(navigation image)
Home American Libraries | Canadian Libraries | Universal Library | Community Texts | Project Gutenberg | Children's Library | Biodiversity Heritage Library | Additional Collections
Search: Advanced Search
Anonymous User (login or join us)
Upload
See other formats

Full text of "Cases on the law of bankruptcy, including the law of fraudulent conveyances"

ill 



•»^ V. 




THE LIBRARY 

OF 

THE UNIVERSITY 

OF CALIFORNIA 

LOS ANGELES 

SCHOOL OF LAW 



C> 



^ 



. I '(,""' 



A'*^ 



^ ->^ 



7 



y 



2 3- 



r 



? 2 



^ ^if^ 7 ^ V ^^ 3y ^js^^ 



^^Y S4rf 



r '■ 



Digitized by tine Internet Arciiive 

in 2007 witin funding from 

IVIicrosoft Corporation 



ih. 



http://www.archive.org/details/casesonlawofbankOOIiolbiala 



CASES 



ON THE LAW OF 



BANKRUPTCY 

INCLUDING THE LAW OF FRAUDULENT 
CONVEYANCES 



Selected and Arranged By 



EVANS HOLBROOK and RALPH W. AIGLER 

Professors o( Law in the University o( Michigan 



CHICAGO 

CALLAGHAN AND COMPANY 

1915 



1915' 



COPYRIGHT 1915 

BY 

CALLAGHAN & COMPANY 



PREFACE 



This collection of cases is the result of several years' work in 
the class-room by both of the editors. It is obvious that there 
are difficulties in the teaching of a subject based entirely on a 
statute, especially in the years immediately following the adop- 
tion of the statute, when its provisions have not yet been passed 
on by the courts ; now, however, a considerable body of authorita- 
tive judicial interpretation of the Bankruptcy Act of 1898 has 
grown up, and it is hoped that the cases contained in this volume 
will serve to show the effective structure that has been con- 
structed on the foundation of the Act. 

Omissions from the opinions reprinted are indicated by the 

use of asterisks. 

EVANS HOLBROOK, 
RALPH W. AIGLER. 
Ann Arbor, January, 1915. 



671021 



CONTENTS 



CHAPTER I 
JURISDICTION 

** PAGE 

§ I. Of the Subject Matter 1 

A. Federal Legislation 1 

1. Constitutional Power 1 

2. Constitutionality of Present Act 1 

B. State Legislation 11 

1. Effect of National Act 11 

2. What State Laws are Suspended 12 

§ II, Of Persons 42 

A. Territorial Jurisdiction 42 

1. Natural Persons 42 

2. Partnerships 51 

3. Corporations 54 

B. Who May Become Bankrupts 61 

1. Natural Persons — Exception (as to Involuntary 

Bankruptcy) in the Cases of 61 

a. Wage-earners 61 

b. Farmers 65 

c. What Time Governs as to Classification . 71 

2. Persons of Abnormal Status 79 

a. Infants 79 

b. Married Women 83 

c. Lunatics 89 

3. Partnerships 96 

4. Corporations 99 

CHAPTER n 
PREREQUISITES TO ADJUDICATION 

§ I. In Voluntary Proceedings 101 

§ II. In Involuntary Proceedings 104 

A. Insolvency 104 

B. Debts of $1,000 or Over 120 

C. Petitioning Creditors 120 

D. Acts of Bankruptcy 121 

1. Fraudulent Conveyances 121 

2. Preferences 247 

3. Assignments 366 

4. Appointment of a Receiver 373 

5. Admission in Writing 377 



li^t 4 a^^^V-'-^^^.v^ ^ -. i.. I. 



CONTENTS 

CHAPTEB III 
ADMINISTRATION 

PAGE 

I I. Eeceiver 380 

S II. Provable Claims 384 

A. In General 384 

B. Tort Claims 396 

C. Contract Claims . . .i 409 

1. Unliquidated Claims 409 

2. Contingent Claims 411 

D. Secured Claims , 463 

E. Claims Having Priority 466 

I III. The Trustee 476 

A. Appointment 476 

B. Property Acquired 486 

1. As of What Time 486 

2. Kinds of Property 492 

3. Dissolution of Liens 578 

4. Mutual Debts and Credits . ., 599 

I IV. Exemptions 647 

CHAPTER IV 
COMPOSITIONS 653 

CHAPTER V 
DISCHARGE 663 

APPENDIX 

STATUTE OF 13 ELIZABETH 717 

NEW YORK ACT OF 1829 718 

BANKRUPTCY ACT OF 1898 AND NOTES 721 



HOLBROOK & AIGLER'S 

CASES ON BANKRUPTCY 



CHAPTER I 
JURISDICTION 

SECTION I 
OF THE SUBJECT MATTER 

A, Federal. Legislation 

1. CONSTITUTIONAL POWER 

Constitutio-n of the United States — Article I., Section 8 

The Congress shall have power * * * to establish 
* * * uniform laws on the subject of bankruptcies through- 
out the United States. 

2. CONSTITUTIONALITY OF BANKRUPTCY ACT H'MTi'l. 

HANOVER NATIONAL BANK v. MOYSES 

186 U. S. 181, 46 L. ed. 1113, 22 Sup. Ct. 857 

(United States Supreme Court. June 2, 1902) 

Statement by Mr. Chief Justice FULLER : 

This was a n action brought by the Hanover National Bank 
of New York against Max Moyses in the circuit court of the 
United States for the eastern district of Tennessee, November 
20, 1899, on a jud gment recovered ag ainst him in the circuit 
court of "Washington county, Mississippi, December 12, 1892. 

The amended declaration averred the execution of a certain 
promissoryjD ote by def ejidaj^t payable to the bank of Greenville, 

1 

H. & A. Bankruptcy — J 







2 ' JURISDICTION 

Missi^iEpi^; the indorsement thereof to plaintiff in New York; 
default in payment, suit in the state court of Mississippi having 
jurisdiction in perso'nam against defendant, who was then a 
citizen and resident thereof ; recovery of judgment ; and that the 
judgment "still remains in full force and effect, unappealed 
from, unreversed, or otherwise vacated, and the plaintiff hath 
not obtained any execution or satisfaction thereof." It was 
also averred that gjt er the rendition of the _ judgmen t in 
Mississippi, defendant changed hi s domicil and residence to th e 
state^of Tennessee, and thereafter, "not being a merchant or a 
trader, nor engaged in business or in any commercial pursuits, 
nor using the trade of merchandise, and being without mercan- 
tile business of any kind, fjLa d^ his volun tajy p pt^tinn in bank- 
rupf/»y jn the district c ourt of the United^ States for the southern 
^ dwdaion-jiLaaid eastern district of Tennessee71iii3er~the act of 
Congress of the United States of America, approved July 1st, 
1898, entitled *An Act to Establish a Uniform System of Bank- 
ruptcy Throughout the United States,' " and was adjudged 
bankrupt, and "since August 1st, 1898,'' "granted an adjudica- 
tion of his discharge in bankruptcy from all his debts, including 
that herein sued for." 

It was admitted that the discharge was * * good and effectual if 
said act of Congress and the proceedings thereunder are valid," 
but charged that the act was void because in violation of the 
Federal Constitution in many particulars set forth. 

Plaintiff also stated that it was and had continued to be 
domiciled in and resident in New York ; that it was not a party 
to said proceedings in bankruptcy, nor did it enter its appear- 
ance therein for any purpose, nor did it prove its claim, nor did 
it in any way subject itself to the jurisdiction of the district 
court in said proceedings; that plaintiff was not served with 
process of any kind on said petition for adjudication, and had 
no notice, personal or otherwise, of the said proceeding by 
voluntary petition for adjudication; nor was any notice of the 
proceeding to adjudicate defendant a bankrupt given plaintiff, 
or anyone else, "nor is any notice of any kind of such pro- 
ceeding to adjudicate a person a bankrupt upon his voluntary 
petition required by said act of Congress, and in this said act 
of Congress violates the Fifth Amendment," as does the "adju- 
dication of defendant as a bankrupt;" that the situs of the 
promissory note, on which the judgment was rendered, was 
never within the jurisdiction of the district court; and that 



•v^ 



CONSTITUTIONALITY OF BANKRUPTCY ACT 3 

the court never acquired jurisdiction of plaintiff, nor of the debt 
sued on. 

Demurrer was filed to the amended declaration, the demurrer 
sustained, and final judgment entered dismissing the suit. The 
circuit court stated that it took this action on the authority of 
Leidigh Carriage Co. v. Stengel, 37 C. C. A. 210, 95 Fed. 637. 
Thereupon the bank brought this writ of error. 

Errors were specified as follows: That the discharge under 
the act of Congress of July 1, 1898, was a nullity, because : 

"1. Said act violates the 5th Amendment to the Constitu- 
tion of the United States in this : 

" (a) It does not provide for notice as required by due process 
of law to the creditor in voluntary proceedings for adjudica- 
tion of bankruptcy and for the discharge of the debt of the 
creditor. - ''iJ ■«"''•• ''-'«"" 

. '* (b) Jen days * notice by mail_to creditors to oppose dis- 
/ charge is so unreasonably short as to be a denial of notice. 

"(c) The grounds of opposition to a discharge are so un- 
reasonably limited as, substantially, to deny the right of opposi- 
tion to a discharge. Thereby the act is also practically a legis- 
lative promulgation of a discharge contrary to art. 3, § 1, of 
the Federal Constitution. 

' ' 2. Said act violates art. 1, § 8, T[ 4, of the Constitution in 
•tljig. 'U'rij ti! u"f>'tq <»i K/ic! i»'»ii>i. "5« no>*rt'»-".' 

"(a) It does not establish uniform laws on the subject of 
bankruptcies throughout the United States. 

**(b) It delegates certain legislative powers to the several 
states in respect to bankruptcy proceedings. 
. "(c) It provides tha,t^cJfhersJtlijaa_tca4ers^niay be adjudged 
bankrupts, and that this may be done on voluntary petitions." 

Mr. Chief Justice FULLER delivered the opinion of the 
court : 

By the 4th clause of § 8 of art. 1 of the Constitution the power 

is vested in Congress "to establish * * * uniform laws on 

the subject of bankruptcies throughout the United States." This 

/^ower was first exercised inJ^O^L, 2 Stat, at L. 19, c. 19. In 

I ^\4803 that law was repealed.^ 2 Stat, at L. 248, c. 6. In 1841 it],^^ 

was again exercised by an act which was repealed in IS^x 

5 Stat, at L. 440, c. 9; 5 Stat, at L. 614, c. 82. It was again 

/'exercised in J-867 by an act which, after being several times 

•^Jamended, was finally repealed in 1878. 14 Stat, at L. 517, 



ft 



JURISDICTION 

176 ; 20 Stat, at L. 99, c. 160. And on July 1, 1898, the present 
act was approved. ~~* 

The act of 1800^applied to "any merchant, or other person, 
residing within the United States, actually using the trade of 
merchandise, by buying or selling in gross, or by retail, or 
dealing in exchange, or as a banker, broker, factor, underwriter, 
or marine insurer," and to involuntary bankruptcy. 

In Adams v. Storey, 1 Paine, 79, Fed. Cas. No. 66, Mr. 
Justice Livingston said on circuit : "So exclusively have bank- 
rupt laws operated on traders, that it may well be doubted 
whether an act of Congress subjecting to such a law every 
description of persons within the United States would comport 
with the spirit of the powers vested in them in relation to this 
subject." But this doubt was resolved otherwise, and the acts 
of 1841 and 1867 extended to persons other than merchants or 
traders, and provided for voluntary proceedings on the part of 
^he debtor, as does the act of 1898. 

It is true that from the first bankrupt act passed in England, 
34 & 35 Hen. VIII. c. 4, to the days of Queen Victoria, the 
EngHsh bankrupLa£ts-*pplied-QnlyJ;fi Jraders, but, as Mr. Justice 
Story, in his Commentaries on the Constitution, pointed out, 
"this is a mgre_matter. of ^policy, and by no means enters into 
the nature of such laws. TheVe is nothing in the nature or 
reason of such laws to prevent their being applied to any other 
class of unfortunate and meritorious debtors." § 1113. 

The whole subject is reviewed by that learned commentator 
in c. XVI. §§ 1102 to 1115 of his work, and he says (§ 1111) 
in respect of ' * what laws are to be deemed bankrupt laws within 
the meaning of the Constitution : " " Attempts have been made 
to distinguish between bankrupt laws and insolvent laws. For 
example, it has been said that laws which merely liberate the 
person of the debtor are insolvent laws, and those which dis- 
charge the contract are bankrupt laws. But it would be very 
difficult to sustain this distinction by any uniformity of laws 
at home or abroad. * * * Again, it has been said that in- 
solvent laws act on imprisoned debtors only at their own 
instance, and bankrupt laws only at the instance of creditors. 
But, however true this may have been in past times, as the 
actual course of English legislation, it is not true, and never 
was true, as a distinction in colonial legislation. In England 
it was an accident in the system, and not a material ground to 
discriminate, who were to be deemed in a legal sense insolvents. 




CONSTITUTIONALITY OF BANKEUPTCY ACT 5 

or bankrupts. And if an act of Congress should be passed, 
which should authorize a commission of bankruptcy to issue at 
the instance of the debtor, no court would on this account be 
warranted in saying that the act was unconstitutional, and the ^ -^ — 
commission a nullity. It is believed that no laws ever were passed ^^^_ 
in America by the colonies or states, which had the technical "^(^^^..^^ 
denomination of 'bankrupt laws.' But insolvent laws, quite 
coextensive with the English bankrupt system in their opera- 
tions and objects, have not been unfrequent in colonial and state 
legislation. No distinction was ever practically, or even theo- 
retically, attempted to be made between bankruptcies and insol- 
vencies. And a historical review of the colonial and state legis- 
lation will abundantly show that a bankrupt law may contain 
those regulations which are generally found in insolvent laws, 
and that an insolvent law may contain those which are common 
to bankrupt laws." 

_ Star ges V. Crowninshield, 4 Whea t. 122, 195, 4 L. ed. 529, 548, 
was cited, where Chief Justice Marshall said: "The bankrupt 
law is said to grow out of the exigencies of commerce, and to be 
applicable solely to traders; but it is not easy to say who must 
be excluded from, or may be included within, this description. 
It is, like every other part of the subject, one on which the 
legislature may exercise an extensive discretion. This difficulty 
of discriminating with any accuracy between insolvent and 
bankrupt laws would lead to the opinion that a bankrupt law 
may contain those regulations which are generally found in 
insolvent laws; and that an insolvent law may contain those 
which are common to a bankrupt law." 

In the case, Re Klein, Fed. Cas. No. 7,865, decided in the 
circuit court for the district of Missouri, and reported in a note 
to Nelson v. Carland, 1 How. 265, 277, 11 L. ed. 126, 130, Mr. 
Justice Catron held the bankrupt act of 1841 to be constitu- 
tional, although it was not restricted to traders, and allowed the 
debtor to avail himself of the act on his own petition, differing 
in these particulars from the English acts. He said, among other 
things : "In considering the question before me, I have not pre- 
tended to give a definition, (but purposely avoided any attempt 
to define) the mere word 'bankruptcy.' It is employed in the 
Constitution in the plural, and as part of an expression, 'the 
subject of bankruptcies.' The ideas attached to the word in 
this connection are numerous and complicated; they form a 
subject of extensive and complicated legislation; of this sub- 



6. JURISDICTION 

ject, Congress has general jurisdiction; and the true inquiry 
is, — To what limits is that jurisdiction restricted? I hold, it 
extends to all cases where the law causes to be distributed the 
property of the debtor among his creditors; this is its least 
limit. Its greatest is the discharge of a debtor from his con- 
tracts. And all intermediate legislation, affecting substance and 
*form, but tending to further the great end of the subject, — 
distribution and discharge, — are in the competency and discre- 
tion of Congress. With the policy of a: law letting in all classes, 
— others as well as traders, — and permitting the bankrupt to 
come in voluntarily, and be discharged without the consent of 
his creditors, the courts have no concern; it belongs to the law- 
makers. " 

Similar views were expressed under the act of 1867, by Mr. 
Justice Blatchford, then District Judge, in Re Reiman, 7 Ben. 
455, Fed. Cas. No. 11,673; by Deady, J., in Re Silverman, 1 
Sawy. 410, Fed. Cas. No. 12,855; by Hoffman, J., in Re Cali- 
fornia P. R. Co., 3 Sawy. 240, Fed. Cas. No. 2,315; and in 
Kunzler v. Kohaus, 5 Hill, 317, by Cowen, J., in respect of the 
act of 1841, in which Mr. Justice Nelson, then Chief Justice of 
New York, concurred. The conclusion that an act of Congress 
establishing a uniform system of bankruptcy throughout the 
United States is constitutional, although providing that others 
than traders may be adjudged bankrupts, and that this may 
be done on voluntary petitions, is really not open to discussion. 

The framers of the Constitution were familiar with Black- 
stone's Commentaries, and with the bankrupt laws of England, 
yet they granted plenary power to Congress over the whole sub- 
ject of "bankruptcy," and did not limit it by the language 
used. This is illustrated by Mr. Sherman's observation in the 
Convention, that ''bankruptcies were, in some cases, punishable 
with death by the laws of England, and he did not choose to 
grant a power by which that might be done here;" and the 
rejoinder of Gouverneur Morris, that "this was an extensive 
and delicate subject. He would agree to it, because he saw no 
danger of abuse of the power by the legislature of the United 
States." Madison Papers, 5 Elliot, 504; 2 Bancroft, 204. And 
also to some extent by the amendment proposed by New York, 
"that the power of Congress to pass uniform laws concern- 
ing bankruptcy shall only extend to merchants and other traders ; 
and the states, respectively, may pass laws for the relief of 
other insolvent debtors." 1 Elliot, 330. See also Mr. Pinkney's 



CONSTITUTIONALITY OF BANKBUPTCY ACT 7 

original proposition, 5 Elliot, 488; the report of the committee 
thereon, 5 Elliot, 503 ; and The Federalist, No. 4?, Ford's ed. 279. 

As the states, in surrendering the power, did so only if Con- 
gress chose to exercise it, but in the absence of congressional 
legislation retained it, the limitation was imposed on the states 
that they should pass no "law impairing the obligation of 
contracts. ' ' 

In Brown v. Smart, 145 U. S. 454, 457, 36 L. ed. 773, 775, 
12 Sup. Ct. Rep. 958, 959, Mr. Justice Gray said: "So long as 
there is no national bankrupt act, each state has full authority 
to pass insolvent laws binding persons and property within its 
jurisdiction, provided it does not impair the obligation of exist- 
ing contracts; but a state cannot by such a law discharge one 
of its own citizens from his contracts with citizens of other 
states, though made after the passage of the law, unless they 
voluntarily become parties to the proceedings in insolvency. 
* * * Yet each state, so long as it does not impair the 
obligation of any contract, has the power by general laws to 
regulate the conveyance and disposition of all property, personal 
or real, within its limits and jurisdiction." Many cases were 
cited, and, among others, Denny v. Bennett, 128 U. S. 498, 
32 L. ed. 494, 9 Sup. Ct. Rep. 134, where Mr. Justice Miller 
observed : ' ' The objection to the extraterritorial operation of a 
state insolvent law is that it cannot, like the bankruptcy law 
passed by Congress under its constitutional grant of power, 
release all debtors from the obligation of the debt. The authority 
to deal with the property of the debtor within the state, so far 
as it does not impair the obligation of contracts, is conceded." 

Counsel justly says that "the relation of debtor and creditor 
has a dual aspect, and contains two separate elements. The 
one is the right of the creditor to resort to present property 
of the debtor through the courts to satisfy the debt; the other 
is the personal obligation of the debtor to pay the debt, and that 
he will devote his energies and labor to discharge it" (4 Wheat. 
198, 4 L. ed. 549) ; and, "in the absence of property, the per- 
sonal obligation to pay constitutes the only value of the debt." 
Hence the importance of the distinction between the power of 
Congress and the power of the states. The subject of "bank- 
ruptcies" includes the power to discharge the debtor from his 
contracts and legal liabilities, as well as to distribute his prop- 
erty. The grant to Congress involves the power to impair the 
obligation of contracts, and this the states were forbidden to do. 



^\*A-l>V 



8 JURISDICTION 

The laws passed on the subject must, however, be uniform 
throughout the United States, but that uniformity is geo- 
graphical, and not personal, and we do not think that the pro- 
vision of the act of 1898 as to exemptions is incompatible with 
the rule. 

Section 6 reads: "This act shall not affect the allowance to 
bankrupts of the exemptions which are prescribed by the state 
laws in force at the time of the filing of the petition in the state 
wherein they have had their doraicil for the six months, or the 
greater portion thereof, immediately preceding the filing of the 
petition." [30 Stat, at L. 544, c. 541.] 

Section 14 of the act of 1867 prescribed certain exemptions, 
and then added : ' ' And such other property not included in the 
foregoing exceptions as is exempted from levy and sale upon 
execution or other process or order of any court by the laws 
of the state in which the bankrupt has his domicil at the time 
of the commencement of the proceedings in bankruptcy, to an 
amount not exceeding that allowed by such state exemption laws 
in force in the year eighteen hundred and sixty-four." [14 
Stat, at L. 517, c. 176.] This was subsequently amended, and 
controversies arose under the act as amended which we need not 
discuss in this case. Lowell, Bankruptcy, § 4. 

It was many times ruled that this provision was not in .deroga- 

rV^ - tion of the limitation of uniformity because all contracts were 

H^^^"^ jnade with reference to existing laws^ and no creditor c ould 

recover more from his deb tor ^^^^ ^^^ iin e xempted part of hia 

assets. Mr. Justice Miller concurred in an opinion to that effect 

in the Case of Beckerford, 1 Dill. 45, Fed. Cas. No. 1,209. 

Mr. Chief Justice Waite expressed the same opinion in Re 
Deckert, 2 Hughes, 183, Fed. Cas. No. 3,728. The Chief Justice 
there said : ' ' The power to except from the operation of the 
law property liable to execution under the exemption laws of 
the several states, as they were actually enforced, was at one 
time questioned, upon the ground that it was a violation of the 
constitutional requirement of uniformity, but it has thus far 
been sustained, for the reason that it was made a rule of the 
law to subject to the payment of debts under its operation only 
such property as could by judicial process be made available for 
the same purpose. This is not unjust, as every debt is con- 
tracted with reference to the rights of the parties thereto under 
existing exemption laws, and no creditor can reasonably com- 
plain if he gets his full share of all that the law, for the time 



CONSTITUTIONALITY OF BANKRUPTCY ACT 9 

being, places at the disposal of creditors. One of the effects 
of a bankrupt law is that of a general execution issued in favor 
of all the creditors of the bankrupt, reaching all his property 
subject to levy, and applying it to the payment of all his debts 
according to their respective priorities. It is quite proper, 
therefore, to confine its operation to such property as other legal 
process could reach. A rule which operates to this effect 
throughout the United States is uniform within the meaning 
of that term, as used in the Constitution. ' ' 

We concur in this view, and hold that the system is, in the 
constitutional sense, uniform throughout the United States, 
when the trustee takes in each state whatever would have been 
available to the creditor if the bankrupt law had not been passed. 
The general operation of the law is uniform although it may 
result in certain particulars differently in different states. 

Nor can we perceive in the recognition of the local law in the 
matter of exemptions, dower, priority of payments, and the like, 
any attempt by Congress to unlawfully delegate its legislative 
power. Re Rahrer, 140 U. S. 545, 560, suh nom. Wilkerson v. 
Rahrer, 35 L. ed. 572, 576, 11 Sup. Ct. Rep. 865. 

But it is contended that as to voluntary proceedings the act 
is in violation of the 5th Amendment in that it deprives creditors 
of their propertv without due process of law in failing to pro-^ 
vide for notice. 

The act provides that "any person who owes debts, except a 
corporation, shall be entitled to the benefits of this act as a 
voluntary bankrupt" (§4a), and that "upon the filing of a 
voluntary petition the judge shall hear the petition and make 
the adjudication or dismiss the petition." § 18g. With the 
petition he must file schedules of his property, and "of his 
creditors, showing their residences, if known, if unknown, that 
fact to be stated. " § 7, subd. 8. The schedules must be verified, 
and the petition must state that "petitioner owes debts which 
he is unable to pay in full," and "that he is willing to sur- 
render all his property for the benefit of his creditors, except 
such as is exempt by law, ' ' This establishes those facts so far as 
a decree of bankruptcy is concerned, and he has committed an 
act of bankruptcy in filing the petition. These are not issuable 
facts, and notice is unnecessary", unless dismissal is sought, when 
notice is required. § 59g. 

As Judge Lowell said: "He may be, in fact, fraudulent, 
and able and unwilling to pay his debts; but the law takes 



10 



JURISDICTION 



.*JL^^ 



him at his word, and makes effectual provision, not only by 
civil, but even by criminal, process to effectuate his alleged 
intent of giving up all his property." Re Fowler, 1 Low. Dec. 
161, Fed. Cas. No. 4,998. 

Adjudication follows as matter of course, and brings the 
bankrupt's property into the custody of the court for distribu- 
tion among all his creditors. After adjudication the creditors 
are given at least ten days' notice by publication and by mail 
of the first meeting of creditors, and of each of the various sub- 
sequent steps in administration. § 58. Application for a dis- 
charge cannot be made until after the expiration of one month 
from adjudication. § 14. 

Form No. 57 gives the form of petition for discharge and the 
order for hearing to be entered thereon, requiring notice to be 
published in a designated newspaper printed in the district, 
and "that the clerk shall send by mail to all known creditors 
copies of said petition and this order, addressed to them at their 
places of residence as stated." 

Section 14b provides for the granting of discharge unless the 
applicant has " (1) committed an offense punishable by imprison- 
ment as herein provided; or (2) with fraudulent intent to 
conceal his true financial condition, and, in contemplation of 
bankruptcy, destroyed, concealed, or failed to keep books of 
account or records from which his true condition might be ascer- 
tained. ' ' 

The offenses referred to are enumerated in § 29, and em- 
brace misappropriation of property ; concealing property belong- 
ing to the estate; making false oaths or accounts; presenting 
false claims ; receiving property from a bankrupt with intent to 
defeat the act; extorting money for acting or forbearing to act 
in bankruptcy proceedings. 

It is also provided by § 15 that a discharge may be revoked, 
on application within a year, if procured by fraud and not 
warranted by the facts. 

Notwithstanding these provisions, it is insisted that the want 
of notice of filing the petition is fatal because the adjudication 
per se entitles the bankrupt to a discharge, and that the pro- 
ceedings in respect of discharge are in personam, and require 
personal service of notice. The adjudication does not in itself 
have that effect, and the first of these objections really rests on 
the ground that the notice provided for is unreasonably short, 
and the right to oppose discharge unreasonably restricted. Con- 



C 



EFFECT OF NATIONAL ACT H 

sidering the plenary power of Congress, the subject-matter of 
the suit, and the common rights and interests of the creditors, 
we regard the contention as untenable. 

Congress may prescribe any regulations concerning discharge 
in bankruptcy that are not so grossly unreasonable as to b e 
in compatible with fundamental la w, and we cannot find any- 
thing in this act on that subject which would justify us in over- 
throwing its action. 

Nor is it possible to concede that personal service of notice 
of the application for a discharge is required. 

Pr oceedings in bankruptcy are, generally speaking, in the jp!^ 
nature of proceedings in rem, as Mr. Justice Grier remarked in I 
SHawhan v. Wherritt, 7 How. 643, 12 L. ed. 854. And in' 
New Lamp Chimney Co. v. Ansonia Brass & Copper Co., 91 
U. S. 662, 23 L. ed. 339, it was ruled that a decree adjudging 
a corporation bankrupt is in the nature of a decree in rem as 
respects the status of the corporation. Creditors are bound by 
the proceedijQgs;jLii distribution on notice by publication and 
niail, and when jurisdiction has attached and been exercised to 
that extent, the court has jurisdiction to decree discharge, if 
sufficient opportunity to show cause to the contrary is afforded, 
on notice given in the same way. The determination of the 
status of the honest and unfortunate debtor by his liberation 
from encumbrance^ on future exertion is matter of public con- 
cern, and Congress has power to accomplish it throughout the 
United States by proceedings at the debtor's domicil. If such 
notice to those who may be interested in opposing discharge, 
as the nature of the proceeding admits, is provided to be given, 
that is sufficient. Service of process or personal notice is not 
essential to the binding force of the decree. 

Judgment affirmed. 

■ I 7.l'i'jqo-i(\ .' B. State Legislation 

1. effect of national act 

Note. — In the absence of a national bankruptcy statute it is// 
within the power of the several states to enact such legisla- 
tion. Sturges V. Crowninshield, 4 Wheat. 122. State bank- 
ruptcy laws, however, in so far as they purport to affect con- 
tracts made before the adoption of the statutes are void as 
impairing the obligation of contracts. Sturges v. Crowninshield, 
supra. As to contracts made after the enactment of the state 



12 JURISDICTION 

bankruptcy statute there is no constitutional objection to the 
state law providing for a full and complete discharge. Ogden 
V. Saunders, 12 Wheat. 213. During the times when there 
was no national bankruptcy law, when the several states had 
covered the ground more or less fully, many interesting and 
difficult problems confronted the courts as to the proper law 
applicable to given cases. The problem usually presented was 
the effect of a discharge by a state court under the state statute 
upon contracts made in other states or held by creditors who 
were non-residents or citizens of other states. For a discussion 
of this very interesting though now comparatively unimportant 
problem/see 6 Harv. L. Rev. 349. / 

fxjT^on the national act taking effect, state statutes covering 
the same or part of the same ground (see mfra, 12-41) are ipso 
facto suspended; and upon the repeal of the national act they 
are ipso facto revived. Lothrop v. Highland Foundry Co., 
T28 Mass. 120; Oil Co. v. Morse & Co., 97 Ark. 513. In Maine 
an insolvency act was passed before the repeal of the national 
act of 1867, and it was held that upon the repeal of the federal 
statute the state law became operative and covered things done 
during the time that the state and federal laws overlapped. 
Palmer v. Hixon, 74 Me. 447. See also Lothrop v. Highland 
Foundry Co., supra. 

WHAT STATE LAWS ARE SUSPENDED '"' - 

f'^" ,,«f4^ .J^f^^ MAYER v. HELLMAN £^^ • "j''^ 

^^.fU'^^^f^ ^ 91 U. S. 496, 23 L. ed. 377 

Jj^y\ (United States Supreme Court. January 31, 1876) 

\ ^ Hellman, as assignee in bankruptcy of Bogen and others, 

sued Mayer and Evans, assignees of the same parties under the 
assignment laws of the State of Ohio, to obtain property which 
passed to defendants under the assignment to them. The, de- 
fendants answered, setting up their title under the assignment; 
and the plaintiffs demurred to the answer. The Court below 
sustained the demurrer, and the defendants sue out their writ 
of error. 

The facts as disclosed by the record, so far as they are material 
for the disposition of the case, are briefly these : On the 3rd of 
December, 1873, at Cincinnati, Ohio, George Bogen and Jacob 
Bogen, composing the firm of G. & J. Bogen, and the same 






WHAT STATE LAWS ARE SUSPENDED 13 

parties with Henry MuUer, composing the firm of Bogen 
& Son, by deed executed of that date, individually and as part- 
ners, assigned certain property held by them, including that 
in controversy, to three trustees, in trust for the equal and 
common benefit of all their creditors. The deed was delivered 
upon its execution, and the property taken possession of by the 
assignees. v.__ 

By the law of Ohio, in force at the time, when an assignment 
of property is made to trustees for the benefit of creditors, 
it is the duty of the trustees, within ten days after the de- 
livery of the assignment to them, and before disposing of any / 
of the property, to appear before the probate judge of the/ 
I county in which the assignors reside, produce the original assign-} 
\ ment, or a copy thereof, and file the same in the Probate Court,l 
Vand enter into an undertaking payable to the State, in suchj 
\sum and with such sureties as may be approved by the judge, / 
•conditioned for the faithful performance of their duties. « 

In conformity with this law, the trustees, on the 13th of 
December, 1873, within the prescribed ten days, appeared before 
the probate judge of the proper county in Ohio, produced the 
original assignment, and filed the same in the Probate Court. 
One of the trustees having declined to act, another one was 
named in his place by the creditors, and appointed by the Court. 
Subsequently the three gave an undertaking with sureties ap- 
proved by the judge, in the sum of $500,000, for the per- 
formance of their duties, and then proceeded with the adminis- 
tration of the trust under the direction of the Court. 

On the 22nd of June of the following year, more than six ' 
months after the execution of the assignment, the petition in 
bankruptcy against the insolvents was filed in the District 
Court of the United States, initiating the proceedings in which 
the plaintiff was appointed their assignee in bankruptcy. As . 
such officer, he claims a right to the possession of the prop- 
erty in the hands of the defendants under the assignment to 
them. Judgment having been rendered against them, they 
sued out this writ of error. 

Mr. Justice FIELD delivered the opinion of the Court. 

The validity of the claim of the assignee in bankruptcy de- 
pends, ^s^ matter of course, uppn^ the legality of the assign- 
ment made under the laws of Ohio. Independently of the Bank- 
rupt Act, there could be no serious question raised as to its 



14 JURISDICTION 

legality. The power which every one possesses over his own 
property would justify any such disposition as did not interfere 
with the existing rights of others; and an equal distribution 
by a debtor of his property among his creditors, when unable 
to meet the demands of all in full, would be deemed not only a 
legal proceeding, but one entitled to commendation. Creditors 
have a right to call for the application of the property of their 
debtor to the satisfaction of their just demands; but, unless there 
are special circumstances giving priority of right to the demands 
of one creditor over another, the rule of equity would require 
the equal and ratable distribution of the debtor's property for 
the benefit of all of them. And so, whenever such a disposi- 
tion has been voluntarily made by the debtor, the courts in this 
country have uniformly expressed their approbation of the 
proceeding. The hindrance and delay to particular creditors, 
in their efforts to reach before others the property^ of the debtor, 
that may follow such a conveyance, are regarded as unavoidable 
incidents to a just and lawful act, which in no respect impair 
the validity of the transaction. 

The great object of the Bankrupt Act, so far as creditors 
are concerned, is to secure equality of dis trib^^^^"" amnng \]\^m 
Av^ of the property of the bankrup t. For that purpose, it sets aside 
\ all transactions had within a prescribed period previous to the 
fjjtr^ petition in bankruptcy, defeating, or tending to defeat, such 
distribution. It reaches to proceedings of every form and kind 
"*7 tIu, undertaken or executed within that period by which a preference 
,A>r^ -4 can be secured to one creditor over another, or the purpose 
of the act evaded. That period is Jour months for some transac- 
tions, and six months for others. Those periods constitute the 
limitation within which the transactions will be examined and 
annulled, if conflicting with the provisions of the Bankrupt 
Act. 

Transactions anterior to these periods are presumed to have 
been acquiesced in by the creditors. There is sound policy in 
prescribing a limitation of this kind. It would be in the highest 
degree injurious to the community to have the validity of busi- 
ness transactions with debtors, in which it is interested, subject 
to the contingency of being assailed by subsequent proceed- 
ings in bankruptcy, Uplesg, jJiefefore^ a^transacti on is void 
against creditors independently jq£ the pr^visiooa-X^th e Bank- 
] ^pFAc t, it s val Tdity js jiot^ open to _contegtation by the assismee . 
where it took place at the geriodL£rescr|bed_by^Jhe_stati^ an- 



WHAT STATE LAWS ARE SUSPENDED 15 

terior to the proceedings in bankruptcy. The assignment in 

this case was not a proceeding, as already said, in hostility to 

the creditors, but for their benefit. It was not, therefore, void 

as against them, or even voidable. Executed six mo nths before ^_ 

jhe petition in ban kr uptcy was filed, it is, to the assi^ee iii_ ^ ^ 

bankruptcy, a closed proceeding. 

The counsel of the plaintiffs in error liaye file d an elaborate ^ 
argument to show that assignmente jor the benefit of creditorg^ 



gen erally are not op posed to the Bankrupt Act, though made 



within six months previous to the filing of the petition. Theirj 
argument is, that such an assignment is only a voluntary execu- 
tion of what the Bankrupt Court would compel; and as it is 
not a proceeding in itself fraudulent as against creditors, and 
does not give a preference to one creditor over another, it con- 
flicts with no positive inhibition of the statute. There is much 
force in the position of counsel, and it has the support of a 
decision of the late Mr. Justice Nelson, in the Circuit Court of 
New York, in Sedgwick v. Place, First Nat. Bank. Reg. 204, 
and of Mr. Justice Swayne in the Circuit Court of Ohio, in 
Langley v. Perry, 2 Nat. Bank. Reg. 180. Certain it is that 
such an assignment is not absolutely void; and, if voidable, it 
must be because it may be deemed, perhaps, necessary for the 
efficiency of the Bankrupt Act that the administration of an 
insolvent's estate shall be intrusted to the direction of the 
District Court, and not left under the control of the appointee 
of the insolvent. It is unnecessary, however, to express any 
decided opinion upon this head ; for the decision of the question 
is no t-Xfifluired for the dig BOsdtion of the case. 

In the argument of the counsel of the defendant in error, the 
position is taken that the Bankrupt Act suspends the opera- 
tion of the act of Ohio regulating the mode of administering 
assignments for the benefit of creditors, treating the latter as 

It does not compel, or in terms even authorize, assignments : '^'^'^-^ 
it assumes that such instruments were conveyances previously "^<»t^ 
known, and only prescribes a mode by which the trust created 
shall be enforced. It provides for the security of the creditors 
by exacting a bond from the trustees for the discharge of their 
duties; it requires them to file statements showing what they 
have done with the property; and affords in various ways the 
means of compelling them to carry out the purposes of the con- 



an insolvent law of the State. The answer is, that the statute ^^ 
of Ohio is not an insolvent law in any proper sense of thej erm. ^f^ at 



16 JURISDICTION 

veyance. There is nothing in the act resembling an insolvent 
law. It does not discharge the inso lvent from arrest or im priij jon- _ 
ment : it leaves his after-acquired property liable to his creditors 
precisely as though no assignment had been made. The pro- 
visions for enforcing the trust are substantially such as a court 
of chancery would apply in the absence of any statutory pro- 
vision. The assignment in this case must, therefore, be regarded 
as though the statute of Ohio, to which reference is made, had 
no existence. There is an insolvent law in that State; but the 
assignment in, question was not made in pursuance of any of its 
r^rovisions. \The position, therefore, of counsel, that the Bank- 

] rupt Law orCongress suspends all proceedings under the Insol- 

S vent Law of the State, has no application?] 

^ The assignment in this case being in our judgment valid and 
binding, there was no property in the hands of the plaintiffs in 
error which the assignee in bankruptcy could claim. The assign- 
ment to them divested the insolvents of all proprietary rights 
they held in the property described in the conveyance. They 
could not have maintained any action either for the personalty 
or realty. There did, indeed, remain to them an equitable right 
to have paid over to them any remainder after the claims of all 
of the creditors were satisfied. If a contingency should ever 
arise for the assertion of this right, the assignee in bankruptcy 
may perhaps have a claim for such remainder, to be applied to 
the payment of creditors not protected by the assignment, and 
whose demands have been created subsequent to that instrument. 
Of this possibility we have no occasion to speak now. 

Our conclusion is, that the Court below erred in sustaining 
the demurrer to the defendant's answer; and the judgment of 
the Court must, therefore, be reversed, and the cause remanded 
for further proceedings.^ 

A "^^^^ ^ "^ BOESE V. KING 

\ V U^ ^ 108 U. S. 379, 27 L. ed. 760 

^ . f^J-(/) V (United States Supreme Court. April 30, 1883) 

'•^ / " Suit by a receiver appointed by a State court in New York 
,3^ ^^'Jw^n return of execution unsatisfied ; brought in New York against 

, rfr J- — -^cc. In re Farrell, 176 Fed. See also Downer v. Porter, 116 

' ^jr\ 505, 100 C. C. A. 63; Pogue v. Rowe, Ky. 422, 76 8. W. 135; Louisville 
XT jJ^' 236 111. 157 (but see Harbaugh v. Co. v. Lamman, 135 Ky. 163, 121 






v^. , 



Costello, 184 111. 110). S. W. 1042. 



WHAT STATE LAWS ARE SUSPENDED 17 

assignees of the property of the judgment debtor under an 
lasaignment for the benefit of creditors, made in accordance with 
'the laws of New Jersey (of which State the _assigiifies--and.JJl^ 
debtor are citizens), and to recover proceeds of the debtor's 
property voluntarily brought within the State of New York by 
the assignees for distribution under the assignment. 

By^eed-of -iissignment executed and delivered September 
25th, 1873, Wm. H. Locke, a citizen of New Jersey, transferred "^^ 
and conveyed to Wm, King, John M. Goetchius, and Edward E. <^^^ 
Poor, and the survivor of them, and their and his heirs and 
assigns, all his property of every kind and description — except I 
such a s was exempt by law from execution — "in trust to take • 
"p^ession of and collect and to sell and dispose of the same at 
public or private sale in their discretion, and to ^distribu te the 
proceeds to and among the creditors of the said Wm. H. Locke, 
in proportion to tneir several 3ust demands, pursuant to the 
statutes in such case made and provided, and on the further 
trust to pay the surplus, if any there be, after fully satisfying 
and paying the said creditors and all proper costs and charges, 
to the said Wm. H. Locke." 

The intention of Locke and the assignors [assignees] was to 
have a distribution made among the creditors of the former in 
conformity with the requirements of an act of the legislature of 
New Jersey, passed April 16th, 1846, entitled "An Act to 
secure to creditors an equal and just division of the estates of 
debtors who convey to assignees for the benefit of creditors." 

That act provided, among other things, that every conveyance 
or assignment by a debtor of his estate, real or personal or both, 
in trust, to an assignee for the benefit of creditors, shall be 
made for their equal benefit in proportion to their several de- 
mands to the net amount that shall come to the hands of the 
assignee for distribution; and all preferences of one creditor 
over another, or whereby one shall be first paid or have a 
greater proportion in respect to his claim than another, shall be 
deemed fraudulent and void, excepting mortgage and judgment 
creditors, when the judgment has not been by confession for 
the purpose by preferring creditors (1) ; further, that the 
debtor shall annex to his assignment an inventory, under oath 
or afl&rmation, of all of his property, together with a list of 
his creditors, and the amount of their respective claims, such 
inventory not, however, to be conclusive as to the quantity of 
the debtor's estate, and the assignee to be entitled to any other 

H. & A. Bankruptcy — 2 



ftiiA ^^- '^ 1 "^ 



18 JURISDICTION 

property belonging to the debtor at the time of the assign- 
ment, and comprehended within its general terms (2). Other 
sections provided for public notice by the assignee of the assign- 
ment; for the presentation of claims of creditors; for filing by 
the assignee under oath of a true inventory and valuation of 
the estate; for the execution by him of a bond in double the 
amount of such inventory or valuation ; for the recording of such 
bond ; for the filing with the clerk of the Court of Common Pleas 
of the county of the debtor's residence, within three months 
after the date of the assignment, of a list of all such creditors 
as claim to be such, and the amount of their demands, first mak- 
ing it known by advertisement that all claims against the estate 
must be made as prescribed in the statute, or be forever barred 
from coming in for a dividend of said estate, otherwise than as 
provided ; for the right of the assignee or any creditor or person 
interested to except to the allowance of any claim presented; for 
the adjudication of such exceptions for fair and equal dividends 
from time to time among the creditors of the assets in pro- 
portion to their respective claims; and for a final accounting 
by the assignee in the Orphans' Court of the county — such set- 
tlement and adjudication to be conclusive on all parties, except 
for assets which may afterward come to hand, or for frauds or 
apparent error (3, 4, 5, 6 and 7). 

The act further provided 

^ . 1 I "11. If any creditor shall not exhibit h is, her or their claims 

y^ v/within the term of three months as aforesaid, such claim shall 

'Xc^ ' \ ^ barred of a dividend unless the estate shall prove sufficient 

^ / after the debts exhibited and allowed are fully satisfied, or 

I such creditors shall find some other estate not accounted for 

/ by the assignee or assignees before distribution, in which case 

/ such barred creditors shall be entitled to a ratable proportion 

' therefrom. 

"12. Whenever any assignee or assignees, as aforesaid, shall 
sell any real estate of such debtor or debtors as is conveyed in 
trust as aforesaid, he or they shall proceed to advertise and sell 
the same in manner as is now or may hereafter be prescribed 
in the case of an executor or administrator directed to sell 
lands by an order of the Orphans' Court for the payment of the 
debts of the testator or intestate. 

"13. Every assignee, as aforesaid, shall have as full power 
and authority to dispose of all estate, real and personal, as- 
signed, as the said debtor or debtors had at the time of the 



WHAT STATE LAWS ABE SUSPENDED 19 

assignment, and to sue for and recover in the proper name of 
such assignee or assignees everything belonging or appertain- 
ing to said estate, real or personal, of said debtor or debtors, 
and shaU have full power and authority to refer to arbitration, 
settle and compound, and to agree with any person concerning 
the same, and to redeem all mortgages and conditional contracts, 
and generally to act and do whatever the said debtor or debtors 
might have lawfully done in the premises. 

* ' 14. Nothing in this act shall be taken or understood as dis- -> , 
charging said debtor or debtors from liabilities to their credito rs "'^^ir. 
who may not choosy to exhibit their claims either in regard to ^ . ^ 
the persons of such debtors or to any estate, real or personal, '^/ 
not assigned as aforesaid, but with respect to the creditors who 
shall come in under said assignment and exhibit their demands 
as aforesaid for a dividend, they shall be wholly barre d from 
having afterward any action or suit at law or equity against 
such debtors or their representatives, unless on the trial of such 
action or hearing in equity the said creditor shall prove fraud 
in the said debtor or debtors with respect to the said assign- 
ment, or concealing his estate, real or personal, whether in 
possession, held in trust, or otherwise." 

The estate which came into the hands of the assignees was 
converted into money in New Jersey — the amount being nearly 
$200,000 — and the proceeds, for the convenience of the assign- 
ees, were deposited in a bank in the city of New York. No 
proceedings in bankruptcy were ever taken against Locke. 

Un the 3rd day of February, 1876, William Pickhardt and 
Adolph Kutroff recovered a judgment against Locke in the 
Supreme Court of the city and county of New York for 
$3,086.85. Upon that judgment execution was issued and re- 
turned unsatisfied. Subsequently, May 27th, 1876, in certain 
proceedings, before one of the judges of that court, supple- 
mentary t(x the return of execution, Thomas Boese, plaintiff in 
error, was appointed receiver of the property of Locke, and hav- 
ing executed a bond for the faithful discharge of the duties of 
his trust, he obtained an order from the same court giving him 
authority, as receiver, to bring an action against the assignees 
of Locke. Thereupon, June 9th, 1876, he commenced this action. 
It proceeds upon these grounds: 1. That the indebtedness from\ 
Locke to Pickhardt and Kutroff arose in New York, where they 
reside, before the making of said assignment; 2. That the 
statute of New Jersey with reference to or under which said 



20 JURISDICTION 

assi^ment was made was, by force of the Bankruptcy Act of 
1867, suspended and of no effect; 3. That the assignment was 
fraudulent and void by the laws of New Jersey, in that it was 
made with the intent upon the part of Locke to hinder, delay 
and defraud his creditors, and in that he had a large amount of 
money and other property which he fraudulently retained to 
his own use and did not surrender to the assignees. 

The prayer of the complaint — the allegations of which were 
fully met by answer — was for judgment against the defendants ; 
that the assignments be adjudged fraudulent and void ; and that 
the defendants be required to account to plaintiff for all the 
property and money received or to which they are entitled un- 
der and by virtue of the assignment. It was conceded at the 
hearing that defendants had in their hands, of the proceeds of 
the sale of the assigned property, an amount sufficient to pay 
the judgment of Pickhardt and Kutroff. 

The Supreme Court of New York, both in general and spe- 
cial terms, sustained the action and gave judgment against the 
assignees in favor of Boese^ as receiver, for the amount of the 
demand of Pickhardt and Kutroff. But in the Court of Appeals 
that judgment was reversed, with directions to enter judgment 
for the defendants. 

The receiver brought the suit here in error asking to have 
this decision reversed. 

Mr. Justice HARLAN delivered the opinion of the Court. 
After reciting the facts in the foregoing language he continued : 
We are to consider in this case whether the final judgment of 
the Court of Appeals of New York has deprived the plaintiff in 
error of any right, title, or privilege under the Constitution or 
laws of the United States. 

We dismiss from consideration all suggestions in the plead- 
ings of actual fraud upon the part either of Locke or of his 
assignees. The court of original jurisdiction found as a fact — 
and upon that basis the case was considered by the Court of 
Appeals — that the assignment was executed and delivered by 
the former and accepted by the latter in good faith and without 
any purpose to hinder, delay, or defraud any creditor of Locke. 
It is further found as a fact that the assignment was made 
with the intent, bona fide, to make an equal distribution of the 
proceeds of the trust estate among creditors, in conformity with 
the local statute. The Supreme Court of Npw York pi^pd that 



WHAT STATE LAWS ARE SUSPENDED 21 

the statute of New Jersey was, in its nature and effect, a bank- 
rupt law, and the power conferred upon Congress to establish 
a uniform system of bankruptcy, having been exercised by the 
passage of the act of 1867, the latter act wholly suspended the 
operation of the local statute as to all cases within its purview; 
consequently, it was held, the assignment was not valid for any 
purpose. The Court of Appeals, recognizing the paramount 
nature of the Bankrupt Act of Congress, and assuming that 
the 14th section of the New Jersey statute, relating to the effect 
upon the claims of creditors who exhibit their demands for a divi- 
dend. was inconsistent with that act and t he^'pforp inopprativp, 
adjudged that other portions of the local statute providing for 
the equal distribution of the debtor's property among his cred- 
itors, and regulating the general conduct of the assignee, were 
not inconsistent with nor were they necessarily suspended by 
the act of 1867; further, that the New Jersey statute did not 
create the right to make voluntary assignments for the equal 
benefit of creditors, but was only restrictive of a previously 
existing right, and imposed, for the benefit of creditors, salutary 
safeguards around its exercise; consequently, had the whole of 
the New Jersey statute been superseded, the right of a debtor 
to make a voluntary assignment would still have existed. The 
assignment, as a transfer of the debtor's property, was, there- 
fore, upheld as in harmony with the general object and pur- 
poses of the Bankrupt Act, unassailable by reason merely of 
the fact that some of the provisions of the local statute may 
have been suspended by the act of 1867. 

