Opinion · Supreme Court of the United States

Zartman v. First Nat. Bank of Waterloo

Zartman v. First Nat. Bank of Waterloo, 216 U.S. 134 (1910)

Type
Opinion
Court
Supreme Court of the United States
Jurisdiction
Federal
Date
1910-02-21
Topic
general

How later courts describe this case

  • “[T]he trustee takes the property of the bankrupt, not as an innocent purchaser, but as the debtor had it at the time of the petition, subject to all valid claims, liens and equities.”

Citator

UpLaw has not yet analyzed Zartman v. First Nat. Bank of Waterloo. The absence of a flag is not a finding that it is good law.

Cited by
86 opinions

Headnotes

  1. Bankruptcy Law — Trustee's Title to Estate Property A trustee in bankruptcy takes the property of the bankrupt not as a bona fide purchaser for value, but in the same condition the debtor held it at the time of the petition, subject to all valid claims, liens, and equities then existing. 216 U.S. at 138
  2. Remedies — Reformation of Written Instruments — Effect of Bankruptcy The bankruptcy law does not suspend the jurisdiction of equity to decree the correction of errors in written contracts caused by mutual mistake; a court of equity may reform an agreement made before the petition to conform to the parties' intent, and the trustee in bankruptcy takes the property subject to that equitable power. 216 U.S. at 138
  3. Remedies — Reformation — Creation of Liens Where a contract is reformed to correct a mutual mistake and conform it to the intent of the parties, no new lien is created; the original lien is merely adjudicated and determined. 216 U.S. at 138
ZARTMANv. FIRST NATIONAL BANK,216 U.S. 134(1910)
30 S.Ct. 368
ZARTMAN, TRUSTEE IN BANKRUPTCY,v. FIRST NATIONAL BANK OF WATERLOO.
ERROR TO THE SUPREME COURT OF THE STATE OF NEW YORK.
No. 74.
Argued January 12, 1910.
Decided February 21, 1910.
The jurisdiction which equity has to decree correction of errors in written contracts caused by mutual mistake is not suspended by the bankruptcy law; and the trustee takes property as the debtor had it at the time of the petition subject to all valid claims, liens and equities, including the power of a court of equity to correct a manifest error by mutual mistake in an agreement made prior to the petition. Where a contract is reformed to correct a mutual mistake and make it conform to the intent of the parties a new lien is not created, but the original lien is adjudicated and determined.189 N.Y. 533, affirmed.
THIS was a suit brought in the Supreme Court of the State of
New York by the First National Bank of Waterloo against Francis
Bacon and George E. Zartman, as Bacon's trustee in bankruptcy, to
procure the reformation of a written contract made by plaintiff
and defendant Bacon February 15, 1902.
Before the contract was made, Bacon was president of the First
National Bank of Waterloo, New York, and also of the Waterloo
Wagon Company. He was active in the office of the Wagon Company,
while the business of the bank was looked after by its cashier
Becker. The Waterloo Bank had extended credit to the Wagon
Company and to Bacon individually, discounting paper and taking
notes.
The Exchange National Bank of Seneca Falls, New York,
Page 135
held, by assignment from Bacon, 461 shares of the stock of the
Wagon Company and 253 shares of the Waterloo Bank, as continuing
collateral security for any existing or future indebtedness of
Bacon or the Wagon Company.
The contract between Bacon and the Waterloo Bank provided that
the shares were "to be held by said bank as a continuing
collateral security for the payment to it of any indebtedness or
liability of any kind, absolute or contingent, due or not due,
now existing or that may hereafter exist, arise, accrue or be
contracted, on the part of himself or of the Waterloo Wagon
Company Limited, to said bank, and the said Francis Bacon hereby
agrees with the First National Bank of Waterloo that the said
certificates of stock above namedare transferred to andmay be
held by the said First National Bank of Waterloo as a continuing
collateral security for the payment to it of any indebtedness or
liability of any kind, absolute or contingent,now existing or
that may hereafter exist, arise, accrue or be contracted on the
part of the Waterloo Wagon Company Limited,or himself, to said
bank and said shares of stock upon their surrender by the
Exchange National Bank shall be deposited with the said First
National Bank of Waterloo."
The words in italics were omitted from the contract by mutual
mistakes made in preparing and executing it, and the New York
Supreme Court, by its decision, reformed the contract by
inserting them. In the meantime, however, Bacon had become a
bankrupt, having been so adjudicated May 4, 1904, and defendant
Zartman had been appointed trustee.
This action was begun October 17, 1904. The trustee alone
defended.
The judgment was unanimously affirmed by the Appellate
Division of the Fourth Department,113 A.D. 612, and on
appeal to the Court of Appeals the decision of the Appellate
Division was unanimously affirmed without opinion.189 N.Y. 533.
The remittitur was filed below November 9, 1907, and this writ of
error was thereupon allowed.
Page 136
Mr. George E. Zartman pro sefor plaintiff in error:

The interest which the trustee took could not be diminished by the action of the court; reformation of the contract would be in direct violation of the bankrupt act. Under § 67aclaims which for want of record or for other reasons could not have been valid liens as against the claims of the creditors of the bankrupt shall not be liens against his estate.

No lien in this case could be created on the stock affected except by delivery, and there was no delivery in this case.Wilsonv.Little,2 N.Y. 446,457; 3 Pom. Eq. Jur., § 1235;Stephensv.Perrine,143 N.Y. 476;Skiltonv.Coddington,185 N.Y. 80.

