February 9, 1959, the same date of the recordation of the deed
from the claimants to Mrs. German.
Prior to the consummation of any of the above transactions, the
bankrupts were indebted to petitioner upon a promissory note
executed as part of the consideration for the purchase by John
German of a garage and automobile dealership. On February 24,
1959 petitioner placed that note in judgment in the Circuit Court
of Rock Island County in the amount of $16,305, plus costs of
suit. After that judgment was taken, as the witnesses testified,
plans for the construction of a new home were abandoned. On March
26, 1959, the bankrupts reconveyed lot 18 upon which the new home
was to be constructed to Thomas McGill and the 13th Street
property to claimants. Thereafter, on April 23, 1959, the Bank
released its mortgage on the McGill lot.
No consideration passed between the parties to either of the
conveyances hereinabove mentioned. Mrs. German paid no
consideration to claimants for the conveyance of the 13th Street
property; the bankrupts paid no consideration to McGill for the
conveyance to them of lot 18; and the bankrupts received no
consideration from the claimants or McGill upon their
reconveyance of the 13th Street property and lot 18,
At all times material to this petition, both bankrupts were
insolvent in that their liabilities exceeded the fair value of
their assets, but the Referee found that no creditor had extended
credit to the bankrupts as a result of the 13th Street property
being placed in the name of Mrs. German.
The Referee's material findings of fact follow the testimony of
the witnesses as hereinabove summarized. Ultimately, he found
that an oral trust was created in the 13th Street premises,
contemporaneously with the conveyance thereof to Mrs. German. The
court cannot say that those findings are clearly erroneous and
they may not, therefore, be disturbed.
The Referee concluded also, that Mrs. German's record title to
the 13th Street property was impressed with a constructive trust
for the benefit of claimants. That conclusion is erroneous upon
the facts of this case, but the validity of his ultimate decision
allowing the claim is not affected by that erroneous conclusion
if, as a matter of law, he correctly decided that an express
Petitioner contends that an oral trust in real estate is void
under the Statute of Frauds of Illinois and that such a trust
cannot be recognized by this court. That is not the law of
Illinois. Like the statute of limitations question hereinabove
discussed, the Statute of Frauds is, in Illinois, an affirmative
defense. E.g., Thomas v. Pope, 380 Ill. 206, 43 N.E.2d 1004. An
oral trust in violation of the Statute of Frauds is voidable at
the election of the trustee, but not void. That defense may be
waived by the failure to plead or assert the defense. E.g., Reed
v. Eastin, 379 Ill. 586, 41 N.E.2d 765. Mrs. German, as trustee
of the 13th Street property, waived her defense on that ground by
reconveying the premises to the claimants, thereby acknowledging
the existence and validity of the trust. Klass v. Hallas,
16 Ill.2d 161, 157 N.E.2d 261. That waiver of the Statute of Frauds
prior to filing the petition in bankruptcy is binding upon the
Trustee in Bankruptcy. The Trustee has the benefit of all
defenses available to the bankrupt "including * * * statutes of
frauds", 11 U.S.C.A. § 110, sub. c, but the trustee is bound by
a waiver of that defense by the debtor prior to the filing of his
petition in bankruptcy. 4 Collier on Bankruptcy, p. 1387.
The critical question when a fraudulent transfer or preference
of a creditor is asserted is whether the transfer removed from
the reach of the trustee in bankruptcy property which should be
applied 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 relates
to fraudulent transfers is interpreted as relating only to the
bankrupt's own property. Property held in trust by a debtor,
later adjudicated a bankrupt, may be transferred without that
constituting a fraud upon his creditors. Frederick v. Baxter Arms
Corp., 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 of
the debtor in property coming into his hands. If property held in
trust by a bankrupt is delivered to the trustee in bankruptcy,
the latter takes only the legal interest which the debtor had in
the property at the time his petition in bankruptcy was filed.
Such property is still impressed with the trust in the hands of
the 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; Todd
v. Pettit, 5 Cir., 108 F.2d 139.
In like manner, for a conveyance to constitute a preference
within the meaning of Section 60 of the Act, the property
conveyed must have been "the property of" the debtor. 11 U.S.C.A.
No question of estoppel arises in this case. As the Referee
found, no creditor extended credit to the bankrupts in reliance
upon Mrs. German's record ownership of the 13th Street property.
All obligations owed by the bankrupts at the time their petitions
in bankruptcy were filed had been incurred by them prior to the
real estate transactions hereinabove described.
