ZARTMAN v. FIRST NATIONAL BANK

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Docket Number

No. 74.

Attorney(S)

Mr. George E. Zartman pro se for 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 § 67 a claims 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. Wilson v. Little, 2 N.Y. 446, 457; 3 Pom. Eq. Jur., § 1235; Stephens v. Perrine, 143 N.Y. 476; Skilton v. 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. Re Peare, 4 Am. Bk. Rep. 578; Goldman v. Smith, 2 Am. Bk. Rep. 104; Morgan v. Campbell, 22 Wall. 381; Thompson v. Fairbanks, 196 U.S. 516; Re McDonald, 21 Am. Bk. Rep. 358; Security Co. v. Hand, 143 F. 32, aff'd 206 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 a bona fide purchaser for value. Re Book, 98 F. 975; Re Thorpe, 12 Am. Bk. Rep. 195; Fourth Street Bank v. Milbourne Mills, 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. Sholes for 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 of the estate of the bankrupt and that he takes the same kind of title as a bona fide purchaser 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. Winsor v. McClellan, 2 Story, 492; Donaldson v. Farwell, 93 U.S. 631; Casey v. La Societe de Credit Mobilier, 2 Wood, 777; Stewart v. Platt, 101 U.S. 731; Re N.Y. Economical Printing Co., 6 Am. Bk. Rep. 615; Yeatman v. New Orleans Sav. Inst., 95 U.S. 764; Thompson v. Fairbanks, 196 U.S. 516. An attaching creditor is not a bona fide purchaser. Sargent v. Sturm, 23 Colo. 359; Thompson v. Rose, 16 Conn. 71; Oswego Starch Factory v. Lendrum, 57 Iowa 573; American Union Ex. Co. v. Willsie, 79 Ill. 92; Jordan v. Parker, 56 Me. 557; Thaxter v. Foster, 153 Mass. 151; Naugatuck Cutter Co. v. Babcock, 22 Hun, 481; Mowrey v. Walsh, 8 Cow. 245; Devoe v. Brandt, 53 N.Y. 462; Bradley v. Olear, 10 N.H. 477; Poor v. Woodburn, 25 Vt. 234. An assignee for benefit of creditors is not a bona fide purchaser. Wailes v. Couch, 75 Ala. 134; Belding v. Frankland, 8 Lea (Tenn.), 67, Farley v. Lincoln, 51 N.H. 579; Ratcliffe v. Sangston, 18 Md. 383; Bussing v. Rice, 2 Cush. (Mass.) 48. Nor is an assignee in bankruptcy a bona fide purchaser. Donaldson v. Farwell, 93 U.S. 631; Montgomery v. Bucyrus Mach. 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. Hunt v. Rousmanier, 1 Pet. 1; Same v. Same, 8 Wheat, 174; Ivinson v. Hutton, 98 U.S. 79; Walden v. Skinner, 101 U.S. 577; Elliott v. Sackett, 108 U.S. 132; Adams v. Henderson, 168 U.S. 573. There is no provision whatever in any statute, either state or 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.

Judges

Melville Weston Fuller

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Smart Summary

Factual and Procedural Background

This case arises from a suit in the Supreme Court of New York brought by the First National Bank of Waterloo against Francis Bacon and his bankruptcy trustee, George E. Zartman, seeking reformation of a written contract executed February 15, 1902. Bacon was president of both the bank and the Waterloo Wagon Company. The bank had extended credit to both Bacon and the Wagon Company, taking shares of stock as collateral. The contract provided that shares were to be held as continuing collateral security for any indebtedness of Bacon or the Wagon Company. However, certain words were mistakenly omitted from the contract, which the New York Supreme Court reformed by inserting the omitted language. Bacon was adjudicated bankrupt on May 4, 1904, and Zartman was appointed trustee. The trustee alone defended the action. The Appellate Division unanimously affirmed the reformation judgment, and the New York Court of Appeals affirmed without opinion. The writ of error to the United States Supreme Court followed.

