived by them when they executed the promissory note. Abdillv. Abdill, 292 Ill. 231, 126 N.E. 543; O'Neill v. Reaman,335 Ill. App.? 327, 81 N.E.2d 749.

The Illinois Statute of Limitations is procedural and affectsonly theremedy, not the substantive rights. Seymour v. Union News Co., 7Cir., 217 F.2d 168; Sun Theatre Corp. v. RKO Radio Pictures,Inc., 7 Cir., 213 F.2d 284; Seymour v. Union News Co.,349 Ill. App.? 197, 110 N.E.2d 475. It is an affirmative defense to aclaim, Wise v. Potomac Nat. Bank, 393 Ill. 357, 65 N.E.2d 767,which must be timely raised or is waived. Roe v. Sears, Roebuck& Co., 7 Cir., 132 F.2d 829; Addante v. Pompilio, 303 Ill. App. 172,25 N.E.2d 123. The bankrupts' waiver of the defense to theiroral promise to pay a part of the money loaned by Mr. Sersig isbinding upon the Trustee.

The basic facts giving rise to petitioner's claim of afraudulent conveyance and/or a preference to claimants is basedupon evidentiary facts which are not disputed. In 1947 claimantsacquired title as joint tenants to a parcel of real estatecommonly known as 2115 13th Street, Moline, Illinois.2 Thebankrupts, husband and wife, have resided upon the 13th Streetreal estate since the premises were acquired by claimants. OnOctober 1, 1958, claimants conveyed the property to Eileen Germanby a warranty deed which was recorded in the Land Records of RockIsland County on February 9, 1959. Thereafter, on March 26, 1959,the bankrupts reconveyed the real estate to the claimants. On May14, 1959, upon their voluntary petitions, Mr. and Mrs. Germanwere adjudicated bankrupts.

The Referee found that the conveyance to Mrs. German wasmotivated by plans shared by the claimants and the bankrupts toconstruct a new house in Moline in which both claimants and thebankrupts would reside; that the property was conveyed to Mrs.German to enable the bankrupts to handle the arrangements andnegotiations for construction and financing of the new home; thatMr. Sersig was unwilling to undertake to make those arrangementshimself because he was then suffering from serious illness; thatthe conveyance to Mrs. German was made upon the express agreementthat the 13th Street property would be mortgaged, and,ultimately, sold to finance construction of the new home; thatthe whole scheme, of which the conveyance to Mrs. German was apart, was made pursuant to an agreement between claimants and thebankrupts that title to the property constituting the new homewould be in Mr. Sersig; and that the bankrupts had no beneficialinterest in the 13th Street property. Finally, the Referee foundand concluded that Mrs. German took legal title to the 13thStreet property as Trustee for the use and benefit of claimants,and that therefore her reconveyance of the premises to claimantsprior to the filing of her petition in bankruptcy constitutedneither a fraudulent conveyance nor a preference to claimants.

To the extent that the fraudulent conveyance or preferenceissue is factual, the court cannot interfere with the Referee'sdecision unless his findings are clearly erroneous. The evidence,which consisted largely of the testimony of the bankrupts and Mr.Sersig, was uncontradicted. Each testified that the conveyance ofthe 13th Street property to Mrs. German was one step of a plan toconstruct a new home in which both the claimants and thebankrupts would reside. In furtherance of that plan, as theevidence reveals, the bankrupts entered into a contract withMcGill Homes for the construction of a residence house onpremises in Moline, which are for convenience, hereinafterreferred to as lot 18.3 On January 28, 1959, Thomas McGill,proprietor of McGill Homes, conveyed lot 18 to the bankrupts injoint tenancy. Thereafter on February 2, 1959, the bankruptsobtained a construction loan from the First National Bank ofMoline secured by a mortgage on lot 18. The deed to the bankruptsfrom McGill and the bank's construction mortgage were recorded inthe Land Records of Rock Island County onFebruary 9, 1959, the same date of the recordation of the deedfrom the claimants to Mrs. German.

Prior to the consummation of any of the above transactions, thebankrupts were indebted to petitioner upon a promissory noteexecuted as part of the consideration for the purchase by JohnGerman of a garage and automobile dealership. On February 24,1959 petitioner placed that note in judgment in the Circuit Courtof Rock Island County in the amount of $16,305, plus costs ofsuit. After that judgment was taken, as the witnesses testified,plans for the construction of a new home were abandoned. On March26, 1959, the bankrupts reconveyed lot 18 upon which the new homewas to be constructed to Thomas McGill and the 13th Streetproperty to claimants. Thereafter, on April 23, 1959, the Bankreleased its mortgage on the McGill lot.

No consideration passed between the parties to either of theconveyances hereinabove mentioned. Mrs. German paid noconsideration to claimants for the conveyance of the 13th Streetproperty; the bankrupts paid no consideration to McGill for theconveyance to them of lot 18; and the bankrupts received noconsideration from the claimants or McGill upon theirreconveyance of the 13th Street property and lot 18,respectively.

