Opinion
Happy & Hindman, for Karen Fogh.
Danson & Huncke, for trustee.
HANFORD, District Judge (after stating the facts as above).
The memorandum decision heretofore filed in this case only disposed of the question raised as to a vendor's lien claimed by Mrs. Karen Fogh, based upon the written contract executed by the bankrupts at the time of their purchase of her stock of merchandise, and reserved for further consideration the question whether the statute of 1901 (Laws Wash. 1901, p. 222, c. 109) created a trust for the benefit of her creditors; and since the filing of that decision a new claim has been presented in her behalf, supported by an affidavit of one of her attorneys, and the case has been again submitted for decision. The court adheres to its former decision adverse to the lien so far as its validity depends upon contract, but the question as to a trust remains to be decided. In accordance with the principles of equity, the courts of this country, in dealing with estates of insolvent debtors, protect trust funds and segregate the same from the assets of the insolvent. See The Spokane County and City Cases against the Receiver of The First National Bank of Spokane (C.C.) 61 F. 538, and 68 F. 979-983, 16 C.C.A. 81. In this case it is not disputed that Mrs. Fogh made a sale of her stock of merchandise in bulk to Gaskill & Sutton, and that in compliance with the statute of 1901 she gave them a sworn statement containing a list of her creditors, specifying the amounts due to each, etc., and that part of the debts so listed are still unpaid; and the claim now under consideration is for the balance of the purchase price which Gaskill & Sutton agreed to pay for the stock of Merchandise. It is also a fact in the case that part of the identical merchandise which Mrs. Fogh sold was on hand when the trustee took possession of the assets of Gaskill & Sutton, and the exact amount which he has received as proceeds from the sale thereof can be ascertained. The statute of 1901, above referred to, was undoubtedly intended to provide for the security of creditors in cases where an entire stock of merchandise is sold in bulk. The Supreme Court of this state in the case of FitzHenry v. Munter & Johnson (Wash.) 74 P. 1003, has declared that the object of the statute is 'to hold the goods of debtors, under such circumstances, as a trust fund for the benefit of all creditors, and to hold the purchaser in possession as a trustee for such creditors. ' In that case the owner of a small stock of merchandise had commenced to dispose of it by an auction sale. After the most valuable goods had been sold in the manner, she accepted an offer of 50 per cent. of the invoice price for the remainder, and gave possession to the vendees. She then refused to give a list of her creditors, as the law requires in cases of sales in bulk, and payment of the purchase money was withheld. She then made a second sale for a nominal consideration to FitzHenry, who commenced an action against Munter & Johnson, the vendees in possession, to recover the amount which they had agreed to pay for the remnants of the stock. Creditors of the vendor who had obtained judgments against her and garnished Munter & Johnson were made parties by the consolidation of their actions with FitzHenry's action. Munter & Johnson deposited the purchase price for which they were liable in the registry of the court, to be disbursed to the party or parties entitled thereto, as the court should adjudge. The vendor filed a disclaimer. Then a new party as assignee of other creditors
Page 237.
of the vendor intervened, claiming that the money should be distributed pro rata among all the creditors of the vendor. The superior court denied the right of the intervener to any share of the fund, and dismissed him from the case. That judgment was reversed by the Supreme Court, which decided, upon the trust-fund theory, that the money paid into the registry of the superior court should be distributed pro rata among all the creditors who were parties to the suit, including the intervener. In going to the extent of depriving judgment creditors of the advantage gained by their garnishment proceedings the Supreme Court necessarily gave full effect to the theory contained in the above excerpt from the opinion, and actually determined that by force of the statute the vendees became trustees for all the creditors of the vendor before they were garnished by some of the creditors. The words 'such circumstances' in the opinion indicate a cautious intention to limit the effect of the decision to the case decided and cases involving similar circumstances. In the case which this court is now considering the circumstances are similar, except that the vendor and vendees observed the requirements of the statute at the time of the sale. That difference, however, to deprive the vendor's creditors of the benefit of the trust-fund theory, requires a construction of the statute which will make disobedience effective to create legal rights in favor of creditors unknown to the vendees, and leave the law ineffectual for the security of creditors who are listed and made known to the vendees in the manner prescribed. It is my opinion that to so construe the law would be unfair both to the creditors and the vendees. I hold, therefore, that the net proceeds of the goods formerly owned by Mrs. Fogh, now in the hands of the trustee, is a trust fund for the security of the balance due to her creditors, specified in the schedule which she gave to Gaskill & Sutton, and I direct that the amount of said fund be paid to them pro rata. By 'net proceeds' I mean the amount realized by the trustee from the sale of said goods after deducting therefrom a proportionate share of the expenses of the bankruptcy proceedings payable out of the assets of the bankrupts.