In re STONE.

(District Court, E. D. Arkansas, W. D. May 20, 1902.)

1. BANKRUPTCY-EXEMPTIONS-CONSTRUCTION OF STATE STATUTES.

In determining the rights of bankrupts to exemptions, courts of bankruptcy are bound by the construction placed on the statutes of the state by its highest court.

2. SAME-HOMESTEAD-ARKANSAS LAWS.

Under the decisions of the supreme court of Arkansas, which give a liberal construction to the homestead laws of the state, a bankrupt who, at the time of his bankruptcy, resided with his family in a portion of a building owned by him, and chiefly occupied for business purposes, is entitled to hold such building exempt as a homestead where it does not exceed the statutory limit of value.

8. SAME-FRAUD TO DEFEAT HOMESTEAD RIGHT.

The fact that a bankrupt removed, with his family, into a building owned by him, after he became insolvent, and in contemplation of bankruptcy, does not defeat his right to claim his homestead exemption in the property.

In Bankruptcy. On review of decision of referee.

The facts necessary for a determination of the issues involved, as found and certified by the referee, are as follows:

"The bankrupt claims as exempt, as his homestead, lots 6, 7, 8, 9, and 10, in block 14 in the town of Casa, Ark. The lots are in the business part of the town, and there is on them a wooden building 44 feet wide and 100 feet long, and in the southeast corner of this building a room 20 by 50 feet; all being under one roof, and divided by a frame partition. Entrance to this room was from the store, and also from the street. The entire building was erected by the bankrupt in 1901, and the large room was used by him exclusively as a storehouse, and the smaller room rented out by him, and was used at one time as a billiard hall, and, up to the time he moved in, as a restaurant. On December 14, six days before his failure, and in contemplation of bankruptcy, he moved his family, which up to that time had resided in a rented dwelling house in another part of the town, into the smaller room, making it the home of his family, which consists of himself, wife, and six children. Until he moved into this room, there was no effort to impress this property with the homestead character, though, when built, the bankrupt stated that he intended the buildings for a store and a home to live in. At the time the debts due from the bankrupt were contracted, no part of the premises was used as his homestead, and from the character and arrangements of the buildings, until he moved into it, the referee finds the buildings were primarily intended for business purposes, to the exclusion of a home for the family, and that the bankrupt had no other homestead."

J. G. Wallace, for the bankrupt.

John M. Moore and W. B. Smith, for the trustee.

TRIEBER, District Judge (after stating the facts). The right to exemptions under the bankrupt law depending solely on the statutes of the state, the national courts are bound by the construction of the statutes by the highest court of the state. Bank v. Glass, 25 C. C. A. 151, 79 Fed. 706; Steele v. Buel, 44 C. C. A. 287, 104 Fed. 968; Richardson v. Woodward, 44 C. C. A. 235, 104 Fed. 873.

While there is an irreconcilable conflict among the decisions of the highest courts of the various states as to the proper construction 12. See Homestead, vol. 25, Cent. Dig. § 54.

of the homestead laws, a careful analysis of the authorities shows that this difference of views depends solely upon the fact whether the court has adopted a liberal or strict construction of the exemption laws. In Arkansas, it is the settled rule that the homestead exemption laws shall be liberally construed. As early as 1867, the supreme court of the state, in Wassell v. Tunnah, 25 Ark. 101, adopted that rule, and it has been followed ever since. In that case, Mr. Justice Compton, delivering the unanimous opinion of the court, said:

"It was an enlightened public policy, looking to the general welfare as well as to that of the individual citizen, which dictated the passage of the homestead act; and the obvious intent of the act is to secure to every householder, or head of a family, a home, a place of residence, which he may improve and make comfortable, and where the family may be sheltered, and live beyond the reach of those financial misfortunes which even the most prudent and sagacious cannot always avoid; and the better to effectuate this intent, and thereby promote the prosperity of the state, as well as the independence of the citizen, no limitation as to value is fixed upon the homestead. The splendid mansion and the humblest cabin stand upon the same legal footing-each is the home of the citizen, as he has it; and as such the law protects it. The act, then, being remedial, and such being its spirit and intent, the narrow and literal construction contended for by the counsel for the appellant cannot be adopted consistently with the established rules of law applicable in such cases." 25 Ark. 103. Gainus v. Cannon, 42 Ark. 503-515.

