Opinion
Argued June 18, 1878
Decided September 17, 1878
A.E. Kilby, for appellant. Marshall P. Stafford, for respondent.
The sheriff having levied upon property of Frink sufficient to satisfy the execution, and returned it unsatisfied, is prima facie liable to the plaintiff for the amount of the judgment. It was incumbent upon him, in order to relieve himself from liability, to show some legal excuse for not collecting the execution. The fact that the property, subsequent to the levy, was taken by the marshal, under the warrant in the bankruptcy proceedings, and by him turned over to the assignee, did not exonerate the sheriff from liability, although it was taken, as the judge found, without the consent and against the protest of the sheriff. The lien of the execution was paramount to the right of the marshal or assignee, and neither acquired any right to the possession of the property levied on, as against the sheriff. The sheriff, by virtue of the execution and levy, was entitled to retain possession of the property to meet the exigencies of the writ, and the assignee in bankruptcy took his title subject to the execution and levy, and no right of possession vested in him or in the marshal, until the execution was satisfied.
The order to show cause, made by the district court, on the 2d of August, 1873, on the filing of the petition in bankruptcy against Frink, restrained the sheriff from making any transfer or disposition of the bankrupt's property, or from any interference therewith, except for its security or preservation, until the further order of the court. But this order, assuming that it was binding upon the sheriff, who had no notice of the application for the order and was not heard in respect to it, did not assume to disturb his possession; and when the property was taken by the marshal, in the latter part of August, 1873, after the adjudication in bankruptcy, under his warrant, that process, as we have said, was no justification for his interference with the possession of the sheriff. It was the duty of the sheriff to retain the possession and sell the property to satisfy the execution, and to take all reasonable means to protect his levy. The marshal, having without right taken the property out of the sheriff's possession, the latter could have retaken it, or maintained an action against the marshal for its conversion. So also, he would have had a remedy against the assignee, after the property was turned over to him, upon his refusal to surrender it. ( Hotchkiss v. McVickar, 12 J.R., 403; Miller v. Adsit, 16 Wend., 335; Mildmay v. Smith, 2 Saund., 343; Watson on Sheriff, 200.)
It was not therefore a defense to the sheriff in this action that the property was taken by the marshal. It was in no proper sense a yielding to a vis major. The sheriff had a right to use all necessary force to protect his possession. He made no effort to retain it, he was not in the actual custody of the property by himself or his agent when the marshal took it; all he did was to claim it under his levy and refuse voluntarily to surrender it, on the demand of the marshal.
But the inaction of the sheriff, and his omission to resist the taking of the property by the marshal, was, as is quite apparent from the case, attributable to ignorance of his legal rights under the execution and levy as against the proceedings in bankruptcy. Indeed the law at that time, as appears from the published decisions, was in a state of great uncertainty. The relative rights of an execution creditor, whose judgment was obtained and execution levied upon a bankrupt's property, within four months before the commencement of proceedings in bankruptcy, and the assignee or marshal claiming the bankrupt's property had been the subject of frequent adjudication, in the bankruptcy courts, and the prevailing course of decision seemed to be that the proceedings in bankruptcy divested the lien of the execution. The opposite doctrine was finally established by the decision of the Supreme Court of the United States in Wilson v. The City Bank (17 Wall., 473), made in October, 1873. The sheriff, in his proceedings and in his dealings with the plaintiff, acted, so far as appears, in good faith. He promptly advised the plaintiff's attorney of the order of the bankrupt court restraining his proceedings, and, in the letter conveying this information, he suggested that it had been his practice, in such cases, not to return the execution at the end of the sixty days, as thereby he "would hold his levy, if anything favorable should occur," and requested the attorney to inform him of his wishes; and the attorney, in response to this inquiry, authorized the sheriff "to retain the execution till requested to make a return." The authority of the attorney was a justification to the sheriff for not returning the execution within the time fixed in the writ. The sheriff may, and, indeed, is bound to follow the instructions of the plaintiff in the execution, within his general duty; ( Root v. Wagner, 30 N Y, 9); and the direction of the attorney issuing the execution stands as the direction of the plaintiff; ( Gorham v. Gale, 7 Cow., 739; Corning v. Southland, 3 Hill, 552; Mickles v. Hart, 1 Denio, 548). But the authority to retain the execution beyond the return day did not relieve the sheriff from the duty of holding his levy and retaining the possession of the property to answer the writ. Nor was he relieved from this duty or justified in allowing the property to be taken by the marshal by his ignorance of his legal rights. He was bound to know and ascertain his rights under the execution and levy, and the plaintiff was not bound to instruct him; ( Dyke v. Duke, 4 B. [N.C.], 203; Bowie v. Brahe, 4 Duer, 676). So far as the plaintiff assumed to direct the officer the latter was relieved from responsibility; but he could not cast upon the plaintiff the burden of deciding for him in respect to his official duty.