At all times material to this petition, both bankrupts wereinsolvent in that their liabilities exceeded the fair value oftheir assets, but the Referee found that no creditor had extendedcredit to the bankrupts as a result of the 13th Street propertybeing placed in the name of Mrs. German.

The Referee's material findings of fact follow the testimony ofthe witnesses as hereinabove summarized. Ultimately, he foundthat an oral trust was created in the 13th Street premises,contemporaneously with the conveyance thereof to Mrs. German. Thecourt cannot say that those findings are clearly erroneous andthey may not, therefore, be disturbed.

The Referee concluded also, that Mrs. German's record title tothe 13th Street property was impressed with a constructive trustfor the benefit of claimants. That conclusion is erroneous uponthe facts of this case, but the validity of his ultimate decisionallowing the claim is not affected by that erroneous conclusionif, as a matter of law, he correctly decided that an expresstrust existed.

Petitioner contends that an oral trust in real estate is voidunder the Statute of Frauds of Illinois and that such a trustcannot be recognized by this court. That is not the law ofIllinois. Like the statute of limitations question hereinabovediscussed, the Statute of Frauds is, in Illinois, an affirmativedefense. E.g., Thomas v. Pope, 380 Ill. 206, 43 N.E.2d 1004. Anoral trust in violation of the Statute of Frauds is voidable atthe election of the trustee, but not void. That defense may bewaived by the failure to plead or assert the defense. E.g., Reedv. Eastin, 379 Ill. 586, 41 N.E.2d 765. Mrs. German, as trusteeof the 13th Street property, waived her defense on that ground byreconveying the premises to the claimants, thereby acknowledgingthe existence and validity of the trust. Klass v. Hallas,16 Ill.2d 161, 157 N.E.2d 261. That waiver of the Statute of Fraudsprior to filing the petition in bankruptcy is binding upon theTrustee in Bankruptcy. The Trustee has the benefit of alldefenses available to the bankrupt "including * * * statutes offrauds", 11 U.S.C.A. § 110, sub. c, but the trustee is bound bya waiver of that defense by the debtor prior to the filing of hispetition in bankruptcy. 4 Collier on Bankruptcy, p. 1387.

The critical question when a fraudulent transfer or preferenceof a creditor is asserted is whether the transfer removed fromthe reach of the trustee in bankruptcy property which should beapplied to satisfaction of the claims of creditors. Section 67,sub. d(2) of the Act, 11 U.S.C.A. § 107, sub. d(2), which relatesto fraudulent transfers is interpreted as relating only to thebankrupt's own property. Property held in trust by a debtor,later adjudicated a bankrupt, may be transferred without thattransferconstituting a fraud upon his creditors. Frederick v. Baxter ArmsCorp., 2 Cir., 107 F.2d 732; Bryce v. National City Bank, 2 Cir.,93 F.2d 300; Strongin v. International Acceptance Bank, 2 Cir.,70 F.2d 248; cf. Capital Finance Corp. v. Leveen, 1 Cir.,217 F.2d 36. A trustee in bankruptcy merely succeeds to the rights ofthe debtor in property coming into his hands. If property held intrust by a bankrupt is delivered to the trustee in bankruptcy,the latter takes only the legal interest which the debtor had inthe property at the time his petition in bankruptcy was filed.Such property is still impressed with the trust in the hands ofthe trustee. City of Dallas v. Crippen, 5 Cir., 171 F.2d 526,certiorari denied 336 U.S. 937, 69 S.Ct. 748, 93 L.Ed. 1096; Toddv. Pettit, 5 Cir., 108 F.2d 139.

In like manner, for a conveyance to constitute a preferencewithin the meaning of Section 60 of the Act, the propertyconveyed must have been "the property of" the debtor. 11 U.S.C.A.§ 96.

No question of estoppel arises in this case. As the Refereefound, no creditor extended credit to the bankrupts in relianceupon Mrs. German's record ownership of the 13th Street property.All obligations owed by the bankrupts at the time their petitionsin bankruptcy were filed had been incurred by them prior to thereal estate transactions hereinabove described.

In this connection, petitioner relies upon the fact that hetook judgment while the record title to the 13th Street propertywas in Mrs. German. He contends that he, as a judgment creditor,stands in the same position as a bona fide purchaser for value.That is not the law of Illinois. The lien of a judgment attachesto the actual title or interest which the judgment debtor has inland, subject to all equities in the property at the date ofjudgment. Mauricau v. Haugen, 387 Ill. 186, 56 N.E.2d 367; EastSt. Louis Lumber Co. v. Schnipper, 310 Ill. 150, 141 N.E. 542.