In the view which we take of the case it is unnecessary to 
consider all of the questions covered by the opinion of the 
state court and discussed here by counsel. Especially it is not 
necessary to determine whether the Bankrupt Act of 1867 sus- 
pended or superseded all of the provisions of the New Jersey 
statute. Undoubtedly the local statute was, from the date of 
the passage of the Bankrupt Act , inoperative in so far as it 
provided for the disc harge of the debtor from future liability 
to creditors who came in under the assignment and claimed to 
participate in the distribution of the proceeds of the assigned 
property. It is equally clear, we think, that the assignment by 
Locke of his entire property to be disposed of as prescribed ^yiXcf a 
the statute of New Jersey, and therefore independently of the /!? fC 
bankruptcy court, constituted, itself, an act of bank ruptcy, for ^ ^^^ifl^ 
which, upon the petition of a creditor filed in proper time. 



t 



22 JURISDICTION '^ TAHv; 

Locke could have been adjudged a bankrupt, and the property 
wrested fr o m his assignee s for administration in the bankruptcy 
court. In Re Burt, 1 Dillon, 439, 440; in Re Goldschmidt, 3 
Bank. Reg. 164 ; In matter of Seymour T. Smith, 4 Bank. Reg. 
, 377. The claim of Pickhardt and Kutroff existed at the time 
of the assignment. The way was, therefore, open for them by 
timely action, to secure the control and management of the as- 
signed property by that court for the equal benefit of all the 
[^editors of Locke. But they elected to lie by until after the 
I expiration of the time within which the assignment could be 

ka*SJ^ I attacked under the provisions of the Bankrupt Act ; and now 
seek, by this suit in the name of the plaintiff in error, to secure 
an advantage or preference over all others; this, notwithstand- 
ing the assignment was made without any intent to hinder, 
delay, or defraud creditors. In order to obtain that advantage 
ror preference, the plaintiff in error relies on the paramount 
^ I force of the Bankrupt Act, the primary object of which, as this 
Court has frequently announced, was to secure equality among 
the creditors of a bankrupt. Mayer v. Hellman, 91 U. S. 496- 
501; Reed v. Mclntyre, 98 U. S. 507-509; Buchanan v. Smith, 
16 "Wall. 277. It can hardly be that the Court is obliged to 
^ lend its aid to those who, neglecting or refusing to avail thera- 

'^ selves of the provisions of the act of Congress, seek to accom- 

"^^ , plish ends inconsistent with that equalit y among cre di tors which 
those provisions were designed to~secure. If it be assumed, for 
the purposes of this case, that the statute of New Jersey was, 
as to each and all of its provisions, suspended when the Bank- 
rupt Act of 1867 was passed, it does not follow that the assign- 
ment by Locke was ineffectual for every purpose. Certainly, 
that instrument was sufficient to pass the title from Locke to 
his assignees. It was good as bet ween them, at least until Locke, 
in some appropriate mode, or by some proper proceedings, mani- 
fested a right to have itset aside or canceled upon the ground 
/ A of a mutual mistake in supposing that the local statute of 1846 

<tAr was operative. An3^ in the absence of proceedings in the bank- 

ruptcy court impeaching the assignment, and so long as Locke 
did not object, the assignees had authority to sell the property 
and distribute the proceeds among all the creditors, disregard- 
ing so much of the deed of assign ment a s required the assignees, 

y ^ m the distribution of the proceeds, to conform to th e local 
Jt statute. The assignment was not void as between the debtorand*" 

^ the assignees simply because it provided for the distribution 



WHAT STATE LAWS AEE SUSPENDED 23 

of the proceeds of the property in pursuance of a statute, none 
of the provisions of which, it is claimed, were then in force. 
Had this suit been framed for the purpose of compelling the 
assignees to account to all the creditors for the proceeds of the 
sale of the property committed to their hands, without discrim- 
ination against those who did not recognize the assignment and 
exhibit their demands within the time and mode prescribed 
by the New Jersey statute, a wholly different question would 
have been presented for determination. It has been framed 
mainly upon the idea that by reason of the mistake of Locke 
and his assignees in supposing that the property could be ad- 
ministered under the provisions of the local statute of 1846, 
even while the Bankrupt Act was in force, the title did not 
pass for the benefit of creditors according to their respective 
legal rights. In this view, as has been indicated, we do not 
concur. — 

We are of opinion that, except as against proceedings insti- 
tuted under the Bankrupt Act for the purpose of securing the 
administration of the property in the bankruptcy court, the 
assignment, having been made without intent to hinder, delay, 
or defraud creditors, was valid, for at least the purpose of se- 
curing an equal distribution of the estate among all the cred- 
itors of Locke, in proportion to their several demands, Reed v. 
Mclntyre, 98 U. S. 507-509 ; and, consequently, we adjudge only 
that the plaintiff in error is not entitled, by reason of any con- 
flict between the local statute and the Bankrupt Act of 1877 
[1867] or by force of the before-mentioned judgment and the 
proceedings thereunder, to the possession of the assigned prop- 
erty or of its proceeds, as against the assignees, or to a priority of 
claim for the benefit of Pickhardt and Kutroff upon such pro- 
ceeds. The judgment is affirmed. 

Mr. Justice MATTHEWS (with whom concurred MILLER, 
GRAY, and BLATCHFORD, JJ.), dissenting. 

Mr. Justice MILLER, Mr. Justice GRAY, Mr. Justice 
BLATCHFORD, and myself, are unable to agree with the 
opinion and judgment of the court in this case. The grounds 
of our dissent may be very generally and concisely stated as 
follows : 

T he New Jersey statute of April 16th, 1846, the validity and 
effect of which are in question, is an insolvent or bankrupt law, 



^/ 



24 JURISDICTION 

which provides for the administration of the assets of debtors 
who make assignments of all their assets to trustees for cred- 
itors, and for their discharge from liabilities to creditors shar- 
ing in the distribution. It was accordingly in conflict with the 
National Bankrupt Act of 1867 when the latter took effect, and 
from that time became suspended and without force until the 
iAr repeal of the act by Congress. It is conceded that the 14th 
*" ^v section, which provides for the discharge of the debtor, is void 
^^ by reason of this conflict, and, in our opinion, this carries with 
V it the entire statute. For the statuleJusL^an^ entirety, and, to 
>J> Y^v'take away the distinctive feature contained in the 14th section, 
Xjf^ destroys the system. It is not an independent provision, but 
^ an Inseparable part of the scheme contained in the law. 

This being so, the assignment in the present case must be 
regarded as unlawful and void as to creditors. For it was made 
in view of this statute and to be administered under it. Such 
is the express recital of the instrument and the finding of the 
fact by the court. It is as if the provisions of the act had been 
embodied in it and it had declared expressly that it was exe- 
cuted with the proviso that no distribution should be made of 
any part of the debtor's estate to any creditor except on condi- 

Jof the release of the unpaid portion of his claim, 
is not possible, we think, to treat the assignment as though 
aw of the state in view of which it was made, and subject 
e provisions of which it was intended to operate, had never 
ed, or had been repealed before its execution. Because 
there is no reason to believe that, in that state of the case, the 
debtor would have made an assignment on such terms. To do 
so is to construct for him a contract which he did not make and 
which there is no evidence that he intended to make. It must 
be regarded, then, as a proceeding under the statute of New 
Jersey, and as such, with that statute, made void, as to creditors, 
by the National Bankrupt Act of 1867. Otherwise that uni- 
form rule as to bankruptcies, which it was the policy of the 
Constitution and of the act of Congress pursuant to it, to pro- 
vide, would be defeated. No title under it, therefore, could pass 
to the defendants in error, and the judgment creditors who 
acquired a lien upon the fund in their hands were by law entitled 
to appropriate it, as the property of their debtor, to the payment 
of their claims. 

For these reasons we are of opinion that the judgment of the 
Court of Appeals of New York should be reversed. 



WHAT STATE LAWS ARE SUSPENDED 25 

J^ii^ \' HAWKINS & CO. v. LEARNED ^S^^ ^ 



54 N. H. 333 ' "^ ^ 



(Supreme Judicial Court of New Hampshire. June, 1874) ^^^ 

Assumpsit, by L. B. Hawkins & Co. against Lewis M. Learned,"*«ii, v.^^. 
to recover the amount of a promissory note, and for goods sold c/ k 
and delivered. Writ dated October 24, 1873. December 23/ *^ -^ 
1873, the defendant was duly decreed to be an insane person, "^^W 
by the probate court for Merrimack county, and John C. Smitli a^,^ 
was appointed his guardian. March 24, 1874, upon the repre/ '^*"'^ 
sentation of said guardian, said probate court decreed said estate / 
insolvent, and appointed John M. Shirley commissioner of in-| 
solvency. 

At the April term, 1874, said guardian appeared specially 
by his attorney, E. B. S. Sanborn, Esq., and moved that this , 
action be dismissed by reason of said proceedings in the probate • 
court ; and the questions arising on said motion were reserved 1 
for the consideration of the whole court. 

SARGENT, C. J. The motion to dismiss in this case is 
founded upon Gen. Stats., c. 167, §10, as follows: "When, 
upon representation of the guardian of any insane person or:5/^ 
spendthrift, the judge is satisfied that estate of the ward is not 
sufficient to discharge the just debts due therefrom, he may 
decree that said estate be settled as insolvent, and thereupon 
such proceedings shall be had, decrees made, appeals allowed, 
suits disposed of, a nd the accounts of the guardian adjusted, 
ag in the case of insolvent estates of deceased persons.^ ' 

In this case, it is agreed that the defendant was duly decreed 
to be an insane person by the probate court, and a guardian 
was appointed. The guardian made the proper representation 
to the probate court, and the defendant's estate was thereupon 
decreed to be administered as insolvent; and after this, at this 
term, the guardian appears and moves that this action, which 
was commenced October 24, 1873, be dismissed in consequence 
of such proceedings in the probate court. 

This is the same way a suit would be disposed of in case of 
a deceased person whose estate was decreed to be administered 
as insolvent. No action shall be commenced or prosecuted 
against an administrator after the estate is decreed to be ad- 
ministered as insolvent, but the cause of action may be pre- 




26 JURISDICTION 

sented to the commissioner and allowed, with the costs of any 
action pending at the time of such decree — Gen. Stats., c. 179, 
§ 8 ; and in such cases no plea is necessary setting forth the de- 
cease or the insolvency. When the facts are suggested, and the 
court is satisfied that such decrees have been made in the court 
of probate, the actions are discontinued in this court at once. 

It is urged in argument that' the plaintiffs should be heard 
upon the question whether the party is insane, etc.; but that 
could not be in this court. The probate court is the tribunal 
selected by law to settle that question; and, when once settled 
there, it is settled for all other places and all other courts. This 
must be so from the nature of the case. If it were not so, the 
same man might be held both sane and insane at the same time. 
The case of Jones v. Jones, 45 N. H. 123, is directly in point, 
under provisions of the statute precisely like the present, and 
must control this case. 

The authorities cited, that the general bankrupt law of the 

United States supersedes all state insolvent laws, do not apply. 

J The laws for the settlement of the estates of deceased persons 

/though they may provide lor sett lin^_ estates in th e insolvent 

^|course. yet are not regarded as generaHnsoly^t laws. It would 



not be claimed, probably, that the statute for the settlement of 
the estates of deceased persons in^the insolvent course was super- 
seded by ithe^gQeral_banEFupt law ; an JTf notT'EHen this ^uld 



not be, because this statute provides for settling the estates of 
insane persons in all respects like the settling of the estates of 
persons deceased. 

The motion to dismiss must be granted. 



JOHNSON V. CRAWFORD et al. 

^_ r — ^-v 



JiJk^^^ 154 Fed. 761 

^ •'" ^^'^XUnited States Circuit Court, Middle District, Pennsylvania. 
^W .-.>--' March 15, 1907) 

^ , l^f/r^fRCHBALD, District Judge. On January 11, 1906, the 
t\, '^glaintiff^eeaYered^_iiidgment_Ql.$27-,Z10.60^^^ defend- 

laa-*^ \ ants in an action of assumpsit for timber sold; and, having 
^aaM^^ failed to obtain satisfaction by execution, on December 20, 1906, 
lu^'^'Tuled ar L afSdavj t__charging, in substance, that the de|endants 
"^^ j^^^-'^N^adL mon^2:-.jIli_property which -tb«y^ -fraudulently cojicealed 
"*" and refused to apply to the payment Jif-iJiejudgm^, and there- 







WHAT STATE LAWS ARE SUSPENDED 27 

upq^secure.d_a warraxit of arrest under the act of assembly of 
July 12, 1842 {FThTFair^^^. Upon this, one of the defend- 
ants, Crawford, was apprehended, and, having been brought 
into court, has moved to quash the writ upon the ground that 
in the present state of the law it is not authoriz ed ; the right tc 
jpip R bo nd to take the benefit of the insolvent laws of the state ! 
being an essential part of the proceedings, and, having been! 
suspended by the passage by Congress of the bankruptcy act] 
of 1898, the right to the writ falls with it. The motion is justi- 
fied by the_ease of Commonwjaj^jy^(X^Hara»_6_Phila^02, wherey 
,itjwas held that^^jwarrant of arrest under the act of jj42^ul5l ) 
not be prosecuted in the faee]^5l_iiie_existiiigj3an^ru^^ | 

theTnsolvent laws of the state being thereby made inoperative./ 
But it was held^,-,Qn-^the other -hand, in Gregg v. Hilsen, 12 
Phila. 348, by a court of equal authority^ just-the^ contrary i^^ 
tl us, tEat nothing short of actual proceedings in bankruptcy 
would prevent a recourse to the writ; and the_question may, 
t herefore be^regarded^s an op£n— one. The further position 
taken in the O'Hara Case, that the writ was obnoxious to the 
bankruptcy law and so not allowable, because it would enable 
the execution creditor to obtain a preference, is an objection 
which would equally apply to a fi. fa. or other process to enforce 
the collection of a judgment, and is, of course, not tenable. 
Chandler v. Siddle, 3 Dill. 479, Fed. Cas. No. 2594; Berthelen 
v. Betts, 4 Hill (N. Y.) 572; In re Hoskins, Crabbe, 466; Ex 
parte Winternitz, 18 Pittsb. Leg. J. (N. S.) 61. And in Scully 
v. Kirkpatrick, 79 Pa. 324, and Hubert v. Horter, 81 Pa. 39, 
the writ was sustained notwithstanding bankruptcy, which neg- 
atives any such idea; the fact that the debts there were not 
discharged being immaterial. This is a federal question, how- 
ever, and must be decided on principle; state decisions at the 
best being merely advisory. 

The act of the Legislature by which th e warrant of arrest i a f^f^^ ^ 
given^m" suBs!ance, provides that in all civil cases, where a 
party cannot be arrested or imprisoned, it shall be lawful for 
the plaintiff, having begun suit or obtained judgment, to apply 
for a warrant to arrest the defendant, upon proof by affidavit 
that he is about to remove any of his property out of the juris- 
diction of the court with intent to defraud his creditors; or 
that he has property which he fraudulently conceals, or money 
or property which he unjustly refuses to apply to the payment 
of the judgment rendered against him ; or that he has assigned, 



28 JURISDICTION 

removed, or disposed, or is about to assign, remove, or dispose, 
of his property with like fraudulent intent ; or that the debt in 
suit was fraudulently contracted. And, the defendant having 
been thereupon brought in, if the judge by whom the writ was 
allowed is satisfied that the charges made in the affidavit are 
substantiated, and that the defendant has done or is about to 
do any of the acts complained of, he shall commit him to the 
jail of the county in which the hearing is had, to be there de- 
tained until he shall be discharged by law: provided that he 
shall not be committed, if he pays the debt or demand with 
costs, or gives satisfactory security to pay the same with inter- 
est, within 60 days, if the demand is in judgment and the time 
allowed for a stay has expired; or gives bond, with sufficient 
sureties, that he will not assign or remove his property, where 
that is the fraudulent design charged; or gives like bond to 
apply within 30 days to the common pleas of the county for the 
benefit of the insolvent laws of the state, and to comply with 
the requirements of such laws, and, failing to obtain a discharge, 
shall surrender himself to the jail again. After having been 
committed, he may also be relieved from custody upon judg- 
ment being rendered in his favor in the pending suit, or upon 
assigning his property and obtaining a discharge in due course, 
or by paying or securing the demand with costs, or upon giving 
either of the bonds mentioned as aforesaid. In taking the ben- 
efit of the insolvent laws, either before or after commitment, 
the defendant is required, as to the matters set forth in his 
petition, the notice to be given to creditors, the oath to be ad- 
ministered to him, and all things touching his property, to pro- 
ceed agreeably to the provisions of the act of June 16, 1886 
(P. L. 729), entitled "An act relating to insolvent debtors;" 
the trustee to whom the assignment is made being given the 
same powers and duties, creditors the same rights and remedies, 
a discharge the same effect, and the defendant made liable civilly 
and criminally the same as if the provisions relating thereto 
were in the warrant of arrest act fully and at length enacted. 
Turning to the act of 1836 f or a better junderstan ding of J heag 
proyisifing, it a ppears that injiig jBetition _to the courtfor_thg 
benefit of th e insolvent Igjsa-tli ^ debtor i s to maSe a state ment 
under oath~of aUJi^ property and effects^andofJiie^debts he 
owes, giving the names of his creditors, the amounts due to 
eacK of them, the nature of the indebtedness, and the causes of 
his insolvency. And a time for a hearing thereon having been 



WHAT STATE LAWS ARE SUSPENDED 29 

fixed, and due notice given to creditors, he is thereupon to ex- 
hibit to the court a just and true account of his debts, c redjts, 
ahd estate, producing, if required, his books and papers rel ating 
thereto, and answering all questions that may be put to him 
touching the same ; and having taken an oath to deliver up all 
his possessions, and denying any transfer or conveyance in 
fraud of creditors, he is to execute an assignment thereof to a 
trustee for the benefit of creditors, being thereafter relieved 
and discharged from- liability to imprisonment by reason of any 
judgment or decree for the payment of money or for any debt 
or damages before that contracted, occasioned, or accrued, but 
property subsequently acquired is still to be liable, although 
after obtaining a discharge it may, by order of court, on con- 
sent of a majority in number and value of creditors, be made 
exempt from execution for seven years as to any previously 
existing debt or cause of action. It is further made the duty 
of the trustee to collect and convert the property so turned 
over to him, and, having accounted therefor, to distribute the 
same to creditors, under the direction of the court, upon due 
proof made of their respective claims. This in^ a general Way* 
was the system of insolvency prevailing at the time the act of 
1842, authorizing a warrant of arrest was passed. More recently 
by act of June 4,~I9DI (P. L. 406), there has been a revision 
and amplification of the law, modifying ~in some respects the 
provisions of the act of 1836 which is in terms repealed ; but 
being in the main the same, the most important difference being 
that_yoluntary assignments for the benefit of creditors, a s we ll 
as those made after arrest upon civil process are provided_for, ' 
and that creditors, upon accepting a dividend from the insolvent 
estate, are re quired to execute release s. So stood the law at the 
time the warrant of arrest in the case in hand was issued^^..-— ^ 
That, under the circumstances and subject to the condH 
tions named in the statute, the right to such a warrant exists in 
the federal, th$-s^me as in the state CQijrtspthgJErC9»:J5e]^o 
serious.,«t*iestion. As a remedy by execution to reach the prop- 
erty of the debtor given by the state law, it either is carried 
into the federal law, as provided by § 916 of the Revised Statutes 
[U. S. Comp, St. 1901, p. 684] ; or, being sanctioned by the state 
statute and so being agreeable to the usages and principles of 
law, it is to be regarded as a writ, which, although not specifically 
provided for by act of Congress, is capable of being adopted as 
necessary for the full and complete exercise of the jurisdiction 






so JURISDICTION 

of the federal courts, within the meaning of section 716, It y 
stands in fact much the same as a capias ad satisfaciendum, of/ 
which it may be considered as only another form. Wayman v. 
Southard, 10 Wheat. 1, 6 L. ed. 253; Bank v. Halstead, 10 
Wheat. 51, 6 L. ed. 264 ; Ex parte Boyd, 105 U. S. 647, 26 L. ed. 
1200; Lamaster v. Keeler, 123 U. S. 376, 8 Sup. Ct. 197, 31 L. ed. 
238; U. S. V. Arnold, 69 Fed. 987, 16 C. C. A. 575; Stroheim 
V. Deimel, 77 Fed. 802, 23 C. C. A. 467. Of course, it goes into 
the federal law, if at all, with all its essential incidents, and 
the method of procedure marked out with regard to it by the 
state statute has therefore to be substantially followed. And 
the defendant, after having been taken into custody, and being 
about to be committed, having the right, as a part of it, to be 
released upon giving bond to take the benefit of the insolvent 
laws, or at least agreeably to the provisions of these laws, if this 
right is to be regarded as inhering in the remedy, and has been 
I taken away by the passage of the bankruptcy act, as argued, 
without anything else being supplied, the right to the writ itself 
is also therewith necessarily abrogated. 

That the right to relief agreeably to the insolvent laws o f the 
state, either before or after commitment, iniieres m the remedy, 
can hardly be doubted. This alternative is expressly given 
by the statute; it being declared that the defendant, upon the 
facts on which the writ is predicated having been found against 
him, shall not be committed, if he shall enter into a bond to the 
plaintiff to apply within 30 days for the benefit of these laws, 
and shall comply in all respects with their requirements ; or, 
in default thereof and failing to obtain a discharge, shall sur- 
render himself into custody again. It must be assumed that the 
Legislature, in allowing the writ, would not have sanctioned it 
upon any other terms; and the measure of relief which is so 
afforded being thus in contemplation, as an essential part of the 
proceedings, they are left incomplete and dismembered without 
it. In this respect, it differs from the case of a^a^_saf the right 
to be discharged from custody, which is there given by resort 
to the insolvent laws, being a separate and independent statutory 
provision, as to which, if it is taken away or suspended by the 
passage of a bankruptcy act, the defendant is simply left with- 
out the opportunity to be released which would otherwise be 
afforded him. Steelraan v. Mattix, 36 N. J. Law, 344; In re 
Rank, Crabbe, 493, Fed. Cas. No. 11,566. It is to be noted, how- 
ever, that these observations do not apply where the fraudulent 



/ 



WHAT STATE LAWS ARE SUSPENDED 

design charged, upon which the warrant of arrest is allowed, is\ 

that the defendant is about to remove his property out of the Y^^u_^^ 

jurisdiction of the court with intent to defraud his creditors; Vi^^V* 

the alternative, in order to escape commitment, where that is 

the fact, being simply that he shall give bond not to remove it 

nor to prefer other creditors. Neither are they applicable where 

the defendant gives security to pay the debt or demand with 

interest and costs, within 60 days if it is in judgment and the 

time for a stay has expired, or, if not in judgment, within a 

like period after it shall have been recovered, in either of which 

cases the superseding of the insolvent laws by a bankruptcy law 

is of no consequence, and the right to the writ therefore as to 

them is beyond controversy. 

It is also, of course, unquestioned that state insolvency laws, \ 
whether a disc harge of the debtor from his liabilities is thereby 1 
provided tor or^not, are superseded and suspended by the pas- * 
sage of a federal bankruptcy law; the authority of Congress on 
the subject being paramount. Sturges v. Crowninshield, 4 
Wheat. 122, 4 L. ed. 529 ; Ogden v. Saunders, 12 Wheat. 213, 
6 L. ed. 606 ; Tua v. Carriere, 117 U. S. 201, 6 Sup. Ct. 565, 29 
L. ed. 855; In re Salmon (D. C.) 143 Fed. 395; In re Interna- 
tional Coal Mining Co., 143 Fed. 665; Harbaugh v. Costello, 
184 111. 110, 56 N. E. 363, 75 Am. St. Rep. 147 ; Parmenter Mfg. 
Co. v. Hamilton, 172 Mass. 178, 51 N. E. 529, 70 Am. St. Rep. 
258; In re Reynolds, 8 R. I. 485, 5 Am. Rep. 615; Potts v. 
Smith Mfg. Co., 25 Pa. Super. Ct. 206. Only, however, as tEe" 
J;wo conflict, is this true, and it is only, therefore, where the II yy 
bankruptcy law covers and supplies that which is undertaken 
to be disposed of by the state law, that the latter must give wa^ 
It does not apply, for instance, to voluntary assignments for 
the benefit of creditors, although forming a part of the general 
insolvency system of the state and regulated to a certain extent 
by statute ; it being held that, as these are good at common law, 
they are to be carried out and given effect unless they are 
directly called in question by a petition in bankruptcy. Mayer 
V. Hellman, 91 U. S. 496, 23 L. ed. 377; Boese v. King, 108 
U. S. 379, 2 Sup. Ct. 765, 27 L. ed. 760 ; Beck v. Parker, 85 Pa. 
262, 3 Am. Rep. 625 ; Reed v. Taylor, 32 Iowa, 209, 7 Am. Rep. 
180; In re Sievers (D. C.) 91 Fed. 366. The same is true, also, 
of proceedings given by statute to wind up the affairs of an 
insolvent corporation by the appointment of a receiver (In re 
Watts & Sachs, 190 U. S. 1, 23 Sup. Ct. 718, 47 L. ed. 933 ; In 



d2 JURISDICTION 

re Wilmington Hosiery Co. [D. C] 120 Fed. 180) ; and so is it 
as to debts and claims which are not discharged by bankruptcy 
(Scully V. Kirkpatrick, 79 Pa. 324, 21 Am. Rep. 62; Hubert v. 
Horter, 81 Pa. 39; Ex parte Winternitz, 18 Pittsb. Leg. J. 
[N. S.] 61) ; as well as to those persons whose debts do not ag- 
gregate the requisite amount (Shepardson's App., 36 Conn. 
23) ; or who are not subject to proceedings, such as wage-earners, 
farmers, and corporations not made specifically liable (Ritten- 
house's Estate, 30 Pa. Super. Ct. 468). Neither, as it has been 
held, does the existing bankruptcy law meet the case of an ab- 
sconding debtor, so as to prevent the issuing of a domestic 
attachment. McCullough v. Goodhart, 8 Dist. (Pa.) 378. Poor 
debtor laws, and those which provide for the release of insolvent 
convicts, would seem to be in the same situation ; the bankruptcy 
law having no provision adapted to these cases, and the parties 
to whom they apply being, otherwise, left without remedy. Jor- 
dan V. Hall, 9 R. I. 219, 11 Am. Rep. 245. And, notwithstand- 
ing the concession made above, not a little could also be said in 
favor of those insolvent laws, such as the act of 1836, which 
merely provide means for relieving from custody a debtor who 
has been arrested upon civil process without undertaking to 
discharge him from his liabilities. Steelman v. Mattix, 36 N. J. 
Law, 344; In re Rank, Crabbe, 493, Fed. Cas. No. 11,566; Sulli- 
^V^^r^an V. Hieskell, Crabbe, 525, Fed. Cas. No. 13,594. Subject to 

/ these exceptions, however, but without losing sight of their sig- 
ji^ nificance, the insolvent laws of a state being rendered inopera- 
tive by an existing federal bankruptcy law, those of Pennsyl- 
vania must be regarded as no longer in force, with all the at- 
tendant consequences, whether the act of 1836 or that of 1901 
V»A LA© taken to represent them. 
*^ tir'^ut it by no means follows that the right to a warrant of 
larrest such as is now in controversy is thereby disposed of. The 
state insolvency system which is superseded by the enactment 
by Congress of a bankruptcy law is one thing, and the relief 
j accorded to a debtor in custody under a warrant of arrest, 
\ agreeably to its provisions, is another, and the two are not to 

Jhe confounded. The debtor, in other words, secures a release, 
not by virtue of the insolvent laws, but simply in conformity" 
with them ; that is to say, by following the course which is there 
marked out, the one statute, so far as it is applicable, being 
written into the other. How far in this respect the act of 1901 
takes the place of the act of 1836, which has been repealed by 



WHAT STATE LAWS ARE SUSPENDED 



33 



it, it is not important to inquire. Whichever be taken, having 
been made a constituent part of the act of 1842, the right 
thereby secured to a debtor in custody under a warrant of ar- 
rest, either before or after commitment, is preserved and re- 
tained and made available to him without regard to the fate of 
the insolvent laws as such, whether suspended or repealed, being 
in effect independent of them. I do not lose sight of the fact 
that the bond, which the defendant is to give, is in terms to take 
the benefit of these laws and to comply with their requirements, 
and that the petition which he is to present to the court for leave 
to do so is to set forth what is directed by the act of 1836, and to 
be verified in accordance with it. But a careful reading of the" 
act of 1842 (§§14, 15, 16) will disclose that this amounts to no 
more than an adoption of the course to be pursued and the steps 
to be taken by the act referred to; the reference over being 
made for the sake of convenience merely and to avoid unneces- 
sary repetition. Suppose, for example, that the provisions oi^ 
the act of 1836 had been written into the act of 1842 at length 
— as by express declaration is in effect the case — and it was 
there enacted, as now, that upon complaint being made of any 
of the several matters, upon which the writ is allowable, a war- 
rant should go out, and upon the defendant being brought in 
and the facts found against him, he should be committed, to be 
released, however, upon giving bond that within 30 days he / 
would p etition the court for lea ve to assign his prop erty f or the, c^ 
benefit oi creditors to be administered and distributed under a^ 



^=^--^ 



the dire ction of the court; and so on, according to all that is 
provided for. Can there be any serious question that the war- 
rant as so authorized could issue, regardless of whether or not 
the state insolvent laws from which these provisions had been 
taken had been superseded by an act on the subject of bank- 
ruptcy? And yet that in effect is the situation here. Or, td^'^-^t^i 
put it in anotTieFloiTOpthrelict~of71842,^m adopting incor- v^ y ^ 

porating into itself, as an alternative of the proceedings upon ^ C^ 
the warrant, the_cours^marked out by tlie insolveiit_jawsfor / 
t^ relief q^^Jf ailing ^ebtor^ not thereby^ made^j|art_^_^e I 
Jngflls; ency system of the sta te, nor "so Tied up to it as to be ob<^ 
noxious to an existing bankruptcy law and be nullified thereby. 
A petition in bankruptcy, duly prosecuted, is no doubt effective 
to avoid the proceedings. Barber v. Rogers, 71 Pa. 362. But 
the statute by which the warrant is given is no more affected 
by the bankruptcy law itself, and is no more incompatible with 

H. & A. Bankruptcy — 3 



34 JURISDICTION 

it — aside from the question of getting a preference — than is that 
which sanctions a capias or any other execution process to reach 
the person or property of the debtor of which it is only an addi- 
tional and special form. 

Ttiis disposes^pf the case; but there is another ground upon 
which the right to the writ^may be sustained. As pointed out 
above, a warrant of arr est, being authorized by the statutes of 
the state, must be regarded as agreeable to the usages of law; 
and, being necessary to a complete exercise of the court's juris- 
diction, is capable of being adopted, although not specifically 
provided for by any federal statute. Rev. St. § 716 [U. S. Comp. 
St. 1901, p. 580]. But in incorporating it into the federal law 
the court is only called upon to preserve the substance ; and if, 
as argued, notwithstanding the views expressed above, the insol- 

. vent laws of the state are superseded and the defendant thereby 
f^AO!>\, deprived of the right to resort to them which he would other- 
^"^^Jl^k. wise have as a means of being relieved from custody, the bank- 
<^-f-^ ruptcy law by which this is brought about may well be looked 

'^ to, to supply what is lacking. It is equally effective and entirely 
appropriate, the commitment of the defendant being merely 
until he shall be discharged by law; and is even more readily 
available, no bond being required nor anything in fact but the 
filing of a proper petition. Proceedings in bankruptcy also 
undoubtedly do away with the necessity for taking the benefit 
of the insolvent laws, although a bond may have been given 
by the defendant to do so. Nesbit v. Greaves, 6 Watts & S. 
(Pa.) 120; Barber v. Rogers, 71 Pa. 362. And why, then, may 
not a complete substitute be found in them? The writ is to 
be saved, if possible; and, if it can be done by falling back 
upon the bankruptcy law in this way, there is no reason why 
the practice should not to that extent be modified, not only in 
the federal, but in the state courts as well, it being desirable, 
of course, if not indeed necessary, that the two should be si 
harmony. It is true that a resort to bankruptcy would not 
release the defendant where the debt or demand upon which 
the warrant of arrest was predicated was not dischargeable. 
Scully V. Kirkpatriek, 79 Pa. 324, 21 Am. Rep. 62 ; Hubert v. 
Horter, 81 Pa. 39; In re Wintemitz, 18 Pittsb. Leg. J. (N. S.) 
61. But in that ease the right to the benefit of the insolvent 
laws would not be interfered with, and there is no occasion there- 
fore to consider it. * * * 
The rule to show cause why the warrant of arrest should not 






WHAT STATE LAWS ARE SUSPENDED 35 

be quashed is discharged; and thereupon the defendant is com-, 
mitted to the common jail of Lycoming county, at Williamsport, ^^^^^ 
Pa,, to be there detained until he shall be discharged by law. ' 

OLD TOWN BANK OF BALTIMORE v. McCORMICK et al. a.^****^ 

96 Md. 341, 53 Atl. 934 ^"^^^hreSy^ 

(Court of Appeals of Maryland. January 21, 1903) ^ ^^*S»-,'^ 

FOWLER, J. This is an appeal from the circuit court for ^ ' 
Harford county. On the 22d May, 1901, the Old Town Bank of 
Baltimore filed a petition in insolvency against J. Lawrence 
McCormiek and others under the provisions of article 47, §§ 22, 
23, of our Code, relating to insolvents, as amended by the Act 
of 1896, e. 446. The defendants each pleaded to the jurisdiction 
of the court. Their pleas are identical. The plea is as follows : 
"(1) That Ihis court has nft jurisdiction in these proceedings, 
because the insolvency laws of the state of Maryland have been 
suspended, superseded^ jor-rendered^inoperatiYe by the passage 
of a national bankrupt law by the congress of the United States, 
and this defendant pleads the said bankrupt law in bar of the 
jurisdiction of this court in the premises." The plaintiff bank 
demurred to these pleas, but the learned judge below over- 
ruled the demurrers, and his certificate states the question raised 
and decided on the demurrers as follows: ''That the enactment 
of the act of congress approved July 1, 1898 [U. S. Comp. St. 
1901, p. 3418], entitled 'An act to establish a uniform system of 
bankruptcy throughout the United States,' and supplements 
and additions thereto, suspended the ftperation of article 47 of 
the Code of Public General Laws of Maryland of 1888, entitled 
'Insolvents,' and all amendments thereof, and especially sus- 
pended the operation of § 22, (as repealed and amended by the 
act of 1896, c. 446), and § 23 thereof, including the operation o 
said article on persons ' engaged chiefly in farming and tillage of 
the soil,' and the class of persons to which the defendant J 
Lawrence MeCormick is alleged in the petition to belong, and 
that this court is without jurisdiction to grant any of the relief 
prayed for in said petition." From the order dismissing its 
petition, the plaintiff has appealed. The issue thus presented 
is clear and well defined. The defendants contend that the 
enactment of the national bankrupt act suspended the operation 
of the whole insolvent law of, this state, whUe t^ie plaintiff 



36 



JURISDICTION 






maintains the position that the passage of this national law by 
congress suspends the operation of our insolvent law only so far 
as our law conflicts with the national law, and that, inasmuch 
\as the present bankrupt law (act of congress of 1898 [U. S. Comp, 
St. 1901, p. 3418]) contains no provision for involuntary bank- 
ruptcy of persons engaged chiefly in the tillage of the soil, the 
provisions of our state insolvent law, so far as they apply to that 
excepted class, remain in full force and effect. The question 
'presented must depend, in the first place, upon the provisions 
of the bankrupt law applicable here. § 4, " Who may become 
bankrupts," subsection (a), provides that "any person who 
owes debts, except a corporation, shall be entitled to the benefits 
of this act as a voluntary bankrupt." And by subsection (b) 
it is enacted that ' ' any natural person, except a wage earner or a 
person engaged chiefly in farming or the tillage of the soil 

* * * may be adjudged an involuntary bankrupt upon de- 
fault or an impartial trial, and shall be subject to the provi- 
sions and entitled to the benefits of this act. * * *" •'■'•'"' 

1. From the year 1819, when Chief Justice Marshall delivefed 
the opinion of the supreme court of the United States in the 
leading case of Sturges v. Crowninshield, reported in 4 Wheat. 
122, 4 L. ed. 529, it has been h^d that the provision of the con- 
stitution of the United States (article 1, § 8, subd. 4) providing 
that ' ' congress shall have power to establish uniform laws on the 
subject of bankruptcy, ' ' does not in itself inhibit the states from 
passing valid insolvent laws. In the case just cited it was said : 

* Jt is nn|, t.]ip Tnere existence of the po wer, butj ts^ ercisj gijjhjnb 
is incompatible with the exercise of the samp p owpr bv_^tjiip 



states. ' * And so, also, there has been a uniform line of decisions 
^to the effect that, so far as congress has failed to legislate with 
reference to insolvents, state laws relating to them are operative. 
Thus, in Sturges v. Crowninshield, supra, it is said that "if it 
is not the mere existence of the power, but its actual exercise by 
the congress of the United States, which prevents the operation 
of state insolvent laws, it is obvious that much inconvenience 
would result from that construction of the constitution which 
should deny to the legislatures of the states the power of acting 
on this subject in consequence of the grant to congress." "It 
may be thought more convenient," continued the court, "that 
much of it should be regulated by state legislation, and congress 
may purposely omit to provide for many cases to which its power 



extends. It does not appear to be a violent construction of the 



WHAT STATE LAWS ARE SUSPENDED 



37 



X^ 



constitution, and certainly a most convenient one, to consider 
the power of the states as existing over such cases as the laws 
of the land may not reach." But in Ogden v. Saunders, 12 
Wheat. 213, 6 L. ed. 606, the rule is explicitly laid down tha 
"the power of congress to establish uniform laws on the subject 
of bankruptcy does not exclude the rights of the states to legis 
late on the same subject, except when the power has been actually 
exercised, and the state laws conflict with those of congress." 
And to the same effect are Baldwin v. Hale, 1 Wall. 229, 17 
L. ed. 531 ; Tua v. Carriere, 117 U. S. 210, 6 Sup. Ct. 565, 29 L. 
ed. 855 ; Ex parte Eames, 2 Story, 322, Fed. Cas. No. 4,237. In 
the recent case of R. H. Herron Co. v. Superior Court o f City 
and Cou nty of San Fran cisco, decided in April of last year by 
the supreme court of California, and reported in 68 Pac. 814, 
136 Cftl,. 279, it was held that, "though the federal bankrupt 
acts suspend operation of any state laws of insolvency where 
there is any conflict between the two, the state laws remain in 
full force in so far as there is no conflict ; and as the bankruptcy 
act of 1898 expressly exempts^lPeorporations from voluntary 
bankruptcy, and only makes subject to involuntary bankruptcy 
'corporations engaged principally in manufacturing, trading, 
printing, publishing, or mercantile pursuits,' the provisions of 
the state law applicable to a corporation engaged principally in 
mining [as was the California corporation] are not suspended 
In the course of its opinion the court said : "If the bankruptcy'^ ^ 
act excepts a class of cases from its operation, either in express I ,--r^*V 
terms or by necessary implication, it must be considered that it I ^^^^V 
was the intention of congress not to interfere in that class of J 
cases with the laws of the several states in reference thereto. ' ' K 
number of cases are cited by Justice Harrison, who delivered the 
opinion of the court, and among them is that of Clarke v. Ray, 1 
Har. & J. 318 ; Chief Justice Chase delivering the opinion of the 
court. He said : ' ' The legislatures of the several states have com- 
petent authority to pass laws for the relief of all persons who are 
not comprehended within the act of congress." See, also. Van 
Nostrand v. Carr, 30 Md. 131. It should be remarked, however, 
that the situation in the California case just cited somewhat, 
differs from the one here presented. For there the insolvent 
proceeded against under the California insolvent law was ex-, 
pressly excepted from the provisions relating to the voluntary 
system, and was not included within, and therefore excepted by 
implication from the class of corporations made subject to the 



i£tL^ 



> 



38 JURISDICTION 

involuntary system, while here the defendant who is sought to 
be declared an insolvent under our insolvent law is included 
under the general terms of the voluntary system, and expressly 
excepted from the involuntary system. See, also, Shepardson's 
Appeal, 36 Conn. 23; Geery's Appeal, 43 Conn. 289, 21 Am. 
Rep. 653; Steelman v. Mattix, 36 N. J. Law, 344; 16 Am. & 
Eng. Ene. Law, 642. 
i_ . 2. This brings us to the real question in the case, namely, is 
vq^\^^ there any conflict between our insolvent law and the federal 
^ bankrupt law? We have already transcribed the provisions of 

§ 4, by which it appears that the defendant is expressly 
excepted from the provisions of the act relating to involuntary 
bankruptcy, and therefore as to this class to which the defendant 
belongs (i, e., farmers or tillers of the soil) the federal power 
has not been exercised. And it therefore follows that, if this 
class is not within the state law, there is no existing provision 
' under which those embraced within it can be compelled to dis- 
tribute their assets fairly and equally among their creditors. 
In Geery's Appeal, supra, it was said: **The benefit of this 
principle [the equal distribution of a debtor's property without 
preference] cannot be denied to a creditor without doing him 
injustice. It is a remedy which he relied o n i n givinc^ credit ^ 
and to which he is fairly entitled, If that remedy is not to be 
found in the bankrupt act, it will not be presumed that congress 
intended to take away the remedy provided by the state. Con- 
gress having limited and restricted the operation of the bank- 
rupt act, leaving a number of cases to which it does not apply, 
it will not be presumed that it was thereby intended to leave 
creditors in such cases entirely without remedy, as must be the 
case if the state law is entirely inoperative." But can it be 
properly or correctly said that any conflict can exist between 
the state and the federal law so long as the latter by express 
terms excludes from its operation the subject or class of persons 
expressly provided for by the state law? The power to enact 
insolvent or bankrupt laws is vested in the states, and it cannot 
be extinguished except by the establishment of a federal system 
in conflict with the state law. And this federal system of bank- 
ruptcy must be a genuine bankrupt law (Sturges v. Crownin- 
shield, supra), or, in other words, as expressed in Ogden v. 
Saunders, supra, the power to pass a uniform system of bank- 
ruptcy must be actually exercised, and the state law must be in 
conflict with it in order to render the latter inoperative. The ques- 



1^i 



WHAT STATE LAWS ARE SUSPENDED 39 

tion, therefore, logically arises, does the present federal bankrupt 
law actually provide for involuntary proceedings against farm- 
ers? And the answer must be that it does not, but the answer of 
the defendant goes further and necessarily must do so in order to 
save his case. He says it is true that while this class is not includeaj 
in, and is expressly excepted from, the involuntary feature of the / ^'4 
system, yet it is included in the voluntary feature, and therefore /-^/^'^^ 
it is within the scope of the national system. We cannot approVS"^ 1a»o^ 
of this method of reasoning, not only because it would seem to ^^^ 
be a " contradiction in terms to say that cases excepted from the 
operation of the most important part of the act are included in 
its scope, ' ' but because it would seem to involve the proposition 
that the federal power can render inoperative the state insolvent 
laws applicable to involuntary insolvency, without establishing 
a genuine bankrupt law to take the place of the state law. As 
we have already seen, it has been held from early day that it is 
only to the extent that congress has actually legislated upon the 
subject that the statutes of the several states are suspended by 
its legislation. How, then, can it be said that a failure to legis- 
late — in other words, an express exclusion — raises a conflict? 
But without pursuing this question further, it seems to us that 
the position taken by the defendant must necessarily lead to 
the conclusion that if the congress of the United States can, by 
including this class in the voluntary part of the system, and 
excepting it from the involuntary part, withdraw it from the 
operation of our state insolvent law, it can do the same in regard 
to any two or more classes (as, for instance, merchants, traders, 
and corporations) ; and the result would be that, in spite of the 
failure on the part of congress to establish a bankrupt law (that 
is, to actually exercise the power conferred by the constitution 
to pass a genuine bankrupt law), state legislation would become 
inoperative, and creditors would be deprived of a remedy to 
which, as was said in Geery's Appeal, supra, they are fairly 
entitled. 

But it was forcibly argued on the part of the defendants that 
§70, subsec. ''b," of the bankrupt act of 1898 [U. S. Comp. 
St. 1901, p. 3452], shows that it was the intention of congress 
to substitute that act for every provision of every insolvent law 
of the several states. It provides as follows: ''Proceedings 
commenced under state insolvent laws before the passage of this 
act shall not be affected by it. ' ' To sustain their view, the case 
of Manufacturing Co. v. Hamilton, 172 Mass. 178, 51 N. E. 529, 




40 u; JURISDICTION 

70 Am. St. Rep. 278, decided in 1898, was relied on. But all 
this ease decides is that the federal act deprives the state court 
of jurisdiction to entertain jurisdiction in insolvency proceed- 
ings filed after 1st July, 1898, when the federal act went into 
force. Or as the court said: "The act is to go into full force 
and effect upon its passage. That is to say, the rights of all 
persons, in the particulars to which the act refers, are to be 
determined by the act from the time of its passage." After 
mentioning a number of the rights which are determined by the 
act, the opinion continues: ''These various provisions affecting 
the rights and conduct of debtors and creditors are different from 
those previously existing in most of the states, and perhaps 
different from those found in the laws of any state, an d the y 
supersede al l conffkting_provisions. ' ' In the concluding part 
of the opinion the distinguished judge who has recently been 
appointed chief justice of the supreme judicial court of Massa- 
chusetts said that the language of § 70, subsec. " b, " " was 
chosen to make clear the purpose of congress that the new 
system of bankruptcy should supersede all state laws in regard 
to insolvency from the date of the passage of the act"; but 
necessarily this language means only that aU conflicting provi- 
^/sions of the state law were thus superseded, for this is the 
well-settled proposition which he had just announced in a 
preceding sentence, and which we have quoted above. If, there- 
fore, we are correct in the conclusion already reached, that there 
is no conflict between the provisions of our insolvent law and 
the present bankrupt law, it follows that the language of § 70 
relied on by the defendant can have no influence upon our 
conclusion in this case. 

But again, it was urged that there is a distinction between this 
case and cases which arose under laws which did not include the 
class within its scope — as, for instance, where the bankrupt act 
applied only to debtors whose debts exceeded $300. It was held 
in Shepardson's Appeal, supra, that in eases where the debts 
were less than $300 the state law was not suspended, and debtors 
of that class could be proceeded against under state laws. But 
the true rule was laid down by Chief Justice Marshall in Sturges 
V. Crowninshield, supra, that the power of the state continues to 
exist over such^jease^asjjifijffederal Jlatw.does not reach. And 
therefore, if eases involving involuntary proceedings against a 
class are not provided for by the federal law, such cases are 
within the reach of the state law, in spite of the fact that the 



WHAT STATE LAWS ARE SUSPENDED 



41 






members of this same class may avail themselves of the voluntary- 
feature ; otherwise the rule laid down by Chief Justice Marshall 
would have to be changed so as to read that the power of the 
state exists only over such cases as are against natural persons 
or corporations not within any class provided for by any provi- 
sion of the federal law. If this were the rule, then, of course^ 
it would follow, as contended, that the defendant being of thCj 
class called "farmers," and the bankrupt act having provided 
that he may avail himself of the voluntary feature, no case 
against him could be reached by the state law. But in our 
opinion, this is not the proper view, for, as we have already^said", [ 
it is not within the power of congress to render inoperative the I 
involuntary feature of state insolvent laws as to any particular/ 
class by excepting that class from the involuntary part of the] 
national law. Otherwise the result would be that the state laws 
as to involuntary insolvency would become inoperative by the 
mere existence of the power of the United States to establish 
a system of involuntary bankruptcy. We have seen, however, 
that it is not the mere existence, but the exercise of the power 
to establish a genuine bankrupt law in conflict with the state 
laws, which renders the latter inoperative. Sturges v, Crownin- 
shield, supra. 

In conclusion, it may be proper to say that if it is the policy 
of our state to render farmers and tillers of the soil like other 
persons subject to the involuntary system of our insolvent laws, 
as it is declared to be by the provisions of our Code (article 47, 
§§ 22, 23), we should not by any strained construction of an act 
of congress, or by a course of ingenious reasoning, attempt to 
thwart this purpose. 

From what we have said, it will be seen that we are of opinion 
that the order appealed from should be reversed. Order re- 
versed and new trial awarded.^ 



2— Ace. Burk's Estate, 34 Pa. 
Co. Ct. Eep. 642 ; Lace v. Smith, 34 
R. I. 1, 82 Atl. 268. See, also, note 
in 11 Mich. L a w Bev . 60. 

"See, as to the effect of the Fed- 
eral Act upon state statutes, in the 
cases of: 

Persons Owing Less Than $1,000. 
— Littlefield v. Gray, 96 Me. 422, 
52 Atl. 925. 

Corporations (before 1903 amend- 



ment of §4b). — Herron & Co. v. 
Superior Court, 136 CaT.~^2la^8 
Pac; . 814, _89 A. S. B. 124 ; Kejt 
stone X !q. v. Superior Court , 138 Cal. 
738,-12-£ac^398; In re Hall Co., 121 
Fed. 992: (after 1910 amendment of 
§ 4b) ; In re Weedman Stave Co., 
199 Fed. 948. 

Building and Loan Associations. 
— Kurtz V. Bubeck, 39 Pa. Super. 
Ct. Eep. 370; Conti nental 



//.* 



§=Mt>d^ H.^ C ^"^^UiA^Juir 




42 JUBISDICTION 

SECTION II 
OF PERSONS 

A. Territorial Jurisdiction 

1. natural persons 

I, -<^ <r In re PLOTKE 

l^M^ 104 Fed. 964, 44 C. C. A. 282 

(Circuit Court of Appeals, Seventh Circuit. November 22, 

1900) 

SEAMAN, District Judge. The alleged bankrupt, Emily 
Plotke, appeals from an order of the district court whereby she 
is adju dicated a bankrupt upon a cred itors' petition filed May 
3, 1899. The petition states that "Emily Plotke has for the 
great er portion of six months next prec eding_the date of filing 
this petition had her principal place of business an d her dom i- 
cile at Chicag o, ' ' in said district, and * * owes debts to the amount 
of $1,000 and over"; that she is insolvent, and within four 
months next preceding * ' committed an act of bankruptcy, ' ' and 
on Ja nuary 3, 1 899, made ' ' a general assignment f or theJifinefit 
J^fjier CT^editorsjtq^one John Popjpowitz^" which was duly filed 
and recorded. The subpoena issued thereupon was returned by 
the marshal as served within the district on Emily Plotke, "by 
leaving, a true copy thereof atjier usual place of abode, with 
Charles Plotke, an adult person, who is a member of the family. ' ' 
On May 29, 1899, the appellant filed a verified plea, which 
reads as follows: ^^ 

"And the said Emily Plotke, (specially limiting her appear- 
ance for the purposes of this pleajTin her own proper person 
comes and defends against the foregoing proceeding, and says 
that she has not had her domicile within the territorial limits 
and jurisdiction of this court for the six months next preced- 
ing the filing of the petition herein, to wit, six months next 
preceding May 3, A. D. 1899, nor has she had her domicile 
within the territorial limits of the jurisdiction of this court as 
aforesaid during any part of said period of six months, nor has 

,« Assn. V. Superior Court, J63 Calif. Educational Corporations. — Dille 

A P ■ 579j^,126 Pac. 476; In re New~York v. People, 118 111. App. 426. 
B. & L. Bank, 127 Fed. 471. 