The day the petition is filed separates past and future as to liens and as to when rights of parties are to be adjusted.RePeare, 4 Am. Bk. Rep. 578;Goldmanv.Smith, 2 Am. Bk. Rep. 104;Morganv.Campbell, 22 Wall. 381;Thompsonv.Fairbanks,196 U.S. 516;Re McDonald, 21 Am. Bk. Rep. 358;Security Co. v.Hand, 143 F. 32, aff'd206 U.S. 415.

The rights of the trustee as representing the receiver were not regarded by the state court. The receiver took the legal title.

The trustee is entitled to the same protection as abonafidepurchaser for value.Re Book, 98 F. 975;ReThorpe, 12 Am. Bk. Rep. 195;Fourth Street Bankv.MilbourneMills, 22 Am. Bk. Rep. 442.

The judgment reforming the contract created a new lien, and both judgment and lien are void as against the trustee.Mr. W.H. Sholesfor defendant in error:

The bankruptcy law does not suspend the important branch of equity jurisprudence which has to do with the correction of mistakes in written instruments caused by the oversight or carelessness of the parties thereto or their scriveners.

Plaintiff in error claims that the mistake made in dictating or writing out the contract is an asset in his hands as a part ofPage 137the estate of the bankrupt and that he takes the same kind of title as abona fidepurchaser for value. This is error, for the rule is, that the trustee takes the property of the bankrupt not as an innocent purchaser would, but as the debtor had it at the time of the petition, subject to all valid claims, liens and equities.Winsorv.McClellan, 2 Story, 492;Donaldsonv.Farwell,93 U.S. 631;Caseyv.La Societe de CreditMobilier, 2 Wood, 777;Stewartv.Platt,101 U.S. 731;ReN.Y. Economical Printing Co., 6 Am. Bk. Rep. 615;Yeatmanv.New Orleans Sav. Inst.,95 U.S. 764;Thompsonv.Fairbanks,196 U.S. 516.

An attaching creditor is not abona fidepurchaser.Sargentv.Sturm,23 Colo. 359;Thompsonv.Rose,16 Conn. 71;Oswego Starch Factoryv.Lendrum,57 Iowa 573;American Union Ex. Co. v.Willsie,79 Ill. 92;Jordanv.Parker,56 Me. 557;Thaxterv.Foster,153 Mass. 151;Naugatuck Cutter Co. v.Babcock, 22 Hun, 481;Mowreyv.Walsh, 8 Cow. 245;Devoev.Brandt,53 N.Y. 462;Bradleyv.Olear,10 N.H. 477;Poorv.Woodburn,25 Vt. 234.

An assignee for benefit of creditors is not abona fidepurchaser.Wailesv.Couch,75 Ala. 134;Beldingv.Frankland, 8 Lea (Tenn.), 67,Farleyv.Lincoln,51 N.H. 579;Ratcliffev.Sangston,18 Md. 383;Bussingv.Rice, 2 Cush. (Mass.) 48.

Nor is an assignee in bankruptcy abona fidepurchaser.Donaldsonv.Farwell,93 U.S. 631;Montgomeryv.BucyrusMach. Works,92 U.S. 257.

That courts of equity will decree the correction of errors in written instruments which have been caused by mutual mistakes has nowhere been more strongly upheld than in the United States courts.Huntv.Rousmanier, 1 Pet. 1;Samev.Same, 8 Wheat, 174;Ivinsonv.Hutton,98 U.S. 79;Waldenv.Skinner,101 U.S. 577;Elliottv.Sackett,108 U.S. 132;Adamsv.Henderson,168 U.S. 573.

There is no provision whatever in any statute, either statePage 138or national, which connects the question involved in this case with any rule or regulation concerning the filing or recording of any paper whatever. No such question is here in any form.
MR. CHIEF JUSTICE FULLER, after making the foregoing statement, delivered the opinion of the court.
The jurisdiction in equity to decree the correction of errors in written contracts which have been caused by mutual mistake is firmly established and needs no citation of authority to sustain it. In the present case the evidence of the mistakes in question was undisputed. We are not aware that the bankruptcy law has suspended that jurisdiction.

The position of the trustee in bankruptcy seems to be that the mistake made by Bacon in dictating or writing out the contract between himself and the Waterloo Bank "is an asset in his hands as part of the estate of the bankrupt," but we cannot agree to that. The trustee claims that he takes the same kind of title as abona fidepurchaser for value, but the rule applicable to this and all similar cases is that the trustee takes the property of the bankrupt, not as an innocent purchaser, but as the debtor had it at the time of the petition, subject to all valid claims, liens and equities.Thompsonv.Fairbanks,196 U.S. 516, and cases cited. And this is so well settled that our jurisdiction of the writ of error is exceedingly doubtful. Judge Williams, speaking for Appellate Division, Fourth Department, treated of this point thus (113 A.D. 612,615):

"It is said that the bankruptcy of Bacon constituted a bar to the relief granted in this action. This cannot be true. The trustee took the bankrupt's property in the same condition and subject to the same liens as the bankrupt himself held it. The trustee is in no sense abona fidepurchaser for value, and entitled to protection as such. No new lien was created by the decision and judgment appealed from. The original lien was adjudicated and determined."

We concur in this view, and the judgment isAffirmed.Page 139