The Referee correctly determined that the Sersig claim shouldbe allowed. There was no fraudulent transfer or creation of apreference which would require the Sersigs, as a condition to theallowance of their claims, to surrender the 13th Street propertyto the Trustee. See 11 U.S.C.A. § 93, sub. g.

On Objections to Discharge.

The petition for review of the order discharging the bankruptsspecifies grounds, as follows: (1) that the Referee's findingthat the conveyance of the 13th Street property to Mr. and Mrs.Sersig was not fraudulent is erroneous; (2) that the Referee'sfinding that Mrs. German's failure to include the transfer of aFord Thunderbird automobile in her statement of affairs was notknowingly and fraudulently made is contrary to the evidence anderroneous; and (3) that the Referee erred in permitting Mrs.German to amend her statement of affairs to include such transferafter notice of the transfer was called to the court's attentionby specifications of objection to discharge.

Petitioner's first contention, related to the conveyance of thereal estate, is governed by the disposition of the like questionupon the petition for review of the order overruling objectionsto allowance of the Sersig claim.

The bankrupt, Eileen German, within four months prior to heradjudication as a bankrupt, transferred a Ford Thunderbirdautomobile to Dale Auto Lease, Inc., for a valuable and adequateconsideration. That transfer was not shown on the statement ofaffairs of the bankrupt. On November 10, 1959, after obtainingleave of the court. Mrs. German amended her statement of affairsto show the transfer of the automobile and to show thedisposition of the proceeds of that sale.

The Referee found that the transfer of the automobile wasomitted from Mrs. German's statement of affairs because shebelieved, upon advice of counsel, that she only had to listtransfers of real estate in response to the question as to whatproperty had been transferred or otherwise disposed of during theyear immediately preceding the filing of her original petition inbankruptcy. The Referee further found that the omission of thetransfer of the automobile was not knowingly and fraudulentlymade. The evidence amply supports those findings and they may notbe set aside by the court.

There is no merit to the petitioner's contention that theReferee erred in permitting amendment of Mrs. German's statementof affairs after specifications of objection to her dischargewere filed on August 3, 1959. The sixth specification ofobjection to the discharge of Mrs. German alleged that she hadsworn falsely in executing her petition in bankruptcy in that shehad omitted from the statement of her affairs the transfer of theThunderbird automobile. On November 10, 1959, upon leave ofcourt, Mrs. German filed an amendment to her statement of affairsshowing that the said automobile had been transferred to DaleAuto Lease, Inc., Moline, Illinois, on or about February 21,1959, for a consideration of $1,300 which was then spent by thebankrupts in the payment of bills and for current livingexpenses.

General Order in Bankruptcy 11, 11 U.S.C.A. following section53, provides in part that "the court may allow amendments to thepetition and schedules on application of the petitioner." ThatOrder vests the court with a sound discretion to permit amendmentof petitions in bankruptcy to correct omissions therefrom. In reClaudon, 7 Cir., 73 F.2d 876; In re Haskell, 7 Cir., 73 F.2d 879.Amendments to petitions in bankruptcy should be liberally allowedwhen required in the interest of justice. In re Haskell, supra;In re Seeley Tube & Box Co., 3 Cir., 219 F.2d 389. In the lattercase, an implied amendment to a bankruptcy schedule wasrecognized and approved in the interest of justice.

In this case the petitioner's specification of objectionalleged that Mrs. German had knowingly and fraudulently made afalse oath in violation of 18 U.S.C.A. § 152, with reference toSection 14, sub. c(1) of the Bankruptcy Act. 11 U.S.C.A. § 32,sub. c(1). Mrs. German filed a verified response to thatspecification in which she alleged that the Thunderbirdtransaction had been omitted from her statement of affairs uponher belief, inspired by advice of counsel, that the transactionneed not be listed. Upon that specification and response thereto,it was certainly within the discretion of the Referee to permither to amend her petition to show the fact of the transfer andthe disposition of the proceeds thereof. The effect of thosepleadings and the amendment was to frame an issue whether thetransfer had been knowingly and fraudulently omitted in the firstinstance.

General Order 11 places no time limit upon allowance ofamendment. A liberal construction of its provisions requires thatthe discretion of the Referee to permit amendment at any stage ofthe proceeding be fettered only by the power of the courts, onreview, to review the exercise of discretion for abuse.

The petition for review will be, and hereby is, denied, and theorders of the Referee approving the Sersig claim and dischargingthe bankrupts are approved.

1. A motion filed January 16, 1961, reveals that Joseph E. Sersigis now deceased. For purposes of the petition for review, EthelB. Sersig was substituted for the decedent by order enteredcontemporaneously with this opinion.

2. Lot 78 in that part of the City of Moline known as and calledEmma D. Velie's Addition to said City, situated in the County ofRock Island and the State of Illinois.

3. Lot 18 in Morgan Park Addition to the City of Moline, Illinois,situated in the County of Rock Island and State of Illinois.

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