NATURAL PERSONS 43 

she now her domicile therein, nor has she had her principal 
place of business within the territorial limits and jurisdiction of 
this court for the greater part of the six months next preced- 
ing the filing of the petition herein, to wit, six months next 
preceding May 3, A. D. 1899, but that before and at the time of 
the filing of the petition herein as aforesaid, on, to wit. May 3, 
A. D. 1899, and for more than five years prior thereto, she, the 
said Emily Plotke, was, and from thence hitherto has been, and 
stiUJSjjmdinginthe city of St. Louis, and jhe state of Missouri, 
and not in the said Northern district of Illinois, and state of 
Illinois, and that she, the said Emily Plotke, was not found 
or served with process in this said proceeding in said Northern 
district of Illinois, or in said state of Illinois. Wherefore she 
says this cou rt is wholly without jurisdicti on in the premises, 
and this she is ready to verify. Wherefore she prays judgment, 
if this court here shall take jurisdiction and cognizance of the 
proceedings aforesaid. ' ' 

The petitioning creditors filed a replication, and the issues 
thereupon were referred for hearing to a referee, who reported 
the testimony taken, with findings sustaining the plea and recom- 
mending that the petition be dismissed for want of jurisdiction. 
The finding was overruled by the district court, and an adjudi- 
cation of bankruptcy entered, from which this appeal is brought. 

The re cord pre sents two questio ns, only, under the several 
assignments of error: (1) Whether, upon the undisputed facts 
shown, the case is witEm the bankruptcy jurisdiction of the 
district court; and (2) whether-jmigdiction_a ppears ov er the 
person of the alleged bankrupt. 

The first issue cHallengesthe jurisdiction of the district court 
over the estate of the bankrupt, the subject-matter of the pro- 
ceeding, irrespective of the question of jurisdiction in personam. 
The facts are undisputed that the bankrupt has neither resided 
nor had her domicile within the district for any period during 
the 6 months preceding the filing of the petition, and h as re- 
si ded fiontinuouslv in the state of Missou ri for the pfl^t, ^?l y^f^r^] 
that she carried on business in Chica go, within the district 
(conducted by one Charles Plotke), from April 30, 1897, up to 
January 3, 1899 (the petition being filed May 3, 1899) ; and that 
she executed a voluntary assignment for the benefit of creditors, 
under the statute of Illinois, on January 3, 1899 (the assignee 
taking possession forthwith, and subsequently disposing of the 
assets and closing out the business under orders of the county 



44 JURISDICTION 

court). The question is thus narrowed to an interpretation of 
the provisions of the statute. § 2, subd. 1, of the bank- 
ruptcy act (30 Stat. 545) invests district courts with juris- 
diction to ' ' adjudge persons bankrupt who have had their £rin; 
cipal-pl^ce of business, resided or had their domicile within 
their respective territorial jurisdictions for the preceding six 
months, or the greater portion thereof, or who do not have 
their principal place of business, reside or have their domicile 
within the United States, but have property within their juris- 
diction, or who have been adjudged bankrupts by courts of 
competent jurisdiction without the United States and have prop- 
erty within their jurisdiction. ' ' As both residence and domicile 
of the bankrupt were beyond the territorial jurisdiction, the 
adjudication of bankruptcy rests alone upon the provision re- 
specting the ''principal place of business." The appellees con- 
tend, in effect, (l).that the proof of a principal place of busi- 
ness inthe district for two mont hs, and of no pl ace of business 
for th e remaining period of limitation, establishes a case within 
the meaning of the words '' greater portion th ereof," in the 
section above quoted; and, if not so consirue(i,"~(2) that the 
voluntary assignment was void under the law of the forum, and 
business was carried on thereunder for the requisite period, and 
was constructively the business of the bankrupt. We are of 
opinion that neithe r of _th ese contentions is tenable . The first 
calls for a departure from the plain meaning of the language 
used in the statute to make it applicable to conditions which 
may have been overlooked in framing the provision, but are 
not within the terms which were adopted ; and however desirable 
it may seem to have such conditions brought within its scope, 
to carry out the general intent of the act, the correction can be 
n;tad ft by Jegislatis^ amendment o nly, and noL hy-wfty-j^liudicial 
eonjitruction . So far as applicable here, the provision confers 
jurisdiction over bankrupts "who have had their principal place 
of business" within the territorial jurisdiction "for the pre- 
ceding six months, or the greater portion thereof." Whether 
thus considered apart from the provision as to residence and 
domicile, or as an entirety, the language is unambiguous, if not 
aptly chosen. The expression "greater portion" of a month or 
other stated period is frequently used as an approximate measure 
of time, and its meaning is well understood as the major part 
or more than half of the period named. No justification appears 
for construing like terms in this provision otherwise than in 



NATURAL PERSONS 45 

the ordinary sense. With jurisdiction dependent upon the single 
fact of having the principal place of business within the district, 
the statute then imposes the further prerequisite that such 
business shall have been there carried on for more than half 
of the preceding six months. In otfeer* Words, the limitation is 
made with reference alone to the duration of the business in 
the district, and regardless of the fact that its location may be 
changed short of that period, and thus be carried on in different 
districts without exceeding the three months in either, or that it 
may be discontinued entirely without reaching the time limited 
in any one ; and the provisions in reference to domicile and resi- 
dence are equally restricted, except for the distinction as to 
residence, that it may be retained in one district after domicile 
is changed to another. With this meaning clearly conveyed by 
the language of the statute, the policy of so restricting jurisdic- 
tion is not open to judicial inquiry. In support of the construc- 
tion for which the appellees contend, two decisions are cited 
wbprphv JJI nf t.bP hflnkruDt act of 1867 (§5014, Rev. St.) 
is so construed, — one by Judge Blatchford (In re Foster, 3 
Ben. 386, Fed. Cas. No. 4,962), and the other by Judge Lowell 
(In re Goodfellow, 1 Low. 510, Fed. Cas. No. 5,536). However 
instructive these cases may be in interpreting the present statute, 
they are nbt applicable by way of precedent, because of the 
clear diversity in the respective provisions, ^ 11 of the form er 

rupts to "the judge of the judicial district in which such 
debtor has resided or carried on business for the six months 
preceding the time of filing such petition, or for the long est 
period dnring .such six mont hs'': and the limitationthus stated 
was held to mean "the longest space of time that the bankrupt 
has resided or carried on business in any district during the 
six months." In re Foster, supra. It may well be conceded 
that the language of that provision was susceptible of no other 
fair interpretation ; that ' ' the longest period ' * of business ' ' dur- 
ing such six months" was clearly implied, and, as remarked 
by Judge Blatchford, "not the period which, mathematically 
considered, is the greatest part of the six months." But_J^' 
subd. 1, of the act of 1898 states the jurisdictional requirements 
in terms clearly distinguishable from those which were thus 
construed, namely, that a principal place of business shall have 
existed within the district ' ' for the preceding six months or the/ 
greater portion thereof," thereby establishing as the test 



46 



JURISDICTION 



^ 



V- 



continuance of the business in the district for the ** greater por- 
tion" of the six months, and not "the longest period" of busi- 
ness "in any district during the six months." This departure 
from the provisions of the prior act is marked both in the 
change of words and in their collocation, and is not a mere 
substitution of synonymous words, as argued by counsel. 

The further contention that the requisite period of carry- 
ing on business appears in the conceded facts of the voluntary 
assignment made January 3, 1899, and the transactions there- 
under, is not well founded. The question discussed on the 
argument, whether the bankrupt act made the assignment void 
ah initio, or voidable only in the event of an adjudication of 
bankruptcy, as affecting the subsequent possession, however im- 
portant in one phase, is not material in the absence of a distinct 
showing that the business was continued under the assignment 
for more than one month. Whe re jurisdi ction of the fede ral 
courts is made d ependent upon citizenship or other specific 
fact, "the presumption m every stage oi the cause is that it is 



' without their ju risdict ion, unless the coi jtrary RppPRra^from 
the record.'' Bors v. i^reston. 111 U. S. 252, 255, 4 SupT Ct. 
407, 28^ L. ed. 419; Railway Co. v. Swan, 111 U. S. 379, 383, 
4 Sup. Ct. 510, 28 L. ed. 462. The essential fact must appear 
affirmatively and distinctly, and "it is not sufficient that juris- 
diction may be inferred argumentatively. " Wolfe v. Insur- 
ance Co., 148 U. S. 389, 13 Sup. Ct. 602, 37 L. ed. 493 ; Parker 
V. Ormsby, 141 U. S. 81, 83, 11 Sup. Ct. 912, 35 L. ed. 654. 
^ In the case at bar the record f ails to show that^ the busin ess w as 
^carried on by the assignee for any jefinite period^ and the 
proofls insuflScient to confer jurisdiction, within the rule stated, 
even on the assumption that the transactions of the assignee 
were, in legal effect, the carrying on of business by the assignor. 
It is true that a sale of the assigned property (a stock of goods) 
appears to have been made by the assignee as an entirety, thus 
closing out the business; but the time is not stated, and it may 
well be inferred from the testimony that such sale occurred 
soon after the assignment was made. The mere fact that pro- 
ceeds of such sale are retained in the hands of the assignee for 
distribution is not carrying on business, in the sense of the 
statute. The active business then ceased, and the liability to 
account for the proceeds is no more operative to save the limi- 
tation than would be the case if the business were closed out 
directly by the bankrupt, either with or without subsequent 



NATURAL PERSONS 47 

payment of debts out of the proceeds. No evidence being pro^ 
duced to overcome the presumption of fact against jurisdiction, 
the question of the legal status of the assignment does not 
require consideration. It may be remarked, however, that the' 
validity of the assignment is not questioned under the state 
statute, and its status depends upon a construotion of the pro- 
visions of the national bankruptcy act in that regard, and the 
inquiry is not one which is governed by any rule of decision in 
the state. In so far, therefore, as Harbaugh v. Costello, 184 
111. 110, 56 N. E. 363, passes upon the effect of such act on 
voluntary assignments made after its passage, the decision is 
not necessarily controlling, as contended by counsel; but that 
question, when presented, will call for independent judgment, 
in the light of all the authorities. In Mayer v. Hellman, 91 U. S. 
496, 500, 23 L. ed. 377, a different construction appears to have 
been placed upon the bankrupt act of 1867 ; and in Simonson v, 
Sinscheimer, 95 Fed. 948, 952, 37 C. C. A. 337, 342, that ruling 
is cited as equally applicable under the present act. See, also, 
Davis V. Bohle, 92 Fed. 325, 34 C. C. A. 372; In re Gutwillig, 
92 Fed. 337, 34 C. C. A. 377; In re Gutwillig (D. C.) 90 Fed. 
475, 478, cited with approval in West Co. v. Lea, 174 U. S. 
590, 596, 19 Sup. Ct. 836, 43 L. ed. 1098. 

We are of opinion, therefore, that the district court was with- 
out jurisdiction of the cause alleged in the petition, and the 
question whether the want of personal service was waived by 
appearance does not call for solution. The order of the district 
court is reversed, accordingly, with direction to dismiss the peti- 
tion for want of jurisdiction. " 

In re GARNEAU 



127 Fed. 677, 62 C. C. A. 403 



(Circuit Court of Appeals, Seventh Circuit. January 5, IQCiJ^^x^ <■ ^^ 

The bankrupt, a young man 26 years of age, was bom in the^"***,^ 
cit y, of St. Louis, and, with the exception of occasional absences, 
lived there aU his life. Up to March, 1900, he resided with his 
brother in the city of St. Louis, and was employed by him in a 
stockyard in that city upon a salary of $50 a month. In March 
or April, 1900, he removed his residence, as he claims, to the 
city of East St. Louis, directly across the river from St. Louis, 
retaining his employment in the business of his brother in the 



^ JURISDICTION 

city of St. Louis. As his sister states : "East St. Louis is not a 
place any one is apt to go to unless for business. You don't go 
there for pleasure. It is all stockyards." He rented by the 
month a room in the house of one Broughan at $10 a month. 
His effects which he moved into the house were contained in one 
trunk. In August of that year he removed his trunk, keeping 
in the room his toilet articles and his nightshirt. The trunk 
was not returned to the room for over a year, and not until after 
the proceeding by creditors hereinafter stated. He__thu8_rs- 
moved, as he claims, to East S t. Louis, for the purpose of gain- 
ingaresidence to file an application inn Sankrujptcy in the 
ISoiUhgrnlSStrigLQl Il linois, and to _secure his discha rge, and 
With the intenti on of g oing west immediatel y _thereafter. He 
did not eat at his lodging, and the record does not show where 
he was accustomed to take his meals, further than for a while 
he obtained his breakfast at some restaurant in East St. Louis. 
He occupied the room at night at first quite regularly, after- 
wards not for several weeks at a time, and then for four or five 
nights in a week; but he paid rent for the room up to the 
present time. On July 13, 1900, he^Jiled his petition in bank- 
ruptcy in the District Court for the Southern District of Illi- 
nois, praying to be discharged of ^s_defets,^ and on that day 
was adjudged a bankrupt, and the matter referred to a referee. 
At the first meeting of creditors on the 14th of August, 1900, 
three debts were proven, amounting to $14,700, and the referee 
reports that there were no assets according to the schedules in 
the bankrupt's petition, and that the three creditors proving 
their debts were all the creditors scheduled. On November 21st, 
upon the petition of the creditors, a citation was issued requir- 
ing the bankrupt to appear for examination on December 4th, 
which was had on that date; the facts concerning his alleged 
change of residence then appearing and being first known to 
the creditors. On that date, also, the bankrupt filed his peti- 
tion for a discharge, and on December 22d, the creditors, who 
were respectively residents of the states of Nevada and of 
I Utah, filed their petitions moving the court to dismiss the pro- 
ceeding for want of jurisdiction upon the grounds that the bank- 
rupt did not have his domicile within the district for the greater 
portion of six months before the filing of the petition, and did 
not have a horui fide residence or domicile within the district 
at any time; and subsequently, on February 15th, the three 
creditors filed their separate specific objections to the discharge 



NATURAL PERSONS 49 

of the bankrupt. The two matters — the motion to dismiss the 
proceeding and the objections to the discharge — ^were referred 
to a referee, who returned the testimony taken, and recom- 
mended that the petition in bankruptcj_bejdismissed for want 
of jurisdi ction. Exceptions were filed to the report, and the 
court below on June 29, 1903, overruled the exceptions, sustained 
the report, and dismissed the proceeding. The correctness of 
that ruling is brought up for consideration by a direct appeal 
and also by an original petition to review. 

JENKINS, Circuit Judge (after stating the facts as above). 
By the terms of the bankruptcy act (Act July 1, 1898, c. 541, 
§2, 30 Stat. 545, 546 [U. S. Comp. St. 1901, p. 3421]), the 
courts of bankruptcy are invested with jurisdiction to adjudge 
persons bankrupt "who have had their principal place of busi- 
ness, resided or had their domicile within their respective terri- 
torial jurisdictions for the preceding six months or the greater 
portion thereof. ' ' There is, of course, a legal distinction between, 
"domicile" and "residence," although the terms are generally 
used as synonymous, the distinction depending upon the con- 
nection in whic h an d the purpose for which the terms are used. 
"Domicile" is the place where one has his true, fixed, perma- 
nent home, and principal establishment, and to which, when- 
ever he is absent, he has the intent ion of retu rning , and where 
he exercises his political rights. 'I'here must exist in combina- 
tion the fact of residence and the mmnus numendi. "Resi- 
dence" indicates permanency of occupation as distinguished 
from temporary occupation, but does not include so much as 
"domicile," which requires an intention continued with resi- 
dence. 2 Kent, 576. Residence has been defined to be a place 
where a person 's habitation is fixed without any present inten- 
tion of removing therefrom. It is lost by leaving tJtie place where 
one has acquired a permanent home and removing to another 
place animo non revertendi, and is gained by remaining in such 
new place amimo mam&tidi. Tracy v. Tracy, 62 N. J. Eq. 807, 
48 Atl. 533. In Shaeffer v. Gilbert, 73 Md. 66, 20 Atl. 434, the 
word is thus defined: 

' * It does not mean * * * one 's permanent place of abode 
where he intends to live all his days, or for an indefinite or 
unlimited time ; nor does it mean one 's residence for a temporary 
purpose, with the intention of returning to his former residence 
when that purpose shall have been accomplished, but means, as 

H. & A. Bankruptcy— 4 



50 JURISDICTION 

iwe understand it, one's actual home, in the sense of having no 
other home, whether he intends to reside there permanently or 
for a definite or indefinite length of time." 

The term is an elastic one, and difficult of precise definition. 
The sense in which it should be used is controlled by reference 
to the object. Its meaning is dependent upon the circumstances 
then surrounding the person, upon the character of the work to 
be performed, upon whether he has a family or a home in an- 
other place, and largely upon his present intention. Bindge 
V. Green, 52 Vt. 208. 

There is some looseness and some conflict in the opinions in 
the definition given to the term ''residence." We need not 
stop to discuss these, because all agree that a residence, whether 
it must be accompanied animo manendi or may exist with a 
present intention at some time to remove therefrom, must be 
bona fide, not pretentious. Morris v. Gilmer, 129 U. S. 329, 
9 Sup. Ct. 293, 32 L. ed. 690. We are constrained to believe 
that the purported change of residence of the bankrupt from 
St. Louis to East St. Louis was pretentious o nly, not real ; and 
was merely for the purpose of pretending to acquire a residence 
solely for the purpose of filing his petition in bankruptcy in a 
district in which he did not reside, "[indeed, the bankrupt 
frankly avowed that to be his only purpose, and that he went 
to East St. Louis with the then intention_ofleaving the place 
[80 soon as he had accomplished his purpose. There was no 
bona fide change of residence. There was no bona fide assump- 
tion of residence in East St. Louis.7 He necessarily must spend 
the hours of business in St. Louis. He left his home in St. 
Louis, where he resided with relatives, and where he had passed 
his life, crossed the river, and at much inconvenience to his 
business assumed a home in a city of stockyards, to which, as 
his sister remarked, one is not apt " to go to unless for business ; 
don't go there for pleasure," carrying such of his effects as he 
thought necessary in a single trunk, which he soon removed 
from the lodging he had engaged, and which was not returned 
for over a year, retaining at his lodging only articles of toilet 
and a nightshirt. He was a soj ourner merely, and not a resi- 
dent, of East St. Louis. We look upon this transaction as an 
imposition upon the jurisdiction of the court. The Congress 
did not intend that one may select any court of bankruptcy 
which he pleases in these broad United States, and be enabled, 
through a pretentious removal to the district of that court, to 



PARTNERSHIPS 51 

obtain his discharge from his debts. To allow that to be done 
would open the door to grave frauds upon creditors, which we 
are not disposed to countenance. * * * 

The petition for review is denied, and upon the appeal the 
decree of the court below dismissing the proceeding is affirmed.^ 

2. OP PARTNERSHIPS Qf ^Cur^X '^C*^"^^ 

In re BLAIR et al. 4 ^^^ "f^^^i^??^ ..r^^ ^ 

99 Fed. 76 -V^-^^'^^,,^ y^"^^^ 

(District Court, S. D. New York. January 25, 1900) .X^J ^^" 

In Bankruptcy. On motion to dismiss petition in involuntary*!-'^*^ 
bankruptcy against the firm of Blair, Stem, Passano & Rosston, i.,..<<r^ 

BROWN, District Judge. The petition in the above case was 
filed on November 20, 1899, against the four defendants above 
named. It states that they composed the co-partnership doing 
business under the name and style of the Anglaise-Americaine 
Soap Company ; that during the greater part of the six months 
next preceding the defendants had their respective domiciles 
in the county of New York within this district and also had 
property therein; that the co-partnerahip being insolvent on 
October 5, 18 99, suffere d a judgment to be recovered against it, 
under which a portion of its property was sold by the sheriff 
under execution, whereby the judgment creditors would obtain 
a preference; and the petition asks that said "co-partnership 
may be adjudged to be a bankrupt." 

The subpoena was served personally on Stem in this district; 
the other defendants were served by order in Baltimore and 
Richmond. On January 9th the defendant Passano appeared 
specially for the purpose of moving to dismiss the petition for 
want of jurisdiction, and upon an affidavit obtained an order 
to show cause why the petition should not be dismissed. XllS 
alSdavit states in brief that none of the defendants had thei r 
«^esidence_jor_.^mni£ile_ji^^ time within this district; that 
Blair during all the period referred to hadhis~'3omicile and 
resided at Richmond, Va,, and the other three defendants at 
Baltimore, Md. ; that Passano had left the firm from three to 
four months before the petition was filed, and Rosston a month 

3—Cf. In re Williams, 120 Fed. 
34; In re Oldstein, 182 Fed. 409. 



52 JURISDICTION 

later; and that at the time of the preference alleged, the firm 
consisted of Blair and Stem only. 

Upon the return of the order to show cause and on hearing, 
a reference to a commissioner was ordered to take proof and 
report the facts as to the place of business as well as the residence 
or domicile of all the parties. 

From the report of the commissioner, it appears that the 
business of the Anglaise-Americaine Soap Company was started 
ati^altiffiore, where it was continued until about August 11th 
or 12th, when it was removed to this district; that on July 
22, 1899, Passano withdrew from the firm, transferring his 
interest to the other three partners, who by agreement assumed 
all the co-partnership liabilities; that on August 11, 1899, Ross- 
ton also retired from the firm, whereupon the business was 
removed to this district by Blair and Stem, the remaining 
partners, as above stated ; that Blair and Stem, from that time, 
continued the business under the same name and under the 
name and style of "Blair-Stem Company, Selling Agents for 
Anglaise-Americaine Soap Company ' ' ; that they continued the 
business in this district until on or about November 1, 1899, after 
which date and until the petition was filed November 9th, they 
were engaged in winding up the affairs of said company; and 
that they had no other place of business subsequent to August 
12, 1899; that Blair, between the 12th and 18th of August, 
removed to New York from Baltimore, where he continued to 
reside until the 1st day of November, when he went to Rich- 
mond to reside; that Stem did not reside or have his domicile 
here, at any time prior to November 7, 1899. 

These findings are supported by the evidence. They show, 
therefore, that the petition cannot be sustained upon its aver- 
ment of domicile, within this district, since neithe r of the four 
partners had his domicile or resided here long enough to sup- 
port the jurisdiction of the court. 

Further inquiry concerning the place of business of the sev- 
eral partners was had in view of the possible allowance of an 
amendment to the petition, getting up a place of business within 
the district for the requisite period. .|^5c_of the act provides 
that in cases of partnership "the court which has jurisdiction 
of one of the partners may have jurisdiction of all"; and by 
§ 2, subd. 1, the court is authorized to adjudge bankrupt persons 
"who have had their principal place of business, resided, or 
had their domicile within its jurisdiction" for the greater por- 



I I 



PARTNERSHIPS 53 

tion of the six months preceding the petition. The abpve_Jacts 
show jbhat two of the part ners, Bl air and Stem, had their onlx . 
place of bu siness within this district for a little over three 
months prior to the petHion^ if thTperiodTrbm November 1st to 
November 20th be deemed a period of doing business, during 
which the firm of Blair and Stem was in liquidation, in charge 
of Mr. Stem; otherwise not. Under the circumstances above 
stated, I think the period from November 1st to November 20th 
cannot be excluded fr om the period during which Stem at least 
had his principal place of business in New York. The circum- 
stances are altogether different from those in the case of In re 
Little, 2 N. B. R. 294, Fed. Cas. No. 8,391. 

It is urged that the business conducted by Blair and Stem 
in New York, was not the original partnership business of the 
four partners above named, but the business of a new firm; 
and that the provision of § 5c should be held applicable only 
to cases where the partner is transacting the same firm's busi- 
ness within the particular jurisdiction, and not where he is 
simply transacting an independent business of his own. But 
in this case Stem and Blair were in fact liquidating the old 
firm's business during this time. Nor do I perceive any sound 
reason for limiting, as suggested, the ordinary meaning of the 
language used in §§ 5c and 2, subd. 1. Whatever doubts may 
have been raised under the act of 1867 (Cameron v. Canieo, 
9 N. B. R. 527, 4 Fed. Cas. 1,128), the proceeding may certainly 
now be commenced in any district in which either partner 
resides; the present act leaves no doubt on this point (Lowell, 
Bankr. 360; Loveland, Bankr. 191; In re Murray [D. C] 96 
Fed. 600) ; and the same was held by Story, J., under the act of 
1841. The jreaspns f or the broad option given by the present jict 
were probably reasons of convenience, and to authorize the pro- 
ceedings to be had in any district wherein a partner was ordi- 
narily to be found, whether by residence, domicile, or place of 
business. 

If the petition were amended, therefore, by averring that 
Stem's place of business was here during the requisite period, 
the jurisdiction of the court should be sustained. The petition 
must, however, further show whether any of the individual 
partners are solvent. As it stands, it is ambiguous in this 
regard. It avers that the "partnership is insolvent"; but other 
statements seem to intimate that by that averment it is intended 
only to state that the joint assets are not sufficient to pay the 



54 JURISDICTION 

joint obligations. No doub tja firm is sometimes said to be 
insolvent when only a deficie ncy of joint asselB is' meant. But 
as each partner is liable in s olido for the debts of the company, 
so that they are debts of each individual member as much and 
as truly as they are debts of the firm, a partnership cannot 
with strictness be said to be insolvent while any one of the 
partners is able to pay all the firm's liabilities. Lowell, Bankr. 
359 ; Hanson v. Paige, 3 Gray, 239, 242 ; In re Bennett, 2 Low. 
400, 3 Fed. Cas. 209. By the express provision of § 5h, more- 
over, the firm assets cannot be administered in bankruptcy if 
one of the partners is not adjudged bankrupt, unless by his 
consent. Bank v. Meyer (D. C.) 92 Fed. 896; In re Meyer (C. 
C. A.) 98 Fed. 976. It is therefore required by rule 1 of this 
court that the petition shall state whether any partner, not 
joining in the petition, is solvent or insolvent. Form 2, more- 
over, prescribed by the supreme court (18 Sup. Ct. xviii.), 
requires for an adjudication of "the firm" as bankrupts, a 
statement in the petition that "the partners owe debts which 
they are unable to pay in full." This necessarily includes the 
individual responsibility of each, as well as their joint responsi- 
bility; and that form evidently contemplates that an adjudica- 
tion of the firm imports an adjudication of all its members 
as well. To avoid any ambiguity, and any delay or complica- 
tion in the subsequent proceedings, the insolvency of each 
member of the firm should be alleged in the petition if an 
adjudication against the firm and an administration of the 
firm assets in bankruptcy are sought, in order that issue on that 
point, if disputed, may be at once taken and heard along with 
any other issues, and the scope of the proceeding determined 
without further delay. 

The petition may be amended, if desired, within 10 days; if 
not so amended it will be dismissed. 

'^ \r^ 3. OP CORPORATIONS 




In re MATHEWS CONSOLIDATED SLATE CO. 

144 Fed. 724 

(United States District Court, District of Massachusetts. 
November 24, 1905) 

An Jnvnlrrntagg petiti on wa^ filftd i n the District Court for 
the DJstneTof Massachusetts against the Mathews Consolidated 



CORPORATIONS 55 

Slate Co. (a corporation organized under the laws of New 
Jersey) ; the company did not object to an adjudication, but 
object ions were filed by a creditor who had ohtairLedA4udgnient 
in New York agamst the Company. One objection was based on 
his contention that the District Court for the District of Massa- 
chusetts was without jurisdiction because the alleged bankrupt 
did not have its principal place of business, reside, or have its 
domicile within that district. The issues were referred to a 
referee, who found that the court had jurisdiction, and recom- 
i fiended an adjudication . 

DODGE, District Judge. * * * There is no dispute that 
the bankrupt was a c orporation ^organi zed under the law s, of 
New Jersey, as found in the report. Its do^jgjle ^theref ore was 
not in Massac husetts. In this jurisdiction it was a foreign 
corporation. Within the meaning of the acts giving jurisdiction 
to federal courts of suits between citizens of different states, 
such a corporation could have no residence in Massachusetts. 
Shaw V. Quincy Mining Co., 145 U. S. 444, 12 Sup. Ct. 935, 
36 L. ed. 768. In my opinion such a corporation cannot be said 
to have "resided" here within the meaning of § 2 (1) of the 
bankruptcy act. IJ_^nnot therefore be adjudged j, bankrupt^ 
here, un less, jt had its principal place of business in Massa- 
chusetts for the six months preceding June 22, 1905j_.or_fQiLthe. 
greater part of that period- 
First. The referee has found it to be a fact that the bank- 
rupt's pnncipal_^la^e_ofJbusmess^a^ its headquarters we re at 
Boston, within the District of Massachusetts, and the respondent 
contendsthat the finding was not warrantedjby the evidence. 

Whatever may be the correct description, for the purposes 
of the question which is raised under § 4b of the bankruptcy 
act, and which is considered below, of the business in which 
the bankrupt was principally engaged, there is no dispute that 
its business consisted in the operation of slate quarries and 
slate mills and in selling the slate thus obtained or produced. 
Upon the evidence which accompanies the report, I find the 
facts below stated as follows: 

(1) The q uarr ies operated were situ ated, either jn VemnQp t 
o r New Yo rk, all near the line between those states, and all 
within about 12 miles of Poultney, Vt. The principal slate mill 
was at Middle Granville, N. Y. This produced structural slate. 



U JURISDICTION 

At several of the quarries were also miUs producing roofing 
slate, as is hereinafter more fully explained. 

(2) The company was organized in May, 1902. Its officers 
were, and had been since its organization, a president, vice presi- 
dent, treasurer, secretary, and general manager. From 1902 
until the filing of the petition it maintained offices in the Sears 
Building in Boston. These were at least its executive offices and 
selling agency. In them the officers above mentioned, who all, 
during the six months before the filing of the petition, resided in 
Boston, were regularly to be found and all their official busi- 
ness was there regularly carried on, except that the general 
manager spent part of his time and performed part of his 

fties in Poultney, as below stated. In the same offices the 
•ectors, ajmaj ority o f whom resid ed in B oston dur ing th e 
ne Egri gd, held all jth,eir-meetiBgs_during_^at period. The 
_ckbook_was^eptJthere. The minutes of the directors and the 
corporation books of account were kept there. Its correspondence 
was conducted from there. The great bulk of sales of the 
product of the quarries and mills was negotiated there or from 
there ; about 1 per cent, only of the total sales being made from 
Poultney. All bills for produce sold were sent out from there, 
being there made up from shipping slips forwarded there from 
Poultney. The prices of goods sold were fixed there, and the 
payments for goods sold received there. Onejcegular salesman 
w as emplo yed, who was to be found there, except when on the 
road, and who was never to be foiind^at the quarries or at 
Poultney. When on the road his reports were all made to 
the Boston office, and all orders from him were received there, 
but only a small proportion of the sales was made by him. 
From one to three clerks or stenographers were employed there 
in the transaction of the company 's business. 
I (3) The principal bankin g of the company was dqn e in_ 
I Boston. All money received for goods sold was deposited either 
in tES City Trust Company or the Webster & Atlas Bank, both 
of Boston. These were the principal bank deposits kept by 
the company. All notes, accounts, and bills payable were ren- 
dered to the Boston office, after being approved when necessary 
at other places, as below, and were paid, as a rule, by checks 
drawn on the above bank deposits. Such checks were drawn 
at the Boston office, and were there signed by the treasurer and 
countersigned by the president. This did not apply to the pay 



CORPORATIONS 57 

roll cheeks, further spoken of below, which were signed by 
the treasurer only, 

(4) The company also maintained ofi&ces during the six 
months prior to the filing~of the petition at Poultney . From 
there the operations carried on at its quarries and mills were 
directed, as below stated, subject to the supe rvision of the 
Boston office. At each quarry the company had a superin- 
tendent. Under each quarry superintendent there was a boss 
over each gang of men employed, whether in the quarries or 
mills. Weekly reports were sent from the quarries and mills 
to the Poultney office, from which reports of product and 
shipments were there made up and sent to the Boston office. 
All shipments were made from the Poultney office, as required 
to fill orders, which were ordinarily sent from the Boston office. 
Stock sheets showing product on hand were kept at the Poult- 
ney office. These were compared usually every month with stock 
sheets kept at the Boston office. For about eight months pre- 
ceding the filing of the petition, in addition to the general 
manager above referred to, a quarry manager had been employed, 
who lived at Poultney and had all the active and immediate 
direction of all the quarries and mills, always, however, sub- 
ject to the supervision and instructions of the general manager 
above referred to, who ordered the increase or decrease of 
laborers employed at the various quarries, or the making of 
new openings, as occasion required. The general manager made 
frequent visits to Poultney, at least as often as once in each 
month. Prior to the employment of the quarry manager, the 
then general manager had resided at Poultney, and there per- 
formed the duties of the quarry manager, receiving his direc- 
tions regarding them from the president, at Boston. Such 
supplies in general as were required in operating the quarries 
or mills were as a rule purchased by the quarry manager acting 
from the Poultney office. These purchases were made in New 
York and Vermont and to a small extent in Boston. Bills for 
goods so purchased were approved by the quarry manager and 
sent to Boston for payment. 

(5) In banks at Poultney and Granville, N. Y., funds were 
deposited by the company just sufficient to cover its pay roll 
each month. The pay rolls were made up and approved by the 
quarry manager at Poultney, and were then forwarded to the 
Boston office, where the treasurer signed the necessary checks 
and forwarded the required money to the Poultney and Gran- 



58 JURISDICTION 

ville banks above mentioned, to be used to cash the pay roll 
checks. The general method was as above until about a year 
before the filing of the petition, when it was changed so far as 
the Poultney banks were concerned. Objection having been 
made by them to paying the checks referred to because the 
account maintained was so small, currency to the required 
amount had been, during the year referred to, forwarded from 
the Boston to the Poultney office and the Poultney pay roll 
cheeks cashed at that office. The deposits in the Poultney and 
Granville banks were chiefly, if not entirely, used for meeting 
the pay roll checks as stated, and the average amount allowed 
to remain on deposit there was at all times small in comparison 
with that allowed to remain in the Boston institutions. 

(6) The mill g,n d most of_thejC[uarries rsfeij'ed to were owned 
by t he Mathews Slate Com pany, a corporatign^organized under 

Jihe laws of Maine. Only two of the quarries operated did not 
belong to that company, both of them situated in New York. 
One of them was owned and one leased by the bankrupt. The 
properties of the Mathews Slate Company were subject to a 
mortgage given by that company to the American Loan & Trust 
Company of Boston, as trustee, to secure an issue of bonds 

1 amounting to $500,000. The_bankrupt_owned all the stock of 
th e Mathews Slate Company, e xcept five shares lield by^its 
dJT'e ctoT's In^OT^der^jo qualify theTn, and also owned $366^00" 
of the bonds issued by it, as^aBove. All the properties of the 
bankrupt, including said stock and bonds, were subject to a 
mortgage given by it to the City Trust Company of Boston, as 
trustee, to secure an issue of its own bonds, amounting to 
$600,000. The coupons on these bonds, due semiannually, were 
payable in Boston. The money to pay them was regularly 
deposited as they became due with the City Trust Company, by 
the treasurer of the bankrupt company, at Boston. Since the 
organization of the bankrupt company in 1902, and the giving 
of the mortgage by it as above, the Mathews Slate Company 
had maintained its organization under the direction of the bank- 
rupt company, but had done no other business and had ceased 
altogether to operate the quarries or mills belonging to it; 
such operation being from that time conducted wholly by the 
bankrupt company. 

(7) The product of the different quarries and mill was stored 
at or near them until shipped by direction from the Poultney 
office as above. None of it appears to have been stored in 



CORPORATIONS 59 

Massachusetts. The property of the company in Massachusetts 
not already referred to consisted of the office furniture in the 
Boston office only, and some samples of slate there kept. Just 
what property was kept at the Poultney office does not appear. 

(8) From 100 to 150 men were employed at the quarries 
and mills referred to, not including the mill at Middle Granville, 
where about 10 men were usually employed. 

(9) By the bankrupt's certificate of incorporation, dated 
May 1, 1902, it is declared that its principal office in the state 
of New Jersey is in Jersey City in that state. It is also pro- 
vided that the corporation is to have one or more offices. It^ad 
^n office in Jersey C ity from the time of its incorporation, at 
which office all stockholders' meetings were held. The stock- 
book was kept at the Boston office as above found. No stock 
transfer records appear to have been kept at the New Jersey 
office. It was contended by the respondent, and apparently not 
denied, that the New Jersey corporation laws required the keep- 
ing of all the books at that office. 

The above being all the facts which seem to me material upon 
the question, as I find them established by the evidence, 1 agre e 
wi th the refe ree that they show the bankrupt's principal place 
of businesg^ iQ .have_b een at Boston and within thi s dis trict. 

The bankrupt had many places of business. Besides its New 
Jersey office, its Boston office, and its Poultney office, each of the 
quarries operated and the structural mill as well was a place 
at which it regularly did business. It does not seem to me that 
the determination of the question, which of these various places 
of business was the principal one, can depend upon the amount 
of property kept or the amount or value of product turned out 
or the number of men employed at each of them. It might 
appear that some particular quarry or the mill was principal in 
this sense; yet to call that particular quarry or the mill the 
bankrupt's principal place of business would not be in accord- 
ance with what is usually understood by that expression. Cer- 
tainly, any one who desired to have business dealings with the 
corporation through its representatives would be more likely 
to go to the Poultney or to the Boston office, even though fewer 
employees and less property were to be found there, and no 
production was actually done there. If he went to the Poultney 
office he would do so because he would be more likely to find 
there some one authorized to act for the corporation regarding 
its quarrying and milling operations. These however, though 



6^ JURISDICTION 

immediately directed, from Poultney, were ultimately controlled 
from Boston, and at Boston was also transacted a large part 
of the company's business with which the Poultney office had 
no concern, a part not less important in its relation to the 
business of the company as a whole than the part which was 
done at the quarries, the mills, or the Poultney office. The fact 
that the supreme direction and control over all the company's 
operations and dealings, and over its entire plant and prop- 
erty, was exercised from the Boston office, and the fact that 
in order to the exercise of such supreme direction and control 
all its operations and dealings, whether relating to production, 
or to sale, or to the company 's finances, if not done at the Boston 
office, were reported to that office and there passed upon by the 
appropriate officers, who were regularly there for the purpose 
of exercising such supreme direction and control, in my opinion 
makes the Boston office the headquarters of the company, and 
prevents that office from being regarded as a "mere executive 
office and selling agency ' ' according to the respondent 's conten- 
tion. Tf \^ be said that t he supreme authority lay with the 
stoc ^olders, a^ that _J|;h ey^llim xmiy iff ^^^jraey City, in the 
business of the company, their authority could only be exer- 
cised through the officers whom they elected. When elected, 
those officers must have been understood to be regularly per- 
forming their duties at Boston 

The facts in this case diiTer materially from those in the case 
relied on by the respondent, in Re Elmira Steel Company 
(D. C.) 109^ Egd, 456. The headquarters of the bankrupt in 
that case could not be said to have been in Philadelphia. On 
the contrary, as is said in the opinion in Re Magid-Hope Silk 
Mfg. Co. (D. C.) 110 Fed. 352, "Its office in Pennsylvania 
seems to have been merely a branch office. ' ' The referee found 
that the business done in that office was less the business of the 
Elmira Steel Company than the business of its selling agents 
(109 Fed. 468), and that everything done in Pennsylvania was 
incidental to what was done at Elmira, N. Y. No similar 
finding seems to be possible in this case. It may be added 
that the Elmira Steel Company, organized under the laws of 
New York, expressly located its principal business office at 
Elmira by its certificate of incorporation. 109 Fed. 466. If a 
manufacturing company, under the circumstances shown in that 
case, does its manufacturing and selling in one state and its 
banking in another, it may well be considered, as was there 



WAGE-EARNERS 61 

held (109 Fed. 471), that it is the principal place of its prin- 
cipal business that must govern. I do not regard the fact that 
the present bankrupt did the greater part of its banking in 
Boston as of itself enough to make Boston the headquarters of 
the company. The banking done was only one of the component 
parts of the bankrupt's business. I^nsider the Boston office 



c, 



*v. 



laye been the bankrupt 's_E>rinciBa l place of business, because. 
all the e omponen tjpa rts of its^usiness were goj ar done at or 

.directed from that office, as to make it jroper to rega rd b otliJthe 
other offices, and each quarry, and the mill, as subor dinate, 

' ■ptafies~of bnaJTiesiit * * * [The referee's] report is there- 
fore confirmed and adjudication ordered.* 

B, Who May Become Bankrupts 

1. NATURAL PERSONS EXCEPTION (aS TO INVOLUNTARY BANK- 
RUPTCY) IN THE CASES OF: 

a. Wage-earners ^ *J4«. 

FIRST NAT. BANK OF WILKES-BARRE v. BARNUJVf 

160 Fed. 245 ^^*^ ^ "^ . 

. 5^ . / ^*.^. ^ 

(District Court, Middle District of Pennsylvania. March 9, "~-— 

1908) 

ARCHBALD, District Judge. T hese are involuntary pro - 
c gedings , and are resisted by the respondent on the grounds: 
(I j That he is a wage-earner; and J^2) that the petitioners are 
not creditors. It appears, as to the first, that the respondent 
is a music teacher, giving lessons on the piano, organ, violin, 
and mandolin, at 50 cents an hour, earning from $35 to $40 a 
month, or a little less than $500 a year, some pupils coming to 
his house for instruction, and others being taught at their own 
homes. This constitutes his livelihood, in addition to which, 
however, he has a summer cottage at Harvey's Lake, which he 

4 — The decision of the District Co., 163 Fed. 579. See also as to 

Court was affirmed by the Circuit whether it is necessary that a for- 

Court of Appeals for the First Cir- eign corporation obtain a certificate 

cuit in 144 Fed. 737, 75 C. C. A. to do business in the state where the 

603. The Supreme Court denied an bankruptcy proceeding is brought, / 

application for a writ of certiorari J n_re Duplex Bad iator Co ., 142 Fed, t/ 

in 50 L. ed. 1176, 26 Sup. Ct. 764. 906. — - 

Ace. In re Penna. Consol. Coal 



62 JURISDICTION 

rents for $175 a season, and another property from which he 
gets $150, besides which he has divided up certain land that he 
owns, and is selling it off in lots. The question is whether under 
these circumstances he is a wage-earner within the meaning of 
the law, so as not to be subject to invol untary bankruptcy. 
A wa ge-ear ner is defined by the bankruptcy act as one ^^ who 

I works for wages, salary, or hire,^t a rate of compensat ion not 
exeeedtegj^e thousand five hundr ed dollars per y ear. ' * By 
this it is evidently intended to relieve from adverse proceed- 
ings those who, not being engaged in business or trade, depend 
for a living upon the result of individual labor or effort, with- 
out the aid of property or capital. But not all of this class 
are exempt, as is show^nby^the^limi^ of $1^500. And the work 
done must be such as is compensated by wages, salary, or hire, 
other earnings not being put in the same category. These 
terms mean much the same thing, and are no doubt collectively 
used in order to cover the different possible kinds of employ- 
ment comprehended within the general idea. A^[ages, as dis- 

.^^ tinguished from salary, are commonly understood to apply to 
the compensation for manual labo r, skilled or unskilled, paid 
at stated times, and measured by the day^-,week^ month, or 
.season. Commonwealth v. Butler, 99 Pa. 535 ; Lang v. Simmons, 
64 Wis. 525, 25 N. W. 650; Campfield v. Lang (C. C.) 25 Fed. 
128 ; Henry v. Fisher, 2 Pa. Dist. R. 7 ; Louisville, etc., R. R. v. 
Barnes, 16 Ind. App. 312, 44 N. E. 1113; Fidelity Ins. Co. v. 
Shenandoah Valley R. R., 86 Va. 1, 9 S. E. 759, 19 Am. St. Rep. 
858; State v. Haun, 7 Kan. App. 509, 54 Pac. 130. And also 
by the piece. Pennsylvania Coal Co. v. Costello, 33 Pa. 241 ; 
Swift Mfg. Co. V. Henderson, 99 Ga. 136, 25 S. E. 27 ; Ford v. 
St. Louis R. R., 54 Iowa, 728, 7 N. W. 126 ; Seider's Appeal, 46 
Pa. 57 ; Adcock v. Smith, 97 Tenn. 373, 37 S. W. 91, 56 Am. 
St. Rep. 810. But not bv J M ,iob. Heebner v. Chave, 5 Pa. 115 ; 
Berkson v. Cox, 73 Miss. 3397^8 South. 934, 55 Am. St. Rep. 
539 ; Morse v. Robertson, 9 Hawaii, 195 ; Henry v. Fisher, 2 Pa. 

t^ Dist. R. 7. Nor includ ing profit s on the seirices^of others. 
Smith V. Brooke, 49 Pa. 147 ; Sleeman v.^rrett, 2 H. & C. 934 ; 
Riley v. Warden, 2 Exch. 59. Neither is it so broad a term as 
* le arnings, * * which comprehend the returns from skill and labor 
in whatever way acquired. People v. Remington, 45 Hun 
(N. Y.) 338; Matter of Stryker, 73 Hun, 327, 26 N. Y. Supp. 
209; Id., 158 N. Y. 526, 53 N. E. 525, 70 Am. St. Rep. 489; 
Jenks v. Dyer, 102 Mass. 236 ; Nuding v. Urich, 169 Pa. 289, 



WAGE-EARNERS 63 

32 Atl. 409 ; Goodhart v. Pennsylvania R. R., 177 Pa. 1, 35 Atl. 
191, 55 Am. St. Rep. 705 ; Hoyt v. White, 46 N. H. 45. Indeed 
the act itself in exempting wage-earners recognizes that there 
are other kinds, ^alary , on the other hand, has reference to 
a superior grade of services. Hartman v. Nitzel, 8 Pa. Super. 
Ct. 22. And implies a position or office. Bell v. Indian Live 
Stock Co. (Tex.) 11 S. W. 346. By contrast, therefore, "wages" 
indicate inconsiderable pay for a lower and less responsible 
character of employment. South Alabama R. R. v. Falkner, 
49 Ala. 115 ; Gordon v. Jennings, 9 Q. B. Div. 45. Where salary 
is suggestive of something higher, larger, and more permanent. 
Meyers v. N. Y., 69 Hun, 29, 23 N. Y. Supp. 484; White v. 
Koehler, 70 N. J. Law, 526, 57 Atl. 124 ; State v. Duncan, 1 Tenn. 
Ch. App. 334 ; Palmer v. Marquette RoUing Mill, 32 Mich. 274. 
The word " hire" is rather associated with the act of employ- 
ment than the reward for services done; and in the latter con- 
nection is more on the plane of wages than of salary, although 
in a sense it comprehends both; and is also applied to engag- 
ing the use of property. We hire a coachman, a gardener, or 
a cook; or a carriage to take a ride. And may also be said 
to hire a superintendent, a bookkeeper, or a clerk, although 
it would seem more correct, in the latter instances, to say engage 
or employ. In some communities, a farm hand is called aN 
hireling, without intending any reflection, although in general! 
speech the term is one of reproach. As further defining its} 
use, a laborer, according to Sacred Writ, is said to be worthy 
of his hire. And coming up from the people, as the word thus 
does, itjs ^ometimes applied, /oiit~of ptace^ to the securing of /, ^ 
prof essional serv ices, as where one is said to hire a lawyer , 
aT^octor, or a person of J;hatj;lass. 

The cases directly decided under the bankruptcy act confirm 
these views. Thus, it is held that a person do ing hauling with 
his fpam by ^^"^ '^''7 — which affords a good example of what 
may in strictness be termed a hiring — is a wage-earner. In re 
Yoder (D. C.) 11 Am. Bankr. Rep. 445, 127 Fed. 894. Althoughl 
it is said that, in allowing the priority given to wages by the I 
act, the amount due for the use of the team must be distinguished I 
from that for the services of the person himself. In re Winton 
Lumber Co., 17 Am. Bankr. Rep. 117. So money due for piece 
work, paid weekly, is held to be wages. In re Gurewitz, 10 Am. 
Bankr. Rep. 350, 121 Fed. 982, 58 C. C. A. 320. And a book- 
keeper, in the employ of others, receiving a salary of $65 or 



7 



64 JURISDICTION 

$70 a month, is a wage-earner within the meaning of the 
law. In re PilgerTDTcTrTAm. Bankr. Rep. 244, 118 Fed. 206. 
And so, as we may assume — applying the same principle — 
would be the chor^ er of a church, paid a specified yearly sum 
for his services. Catlin v. Ensign, 29 Pa. 264. Or a traveling, 
' salesman r eceiving a percentage commission on the amount of 
this sales. Hamberger v. Marcus, 157 Pa. 133, 27 Atl. 681, 
37 Am. St. Rep. 719. But not a factor or broker, engaged in 
the business of selling goods on commission. Id. Nor a mill- 
owner, who saws lumber for others at so much a thousand. 
Campfield v. Lang (C. C.) 25 Fed. 128. Nor one who builds 
a house or other structure, by contract, even though he does 
a part of the work himself. Berkson v. Cox, 73 Miss. 339, 18 
South. 934, 55 Am. St. Rep. 539 ; Henry v. Fisher, 2 Pa. Dist. 
R. 7 ; Morse v. Robertson, 9 Hawaii, 195. Nor one who tows a 
canal boat. Ryan v. Hook, 34 Hun, 191. Or threshes out grain 
by the job. Johnston v. Barrills, 27 Or. 251, 41 Pac. 656, 50 
Am. St. Rep. 717. Nor are the fees of lawyers, physicians, and 
the like to be classed as wages. Vane v. Newcombe, 132 U. S. 
220, 10 Sup. Ct. 60, 33 L. ed. 310; People v. Myers (Sup.) 

11 N. Y. Supp. 217. Norjthejiebts due to a blacksmith from^is 
customers for his services. Tatura v. Zacliry, 86 Ga. 573, 

12 S. E. 940. Nor is a school teacher a laborer or servant; 
however, we may speak of one, at times, as being hired. School 
District v. Gautier, 13 Okl. 194, 73 Pac. 954. 