Legal Issues Presented

Whether the bankruptcy law suspends the equity jurisdiction to reform contracts for mutual mistake.
Whether the trustee in bankruptcy takes the property of the bankrupt as a bona fide purchaser for value or subject to all valid claims, liens, and equities existing at the time of the bankruptcy petition.
Whether the reformation of the contract created a new lien or merely adjudicated the original lien.

Arguments of the Parties

Appellant's Arguments (Trustee George E. Zartman)

The trustee's interest could not be diminished by the court's reformation of the contract, as doing so would violate the Bankruptcy Act.
Under § 67a of the Bankruptcy Act, claims that could not have been valid liens against creditors should not be liens against the estate.
No lien could be created on the stock without delivery, which did not occur here.
The trustee, representing the receiver, holds legal title and is entitled to the same protection as a bona fide purchaser for value.
The judgment reforming the contract effectively created a new lien, which is void as against the trustee.

Defendant in Error's Arguments (First National Bank of Waterloo)

The bankruptcy law does not suspend equity's power to correct mutual mistakes in written instruments.
The trustee does not take the bankrupt’s property as a bona fide purchaser but takes it subject to all valid claims, liens, and equities existing at the time of the petition.
Courts of equity have long upheld correction of mutual mistakes in contracts.
No statutory provision connects the issues here with any filing or recording requirements.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Thompson v. Fairbanks, 196 U.S. 516	The trustee in bankruptcy takes property subject to all valid claims and liens existing at the time of the bankruptcy petition, not as a bona fide purchaser.	The court relied on this precedent to affirm that the trustee holds the property subject to the original lien and equities, not free of them.
Winsor v. McClellan, 2 Story, 492	Trustee takes property as debtor had it, subject to valid liens and equities.	Supported the principle that the trustee does not receive greater rights than the bankrupt had.
Donaldson v. Farwell, 93 U.S. 631	Trustee’s rights are not equivalent to those of a bona fide purchaser.	Reinforced the principle that the trustee takes subject to equities.
Hunt v. Rousmanier, 1 Pet. 1	Equity’s jurisdiction to reform contracts for mutual mistake.	Supported the court’s recognition of equity’s power to correct mutual mistakes despite bankruptcy.
Ivinson v. Hutton, 98 U.S. 79	Equity will correct mutual mistakes in written instruments.	Used to confirm that bankruptcy law does not suspend equity’s correction powers.
Walden v. Skinner, 101 U.S. 577	Equity’s power to reform contracts for mutual mistake.	Affirmed the continuing jurisdiction of equity in such matters.
Elliott v. Sackett, 108 U.S. 132	Equity correction of mutual mistakes.	Further supported equity’s jurisdiction unaffected by bankruptcy law.
Adams v. Henderson, 168 U.S. 573	Equity jurisdiction for reformation of contracts.	Confirmed that equity jurisdiction remains intact in bankruptcy context.

Court's Reasoning and Analysis

The court recognized the firmly established equity jurisdiction to correct mutual mistakes in written contracts and found no indication that bankruptcy law suspends this jurisdiction. The evidence of mutual mistake in the contract was undisputed. The trustee’s argument that the mistake was an asset taken as a bona fide purchaser was rejected. Instead, the court held that the trustee takes the bankrupt’s property subject to all valid claims, liens, and equities existing at the time of the bankruptcy petition. The court emphasized that no new lien was created by the reformation; rather, the original lien was simply adjudicated and determined. The court agreed with the Appellate Division’s reasoning that the bankruptcy does not bar relief and that the trustee is not entitled to protection as a bona fide purchaser for value.

Holding and Implications

The judgment of the New York courts reforming the contract was AFFIRMED.

The direct effect of this decision is to uphold the equity court’s power to reform contracts for mutual mistake even after bankruptcy proceedings have commenced, confirming that trustees take the bankrupt’s property subject to all valid liens and equities rather than as innocent purchasers. No new lien arises from reformation; the original lien is recognized and enforced. The decision does not create new precedent beyond affirming established principles regarding equity jurisdiction and the rights of bankruptcy trustees.

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ZARTMAN, TRUSTEE IN BANKRUPTCY, v. FIRST NATIONAL BANK OF WATERLOO.

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.

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 a bona fide purchaser 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. Thompson v. 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 a bona fide purchaser 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 is

Affirmed.