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District Court of Appeal, Fourth District, California.


Civ. 1353.

Decided: March 22, 1935

Farnsworth, Burke & Maddox, of Visalia (James K. Abercrombie, of Visalia, of counsel), for appellant. F. C. Huebner and Arthur H. Drew, both of Fresno, for respondent.

This is an appeal by plaintiff from a judgment rendered in an action wherein he sought to recover from defendant the sum of $3,035.50. This sum had been collected by defendant under an execution issued on a judgment rendered in his favor in an action against the California Olive Growers, Inc., a corporation. We will refer to the California Olive Growers, Inc., as the corporation. The facts are not in dispute.

A. M. Drew, an attorney at law, performed legal services for the corporation prior to September 19, 1927. On that day he commenced an action in the superior court of Fresno county to recover $3,025.50 from the corporation and caused its bank account to be attached. Summons was served and the parties entered into negotiations for a settlement of the claim. Pending these negotiations the default of the corporation was taken, judgment entered, and execution levied under which $3,035.50 was collected and paid to Drew. Thereafter the judgment was vacated, the default opened, and an answer filed. The case was not brought to trial and was dismissed for lack of prosecution on September 22, 1933.

On March 27, 1928, the corporation was adjudged an involuntary bankrupt and plaintiff was appointed, qualified, and acted as its trustee. The scheduled debts of the corporation totaled $211,924.51, and its scheduled assets $17,787.45.

On November 15, 1929, plaintiff brought this action to recover the $3,035.50 which defendant had collected under the execution. Defendant maintains that he is entitled to retain the money collected under the execution as payment of his bill for services rendered. It was stipulated at the trial that the reasonable value of Drew's services to the corporation was $3,025.50.

It is well settled in California that when a judgment is reversed on appeal the appellant is entitled to restitution of all things taken from him under the judgment. After reversal, the respondent stands in the position of a trustee of appellant of the property obtained under the judgment. Restitution may be sought in the same or in an independent action. Ward v. Sherman, 155 Cal. 287, 100 P. 864; Asato v. Emirzian, 177 Cal. 493, 171 P. 90. The same rule should apply where a judgment has been vacated by a trial court. A judgment, when vacated, cannot be effective for any purpose. Lapique v. Plummer, 50 Cal. App. 88, at page 94, 195 P. 293; Sichterman v. R. M. Hollingshead Co., 117 Cal. App. 504, 4 P.(2d) 181; Thomas v. Lavery, 125 Cal. App. 666, 14 P.(2d) 158; Clarke v. Baird, 98 Cal. 642, 33 P. 756. We therefore conclude that defendant had no right to retain the money collected under the execution after the judgment upon which it was issued had been vacated. He urges that he caused satisfaction of the judgment to be entered after he had received the money from the sheriff. This can avail him nothing as there remained nothing to satisfy after the judgment was vacated.

There remains for determination the question of defendant's right to offset his claim for services rendered against the claim of the plaintiff for restitution of the money unlawfully held by defendant. To permit defendant to offset his claim would give him a preference over other general creditors of the bankrupt by permitting him to be paid in full while other creditors in the same class would receive but percentages of their demands.

The rule is consistently applied in the federal courts that when a debtor, prior to bankruptcy, voluntarily places in the hands of his creditor assets for the particular purpose of extinguishing a debt, and bankruptcy occurs, the creditor can offset his demand against the claim of the trustee in bankruptcy for a return of the assets to the bankrupt estate. It is equally well settled that the unauthorized possession of funds of the bankrupt can give the creditor no right to apply them to the payment of his own claim to the prejudice of the rights of other creditors. Emerson v. Fisher (C. C. A.) 246 F. 642; Lehigh Valley Coal Sales Co. v. Maguire (C. C. A.) 251 F. 581; Alvord v. Ryan (C. C. A.) 212 F. 83; In re Interborough Consol. Corp. (C. C. A.) 288 F. 334, 32 A. L. R. 932; Parker State Bank v. Pennington (C. C. A.) 9 F.(2d) 966; In re Gans & Klein (D. C.) 14 F.(2d) 116; Cook County Nat. Bank v. United States, 107 U. S. 445, 2 S. Ct. 561, 27 L. Ed. 537; Hanover Nat. Bank of New York v. Suddath, 215 U. S. 122, 30 S. Ct. 63, 54 L. Ed. 120.

In the instant case the money was not voluntarily paid to defendant by the corporation, but was forcibly seized by the levy of an execution, nor was it voluntarily handed over to be applied on the particular debt owed to defendant. When his judgment was vacated, defendant's possession of the money became illegal and he should have restored it to his debtor. It follows that defendant cannot offset the amount of his claim against the suit of the trustee in bankruptcy for the money which he unlawfully retained but must restore it and take his place among the general creditors of the bankrupt estate. Had there been no adjudication of bankruptcy, and had the corporation been suing, the defense of offset or counterclaim might have been available to defendant, but not under the circumstances here shown.

Judgment reversed.

MARKS, Justice.

We concur: BARNARD, P. J.; JENNINGS, J.