From these considerations, as it seems to me, but one con- 
clusion can be drawn. A person, like the respoa dent, giving 
music lessons at so much an hour, is not a wage-earner within 
t he meaning of th e act. Teaching is a pfoFession, denoting a 
nicer relation and involving a finer character of work, and 
entitled, like that of the lawyer, doctor, the engineer, the archi- 
tect, or the minister, to Be regarded as upon a higher plane. 
His work is mental, not physical. He labors with his head, 
not his hands. And while that may not be distinctly conclusive, 
it has its weight. He is the tutor, or instructor, of his pupil, 
not his servant ; his, ofJJifitwo, being the master mind. This 



is not to say that one who works for a salar j v. like the teachers 
in our public schools, may not be wage-earners, within the mean- 
ing of the bankruptcy law. The fact of being under a salary 
makes a difference, and brings the case squarely within the act, 
although it may be noticed in passing that, in the school laws 
of the state, teachers are said to be appojn ted, not employed or 



FARMERS 65 

hired. But the compensation received by the respondent, in 
the present instance, is certainly not a salary. Neither is it 
wages. And notwithstanding the misuse of the term, alluded 
to above, neither can he be said to work for hir^ . He is simply 
paid a stipulated sum or stipend in return for the instruction 
which he gives, which he holds himself out as competent to 
impart, being engaged so to do by his pupils or their parents, 
but not hired, any more than the lawyer, doctor, or others in 
professional life. The returns from his teachings may be earuA 
ings, which as we have seen is a comprehensive term, but not) 
wage-earnings, and so not effective to exempt him from liability/ 
here. * * * [On the second ground of objection, that the 
petitioners were not creditors, the petition was dismissed.] ^ 

h. Farmers -^o/ a j^^t^^ 

BANK OF DEARBORN et al. v. MATNEY C^^-f- ^"^^ 
132 Fed. 75 Xc.. d 

(District Court, W. D. Missouri. April 16, 1904) 

PHILIPS, District Judge. This is a petition in involuntary 
bankruptcy. There is no question made, if the defendant is 
subject to the operation of the bankrupt act (Act July 1, 1898, 
c. 541, §1, 30 Stat. 544 [U. S. Comp. St. 1901, p. 3419]), that 
he had not committed acts of bankruptcy at the time of the 
filing of the petition against him. The qj i^tion of fact and 
law raised by his answer is as to whether he was chiefly engaged 
inf armi ng or the tillage of the sfi il. * * * The controlling 
facts will appear in the following discussion : 

It is not every person engaged in farming or the tillage of 
the soil who is exempt from the operation of the bankrupt act, 
but it is a person "engaged chiefly in farming or the tillage of 
the soil." The courts are generally agreed that the term ' ^f ariji- 
ing" is not synonymous with a tiller of the soil. To constitute 
one a farmer it is not essential that he in person should till 
the soil, or that his operations should be limited to agricultural 
planting, sowing, and cultivation of the soil. Yet the context 
indicates that the terms "farming" and "tilling of the soil" 

5— cy. In re Yoder, 127 Fed.*^ 
894; In re Pilger, 118 Fed. 206 T*^ 
In re Hurley, 204 Fed. 126. V^ 
H. & A. Bankruptcy — -'5 



66 JURISDICTION 

are more or less closely allied. The word "farming" was doubt- 
less employed in the act as a generic term, in a comprehensive 
sense. The lawmakers, coming from the wide extent of the 
Republic, with its diversified agricultural adaptability, are to 
be presumed to have had in mind their knowledge of the methods 
in different localities of conducting the business of farming. It 
is therefore reasonable to conc ludejhat the termjwas^ot_limited 
jnerely__tg tha-production of graJns^a^^Ig JA ' JSt^s ^Tid tVip- liTcp 
^he farmer may cultivate all or a part of his lands. He may 
be general or special. He may devote his cultivation to the 
production of corn, or wheat, oats, or rye, or grasses, which- 
ever, in his judgment, may be the more useful and profitable. 
He may include also with these breeding, feeding, and rearing 
of live stock, embracing cattle, horses, mules, sheep, and hogs, 
for domestic use and for market. If he find it more profitable 
to feed his agricultural products or his grasses to live stock 
than to rely upon marketing the surplus, he may not be limited 
to the quantity of live stock for such purposes to what he may 
breed or rear on his farm. For this purpose he may rely entirely 
upon the purchase of such live stock from his neighbors or on 
the market, and utilize his farm products in feeding and fatten- 
ing such "feeders" for market. Neither, in my opinion, should 
the act be so construed as to restrict the farmer entirely, under 
all circumstances and conditions, to the corn and hay and 



grasses he may produce for rearing such feeders and prepar- 
ing them for market. In other words, where he relies largely 
upon his pasture lands for grazing his cattle, and his crops of 
corn may not be sufficient to carry them through the particular 
winter and the feeding season, he may supplement these by 
purchasing from without sufficient corn, and the like, to meet 
the requirement. But certainly there should be apparent such 
relation between his method of farming and the buying and 
feeding of cattle, hogs, and the like, for market, as to reasonably 
indicate that his farming is not made principally subsidiary 
to the business of buying and selling cattle. So that, if his 
chief businessis that o Qhus trading^ in cattle, using his lands 
as a mere feeding station, relying upon the purchased feed from 
the market for preparing them for sale much more than on his 
agricultural products, he may cross the dividing line b etween 
farmingijs. his chief business an3~'S^aHmgjrMcattl£^ 
8tjar'(^ of tivtelih ta^. NblLia^^a"lait^lfe dm ^My be laid 



;« 



FARMERS 67 

down by the courts indifferently applicable to all cases. Each 
must depend more or less upon its own particular facts. 

The case of In re Thompson (D. C.) 102 Fed. 287, principally 
relied upon by the defendant, is in accord with the views enter- r 

tained by this court of the limit of indulgence to be accorded i 

to the farmer. It is observable that the learned judge made the 
case turn upon the fact that, taking into consideration the quan- 
tity of land in cultivation and its product, and the quantity of 
stock raised and bought, there was not such disproportion be- 
tween the defendant's farming and cattle trading operations 
as to exclude him from the protection of the bankrupt act. 

In iggj^fackg y (D- C} _11(VFVd_g55j the court has furnished 
a most sensible and just rule for determining whether the person 
be engaged chiefly in farming or other business run in connec- 
tion therewith. The court said: 

*'A person engaged chiefly in farming is one whose chief 
occupation or business is farming. The chief occupation or 
business of one, so far as worldly pursuits are concerned, is that 
which is of principal concern to him, of some permanency 
nature, andLonwhicli lie chiefly reli es for his livelihood 
tlvpjTTpgiip nf ^cgrirlDg azflalth^ ^^'Pajw^r^TjigjII That One may 
principally devote his physical exertions or his time to a given 
pursuit, while one of the factors entitled to consideration, is not 
in all cases determinative of the question whether that pursuit 
is his chief occupation or business. * * * jf g^di dealing 
is of principal concern to him, and chiefly relied on by him for 
his subsistence and financial advancement, and if he treats it 
as of paramount importance to his welfare, he would not be 
within the category of persons chiefly engaged in farming, even 
were his farm to yield him some profit. * * * It is evi- 
dent that it is impracticable, if not impossible, to define with 
precision the facts which will in all cases determine whether 
one is engaged chiefly in farming, and that each case must be 
decided on its own circumstances. It may, however, legitimately 
be stated, generally, that, if it appears in a given case that 
one's occupation or business which is of principal concern to 
him, not ephemeral, but of some degree of permanency, and on . 
which he mainly relies for his livelihood and financial welfare,/ 
be other than farming, he is not 'a person engaged chiefly in 
farming. ' Np one_a bould be held esfiinpt^ from-the provisiops 
o f the ban krupt^acl^n_this_gro^Mtd..un]£^ it satisfactorily a p - 
pears that he comes within the exception. ' ' " f '■ '** ' ^' ' • • 



y in its £^ 
li_or_as ^**v-< 



68 JURISDICTION 

The same test is applied by the court in Wulbern et al. v. 
Drake, 120 Fed. 495, 56 C. C. A. 645, as follows : 

"It does not matter if the person may have other business 
or other interests, if his principal occupation is that of an 
agriculturalist — if that is the business to which he devotes more 
largely his time and attention — which he relies upon as a source 
of income for the support of himself and family, or for the 
accumulation of wealth." 

I In the case at bar it is true that the defendant grew to man- 
/hood on his father's farm. After he attained his majority and 
» began to work for himself, his father had a store on the home- 
stead, and was postmaster there, and at one time ran a mill. 
He gave his principal attention to his store and the post office. 
The farm and homestead, consisting oi about_3 85 acres ^_were 
run__^^ejd^jemifijit3nd_his J)rother, accounting to the father 
f or one-half of the crops. The deJendant from tEeoutset mani- 
'~Fested a passion for dealing in cattle, buying and selling, so 
much so that it was conceded in argument that up to 1893 he 
dealt in the buying and shipping of cattle to such an extent that 
he became largely indebted for moneys borrowed to exploit this 
business. Up to 1900 he and his brother continued to occupy 
the farm as tenants under the father; so that during that 
period his farming operations, as such, consisted in the use of 
1921/^ acres of land of his father, on which he paid one-half 
of the crop as rental. 

He bought some more land in the early part of 1903, which 
made the amount of land he owned and the leased land, in 
1903, something over 600 acres. The result of his business opera- 
tions was that in August, 1903, when the petition in bank- 
ruptcy was filed against him, he was indebted to the extent of 
over $52,000. It is conceded that over $39,000 of this indebted- 
ness is referable to his dealings in live stock and the purchase 
of com for their feeding. The land owned by him, 295 acres, 
was valued at about $65 an acre, which would leave $5,000 or 
$6,000 representing his land after taking out the purchase 
money. 

* * * It would appear that, while the defendant's total 
crop and pasturage for 1901 amounted to about $1,770, an 
examination of his checks at one bank shows that he spent 
$8,906 that season for corn, while his mortgages indicate that he 
must have expended about $6,700 for stock to feed. 



FARMERS 69 

There is some difficulty in arriving at the exact history of the 
purchase of all cattle covered by his various mortgages. * • * 
The evidence shows that under ordinary husbandry the annual 
expense of conducting the defendant's farming operations would ^ 
not exceed $1,200. The evidence shows, from his accounts with '*»i^ 
the banks, that during his operations he did business with the 
banks aggregating $94,622.19, made up as follows: Firstl**^ 
National, St. Joseph, $42,195.66; Bank of Dearborn, $44,426.53; 
Tootle-Lemon Bank, $8,000. This extraordinary amount of 
business done by such a farmer with the banks excites special | 
wonder as to how such extensive financial operations can con- 
sist with the idea that the defendant was chiefly engaged in 
farming on such a quantity of land. They can be traced in this 
evidence to no other source than his specialty in dealing in live 
stock. 

The defendant claims in extenuation of his large indebtedness 
at the banks that the bulk of it was created prior to 1893, and 
that he has been carrying much of it since, paying interest 
thereon. He seems to have kept books prior to that time, but 
none since. He furnishes in his evidence no data from which 
the approximate amount of his indebtedness can be ascertained 
in 1893. * » * 

The state of the proofs is such, relying as it does largely upon 
facts obtained from the defendant's testimony, when_Jiekept 
nij^b^ks_silice_ 1893^^s_tojrend^ impossible to ascertain from 
thejgyidfingp exactly tb<> times of his^urchases and the number 



and ctgit of^we ^stQck actually pur cFiased T>y him cmTBeTSISfketr 
The following summary is gathered from his own^ statement : 
During the period preceding 1900 of, say five years, he pur- 
chased 6 car loads of cattle for immediate shipment, the car 
loads averaging from 16 to 18 head of cattle. He also during 
that time purchased, fed, and sold sheep to the extent of a car 
load a year. In 1900 he purchased 10 mules, colts, which were 
at once sold ; price not stated. He also purchased between 50 
and 60 calves, taken onto the farm. He shipped one car load 
of cattle and hogs, three cars of hogs, three cars of cattle, two 
other car loads of stock, not specially designated by the evi- 
dence. In 1901 he bought 10 mule colts, $57 each, which he 
kept from a year and a half to two years, and sold for from 
$125 to $175 per head. He bought 55 or 57 calves at $14 per 
head, which went onto the farm. He shipped one car load of 
cattle and hogs, and one car load of cattle, hogs, and sheep. 



70 JURISDICTION 

In 1902 he bought 140 calves at an average price of $21.25, 
out of which he at once sold 40 heifer calves; and shipped two 
car loads of cattle and a car load of aheep, hogs, and cattle. 
He also purchased 80 shoats (some of his hogs died of cholera) ; 
3 mules of Guyton & Harrington, 3 from Jack Hahn, 1 from 
Milt Gustin (one of which he traded to one Black for a pair, 
paying $155 to boot), and 2 mules bought in Kansas City, for 
the freight on which he drew his check on the Bank of Dear- 
born, and which cost $400. The probable estimate of the cost 
of the 10 mules would be in the neighborhood of $1,500. He 
also had about 100 head of Hereford and Black yearling steers, 
mortgaged October 31, 1902. These were probably calves in 
1901, but he testifies that he only bought 55 or 57 calves that 
year, leaving it inferable that he must have purchased some- 
where about 40 or 43 not accounted for as yearlings in 1902; 
and it is inferable that they were paid for with the proceeds 
ofjthe mortgage of $2,860 which covered them. 
] It does seem to me, in view of the conspicuous, controlling 
I facts in this record, that the defendant's case is brought within 
/ the rule given by the court, supra, that where "one's occupa- 
I tion or business which is of principal concern to him, not 
I ephemeral, but of some degree of permanency, and on which 
he mainly relies for his livelihood and financial welfare, be other 
\ than farming, he is not * a person engaged chiefly in farming. ' ' * 
Beyond question the defendant's energies of body and mind 
and h js time were princ ipally devoted_^othejmatterj)£_.buying 
a nd ma^ et ing liv p gtofj^^^^jjif Tchief source of his livelihooiJ l 
^agjdto whictLJlfi-.£hiefly loo ked for fin ancial success. When he 
rented lands, it was solely to get more~pasture' for the stock 
he was buying and preparing for market. His crops cultivated 
bore comparatively little relation, in proportion, to the amount 
he bought for his feeders. The great bulk of his indebtedness 
was for moneys borrowed for his cattle speculation. I|hat_s[as 
hia^pejynasg pt, spec ific bii^ness. '"Hisfarming was merely 
auxiliary — ^the incident, and not the principal thing. Banks 
and others loaning him money gave him credit on his cattle, 
and took mortgages thereon. His preferred creditors, whose 
chattel mortgages are involved in this controversy, were secured 
on the live stock he purchased. To hold such a debtor, with 
his lands all covered by mortgages, owing $40,000 growing out 
of buying and feeding live stock, is chiefly engaged in farm- 
ing, it does seem to me would be to yield to a sentiment, rather 



WHAT TIME GOVERNS AS TO CLASSIFICATION 71 

than the spirit of the bankrupt act, which is designed to secure 7 
equality among creditors. Where such a debtor seeks protec- 
tion under the exemption of the statute, he should present 
tangible, reliable evidence to bring himself within the excep- 
tion. This the defendant failed to do to the satisfaction of 
the court. 

It results that the petition to have the defendant adjudged 
a bankrupt should be sustained.* 

c. What time gcxuems as to classification, ^f .xx-vx^s"^ I 

FLICKINGER v. FIRST NAT. BANK c^cf / J^^k.^..^ 

145 Fed. 162, 76 C. C. A. 132 /^rn.^ '^«^*-^^vwI;2 

(Circuit Court of Appeals, Sixth Circuit. May 1, 1906) ^ 6<t-a.tfk. 

SEVERENS, Circuit Judge. This cause comes here on an W^..,,,^^ 
appeal from an order of the district court adjudging Flickinger k _ ^ 
a bankrupt. * * * 

Upon the merits, the first question arises upon the conten- 
tion that Flickinger was exempt from bankruptcy proceedings 
u nder § 4b of the act of July 1, 1898 (c. 541, 30 Stat. 
547 [U. S. Comp. St. 1901, p. 3423]), because he was a p erson 
chie fly engaged in farmi ng. The evidence shows that for some 
years prior to August, 1903, Flickinger resided at GaUon, Craw- 
ford Co., Ohio, and was actively engaged in the business of 
the Flickinger Wheel Company, a manufacturing corporation 
employing a great number of men, and located at that place, 
of which he was a stockholder, director, the president, and gen- 
eral manager. Hehad ajsp owne d and cultivated a farTn j^ 
L ogan coun ty, which with the implements and stock upon it 
was sold by the assignee for $21,000, and which was managed 
by"Eim7~or under his direction, and on which he had a house, 
which was occupied by him and frequently by his family when 
he visited it for the purpose of giving direction to the cultiva- 
tion and management of the farm. He went there once or twice 

6 — Cf. In re Taylor, Mattoon Ameriean Agricultural Chem. Co. 

Nat, Bk. V. First Nat. Bk., 102 Fed. v. Brinkley, 194 Fed. 411. 114 C. C. 

728, 42 C. C. A. 1; In re Hoy, 137 A. 373. As to a corporation engaged 

Fed. 175; Eise v. Bordner, 140 Fed. in farming, see In re Sugar Co., 129 

566; Gregg v. Mitchell, 166 Fed. Fed. 640; as to a partnershi p. H. ^yXX^ 

725, 92 C. C. A. 415; In re Dwyer, D. Still's Sons v. Bank, 209 Fed. "^"^uVi!^ 

184 Fed. 880, 107 C. C. A. 204; 749, 126 C. C. A. 473. ^ ^ , 



72 JURISDICTION 

a week, and telephoned his orders when he was otherwise en- 
gaged. He bought whatever was bought upon the farm, and 
sold all its products. In August, 1903^thejwheel^eompany went 
into the "Wheel Trust, * ' so c^ledj after, which he was jaot 
actively "occupied in its a ffairs . In January, 1904, the wheel 
company went into the hands of a receiver appointed by the 
n court of common pleas of Crawford county. 'rOn_Ma3L_3,-A9111, 

i'<-''^'\_-L he^iade a, general jjssi^ment^ fo^ The 

>i4**^'**'*^ ' petition in bankruptcy was filed Septem ber 2, 1904. Down to 
Cj t^e time when he made his assignment, he had made occasional 

visits to his farm in Logan county, and gave direction regard- 
ing its management, much as he had done while managing the 
business of the Flickinger "Wheel Company. He says_that_he 
had no other business than farming after his compa ny w ent 
into~tIie hands of the receiver, and that he had the sole and 
exclusive management of the farm thereafter. His statement 
. is not contradicted and is confirmed by other witnesses, and it 
does not appear that he intended to engage in any other busi- 
ness. It is difficult to seejhow, after he made a general assign- 
jnent on May 3, 1904, which, of „cnurse,^ conveyed his farm, he 
jeould properly be said to be chtefly engaged in farming. Four 
/months passed before the petition in^ bankruptcy was filed. We 
/think it could not be held that he was engaged in farming when 
'the petition was filed. The farm was sold on July 17, 1904, by 
the assignee, who at that time was in control of it. We think 
the fair conclusion from the facts shown would be that prior to 
the time when the business of the wheel company went into the 
hands of the receiver (January, 1904), Flickinger was engaged 
in two kinds of business — manufacturing and farming — of 
which the former was the chief; that after that time he was 
not engaged in that business, and that farming became his chief, 
in fact his only, occupation,^ and, continued such until his a§- 
Mgnment in May, 1904^ 

e decisive qifestion would therefore seem to be whether 
r,.^ , R 4b refers to the time when an act of bankruptcy is com- 
)iL^^ imitted for the purpose of determining the occupation, as some 
9^^'^ /of the courts in bankruptcy have held, or to the time of filing 

the creditors' petition, which seems to be the natural meaning 
of the words employed. It was held In re Luckhardt (D. C.) 
101 Fed. 807, and In re Maekey (D. C.) 110 Fed. 355, that the 
time referred to by this exception in the act is the time when 
the act was done which was the ground of the adjudication. 



WHAT TIME GOVERNS AS TO CLASSIFICATION 73 



This construction was adopted, because it was thought neces- 
sary in order to defeat attempts which bankrupts might make 
to escape the consequences of their acts by running under the 
shelter of an excepted occupation. If the language used is fairly 
su sceptible of this interpretation, the argument from inconven-" 
Tence would Justify the proposed construction. This question was 
presented in the case of In re Pilger (D. C.) 118 Fed. 206, 
before Judge Seaman, who expressed doubt about it, but passed 
it by, holding that it was unnecessary to decide it in that case. 
In the case entitled Ip re Matson (D. C0123 Fed. 743, Judge 
Archbald, in deciding whetHer the respondent should be ad- 
judged bankrupt, referred the question of occupation to the 
time when he was passing upon it ; but we do not know whether 
the question was debated before him or not. Judge Brown, in 
construing the words in § 4b, w hich include certain cor- 
porations and exclude others from the operation of the law, 
said: 

' ' These words must be interpreted in the sense in Vhich they 
are commonly used and received, and not in any strained or 
unnatural sense, for the purpose of including or of excluding 
particular corporations. ' ' 

In re N. Y. & W. Water Co. (D. C.) 98 Fed. 711, 713. 

Amajority of the cou rt is inclined to think that the st^ tntQ 
should be regarded a s having reference ^q^t he condit iong^fixiat- 
ing at the time when the act of bankruptcvjs committed. Upon 
this construction, tlie facts would require a finding that the 
respondent was within the exception. — 

There are no other questions which require consideration. 
The order must be reversed, with costs to the appellant,^ 



TIFFANY v. LA PLUME CONDENSED MILK CO. ► 



141 Fed. 444 
(District Court, M. D. Pennsylvania. October 20, 1905) 






ARCHBALD, District Judge. The controv ersy h ere is one 
ofjurisdiction. The respondent, a New Jersey corporation, 

7 — An application for a writ of In re Folkstad, 199 Fed. 363, and 



certiorari was denied by the United 

States Supreme Court in 203 U. S. 

595, 51 L. ed. 332, 27 Sup. Ct. 783. 

Ace. In re Leland, 185 Fed. 830; 



see note in 11 Mich. Law Rev. 246. 



But see in re Matson, 123 Fed 
743 









74 JURISDICTION 

denies by its plea that it Jmg had its principal place of business 
within the district for the greater portion of six.months pre- 
ceding the institution of these proceedings, as averred in the 
petition, and as is essential ; there being no claim of residence 
or^ domicile. Bankr. Act July 171898, c. 541, §^2J1), 30 Stait. 
545 [U. S. Comp. St. 1901, p. 3420] . The evidence shows that 
while incOTporated under the laws of New Jersey — and, in or- 
der to comply with them, having a nominal office ~at Camden in 
that state — the company was engaged in the business of manu- 
facturing and selling condensed milk at La Plume and at Brook- 
lyn, Pa., in this district, from the early part of 1903 up to 
October 6, 1904, when its plant at the latter place was destroyed 
by fire; that at the other having been sold the previous Jan- 
uary. It also had during the same period a centra l office at 
ScrastfflBi^from which the management of the company was 
directed; the whole of its corporate business having been con- 
ducted in these three places. The fire, however, broke up what 
was left eft its manufacturing business, which was not after- 
wards resumed. But it still retained its central office at Scran- 
ton, and from it, through its treasurer as its executive officer, 
with the assistance of a regularly employed stenographer, pro- 
ceeded to settle up its affairs. An adjustment of the insurance 
was secured, amounting to some $14,000, a considerable por- 
tion of which was not paid until the latter part of November; 
the relics of the fire were disposed of; accounts aggregating 
about $5,000 were collected in, the money received from these 
several sources being deposited in a local bank; and sundry 
bills which were due were compromised and paid. The man- 
ager of the burned condensary was also retained until the mid- 
dle of November, and a man put in charge of what was left of 
the property for some two months after that. This_wasthe 
situation on February , 2, 1905, w hen _thfi_ju:eseBt, ^etitjon-gag 
filed; the debts~3ue to the petitioning creditors having been 
incurred in the course of its condensing business, 
r^ There can be no question upon this showing as to the prin- 
cipal place of business of the company being within the district, 
\ not only for the greater part, but the whole, of the six months 
[necessary to give jurisdiction. In re Marine Machine Co., 1 
Am. Bankr. Rep. 421, 91 Fed. 630; In re Brice, 2 Am. Bankr. 
Rep. 197, 93 Fed. 942; In re Elmira Steel Co., 5 Am. Bankr. 
Rep. 484; Dressel v. North State Lumber Co., 5 Am. Bankr. 
Rep. 744, 107 Fed. 255; In re Mackey, 6 Am. Bankr. Rep. 577, 



WHAT TIME GOVERNS AS TO CLASSIFICATION 75 

110 Fed. 355; In re Magid-Hope Silk Co., 6 Am. Bankr. Rep. 
610, 110 Fed. 352. The fact is that (not counting the nominal 
oflSce at Camden, N. J.) not only the principal part , but sub- 
stantially the whole, of its business w5s conducted here. It is 
contended, however, that after October 6th, the datje^qf the fire, ^^ 
it was ePj?aged i n nothing but liquidation, which is not the doing /'i^ -^^t/ 
of business within the meaning of the law, the business required 
to be done, either by a corporation or an individual, in order 
to give jurisdiction, being none other than that by which either 
is made liable to bankruptcy, and that, the respondent here 
having been out of such business for nearly four months of the 
six next preceding the filing of the petition, the court has no 
jurisdiction over it, and the proceedings cannot be maintained. 
The question involved in this contention is not altogether a 
new one, although the particular form which it assumes here 
may be. "Fuit agree," as it is said in Heylor v. Hall, Palmer, 
325 (1619-1629), "q si un exercise traffique, e donque devient 
indebted, e apres desert son trade, e Hue in le pads sans a^cu 
trade, mes sur son tre, e luy conceale de ses Creditors, uncore 
est Bankrupt quia vive p son trade, qnt le Debt grow." (It 
was agreed that if one engages in traffic and thereby becomes 
indebted, and afterwards abandons his trade and lives in- the 
country without any trade, but upon his gains, and conceals it 
from his creditors, yet is he a bankrupt, because he lives by 
means of the trade out of which the debt grew). In line with 
this, in Meggott v. Mills, 12 Mod. 159, s. c. Ld. Raym. 286, a 
person exercising the trade of a victualer, in which he was liable 
to bankruptcy, contracted a ' debt, and subsequently quit the 
trade and became an innkeeper, after which he committed an 
act of bankruptcy, and it was held that, though a man quit his 
trade, he may be bankrupt for the debts that he owed before.? 
And in Ex parte Bamford, 15 Vesey, 449, Lord Eldon declared 
tiaJL^.commission in bankruptcy could be sustained beyond 
doubt by an~act of bankruptcy committed after retiring from 
tradej^the debts~conTracted during trade remaining unpaid. To 
the same effecTafe i)a:we v. Holsworth, Peake, 64, Doe ex dem. 
v. Hayward, 2 Car. & Payne, 134, and Bailie v. Grant, 9 Bing. 
121 ; it being stated in the latter case by Tindal, C. J., that the 
point was settled. It seems to have been carried one step fur- 
ther, or at least a new form given to it, in Ex parte Griffiths, 
3 De G., M. & G. 174, where it was said by Knight Bruce, L. J. : 
"A trader, who, after having become indebted, leaves off trade. 



c^* 



76 JURISDICTION 

is not to be heard to say to his creditor that the trading has 
been left off, if a question arises whether the debtor can or can- 
not be, aa a trader, made bankrupt." And Lord Alverstone, 
C. J., In re Worsley, 1 K. B. (1901) 309, similarly declares 
that, so long as a debtor does not pay the debts which he con- 
tracted while engaged in trade, he is to be regarded as still so 
engaged. The doctrine of these cases was adopted and applied 
in this country, in Everett v. Derby, 5 Law Rep. 225, Fed. Cas. 
No. 4,576, a case arising under the bankruptcy act of 1841. It 
was there objected that the respondent was not liable to bank- 
ruptcy, not being at the time of the alleged acts, nor at the time 
of the filing of the petition a merchant actually using the trade 
of merchandise, nor yet a retailer, so as to bring him within the 
law. But it was held by Judge Ware, on the authority of what 
was said by Lord Eldon in Ex parte Bamford, supra, that the 
proceedings should be sustained. 

A case under the present act, more nearly approaching to the 
I one in hand, is to be found,In_re_LufiMiardtj 4 Am. Bankr. Rep. 
J 307, 101 Fed. 807. The bankrupt there, who was engaged in the 
retail boot and shoe trade, abandoned it and went to farming; 
and, a petition having been filed against him, it was claimed 
that he was exempt. In holding him liable, however, it is said 
by Hook, J. : 
y^ "The exemption from involuntary proceedings in favor of 
wage earners and persons engaged chiefly in farming or the 
tillage of the soil is not intended as a means of escape for in- 
solvents, whose property was acquired and whose debts were 
incurred in other occupations recently engaged in. If the right 
of the creditors to institute involuntary proceedings may be 
thus defeated by the debtors within the period allowed for the 
commencement of such proceedings, it could be defeated by a 
V>^ change of occupation made coincidently with the commission 
of an act of bankruptcy, and an insolvent debtor would thus be 
permitted to dispose of a stock of merchandise or other prop- 
erty, distribute the proceeds thereof in such manner as pleased 
him, immediately become for the time being a tiller of the soil, 
or a wage earner, * • * and so avoid the operation of the 
I bankruptcy act. Such a result is not in accord with the purpose 
1 nor within the spirit of the law. A petition in an involuntary 
j proceeding must be filed within four months after the commis- 
1 sion of the act of bankruptcy relied on, and, if an insolvent, 
[who is engaged in an occupation which is within the purview 




WHAT TIME GOVERNS AS TO CLASSIFICATION 77 

of the law, has committed an act rendering him amenable to^ 
its provisions, and desires within such period to adopt one of/ 
the callings favored by the law and exempted from its operation | 
in respect of involuntary proceedings, he should not be per- / 
mitted to carry with him the property previously accumulated, 
to the defrauding of pre-existing creditors. The excepted occu- . 
pations are not designed as a ref uge f or ins olyen£iie btors. lad en I 
with property and fleeing from other callings. The right of/ 
the cre^JitorsTto proceed within the period limited after the com- 1 
mission of an act of bankruptcy cannot be thus defeated by the i 
debtor." J 

Closely in point is In re White Mountain Paper Co., 11 Am . 
Bankr. Rep. 491, 127 Fed. 180, where a corporation, organized K3 
under the laws of New Jersey for the purpose of manufactur- 
ing pulp, acquired land and erected a plant in New Hampshire 
for the purpose of engaging in that business^ but b ecame in- 
volved before any direct manufacturing was done. In holding 
it liable to proceedings in bankruptcy, notwithstanding the lat- 
ter circumstance, it is said by Aldrich, J. : 

"The question • * * does not depend upon * • • 
whether the corporation was at the particular time of the peti- 
tion actually engaged in * * * the process of manufactur- 
ing. My impression would be that the language 'engaged prin- 
cipally in manufacturing * * * pursuits' was used for the 
purpose of describing the kind of a corporation which may be 
put into bankruptcy, and that it was not intended that the 
operation of the bankrupt law upon a corporation of a kind 
within the meaning of the statute should depend upon the ques- C«.-^-^-u. 
tion whether it was actually engaged in manufacturing_at.ihe<;»,^^^^^^^ 
particular time when the petitiog is filed. ' ' '^^ ±jii 

This case was affirmed on appeal (11 Am. Bankr. Rep. 633, ; 
127 Fed. 643, 62 C. C. A. 369) upon the somewhat narrower 
ground that, in the opinion of the court, manufacturing, under 
the evidence, had in fact begun, although only in its earlier 
stages — a view which, while it may not adopt, does not detract 
from, that expressed by the lower court. Finally, In re Moench 
Co., 12 Am. Bankr. Rep. 240, 130 Fed. 685, 66 C. C. A. 37, 
where the corporation at the time of filing the petition was in 
the hands of receivers appointed by a state court, it was con- 
tended, similarly to what it is here, that the company, having 
ceased to do business when the receivers were appointed, was 
not within the provisions of the act. But it was said by La- 



78 JURISDICTION 

combe, J., speaking for the Court of Appeals of the Second 
Circuit : 

"No case is cited in support of this proposition, and, in the 
absence of authority, we shall be unwilling to hold that a cor- 
poration could thus easily avoid the operation of the bank- 
ruptcy act by making a general assignment, or by securing the 
appointment of receivers, or by ceasing to do any business, be- 
ifore its creditors filed a petition against it." 

While neither of the authorities so cited may be in exact cor- 
respondence with the case in hand, the principle to be deduced 
from them, applicable thereto, is clear. The liability of a per- 
son, whether natural or artificial, to bankruptcy is to be judged 
by the character of the pursuit in which such person was en- 
gaged at the time the debts due the petitioning cre di tors we re 
incurred, with respect to which it may be conceded that, as to 
a corporation, its actual business is to be considered, and not 
that which it might possibly have undertaken by virtue of au- 
thorized but unexercised powers. In re New York & W. Water 
Co., 3 Am. Bankr. Rep. 508, 98 Fed. 711 ; In re Tontine Surety 

iCo., 8 Am. Bankr. Rep. 421, 116 Fed. 401. As to such debts, 
an individual does not lose his previous character by ceasing to 
carry on the business in which they were contracted and turn- 
ing to another, in which he is not liable to bankruptcy, and 
neitheg^dogs a corporation,^by stoppin^Jbusines s altogether and 
1 goingJntpJdjQiidation^^ v oluntary or invo luntary. In either case, 
Va& to debts previously contracted, the business character of such 
erson, in the contemplation of the law, remains the same. 
Whereyerj^ thereforej^jhe principj ,! glace of^ business_of .such, 
fterson l^a^ been ^tablished |or the greater part of six mo ntM 
precedin^LJh e filing of the petiti on, and witho u t regard to^ ^ 
budness_ihgrecarrie4__o^ as to debts previously contracted, 
roceedings may be maintained. 

This is not to deny the force of those eases which hold that, 
where a person ceases to belong to one of the excepted classes, 
he becomes liable according to the class in which he is found at 
the time proceedings are instituted. In re Ma tsnn^ 10 Am. 
BMlO L-Rep. 473, 123 Fed. 743; Hoffschlaeger v. Young Nap, 
12 Am. Bankr. Rep. 521. It is simply that a different prin- 
ciple applies. Nor does it seem to make any difference that the 
debts due the petitioning creditors were incurred before the 
change (Butler v. Easto, Doug. 295), provided only the act of 
bankruptcy has been committed since. Bailie v. Grant, 9 Bing. 



INFANTS /^Cf^*^//t^ /3/ 

121. As declared in the latter case, *'a debt contracted before 
trade, but remaining unpaid at and after the time the debtor 
enters into trade, " is "a subsisting debt for every purpose, and 
subject to every consequence which belongs to a debt originally 
contracted during trade." But without enlarging upon this, 
which is somewhat obiter, whatever be the rule where a change 
is made from an exempt to a nonexempt class, there can be no 
question as to what is the rule here. 

The exceptions to the report of the referee are overruled, the 
issue raised by the plea is found in favor of the petitioners, and 
the respondent is directed to answer over within 10 days.^ 

2. PERSONS OP ABNORMAL LEGAL STATUS 



In re WALRATH ^<^* 



■mT. 



175 Fed. 243 7^^^ ^^^^^ 
(District Court, N. D. New York. January 4, 1910) .u_^^^ . J 

RAY, District Judge. The above-named bankru pt is an ii^ - 
fant np(^er the age of 21 ve arSj and it is alleg ed that for such V ''g**</ 
reasonthis^ court has nQ_iurisdictiQn-4o-^aat-a.-iii§ch arge in y ^f^ 
this^roceeding. Henry L. Walrath filed his vo lunta ry petition l7 
in bankruptcy on or about Ma y 26, 1909 . An adjudication was '^'*^^'^ 
made, and the matter referred to C. L. Stone, Esq., one of the / 
referees in bankruptcy. The first meeting of creditors was held 'fO '^'^ 
July 19, 1909, and Frank E. Parsnow, a creditor, appeared and nf- a< 
filed his claim in the sum of $939.40, and same was duly proved -L 

and allowed. A. H. Sheldon was appointed trustee of the estate C/caX*^'^ 
of said bankrupt, and Parsnow participated in such appoint- j« JL 
ment. The trustee duly qualified and acted. Parsnow de- 
manded an examination of such bankrupt, and such examina- f\^ 
tion was had. It appears there were no assets^ No other cred- 
itor proved a claim. September 15, 1909, the bankrupt filed 
his petition in due form, asking a discharge under the bank- 
[ruptcy law. The referee has filed his certificate of conformity 
and recommends a discharge. On the return of the order to 
show cause on such petition for a discharge, said Frank E. 

8 — Ace. In re Burgin, 173 Fed. 
726; In re Wakefield, 182 Fed. 247; 
>B58Tiote in 23 Harv. Law Ebv. 393a 



do JURISDICTION 

/ Parsnow, who had proved such claim, filed specifications of ob- 
/ jection to the discharge of the bankrupt on the ground that, he 
being an infant, the court has no jurisdiction to grant such 
/ order. 

The claim of Parsnow proved and allowed, and which gives 
him standing in court, is the amount of a judgmen t in his favor 
against Walrath_iiLJ^a;Ctix)n_jPor^egljgei^ from which no 
appeal has been taken. The said objecting creditor has not at 
any stage moved to open the adjudication or dismiss the peti- 
/ tion instituting the bankruptcy proceedings. Infants are liable 
j ^gr^ome debts, and they and their property may_be bound in 
I judgment therefor. This claim of Parsnow is one of that^lass. 
It has been so adjudicated by a court of competent jurisdiction. 
Walrath, the bankrupt, owes the debt. He owed the debt when 
the proceeding in bankruptcy was instituted. The law has so 
adjudged. The bankruptcy act, "An act to establish a uniform 
system of bankruptcy throughout the United States," approved 
July 1, 1898 (Act July 1, 1898, c. 541, 30 Stat. 545 [U. S. 
Comp. St. 1901, p. 3418]), as amended February 5, 1903 (32 
Stat. 797, c. 487), and June 15, 1906 (34 Stat. 267, c. 3333), 
provides.- in ll__that_l:_jdebt' j^halLgnclude. aiiy_ debt, de- 
mand— ojL^iil^improvable iu bankruptcy," and in §2 that 
the courts of bankruptcy shall have power to ' ' adjudge persons 
bankrupt who," etc., and in §4 that "any person who 
owes debts, except a corporation, shall be entitled to the benefits 
of this act as a voluntary bankrupt," and in §63__that 
/"debts of the bankrupt may be proved and allowed against his 
/estate which are (1) a fixed liability as evidenced by a judg- 
j ment or an instrument in writing, absolutely owing at the time 
I of the filing of the petition against him," etc. 

This was a provable debt, and was proved by this objecting 
creditor, and duly allowed. The act nowhere excepts infants 
from its provisions or benefits. The language is as broad as it 
could have been made in general terms to include infants, and 
there is nothing elsewhere in the act indicating that they are 
not included in the language quoted. There is no ground of 
public policy for excluding them, or so construing the act as to 
exclude them, where they owe debts. This court therefore holds 
that Henry L. "Walrath was, although an infant, entitled to the 
benefits of the act, and that he was properly adjudicated a 
bankrupt. The proceedings had are neither void nor voidable. 



INFANTS 81 

In re Carl S. Brice, 2 Am. Bankr. Rep. 197, 93 Fed. 942 ; Collier 
on Bankruptcy (7th ed.) 96, 97, where it is said: 

"An infant, either petitioning or petitioned against, must ap- 
pear toh ave capacity to owe. It is yet a mooted question, how- 
ever, whetEerHan infant wEo has either held himself out and 
traded as an adult, or who alleges only debts for necessaries, 
cannot be adjudged bankrupt on his own petition. The better 
opinion seems to be that he can." 

This infant in respect to this debt was under no disability. 
He owed the debt^ and his property was liable for its payment. 
Suppose he had owed ten debts of the same class and grade, 
with only property sufficient to pay 50 cents on the dollar; is 
there any good reason why he should not have been adjudged 
a bankrupt, and his property applied in payment of all pro rata? 
Or, should the fi rst one to obtain judgment and execution be 
allowed to sweep the deck^ in the very face of the act and its 
declared iiilPp0S6'^ Under the act of 1841 (Act Aug. 19, 1841, 
c. 9, 5 Stat. 440), where, as here, infants were not exempted 
from its operation, it was held they were entitled to its benefits. 
In re Book, 3 McLean, 317, Fed, Cas. No. 1,637. It is unquesH 
tionably true that an infant cannot be adjudicated a bankrupt, i 
unless it appears that he "owes" debts. The word "owe" I 
means something: That he is now_legally liable for its pay- / 
ijig nt, an d that J t may be enforced. ThisnSemg so, TieTs~5i- /o' ^y ^ 
titled to his discharge in this proceeding instituted for thatjv^ u 
purpose; no other ground of objection appearing. " Any per- p^^"** 
SQn who owes debtg '/ is entitled to the benefits of the act, and it 
cannot be successfully contended that an infant is not a person. 

But the validity of these proceedings cannot be challenged 
here collaterally. The petitioner has been adjudicated, and 
jurisdiction established. That judgment stands unimpeached. 
This is an independent proceeding . In re Clisdell (D. C.) 4 
Am. Bankr. Rep. 95, 101 Fe4_246i_IilJCfi^Mason, 3 Am. Bankr. 
Rep. 599, 99 Fed. 256. f§ ^ 14 and 29] state the objections 
which may be interposed 'and litigated here. J[urisdiction and . / , 
the validity of the prior proceedings are not included. The 
confusion in the cases has arisen over the attempt to show that 
an infant who actually "owes" a debt for which he and his 
property are liable, and which may be enforced against both, 
is not entitled to the benefits of the act, for the reason that 
infants who have made contracts not binding, and which may 
not ever become binding, which the infant may ratify on he-, 

H. & A. Bankruptcy — 6 



82 JURISDICTION 

coming of age and then owe the debt incurred by such ratifica- 
tion, but which they do not owe or cannot owe during infancy, 
are not entitled to the benefits of the act; in other words, that 
infants who do "owe" debts are' not entitled to the benefits of 
the act, for the reason infants who do not owe debts are not. 
In fants with no liabilities except o f the latter description 
are not entitled to the benefits of the acf, for the reason they 
do not ^'owe" de^ tSj not for the reason they are infants. An 
adult is not entitled to the benefits of the act unless he owes 
debts. The disability of the infant goes to his power to incur 
a debt, so that he cannot be said to owe it, not to his power to 
pay or avoid a debt he actually owes, or take the benefit of a 
law which releases him, or which may release him, from one he 
actually ' ' owes. ' ' The law does not say ' * any adult person who 
owes debts, except a corporation, shall be entitled to the benefits 
of this act as a voluntary bankrupt," but "any person ;" and 
u ntil it^ an be demonstrated that an infant who owes a debt is 
not a "person," such infant is within the Taw^andre^Sitied to 
its benefits^ Such infant is clearly included in the term "any 
person who owes debts," etc. It would have been just as easy 
for Congress to have said "Adult persons who owe debts," or 
"Any adult person who owes debts," and thus have excluded 
infants who owe debts, as to have used the language it did. It 
was not the purpose of Congress to secure an equal distribution 
of the property of all insolvent adult persons amongst their 
t creditors, respectively, and_givejthem^J;he benefits of the_act, 
/and leave the property of infants within the grasp of the first 
(creditor obtaining judgment, to the exclusion of all others, and 
leave such infant liable for its unpaid debts or for the remain- 
der of its unpaid debts. There is no reason why infants who 
owe debts which may be enforced against them and their prop- 
erty should not have the benefit of the act, and I can see no 
legal obstacle to their having it. 

By the adjudication it was settled that Walrath, the peti-^ 
tioner, owed debts, and in that adjudication this objecting cred- 
itor acquiesced. He made himself a party to the proceedings 
in bankruptcy, when he appeared therein, and proved his claim, 
and examined the bankrupt, and took part in the appointment 
of the trustee of his estate. He comes here in this proceeding, 
alleging that he is a creditor of this infant, and, in legal effect, 
asserts that the petitioner owes to him an established and en- 
forceable debt. On his own showing this infant is within and 



MARRIED WOMEN 83 

entitled to the benefits of the law. He sets up no objection 
specified as a ground for refusing a discharge in §§14 
and 29 of the act, ^nd as the adjudication stands unreversed it 
must be assumed to be valid. As was said by Coxe, Circuit 
Judge, In re Clisdell, supra: 

"The petition for a discharge rests upon the fundamentalN 
proposition that the petitioner has been adjudicated a bank-/ 
rupt. ' ' 

This court holds that the validity of that adjudication, not 
appealed from, reversed, or set aside, cannot be questioned, on 
application for a discharge, except by showing it was made by 
a court having no jurisdiction to pronounce it. 

Motion granted, and there will be a discharge according to 
the prayer of the petition.^ 

b. Married Women V^'***<£ i. 

CO. e^ al.^ T^ 



MAC DONALD v. TEFFT-WELLER 



--H... "C 




128 Fed. 381, 63 C. C. A. 123 ^^ ,^ yc/^/ 

(Circuit Court of Appeals, Fifth Circuit. March C 1904) ~"^ --^ 

Tjivn1iipt.^T y_prnp.^<lmgs^vn bankruptcy were begun in the 
District Court by the filing of a petition alleging, inter alia, 
that ''Ruth E. MacDonald is a married woman * * * and 
has for several years * » * been engaged in the business 
of buying, selling, and trading in dry goods * * * and has 
Qpndu cted said busines s in h er own nam e j * * * that the 
said business, and said goods, wares, and merchandise, store, 
and office fixtures and furniture and store accounts 2j:q her 
separate pe rsonal prope rty, and that the amounts due by said 
Ruth E. MacDonald in the conduct of said business to peti- 
tioners, hereinafter referred to, were incurred by her for the 
purchase price of the personal property, to wit, stock of goods 
in the store and business of said Ruth E. MacDonald, and went 
to the increase of her separate personal property, and that she 
therefore charged her separate property with the payment of 
the same;" that the petitioners have provable claims against the 
alleged bankrupt ^or~specified" amounts^ and that the alleged 

9 — Ace. In re Brice, 93 Fed. 942. are partners, see In re Dunnigan, 

But see In re Eidemiller, 105 Fed. 95 Fed. 428, In re Duguid, 100 Fed. 

595; In re Soltykoff. [1891] 1 Q. B. 274 and Jennings v. Stannus & Son, 

413. Ab to firms in which infants 191 Fed. 347, 112 C. C. A. 191. 



84 JURISDICTION 

bankrupt had, within four months, made a conveyance which 
was a preference of one of her creditors. 

Mrs. MacDonald appeared by counsel, and filed demurrer to 
the foregoing petition on the following grounds: * • * 

"(5) That a married woman residing in Florida cannot be 
adjudged a bankrupt; (6) that there is no personal liability for 
her obligations resting upon a married woman residing and 
doing business within the state of Florida, which obligations 
would be enforceable against her, and that a married woman 
cannot be adjudicated a bankrupt; (7) that in this court a mar- 
ried woman not a .free^jlealer cannot be adjudicated a bank- 
rupt." """^ ^ 

The court below overruled the demurrer, and this court is 
asked to revise the proceedings on the grounds stated in the 
demurrer. 

PARDEE, Circuit Judge (after stating the facts * * *). 
The question presented is whether, under the facts alleged in 
the petition in this case, a married woman in the state of Florida, 
having separate statutory property, and engaging in trade, 
buying, and selling on her own account, but not a free dealer ^ 
can be adjudicated a bankrupt under the bankrupt law of 1898. 

Under §§1505-1509, Rev. St. Fla. 1892, a married woman 
may have her disabilities removed, and she may have a license 
as a free dealer authorized to contract, sue, and be sued, and in 
all respects to bind herself as if she were unmarried. See Mar- 
tinez V. Ward, 19 Fla. 175. 

By article XI of the C onstiti^t ion of the state ofJE lprida of 
1885 it is provided : 

" § 1. All property, real and personal, of a wife owned by 
her before marriage, or lawfully acquired afterwards by gift, 
devise, bequest, descent, or purchase, shall be her separate prop- 
erty, and the same shall not be liable for the debts of her hus- 
band without her consent given by some instrument in writing, 
executed according to the law respecting conveyances by mar- 
ried women. 

" § 2. A married woman 's separate real or personal property 
may be charged in equity and sold, or the uses, rents and profits 
thereof sequestrated for the purchase money thereof; or for 
money or thing due upon any agreement made by her in writ- 
ing for the benefit of her separate property ; or for the price of 
any property purchased by her, or for labor and material used 



MARRIED WOMEN 85 

with her knowledge or assent in the construction of buildings, 
or repairs, or improvements upon her property, or for agricul- 
tural or other labor bestowed thereon, with her knowledge and 
consent. 

" § 3. The Legislature shall enact such laws as shall be neces- 
sary to carry into effect this article," 

It does not appear that there has been any legislation under 
§ 3 of said article, but "it is well settled, ' ' says the Florida 
Supreme Court in First National Bank of Pensacola v. Hirsch- 
kowitz, 35 South. 22: 

"In an unbroken line of decisions, beginning with Lewis v. 
Yale, 4 Fla. 418, down to the present time, this court has held 
that 'a feme covert is not competent to enter into contracts so 
as to give a personal remedy against her. ' As was said in Doll- 
ner v. Snow, 16 Fla. 86 : * At common law the promissory note 
of a married woman is void. The Constitution and statute of 
this state make no change in this respect. Neither at law nor 
in equity can she bind herself so as to authorize a personal judg- 
ment against her. ' Under the rule laid down in these decisions, 
appellants could not have proceeded at law against the said 
married woman, Dora Hirschkowitz, and hence could not have 
reduced their claims to judgment; also see Crawford v. Feder, 
34 Fla. 397, 16 South. 287." 

In the headnotes to this report, which in Florida are pre- 
pared by the judges. No. 1 reads as follows: 

"At common law the promissory note of a married woman 
is void. The Constitution and statutes of this state make no 
change in this respect, unless said married woman shall have 
been made a free dealer. Neither at law nor in equity can she 
bind herself so as to authorize a personal judgment against 
her." 

