Flanders v. Coleman

Background

A bankruptcy trustee brought suit on behalf of a bankrupt man against the bankrupt’s father, saying the father received four rent notes and the son’s rights in a farm to hinder, delay, and defraud creditors. The trustee said the son had lived on and improved the land for years, became insolvent in December 1914, and shortly before filing bankruptcy turned over the notes and gave up his land rights. The trustee asked the court to void the transfers, recover collected funds, declare the land property of the bankruptcy estate or an equitable lien, and force transfer of title for the benefit of creditors. The District Court referred the case to a master, but then dismissed the bill after deciding it lacked power to hear the dispute.

Reasoning

The central question was whether the federal bankruptcy court had the power to hear claims to undo transfers and preferences made shortly before bankruptcy. The Court examined the trustee’s allegations and the relevant parts of the Bankruptcy Act that allow trustees to avoid transfers made within four months and to recover property or its value. The Court explained the federal law amendments give federal courts concurrent authority with state courts to consider such claims. Because the trustee’s bill and amendment alleged enough — fraudulent transfers and preferential transfers within the statutory period — the Court held those allegations were sufficient to invoke the court’s power to hear the case and reversed the dismissal.

Real world impact

The trustee may now pursue the claims in federal court. This ruling concerns whether the court can hear the suit, not the final facts or whether fraud actually occurred, so the merits remain to be decided.