Applying this rule to the facts of the case at bar, there is no difficulty to reach a correct conclusion. The bankrupt, at the time the petition was filed, and ever since, has occupied a part of the premises claimed as exempt as his home, living there with his family, and having no other home. How short a time he occupied the premises as such a home is immaterial, as long as he actually occupied the premises as his home at the time the rights of the creditors or trustee in bankruptcy accrued. The fact that the premises are used principally as a storehouse does not deprive the debtor's family of the right of homestead. Klenk v. Knoble, 37 Ark. 298; Gainus v. Cannon, 42 Ark. 503; Berry v. Meir, 66 S. W. 439, 70 Ark., decided by the supreme court of Arkansas in January, 1902. In Klenk v. Knoble, supra, the facts were that the debtor claimed as exempt several lots lying contiguous in one block. He was a stone mason, and also a brewer. On the premises, he had erected a small dwelling house occupying one lot, and the brewing house occupying some of the other lots. The family lived in the dwelling house, but the debtor slept frequently in the brewery, not for want of room in his house, but on account of his business, and because he did not live pleasantly with his wife. Upon these facts, the court held that the entire premises, including the brewery, constituted a homestead, and was exempt from seizure and sale under execution. In Berry v. Meir, supra, the facts were that the debtor purchased one-third of a town lot on which was a storehouse, in which he conducted a retail business. Subsequently he purchased the other two-thirds of the lot, erected at dwelling house thereon, and used it for residence purposes; the two parts of the lot being separated by a fence. Upon these facts, the court held that the entire lot was exempt as the homestead. In its opinion the court say:

"There are decisions by courts of other states to the effect that such a storehouse, entirely separate from the residence of the owner, and not used as an appurtenance or convenience of the dwelling house, is not a part of the homestead, but a majority of the judges are of the opinion that this court is committed to a different view of the law. In Gainus v. Cannon, 42 Ark. 504, Mr. Justice Eakin, speaking for the court, said: 'It is a strange and irrational idea, sometimes advanced, that a man ought to lose his homestead as soon as he attempts to make any part of it helpful in family expenses.'

To the same effect, see Rush v. Gordon, 38 Kan. 535, 16 Pac. 700; In re Ogburn's Estate, 105 Cal. 95, 38 Pac. 498; Orr v. Shraft, 22 Mich. 260; Groneweg v. Beck, 93 Iowa, 717, 62 N. W. 31; McDougall v. Meginniss, 21 Fla. 362; Lamont v. Le Fevre, 96 Mich. 175, 55 N. W. 687; Corey v. Schuster, 44 Neb. 269, 62 N. W. 470; Parisot v. Tucker, 65 Miss. 439, 4 South. 113; Palmer v. Hawes, 80 Wis. 474, 50 N. W. 341. Even if the homestead consists of two tracts, which only corner with each other, and on one of which the dwelling house is located, both tracts may, under the laws of Arkansas, be claimed as a homestead, if they do not exceed the legal area and value. Clements v. Bank, 64 Ark. 7, 40 S. W. 132, 62 Am. St. Rep. 149. It is, therefore, the established rule of the state that premises in part occupied for business purposes may still be claimed as exempt as a homestead under its laws.

Does the fact that the bankrupt made the premises his homestead when he knew that he was insolvent, and in contemplation of bankruptcy, constitute such a fraud as to deprive him and his family of the benefit of the exemption laws? In determining this question, it must be remembered that the object of the homestead exemption, under the laws of this state, as declared by the supreme court, is "to secure to every head of a family a home and place of residence, which he may improve and make comfortable, and where the family may be sheltered, and live beyond the reach of those financial misfortunes which even the most prudent and sagacious cannot always avoid." 25 Ark. 103. A fraudulent conveyance of the homestead does not cause the debtor to forfeit it. Bennett v. Hutson, 33 Ark. 762; Turner v. Vaughan, Id. 454; Carmack v. Lovett, 44 Ark. 180; Bogan v. Cleveland, 52 Ark. 101, 12 S. W. 159, 20 Am. St. Rep. 158; Blythe v. Jett, 52 Ark. 547, 13 S. W. 137; Pipkin v. Williams, 57 Ark. 242, 21 S. W. 433, 38 Am. St. Rep. 241. If a debtor, while insolvent, may take property not exempt, and invest it in a homestead, and hold that as exempt, is he not clearly entitled to appropriate property owned by him for his homestead, by moving his family into it, and using it, when insolvent, as a family dwelling? That the former may be done. is settled by numerous decisions. Chase v. Swayne, 88 Tex. 218, 30 S. W. 1049, 53 Am. St. Rep. 742; Cipperly v. Rhodes, 53 Ill. 347; Jacoby v. Distilling Co., 41 Minn. 227, 43 N. W. 52; Sproul v. Bank, 22 Kan. 336; O'Donnell v. Segar, 25 Mich. 367; Kelly v. Sparks (C. C.) 54 Fed. 70. This rule has been recognized in this court by Judge Caldwell in Backer v. Meyer (C. C.) 43 Fed. 702, and by the circuit court of appeals for the Eighth circuit in Bank v. Glass, 25 C. C. A. 151, 79 Fed. 706. In the last case, Judge Sanborn, in delivering the opinion of the court, says:

"If he takes property not exempt from judicial sale, and applies it to this purpose, he merely avails himself of a plain provision of the constitution or the statute enacted for the benefit of himself and his family. He takes nothing from his creditors, by this action, in which they have any vested right. * * Nor can the use of property that is not exempt from execution to procure a homestead be held to be a fraud upon the creditors of an insolvent debtor, because that which the law expressly sanctions and permits cannot be a legal fraud."