The court further says: 

"It is also the settled law of this state that 'where a married^ 
woman carries on business in her own name, having property J 
employed in such business, and purchases goods upon her sole / 
credit for the purpose of such business, her separate property I 
may be subjected in equity to the payment of claims for money i 
due for such purchases.' Blumer v. PoUak, 18 Fla. 707. Also^ 
see Staley v. Hamilton, 19 Fla. 275 ; Garvin v. Watkins, 29 Fla. 
151, 10 South. 818; Halle v. Einstein, 34 Fla. 589, 16 South. 
554. In Crawford v. Gamble, 22 Fla. 487, it was held that 
'merchandise purchased by a married woman who is conduct- 



66 /JURISDICTION 

ing a mercantile business in her own name is her separate stat- 
utory property.* " 

From these references to the law in_ Florida it appears that 
a,, TTi jgTried w oman having separate statutory property, although 
not a free dealer, ca£_lawfuU:£: car ry on busine ss, buy and sell 
upon her sole credit, and thus contract obligations binding upon 
her property in all respects as if she were a feme sole, exce pt 
t hat s he cann ot be hel d personally liable at law; the creditors' 
legal remedy upon her contracts being in equity, under which 
all her separate property may be taken. That is to say, that 
such married woman may contract a debt which, she morally 
owes — owes in equity and good conscience, lawfully owes — but 
which she cannot be personally adjudged to pay. 

Is Jibe lmited_objigajign^ thT3AJ:esulting_a _ " debt, * ' within the 
meaning of the word as used in_j_4 of the bankrupt law of 1898 ? 
Clause"^' a^^^^TX^aikr. Law, July 1, 1898, c. 541, 30 Stat. 547 
[U. S. Comp. St. 1901, p. 3423], provides that "any person who 
owes debts, except a corporation, shall be entitled to the benefits 
of this act as a voluntary bankrupt." Clause "b" provides 
that *'any natural person, except a wage earner, or a person 
engaged chiefly in farming or the tillage of the soil, any unin- 
corporated company, and any corporation engaged principally 
in manufacturing, trading, printing, publishing, mining, or mer- 
cantile pursuits, owing debts to the amount of one thousand 
dollars or over, may be adjudged an involuntary bankrupt upon 
default, or an impartial trial, and shall be subject to the pro- 
visions and entitled to the benefits of this act. ' ' Blackstone de- 
fines a "debt" as foUows: "A sum of money due by certain 
and express agreement, as by bond for a determinate sum, a bill 
or note, a special bargain, or a rent reserved on a lease, where 
the amount is fixed and specific, and does not depend upon any 
subsequent valuation to settle it." 3 Bl. Com. 154. Again: 
"Any contract, in short, whereby a determinate sura of money 
becomes due to any person and is not paid, but remains in action 
merely, is a contract of debt." 2 Bl. Com. 464. "The word 
'debt' is of large import, including not only debts of record or 
judgments and debts by specialty, but also obligations arising 
under simple contract to a very wide extent, and in its popular 
sense includes all that is due to a man under any form of obli- 
gation or promise." Gray v. Bennett, 3 Mete. (Mass.) 522, 
|526; Shane v. Francis, 30 Ind. 93. "A 'debt' signifies what- 
l ever one owes. There is always some obligation that it shall be 



MAERIED WOMEN 87 

paid, but the manner in which, or the condition upon which, it 
is to be paid, or the means of recovering payment, do not enter 
into the definition." Rodman v. Munson, 13 Barb. 197. "A 
debt is a sum of money due by contract, express or implied." 
Perry v. Washburn, 20 Cal. 350. § 1 of the bankrupt law of 
July 1, 1898, c. 541, which gives the meaning of words and 
phrases used in the act, provides in paragraph 11 (30 Stat. 544 
[U. S. Comp. St. 1901, p. 3419]), *' 'debt' shall include any 
debt, demand or claim provable in bankruptcy," and § 63 (30 
Stat. 562 [U. S. Comp. St. 1901, p. 3447]), relating to debts 
which may be proved, provides as follows: "Debts of the 
bankrupt may be proved and allowed against his estate which 
Qj,Q * * * (4) founded upon an open account or upon a 
contract express or implied." 

These broad definitions of "debt" from the text-books, ad- 
judicated cases, and the bankrupt law all clearly include the 
obligation lawfully contracted by a married woman, not a free 
dealer, in the state of Florida, dealing with her separate estate. 

We are referred to no adjudicated cases on the question as 
to whether a married woman can be adjudicated a bankrupt 
under the present law — all the cases cited are under other and 
former laws. 

The English_cases_cited, and much relied on by counsel for 
petitioner (Ex parte Jones, In re Grissel, 12 Chan. Div. 484, 
and In re Gardiner, Ex parte Coulson, 20 Q. B. Div. 249), lose 
much of their force here, because the married women's property 
act, 45 & 46 Vict., provides: "Every married woman carrying 
on a trade separately from her husband shall, in respect of her 
separate property, be subject to the bankruptcy laws in the 
same way as if she were a feme sole. ' ' And § 152 of the bank- 
ruptcy act provides: "Nothing in this act shall affect the pro- 
visions of the married women's property act 1882." 

In re Kinkead, 3 Biss. 405, Fed. Cas. No. 7,824, a case 
decided under the law of 1867, wherein it was held that a mar- 
ried woman residing in Illinois could be adjudicated a bank- 
rupt, seems to have turned upon the laws of Illinois with regard 
to the rights of married women. In the note by the learned 
reporter in that case many of the current decisions in this conn- 
try and in England are reviewed, and the reporter sums up as 
follows : 

?i;rr* Impossible as it may be to reconcile the decisions on the 
general question of the rights and liabilities of married women, 



88 JUEISDICTION 

the duty of the federal courts in administering the bankrupt 
act would seem to be simply to determine the status of a mar- 
ried woman under the existing laws of the state where the juris- 
prudence is to be exercised, and administer the act upon the 
jbasis of the principles thus discovered. Thfi_Jormdatira_of 
bankrjajioy-p^ceedings is indel?j£diies§ ; but the bankrupL,act 
does not make any new standard of liability^— it^simBly operates 
upon those already existing . The application of the act to mar- 
ried women depends, clearly, not upon their rights, but their 
liabilities, and those liabilities are determined by the law of the 
forum where the jurisdiction is invoked." 

From what has been said, it follows that we do not agree with 

the learned counsel, whose able oral argument and exhaustive 

brief have received our close attention, that the test is whether 

the contracts of an alleged bankrupt can be enforced by judg- 

C ment in personam, but rather is whether the said contracts con- 

\stitute an existing indebtedness. 

The object of the bankrupt law is twofold — the benefit of the 
creditors and the relief of the bankrupt. Mr. Justice Story de- 
scribes a bankrupt law as "a law for the benefit and relief of 
creditors and their debtors in cases in which the latter are un- 
able or unwilling to pay their debts." 2 Story, Const. § 1113, 
note 2. Mr. Stephen speaks of it as "a system of law of a pe- 
culiar and anomalous character, intended to afford to the cred- 
itors of persons engaged in trade a greater security for the 
collection of their debts than they enjoyed at common law un- 
der the ordinary remedy by action." 2 Steph. Cora. 189. It 
cannot be necessary that both objects shall be attainable in or- 
der to warrant proceedings in bankruptcy. In many, perhaps 
a majority, of cases, the relief to the bankrupt is the only ques- 
tion, for there are no assets to distribute, and in many other 
cases the benefit and relief of creditors is the only object. A 
bankrupt may through fraud have lost his right to a discharge. 
An insolvent corporation whose property, including all fran- 
chises, has been distributed to creditors in involuntary proceed- 
ings in bankruptcy, takes little, if anything, by a discharge, 
r^ut this can be said for the petitioner that, if she is dis- 
charged in bankruptcy, and thereafter she is sued at law or in 
/equity, she can plead the discharge in bankruptcy as well as 
coverture, and with regard to after-acquired separate property 
she will be relieved from all her present obligations. The legal 
as well as the general trend of the day is towards emancipating 



LUNATICS 89 



f a\ 
isi- 1 



women, married or single, from all legal and other disabilities 
not bearing on the other sex, and particularly in all directions 
wherein she is thought to be handicapped in earning a living, 
taking care of her property, or carrying on business. And if 
married woman is encouraged and permitted to carry on busi 
ness, buy and sell — in short, be a trader, as she is in Florida — 
why, when she is unfortunate in business and burdened with 
debts, shall she not, like the married man, be entitled to claim 
and have her debts wiped from the slate under the more or less 
wise provisions of the bankrupt law? 

On the whole matter, we conclude that neither the terms nor j 
the policy of the bankrupt law of 1898, nor any outside public / 
policy, preclude, because of coverture, a woman owning debts] 
exigible against her property from being adjudicated a bank-/ 
rupt ; and it follows that the question stated at the beginning { 
of this opinion must be answered in the affirmative, and thatj 
this petition for revision be denied. '^ 

And it is so ordered, i** 

In re FUNK ^^l^i ^..^i^c. ^oT^ 

101 Fed. 244 cf ^-^^ ^u^d^^^ , 

(District Court, N. D.^Jowa. April 26, 1900) y ^ _^^ 

SHIRAS, District Judge. From the papers submitted to the^ X«u^ 
court it appears that on the 4th_day of October ^1899 , Jaco b iT 
A. Funk, then residing in Livingston county, 111., w asduly ad- 
judge d to be insane by th e county court of the named county, 
and F, L, Rieke was appointed the guardian of his person and 
estate, and qualified as such guardian ; and on the 12th day of 
March, 1900, a duly-certified copy of the record of such pro- 
ceedings was filed in the office of the clerk of the district court 
in Wright county, Iowa ; and thereupon, by order of that court, 
the said Rieke was appointed guardian of the property of said 
Funk in the state of Iowa, — it appearing that he then had af 
stock of goods in Wright county in charge of an agent or clerk. I 

(tt further appears that on the 13th day of April, 1900, a peti- 
tion on behalf of certain creditors was filed in this court, aver- 

10 — See also In re Johnsoa, 149 
Fed. 864. 



90 JURISDICTION 



ring that Jacob A. Funk was insolvent, and had committed cer- 
tain acts of bankruptcy mJi£_months_Qf_Maiy2hL_and_Jl^ 

i j.900. by transferring property to secure debts due to certain 
named creditors. To this petition an answer has been filed by 
the guardian of the alleged bankrupt, in which is set forth the 
adjudication of the court in Illinois, declaring Funk to be in- 
sane, and the appointment of the guardian in Illinois, and also 
in Iowa, and then, by proper averment, the answer presents 
the ^uestion w hethe r Fun k can be adjudged_a_ bankrupt for 
a cts done by hi m afterjhe^^gatgjof^ e adj i ^dication of insani ty, 
and the appointment of a guardian for his person and property. 
B y § 8 of the bankrupt act, it is declared that "the death or 
insanity of a bankrupt shall not abate the proceedings, but the 
same shall be conducted and concluded in the same manner, so 
far as possible, as though he had not died or become insane." 
In this section provision is made for cases wherein the proceed- 
ings in bankruptcy are commenced during the lifetime of the 
party, or at a time preceding his becoming insane, and, in effect, 
the meaning of the section is that^ ia-oases wherein the juris- 
diction of the court in bankruptcy has rightfully attached, the 
proceedings shall not be abated by the subsequent death or 
insanity of the bankrupt. In cases wherein the party, although 
giving evidence of insanity, has not been adjudged insane, but 
remains in possession and control of his property, and his cred- 
itors seek his adjudication as a bankrupt, it might be held that 
the bankruptcy court could rightfully exercise jurisdiction, and 
could hold the party responsible for his acts done before the 
fact of his insanity had been ascertained and established; but, 
however this may be, it cannot be so held in cases like that now 

/^before the court, wherein it appears that, prior to the filing of 
the petition in bankruptcy on behalf of creditors, the party pro- 
ceeded against had been adjudged to be insane by a competent 

, court, and a guardian had been put in possession of his prop- 
erty. By § 3227 of the Code of Iowa, it is provided that, if the 
estate of an insane person "is insolvent, or will probably be 
insolvent, the same shall be settled by the guardian in like man- 
ner and like proceedings may be had, as are required by law for 
the settlement of the insolvent estate of a deceased person." 
Under the provisions of this section, it becomes the duty of the 
guardian appointed by the district court of Wright county to 
settle up the estate placed in his hands under the direction of 
the court appointing him, and it will be the duty of that court 



LUNATICS dl 

to determine the question of the validity of the liens or convey- 
ances executed since the date of the adjudication of the insanity 
of the alleged bankrupt, and to make due and proper distribu- 
tion of the assets belonging to the estate now in its charge. It 
certainly cannot be held that the presen t bankrupt act con fers 
upon tnfe courts of bankruptcy the rig ht to settle the estates of 
insolvent decedents un less jurisdiction in t he court of bank- 
ru^^Kiy had alUichecL during the lifetime of the bankrupt, and/ 
tke same rule must hold good in cases wherein, before the peti-l ( 
tion has been filed in the bankrupt court, the debtor has been 
adjudged to be insane, and his property has been taken charge 
of by a state court of competent jurisdiction. ^ 

It is further contended by the guardian in this case that the 
acts of bankruptcy charged in the petition were committed after 
Funk had been adjudged to be insane, and that he cannot be 
held responsible therefor in such sense that these acts can be 
held to be acts of bankruptcy; and in support of this conten- 
tion the ruling of Judge Dillon in the case of In re Marvin, 1^ ^ty 
Dill. 178, Fed. Cas. No. 9,178, is cited, wherein it was said that 
"the court is of opinion that a person who is so unsound in . 4j4^ 
mind as to be wholly incapable of managing his affairs cannot i ^, 
in that condition commit an act for which he can be forced into \ /; . 
bankruptcy by his creditors, against the objection of his guar- ''^^'-*^ 
dian ; ' ' and it would seem clear that a person who, by reason i 
of insanity, is wholly incapable of managing his business affairs, 1 
cannot be held to have intended to violate the provisions of the 1 
bankrupt act by entering into transactions which, by reason of I 
his mental disability, would not be binding upon him under the.^ 
rules of the common law. Under the admitted facts in this 
case, this court, as a court of bankruptcy, should not entertain 
jurisdiction of the petition filed by the creditors, and the same 
will therefore be dismissed, at the costs of petitioners. 

X61 Fed. ^^^..w^^ir^ix; 

(District Court, D. New Jersey. April 10, 1908)^ ^^ ^^^ 

LANNING, District Judge. Three ctadii^is of WilliamR. "^ ^ 
Ward have ^Igd their petition t o have him adjudged_an_mv^-''**''^ 
untary bankrupt. The only act of bankruptcy charged is that : . C*-€<s«-^ 



"William R. Ward is insolvent, and that within four months )^**-«-*** 




a^ 



ct. 



92 JURISDICTION 

preceding the date of this petition the said William R. Ward 
committed an^jj t of bankru^ cy. in that he did heretofore, while 
insolvent, and on the 27th day of November, 1907, and the 5th 
day of December, 1907, convey to one Benjamin Treacy, of the 
city of Jersey City, county of Hudson, and state of New Jersey, 
11 distinct and separate parcels of land, with the buildings 
thereon, situated in the cities of Newark and East Orange, 
county of Essex, and state of New Jersey, including the place 
of residence of said William R. Ward, with intent to hinder, 
delay, and defraud the creditors of said William R. Ward, in- 
eluding your petitioners." 

An answer was promptly filed by Ward's guardian ad litem, 
appointed on ex parte proofs of his insanity, setting up, as de- 
fenses: (1) That Ward, at the time of committing the alleged 
act of bankruptcy mentioned in the petition, was so unsound 
of mind as to be wholly incapable of managing his affairs or of 
committing the act of bankruptcy charged; (2) that he did not 
commit the act of bankruptcy charged; and (3) that he is not 
insolvent. Later, another answer was filed, under an order of 
leave granted by the court, by Anna Day Ward and Henry L. 
Poinier, as guardians of the person and estate of Ward, setting 
up that on December 28, 1907, which was 10_days.,a|t er the p e- 
tiiiaELjn_bankrupte3^_was_fi]Mi^ a writ de 

lunatico inquirendo were instituted against Ward in the Court 
of Chancery of New Jersey, which resulted in a decree of that 
court, dated March 2, 1908, confirming the proceedings and the 
finding of the jury "that the said William R. Ward of East 
Orange, N. J., was, at the time of taking that inquisition a 
lunatic of unsound mind and did not enjoy lucid intervals, so 
that he was not sufficient or capable of the government of him- 
self, his lands, tenements, goods, and chattels, and that he had 
been in the same state of lunacy and unsoundness of mind from 
at least the 1st day of May, 1904," and that on March 28, 1908, 
the orphans' court of Essex county duly appointed Anna Day 
Ward and Henry L. Poinier as guardians of Ward 's person and 
estate. In this answer there are also set up the same defenses 
made by the answer of the guardian ad litem. In each of the 
answers there is a demand that the issues be tried by a jury. 

The motions are to strike out the defense of insanity, to limit 
the issues to be tried by the jury to the second and third 
defenses, and, if these motions be denied, for an order for the 
examination of Ward by the petitioning creditors and their ex- 



LUNATICS 93 

perts before trial. The first of these motions is based on the^ 
theory that the insanity of an alleged bankrupt is not a good 
defense, where no adjudication of lunacy has been made prior 
to the filing of the petition in bankruptcy. ^^ 

The federal Constitution confers upon Congress the power 
to establish "uniform laws on the subject of bankruptcies, 
throughout the United States." The extent to which Congress 
has exercised that power determines the scope of the power of 
the federal courts in bankruptcy cases. § 8 of the bankruptcy 
act (Act July 1, 1898, c. 541, 30 Stat. 549 [U. S. Comp. St. 
1901, p. 3425]) is as follows: 

"The death or insanity of a bankrupt shall not abate the 
proceedings, but the same shall be conducted and concluded 
in the same manner, so far as possible, as though he had not 
died or become insane ; provided that in case of death the widow 
and children shall be entitled to all rights of dower and allow- 
ance fixed by the laws of the state of the bankrupt's residence." 

This section clearly provides that, if the jurisdiction of the 
bankruptcy court in a given case has once rightfully attached, 
it cannot be defeated by the subsequent death of the alleged 
bankrupt, or if he subsequently become insane. Whether juris- 
diction exists to administer the estate of an insolvent debtor in 
bankruptcy, where the alleged bankrupt has been adjudged, 
after the petition in bankruptcy has been filed, to have been, 
from a time antedating the alleged act of bankruptcy, a lunatic 
wholly incapable of managing himself or his estate, must be 
determined by comparing other provisions of the bankruptcy 
act with § 8. The creditors in the present case contend that 
jurisdiction attaches in the present case because § 4b (30 Stat. 
547) declares that "any natural person, except a wage-earner, 
or a person engaged chiefly in farming or the tillage of the 
soil," may be adjudged an involuntary bankrupt. But no 
natural person can be so adjudged, in an involuntary proceed- 
ing, unless he committed one of the acts of bankruptcy described 
in § 3a (30 Stat. 546) within four months next before the filing 
of the petition in bankruptcy. The first subdivision of that 
section declares • that any person shall be held to have com- 
mitted an act of bankruptcy if he has "conveyed, transferred! 
concealed, or removed, or permitted to be concealed or removed! 
any part of his property, with intent to hinder, delay or deA 
fraud his creditors, or any of them." That is t he act of bank- 
ruptcy charged against Ward. But if he has been a lunatic and 



M JURISDICTION 

so unsound of mind as to have been wholly incapable of manag- 
ing himself or his estate ever since May 1, 1904, he could not 
have conveyed his lands in November and December, 1907, 
"with intent to hinder, delay and defraud his creditors." "An 
intent to hinder or delay creditors," says Judge Bradford, in 
the Wilmington Hosiery Company's Case (D. C.) 120 Fed. 
185, "involves a purpose wrongfully and unjustifiably to pre* 
vent, obstruct, embarrass, or postpone them (creditors) in the 
collection or enforcement of their claims." Without under- 
taking to determine the exact boundaries of the jurisdiction of 
our bankruptcy courts in cases against lunatic bankrupts, it 
is sufficient to say that, in the present case, the defense of in- 
sanity cannot be stricken out of the answer. 
r But is the adjudication in the Court of Chancery of New 
/ Jersey conclusive on this-eourt in this proceeding? It would 
C^ot be so in an action at law against the alleged bankrupt. 
In such a case, "when an inquisition is admitted in evidence, 
the party against whom it is used may introduce proof that 
the alleged lunatic was of sound mind at any period of the time 
covered by the inquisition." Den v, Clark, 10 N. J. Law, 217, 
18 Am. Dec. 417. The same rule applies in equity. Hunt 
v. Hunt, 13 N. J. Eq. 161; Yauger v. Skinner, 14 N. J. Eq. 
389; Hill's Ex'rs v. Day, 34 N. J. Eq. 150; 16 Am. & Eng. 
Ency. Law, 606. I think it is equally applicable to a bank- 
ruptcy case where the adjudication of lunacy is made upon 
proceedings instituted after the petition in bankruptcy has been 
filed. The Funk Case (D. C.) 101 Fed. 244, is distinguishable 
from this because there the adjudication- of lunacy was made, 
and the property of the lunatic put into possession of his guar- 
dian, before the petition in bankruptcy was filed. In the Kehler 
Case (D. C.) 153 Fed. 235, where a petition in involuntary 
proceedings was filed before the alleged bankrupt had been 
adjudged a lunatic, Judge Hazel denied the motion to dismiss 
the petition because the jurisdiction of the bankruptcy court 
attached before the alleged bankrupt was adjudged insane, 
and because of the presumption of the alleged bankrupt's sanity 
at the time the acts of bankruptcy were committed. It is not 
necessary to decide, in the present case, what may be the effect 
of an adjudication of lunacy and the appointment of a guardian 
or committee for the lunatic under a writ de lunatico inquirendo 
before a petition in bankruptcy is filed against the lunatic. It 
may be that in such a case the bankruptcy court acquires no 



LUNATICS 95 

jurisdiction; but, where a person is adjudged a lunatic under 
proceedings instituted after a petition in bankruptcy has been 
filed against him, the jurisdiction of the bankruptcy court to 
try the issues involved in the bankruptcy proceedings seems 
to me clear. In such a case, its jurisdiction attaches upon the 
filing of the petition in bankruptcy. If the alleged bankrupt 
was, at the time of committing the alleged act of bankruptcy 
charged in the petition filed against him, so insane that he 
did not understand the nature of the act, its commission should 
be denied on the ground that, being insane, he could n ot com- 
mit it. On the trial of such an issue, the adjudication of luna^ 
may, perhaps, be offered as prima facie evidence of insanit y, 
provided it shows lunacy at the time of the commission of the 
alleged act of bankruptcy. 

It will be observed, from what has been said, that, in such a^ 
case as the present one, the defense that the alleged bankrupt 1 
did not commit the act of bankruptcy charged against him in- 
volves the question of his insanity. As already stated, the only^ 
act of bankruptcy charged here is that the alleged bankrupt 
conveyed certain of his lands with intent to hinder, delay, or 
defraud his creditors. Evil intent is an essential element of the 
act charged. § 19 (30 Stat. 551) of the bankruptcy act gives 
to an alleged bankrupt the right to a trial by jury of the ques- 
tion of his insolvency and of the question concerning his com- 
mission of an act of bankruptcy, provided a written applica- 
tion for such trial be made. Such application has been made. 
The question of the alleged bankrupt's insanity will there- \ p. 
foire^be §ubmjtte3]to^ as^an essential part uf thedefgse / •r^^'^^L- 

tfciatjie didJiQL_cpmjnitJJie_actj)fJ>^^TOp^^ *- *^^^^ 

Although it is alleged in the petition that Ward was insolvent 
at the time of executing the deeds of conveyance, that allegation 
is immaterial, and will not be involved in the issues to be tried. 
There is also an allegation that he was insolvent at the time of 
the filing of the petition. That is a proper, if not a necessary, 
allegation, since § 3c of the bankruptcy act makes the defense 
of solvency at the time of filing the petition, in a case like 
the present one, a good defense. West Company v. Lea, 174 
U. S. 590, 19 Sup. Ct. 836, 43 L. ed. 1098 ; Elliott v. Toeppner, 
187 U. S. 330, 23 Sup. Ct. 133, 47 L. ed. 200. 

The issues to be triedJ aLihejuryare therefore : (1) Whether 
the alleged bankrupt was insolvent at the time of the filing of 
the petition in bankruptcy, and (2) whether the particular act 



96 JURISDICTION 

of bankruptcy charged was committed by him. The latter issue 

will necessarily involve the question of his insanity. * • • 
[The third motion of petitioners was also denied.] 
The motions of the petitioning creditors will all be denied. 

They may file their replication and bring the case to trial in 

the usual source of procedure. ^^ 

J^'^Y ' 3. PARTNERSHIPS 

C^ STANLEY FRANCIS v. J. HECTOR McNEAL 

228 U. S. 695, 57 L. ed. 1029, 33 Sup. Ct. 701 
(United States Supreme Court. May 26, 1913) 

Mr. Justice HOLMES delivered the opinion of the court: 
This is a proceeding to review an order of the bankruptcy 
court to the effect that the separate estate of Stanley Francis 
should be turned over for administration to the respondent, 
McNeal, trustee in bankruptcy of a firm of which Francis was a 
member. The order was made on the petition of the trustee, 
and was afiflirmed upon a petition for revision by the Circuit 
Court of Appeals. 108 C. C. A. 459, 186 Fed. 481. 

The facts are short. Creditors filed a petition against Lati- 
mer, Francis, and Marrin, alleging that they were partners 
trading as the Provident Investment Bureau, and that they 
were bankrupt individually and as a firm. McNeal was ap- 
pointed receiver of the partnership and individual estates, but 
Fran cis denied that he was a partner, and sought to^haye^ the 
receiver discharged. Thereupon, on March 13, 1906, it was 
agreed between tlie counsel for the receiver and for Francis 
that McNeal should be discharged as receiver of the individual 
estate of Francis; that the question whether Francis was a 
partner should be referred to one of the regular referees; that 
until the determination of that question, his counsel, Scott, 
should collect the rents and retain possession of his estate; 
and that thereafter Scott should account and turn over the 
funds to such person as the court might direct. On April 17 
an order was made embodying the agreement and naming a 
referee. The referee found that_Francis„,was_a_partner^ and 
that now stands admitted for the purposes of the present 
decision. The firm was adjudicated bankrupt in June, 1909. 
McNeal was appointed trustee in July, and forthwith filed the 

\\—Cf. In re Eisenberg, 117 Fed. . see In re Stein, 127 Fed. 547, 62 C. 
786. As to insanity of a partner C. A. 272. 



PAETNBRSHIPS 97 

petition upon which the order in question was made. The 
order declared that the separate estate of Francis was subject 
to administration in bankruptcy, and ordered the real estate 
turned over to McNeal, with leave to sell. T he firm, eve n ^ 
with the separa te estates of the pa rtners, will not be able to ^^ - 
pay its debts~ in~Iuirr' 

Since Cory on Accounts was made more famous by Lindley 
on Partnership, the notion that the firm is an entity distinct 
from its members has g^own in popularit y, and the notion has 
been confirmed by recent speculations as to the nature of cor- 
porations and the oneness of any somewhat permanently com- 
bined group without the aid of law. But the fact remains 
as true as ever that partnership debts are debts of the mem- 
bers of the firm, and that the individual liability of the mem- 
bers is not collater jdjike that of a surety, but primary and 
direct, w hatever j>rioriti^_there_may be in the marshaling of 
assets. The nature of the liability is determined by the com- 
mon law, not by the possible intervention of the bankruptcy 
act. Therefore ordinarily it would be impossible that a firm 
should be insolvent while the members of it remained able 
to pay its debts with money available for that end. A judgment 
could be got and the partnership debt satisfied on execution 
out of the individual estates. 

The question is whether the bankruptcy act has established 
principles inconsistent with these fundamental rules, although 
the^business of such an act is, so far as may be , to p^serye, not 
to upset, existing re latio ns. It is true that by § 1, the word 
"person," as used in the act, includes partnerships; that 
by the same section, a person shall be deemed insolvent when 
his property, exclusive, etc., shall not be sufficient to pay his 
debts ; that by § 5a, a partnership may be adjudged a bank- 
rupt, and that by § 14a, any person may file an application for 
discharge. No doubt these causes, taken together, recognize the. 
firm as an entity for certain purposes, the most important of 
which, after all, is the old rule as to the prior claim of partner- 
ship debts on partnership assets, and that of individual debts 
upon the individual estate. § 5g. But we see no reason for 
supposing that it was intended to erect a commercial device 
for expressing special relations into an absolute and universal 
formula, — a guillotine for cutting off all the consequences ad- 
mitted to attach to partnerships elsewhere than in the bank- 
ruptcy courts. On the contrary, we ^otild infer from § 5, 

H. & A. Bankruptcy— 7 "~ 



98 JURISDICTION 

clauses c through g, that the assumption of the bankruptcy act 
was that the partnership and individual estates both were to 
be administered, and that the only exception was that in h, 
"in the event of one or more, but not all, of the members of a 
partnership being adjudged bankrupt." [30 Stat, at L. 548, 
c. 541, U. S. Comp. Stat. 1901, p. 3424.] 

In that case, naturally, the partnership property may be 
administered by the partners not adjudged bankrupt, and does 
not come into bankruptcy at all except by consent. ,But we d o 
not percei ve that_thecla use imports that the partners hip cou ld 
^in ba^rupteyT and the partners!^ ThTliypothesis is 
/that some of the partners are in, but that the firm has remained 
out, and provision is made for its continuing out. The neces- 
sary and natural meaning goes no further than that. 

On the other hand, it would be an anomaly to allow pro- 
ceedings in bankruptcy against joint debtors from some of 
whom, at any time before, pending, or after the proceeding, the 
debt could be collected in full. If such proceedings were allowed, 
it would be a further anomaly not to distribute all the partner- 
ship assets. Yet the individual estate, after paying private 
debts, is part of those assets, so far as needed. § 5f . Finally, it 
would be a third incongruity to grant a discharge in such a 
case from the debt considered as joint, but to leave the same 
persons liable for it considered as several. We say the same 
persons, for however much the difference between firm and 
member under the statute be dwelt upon, the firm remains at 
common law a group of men, and will be dealt with as such in 
the ordinary courts for use in which the discharge is granted. 
rifK_as Jn the present case, the partnership and individual estates 
l^ogether jire not enough to pay the partnership debts, the rational 
thing to d0j_and one certainly^ not forbidden By the act, is to 
I .,administer_both in^^^S^ruptcy. If such a case is within § 5h, 
it is enough that Francis never has objected to the firm prop- 
erty being administered by the trustee. 

If it be said that the logical result of our opinion is that 
the partners ought to be put into bankruptcy whenever the firm 
is, as held by the late Judge Lowell, in an able opinion (Ee 
Forbes, 128 Fed. 137), it is a sufficient answer that no such 
objection has been taken, but, on the contrary, Francis has 
consented and agreed to hand over his property according to the 
order of the court. So far as Vaccaro v. Security Bank, 43 
C. C. A. 279, 103 Fed. 436, 442, is inconsistent with the opinion 



CORPORATIONS 



99 



of the majority in Re Bertenshaw, 17 L. R. A. (N. S.) 886, 
85 C. C. A. 61, 157 Fed. 363, 13 Ann. Gas. 986, we regard it as 
sustained by the stronger reasons and as correct. 
Decree affirmed. ^^ 



4. CORPOEATIONS 

Note: Before the amendment o f 191Q a corporation was not 
entitled to become a voluntary bankrup t, and only certain classes 
of corporations were liable to involuntary bankruptcy, their lia- 
bility depending on whether they were "engaged principally 
in manufacturing, trading, printing, publishing, ('mining' 
was added by the amendment of 1903) or mercantile pursuits." 
Many interesting distinctions were made in determining whether 
corporations were within the liable classes, but they are, of 
course, not of great importance under the law as it now stands, 
which has returned to the phraseology of § 37 of the Act of 
1867: "moneyed, business, or commercial corporations." The 
decisions under that Act, which have been held to be authorita- 
tive as to the interpretation of the 1910 amendment (In re R. 



12 — Before the decision in Francis 
V. McNeal the courts were hopelessly 
divided on several questions arising 
out of the provisions of § 5 of the 
Act. It was pretty well agreed that 
§ 5 (a) justified the treatment of 
the firm itself as a distinct entity 
apart from any or all of the part- 
ners, and that this entity was ad- 
judieable as a bankrupt whether the 
partners were adjudicated or not. 
Chemical Nat. Bk. v, Meyer, 92 Fed. 
896; In re Perlhefter, 177 Fed. 299. 
But on the question of insolvency 
it was uncertain whether the sol- 
vency of the firm should be deter- 
mined by balancing firm liabilities 
against firm assets (In re Berten- 
shaw, 157 Fed. 363, 85 C. C. A. 61; 
In re Everybody's Market, 173 Fed. 
492) or whether the individual assets 
of the several partners should also 
be included (In re Blair, 99 Fed. 76; 
Vaccaro v. Bank, 103 Fed. 436, 43 
C. C. A. 279; Francis v. McNeal, 



186 Fed. 481, 108 C. C. A. 



459); 



the weight of authority doubtless 
inclining to the latter view. And on 
the question as to whether the trus- 
tee in bankruptcy of the bankrupt 
firm should administer both the firm 
estate and the estates of the non- 
bankrupt partners the courts also 
divided; one line of cases (of which 
Francis v. McNeal, 186 Fed. 481, 
108 C. C. A. 459; Dickas v. Barnes, 
140 Fed. 849, 72 C. C. A. 261; and 
In re Duke & Sons, 199 Fed. 199, 
are representative) held that the 
firm trustee had this power, and that 
§ 5 (h) referred only to cases in 
which some of the partners, but not 
the firm itself, were bankrupt ; other 
cases (In re Junck & Balthazard, 
169 Fed. 481; In re Solomon & 
Carvel, 163 Fed. 140) following the 
doctrine of the Bertenshaw case, 
held that the firm trustee had no 
such power, and that § 5 (h) was 
intended to govern the case of a 
firm which had been adjudicated. 
See note in 10 Mich. Law Eev. 215. 



i F-l- fH 



100 JURISDICTION 

L. Radke Co., 193 Fed. 735), held generally that these words 
included practically every corporation organized for pecuniary 
profit. See Adams v. Boston, etc., R. R. Co., Holmes 30, 1 
Fed. Cas. No. 47 ; Sweatt v. id., 3 Cliff. 379, 23 Fed. Cas. No. 
13684; Rankin v. Florida, etc., R. R. Co., 20 Fed. Cas. No. 
11567 ; Winter v. Iowa, etc., Ry. Co., 2 Dill. 487, 30 Fed. Cas. 
No. 17890; In re Independent Ins. Co., Holmes 103, 13 Fed. 
Cas. No. 7017 ; In re Merchants Ins. Co., 3 Biss. 162, 17 Fed. 
Cas. No. 9441 ; In re Hercules, etc., Soc., 6 Benedict 38, 12 Fed. 
Cas. No. 6402. 







CHAPTER II 
PREREQUISITES TO ADJUDICATION 

SECTION I 
IN VOLUNTARY PROCEEDINGS . „ , 
S^ ^ In re SCHWANINGER ^ "^ ^^^^ 

, »..,*> 144 Fed. 555 " ^ ^ 

''* (District Court, E. D. Wisconsin. March 2, 1906) 



QUARLES, District Judge. This is a motion to discharge 
a voluntary petitio n in bankruptcy, and to set aside the adjudi- 
cation made thereon] The schedules of the bankrupt show but 
one debt, which is a judgment for $1,065.80. The schedule of 
assets discloses that the entire property of the bankrupt con- 
sists of chattels amounting in value to $50, all of which is 
claimed as exempt, and undoubtedly is exempt under the statutes 
of Wisconsin. ^ 

The question raised by the motion is a novel one. /The sole 
creditor appears and raises the contention that a debtor having 
but one debt and no assets to which the trustee can take title 
under the act, is not a person qualified to become a bankrupt 
under the provisions of Bankr. Act July 1, 1898, c. 541, 30 Stat. 
544 [U. S. Comp. St. 1901, p. 3418], and that the court has 
acquired no jurisdiction over the case.l As jurisdiction in bank- 
ruptcy springs wholly from the statute, the pending question 
must hinge upon the construction of the provisions of the act 
of Congress. § 4 (30 Stat. 547 [U. S. Comp. St. 1901, p. 3423] ), 
provides that "Any person who has [owes] debts, except a cor- 
poration, shall be entitled to the benefits of Ihis act as a volun- 
tary bankrupt." It is contended that this language clearly 
indicates the purpose of Congress to extend the benefits of the 
act only to such debtors as have a plurality of debts; that the 
language is so plain there is no room for construction. But 
§ 1, subd. 29, under the title "Definitions," provides that "words 
importing the plural number may be applied to and mean only 

101 



102 PREREQUISITES TO ADJUDICATION 

a single person or thing." This provision, if applicable, would 
make the text of § 4 read * ' debts or debt, ' ' and would seem to 
settle the question adversely to the present motion. No doubt 
has been expressed so far as we can find, in any text-book or 
adjudicated case, that § 4 ought to be construed with reference 
to the definition provided in § 1. 

Re_^Magles_(D ^ C.) 105 Fed. 922, i^^ jcasejwhgiae_ihgre_was 
but a single deBt, and where there were no assets. If the 
objection which we are now considering were sound, it was 
clearly decisive of the Maples Case. But the court was at great 
pains to point out that the solitary debt in that case was not a 
provable debt within the purview of the bankruptcy act. The 
court there held "the bankrupt in his petition, therefore, has 
not presented any debt or claim from which this court can dis- 
Miarge him." While the court did not expressly say that a 
I single provable debt would answer the purposes of jurisdic- 
(tion, we are left to infer as much from what the court did say. 
Re Yates (D. C.) 114 Fed. 365, is another case where the only 
debt disclosed by the schedules was a judgment in tort, wherein 
an appeal had been taken which suspended its mandate for the 
time being. There is no suggestion in the opinion that the 
judgment, if final, and of a nature to be proved as a debt, 
would not sustain the jurisdiction. The reasoning of the court 
would certainly lead us to the opposite conclusion. I pass now 
to consider the second proposition upon which this motion is 
based. 

It is contended that where there is no property to be dis- 
tributed there is no function to be performed by any officer 
kno¥m to the act, and that the machinery provided by the law 
will be wholly inoperative, and that such a proceeding, culminat- 
ing only in the discharge from a single obligation, was not 
within the contemplation of Congress. While it is true that 
the act of 1898 contemplates distribution as well as discharge, 
the presen ce of assets has not been specificallvjree ^nized andi aid 
d$wn_asje^ntialtojur^^ of indebted- 

ness has been^^plicitly made a condition precedent. Cases are 
• cited holding that the absence of assets is fatal to the jurisdic- 
tion of probate courts. Such cases are not in point here, because 
the distribution of assets among creditors and legatees or heirs 
at law, is the sole function of a court of probate. Wlien^he 
bankruptcy act was passed. Congress had in mind the relief of 
unfortunate debtors. That humane policy permeates the entire 



VOLUNTARY PROCEEDINGS 103 

act, and seems to have been made quite as important a function 
as an equitable distribution of assets among the creditors. The 
bankruptcy act of 1841 was the first act which provided for an 
unqualified discharge of the debtor. Its constitutionality was 
assailed, and the court, in Re Klien, 1 How. (42 U. S.) 277, 
note, Fed. Gas. No. 7,865 say: 

"Of this subject Congress has general jurisdiction; and the 
true inquiry is, to what limits is that jurisdiction restricted? 
I hold it extends to all cases where the law causes to be dis- 
tributed the property of the debtor among his creditors ; this is 
its least limit. Its greatest is a discharge of the debtor from 
his contracts. And all intermediate legislation, affecting sub- 
stance and form, but tending to further the great end of the 
subject — distribution and discharge — are in the competency and 
discretion of Congress. ' ' 

In Hanover National Bank v. Moyses, 186 U. S. 181, 188, 22 
Sup. Ct. 857, 46 L. ed. 1113, which involved the constitutionality 
of the act of 1898, the court say: 

"The subject of 'bankruptcies' includes the power to dis- 
charge the debtor from his contracts and legal liabilities as well 
as to distribute his property. The grant to Congress involves 
the power to impair the obligation of contracts, and this the 
states were forbidden to do." 

Later on, on page 192 of 186 U. S., page 862 of 22 Sup. Ct. 
(46 L. ed. 1113), the court say: 

"The determination of the status of the honest and unfortu- 
nate debtor by his liberation from encumbrance on future ex- 
ertion is matter of public concern, and Congress has power to 
accomplish it throughout the United States by proceedings at 
the debtor's domicil." 

It is difficult to understand why a debtor owing a singlel 
obligation of $1,065, should not fall within the merciful policy 
of the act. It is an accidental circumstance that the indebted-/ 
ness was not distributed among two or more creditors. His case' 
is clearly within the spirit of the act, and no good reason has 
been suggested why he should not be within its scope and opera- 
tion. It is my belief that Congress had not in mind any pur- 
pose to discriminate against an unfortunate debtor who is op- 
pressed by a single obligation, and that the will of Congress 
will be effectuated by making the definition above recited 



104 PREREQUISITES TO ADJUDICATION 

applicable to § 4, and treating the term "debts" where it occurs 
in such section as the equivalent of * * debt. ' ' 
For these reasons the motion will be denied. ^ 

j^>^ SECTION II 

' J^ n^IN INVOLUNTARY PROCEEDINGS 
**^ a/**Q ^./t^ *^ A. Insolvency 

^^ jyVi GEORGE M. WEST CO. v. LEA et al. 

174 U. S. 590, 43 L. ed. 1098, 19 Sup. Ct. 836 
(United States Supreme Court. May 22, 1899) 



p-^ f" 



Mr. Justice WHITE delivered the opinion of the court. 

The facts stated in the certificate of the Circuit Court of 
Appeals are substantially as follows: 

Lea Bros. & Co. and two other firms filed on December 18, 
1898, a petition in the District Court of the United States for 
the Eastern district of Virginia^ praying that an alleged debtor, 
the George M. West Company, a corporatiqn, located in Rich- 
mond, Va., be adjudi cated a bankrupt, because of the fact that 
it had, on theHate^ the filing of the petition, executed a deed 
qf_general assi^ment, conveying all its property and assets 
to Joseph V. Bidgoodf, trustee. The George M. West Company 
pleaded, denying that at the time of the filing of said petition 
against it the corporation was insolvent, within the meaning of 
the bankrupt act, and averring that its property, at a fair 
valuation, was more than sufficient in amount to pay its debts. 
The prayer was that the petition be dismissed. The court re- 
jected this plea, and adjudicated the West Company to be a 
bankrupt. The cause was referred to a referee in bankruptcy, 
and certain creditors secured in the deed of assignment, who had 
instituted proceedings in the law and equity court of the city 
of Richmond, under which that court had taken charge of the 
administration of the estate and trust under the deed of assign- 
ment, were enjoined from further prosecuting their proceedings 
in the state court under said deed of assignment. 91 Fed. 237. 
From this decree an appeal was allowed to the Circuit Court of 

1 — See also In re Lachenmaier, that creditors are not authorized by 
203 Fed. 32, 121 C. C. A. 368. In the Act to file answers to a voluntary 
re Jehu, 94 Fed. 638, it was held petition in bankruptcy. 



INSOLVENCY i\H 105 

Appeals for the Fourth circuit. On the hearing of said appeal 
the court, desiring instructions, certified the case to this court. 
The certificate recites the facts as above stated, and submits the 
following question: 

"Whether or not a plea that the party against whom the 
petition was filed 'was not insolvent, as defined in the bank-, 
rupt act, at the time of the filing of the petition against him,' \ 
is a valid plea in bar to a petition in bankruptcy filed against / 
a debtor who has made a general deed of assignment for the/ 
benefit of his creditors." •^ 

The contentions of the parties are as follows: On behalf of 
the debtor it is argued that under the bankrupt act of 1898 two 
things must concur, to authorize an adjudication of involuntary 
bankruptcy. First, insolve ncy in fac t, and, second, the com- 
mission of an act of banSruptcy^_ _From this proposition the con- 
clusion is deduced that a debtor against whom a proceeding in 
involuntary bankruptcy is commenced is entitled, entirely irre- 
spective of the particular act of bankruptcy alleged to have 
been committed, to tender, as a complete bar to the action, 
an issue of fact as to the existence of actual insolvency at the 
time when the petition for adjudication in involuntary bank- 
ruptcy was filed. On the other hand, for the creditors it is 
argued that whilst solvency is a bar to proceedings in bankruptcy 
predicated upon certain acts done by a debtor, that as to other 
acts of bankruptcy, among which is included a general assign- 
ment for the benefit of creditors, solvency at the time of the filing 
of a petition for adjudication is not a bar, because the bankrupt 
act provides that such deed of general assignment shall, of 
itself alone, be adequate cause for an adjudication in involuntary 
bankruptcy, without reference to whether the debtor by whom 
the deed of general assignment was made was in fact solvent 
or insolvent. ; 

A decision of these conflicting contentions involves a construe-y 
tion of JXof the act of 1898 (30 Stat. 546). * » • ^ 

It will be observed that the section is divided into several 
paragraphs, denominated as a, b, c, d, and e. Paragraph a is 
as follows: 

"§3. Acts of Bankruptcy, (a) Acts of bankruptcy by a 
person shall consist of his having (1) conveyed, transferred, 
concealed, or removed, or permitted to be concealed or removed, 
any part of his property with intent to hinder, delay, or defraud 
his creditors, or any of them ; or (2) transferred, while insolvent. 



106 PREREQUISITES TO ADJUDICATION 

any portion of his property to one or more of his creditors with 
intent to prefer such creditors over his other creditors; or (3) 
suffered or permitted, while insolvent, any creditor to obtain 
a preference through legal proceedings, and not having at least 
five days before a sale or final disposition of any property 
affected by such preference vacated or discharged such pref- 
erence; or (4) made a general assignment for the benefit of his 
creditors; or (5) admitted in writing his inability to pay his 
debts and his willingness to be adjudged a bankrupt on that 
ground." 

It is patent on the face of this paragraph that it is divided 
into five different headings, which are designated numerically 
from 1 to 5. Now, the acts of bankruptcy embraced in divisions 
numbered 2 and 3 clearly contemplate, not only the commission 
of the acts provided against, but also cause the insolvency of 
the debtor to be an essential concomitant. On the contrary, ^sl 
tothe acts embraced in enumerations 1, 4, and 5, there is no/ 
^express requirement that the acts should liave T)een eomihitteB 
while insolvent. Considering alone the text of paragraph a, it^ 
results that the nonexistence of insolvency at the time of the 
filing of a petition for adjudication in involuntary bankruptcy 
because of the acts enumerated in 1, 4, or 5 (which embrace the 
(making of a deed of general assignment), does not constitute a 
Mefense to the petition, unless provision to that effect be else- 
(where found in the statute. This last consideration we shall 
hereafter notice. 

The result arising from considering the paragraph in ques- 
tion would not be different if it be granted arguendo that the 
text is ambiguous, for then the cardinal rule requiring that we 
look beneath the text for the purpose of ascertaining and enforc- 
r ing the intent of the lawmaker would govern. Applying this 
\ rule to the enumerations contained in paragraph a, it follows 
that the making of a deed of general assignment, referred to 
in enumeration 4, constitutes in itself an act of bankruptcy, 
which per se authorizes an adjudication of involuntary bank- 
^ruptcy entirely irrespective of insolvency. This is clearly 
demonstrated from considering the present law in the light 
afforded by previous legislation on the subject. 

Under the English bankrup tcy statute s (as well that of 1869 
as those upon which our earlier acts were modeled), and 
our own bankruptcy statutes down to and including the act 
of 1867, the making of a deed of general assignment was 



INSOLVENCY 107 

dg emed to be re pugnant to the policy^of the bankruptcy lawa^ 
and^ as a necessary consequence, constituted an act of bank- 
ruptcy, per s e. This is shown by an examination of the de- 
cisions bearing upon the point, both English and American, In 
Globe Ins. Co. v. Cleveland Ins. Co., 14 N. B. R. 311, 10 Fed. 
Cas. 488, the subject was ably reviewed, and the authorities are 
there copiously collected. The decision in that case was ex- 
pressly relied upon In re Beisenthal, 14 Blatchf. 146, Fed. Cas. 
No. 1,236, where it was held that a voluntary assignment, with- 
out preferences, valid under the laws of the state of New York, 
was void as against an assignee in bankruptcy; and this latter 
case was approvingly referred to in Reed v. Mclntyre, 98 U. S. 
513. So, also, in Boese v. King, 108 U. S. 379, 385, 2 Sup. Ct. 
765, it was held, citing (p. 387, 108 U. S., and p. 771, 2 Sup. 
Ct.) Reed v. Mclntyre, that whatever might be the effect of a 
deed of general assignment for the benefit of creditors, when 
considered apart from the bankrupt act, such a deed was repug- 
nant to the object of a bankruptcy statute, and therefore was, 
in and of itself alone, an act of bankruptcy. The foregoing 
decisions related to deeds of general assignment made during the 
operation of the bankrupt act of 1867 (14 Stat, 536), or the 
amendments thereto of 1874 and 1876 (18 Stat. 180; 19 Stat. 
102), Neither, however, the act of 1867, nor the amendments to 
it, contained an express provision that a deed of general assign- 
ment should be a conclusive act of bankruptcy. Such conse- 
quence was held to arise, from a deed of that description, as a 
legal result of the clause in the act of 1867 forbidding assign- 
ments with "intent to delay, defraud or hinder" creditors, and 
from the provision avoiding certain acts done to delay, defeat, 
or hinder the execution of the act. Rev, St. 5021, pars. 4, 7. 
Now, when it is considered that the present law, although it 
only retained some of the provisions of the act of 1867, con- 
tains an express declaration that a deed of general assignment 
shall authorize the involuntary bankruptcy of the debtor making 
such a deed, all doubt as to the scope and intent of the law is 
removed. The conclusive result of a deed of general assign- 
ment under all our previous bankruptcy acts, as well as under 
the English bankrupt laws, and the significant import of the 
incorporation of the previous rule, by an express statement, in 
the present statute, have been lucidly expounded by Addison 
Brown, J., In re Gutwillig, 90 Fed. 475, 478, 

But it is jirgued that, whatever may have been the rule in 



108 PREREQUISITES TO ADJUDICATION 

previous bankruptcy statutes, the present act, in other than 
the particular provision just considered, manifests a clear in- 
tention to depart from the previous rule, and hence makes insol- 
vency an essential prerequisite in every case. To^aintain this 
proposition^^ reliance is placed upon para^aph c of § 3, which 
reads as follows^ ; • ■•■> t- ! ■ 

**(c) It shall be a complete defense to any proceedings in 
bankruptcy instituted under the first subdivision of this sec- 
tion to allege and prove that the party proceeded against was 
not insolvent as defined in this act at the time of the filing the 
petition against him, and if solvency at such date is proved 
by the alleged bankrupt the proceedings shall be dismissed, and 
under said subdivision one the burden of proving solvency shall 
be on the alleged bankrupt." 