If no other facts appeared than those which have been stated, the liability of the sheriff for returning the execution unsatisfied would seem to be established. But the difficulty in the way of the recovery by the plaintiff against the sheriff arises from two facts, which occurred subsequent to the taking by the marshal of the property from the sheriff's possession, and the turning it over by him to the assignee in bankruptcy; first, the plaintiff in November, 1873, proved his debt before the register in bankruptcy as a debt arising upon judgment, without referring to or disclosing the lien by virtue of the execution; and second, in May, 1874, he gave to the sheriff a peremptory direction to return the execution immediately, which the sheriff obeyed, making a special return, setting forth the proceedings in bankruptcy, and that he had retained the execution by the direction of the plaintiff, and now returned it by his direction "nothing having been collected thereon." It seems to be well settled as a general rule in courts of bankruptcy that the proof by a creditor of a bankrupt of a debt which is secured by lien on the bankrupt's property without disclosing the security, operates as a release or discharge of the security, and the property upon which the lien exists passes to the assignee in bankruptcy discharged therefrom, and the creditor thereafter stands as a general creditor, entitled only to his equal share in the distribution of the bankrupt's estate; ( Stewart v. Isidor, 1 B.R., 485; In re Bloss, 4 id., 37; In re Stansell, 6 id., 183; Wallace v. Conrad, 3 id., 10); Grugeon v. Gerrard, 4 Y. Collyer, 119; Ex parte Solomon, 1 G. J., 25; Ex parte Hornby, Buck's Cas. Bank., 351; Ex parte Downes, 18 Ves., 290; Ex parte Eggington, Montagu, 72). The principle upon which this doctrine proceeds is that otherwise the proceeding would operate as a fraud upon or to the injury of other creditors, by enabling the secured creditor to obtain a dividend on his whole debt, out of the common fund, and at the same time have the benefit of the security, thereby producing inequality in the distribution between him and the other creditors. The bankrupt law protects existing bona fide liens, and a secured creditor may prove the balance of his debt remaining after applying the value of the security without surrendering it. If he does this only, he acquires no preference, except such as the law allows. The plaintiff, in this case, by proving his debt, submitted his claim to the jurisdiction of the court of bankruptcy. The claim was allowed as proved, and several months afterwards a dividend was declared upon it which, however, the plaintiff declined to accept. It is quite probable, that in proving the debt the plaintiff acted unadvisedly and in uncertainty as to the exact state of the law and the priority of right to the property levied upon, as between the sheriff and the assignee. But the district court had ample power to relieve him and to allow him to withdraw or amend the proofs, so as to have preserved his lien, and this power is frequently exercised where, through inadvertence, or in ignorance of his rights, and without fraud, a secured creditor has been prejudiced by the form of his proof: (Bump's Bank., 86, and cases cited).
In this case, the plaintiff, prior to the commencement of this action, applied to the district court for relief which, for some reason which does not appear, was denied him. The plaintiff, by proving his debt without disclosing his security, placed himself in this position; by the general rule of law the lien, by virtue of the execution, was discharged, and the property passed to the assignee, freed therefrom. He had, by his own act, submitted his claim to the jurisdiction of the court of bankruptcy, and his remedy, to obtain relief from the effect of his mistake or inadvertence, was in that court, and until obtained, the right of the assignee to the property was perfect. Having by his own act discharged the lien, the sheriff could no longer pursue the property, and any remedy which he otherwise had to recover it or its value was defeated. Under these circumstances, we think the sheriff was authorized to return the execution unsatisfied, and having returned the execution, pursuant to the peremptory direction of the plaintiff — which must have been understood as a direction to return it in the condition in which it then was, — we think the sheriff, for this reason also, was justified.
The provision in the twentieth section of the bankrupt act, to the effect that if property subject to a lien is not sold, released or delivered up, as provided in that section, "the creditor shall not be allowed to prove any part of his debt" does not, we think, affect the rights of these parties. The proof of the plaintiff's debt might perhaps have been disallowed or rejected, for his omission to release his lien by a formal instrument, but it was not rejected but was allowed, and the lien was released by operation of law, and the plaintiff is not in a position to question the regularity or sufficiency of the proof. The same considerations dispose of the objection that the proof was not taken before the proper register, assuming it to be well founded — which is, however, as the law stood when the proof was made subject to much question.
The judgment should be reversed and a new trial granted.
All concur, except HAND, J., not voting; MILLER and EARL, JJ., absent.
Judgment reversed.