And Judge Caldwell, in Backer v. Meyer, supra, said:

"The homestead of the defendants was purchased by Meyer, after his insolvency, in the name of his wife, but this fact does not make it any the less the family homestead. If Meyer had purchased the homestead in his own name, it would, under the constitution and laws of the state of Arkansas, have been exempt, and the creditors were not, therefore, defrauded or prejudiced by the fact that it was purchased in the name of the wife."

In Re Wright, 3 Biss. 359, Fed. Cas. No. 18,067, and in Re Lammer, 7 Biss. 269, Fed. Cas. No. 8,031, different conclusions were reached by the court, but this court is concluded by the decisions of the highest court of this state and those of the United States circuit court of appeals for the Eighth circuit.

The conclusion is that the bankrupt is entitled to claim the premrses as exempt, they constituting his homestead under the provisions of the constitution and laws of the state of Arkansas.

Since the foregoing opinion was prepared, the identical question has been decided by the United States circuit court of appeals for this circuit [Eighth] in Huenergardt v. Dry Goods Co., 116 Fed. 31, and the same conclusion reached.

In re WYLY et al.

(District Court, N. D. Texas. June 7, 1902.)
No. 261.

1. BANKRUPTCY-RIGHT TO Prove Claim-Indorsee of NEGOTIABLE PAPER. The bankruptcy act does not change the rights of indorsees of negotiable instruments, and a bank which, in the ordinary course of business and in good faith, discounted for a customer a note of a third party, indorsed by the customer, may prove the same as a debt against the estate of the maker on his subsequent bankruptcy, notwithstanding the fact that the payee and indorser had received preferences from the bankrupt which he would have been required to surrender before he could have proved the note.

In Bankruptcy. On certificate from referee.

R. W. Flournoy, for State Nat. Bank.
Davis & Cocke, for trustee.

MEEK, District Judge. The referee certifies that the firm of Wyly & Wyly were adjudged involuntary bankrupts on a petition filed by creditors on the 14th day of November, 1901; that the State National Bank of Ft. Worth filed and had allowed its proof of debt based on a

11. See Bankruptcy, vol. 6, Cent. Dig. § 498.

promissory note for $563.60. The record shows this note to have been executed on the 22d day of October, 1901, by Wyly & Wyly, and delivered to the Carter-Battle Grocery Company, in whose favor it was made. On October 26, 1901, the grocery company transferred this note by indorsement to the bank. The trustee of the bankruptcy estate filed a contest of the claim of the bank on the following grounds: That the claim was really that of the Carter-Battle Grocery Company, and the bank was acting for and in its behalf; that the grocery company had received certain preferences which it should be required to return before the allowance of this claim; and that, in any event, the bank should be required to look first to the grocery company for its money before being permitted to file its claim against the bankruptcy

estate.

The State National Bank answered the contest, and alleged that the promissory note was acquired by it before the filing of the petition in bankruptcy against Wyly & Wyly, by purchase from the grocery company; that the bank paid a valuable consideration in cash for the note, and that the same was regularly indorsed and transferred to it by the grocery company, whereby it became the owner thereof; that it had no notice or information of any rights or claims on the part of the makers thereof against the payee, or of their relations and dealings with the payee; that it took the note in good faith by purchase as aforesaid, for a valuable consideration, before maturity, in the ordinary course of its business as a banking corporation discounting commercial paper; and it asks that this claim against the bankrupt estate of Wyly & Wyly be permitted to stand according to the proof already made. Proof was adduced before the referee on the issue thus made, and he permitted the claim of the bank to stand as proved, and the trustee asked for this certificate.

It is admitted in the record that the grocery company, the indorser of the note, had received large payments from Wyly & Wyly, bankrupts, during their insolvency, and in event this note had remained the property of the grocery company it could not have been proved up by it without having first made a surrender of the preferential payments received largely in excess of the face of the note. The contention of the trustee to the effect that the note was in fact the property of the grocery company, and that the bank was simply filing it in its name to aid the grocery company in rendering it possible for the latter to collect the note without a surrender of preferential payments received by it, is not supported by any evidence whatever. On the other hand, it is shown that the note was indorsed by the grocery company, and transferred to the bank before maturity, and in the due course of the bank's business in discounting paper for its customers. The evidence fails to disclose that the bank had knowledge of the insolvency of Wyly & Wyly or of the relations existing between Wyly & Wyly and the grocery company. It is true the bank has since the insolvency of Wyly & Wyly practically agreed to first look to the bankruptcy court for the payment of the note, and to hold the grocery company only for that portion which is not paid out of the dividends arising from the bankruptcy estate. This fact cannot, without other and additional circumstances, which are wholly lacking, support a finding of collusion