The argument is that the words "under the first subdivision 
of this section" refer to all the provisions of paragraph a, be- 
cause that paragraph, as a whole, is the first part of the section, 
separately divided, and, although designated by t he letter a, 
it is nevertheless to be considered, as a whole, as subdivision 1. 
But whether the words "first subdivision of this section," if 
considered intrinsically and apart from the context of the act, 
would be held to refer to paragraph a as an entirety, or only 
Jtothe first subdivision of that paragraph, need not be considered. 
We are jeoncemed only with the meaning of the- words. aa_us^d 
iojlhe law we are interpreting. Now, the context makes it plain 
that the words relied on were only intended to relate to the 
^rst numerical subdivision of paragraph a. Thus, in the last 
sentence of paragraph c the matter intended to be referred to 
by the words "first subdivision of this section," used in the 
prior sentences, is additionally designated as follows, "and 
under said subdivision one," etc., — language which cannot pos- 
sibly be, in reason, construed as referring to the whole of para- 
graph a, but only to subdivision 1 thereof. «• 

This is, besides, more abundantly shown by paragraph d, 
which provides as follows : 

"(d) "Whenever a person against whom a petition has been 
filed as hereinbefore provided under the second and third sub- 
divisions of this section takes issue with and denies the allega- 
tions of his insolvency, it shall be his duty to appear in court on 
the hearing with his books, papers and accounts and submit 
to an examination, and give testimony as to all matters tending 
to establish solvency or insolvency, and in case of his failure 



INSOLVENCY 109 

to so attend and submit to examination the burden of proying 
his solvency shall rest upon him." 

This manifestly only refers to enumerations 2_and_3_found 
in paragraph a, which, it will be remembered, make it essential 
that the acts of bankruptcy recited should have been committed 
by the debtor while insolvent. Indeed, if the contention ad- 
vanced were followed, it would render § 3, in many respects, 
meaningless. Thus, if it were to be held that the words "first 
subdivision of this section, ' ' used in paragraph c, referred to the 
first division of the section (that is, to paragraph a as a whole), 
it would foUow that the words "second and third subdivisions of 
this section," used in paragraph d, would relate to the second 
and third divisions of the section (that is, to paragraphs b and 
c). But there is nothing in these latter paragraphs to which 
the reference in paragraph d could possibly apply, and there- 
fore, under the construction asserted, paragraph d would have 
ho significance whatever. To adopt the reasoning referred to 
would compel to a further untenable conclusion. If the reference 
in paragraph c to the "first subdivision of this section" relates 
to paragraph a in its entirety, then all the provisions in para- 
graph a would be governed by the rule laid down in paragraph 

c. The rule, however, laid down in that paragraph, would be 
then in irreconcilable conflict with the provisions of paragraph 

d, and it would be impossible to construe the statute har- 
moniously without eliminating some of its provisions. 

Despite the plain meaning of the statute as shown by the 
foregoing considerations, it is urged that the following pro- 
vision contained in paragraph b of § 3 operates to render any 
and all acts of bankruptcy insufficient, as the basis for proceed- 
ings in involuntary bankruptcy, unless it be proven that at 
the time the petition was filed the alleged bankrupt was in- 
solvent. The provision is as follows : "A petition may be filed 
against a person who is insolvent and who has committed an 
act of bankruptcy within four months after the commission of 
such act." Necessarily if this claim is sound, the burden in all 
c ases w ould be upon tne pemioningjcre^tgr£3g;;3gte^fe_iyid 
"prove suclrinsotVenc y. Thecontention, however, is clearly re- 
butted by the terms of paragraph c, which provides as to one 
of the classes of acts of bankruptcy, enumerated in paragraph 
a, that the burden should be on the debtor to allege and prove 
his solvency. So, also, paragraph d, conforming in this respect 
to the requirements of paragraph a, contemplates an issue as 



110 PREREQUISITES TO ADJUDICATION 

to the second and third classes of acts of bankruptcy, merely 
with respect to the insolvency of the debtor at the time of the 
commission of the act of bankruptcy. Further, a petition in a 
proceeding in involuntary bankruptcy is defined in § 1 of the 
act of 1898, enumeration 20, to mean "a paper filed • • • 
by creditors alleging the commission of cm act of ha/nkruptcy 
by a debtor therein named." 

It follows that the mere statement in the statute, by way 
of recital, that a petition may be filed ''against a person who 
is insolvent and who has committed an act of bankruptcy," 
was not designed to superadd a further requirement to those 
contained in paragraph a of § 3, as to what should constitute 
acts of bankruptcy. This reasoning also answers the argument 
based on the fact that the rules in bankruptcy promulgated by 
this court provide in general terms for an allegation of insol- 
vency in the petition, and a denial of such allegation in the 
answer. These rules were but intended to execute the act, and 
not to add to its provisions by making that which the statute 
treats in some cases as immaterial a material fact in every case. 
Therefore, though the rules and forms in bankruptcy provide 
for an issue as to solvency in cases of involuntary bankruptcy, 
where by the statute such issue becomes irrelevant, because the 
particular act relied on in a given case conclusively imports a 
right to the adjudication in bankruptcy if the act be established, 
the allegation of insolvency in the petition becomes superfluous, 
or, if made, need not be traversed. ' 

'Our conclusion, then, is that as a deed of general assignment 
Hor the benefit of creditors is made by the bankruptcy act alone 
Sufficient to justify an adjudication in involuntary bankruptcy 
against the debtor making such deed, without reference to his 
solvency at the time of the filing of the petition, the denial of 
insolvency by way of defense to a petition based upon the mak- 
ing of a deed of general assignment is not warranted by the 
bankruptcy law, and therefore that the question certified must 
be answered in the negative. 

And it is so ordered.^ 

2 — As to the necessity (before tary petition, see In re Lachenmaier, 
the 1910 amendment of § 4a) of an 203 Fed. 32, 121 C. C. A. 368. 
averment of insolvency in a volun- 



INSOLVENCY _ 111 

In re HINES ' ,A J - 

144 Fed. 142 ^ . - 

(District Court, D. Oregon. February 5, 19ol) "^'^^^'W'^ fT 

Several creditors of S. E. Hines, of North Bend, Coos county, 
Or., on January 25, 1905, filed their petition in court charging 
him with having committed an act of bankruptcy , in that, while 
insolvent, and on January 17, 1905, he suffered a judgment to 
be obtained against him in the sum of $2,030, upon which execu- 
tion has been issued and certain property of defendant levied 
upon, and that defendant has not vacated or discharged the 
same. The defendan t contr overts these allegatio ns, and avers 
that his^ pr opert y , at a fair v aluation, is worth $3,00 in excess 
of his^indebte^ess or liabilities. 

WOLVERTON, District Judge. The single question pre- 
sented by counsel for the creditors for consideration is: Was 
the def endant insolvent when the judgment was entered aga inst 
him andjevxmade in pursuance of the execution issued thereon ? 
If he was, he is guilty of the act of bankruptcy charged ; if not, 
the petition should be dismissed. In re Rome Planing Mill 
(D. C). 96 Fed. 812. 

By the fi i^t sect ion (subdivisio n 15) of the bankruptcy act 
(Act July 1, 1898, c. 541, 30 Stat. 544 [U. S. Comp. St. 1901, 
p. 3419]. See Collier on Bankruptcy [4th ed.] p. 2.) a person 
is deemed insolvent whenever the aggregate of his property, 
exclusive of any property that he may have conveyed, trans- 
ferred, concealed, or removed, or permitted to be concealed or 
removed, with intent to defraud, hinder, or delay his creditors, 
is not, at a fair valuation, sufficient in amount to pay his debts. 
Lj!f As it respects property considered in a commercial sense, I can 

r^ conceive of no better or surer standard by which to arrive at a 
P,^J(^ fair v al uation tha n the^ market value; that is, what the prop- 

' ' erty will probably bring, or is worth in the gene ral marke t, where 
everybody buys. It could noTHe what it is worth to one person 
or to another specially circumstanced, or having special use for 
a particular article, but what it is worth as a marketable com- 
modity, at a given time, with no special conditions prevailing 
other than affect the market generally in the locality where the 
commodity is for sale. "We think," says Mr. Justice Gray, 
in an able and elaborate opinion rendered in the Circuit Court 



112 PREREQUISITES TO ADJUDICATION 

of Appeals for the Third Circuit, in the case of Duncan v. 
Landis, 106 Fed. 839, 858, 45 C. C. A. 666, 685, ''that__thfi 
.present market value of the property in question wouIdTbe a 
[lair valiiation of the same." See, also. In re Bloch, 109 Fed. 
790, 48 C. C! A. 650, and In re Coddington (D. C.) 118 Fed. 281. 
The intendment of the statute could scarcely be otherwise, 
giving the language employed its usual and natural significance. 
Thejdiffiuulty-is, and perhaps always will be, in arriving at the 
market v alue. Unless the commodity has a value quotable iu 
the current markets of daily or frequent sales, there is much of 
opinion that enters into the estimate, and from this must be 
deduced the probable market value, and consequently, under 
the bankruptcy act, a fair valuation. Nor is such valuation 
affected by any depreciation of property consequent upon the 
recovery of judgment against the debtor and a levy thereunder. 
The language of the act is: "Having * * * suffered or 
permitted, while insolvent, any creditor to obtain a preference 
through legal proceedings," etc. (§3, subd. 3, Bankr. Act [30 
Stat. 546 ; U. S. Comp. St. 1901, p. 3422] ; Collier on Bank- 
ruptcy [4th ed.] p. 2, § 3, p. 27) — the intendment being that 
the insolvency must exist at the time of suffering the preference 
to be taken; for, if the de btor ,ia, solyent^, would be.perf ectly 
proper and legitimate for^in^to make any sort of preference 
^Ea$2fi-5ugK^e fit. The fact of suffering the preference, there- 
fore, unless iTmiglit be under circumstances indicating that he 
intended to hinder, delay, or defraud certain of his creditors, 
could not be permitted to affect the value of his assets. If 
such were the case, then a person, who was before perfectly 
solvent, might be rendered insolvent by an action, accompanied 
by an attachment, and his insolvency would depend upon 
whether he could pay his debts under the stress of the occasion, 
and not, under the simple inquiry prescribed by the bankruptcy 
act, ..wh^therJhe_agg£egajja,j>t-Ms_^^ 

is sufificient_ in ainouEyt_to_XLax.his_d^ Such is the rationale 
of the holding in Chicago Title & Trust Co. v. Roebling's Sons 
Co. (C. C.) 107 Fed. 71. That was an action by the trustee to 
recover on account of a preference alleged to have been obtained 
by a creditor attaching the manufacturing plant of the debtor, 
together with raw materials in store. The attachment destroyed 
the value of the plant as a going concern, and impaired also 
the value of the materials. It therefore became material to 
determine whether the valuation should be according to the 



INSOLVENCY 113 

worth of the property prior or subsequent to such attac hment, 
and the conclusion was that the prior worth was the appro- 
priate standard by which to make the estimate; Kohlsaat, Dis- 
trict Judge, saying: 

' ' While I regret to be forced to the conclusion, yet I am of the 
opinion that, under the wording of the present bankruptcy act, 
and especially the proper interpretation of the words 'being 
insolvent, ' such action on the part of a judgment creditor would 
not create a preference recoverable by the trustee under the 
terms of the act." 

This decision, while not distinctly upon the point under dis- 
cussion, is perfect in analogy, and its authority cannot be gain- Q^P 
said. Nor should nronertv exempt by the state law from execu- ^ ^"^^^^^^ 
tion be deducted from the debtor's assets in ascertaining '^^^^•'^-^v^; 
whether they are, at a fair valuation, sufficient in amount to F'Wl^ 
pay his debts. This has been directly decided in the case of 
Jn re Baumann (D- C) 96 Fed 948 . The question came up on 
a construction of such subdivision 15, of § 1, of the bankruptcy 
act. Mr. Justice Hammond says, relative to the provision : 

"This is probably as arbitrary a provision as is to be found 
in the statute. It was intended to wipe out, as with a sponge, 
all that confusion which is to be found in previous bankruptcy 
statutes and decisions as to the meaning of the word ' insolvency. ' 
It had also the more comprehensive purpose of designating 
with absolute fixity the only class of persons upon whom the 
involuntary features of the bankruptcy statute should operate, 
namely, those whose property was not sufficient in amount to 
pay their debts. It does not proceed upon any t heory that the 
debts will in fact be paid by the a p propriation of the property 
to that 9i^(j . nor upon the theory that as a matter of fact it is 
available for compulsory payment, but upon the theory that 
the defendant has sufficient property with which he ma y pay 
his debts if he chooses to do so. . * * * Moreover the language 
of the above-quoted section is explicit. There is not the least 
ambiguity about its meaning. It leaves no room for any con- 
struction by implication or otherwise. Obviously, it was in- 
tended to give us a rule in mathematics, the terms of which 
are absolute." 

■-'So arguing, and in further consideration that the act has 
made one exception, and one only — that of property conveyed 
or concealed with intent to defraud — it was concluded that it 
was clearly not the, intendment of Congress to make another 

H. & A. Bankruptcy — 8 



114 PREREQUISITES TO ADJUDICATION 

exception in relation to exempt property. The reasoning of the 
learned justice is strong and cogent, and his conclusion irre- 
sistible. TheJanguage of the act is very plain, without ambiguity 
or double meaning, and, when it is f ound that one exception 
is e xpressly made, it excludes, by almost" absolute inference, 
a de duction tna t another was also intended, so that, upon a 
'simple construction ot the act, It'Tslnanifestlhat it was not the 
purpose or intendment of the lawgiver that exempt property 
should be deducted in ascertaining the amount of the debtor's 
property at a fair valuation. 

In this view of the law, I will now examine the facts as 
disclosed by the evidence, to determine whether Hines was in- 
solvent at the time the judgment was entered against him and 
levy made. 

The property w hich Hine_s,, claims he owned consists of a 
stock of nierchandise (the same that was levied upon) ; bills^Hid 
accounts, and $350 in cash ; lot 3, block 19, in the town of North 
Bend, upon which is situated a two-story building 38x70 feet, 
the lower floor being occupied by Hines as a storeroom; and 
lots 1, 2 and 3 in block 45, without improvement. The day 
following the levy, Hines, assisted by the sheriff and S. Bachy 
and J. W. Grout, took an inventory of the stock in the store, 
which footed up to $3,278.84. The original cost price, which 
was ascertained from the markings upon the different articles 
going to make up the stock, or from the bills of purchase where 
the marking could not be found, was made the basis of valua- 
tion. No allowance was made for shopworn goods, as it was 
said the stock was **not very old." Bachy and Grout concur 
with Hines as to the manner of taking the inventory. I am 
satisfied that it was fairly made upon the basis of the cost 
price to Hines when he purchased the goods in the first instance. 
Hines testifies that at the time of the attachment he had some 
bills that amounted to as much as $200; the amount set down 
being $250. He further states that he had $350 in cash, which 
also appears to have gotten into the inventory. This comprises 
the whole of his personal property. 

Lot 3, block 19, upon which the store building is situated, 
is incumbered by a mortgage of $1,000, The value of this 
piece of realty is variously estimated by the witnesses, ranging 
from $3,000 to $4,500. The lot cost the defendant, on February 
10, 1904, $1,000, excavation $300, and for construction of store 
building about $2,000 — ^thus aggregating $3,300. As to lots 1, 



INSOLVENCY 115 

2, and 3 of block 45, Hines testifies that he paid for them $200 
each, or for the whole $600. These were valued by witnesses 
ranging from $800 to $1,050, Hines had made some improve- 
ment upon them, by way of clearing them in part of brush and 
timber, at a cost, he affirms, of about $100. Touching the value 
of the stock of merchandise, several witnesses testify that it is 
worth, at sheriff's sale, being under attachment, from 50 to 65 
and 70 cents on the inventoried value ; that it would not bring 
more than these figures at forced sale. Two witnesses, H. Lock- 
hart and H. J, Edwards, testify to the value of the stock if dis- 
posed of in bulk, while the concern was in active operation. 
Lockhart says the discount to be allowed upon the invoice price 
"is a matter to be agreed upon between the buyer and seller; 
it depends upon the age of the stock and its condition, and the 
value of the business. Twenty-five per cent, is the maximum \ 
amount generally allowed in such cases; discount sometimes | 
being greatly in excess of that." Edwards corroborates this 
view, and no one controverts it. It seems, therefore, that the 
probable marketable value of this stock of goods, being in good 
condition, that is, "not very old," if then sold in bulk, prior to 
attachment and while the venture was a going concern, would 
have approximated 75 per cent, of the invoice, or $2,459.13. 
Such an estimate is the only one reasonably deducible under 
the evidence. The value of the accounts or bills has not been 
proved. Hines says, in effect, they amounted to $200 or $250, 
but he gives no itemized statement thereof, nor any informa- 
tion whatever as to whether they are against solvent persons. 
He may have had the bills, perhaps did, but they may have 
been worthless. As to their value, he makes no suggestion or 
statement. The cash item must be admitted, although the tes- 
timony is meager as to that. The estimates of value placed 
on the store property were based, sometimes upon the estimated 
rental value (it not having been shown that any part of the 
building had been rented, except six of the upper rooms at 
$15 per month), and sometimes upon the witness' opinion of 
the value of real property in North Bend, without reference to 
any particular standard, as actual sales of property and the 
like. There appears to be no estimate by any witness of sale 
values in the market at the time of the attachment. Charles 
Windsor, cashier of the North Bend Bank, testifies that in his 
opinion the property was worth from $3,000 to $3,500. He was 
a witness for the defendant, and his statement approximates the 



116 PREREQUISITES TO ADJUDICATION 

original cost of the property to Hines — the purchase price of 
the lot and the cost of excavation and building. There is yet 
no evidence, however, that the property was worth in the market 
what it cost the owner. There is evidence that the value of 
property has increased since Hines purchased, but there is much 
that property values have been vacillating in range, and, while 
there is much uncertainty in the testimony from which to form 
an opinion, I am impelled to the conclusion that the cost value 
is approximately what the sale value was at the time of the 
judgment and levy, thus rating lot 3, block 19, at $3,300. It 
was probably not worth less than this. 

As respects lots 1, 2, and 3, of block 45, it appears from 
developments in the testimony that Hines never acquired the 
legal title to them, nor is it very clear that he has such an 
equitable right as entitles him under any condition to the legal 
title. J. L. Simpson, of the Simpson Lumber Company, who 
U at the time held the legal title to the lots in trust for the com- 
\ pany, testifies that he sold the lots to Hines at $600; that the 
amount was included in a note given by Hines to the lumber 
company on settlement; and that the note is the same as sued 
on by Guerry. So that it appears that nothing was paid down 
on the lots, and this is shown by an account rendered by the 
lumber company to Hines at the time of the alleged settlement. 
When it was inquired whether Hines had a written contract for 
the purchase of the lots, neither he nor Simpson was sure that 
any such contract was ever executed, and none was or could be 
produced at the trial. This leaves nothing but possessory title _ 
and so me improveme nts made upon the lots , by way of clearing 
them of ibrush and timber, upon which to base his right to the 
legal title. These are shadowy and not well established. 
Coupled therewith, it is not entirely clear that Hines did not 
intend that the title to these lots should remain in doubtful 
validity until his creditors were appeased. Consequently, he is 
not entitled to have them included among his assets for the 
purpose of determining his solvency. 

/ A s_to the r emailidpr of hi8-jM!0jieily^-L-fiud.nojajLrEQse-Qnubi§. 
/ part to cover orconce al any part of i t with a view to putting the 
l^a^^^beyondTthe reach of his creditors. His entire property, 
therefore, toTwhich he was entitled, at its fair valuation at the 
time of the judgment, consists of stock of merchandise, $2,459.13 ; 
lot 3, block 19, North Bend, $3,300 ; and cash on hand, $350— 
aggregating $6,109.13. The defendant's schedule of indebted- 



/niTAnU- INSOLVENCY 117 

ness shows an aggregate of $5,867.78. To this schedule should 
be added accrued interest on mortgage, $20; to Wm. Cluff Com- 
pany's demand, $1.94; to Fleischner, Mayer & Co.'s, $36.08; 
to Wellman Peck & Co.'s, $10.15; to Cahn Nickelsburg & Co.'s, 
$11.92 — making a total of liabilities in the sum of $5,947.87. 
Hines' prop ert;;^;^_at a fair valuatio n, therefore, exceeded his 
liab ilities by $161.2 6, at the time of the entryof the judgment 

a nd lev y. ^^ — ■ — "" 

It follows that he was not in solv ent, and the petition in banfe, 
ruptcy should be dismissed; and such will be the order of the 
court. 

. . .. HUTTIG MFG. CO. v. EDWARDS ^^^^ ^^^^^ 

160 Fed. 619, 87 C. C. A. 521 '^•-^— ^ 






(Circuit Court of Appeals, Eighth Circuit. March 27, 1908) ^T'W^ 

if ^^ 
r-' HOOK, Circuit Judge. The principal question on these ^ C 

^^^'''^^peals is w hether ^the Huttig Manufacturing Company received^ 

a voidable preference when it took a mortage on all of the 

p roperty of D. Winter, bajakru pt. _ A&J:he mortgage was taken 

within the prohibited period of four months we proceed to 

inquire whether Winter was then insolvent, and if so^ wheth er 

the ma nufactu ring company or its agents acting therein had / 

reasonable c ause to believe a preference was intended . The 

Trustee says he was insolvent because, first, he was a member 

of the firm of E. D. Winter & Co., also adjudged bankrupt, 

and the addition of D. Winter's debts and assets to those of 

the firm confessedly exhibited a condition of hopeless insolvency ; 

and second, if D. Winter was not a member of the firm his 

debts exceeded the fair valuation of his property. We are of 

opinion the second contention is well taken, and therefore need 

not discuss the first. D. Winter's property consisted exclusively 

of real estate. Hisjja debtedne^ arose from len ding his credit 

to his son, E. D. Winter, who conducted the business of E. D, 

Winter & Co., and from hol ding bi]|x|Re lf out as a partner, though 

he may not have been one in fact. There are some expressions 

in the testimony, mostly if not wholly hearsay, that the real 

estate of D. Winter, including his homestead, was estimated to 

be worth from $18,000 to $20,000. The assessed value of all 

excepting the homestead was $16,000, of the homestead $1,200. 

The value fixed by sworn appraisers appointed in the bank- 



118 PREREQUISITES TO ADJUDICATION 

ruptey proceedings was $15,150, with $3,000 additional for the 
hOTQ^ea^. AH that the trustee could obtain for the property 
e:^lusiye of the homestead was $12,245.50. The proceeds were 
brought into court to abide the result of this litigation, and they 
were insufficient to pay the mortgage claim of the manufactur- 
ing company. When_the_mort_gage was given D. Winter owed 
t he ma nufacturing company $13,391.73, August Carstens 
$2,000, and the Merchants ' National Bank of Burlington^owa, 
"$2^00, a total of $18,091,73^ He also owed the bank an addi- 
tional $5,500 on two notes, but they were dated after the mort- 
gage in question, and it was not shown they were renewals of 
prior notes or when the indebtedness originated. It is con- 
tended by the manufacturing company that the $13,391.73 for 
which it took the mortgage was not D. Winter's debt, and 
should not be considered in determining his solvency or in- 
solvency. It was for goods sold by the manufacturing company 
to E. D. Winter & Co., and it is admitted D. Winter_guaranteed 
the debt before it was incurred. The trustee says the guaranty 
was by a writing in which D. Winter also held himself out as 
a member of the firm, while the manufacturing company con- 
tends the signature of D. Winter to the writing was a forgery 
by E. D. Winter, his son, and that the guaranty was an oral 
one. ^n e ither event we thinkjthe amount of the debt directly 
aflfectejLJX _Winter 's solven cy. ^ surety of 'indxirser for a ItRrrk, 
rupt has It^p^i TipI^I tn h^ fl, (>]'f>(lit,or within tl^ft mf>anin g of t) tfi 
banlrrn ptf^v 1» w (Kobusch V. Hand [C. C. A.] 156 Fed. 660; 
Swarts V. Siegel, 54 C. C. A. 399, 117 Fed. 13) ; and upon the 
same principle a guarantor liable upon a fixed, liquidated de- 
mand as this was, is a debtor to him who holds it, and his 
liability is to be counted in determining his financial status. 
Jhat t he guaranty may have been oral and therefore within t he 
statute~ot trauas~of Iowa where the transaction occurred i s 
immaterial . The Iowa statute relates merely to the evidence 
or proof of the undertaking, and not to its validity. Berryhill 
V. Jones, 35 Iowa, 335; Merchant v. O'Rourke, 111 Iowa, 351, 
82 N. W. 759. In the latter case it was said: 

"The statute of frauds does not prohibit an oral contract nor 
make such an agreement illegal because certain formalities are 
not complied with, but relates only to the method by which proof 
may be made in an attempt to enforce it." 

The manufacturing company asserted and D. Winter admitted 
the validity of the demand against him, and the former is not 



INSOLVENCY 119 

in position to say the latter was solvent because his property, 
all of which it took under its mortgage, was sufficient to pay 
his other creditors. If the mortgage held, the other^reditors 
wauM__get_ nothing, and the solvency of the debtor woul d seem 
quite_unsu^t^ti^ 

There is another matter affecting the financial condition of 
,D. Winter. Some letters were received in evidence to which 
[ his name was signed, a nd w hich stated he was a member of 
D. Winter & Co. and liable for their debts^ One of these 
letters was to a mercantile agency which made it the basis of 
commercial reports upon the faith of which Welt & Reddel- 
sheimer sold the firm goods amounting to $914.70. The genuine- 
ness of the signature to the letter was attacked, but there were 
received in evidence before the referee for purposes of compari- 
son admitted writings of D. Winter, and his decision that D. 
Winter so held himself out as liable, affirmed as it was by the 
District Court, should not be disturbed. It ^is altog ether prob- 
able that D. Winter owed much more^^but the debts mentioned 
rendered him msolvent when he made the. mortgage. We are 
al^ convincedUe knew it. He had previously given his daughter 
all his household effects and jewels in order, as he said, "to 
avoid all trouble for her in the future." He was conscious of 
being deeply involved with his son who conducted the business 
of E. D. Winter & Co., and he included in the mortgage to the 
manufacturing company all of the property he had left. The \ >e7 
necessarx_effect of the mortgage was to give the mortgageejT/ ^y^-t-e^ 
p ^reierence over other creditors. / '- 

The referee in bankruptcy and the District Court found the 
manufacturing company had reasonable grounds to believe a 
preference was intended. An attentive consideration of the 
evidence and the fair inferences to be drawn from the facts 
admitted or proved lead us to the conclusion the fiinding is 
adequately supported. * * * 

The decree of the District Court is * * * affirmed. 

SANBORN, Circuit Judge (dissenting). I am unable to 
assent to the opinion and the conclusion of the majority in this 
case because in my opinion the competent evidence presented 
fails to prove that D. Winter was insolvent, or that the Huttig 
Manufacturing Company had reasonable cause to believe that he 
was insolvent when he gave the mortgage, and it seems to me 
that there is no substantial competent evidence that he or any 



120 



PREREQUISITES TO ADJUDICATION 



other person with his knowledge or permission ever held him 
out to creditors who relied upon such holding as a member of 
the firm of E. D. Winter & Co. 

B. Debts Amounting to $1,000 oe Over 

§ 4b. Any natural person, except a wage-earner, or a person 
engaged chiefly in farming or the tillage of the soil, any unin- 
corporated company, and any moneyed, business or commercial 
corporation, except a municipal, railroad, insurance, or bank- 
ing corporation, owing debts to the amount of one thousand 

dollars or over, may be adjudged an involuntary bankrupt. 

* * * 

§1 (11). "Debt" shall include any debt, demand, or claim 
provable in bankruptcy.^ 

C. Petitioning Creditors 



§ 59b. T ^re ejor^ mo re credi tors who have provable claims 
against any perso n which amount in the aggregate, in excess 
of the value of securities held by them, if any, to five hundred 
dollars or over; or if all of the creditors of such person are 
less than twelve in number, then one of such creditors whose 
claim equals such amount may file a petition to have him 




adjudged a bankrupt.* 

3 — The matter of provable claims 
will be taken up under the head of 
administration, see pages 384-476, 
post. 

4 — As to the right of a creditor, 
who has assented to an assignment 
by the alleged bankrupt for the bene- 
fit of his creditors, to join in a pe- 
tition based on the assignment as 
an act of bankruptcy under § 3a (4), 
see Moulton v. Coburn, 131 Fed. 
01, 66 C. C. A. 90 (certiorari de- 
led, 196 U. S. 640, 49 L. ed. 631, 
5 Sup. Ct. 796);^X!aJM£i:-iJS4b- 
■ter Tapp er Co., 168 Fed. 519, 93 
C. d. A., 541. As to whether such 
assenting creditor should be counted 



lio 



a 






1 



in ^determining the number of credi 
tors, see Stevens v. Neve-McCord 
Merc. Co., 150 Fed. 71, 80 C. C. A. 
25. As to status of preferred cred- 
itors, see In re Smith, 176 Fed. 426. 
As to amendments to petition, see 
Manning v. Evans, 156 Fed. 106; 
In re Charles Town L. & P. Co., 183 
Fed. 160. 

As to time when petitioner must/ 
have been a creditor, see Brake v, 
Calllson, 129 Fed. 201, 63 C. C. A. ,^l^- 
359 (affirming 130 Fed. 987); In '' 
re Perry & Whitney Co., 172 Fed. 
745; In re Hanyon, 180 Fed. 498 
(affirmed 181 Fed. 1021, 104 C. C. 
A. 667) ; In re Stone, 206 Fed. 356. 



v^ 









/^ff' 



FRAUDULENT CONVEYANCES 121 



f^^'^ D. Acts op Bankruptcy 



1. CONVEYANCES WITH INTENT TO HINDER, DELAY OR DEFRAUD ' 

GOWING V.RICH ^ ^"^ '^^.^^-C.^ 
1 Ired. L. 553 C^/--w^3C^ 

(Supreme Court of North Carolina. Junfe, 1841)-^^ ^ ^^ 

This was an a ction of ejectm ent, tried at Davie Superior Court 
of Law at Fall Term, 1840, before his Honor Judge Pearson. 

Both parties claimed under one Sheeks. The def endai it ad- 
mitted himself in possession. The plaintiff offered in evidence 
a judgment in favor of one Alexander against one Chloe Oaks 
and others, an execution thereon and a sheriff^s deed to him- 
self , conveying all the interest of the said Chloe Oaks. The 
plaintiff then offered evidence to prove, that the said Chloe 
Oaks in the year 1836, while the suit of Alexander, which was 
for a debt of about $2,500 was pending, had sold a negro 
and had sold her home place for $700, a nd had contracted ver - 
bally t o bu y^jthe JanjLiQ^i liiP^tioTi of Sheeks for $1,250 ; that, 
on the day agreed upon to execute the writings, Sheeks went 
to the house of Mrs. Oaks, when he was informed_by_Mra^ 
Hoskin s, who was the daughter of Mrs. Oaks and the widow 
of one Hoskins, who had died a few years before insolvent, 
leaving his widow destitute and dependant upon her mother for 
support, that-_she was tojbuyjthe land and _ would pay for it 
agd take the deed in her own name. Sheeks expressed himself 
willing to make the deed to whoever paid him the money, and, 
accordingly, with the knowledge and consent of Mrs. Oaks, he_ 
made the deed to Mrs. Hoskins and received from h^ $700_in 
c^ih^ of which $600 was in one hundred dollar bills, and took 
Mrs. Hoskins' note under seal for the balance, $550. Sheeks 
stated that he took Mrs. Hoskins' note without security, be- 
cause he was told and believed that the land was bound to 
him for the purchase money. The plaintiff then offered _evi- 
dence to prove that Mrs. Oaks had ISought and paid for the 
land; th at the $700 paid'wa slier mon ey, which she had handed 
to Mrs. Hoskins, with the understanding that the deed was 
to be taken in the name of Mrs. Hoskins to keep off the creditors 
of Mrs. Oaks; and that Mrs. Hoskins was to execute the note 
for the balance of the purchase money, but Mrs. Oaks was to 
pay it. The defendant offe red evidence to shew that the $700 

* The statute of 13 Elizabeth, and lation on this subject, will be found 
an early New York statute, the pat- in the Appendix, -post. pp. 715-718. 
tern for much of the American legis- 



122 PREREQUISITES TO ADJUDICATION 

wasJtha jnoiifgr of Mrs. Hoskins — that a few months after the 
deed was executed and after IMrs. Oaks and Mrs. Hoskins had 
taken possession of their new home, the land in question, hfi_ 
had married Mrs. Hoskins, without notice of any implied trust 
In'Mrs. Oaks, and^^MdTbeen compelled to pay the note of $550 
execiited^y_Jiis_wife. The plaintiff's counsel insisted, that, if 
in fact Mrs. Oaks had bought the land and paid $700 of the 
price and agreed to pay the balance, and made use of Mrs. 
Hoskins' name in the deed and in the note, as a cover to keep 
off creditors, then Mrs. Oaks had a trust estate, which was 
subject to execution sale under the act of 1812. The defendant 's 
counsel insisted, 1st, that supposing the facts to be as con- 
tended for by the plaintiff's counsel and that Mrs. Oaks had an 
implied trust, the purchaser of this trust under the act of 1812, 
did not acquire the legal title, but his remedy was in equity. 
2dly, That the act of 1812 did not take within its operation an 
implied trust. 3dly, That the defendant, as husband, was a 
purchaser for valuable consideration, and, if he married with- 
out notice, he was not bound by the trust. 4thly, That, tak- 
ing the facts to be as contended for by the plaintiff, yet if the 
jury were satisfied that the defendant had married without 
notice of the understanding that Mrs. Oaks was to pay the $550 
note, and had been compelled to pay the amount himself, then 
although Mrs. Oaks had a trust to the amount of $700, yet he also 
had a trust to the amount paid by him, and the case would not 
come within the operation of the act of 1812. Sthly, The de- 
fendant's counsel insisted, as a matter of fact to the jury, that 
the land was bought and paid for by Mrs. Hoskins for her own 
use and out of her own money, and insisted that it made no 
difference how she obtained the money, whether by loan from 
Mrs. Oaks or from her other relations, or by secreting 'it out 
of her husband's effects, provided it was not, at the time she 
paid it, the money of Mrs. Oaks. 

The court charged that to entitle the plaintiff to recover the 
jury must be satisfied that Mrs. Oaks had bought the land, 
and had, for the purpose of avoiding her creditors, resorted to 
the plan of handing the $700 to Mrs. Hoskins, and getting her 
to pay it over, and get the deed in her name and execute the 
note, with the understanding that Mrs. Oaks was to pay the 
amount of the note when due ; that if these were the facts, then, 
although the legal title was vested in Mrs. Hoskins by the deed 
of Sheeks, still she held the land in trust for Mrs. Oaks, and 



FRAUDULENT CONVEYANCES 123 

this was such a trust as was liable to execution ; and the plaintiff, 
as purchaser under The sheriff's sale, by virtue of the act of 
1812, acquired not only the trust estate of Mrs. Oaks, but also 
the legal estate of Mrs. Hoskins, and was entitled to recover 
in this action — that the position taken by the defendant's coun- 
sel, that a husband, marrying without notice, was considered in 
the light of a purchaser for a valuable consideration, discharged 
of the trust, was not true ; for the husb and, taking by opera tion 
of law, stood in the place of the wife,_jand._took.n<L_greater, 
estate, and was bound by the trust, whether he had notice or 
not— -that so far as the $550 note was concerned, if it was a 
part of the understanding that the note was to be given in the 
name of Mrs. Hoskins, but Mrs. Oaks was to pay it, then, 
though the defendant, by marrying Mrs. Hoskins, made himself 
liable for the note, and had in fact been compelled to pay it; 
still his paying it would not alter the case, but would only 
place him in the situation of a security , who had paid money 
for Mrs. Oaks, without thereby acquiring a lien upon the land 
or any interest in the land. On the other hand, if the jury were 
not satisfied that the money was the money of Mrs. Oaks, but 
came to the conclusion that Mrs. Hoskins had procured it either 
by loan from Mrs. Oaks or in any other way; or, supposing 
the money was Mrs. Oaks', if the jury were not satisfied that 
Mrs. Hoskins gave the note in her name with the understanding 
that Mrs. Oaks was to pay it, then the defendant would be 
entitled to a verdict ; for if Mrs. Hoskins gave the note expect- 
ing to pay it herself, then the trust estate would be divided, 
and Mrs. Hoskins would hold the land in trust for Mrs. Oaks 
as to the $700, supposing that to have been her money, and in 
trust for herse lf as to the amount of the note, and thus would 
Be presented the case of a mixed trust, which does not come 
within the operation of the act of 1812. 

T^^[«;ewas^verdict^ for_th^^ a motion for a new trial 

for error in the opinion of the court was discharged, and, judg- 
ment being thereupon rendered for the plaintiff, the defendant 
appealed. 

RUFFIN, C. J, In the instructions to jthe^jurY, th e inten- 
ti ons of the part ies and the true character of the transaction, 
upon which the deed was made to Hoskins, were fairly sub- 
mitted to the m. It must, therefore, bea ssumed , "upon this ver-| 
diet, that tEe'contraet of purchase was made by Oaks for hen 



124 PREREQUISITES TO ADJUDICATION 

own benefit, that the sum paid, $700, was her money, and that 
she was to pay the residue of the purchase money, $550; and 
that she did not give her own note as a security therefor, but 
procured her daughter to give her note, with the understand- 
ing that Oaks should pay it; and that this was done with the 
view to conceal the interest of Oaks from her creditors and pre- 
vent them from seeking satisfaction of their debts out of the 
land. Wfi^e then to trea,t this as a strong case of bad faith, 
in which clearly the daughter held upon a secret agreement and 
in confidence for the mother. In such a case, it would be a 
reproach to any system of jurisprudence, if it provided no 
means of reaching the land or the interest of the mother in it, 
for the payment of her debts. We doubt not but her interest 
may be made liable for her debts; but the guestjxm is, whether 
it^be so liable as to be the subject of sale under a fieri facias 
on a judgment at law, and whether the purchaser at such a 
sale gets the legal title ? Upon that question, after deliberation, 
we have come to a conclusion differing from the opinion held 
by_his Honor. 

Before the act of 1812, which made trust property subject to 
legal execution, such an interest as this certainly could not be 
reached at law. It was the constant practice, both in England 
and this country, for a purchaser to take his conveyance to a 
trustee; and it was allowed, though such conveyance defeated 
dower, and prevented the redress of creditors at law, and obliged 
them to sue in a court of equity. The act of 1812 altered and 
corrected that, in cases, in which a person is seized simply 
and purely for the debtor, without any beneficial interest in the 
party having the legal title or in any other person except the 
debtor in execution. Brown v. Graves, 4 Hawks, 342 ; Gillis v, 
McKay, 4 Dev. 172. The reason for thus confining the opera- 
tion of the act is, that it divests the whole legal estate of the 
trustee, and, therefore, can only extend to a case, in which the 
trustee does not need that title to subserve the rights of himself 
or third persons. The act embraces, therefore, only the case in 
which the debtor in execution might call upon the trustee for a 
conveyance of the legal estate, or, at the least, if there were sev- 
eral equitable joint tenants for a conveyance of such part of 
the legal estate, as would be commensurate with his equitable 
right. The act in no case gives to the creditor of the cestui que 
truest an interest or power over the estate, legal or equitable, 
greater than that to which the cestwi que trust may be entitled. 



FRAUDULENT CONVEYANCES "' 125 

The purchaser holds the land exactly as the debtor held the 
trust. The act does not, therefore, at all proceed on the idea of 
a fraud in the creation of the trust; or provide that, by reason 
thereof, the trustee shall be deprived of any interest in himself, 
derived by the same conveyance. But it is founded on the fact 
that the debtor, being entitled to the trust, is, in equity and in 
substance, the owner of the land, and therefore, that it ought 
to be liable to be sold for his debts. The interest of the debtor, 
as cestui qus trust, is the subject of sale and the purchaser can 
get no more. He therefore is to stand precisely in the shoes of 
the debtor, except that the debtor would have been obliged to 
apply to the chancellor to obtain the legal title; whereas the 
purchaser gets that also by the sheriff's deed. The question ^ 
then^is^jl^ether^jis between the debtor in execution and the 
person having the legal title, the former could, in the state of 
the dealings_between them, call for an immediate conveyance 
from the latter? Now we are clearly of opinion, that the daugh' 
ter would not have been compelled to convey to the mother, 
without first being discharged from her note, given for a part 
of the purchase money, or, after the money was paid, without 
its being repaid. If Oaks had given her note and Hoskins had 
executed it as her surety, the latter would have been entitled 
to retain the legal title as a security in the nature of a mortgage. 
This is the same case in substance. Hoskins gave her note for 
Oaks' debt, and the latter agreed, as she ought, to pay it. But 
she did no t, a nd the former paid it ; and, being for the pur- 
chase money of this very l and, the title could not be taken from 
her, without making h er whole. As between these parties, that 
cannot be denied. But it is co ntende d, the bad faith towards 
th e mother 's creditors is an ingredient in the case, which repels 
alljelaim^ of the daughter upon the land^ as against the creditofs, 
and gives them a higher right than the mother. Not, we think, 
under this act of 1812. We have already endeavored to shew, 
that the remedy given by it does not stand on the footing of 
fraud. But another view will render this still clearer. If there 
was an intention to defraud creditors, then it is a settled prin- 
ciple, that equity will help neither party to such a contract; 
and, consequently, the mother could not have had a decree 
against the daughter for a conveyance, nor could the creditor 
of the mother, that is to say, by way of insisting on such a trust 
and asking its execution, since that would be to affirm and en- 
force a fraudulent intent. The remedy of the creditor is founded 



k 



126 PREREQUISITES TO ADJUDICATION 

[on a different principle, which is^ the .right in eg[uity to follow 
[t^ funds of the^debtor. Dobson v. Erwin, 1 Dev. & Bat. 569. 
When the estate was "once in the debtor and has been conveyed 
by him in trust for himself, the redress of the creditor is plain 
at law upon either of two grounds. He may sell the trust, and 
that will, under the act of 1812, carry the legal estate; or he 
may treat the conveyance as fraudulent and null ab initio under 
the act of 13th Eliz. (R,ev. St., c. 50, § 1), and therefore as leav- 
jing the legal title in the debtor. But this last is invoking an- 
( other statute which is not applicable to a case like that before us ; 
\ which is not of a conveyance by a debtor of land before owned 
Iby her, but that of a purchase by the debtor and a conveyance 
(to a trustee for her. That the statute of Eliz. does not apply 
to the case of a purchase by the debtor is clear from the consid- 
eration, that it operates entirely by making void the assurances 
within its purview. In this case, that would leave the title in 
Sheeks, which would not serve the plaintiff's purpose. As has 
been already mentioned, however, before the statute 29th Charles 
2nd, from which our act of 1812 is taken, purchases were daily 
made in England in the name of trustees; and, though equity 
found means of paying out of the estate the debts of the person, 
who, in the view of that court, was the owner, yet the purchase 
and C Qpveya nce to the trustee were never deemed within the 
statute of Elizabeth, so as to subject the land to a legal judg- 
^nt and execution. That was the cause of passing the acts to 
operate at law on the trusts, qiia trusts. And they have never 
been construed to give more to the creditor than the debtor 
could equitably claim, nor to apply to a case in which the debtor 
could not, immediately and unconditionally claim a conveyance 
^"^ the legal estate. As Oaks could not, in this case, have done 
that, but must have indemnified Hoskins or her husband for 
the money paid as her surety, in part of the purchase money, 
the case is not within the act of 1812, and the land was not 

subject to be sold under execution. 

■-■■ » 

Per Curiam. Judgment reversed and venire de novo 
awarded.' 

5_See also Webster v. Folsom, Long, 35 Vt. 564. As an example 

58 Me. 230; Cone v. Hamilton, 102 of statutory provision affecting the 

Mass. 56; Mulford v. Peterson, 35 situation, see Consol. Laws of New 

N. J. L. 127, 133 ; Garfield v. Hat- York, c. 50, § 94. 
maker, 15 N. Y. 475; Dewey v. 



FRAUDULENT CONVEYANCES 127 



KIMMEL V. M 'RIGHT ^ 



2 Pa. St. 38 ^ ""^^^ ' '^^^ 



(Supreme Court of Pennsylvania, September Term, 1845) ^ , ^ 

^ . 
Error to the Common Pleas of Westmoreland county. ' ' * J' 

The plainti ff, as pu rcha ser of George Kimmel's estate ^ 
sheriff' s sale, bi:Qught_ejectinent againstjiim. It appeared from 
the evideiice, that O badiah , a natural son of George, claimed 
the property under a conveyance from a stranger,, and that his 
father lived in the house with him; but he was not named de- 
fendant on the record. 

To avoid the effect of this conveyance, plaintiff showed that 
at the time of this purchase, which was subsequent to his judg- 
ment, Obadiah was but fourteen or sixteen years old. That his 
father made the bargain and handed him the money to pay thje 
Crice. The defendant objected to evidence of a declaration by 
George Kimmel, that *'he would buy land in Obadiah 's name." 
The court told the jury the purchaser was entitled to recover, 
if George Kimmel had any beneficial interest in the land; that 
if he made the purchase at the time, and was indebted, a result- 
ing^ trust would arise to him ; though, as a general rule, such a 
trust would not arise, where the payment was not with consent 
of the grantee. Or if the jury found the purchase was with 
intent to defraud his creditors, they would be entitled to retain 
it, under 13 Eliz., against Obadiah. 

^ The tgu rth point of defendant was, "That a man indebted is 

J not prevented or prohibited by law from making a present of 

/ money, if he has it, to his children, that it is no fraud to do 

I so." "We answer that the law is the reverse of the statement 

/in this proposition." 

ROGERS, J. No excep tion can be taken to the general ch^ge, 
nor to the answer to the points, exce pt the fo urth. The court 
are made to say, that a man is prohibited from making a present 
of .money to his children. As an abstract principle, nothing can 
be more erroneous, for undoubtedly, a man may do as he pleases 
with his own property. But the^court must have intended, as 
appears very clearly from the general tenor of the charge, that 
a man who is largely indebted in proportion to his means, can-; 
not give his property to his ch ildren at the expense of his cred- 
itors. And Ihis certainly is the law, a man must be just before 




y ^yr .. r^<^ Cj._ ^-ph. 100 



128 PREREQUISITES TO ADJUDICATION 

he is generous. The title to the land passed from the several 

grantors to Obadiah ; and as against his father, as it appears to 

have been a gift, he might have held the land. But the father, 

at the time of the several conveyances, was largely indebted; 

and these conveyances to his son were devices to cheat and de- 

y r fraud his creditors. As against them, by the statute of fraud- 

, (^ulent conveyances, the title is utterly void. 

\i^ S> We see no cause for complaint, admitting even the testimony 

*» Sl/ of the declarations of Dr. Kimmel, that "now he would buy 

H land, and that he would buy in Obadiah 's name." If he was 

'^^ indebted at the time the declarations were made, it is pertinent 

testimony; if he was not, it is evidence in the defendant's favor, 

as it shows his honesty of purpose. In no point of view is he 

injured, and the court would be badly employed in reversing 

judgments for errors which work no mischief. 

Judgment afl&rmed.^ 

'' ' (jK^ aJ- j^ NORCUTT v. DODD 

pj^ /t^High Court of Chancery. January 29, 1841) 

Yy^ This suit was instituted by the assignee, under the insolvent 

^j vjL debtor's act, of Robert Torre, one of the defendants, for the 

O^ Jk^ purpose of setting aside a voluntary assignment of an annuity 

\ ^ to which he was entitled under his marriage settlement. 

^ / By the settlement, which bore date the 12th of April, 1832, 

, \r^ and was made between Elizabeth Dodd, the intended wife of the 

j-f\^ first part; Robert Torre of the second part; William Dodd, the 

/,t^^ father of Elizabeth Dodd, of the third part; and Henry Le 

Ij ^ Keux and another person, as trustees, of the fourth part, Wil- 

^ -If^liam Dodd covenanted with Robert Torre, that in case the mar- 

J^y^ ♦'riage should take effect, he, William Dodd, would, during the 

•^ l^ joint lives of himself and his daughter, pa2LJto^Bfifcert-3!orr£' ^^ 

c/*^ his assigns, the yearly sum of £50, as therein mentioned. 

The marriage was solemnized on the 13th of April, 1832. 
)u * , On the 17th of November, 1836, the jilaiotjff recovered judg- 
/guBnt against Robert Torre, in an action of debt, for the sum of 
£70 and costs ; but a t the r equest of RoberU'Qrre^ who stated 

6— Pennington v. Clifton, 11 Ind. 194 111. 638, 62 N. E. 794; Bloom- 
162; Hawkins v. Cramer, 63 Tex. ingdale v. Stein, 42 OMo State 168. 
99 aoc. See aJso Smith ▼. Patton, 



FRAUDULENT CONVEYANCES 129 

that he expected to receive some money on the 19th of Novem- 
ber, which would enable him to satisfy the plaintiff's debt,^xe- 
cuid^n_wa^elayed_ujQj^^^ On the 19th of Noyemherr 

Robert Torre having again made defaiTlFIirpayment, the plain- 
tiff sued out a writ of execution; but the sheriff's officer, on 
coming to Robert Torre's house for the purpose of executing 
the writ, found another officer in possession of his goods, under 
a similar writ, at the suit of one Mottram.^ to whom Robert 
Torre had executed a warrant of attorney the day before, to 
enter up judgment against him for the sum of £72 10s. On the 
22nd of November, a third writ was lodged with the officer so 
in possession of the goods, at the suit of one Perring, for £70. 
The officer continued in possession until the 2d of January, 
when the goods were sold by auction, and the net proceeds of 
the sale were not suflfieient for the satisfaction of Mottram's 
debt. 

Q n the 22d of Decem ber, 1836, Robert Torre executed a deed, ^^ 

by which he assigned the annuity to Henry Le Keux^^m^ trust f^^ 

for the separate use ol his_wife ; and in the month of May, 1837, ^ 

he surrendered himself to prison, and was subsecjuently dis- 
charged under the insolvent debtors' act, after six months' con- 
finement ; and the plaintiff was duly chosen the assignee of his 
estate and effects. 

The^ill was filed against William Dodd, Heiirx Le Keux^ and 
Robert Torre and Elizabeth _his^ wife; and it prayed that the 
assignment might be declared fraudulent^ and void against the_ 
plaintiff and the other creditor^ of the^ iMolvent ; that an ac- 
count might be taken of what was due to the plaintiff for the 
arrears of the annuity, and that William Dodd and Henry Le 
Keux might be decreed to pay to the plaintiff what should be 
found due from them respectively on account thereof, together 
with the costs of the suit. 

The cause now came on to be heard before the Lord Chan- 
cellor. 