In this connection, petitioner relies upon the fact that he
took judgment while the record title to the 13th Street property
was 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 attaches
to the actual title or interest which the judgment debtor has in
land, subject to all equities in the property at the date of
judgment. Mauricau v. Haugen, 387 Ill. 186, 56 N.E.2d 367; East
St. Louis Lumber Co. v. Schnipper, 310 Ill. 150, 141 N.E. 542.
The Referee correctly determined that the Sersig claim should
be allowed. There was no fraudulent transfer or creation of a
preference which would require the Sersigs, as a condition to the
allowance of their claims, to surrender the 13th Street property
to the Trustee. See 11 U.S.C.A. § 93, sub. g.
On Objections to Discharge.
The petition for review of the order discharging the bankrupts
specifies grounds, as follows: (1) that the Referee's finding
that the conveyance of the 13th Street property to Mr. and Mrs.
Sersig was not fraudulent is erroneous; (2) that the Referee's
finding that Mrs. German's failure to include the transfer of a
Ford Thunderbird automobile in her statement of affairs was not
knowingly and fraudulently made is contrary to the evidence and
erroneous; and (3) that the Referee erred in permitting Mrs.
German to amend her statement of affairs to include such transfer
after notice of the transfer was called to the court's attention
by specifications of objection to discharge.
Petitioner's first contention, related to the conveyance of the
real estate, is governed by the disposition of the like question
upon the petition for review of the order overruling objections
to allowance of the Sersig claim.
The bankrupt, Eileen German, within four months prior to her
adjudication as a bankrupt, transferred a Ford Thunderbird
automobile to Dale Auto Lease, Inc., for a valuable and adequate
consideration. That transfer was not shown on the statement of
affairs of the bankrupt. On November 10, 1959, after obtaining
leave of the court. Mrs. German amended her statement of affairs
to show the transfer of the automobile and to show the
disposition of the proceeds of that sale.
The Referee found that the transfer of the automobile was
omitted from Mrs. German's statement of affairs because she
believed, upon advice of counsel, that she only had to list
transfers of real estate in response to the question as to what
property had been transferred or otherwise disposed of during the
year immediately preceding the filing of her original petition in
bankruptcy. The Referee further found that the omission of the
transfer of the automobile was not knowingly and fraudulently
made. The evidence amply supports those findings and they may not
be set aside by the court.
There is no merit to the petitioner's contention that the
Referee erred in permitting amendment of Mrs. German's statement
of affairs after specifications of objection to her discharge
were filed on August 3, 1959. The sixth specification of
objection to the discharge of Mrs. German alleged that she had
sworn falsely in executing her petition in bankruptcy in that she
had omitted from the statement of her affairs the transfer of the
Thunderbird automobile. On November 10, 1959, upon leave of
court, Mrs. German filed an amendment to her statement of affairs
showing that the said automobile had been transferred to Dale
Auto Lease, Inc., Moline, Illinois, on or about February 21,
1959, for a consideration of $1,300 which was then spent by the
bankrupts in the payment of bills and for current living
General Order in Bankruptcy 11, 11 U.S.C.A. following section
53, provides in part that "the court may allow amendments to the
petition and schedules on application of the petitioner." That
Order vests the court with a sound discretion to permit amendment
of petitions in bankruptcy to correct omissions therefrom. In re
Claudon, 7 Cir., 73 F.2d 876; In re Haskell, 7 Cir., 73 F.2d 879.
Amendments to petitions in bankruptcy should be liberally allowed
when required in the interest of justice. In re Haskell, supra;
In re Seeley Tube & Box Co., 3 Cir., 219 F.2d 389. In the latter
case, an implied amendment to a bankruptcy schedule was
recognized and approved in the interest of justice.
In this case the petitioner's specification of objection
alleged that Mrs. German had knowingly and fraudulently made a
false oath in violation of 18 U.S.C.A. § 152, with reference to
Section 14, sub. c(1) of the Bankruptcy Act. 11 U.S.C.A. § 32,
sub. c(1). Mrs. German filed a verified response to that
specification in which she alleged that the Thunderbird
transaction had been omitted from her statement of affairs upon
her belief, inspired by advice of counsel, that the transaction
need not be listed. Upon that specification and response thereto,
it was certainly within the discretion of the Referee to permit
her to amend her petition to show the fact of the transfer and
the disposition of the proceeds thereof. The effect of those
pleadings and the amendment was to frame an issue whether the
transfer had been knowingly and fraudulently omitted in the first
General Order 11 places no time limit upon allowance of
amendment. A liberal construction of its provisions requires that
the discretion of the Referee to permit amendment at any stage of
the proceeding be fettered only by the power of the courts, on
review, to review the exercise of discretion for abuse.
The petition for review will be, and hereby is, denied, and the
orders of the Referee approving the Sersig claim and discharging
the bankrupts are approved.