THE LORD CHANCELLOR [Cottenham]. This being an 
assignment of a chose in action, and the debtor being still living, 
the transaction is not fraudulent under the statute of Eliz^ 
alone; but under that statute, taken in connection with the 
insolvent debtors' act I am of opinion that it is. The difficulty 
which arose upon the statute of Eliz., with respect to voluntary 
assignments of choses in action, was, that, during the lifetime 

H. & A. Bankruptcy — 9 



130 PREREQUISITES TO ADJUDICATION 

of the debtor, creditors could not be said to be prejudiced by 
them, inasmuch as that species of property was not subject to 
be taken in execution; but_aiterjiis death, it was otherwise, be- 
cause then the creditors might reach all his personal property 
of whatever KndT and the same reason applies where the debtor 
has brought himself within the operation of the insolvent 
debtors' acts; because, under those acts, all his property becomes 
^s^plicable to the payment of his debts. In the present case, 
however, there is no conclusive evidence that the debtor was 
indebted to the extent of insolvency at the time of the assign- 
ment, though the fact of their being three executions in his 
L house at the time makes it highly probable. As to that, there- 
fore, there must^ be an inquiry^ * * * 

W*^ ^^>*-^'^<^ BRACKETT v. WATKINS 
"^ <-v ^ 21 Wend. 68 





L ^ '"\ ^ '"Supreme Court of New York. January, 1839) 

. "^ Ijrror from Onondaga Common Pleas. Brackett sued Wat- 
kins in an action of replevm, for taking 30 runs of woollen 
yam. The plaintiff proved that he was a householder, and that 
in March, 1837, the yarn was taken from, his possession by 
virtue of an execution in favor of the defendant, and by his 
direction. In March, 1836, the plaintiff purchased 300 sheep, 
which he sheared, and sold the whole of the wool except one 
large fleece of about 4 pounds. In the summer or autumn of 
the same year he sold the sheep he purchased in March. On 
this evidence the plaintiff rested. The defendant moved for a 
nonsuit, on the following grounds: 1. That it was not shown 
that the yarn in question was made from wool sheared from 
the plaintiff's own sheep; 2. That there was no evidence that 
the plaintiff did not own a large flock of sheep through 1836 
and 1837 ; and 3, That the statute does not apply to a case where 
a man has a large flock of sheep and sells all the wool except 
ten fleeces. The court granted the nonsuit. The plaintiff ex- 
cepted and brought error. 

By the Court, COWEN, J. The first of the grounds taken 
by the defendant's counsel in the court below is now given up 

7 — See Edmunds v. Edmunds 
[1904], Prob. & Div. 362. 



FRAUDULENT CONVEYANCES 131 

as erroneous, on the authority of Hall v. Penney, 11 Wendell, 
44, By this case the words of the statute were equitably ex- 
tended beyond their literal import, and made to cover cloth, 
yam, etc., whether it comes from the sheep of the owner or not. 
Nor can I perceive any force in the other points, when taken 
in the abstract. It was pretty evident, that the plaintiff had 
reduced himself to the 30 runs, and had no more. Being a 
householder, the statute conferred upon this the same protec- 
tion, whether the plaintiff had before owned but 10 or 1,000 
sheep . I say in the abstract. Very likely the court below were" 
disgusted with the strong appearance of a fraud upon the stat- 
ute, by a man disposing of, or covering ug^all^ his^ther j)ro£- 
erty, and turning wKat was intended as a shield ^^pqvertyjnto/ 
an instrument of fraucH It is quite common for dishonest men 
todo^o. But I think the court below have mistaken the remedy. 
If_ there jie an appearance from circumstances th at the plaint iff 
has reduced himself to exempt property, in order to defraud 
his creditors, that question should be submitted to the jury, 
under proper directions from the court. Their sagacity would 
be, in general, quite a match for the case. On their being satis- 
fied that the plaintiff had placed himself on his exempt property 
in order to defraud his creditors, as in the instance below, by 
a sale of his sheep and wool, they may clearly place him beyond 
the reach of the statute, by sustaining the levy. His sales or 
^other arrangements would come within the words of the statute, 
l^~Elizabet}i, being to delay, hinder 6r"de?raud creditors; or, 
if not, they would be void at the common law. The rule, then, 
is this: prima facie the fleeces, yarn, cloth, and other things 
limited to a certain amount by the statute, 2 R. S. 290, par. 22, 
are protected. But if the jury believe that it was brought down 
to the compass of exemption, with intent to defraud creditors^ 
they ought to find for the creditor. Most commonly, the other 
goods being mortgaged or sold, remain still in the debtor's pos- 
session, when either they may be seized, or those which are ap- 
parently exempt, at the election of the creditor. In general, 
the mortgaged or sold goods are seized. But th e more artfuO 
d ebto rjwill fix a more secure cover for his property, by chang-/ 
ing it into money, o r something as little tangible to an execu- 
tipn as inay be^when the property claimed as exempt must be 
resorted to, and the question of fraud litigated upon that. On 
such obvious fraud as possession after a mortgage or sale, the 
court may doubtless nonsuit, or direct the jury to find the covin, 



i^r 



132 PREREQUISITES TO ADJUDICATION 

/sincejthe statute has declared the possession to be conclusive 
) evidenc e where it_ is not satisfactorily explained. Not so^f 

more equivocal instances. On these the question is, in general, 

for the jury. We think it should have been put to them in the 

case before us. 

The judgment must, therefore, be reversed, and a venire de 

nova go from the court below, the costs to abide the event.^ 

/L /t^*''^"*^^^ JOHNSON V. SILSBEE 
rtP^ ' 49 N. H. 543 



(Supreme Judicial Court of New Hampshire. June, 1870) 



This was assumpsit brought by Johnson & Fisher against R. 
W. Silsbee, and one W. F. Howard, trustee. The only questions 
raised related to the liability of the trustee. The depositions 
of the trustee and others were submitted to the court from 
which the following facts appear. The trus tee bought of defend- 
ant and of his daughter, J. Arlette Silsbee asewing rnachine, 
for which he agreed to pay the sum of $65.00, no part of which 
had been paid. They both spoke of the machine as belonging 
to the daughter, and the trustee understood at the time that it 
was hers, though her father assisted her in the sale. This ma- 
chine was purchased by the said J. Arlette of her uncle in 
Buffalo, N. Y., and she had paid $20.00 cash towards it, and was 
to have a commission of $5.00 or more on it if she sold it, so 
that she only owed about $40.00 for it when she sold it. The 
said J. Arlette Silsbee was and is a minor daughter of defend- 
ant, who lives at home with him and acts as housekeeper for her 
father. He has always boarded and clothed her as other fathers 
generally board and clothe their daughters, and she has always 
remained a member of his family and been supported there. 
She is n ot emancipated and her father has never given her her 
time or earnings by any express gift or contract. But she has, 
with his consent, worked at sewing for the neighbors and earned 
small sums of money, which have been paid to her, and her 
father has never claimed them or undertaken to control his 

8— See Wilcox v. Hawley, 31 N. Hetrick v. Campbell, 14 Pa. St. 

Y. 648; Bishop v. Johnson, 15 263; Eose v. Sharpless, 33 Gratt. 

N. Y. St. Eep. 579; O'Donnell v. 153; White v. Givens, 29 La. Ann. 

Segar, 25 Mich. 367; Comstock v. 571. 
Bechtel, 63 Wis. 656, 24 N. W. 465 ; 



FRAUDULENT CONVEYANCES 133 

daughter in the manner of spending the same, but she has ex- 
pended a portion of such earnings in purchasing clothing for 
herself, and the $20.00 paid towards this sewing machine was 
earned in that way, and paid by the daughter without any direc- 
tion from the father or any objection on his part. Upon these, 
facts the plaintiffs claim to charge the trustee for the value of. 
the.^Hiachine ($65.00), but if they cannot hold that amount then 
they claim to hold him for the value of the machine, less the 
amount remaining due for the same; while the defendant and 
his daughter claim that the trustee cannot be charged for any- 
thing. 

SMITH, J. There is no evidence that the minor bought the 
machine for, or on behalf of, her father. 

Apart from the fact that the twenty dollars paid came from 
her earnings, there could be no doubt that the machine was the 
property of th e minor. So far as it was bought on creditTTt was 
on her credit^ not on her father's. Although a f atHer is entitled 
to the earnings of his child as a recompense for his liability to 
support the child, he has no power over his child's estate except 
as his trustee or guardian; 1 Blackstone's Com. 453. ''He has 
no title to the property of the child, nor is the capacity or right 
of the latter to take property or receive money by grant, gift 
or otherwise, except as a compensation for services, in any de- 
gree qualified or limited during minority. Whatever therefore 
an infant acquires which does not come to him as a compensa- 
tion for services rendered, belongs absolutely to him, and his 
father cannot interpose any claim to it;" see Bigelow, C. J., in 
Banks v. Conant, 14 Allen, 497, p. 498 ; Wendell v. Pierce, 13 
N. H. 502. If therefore the father had any interest in this 
machine, it must have been solely by reason of the fact that it 
was partly paid for out of the earnings of his daughter. 

In the present case, upon the evidence in the depositions, we 
find, as matter of fact, that, when the daughter began to do the 
work by which she earned the twenty dollars, the father con- 
sented, in good faith that the wages to be earned by that labor, 
should belong to the daughter. 

The father did not "put his consent into words;" but his 
acts (as detailed in the depositions) relative to the daughter's 
employment at various times in sewing, and as to her disposi- 
tion of the sums which had thus been earned, justify the infer- 
ence that he so consented on this occasion, and thus express 



134 PREREQUISITES TO ADJUDICATION 

his consent as effectually "as words would have done;" see 5 
(Am. Law Review, 11, 12. Can this relinquishment of the father's 
vright to the daughter's future earnings be avoided by his exist- 
png creditors as fraudulent in law? 

A debtor cannot give away his attachable property, to the 
prejudice of existing creditors. But his time and talents are 
at his own disposal. If the debtor, instead of laboring to earn 
wages which his creditors can attach by the trustee process, 
chooses to remain idle, or "to give away his own services by 
working gratuitously for another," his creditors have no legal 
remedy. They "cannot compel him to work and earn wages 
for their benefit. ' ' The laws of this state do not authorize ' ' the 
sale of the person of a debtor for the satisfaction of his debts." 
Abbey v. Deyo, 44 N. Y. 353, pp. 346-9; Bush v. Vought, 55 
Penn. State, 437, p. 441; see also Williams v. Chambers, 10 
Queen's Bench, 337; Chippendale v. Tomlinson, 4 Douglas, 318. 

If the father can give away his own labor, by working gratui- 
tously for another, why may he not also give away his right to 
the future labor of his child? The creditors of the father can- 
not attach, or sell upon execution, the child's capacity to labor. 
Practically, the father's right to the child's prospective earn- 
ings is worthless unless the father and the child both choose to 
make it valuable. There is no legal process, by which the cred- 
itors can compel the father, to make the son labor for their 
benefit. No law requires the father "to work his son or his 
daughter as he would work a horse or a slave for the benefit of 
his creditors." Black, J., in McCloskey v. Cyphert, 27 Penn. 
State, 220, p. 225. 

If the father can give to a third person the right to his 
daughter's future services, can there be any valid objection to 
his giving this right to the daughter herself? We are not to 
pass upon this question without giving some consideration to 
the interests of the daughter. She is not a chattel, but is en- 
titled to the care and protection of the law, just as much as her 
father's creditors. See Parker, C. J., in Whiting v. Earle, 3 
Pick. 201, p. 202; Isham, J., in Bray v. Wheeler, 29 Vt. 514, 
pp. 516-7. If they can take her future earnings against her 
will, and her father's will, she is, in effect reduced "to a con- 
dition of qualified slavery." The law does not contemplate the 
subjection of the child to any person not standing in loco par- 
entis. The consequences to the child of denying the father's 
power to relinquish his right to the child's future earnings, 



FRAUDULENT CONVEYANCES 136 

would often prove extremely pernicious. If a son anticipates 
that his wages will be applied, against his father's will, to pay 
his father's debts, it is hardly probable that he will labor with 
much vigor, or earn anything above his support. The creditors 
will generally gain nothing, but the son may be ruined by the 
absence, at the most important time of his life, of some of the 
strongest incentives to the formation of industrious habits. We 
are not now considering the validity of a gift by the father of 
a claim for wages already due for his own past services, or of 
a gift by the father of his claim for wages already earned by 
labor which his minor child has performed without any previ- 
ous understanding that the avails should go to the child's own 
use. Nor is this a case where the arrangement between the 
father and the child was merely colorable, designed by the par- 
ties to cover the earnings of the daughter for the father's use 
and benefit, and in fraud of his creditors. See Gragg v. Martin, 
12 Allen, 498. In the present case, the father, in good faith, 
consented that his minor daughter should receive to her own 
use, her future earnings in a certain employment. His cred- 
itors cannot interpose to take from the daughter wages earned 
by her in that employment subsequently to the father's relin- 
quishment of his right. See Wolcott v. Rickey, 22 Iowa, 171 ; 
McCloskey v. Cyphert, 27 Penn. 220 ; Lyon v. Boiling, 14 Ala. 
753; Bobo V. Bryson, 21 Ark. 387; Lord v. Poor, 10 Shepley, 
569; Bray v. Wheeler, 29 Vt. 514; Manchester v. Smith, 12 
Pick. 113 ; Whiting v. Earle, 3 Pick. 201 ; Jenney v. Alden, 12 
Mass. 375. 

It seems to have been asserted, that a horm fide relinquish- 
ment by a husband to his wife, of his marital right to the wife 's 
future earnings, is invalid as against the husband's creditors. 
See 2 Story's Equity Jur. § 1387. If the reason of such a doc- 
trine is found in the common law disability of a husband to 
contract with his wife, it can have no application to the present 
case. If the doctrine can be sustained at all, it must be as an 
exception, growing out of the peculiar stains of the parties; 
and not as a rule based upon general principles, applicable 
alike to husband and wife, and parent and child. 

The right of the daughter to hold the twenty dollars against.] 
her father's creditors, does not depend on the question whether 1 
she had [been] fully emancipated, or had ceased to receive an^J 
support from her fatEer. If she performed the labor, by which 
that sum was earned, upon an understanding with her father 



136 PREREQUISITES TO ADJUDICATION 

that she should receive the avails of that labor, that under- 
standing cannot be treated as a nullity merely, because it did 
not extend to all other labor which the daughter might perform 
during minority. A partial relinquishment of the parental 
right avails pro tmito: see Tillotson v. McCriUis, 11 Vt. 477, 
p. 480. Notwithstanding the decision in Godfrey v. Hays, 6 
Ala. 501,- we think that the fact that the daughter remained a 
member of her father's family is material only as evidence to 
be weighed in determining whether the alleged relinquishment 
by the father was an act done in good faith, or merely colorable. 
In many instances where minors are allowed to control their 
own earnings, it may reasonably be expected, that they will 
support themselves out of those earnings, and thus diminish 
the claims on their parents. The probability of such a result 
has had some weight in inducing courts to deny the right of 
creditors to take the fruits of the minor's labor. B ut we do not 
ilinderstand that thejuse which_the minor ma kes of h js^arnings 
lis the test of his right to those earnings j nor that the contin- 
lu ing liability of the fa the r to suppo rt the min or i s fatal to the 
Immor^ claimjto^(M]trol his own ^amings . If it were otherwise, 
no emancipation by the father could ever be of any validity 
against his creditors; for it is clear that a father cannot, by 
his own act, "cast his son upon the public, and relieve himself 
from the obligation of maintenance" imposed upon him by the 
pauper laws (see Gen. Stat. c. 74, §8). The usual clause in 
"freedom notices," in which the father declares that he will 
/ / / P^y none of the son 's debts, can hardly have the full effect 
' which many fathers may imagine; see Bell, C. J., in Hall v. 
Hall, 44 N. H. 293, pp. 295, 296 ; 1 Parsons on Contracts, 5th 
ed., 310, 311. The conti nued receipt b,y_the_minor of s upport 
from his fat her is c oropetent evidence upon the qu estion , 
whether the father's alleged relinquishment of his nght to any 
^portion of the mmor's future earnings was a reality j>r a jgaere 
"sEfam; and it is not difficult to imagine eases where such evi- 
dence would carry decisive conviction of the colorable imturje, 
of the alleged_ relinquishment. But proof of this fact does not 
give rise to a conclusive legal presumption of fraud. In the 
present case, it seems not improbable that the daughter's serv- 
ices as her father's housekeeper fully compensated him for her 
support. 

We find that his consent to her receipt of the money earned 
by sewing was given in good faith, and was not designed to 



FRAUDULENT CONVEYANCES 137 

cover up the daughter 'sj^arniugs for the father's benefit in 
fraud of his creditors. ^Tt f ollows that the,^laintiffs^4vtiough 
assumed to ^^ existing crediJoTs of the father, had no claim on 
the twen ty dollars; and of course have no claim upon the prop-; 
erty purchased therewijji^ 

If we had held that the twenty dollars should be regarded as 
the father's money, it might have been necessary to inquire 
whether that sum was paid doAvn at the time of purchase, or 
whether the machine was purchased wholly upon the daugh- 
ter's credit and the sum of twenty dollars was afterwards ap- 
plied by the daughter in part payment of her debt; see Adams 
on Equity, 143, 144; 1 Leading Cases in Equity, 3 Am. ed. 275; 
Francestown v. Deering, 41 N. H. 438; 2 Story on E(iuity 
Jurisp., §§1258-9; Taylor v. Plumer, 3 Maule & Selwyn, 562; 
2 Kent's Com. 623. 

Caswell V. Hill. 47 N. H. 407, is not directly in point. There 
the court found, as a matter of fact, that the transaction rela- 
tive to the musical instrument was, really, "nothing more nor 
less than a gift of this instrument" by a step-father to his step- 
daughter; and the gift was of course held invalid as against 
his existing creditors. 

Trij^tee discharged.^ 

^^ENTRAL NAT. BANK v. HUME 




128 U. S. 195, 32 L. ed. 370, 9 Sup. Ct. 41 
ted States Supreme Court. November 12, 1888) 
23d of April, 1872, in consideration of an annual pre- 



"^^ri.h^ium of $230.89, the Life Insurance Company of Vir ginia issued 



jt' Petersburgh, in that commonwealth, a policy of insurance on 
the life of T homas L. Hum e, of Washington, D. C,, for the term 
of his natural life, in the sum of $10,000, for the sole use and 
benefit^ .his wife, Annie Graham Hume, and his children, pay- 
ment to be made to them, their heirs, executors, or assigns, at 
Petersburgh, Va. The charter of the company provided as fol- 
lows: "Any policy of insurance issued by the Life Insurance 
Company of Virginia on the life of any person, expressed to be 
for the benefit of any married woman, whether the same be 

9—Cf. Tuc.ky v. Lovell, 8 Idaho, 
731, 71 Pac. 122 ; Dclaney v. Green, 
4 Harr. (Del.) 285. 



■^r^ 




138 PREREQUISITES TO ADJUDICATION 

yfp y- effected originally by herself or her husband, or by any other 
^Wfty person, or whether the premiums thereafter be paid by herself 
or her husband or any other person as aforesaid, shall inure for 
her sole and separate use and benefit, and that of her or her hus- 
band's children, if any, as may be expressed in said policy, and 
shall be held by her free from the control or claim of her hus- 
band or his creditors, or of the person effecting the same and 
<^is creditors." (§7.) The application for this policy was made 
on behalf of the wife and children by Thomas L, Hume, who 
signed the same for them. The premium of $230.89 was reduced 
by annual dividends of $34.71 to'llSNSllS, which sum wa§_rfig« 
ularly paid on the 23d of April, 1872, and each year thereafter, 
up to and including the 23d of April, 1881. On the 28th of 
-^ March, 1880, the Ha rtford Life & Annuity Company_qfJ?art- 
ford. Conn., issued five certificates of insurance upon the life of 
ffJC^ Thomas L. Hume, of $1,000 each, payable at Hartford, to his 
<^wife, Annie G. Hume, if living, but otherwise to his legal repre- 
sentatives. Upon each of these certificates a premium of $10 
was paid upon their issuance, amounting in all to $50 ; and there- 
after certain other sums, amounting at the time of the death of 
Hume to $41.25. On the 17th of February, 1881, the Maryland 
-JB ^Jfi|e^ Insurance Company of Baltimore issued, at Baltimore, a 
policy of insurance upon the life of Thomas I>. Hume, in the 
^5j-^ sum of $10,000, for the term of his natural life, payable in the 
'nj city of Baltimore to "the said insured, Annie G. Hume, for her 
sole use, her executors, administrators, or assigns;" the said 
policy being issued, as it recites on its face, in consideration of 
the sum of $337.20 to them duly paid by said Annie G. Hume, 
and of an annual premium of the same amount to be paid each 
I year during the continuance of the policy. The application for 
i thia4iolic5^was_signed^*_^ Annie G,_Hume, by Thomas^L.J3ume, " 
as is a recc^nized usage in such applications, and in accordance 
with instructions to that effect printed upon the policy. 
/OJt aJL« '^^^ Qharter_of_the Jfer^landJLifeJn^^^^ pro- 

^ vides as follows : "§ 17. That it shall be lawful for any married 

woman, by herself, or in her name or in the name of any third 
person, with his consent, as her trustee, to cause to be insured 
in said company, for her sole use, the life of her husband, 
for any definite period, or for the term of his natural life ; and, 
in case of her surviving her husband, the sum or net amount of 
the insurance becoming due and payable by the terms of the 
insurance shall be payable to her to and for her own use, free 



FRAUDULENT CONVEYANCES 139 

from the claims of the representatives of her husband; or of 
any of his creditors. In case of the death of the wife before the 
decease of the husband, the amount of the insurance may be 
made payable, after the death of the husband, to her children, 
or, if under age, to their guardian, for their use. In the event 
of there being no children, she may have power to devise, and, 
if dying intestate, then to go [to] the next of kin." The direc- 
tions printed on the margin of the policy called especial atten- 
tion to the provisions of the charter upon this subject, an extract 
from which was printed on the fourth page of the application. 
The amount of premium paid on this policy was $242.26, a loan 
having been deducted from the full premium of $337.20. 

On the 13th of June, 1881, the Conn ecticut MutuaL-Iiife-Iib- 
surance Company of Hartford, in consideration of an annual 
premium of $350.30, to be paid before the day of its date, issued s*^ 
a policy of insurance upon the life of Thomas L. Hume, in the 
sum of $10,000, for the term of his natural life, payable at Hart- 
ford to Annie G. Hume and her children by him, or their legal 
representatives. The application for this policy was signed 
'* Annie G. Hume, by Thomas L. Hume." It was expressly pro- 
vided, as part of the contract, that the policy was issued and 
delivered at Hartford, in the state of Connecticut, and was "to 
be in all respects construed and determined in accordance with 
the laws of that state." The "statute of Connecticut, respect- 
ing policies of insurance issued for the benefit of married 
women," was printed upon the policy under that heading, and 
is as follows: "Any policy of life insurance expressed to be^ 
for the benefit of a married woman, or assigned to her or inl 
trust for her, shall inure to her separate use, or, in case of her 
decease before payment, to the use of her children or of her hus- 
band's children, as may be provided in such policy: provided, 
that JLthe annuaL:premium^n_sucJi.4iolicy shall _£seeed- three 
hundred doll ars, the amount of such pxopss^jwjth interest, shall 
inure to the benefit^^FtEe "creditors of the person paying the 
premium s ; but if she~shall dielbefore the person insured, leav- 
ing no children of herself or husband, the policy shall become 
the property of the person who has paid the premiums, unless 
otherwise provided in such policy;" and this extract from the 
statute was printed upon the policy, and attention directed 
thereto. From the $350.30 premium the sum of $105 was de- 
ducted, to be charged against the policy in accordance with its 
terms, with interest, and $245.30 was therefore the sum paid. 



140 PREREQUISITES TO ADJUDICATION 

T ^ Amer ican Life Insurance & Trust Company of Philadelphia 
,_^had also issued a policy in the sum of $5,000on the life of Hume, 
payable to himself or his personal representatives, and this was 
collected by his administrators. 

Thomas L. Hume died at Washington on the 23d of Oct ober, 
1881, i nso , l s;ejtJ:» jlis widow^ :^jjli^ G^Hume, and six minor chjl- 
^v^^^Bz-S^iJ^^^i^i^^^'SLWm- November 2d, 1881, the Centra l^ Nati onal 
-^Aj^W Bank of Washington, as the holder of certain promissory notes 
of Thomas L. Hume, amounting to several thousand dollars, filed 
a bill in the Supreme Court of the District of Columbia against 
Mrs. Hume and the Maryland Life Insurance Company, the case 
being numbered 7,906, alleging that the policy issued by the 
latterjwas_procured while Hume was jnsolvent; that Hume paid 
the premium of $242.26 without complaihant 's knowledge or 
consent, and for the purpose of hindering, delaying, and de- 
frauding the complainant and his other creditors; and praying 
for a restraining order on the insurance company from paying 
to, and Mrs. Hume from receiving, either for herself or children, 

I the amount due pending the suit, and "that the amount of the 
said insurance policy may be decreed to be assets of said Thomas 
L. Hume applicable to the payment of debts owing by him at 
his death," etc. The temporary injunction was granted. On 
the 12th of November the insura^e cpm^any_filed its answer to 
the effect _that_llrs. -Hume- obtained the insurance, in. JieiL.^wh 
nanie]_and was entitled under the^policy to the amounl ^ereof , 

rsfnd setting up and relying upon the seventeenth section of its 
charter, quoted above. Mrs. Hume answered, November 16th, 
i declaring that she applied for and procured the policy in ques- 
£ ^ \ tion, and that it was not procured with fraudulent intent ; that 
"^^"^ the estate of her father, A. H. Pickrell, who died in 1879, was 

the largest creditor of Hume's estate; that she is her father's 
jresiduary legatee; that the amount of the policy was intended, 
[not only to provide for her, but also to secure her against loss ; 
t hat her m othtef-Md^furnishM--Hjime wjth about a thousand 
dd lars a nnually, to be used for her best interestTanHThat oFTiis 
wife anj~cliildren ; and that the premium paid on the policy in 
question, and those paid on other policies, was and were paid 
out of money belonging to her father's estate, or out of the 
I money of her mother, applied as directed and requested by the 
^tter. • * * 

The evidence tends to show that Hume's financial condition, 
as early as 1874, was such that, if called upon to respond on the 



.^ 



FRAUDULENT CONVEYANCES 141 

instant, he could not have met his liabilities, and that this con- 
dition grew gradually worse, until it culminated in irretrievable 
ruin, in the fall of 1881; but it also indicates that for several 
years, and up to October 21st, 1881, two days before his death, 
he was a partner in a going concern apparently of capital and 
credit ; that he had a considerable amount of real estate, though 
most of it was heavily incumbered; that he was an active busi- 
ness man, not personally extravagant ; and that he was, for two 
years prior to October, in receipt of moneys from his wife's 
mother, who had an income from her separate property. He 
seems to have received from Mrs. Pickrell, or the estate of Pick- 
rell, his wife's father, of which Mrs. Hume was the residuary 
legatee, over $6,000 in 1879, over $3,000 in 1880, and over $1,700 
in 1881. Mrs. Pickrell's fixed income was $1,000 a year from 
rents of her own property, which, after the death of her hus- 
band in May, 1879, was regularly paid over to Mr. Hume. She 
testifies that she told Hume that "he could use all that I [she] 
had for his own and his family's benefit, and that he could use 
it for anything he thought best ; ' ' that she had out of it herselfi 
from $200 to $250 a year from the death of Pickrell, in May,) 
1879, to that of Hume, in October, 1881 ; and that before his J 
death Mr. Hume informed his wife and herself that he had in- 
sured his life for Mrs. Hume's benefit, but did not state where 
the premium money came from. B lackford, agent for the Mary - 
land c ompany^estified, under objection, tha t Hume told hiixf * 
in February, 1881, that certain means had- Jjeen_placedJs_.hial 
hands, to be invested for his wife and^ ehildrgo^jind he had con- 
cluded to take $10,000 in Blackford's agency, and should, some 
months later, take $10,000 in the Connecticut Mutual. He ac 
cordingly took the $10,000 in the Maryland, and subsequently, 
during the summer, informed Blackford that he had obtained 
the insurance in the Connecticut Mutual. Evidence was also 
adduced that Mr. Hume was largely indebted to Pickrell 's estate, 
by reason of indorsements of his paper by Pickrell, and the 
use by him in raising money of securities belonging to the latter, 
and that said estate is involved in litigation, and its ultimate 
value problematical. The causes were ordered to be heard in 
the first instance at a general term of the Supreme Court of the 
District of Columbia ; which court, after argument, on the 5th 
day of January, 1885, decreed that the administrators should 
recover all sums paid by Thomas L. Hume as premiums on all 
said policies, including those on the Virginia policy from 1874; 



142 PREREQUISITES TO ADJUDICATION 

and that, after deducting said premiums, the residue of the 
money paid into court (being that received from the Mary- 
land and the Connecticut Mutual) be paid to Mrs. Hume in- 
dividually, or as guardian for herself and children; and that 
the Hartford Life & Annuity Company pay over to her the 
amount due on the certificates issued by it. From this decree 
the said Central National Bank, Benjamin U. Keyser, the 
Farmers' & Mechanics' National Bank of Georgetown, George 
"W. Cochran, and the administrators, as well as Mrs. Hume, 
appealed to this court, and the cause came on to be heard here 
upon these cross-appeals. 

Mr. Chief Justice FULLER, after stating the case, delivered 
the opinion of the court. 

No appeal was prosecuted from the decree of January 4, 
.1883, directing the amount due upon the policy issued by the 
Life Insurance Company of Virginia to be paid over to Mrs. 
Hume for her own benefit and as guardian of her children, 
nor is any error now assigned to the action of the court in that 
regard. Indeed, it is conceded by counsel for the complainants 
[that this contract was perfectly valid as against the world, but 
it is insisted that, assuming the proof to establish the insolvency 
/of IJum_e in 1874 and thenceforward, th^_gremiuW^£ai3Ij5^jt^ 
and_.the subsequent years on this policy belonged jn equity^ to 
[the creditors, and that they were entitled to a decree therefor, 
as weilas~for^ the amount of the Maryland and Connecticut 
policies, and the premiums paid thereon. It is not denied that 
the contract of the Maryland Insurance Company was directly 
between that company and Mrs. Hume, and this is, in our judg- 
ment, true of that of the Connecticut Mutual, while the Hart- 
ford company's certificates were payable to her, if living. 

Mr. Hume having been ^nsolvpn t at the time the insur ance was 

e ffected , and having paid thes^remiums himself, it is argued 

'"that these policies were within the provisions of 13 Eliz^Q.^, 

f and inure to the benefit of his creditors as equivalent to trans- 

<fers of property with intent to hinder, delay, and defraud. The 

object of the statute of Elizabeth was to prevent debtors from 

dealing with their property in any way to the prejudice of their 

creditors; but dealing with that which creditors, irrespective of 

such dealing, could not have touched, is within neither the 

letter nor the spirit of the statute. In the view of the law, 

credit is extended in reliance upon the evidence of the ability 






FRAUDULENT CONVEYANCES 143 

of the debtor to pay, and in confidence that his possessions will 
not be diminished to the prejudice of those who trust him. 
This reliance is disappointed, and this confidence abused, if 
he divests himself of his property by giving it away after he 
has obtained credit. And where a person has taken out policies 
of insurance upon his life for the benefit of his estate, it has 
been frequently held that, as against creditors, his assignment, 
when insolvent, of such policies, to or for the benefit of wife 
and children, or either, constitutes a fraudulent transfer of 
assets within the statute ; and this, even though the debtor may 
have had no deliberate intention of depriving his creditors of 
a fund to which they were entitled, because his act has in 
point of fact withdrawn such a fund from them, and dealt with 
it by way of bounty. Freeman v. Pope, L. R. 9 Eq. 206, L. R. 
5 Ch. 538. The rule stands upon precisely the same ground 
as any other disposition of his property by the debtor. The_ 
defect of the disposition is that it removes the property of the 
debtor out of the reach of his creditors. Cornish v. Clark, L. R. 
14 Eq. 184, 189. But the rule applies only to that which the 
debtor could have made available for payment of his debts. For 
instance, the exercise of a general power of appointment might be 
fraudulent and void under the statute, but not the exercise 
of a limited or exclusive power; because, in the latter case, the 
debtor never had any interest in the property himself which 
could have been available to a creditor, or by which he could 
have obtained credit. May, Fraud. Conv. 33. It is true that 
creditors can obtain relief in respect to a fraudulent convey- 
ance where the grantor cannot, but that relief only restores • 
the subjection of the debtor's property to the payment of his 
indebtedness as it existed prior to the conveyance. 

A person has an insurable interest in his own life for the\^ 
benefit of his estate. The contract affords no co mppusfltioTi fx) Y^-^^-t^^-^^ 
him^ but to his representatives. So the c redit oclias an insurable 
i nter est in the del>tor!s life, and can protect himself accord- 
in^yTlFTie so chooses. Marine and fire insurance is considered 
as strictly an indemnity; but while this is not so as to life/ 
insurance, which is simply a contract, so far as the company 
is concerned, to pay a certain sum of money upon the occurrence 
of an event which is sure at some time to happen, in considera- 
tion of the payment of the premiums as stipulated, neverthe- 
less the contract is also a contract of indemnity. If the creditor 
insures the life of his debtor, he is thereby indemnified against 



^U-Cc- 






144 PREREQUISITES TO ADJUDICATION 

the loss of his debt by the death of the debtor before payment, 
yet if the creditor keeps up the premiums, and his debt is paid 
before the debtor's death, he may still recover upon the con- 
tract, which was valid when made, and which the insurance 
company is bound to pay according to its terms; but if the 

I debtor obtains the insurance on the insurable interest of the 
creditor, and pays the premiums himself, and the debt is ex- 
tinguished before the insurance falls in, then the proceeds would 
go to the estate of the debtor. Knox v. Turner, L. R. 9 Eq. 155. 
The wife and children have an insurable interest in the life of 
the husband and father, and if insurance thereon be taken out 
by him, and he pays the premiums and survi ves them, it might 
be reasonably claimed, in the absence of a statutory provision 
to the contrary, that the policy would inure to his estate. In 
Insurance Co. v. Palmer, 42 Conn. 60, the wife insured the 
life of the husband, the amount insured to be payable to her 
if she survived him ; if not, to her children. The wife and one 
son died prior to the husband, the son leaving a son surviving. 
The court held that, under the provisions of the statute of that 
State, the policy being made payable to the wife and children, 
the children immediately took such a vested interest in the policy 
that the grandson was entitled to his father's share, the wife 
having died before the husband; but that, in the absence of 
the statute, ''it would have been a fund in the hands of his 
representatives for the benefit of creditors, provided the pre- 
miums had been paid by him." So in the case of Anderson's 
Estate, 85 Pa. St. 202, A. insured his life in favor of his wife, 
who died intestate in his life-time, leaving an only child. A. 
died intestate and insolvent, the child surviving, and the court 
held that the proceeds of the policy belonged to the wife's 
i estate, and, under the intestate laws, was to be distributed share 
1 and share alike between her child and her husband's estate, not- 
1 withstanding, under a prior statute, life insurance taken out for 
the wife vested in her free from the claims of the husband's 
creditors. But if the wife had survived she would have taken 
\the entire proceeds. 

.^--''ni\/'e think it cannot be doubted that in the instance of con- 
1 tracts of insurance with a wife or children, or both, upon their 
insurable interest in the life of the husband or father, the 
latter, while they are living, can exercise no power of disposi- 
tion over the same without their consent, nor has he any in- 
terest therein of which he can avail himself, nor upon his death 



FRAUDULENT CONVEYANCES 145 

have his personal representatives or his creditors any interest] 
in the proceeds of such contracts, which belong to the benej 
ficiaries, to whom they are payable. It is indeed the general 
rule that a policy, and the money to become due under it, belong, 
the moment it is issued, to the person or persons named in it 
as the beneficiary or beneficiaries; and that there is no power 
in the person procuring the insurance, by any act of his, by deed 
or by will, to transfer to any other person the interest of the 
person named. Bliss, Ins. (2d ed.) 517; Glanz v. Gloeckler, 
10 111. App. 484, per McAllister, J. ; Id., 104 111. 573 ; Wilbum 
v. Wilburn, 83 Ind. 55; Ricker v. Insurance Co., 27 Minn. 193, 
6 N. W. Rep. 771 ; Insurance Co. v. Brant, 47 Mo. 419 ; Gould 
v. Emerson, 99 Mass. 154 ; Insurance Co. v. Weitz, Id. 157. 

This must ordinarily be so where the contract is directly 
with the beneficiary ; in respect to policies running to the person 
insured, but payable to another having a direct pecuniary in- 
terest in the life insured; and where the proceeds are made to 
inure by positive statutory provisions. Mrs. Hume was coi? 
fessedly a contracting party to the Maryland policy; and, as 
to the Connecticut contracts, the statute of the state where they 
were made and to be performed explicitly provided that a policy 
for the benefit of a married woman shall inure to her separate 
use or that of her children ; but, if the annual premium exceed 
$300, the amount of such excess shall inure to the benefit of 
the creditors of the person paying the premiums. The rights 
and benefits given by the laws of Connecticut in this regard 
are as much part of these contracts as if incorporated therein, 
not only because they are to be taken as if entered into there, 
but because there was the place of performance, and the stipu- 
lation of the parties was made with reference to the laws of that 
place. And if this be so as between Hume and the Connecticut 
companies, thenhe^oul d not ha ve atany tim^jdispoaed jjf thes £_ 
policies^ withoiit^_thejeo nsent of the ben eficiarY_: nor is there 
anything to the contrary in the statutes or general public policy 
of the District of Columbia. It may very well be that a transfer 
by an insolvent of a Connecticut policy, payable to himself or 
his personal representatives, would be held invalid in that dis- 
trict, even though valid under the laws of Connecticut, if the 
laws of the district were opposed to the latter, because the posi- 
tive laws of the domicile and the forum must prevail ; but there 
is no such conflict of laws in this case, in respect to the power 

H. & A. Bankruptcy — 10 



146 



PREREQUISITES TO ADJUDICATION 




/ 



of disposition by a person procuring insurance payable to 
another. 

he obvious distinction between the transfer of a policy taken 
out by a person upon his insurable interest in his own life, and 
payable to himself or his legal representatives, and the obtain- 
ing^ of a policy by a^erson uponjthe insurable_interest of his 
wife and children, and payable to them, has been repeatedly 
N^ecbgnized by the courts. Thus in Elliott's Appeal, 50 Pa. St. 
75, 83, where the policies were issued in the name of the husband, 
and payable to himself or his personal representatives, and 
while he was insolvent were by him transferred to trustees for 
his wife's benefit, the Supreme Court of Pennsylvania, while 
holding such transfers void as against creditors, say : ' ' We are 
to be understood in thus deciding this ease that we do not 
mean to extend it to policies effected without fraud, directly 
and on their face for the benefit of the wife, and payable to 
her ; such policies are not fraudulent as to creditors, and are not 
touched by this decision." In the use of the words ''without 
fraud," the court evidently means actual fraud participated 
in by all parties, and not fraud inferred from the mere fact of 
insolvency; and, at all events, in McCuteheon's Appeal, 99 Pa. 
St. 133, 137, the court say, referring to Elliott's Appeal: "The 
policies in that case were effected in the name of the husband, 
and by him transferred to a trustee for his wife at a time when 
he was totally insolvent. They were held to be valuable choses 
in action, the property of the assured, liable to the payment of 
his debts, and hence their voluntary assignment operated in 
fraud of creditors, and was void as against them under the 
statute of 13 Eliz. Here, however, the policy was effected in the 
name of the wife, and in point of fact was given under an 
agreement for the surrender of a previous policy for the same 
amount, also issued in the wife 's name. * * * The question 
of good faith or fraud only arises in the latter case; that is, 
when the title of the beneficiary arises by assignment. When 
it exists by force of an original issue in the name or for the 
benefit of the beneficiary, the title is good, notwithstanding the 
claims of creditors. * * * There is no anomaly in this, nor 
any conflict with the letter or spirit of the statute of Elizabeth, 
because in such cases the policy would be at no time the property 
of the assured, and hence no question of fraud in its transfer 
could arise as to his creditors. It3,imly in CMeJifJJie_assign- 
ment of a policy that once hdonged to the^assured that the ques- 



FRAUDULENT CONVEYANCES 147 

tion of fraud can arise under t hls^act." And see Bank v. Insur- 
ance Co., 24 Fed. Repi T70 ; PencTv. Makepeace, 65 Ind. 345, 
347; Succession of Hearing, 26 La. Ann. 326; Stigler's Ex'r 
V. Stigler, 77 Va. 163 ; Thompson v. Cundiff, 11 Bush. 567. ^ , 

Conceding, then, in the case in hand, that Hume paid the I ^f^ ' 
premiums out of his own money, when insolvent, yet, as Mrs. -/uM>'^ 
Hume and the children survived him, and the contracts covered I ' 
their insurable interest, it is difficult to see upon what ground // 
the creditors, or the administrators as representing them, can 1 1 
take away from these dependent ones that which was expressly// 
secured to them in the event of the death of their natural sup-'/ 
porter. The. interest insured was neither- the debtor's, not Jiis^ 
credito rs'. The contracts were not payable to the debtor, ori 
his representatives, or his creditors. No fraud on the part ofl^ "/^u^, 
the wife, or the children, or the insurance company is pretended.jr^s/?^^ 
In no sense was there any gift or transfer of the debtor's prop - ^ U) 
ertyT^unless the amounts paid_as prfiii[uumsare_to_j2fiJheid_to ij^ 
constitute _S]ich gift or transfer. This seems to have been the 
view of the court below, for the decree awarded to the com- 
plainants the premiums paid to the Virginia Company from 
1874 to 1881, inclusive, and to the other companies from the 
date of the respective policies; amounting, with interest, to 
January 4, 1883, to the sum of $2,696.10, which sum was directed 
to be paid to Hume's administrators out of the money which 
had been paid into court by the Maryland and Connecticut 
Mutual Companies. But, even though Hume paid this money"! 
out of his own funds when insolvent, and if such payment were I 
within the statute of Elizabeth, this would not give the creditors |//, /3 
any interest in the proceeds of the policies, which belonged to I 
the beneficiaries for the reasons already stated. n ^ 

Were the creditors, then, entitled to recover the premiums? 'J^**-»-*-L^ 
These premiums were paid by Hume to the insurance companies, 
and to recover from them would require proof that the latter 
participated in the alleged fraudulent intent, which is not 
claimed. Cases might be imagined of the payment of large 
premiums, out of all reasonable proportion to the known or 
reputed financial condition of the person paying, and under 
circumstances of grave suspicion, which might justify the infer- 
ence of fraud on creditors in the withdrawal of such an amount 
from the debtor's resources; but no element of that sort exists 
here. The premiums form no part of the proceeds of thq 
policies, and cannot be deducted therefrom on that ground. 



148 PREREQUISITES TO ADJUDICATION 

Mrs, Hume is not shown to have known of or suspected her 
husband's insolvency, and if the payments were made at her 
instance, or with her knowledge and assent, or if, without her 
knowledge, she afterwards ratified the act, and claimed the 
benefit, as she might rightfully do, (Thompson v. Ins, Co., 
46 N. Y, 675,) and as she does, (and the same remarks apply 
to the children,) then has she thereby received money which 
ex aequo et bono she ought to return to her husband's creditors; 
and can the decree against her be sustained on that ground? 
If in some cases payments of premiums might be treated as 
gifts inhibited by the statute of Elizabeth, can they be so treated 
here? 

It is assumed by complainants that the money paid was 
derived from Hume himself, and it is therefore argued that to 
that extent his means for payment of debts were impaired. 
That the payments contributed in any appreciable way to 
Hume's insolvency, is not contended. So far as premiums 
were paid in 1880 and 1881, (the payments prior to those years 
having been the annual sum of $196.18 on the Virginia policy,) 
we are satisfied from the evidence that Hume received from 
Mrs. Pickrell, his wife's mother, for the benefit of Mrs. Hume 
and her family, an amount of money largely in excess of these 
payments, after deducting what was returned to Mrs. Pickrell; 
and that, in paying the premiums upon procuring the policies in 
the Maryland and the Connecticut Mutual, Hume was appro- 
priating to that purpose a part of the money which he con- 
sidered he thus held in trust; and we think that, as between 
Hume's creditors and Mrs. Hume, the money placed in Hume's 
hands for his wife's benefit is, under the evidence, equitably 
as much to be accounted for to her by Hume, and so by them, 
as is the money paid on her account to be accounted for by 
i her to him or them. We do not, however, dwell particularly 
u|)on this, nor pause to discuss the bearing of the laws of the 
states of the insurance companies upon this matter of the 
payment of premiums by the debtor himself, so far as they 
may differ from the rule which may prevail in the District of 
Columbia, in the absence of specific statutory enactment upon 
that subject, because we prefer to place our decision upon 
broader grounds. 

In all purely voluntary.,£fl]ig«y<ui£ es it is the fraudulent i ntent 
)f the d onor which vitiates. If actually insolvent, he is lield to 
[knowledge ol nis conaition; and if the necessary consequence 



FRAUDULENT CONVEYANCES 



149 



^"^^* 
^ 



of his act is to hinder, delay, or defraud his creditors, withini ^ao^A « 
the statute, the presumption of the fraudulent intent is irrerj <£jj/^ ^ 
buttable and conclusive, and inquiry into his motives is inadj 
missible. But the circumstances of each particular case should be 
considered, as in Partridge v. Gopp, 1 Eden, 163, 168, Amb, 596, 
599, where the Lord Keeper, while holding that debts must be 
paid before gifts are made, and debtors must be just before they 
are generous, admitted that "the fraudulent intent is to be col- 
lected from the magnitude and value of the gift. ' ' Where fraud 
is to be imputed, or the imputation of fraud repelled, by an 
examination into the circumstances under which a gift is made 
to those towards whom the donor is under natural obligation, 
the test is said, in Kiff v. Hanna, 2 Bland, 33, to be th^ 
pecuniary ability of the donor at that time to withdraw the 
amount of the donation from his estate without the least hazard 
to his creditors, or in any material degree lessening their then 
prospects of payment ; and, in considering the sufficiency of the 
debtor's property for the payment of debts, the probable, im- I 
mediate, unavoidable, and reasonable demands for the support 
of the family of the donor should be taken into the account and | 
deducted, having in mind also the nature of his business and his J 
necessary expenses, Emerson v. Bemis, 69 111. 541. This argtl- 
raent in the interest of creditors concedes that the debtor may 
rightfully preserve his family from suffering and want. It 
seems to us that the same public policy which justifies this, and 
recognizes the support of wife and children as a positive obliga- 
tion in law as well as morals, should be extended to protect 
them from destitution after the debtor's death, by permitting 
him, not to accumulate a fund as a permanent provision, but^ 
to devot e a moiierate^p^OEJiQii^of his^ar^^ 
%_seeurity for support already, or which could thereb y be, law -^ 
fgllyobtained, arieast to the extent of requiring th at, under^ 
safikjgircumitances, the fraudulent in tent ^i both parties to 
the transaction should b^~m 



le out. And inasmuch as there is 
no evidence from which such intent on the part of Mrs. Hume or 
the insurance companies could be inferred, injourjudSH^^t 
none of these piremiums can be recovered. 

Thedecree is affirmed, except so far as it directs the payment 
to the administrators of the premiums in question and interest, 
and, as to that, is reversed, and the cause remanded to the 



rTT^,»««^ 



150 PREREQUISITES TO ADJUDICATION 

court below, with directions to proceed in conformity with this 
opinion.i*^ 

FIR^T NAtFbANK of HUMBOLDT, NEB., v. GLASS et al. 
^-^^ ^. j^'c-^^-L . 79 Fed. 706, 25 C. C. A. 151 

(Circuit Court of Appeals, Eighth Circuit. March 22, 1897) 

Appeal from the Circuit Court of the United States for the 
District of Kansas. 

This appeal challenges a decree which sustained a demurrer 
to a bill brought by a judgment debtor to subject a homestead, 
which the debtor had bought and caused to be conveyed to his 
wife, to the payment of the judgment. The bill disclosed these 
facts: The statutes of Nebraska exempt from judicial sale a 
homestead not exceeding in value $2,000, consisting of a dwell- 
ing house in which the claimant resides and the land on which 
the house is situated, not exceeding 160 acres in extent. Consol. 
St. Neb. 1891, c. 19, p. 430. The constitution of the state of 
Kansas exempts from forced sale under process of law a home- 
stead not exceeding 160 acres of farming land, or one acre within 
the limits of an incorporated town or city, and all the improve- 
ments thereon, when it is occupied as a residence by the family 
of the owner, whatever its value may be. Const. Kan. art. 15, 
§ 9 ; 1 Gen. St. 1889, par. 235. From May 4, 1892, until March 
22, 1894, the appellee, John F. Glass, owned, and with his wife, 
Harriet H. Glass, resided upon and occupied, 160 acres of land 
in the state of Nebraska, as their homestead. In May, 1892, 
Glass purchased of one Gravatte some fruit trees which were 
planted on his farm, and which enhanced its value $3,000. He 
gave Gravatte a span of horses and six of his promissory notes 
for these trees. The appellant, the First National Bank of 
Humboldt, Neb., purchased four of these notes before their 
maturity, and on November 19, 1894, obtained a judgment 
thereon for $2,278.44 against John F. Glass, in an action which 

^ ^ 10 — Cf. The Merchants' and itors in case transaction is declared 

Cj Crl*^/Mi°c^s' Transportation Co. v. Bor- fraudulent see Roberts v. Winton, 

3 1 land, 53 N. J. Eq. 282. 100 Tenn. 484; Bailey v. Wood, 202 

'y^i^^ / See article in 25 Am. L. Rev. Mass. 549; Lehman v. Gunn, 124 

Y" '385, where the cases and statutes Ala. 213; Asbury Park First Nat. 

^ are discussed. Bank v. White, 60 N. J, Eq. 487, 

As to amount recoverable by cred- 46 Atl. 1092. 



FRAUDULENT CONVEYANCES 151 

it had commenced in the District Court of Pawnee county, in 
the state of Nebraska, on June 24, 1893. Glass was insolvent, 
and he had no property except the farm which he occupied as 
his homestead. On Maroh 2g, 18fl4 ^ he sold and con veved-this 
farm to one jluff^for $6,100, and with that money he bought 
160 acres of farming land in Franklin f.nimt y in thej rtate oi. 
Kgaaa g, and cau se d the vendor to convey it to his wife. He 
and his wife immediately took possession of it, and have ever 
since resided upon, occupied, and claimed it as their homestead. 
The bank caused an execution to be issued on its judgment in 
1895, and it was returned nulla bona. It then _brought an action 
u pon this .iudg ment, and obtained a ju dgment in that action , 
and a reijarno^f execution unsat^^ in the District. Court „Qf 
Franklin c ounty, in th e state of Kans as.^ Thereupon it exhibited 
its bill in the court below, and alleged, in addition to the fore- 
going facts, that the appellees sold their farm in Nebraska, 
secretly fled to the state of Kansas, and purchased and took 
possession of their farm in that state with the intent and for 
the purpose of cheating and defrauding the bank out of its 
claim against Glass, and for the purpose of preventing it from 
collecting its judgment from the farm in Nebraska, which was 
worth $4,100 more than the value of an exempt homestead, 
under the statutes of that state. The_ bank— prayed for the, 
sfllpjvf flip farm jri Kansas, an4 for.jj^^^appljf^atinn of the pro- 
ceeds of the sale to the payment of its judgment . 

SANBORN, Circuit Judge, after stating the case as above, 
delivered the opinion of the court. 

An insolvent debtor may use with impunity any of his prop- 
erty that is free frpin the liens ai\djhe. v ested eq uitable interests 
of his creditors to purchase~a~homestead tor himself and his 
family in his own name. If he takes property that is 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 creditQEs^- by t hi s a ctin n in which 
they have jany jvested right._ The constitution or statute exempt- 
ing the homestead from the judgments of creditors is in force 
when they extend the credit to him, and they do so in the face 
of the fact that he has this 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, 



152 



PREREQUISITES TO ADJUDICATION 






y./3 



b^ji^ 



because that which the law expressly sanctions and permits can- 
not be a legal fraud. Jaeoby v. Distilling Co., 41 Minn. 227, 
43 N. W. 52; Kjelly v. Sparks, 54 Fed. 70; Sproul v. Bank, 
22 Kan. 238; Tucker v. Drake, 11 Allen, 145; O'Donnell v. 
Segar, 25 Mich. 367 ; North v. Shearn, 15 Tex. 174 ; Cipperly v. 
Rhodes, 53 111. 346; Randall v. Buffington, 10 Cal. 491. When 
the appelles sold their farm in Nebraska, and bought and took 
possession of their homestead in Kansas, the bank had acquired 
no lien and no specific equitable interest in any of th e propert y 
Qf its debt or. It was his simple conffact creditor, and it had 
no vested right in either his property or his residence. He had 
, the right to change his residence from one state to another, and 
\to secure for himself a homestead in any state where he chose 
/to live. If, therefore, he had taken the conveyance of his home- 
stead in Kansas in his own name, it would have been exempt 
from the judgment of the appellant.^ ^ 

The only question remaining is whether the farm lost this 
exemption because he caused it to be conveyed to his wife. Upon 
this question the authorities are not in accord. The Supreme 
Court of Minnesota declares that such a transaction is a fraud 
'upon creditors, and subjects The property so acquired to the 
I payment of their debts. Sumner v. Sawtelle, 8 Minn. 309 (Gil. 
272) ; Rogers v. McCauley, 22 Minn. 384. The Supreme Court 
Sof Kansas, on the other hand, holds that a homestead purchased 
(and paid" for from the unexempt property of the husband is 
lequally exempt from judicial sale, under the constitution of that 
(state, whether the title is taken in the name of the husband or 
I in that of the wife. Monroe v. May, 9 Kan. 466, 475, 476 ; Hixon 
"vT George, 18 Kan, 253, 258. The decisions of the highest 
[judicial tribunal of the state of Kansas, which we have cited, 
{settle this question in the case at bar. * * * The decree be- 
llow is in accordance with the constitution and statutes of the 
state of Kansas, as they have been construed by its supreme 
court, the property in controversy is situated in that state, and 
its title is fixed by that construction. Let the decree be aflBrmed, 
with costs. ^2 



I I son. 



11 — To same effect is I n re^WiI_- 
123 Fe d. 20, reviewing earlier 
eases contra. See also Ferguson v. 
Little Eock Trust Co., 99 Ark. 45, 
137 8. W. 555 Ann. Cas. 1913 A, 
960 and note wherein many cases 
are collected. 



12 — As to creditor's possible j\ 
remedy, see Riddell v. Shirley, 5 /j 
Cal. 488; Comstock v. Bechtel, 63 | 
Wis. 656, 24 N. W. 465. 

Fraudulent Conveyance of Ex- 
empt Property. — "This case was 
determined by the court below in 



FRAUDULENT CONVEYANCES 



153 



TWYNE'S CASE 

3 Coke, 80 b. 

(Star Chamber, 1602) 

In an information by Coke, the Queen's Attorney General, 
against Twyne of Hampshire, in the Star Chamber, for mak- 
ing and publishing of a fraudulent gift of goods: the case on 
the Stat. 13 Eliz. e. 5 was such ; Pierce was indebted to Twyne 
in four hundred pounds, and was indebted also to C. in two 
hundred pounds. C. brought an action of debt against Pierce, 
and pending the writ, Pierce being possessed of goods and chat- 
tels of the value of three hundred pounds, in secret made a 
general deed of gift of all his goods and chattels real and per- 



accordance with what has been gen- 
erally understood to be the tendency 
and logical result of Piper v. John- 
ston, 12 Minn. 60, and before the 
decisions of this court in Morrison 
V. Abbott, 27 Minn. 116; Fergu- 
son V. Kumler, Id. 156; and Fur- 
man V. Tenney, ante, p. 77, were 
promulgated. So far as this Court 
is concerned, the latter cases estab- 
lish the rule that a debtor's trans- 
fer of prC^pertV PIP"^r^ fr-r^m ovoon. 

tion is not void , but valid, even 
against his creditors, though the 
transfer be voluntary. It is, of 
course, no less valid if made upon 
a consideration." Berry, J., in 
Baldwin v. Eogers, 28 Minn. 544, 
548. 

"There is no principle of law 
more consonant with reason, or bet- 
ter supported by authority, than 
that a conveyance which is fraudu- 
lent as to creditors, binds, never- 
theless, the parties to it. Through 
that 'cloud of authorities' of which 
the counsel speak; this principle 
shines perpetually, and it guides us 
to the conclusion that the appellant 
is here without merits. 

"Having caused his house and 
lot to be conveyed to his wife for 



the purpose of hindering and delay- 
ing his creditors, denying his own- 
ership as long as denial would serve 
to keep them off, he chops round 
now when they have raised $314.26 
out of the property by a sheriff 's 
sale of it. and claims $300 of the 
proceeds under our exemption stat- 
ute. 

"It would be a penersion of 
that humane law to apply it to such 
a ease. As to his creditors, the 
fraudulent deed was void, and he 
remained the owner of the property, 
but the deed concluded him for all 
other purposes. The statute was 
not made as an instrument of fraud 
to delay and hinder creditors, but 
to secure to honest debtors from 
the wreck of their fortunes a sub- 
sistence until they can do something 
for themselves and families." 
Woodward, J., in Huey's Appeal, 
29 Pa. St. 219, 220. For the cases 
generally, see 20 Cyc. 3/77'<?? seq. 
"Property of Little or No Value. — 
Compare French v. Holmes, 67 Me. 
186, with Garrison v. Monaghan, 33 
Pa. St. 232. See dissenting opinion 
in Aultman, etc., Co. v. Pikop, 56 
Minn. 531. See also "Williams v. 
Bobbins, 15 Gray, 590. 



154 PREREQUISITES TO ADJUDICATION 

sonal whatsoever to Twyne, in satisfaction of his debt; not- 
withstanding that Pierce continued in possession of the said 
goods, and some of them he sold; and he shore the sheep, and 
marked them with his own mark : and afterwards C. had judg- 
ment against Pierce, and had a fieri facias directed to the sheriff 
of Southampton, who by force of the said writ came to make 
execution of the said goods; but divers persons, by the com- 
mand of the said Twyne, did with force resist the said sheriff, 
claiming them to be the goods of the said Twyne by force of 
the said gift; and openly declared by the commandment of 
Twyne, that it was a good gift, and made on a good and lawful 
consideration. And whether this gift on the whole matter, was 
fraudulent and of no effect by the said Act of 13 Eliz. or not, 
was the question. And it was resolved by Sir Thomas Egerton, 
Lord Keeper of the Great Seal, and by the Chief Justice Popham 
and Anderson, and the whole Court of Star Chamber, that this 
gift was fraudulent, within the statute of 13 Eliz. And in this 
ease divers points were resolved: 

1st. That this gift had the signs and marks of fraud, because 
the gift is general, \^'ithout exception of his apparel, or any- 
thing of necessity ; for it is commonly said, quod dolus versatur 
in generalihus. 

2nd. The donor continued in possession, and used them as 
his own; and by reason thereof he traded and trafficked with 
others, and defrauded and deceived them. 

3rd. It was made in secret, et dona dandestina sunt semper 
suspiciosa. 

4th. It was made pending the writ. 

5th. Here was a trust between the parties, for the donor 
possessed all, and used them as his proper goods, and fraud 
is always apparelled and clad with a trust, and a trust is the 
cover of fraud. 

6th. The deed contains, that the gift was made honestly, truly, 
and }}(ma fide; et clausvlcB inconsuet' hiducunt suspicionem. 

Secondly, it was resolved, that notwithstanding here was a 
true debt due to Twyne, and a good consideration of the gift, 
yet it was not within the proviso of the said Act of 13 Eliz. by 
which it is provided, that the said Act shall not extend to any 
estate or interest in lands, etc., goods or chattels made on a 
good consideration and bona fide; for although it is on a true 
and good consideration, yet it is not hcyna fide, for no gift shall 
be deemed to be hcma fide within the said proviso which is accom- 



FRAUDULENT CONVEYANCES 155 

panied with any trust; as if a man be indebted to five several 
persons, in the several sums of twenty pounds, and hath goods 
of the value of twenty pounds, and makes a gift of all his goods 
to one of them in satisfaction of his debt, but there is a trust 
between them, that the donee shall deal favourably with him 
in regard of his poor estate, either to permit the donor, or some 
other for him, or for his benefit, to use or have possession of 
them, and is contented that he shall pay him his debt when he 
is able; this shall not be called bona fide within the said pro- 
viso; for the proviso saith on a good consideration, and bona 
fide; so a good consideration doth not suffice, if it be not also 
bona fide; and therefore, reader, when any gift shall be to you 
in satisfaction of a debt, by one who is indebted to others also ; 
Ist, Let it be made in a public manner, and before the neighbours, 
and not in private, for secrecy is a mark of fraud. 2nd, Let the 
goods and chattels be appraised by good people to the very 
value, and take a gift in particular in satisfaction of your debt. 
3rd, Immediately after the gift, take the possession of them; 
for continuance of the possession in the donor, is a sign of 
trust. And know, reader, that the said words of the proviso, 
on a good consideration, and bona fide, do not extend to every 
gift made bona fide; and therefore there are two manners of 
gifts on a good consideration, scil. consideration of nature or 
blood, and a valuable consideration. As to the first, in the 
case before put; if he who is indebted to five several persons, 
to each party in twenty pounds, in consideration of natural 
affection, gives all his goods to his son, or cousin, in that case, 
forasmuch as others should lose their debts, etc., which are things 
of value, the intent of the Act was, that the consideration in such 
case should be valuable ; for equity requires, that such gift, 
which defeats others, should be made on as high and good con- 
sideration as the things which are thereby defeated are ; and it 
is to be presumed, that the father, if he had not been indebted 
to others, would not have dispossessed himself of all his goods, 
and subj ected h imself to his cradle; and therefore it shall be 
intended, that it was made to defeat his creditors; and if con- 
sideration of nature or blood should be a good consideration 
within this proviso, the statute would serve for little or nothing, 
and no creditor would be sure of his debt. And as to gifts made 
bo^ia fide, it is to be known, that every gift made bana fide, 
either is on a trust between the parties, or without any trust; 
every gift made on a trust is out of this proviso ; for that which 



156 PREREQUISITES TO ADJUDICATION 

is betwixt the donor and donee, called a trust per nomen 
spedosum, is in truth, as to all the creditors, a fraud, for they 
are thereby defeated and defrauded of their true and due debts. 
And every trust is either expressed, or implied; an express 
trust is, when in the gift, or upon the gift, the trust by word 
or writing is expressed; a trust implied is, when a man makes 
a gift without any consideration, or on a consideration of 
nature, or blood only; and therefore, if a man before the stat. 
of 27 H. 8 had bargained his land for a valuable consideration 
to one and his heirs, by which he was seized to the use of the 
bargainee; and afterwards the bargainor, without a considera- 
tion, infeoffed others, who had no notice of the said bargain ; in 
this case the law implies a trust and confidence, and they shall 
be seized to the use of the bargainee ; so in the same case, if the 
feoffees, in consideration of nature, or bloode had without a 
valuable consideration enfeoffed their sons, or any of their 
blood who, had no notice of the first bargain, yet that shall not 
toll the use raised on a valuable consideration ; for a feoffment 
made only on consideration of nature or blood, shall not toll 
an use raised on a valuable consideration but shall toll an 
use raised on consideration of nature, for both considerations 
are in cequali jure, and of one and the same nature. 

And when a man, being greatly indebted to sundry persons, 
makes a gift to his son, or any of his blood, without considera- 
tion, but only of nature, the law intends a trust betwixt them, 
soil, that the donee would, in consideration of such gift being 
voluntarily and freely made to him, and also in consideration 
of nature, relieve his father, or cousin, and not see him want 
who had made such gift to him, vide 33 H. 6, 33, by Prisot, if 
the father enfeoffs his son and heir apparent within age hona 
fide, yet the lord shall have the wardship of him : so note, valu- 
able consideration is a good consideration within this proviso; 
and a gift made haiw fide is a gift made without any trust either 
expressed or implied: by which it appears, that as a gift made 
on a good consideration, if it be not also hmid fide, is not within 
the proviso ; so a gift made han^i fide, if it be not on a good con- 
sideration, is not within the proviso; but it ought to be on a 
good consideration, and also bona fide. 

To one who marvelled what should be the reason that Acts 
and statutes are continually made at every Parliament without 
intermission, and without end ; a wise man made a good and 
/ short answer, both of which are well composed in verse. 



FRAUDULENT CONVEYANCES 157 

Quaeritur, ut crescunt tot magna volumina legist 
In prompt u causa est, arescit in orhe dolus. 

And because fraud and deceit abound in these days more than 
in former times, it was resolved in this case by the whole Court, 
that all statutes made against fraud should be liberally and 
beneficially expounded to suppress the fraud. Note, reader, 
according to their opinions, divers resolutions have been 
made. * * * 



CADOGAN V. KENNETT / k ; 

2 Cowp. 432 f^^ n^^JL 

(King's Bench. May 6, 1776) p^^ * 

Upon shewing cause why a new trial should not be granted 
in this case, Lord MANSFIELD reported as follows: 

This was an action of trover brought by the plaintiffs, who 
are theJxusteeshUBderthe marriage-^fittl ement of Lord Mo ntfort, 
against the defendantMrTKennett, who is a judgment creditor 
of Lord jMontfort's, and the other defendants, who are sheriff's 
officers, to recover certain goods taken by them in execution 
under a fi. fa. — At the trial the plaintiffs proved Lord Mont- 
fort's marriage settlement, by which it appeared that the goods 
in question, wh jch were the hou se hold goods belonging to Lord 
IVInjtfnrt, ?^t his InrHsliip's bni if^pJri^tmvTi, anH which were very 
minutely particularized in a schedule annexed to the settle- 
ment, \y^re__all_ conyeyed_tothe plai ntiffs, as trustees, f or the 
use of Lord Mo ntfort for life, remainder to Lad y Montfort for 
her life».i:emain der to the first and other son s of the marriage 

One of the witnesses proved, that at the time of the settle- 
ment being made, it_was^ known ^Lom Montfort was in debfT — 
but he thougEl the fortune of the lady he was to marry, which 
amounted to £10,000 was amply sufficient to pay all the debts 
he owed at that time, and had no idea of disappointing any 
creditor. That Mr. Kennett was a creditor of Lord Montfort 
at the time of the settlement. That Lady Montfort was a ward 
of the Court of Chancery ; and the reason for including the 
household goods in the settlement was, because it was thought 
Lord Montfort 's real estate was not of itself sufficient to make 
a proper and adequate settlement. — It appeared also that the 



158 PREREQUISITES TO ADJUDICATION 

settlement was referred to a JJiaster in Chancery, who app roved 
of,-the_settlemfiiit, and the inserting the household goods for the 
reason above-mentioned. 

At the trial, I inclined to think, that the settlement being made 
under a treaty with the Court of Chancery, and approved of 
by the Master, was a bona fide transaction, and that the posses- 
sion of Lord Montfort was not fraudulent, because it was in 
pursuam,ce, and in execution, of the trust. 

The jury found a verdict for the plaintiffs, damages Is. and 
if the court should be of opinion with the plaintiffs, then the 
goods were to be delivered specifically. 

LORD MANSFIELD.— The question in this case is, whether 
the plaintiffs, who are trustees under the marriage settlement of 
Lord Montfort, by which the household goods in question are 
settled as heir looms with the house in strict settlement, and 
specifically enumerated in a schedule annexed to the settle- 
ment, so as to avoid any fraud by the addition or purchase 
of new; whether, the trustees are entitled to the possession of 
these goods against the defendant Mr. Kennett. 

The defendant has taken the goods in execution; and it is 
not disputed that he is a fair creditor. But the plaintiffs bring 
this action as trustees under the marriage settlement, and the 
question is, whether they are, against the defendant, entitled 
to the possession of these goods for the purposes of the trust. 
I have thought much of this case since the trial, and in every 
light in which I have considered it, I have not been able to 
raise a doubt. 

The principles and rules of the common law, as now uni- 
versally known and understood, are so strong against fraud in 
every shape, that the common law would have attained every 
end proposed by the statutes 13 El. c. 5, and 27 El, c. 4. The 
former of these statutes relates to creditors only; the latter to 
purchasers. These statutes cannot receive too liberal a construc- 
tion, or be too much extended in suppression of fraud. 

The stat. 13 El. c. 5, which relates to frauds against creditors, 
directs "that no act whatever done to defraud a creditor or 
creditors shall be of any effect against such creditor or cred- 
"^itors." But then such a construction is not to be made in 
support of creditors as will make third persons sufferers. There- 
fore, the statute does not militate against any transaction bona 
fide, and where there is no imagination of fraud. And so is the 



FRAUDULENT CONVEYANCES 159 

common law. But if the transaction be not bona fide, the cir- 
cumstances of its being done for a valuable consideration, will 
not alone ta ke it out of the statu te. I have known several cases 
*Vnere persons kave given a lair^^aiid fuU price for goods, and 
where the possession was actually changed; yet being done for 
the purpose of defeating creditors, the transaction has been held 
fraudulent, and therefore void. 

One case was, where there had been a decree in the Court of 
Chancery, and a sequestration. A person with knowledge of the 
decree, bought the house and goods belonging to the defendant, 
and gave a full price for them. The court said, the purchase 
being with a manifest view to defeat the creditor, was fraudu- 
lent, and therefore, notwithstanding a valuable consideration, 
void. So, if a man knows of a judgment and execution, and, 
with a view to defeat it, purchases the debtor's goods, it is void: 
because, the purpose is iniquitotcs. It is assisting one man to 
cheat another, which the law will never allow. There are man^ 
things which are considered as circumstances of fraud. The \ 
statute says not a word about possession. But the law says, 
if after a sale of goods, the vendee continue in possession, and I 
appear as the visible owner, it is evidence of fraud; because/ 
goods pass by delivery: but it is not so in the case of a lease, 
for that does not pass by delivery. 

The stat. 27 El. c. 4, does not go to voluntary conveyances 
merely as voluntary, but to such as are f rmdulent . A fair 
voluntary conveyance may be good against creditors, notwith- 
standing its being voluntary. The circumstance of a man being 
indebted at the time of his making a voluntary conveyance, is an 
argument of fraud. T he question, ther efore, in every case is, 
whether Jthfi_act.dQnfi_^a ftgytaj^ transaction^jir-'cp^^ptliPT' ijf^g '**/*< 
a trick-anxL,contrivance t o defeat credit ore. If there be a con- 
veyance to a trustee for the benefit of the debtor, it is fraudu- 
lent. The question then is, whether this settlement is of that 
sort. It is a settlement which is very common in great families. 
In vnlls of great estates, nothing is so frequent as devises of 
part of the personal estate to go as heir looms; for instance, 
the devise of the Duke of Bridge water's library. — the old Duke 
of Newcastle's plate. So in marriage settlements, it is very 
common for libraries and plate to be thus settled, and for 
chattels and leases to go along with the land. If the husband 
grows extravagant, there never was an idea that these could 



160 PREREQUISITES TO ADJUDICATION 

afterwards be overturned. If this court were to determine they 
should, the parties would resort to Chancery. — ^We come then 
to the circumstances of the present case, which are very strong. 
Th ere is not a sus;gestion of any intention to defraud, or the 
most__distaB t_view of disappointing any creditor. The very 
object of the marriage settlement was, that the lady's fortune 
might be applied to the discharge of all Lord Montf ort 's debts : 
the amount of this fortune was £10,000 and was thought fully 
sufficient for that purpose. Besides this, it is a settlement 
approved by a Master in Chancery. Most clearly the Master in 
Chancery and the Great Seal could have no fraudu l ent view\ 
But it appears further, that the reason why the goods were 
inserted was, because the settlement of the real estate alone was 
thought inadequate without them. Clearly, therefore, it was no 
contrivance to defeat creditors, but meant as a provision for 
the lady if she survived, and heir looms for the eldest son. 

iAn argument, however, is drawn from the_po££essio2L_a§_a 
strong circum stan ce of fraud : but it does not hold in this case. 
Ft is a part of the trust that the goods shall continue in the 
house ; and for a very obvious reason : because, the furniture 
of one house will not suit another; and it was the business of 
the trustee to see the goods were not removed. 

If Lord Montfort had let his house with the furniture, reserv- 
ing one rent for the house, and another for the furniture; or 
if the rent could be apportioned, the creditors would be en- 
titled to the rent; but they have no right to take the goods 
themselves: the possession of them belongs to the trustees, and 
the absolute property of them is now vested in the eldest son. 

I expected an authority; but though such settlements are 
frequent, no case has been cited to shew they are fraudulent. 
How commx)n are settlements of chattels, and money in the 
stocks ; can there be a doubt but they are good ? Yet the creditors 
would be entitled to the dividends during the interest of the 
debtor. Here, there was clearly no intention to defraud, and 
there is a good consideration. Therefore, I am of opinion it 
could not be left to the jury to find the settlement fraudulent, 
merely because there were creditors. The goods must now be 
kept in the house for the benefit of the son. 

ASTON, Justice. I am of the same opinion. 

WILLES, Justice. I am of the same opinion. 

Per Cur. Rule for a new trial discharged. 



FRAUDULENT CONVEYANCES 161 

MEUX V. HOWELL 

4 East 1 ^^^ f^K ^ 

(King's Bench. June 13, 1803) 

This_^ya8 an action on the statute 13 Eliz. c. 5, wherein^ e 
declarati2iL.atatedj^ that the defendants of their malice, fraud, 
fiovinTand collusion, on the 10th of June, 1802, at, etc., were 
parties to a certain feigned, covenous, and fraudulent suit 
against one J. Norton, in whic h^a certain feigned, covenous, and 
fraudulent jud gment against him, to which the defendants were 
also parties, was signed and entered of record in B, R. as of 
Easter term, 42 Geo. 3 ; by which said judgment the defendants 
feignedly, covenously, and fraudulently recovered against the 
said J. N. as well a supposed debt of £800, as also 63s. damages, 
etc., to the purpose and intent to delay, hinder, and defraud the 
plaintiffs of their just debt, the plaintiffs then being creditors of 
the said J. N. for a debt of £176, etc. ; which said feigned, cove- 
nous, and fraudulent judgment, the defendants being parties 
and privies to, and knowing of the same, afterwards, on 12th 
June, 1802, at, etc., did wittingly and willingly put in use, 
avow, maintain, and defend as true, simple, bmm fide, and upon 
good consideration, contrary to the form of the statute, etc. ; 
by reason whereof an action hath accrued to the plaintiffs, 
they being the parties aggrieved, etc., to demand £803 3s. 
being so much contained in the said feigned, covenous, and 
fraudulent judgment, etc. Plea, nil debet. 

At the trial before Lord Ellenborough, C. J., at the sittings/ 
after last Hilary term, at Westminster, the plaintiff recovered a 
verdict upon the first count of the declaration above stated ; 
and upon a rule nisi obtained in the last term for setting aside 
the verdict and entering a nonsuit, or arresting the judgment, 
which stood over till now, the following facts appeared. 

The plaintiffs were brewers, and landlords of a public house ' 
tenanted by J. Norton, who was indebted to them £92 10s. for 
three years* rent in arrear, and also £116 for beer supplied to 
him by the plaintiffs. On the 11th of May._1802, the plaintiffs^ 
distr ained for the^ £92 lOs ^ent in arrearTand an agent was put 
in pfigsession of tlifiL^goods distrained on the premises, but no 
s.ale_ gas majie, Norton applying to them for time to settle his 
affairs, and agreeing that the plaintiffs' agent should continue 
in possession of the distress in the mean time. Prior to the 

H. & A. Bankruptcy — H 



162 PREEEQUISITES TO ADJUDICATION 

sending in the distress Norton was arifisted-by the, defe ndant s, 
who were distillers, for £42, for which he had at first given bail, 
t on the 12th of May was rendered in discharge of his bail. 
On the 19th of May, Norton having a greed to dispose of hjs 
business to one J. W., while the plaintiffs' distress still con- 
tinued, entered into an agreement in writing with the plaintiffs' 
agent Deady, whereby he requested him to let J, W. into posses- 
Ision of his (Norton's) house for £50 goodwfflpajQ^^to sell by 
appraisement all the goods, fixtures, and stock in trade on the 
premises to J. W. before the 24th of May, and after such settle- 
ment Deady was to pay all the rent, taxes, expenses, and the 
book debt due to Meux and Co., and another debt to him, 
(Deady) and another to his brother; the overplus to be re- 
amed to Norton, etc. In consequence of this authority Deady 
procured the goods, etc., to be appraised, and the gross amount 
was £236 7s. 3d., out of which certain deductions were to be 
made for taxes, expenses, etc. The defendants being apprised 
by Norton of these circumstances, on the 25th of May, while 
the plaintiffs' agent was still in possession under the distress, 
the defendan t Atl ee told^Norton thathe should J)e veryis_orrxlhat 
[ Iigadj;_should run away with the whole of the^rogerty, and 
lthat_2f]hirXNortpnj w^ to sign, ai^yistrument^he 

\wjould give him his discharge immediately. What the instru- 
ment was Norton did not know till he had signed it; but 
Atlee proposed that it should be for the benefit of the creditors 
in general. Norton did not himself consult any of his creditors, 
of whom he had several, but left that to Atlee. NQrliau_how- 
ex er, s wore that he did not sign the instrument for the purp ose 
of defeating the plaintiffs' d istress ;^ and at the time of the trial 
he was still in custody at the suit of the defendants. This instru- 
ment, which was prepared by Mr. Wild, the attorney for the 
defendants, was a warrant of attorney to confess judgment for 
£800, with a defeazance that execution should issue to levy 
£500 (which the defendants' attorney computed to be the prob- 
able amount of the debts), and that with the produce of the 
sale an equal distribution should be made amongst all the 
creditors. Under this power judgment was entered up on the 
10th of June, and execution issued on the 12th, when all the 
goods were sold for about £104, and no part of the money was 
paid to the plaintiffs either on account of their distress for 
the rent, in respect of which the plaintiffs' agent was still on 
the premises, with Norton 's consent, or for their book debt : but 



FRAUDULENT CONVEYANCES 163 

a tender was made to the plaintiffs as for the rent (but less 
than the two years' rent), which they would not receive. The 
defendants had not previously consulted any of the othet 
creditors of Norton; but Atlee, in answer to one of them who 
afterwards called upon him, said, that he meant to divide the 
money equally amongst the creditors as soon as he could pro- 
cure a list of them. On the part of the defendants, Mr. Wild 
their attorney swore, that the instructions he received from them 
was merely to take such measures as the occasion required to 
effect an equal distribution of Norton's property amongst all 
his creditors, leaving the particular mode of doing it to him 
(Wild) ; in consequence of which he prepared the warrant of 
attorney on which the judgment in question was entered up. 
The defeazance was taken for £500, considering that to be about 
the amount of Norton's debts altogether. It was left to the 
jury to consider whether the defend ants were privy to the actua l 
judgment and ^eiration^_^^£ded up on the power of attorney 
prepared by Wild their agent, or merely to the general object 
oj obtaining possession_of the p roperty to prevent the plaintiffs 
from satisfying their demand i n prejudice to the general 
creditors. The jury found, that the defendants were privy to 
the means used as well as to the general object, a nd found a 
verd ict for the plaintiffs for £803 3s. 

LORD ELLENBOROUGH, C. J. It is not every feoffment, 
judgment, etc., which will have the effect of delaying or hinder- 
ing creditors of their debts, etc., that is therefore fraudulent 
within the statute; for such is the effect pro tanto of every 
assignment that can be made by one who has creditors: every 
assignment of a man's property, however good and honest the 
consideration, must diminish the fund out of which satisfaction 
is to be made to his creditors. But the feoffment, judgment, 
etc., must be devised of malice, fraud, or the like, to bring it 
within the statute. Then was this judgment of that sort? 
For whose benefit was the fraud? Norton has extinguished no 
debt by means of it, further than as the execution shall turn 
out productive in satisfying the demands of his just creditors. 
It holds out no protection to him otherwise. He is even left 
under arrest at the suit of the particular creditor, as he was 
before the judgment was confessed. Then Jiow-are ^he defe nd- 
a nts impli cated in any fra ud? Instead of having, as tEey 
might have had, a satisfaction~Tor their whole debt, by having 



164 



PREREQUISITES TO ADJUDICATION 



1^' 



^iti^ 



the judgment confessed to them for that alone, they forego that 
advantage, and take a judgment confessed for the amount of 
the debts of the creditors at large, being contented to come in 
pari passu with the other creditors. They have derived there- 
fore no benefit to themselves. No r was th e judg ment confessed 
in prejudice of an y_right of the plaintiffs. For their distress 
wEich was in could not be defeated by^the operation of the 
judgment. And as to their book debt, they had taken no inchoate 
legal steps to recover it, for the paper signed by Norton operated 
nothing. The judgment put the plaintiffs in the same situation 
as the rest of the creditors. It delayed the plaintiffs indeed so 
far as a proportionable payment to creditors in general is a 
delay of each of them in particular : but there was no fraud, n o 
colour, no undue protection to the debtor. The defendants were 
placed in a worse situation than if they had taken the judg- 
/ment for themselves alone. Therefore unless we were to go the 
length of saying that every assignment to a creditor is fraudu- 
lent as to the rest of the creditors, and prohibited to be made, 
this was not fraudulent. It has none of the qualities of fraud 
within the act of parliament, which was meant to prevent deeds, 
etc., fraudulent in their concoction, and not merely such as in 
their effect might delay or hinder other creditors. 



GROSE, J. The statute in its whole frame is calculated to 
prevent certain frauds, and to punish those who are guilty of 
them; and we must be satisfied that the defendants have been 
so guilty before we can say that the verdict ought to stand, 
which is to induce that punishment upon them. The first clause 
of the statute speaks of judgments, etc., devised of "malice, 
fraud, covin, collusion, or guile," not only to "the let or 
hindrance of the due course and execution of law and justice," 
but also to "the overthrow of all true and plain dealing." The 
second clause speaks of persons whose suits, debts, etc., are 
hindered, delayed, or defrauded "by such guileful, covenous, 
or fraudulent devices and practices as aforesaid." And the 
third section inflicts punishment upon such as put in ure, etc., 
"as true, simple and done bona fide and upon good considera- 
tion," such acts. This satisfies me that if the judgment, etc., 
be given hana fide and upon good consideration, it is not within 
the act. Here there is nothing like a fraud. And it makes one 
shudder to think that persons who appear like the defendants to 
have acted most honestly should have been in any hazard of being 



FRAUDULENT CONVEYANCES 165 

subjected to punishment for having endeavoured to procure 
an equal distribution of their debtors' effects amongst all his 
creditors. Their conduct was meritorious, and the judgment 
confessed by Norton was not covenous or feigned, but given boiKt 
fide and upon good consideration for debts due to the defend- 
ants and the other creditors. Therefore, I think there ought to] 
be a new trial. 

Lord ELLENBOROUGH, C, J., then observed, that he 
thought the third clause of the act imposing the penalty, which 
in one part only mentions the word band, had had a fair con- 
struction put upon it by the plaintiffs' counsel; and that it must 
be taken to extend to feoffments, judgments, etc., as mentioned in 
the other parts of the clause, 

LAWRENCE, and LE BLANC, Justices, declared themselves 
of the same opinion for the defendants. :ky^ -XX 



Rule absolute. 



FREEMAN v, POPE 



5 Ch. App. 538 I ^ 






^i^r 



(Chancery. June 7, 1870) ' fv- 

This was an appeal by the Defendant Pope from a,.d£er.ee of 
Vice-Chancellor James, se tting aside a voluntary settlement, 
dated the 3d of March, 1863, by which the Rev, J, Custance 
assi^ed to trustees for the benefit of Julia Pope (then Julia 
Thrift) a policy of insurance for £1000 (effected by him in 
1845 on his own life), and covenanted to pay the premiums. It 
appeared that he had previously settled this policy upon her in 
1853, reserving a power of revocation, which he exercised in 
1861, in order that he might deceive a bonus. 

At the time when the settlement now impeached was made, 
the settlor held two livings producing a net income of £815, and 
he was entitled to a Government life-annuity of a little more 
than £180, and to a copyhold cottage which he on the same day 
covenanted to surrender to Mrs. Walpole, the mother of Julia 
Pope, for £50, He had no other property except his furniture, 
and he was being pressed by his creditors. Among other debts, 
he owed £489 to Messrs, Gurney, his bankers at Norwich, and 
£7 8s. 6d, to a postmaster. On the same 3d of March, 1863, he 



166 PREREQUISITES TO ADJUDICATION 

borrowed from Mrs. Walpole £350, for which he gave her a bill 
of sale of his furniture. Mrs. Walpole was privy to, and one of 
the trustees of, the settlement. At the same time he made an 
arrangement with his bankers that his solicitor, Mr. Copeman, 
should receive certain income from the benefices, and pay out of 
it £50 each half-year towards discharge of the balance. The 
banking account at Norwich was to remain a dead account, and 
to be discharged, with interest, by the above instalments. A 
new account was to be opened with the Aylsham branch of the 
same bank, and Copeman was to pay the residue of the income 
(after deducting the £50) to this new account, which was to be 
an ordinary current banking account. 

At the testator 's . death, in April, 1868, the balance of £489 
due to the bankers had been reduced to £117 by means of the 
annual instalments of £50. The Aylsham account showed no 
balance on either side. The postmaster's debt of £7 8s. 6d., and 
Mrs. Walpole 's £350, with an arrear of interest, remained un- 
paid. The other debts due at the date of the settlement had 
been paid. The settlor, however, owed many debts subsequently 
contracted, and there were no assets whatever to pay them ; the 
furniture having been sold under a subsequent bill of sale, to 
which Mrs. Walpole had agreed to postpone her security. 

The Plaintiff, a tradesman who had supplied goods to the 
settlor after the date of the settlement, filed his bill for adminis- 
tration of the settlor's estate, and to set aside the settlement, 
to the benefit of which the Defendant Pope had become entitled 
under an appointment by Julia Pope. 

The Vice-Chancellor James made a decree for setting aside 
the settlement, from which Pope appealed. 

LORD HATHERLEY, L. C. The principle on which the 
statute of 13 Eliz. c. 5, proceeds is this, that persons must be 
just before they are generous, and that debts must be paid before 
gifts can be made. 
V The difficulty the Vice-Chancellor seems to have felt in this 
Ky^' case, was, that if he, as a special juryman, had been asked 
''^ whether there was actually any intention on the part of the 

settlor in this case to defeat, hinder, or delay his creditors, he 
should have come to the conclusion that he had no such inten- 
tion. With great deference to the view of the Vice-Chancellor, 
and with all the respect which I most unfeignedly entertain 
for his judgment, it appears to me that this does not put the 



wl 



FRAUDULENT CONVEYANCES 



167 



question exactly on the right ground ; for it would never be left 
to a special jury to find, simpliciter, whether the settlor intended 
to defeat, hinder, or delay his creditors, (without a direction from J^{^2m/- 
the Judge that^if_the necessary effect of the instrument was to - 

defeat, hinder, or delay the creditors, that necessary effect was "^'^''^i^^ 
to be considered as evidencing an intention to do so. A jury 
would undoubtedly be so directed, lest they should fall into 
the error of speculating as what was actually passing in the 
mind of the settlor, which can hardly ever be satisfactorily 
ascertained, instead of judging of his intention by the necessary 
conseque nces of his act, which consequences can always be esti- 
mated from the facts of the case. Of course there may be cases 
— of which Spirett v. Willows, 3 D. J. & S. 293, is an instance — 
in which there is direct and positive evidence of an intention 
to defraud, independently of the consequences which may have 
followed, or which might have been expected to follow, from 
the act. In Spirett v. Willows the settlor, being solvent at the 
time, but having contracted a considerable debt, which would 
fall due in the course of a few weeks, made a voluntary settle- 
ment by which he withdrew a large portion of his property from 
the payment of debts, after which he collected the rest of his 
assets and (apparently in the most reckless and profligate man- 
ner) spent them, thus depriving the expectant creditor of the 
means of being paid. Jnthat case there was clear and plain evi- 
dence of an actual intention to defeat creditors . But it is 
established by the authorities that in the absence of any such 
direct proof of intention, if a person owing debts makes a settle- 
ment which subtracts from the property which is the proper 
fund for the payment of those debts, an amount without which 
the debts cannot be paid, then, since it is the necessary conse- 
quence of the settlement (supposing it effectual) that some 
creditors must remain unpaid, it would be the duty of the 
Judge to direct the jury that they must infer the intent of the; 
settlor to have been to defeat or delay his creditors, and that' 
the case is within the statute. 

The circumstances of the present £ase are these : The settlor 
was pressed by his creditors on the 3d of March, 1863. He was 
a clergyman with a very good income, but a life income only. 
He had a life-annuity of between £180 and £190 a year, and 
besides that he had an income from his benefice — his income 
from the two sources amounting to about £1,000 a year. But at 
the same time his creditors were pressing him, and he had to 



168 PREREQUISITES TO ADJUDICATION 

borrow from Mrs. Walpole, who lived with him as his house- 
keeper, a sum of £350 wherewith to pay the pressing creditors. 
That accordingly was done, and he handed over to her as security 
the only property he had in the world beyond his life income 
and the policy which is now in question, namely, his furniture, 
and a copyhold of trifling value. It is said, however, that the 
value of the furniture exceeded (and I will take it to be so) 
by about £200 the value of the debt which was secured to Mrs. 
Walpole. That debt may be put out of consideration, not only on 
that account, but because Mrs. Walpole, being herself a trustee 
of the settlement which is impeached, cannot be heard to com- 
plain of that settlement. But he also owed at the time of this 
pressure a debt of £339 to his bankers at Norwich, and he re- 
quired for the purpose of clearing the pressing demands upon 
him, not only the sum which he borrowed from Mrs. Walpole, 
but an additional sum of £150, which sum the bankers agreed 
to furnish, making their debt altogether, at the date of the execu- 
tion of this settlement, a debt of £489. They made with him 
an arrangement (which probably intended, in a great measure, 
as a friendly act towards a gentleman who was seventy-three 
years of age, and the duration of whose life, therefore, could 
not be expected to be very long), that they would for the 
present (for it cannot be held to be more than a present arrange- 
ment) suspend the proceedings, which, it appears, they were 
contemiplating, upon his allowing his solicitor to receive part 
of his income, pay £100 a year towards liquidating the £489 
(which was to be carried to what is called a "dead account") 
and pay the residue into their branch bank at Aylsham, to an 
account upon which the settlor might draw. That arrangement 
was made, but there was no bargain on the part of the bankers 
that they would not sue at any time they thought fit; and, on 
the other hand, they had nothing in the shape of security for the 
payment of their debt, for they had not taken out sequestration, 
and there could be nothing in the shape of a charge upon the 
living except through the medium of a sequestration. When the 
settlor had made the voluntary assignment of the policy, he 
stood in this position, that he had literally nothing wherewithal 
to pay or to give security for the debt of £489, except the sur- 
plus value of the furniture, which must be taken to be worth 
about £200, and he was clearly and completely insolvent the 
moment he had executed the settlement, even if we assume that 
some portion of his tithes and of the annuity was due to him. 



FRAUDULENT CONVEYANCES 169 

It appears that a payment of the tithes was made in January, 
and we cannot suppose that there was more owing to him than 
the £200 which was paid in May, two months after the date of 
the deed ; and if we add to that £200 as the surplus value of the 
furniture, and add something for an apportioned part of the 
annuity, the whole put t(^ether would not meet the £489. He, 
in truth, was at that time insolvent ; and there I put it more 
favourably than I ought to put it, because he could not at once 
put his hands upon that sum, so as to apply it towards satisfy- 
ing the debt, at any time between March and May. The case,--? 
therefore, is one of those where an intention to delay creditors J 
is to be assumed from the act. ' 

The Viee-Chancellor seems to have felt himself very much 
pressed by the case of Spirett v. Willows, 3 D. J. & S. 293, 302, 
and the dicta of Lord Westbury in that case. The first of those 
dicta is: "If the debt of the creditor by whom the voluntary 
settlement is impeached existed at the date of the settlement, 
and it is shov^Ti that the remedy of the creditor is defeated or 
delayed by the existence of the settlement, it is immaterial 
whether the debtor was or was not solvent after making the 
settlement." The Vice-Chancellor seems to have thought him-"' 
self bound by this expression of opinion, and to have set aside 
the settlement upon that ground alone. It is clear, however,--^ 
that this expression of opinion on the part of the Lord Chan- 
cellor was by no means necessary for the decision of the case 
before him, where the settlor was guilty of a plain and manifest 
fraud. It is expressed in very large terms, probably too large ; 
but at all events, it is unnecessary to resort to it in the present 
case. It seems to me that the difficulty felt by the Vice-Chan- 
cellor arose from his thinking that it was necessary to prove an 
actual intention to delay creditors, where the facts are such as 
to show that the necessary consequence of what was done was to 
delay them. If we had to decide the question of actual inten- 
tion, probably we might conclude that the settlor, when he 
made the settlement, was not thinking about his creditors atl 
all, but was only thinking of the lady whom he wished to bene- ; 
--fhr, and that his whole mind being given up to considerations 
of generosity and kindness towards her, he forgot that his 
creditors had higher claims upon him, and he provided for her I 
without providing for them. It makes no difference that Messrs. \ 
Gnrney, the bankers, seem to have been willing to forego the ' 
immediate payment of their debt ; the question is, whether they 



170 PREREQUISITES TO ADJUDICATION 

could not within a month or less after the execution of the settle- 
ment, if they had been so minded, have called in the debt and 
overturned the settlement? 

Beyond all doubt they could, on the ground that it did not 
leave sufficient property to pay their debt; and this being so, 
we are not to speculate about what was actually passing in his 
mind. I am quite willing to believe that he had no deliberate 
intention of depriving his creditors of a fund to which they 
were entitled, but he did an act which, in point of fact, with- 
drew that fund from them, and dealt with it by way of bounty. 
That being so, I come to the conclusion that the decree of the 
learned Vice-Chancellor is right. * » * 

Sir G. M. GIFFARD, L. J. In this case 1 quite agree with the 
Vice-Chancellor in thinking that if the propositions laid down in 
Spirett V. Willows are taken as abstract propositions, they go too 
far and beyond what the law is ; but if they are taken in connec- 
tion with the facts of that case, then undoubtedly there is abun- 
dantly enough to support the decision, for there was a voluntary 
settlement by a man who, at its date, was solvent, but immediately 
/ / I afterwards realized the rest of his property and denuded himself 
of everything. 

Of course the irresistible conclusion from that was, that 
the voluntary settlement was intended to defeat the subsequent 
creditors. That being so, I do not think that the Vice-Chancellor 
need have felt any difficulty about the case of Spirett v. Wil- 
» ; lows, but he seems to have considered, that in order to defeat 
Ija voluntary settlement there must be proof of an actual and 
|( express intent to defeat creditors. That, however, is not so. 
There is one class of cases, no doubt, in which an actual and 
express intent is necessary to be proved — that is, in such cases 
as Holmes v. Penney, 3 K. & J. 90, and Lloyd v. Attwood, 
3 De G. & J. 614, where the instruments sought to be set aside 
were founded on valuable consideration; but where the settle- 
ment is voluntary, then the intent may be inferred in a variety 
of ways. For instance, if after deducting the property which 
is the subject of the voluntary settlement, sufficient available 
assets are not left for the payment of the settlor's debts, then 
the law infers intent, and it would be the duty of a Judge, in 
leaving the case to the jury, to tell the jury that they mi^st pre- 
sume^ that that was the intent. Again, if at the date of the 
settlement the person making the settlement was not in a posi- 



FRAUDULENT CONVEYANCES 171 

tion actually to pay his creditors, the law would infer that 
he intended, by making the voluntary settlement, to defeat and 
delay them. 

Now, in this case, at the date of the settlement, Mr. Custance 
was really insolvent; and if at the date of the settlement the 
bankers had insisted on payment, and had issued execution, 
they could not have got a present payment unless they had7 
resorted to that particular policy. That being so, it seems to 1 
me that the facts of this case bring the matter entirely within I 
all the decided cases, and it is enough to say that at the date ; 
of this settlement Mr. Custance was not in a position to make' 
any voluntary settlement whatever. "^ 

That being so, the appeal must be dismissed, and dismissed 
with costs, as I can see no reason for saying that the decree was 
not right in giving the whole costs of the suit. There was, 
previously to this case, a decision by Viee-Chancellor Kindersley 
(Jenkyns v. Vaughan, 3 Drew. 419), laying down the rule that 
where a subsequent creditor institutes a suit and proves the 
existence of a debt antecedent to the settlement, he can maintain 
a suit such as this, and therefore it is not a new case. There 
can be no reason for doubting the correctness of that decision, 
either in point of principle or justice.*^ 



In re JOHNSON— GOLDEN v. GILLAM 

20 Ch. D. 389 

(Chancery Division. December 13-15, 1881) 



This was an action to set aside a deed of gift as fraudulent 
and void under the statute 13 Eliz. c. ^5! ~ 

The deed of gift was dated the 12th of June, 1878, and wit- 
nessed that in consideration of the natural love and affection of 
Judiths Johnson, widow, towards her daughters Alice and Amy, 
and of the covenants thereinafter contained, the said Judith 
Johnson granted a farmhouse and premises in Trunch, in the 
county of Norfolk, to Stephen Gillam and his heirs, as to one 
moiety to the use of her daughter Alice, and as to the other 
moiety to the use of her daughter Amy, and assigned the crops 
of the farm as to one moiety in trust for Alice, and as to the 
other moiety in trust for Amy. And Alice and Amy covenanted 

13 — See also In re Lane-Fox 
(1900), 2 Q. B. 508. 



172 



PREREQUISITES TO ADJUDICATION 



^ . jthat they, or one of them, would ' 'pay all the just debts incurred 
v^^^^^J^^ V^y th® said Judith Johnson up to the date of the said indenture 
in connection with the working and management of the said 
farm," and would maintain the said Judith Johnson during 
her life, providing her with a home, food, clothes, and medical 
or other attendance in such style or manner as she had been 
theretofore accustomed to. 

This deed of gift, which was executed by Judith Johnson and 
Alice Johnson, was a conveyance of all the property of Judith 
Johnson. 

The plaintiff was a creditor of Mrs. Johnson at the date of 
the deed for £120. This debt was not incurred by Mrs. John- 
son, but by William Johnson, her predecessor in the farm, and 
she had adopted it by giving a promissory note for the amount. 

Evidence was offered that there were other creditors of Mrs. 
Johnson besides the plaintiff, who were not provided for by the 
deed, but the court held that none of these debts were proved 
to have been incurred for purposes unconnected with the farm. 

The state of the family of Judith Johnson when the deed was 
executed was as follows: Judith Johnson was the widow of 
William Johnson, who had previously been the husband of her 
sister, and had had by her a family of whom one son, James, 
was living. After his first wife's death William Johnson had 
gone through the ceremony of marriage with Judith Johnson, 
his deceased wife's sister, and had a family by her, of whom 
George, Arthur, Alice, and Amy were living. William Johnson 
had provided for his children, other than Alice and Amy, out 
of other property, and shortly before he died he granted the 
Trunch farm — the subject of this litigation — by deed of gift to 
Judith Johnson, in consideration of her covenant "to pay all 
debts incurred by William Johnson in connection with the work- 
ing and management of the farm, and all liabilities that he 
might incur for means of living, medical attendance, and ex- 
penses of a like nature." 

George and James Johnson were living away from the farm, 
Arthur lived with his mother, Mrs. Johnson, till 1877, when he 
left, and, Mrs. John being then bedridden, the farm was carried 
on by Alice, the elder daughter, and Amy (who was an infant 
at the date of the deed), with the assistance of the Defendant 
Gillam. Gillam made them advances of money from time to time 
for the purchase of cattle and stock, and repaid himself out of 
the produce. The plaintiff claimed to set aside the deed to the 



FRAUDULENT CONVEYANCES 173 

defendant as fraudulent against himself and the other creditors 
of Mrs, Johnson. 

FRY, J,, after stating the effect of the deed, said : 

It is clear that the consideration for the deed of the 12th of / 
June, 1878, was in part meritorious and in part valuable. The/ 
question before me is whether the deed is void against creditors; 
under the statute of 13 Eliz., c. 5. 

For the purpose of deciding this, it will be convenient and 
proper to refer to the material words of the statute, and I find 
these sufficiently stated in a passage of the judgment of Sir 
Thomas Plumer, when Vice Chancellor, in Copis v. Middleton 
(2 Madd. 410). He says (2 Madd. 427), ''The preamble of the - 
act is, for the avoiding and abolishing of feigned, covinous, and 
fraudulent feoffments, as well of lands and tenements as of goods 
and chattels, devised and contrived of malice, fraud, covin, col- 
lusion, or guile, to the end, purpose, and intent to delay, hinder, 
or defraud creditors and others of their just and lawful actions, 
suits, debts, etc., not only to the let or hindrance of the due 
course and execution of law and justice, but also to the over- 
throw of all true and plain dealing * * * between man 
and man, without which no commonwealth or civil society can 
be maintained or continued. A conveyance, therefore, (the Vice- 
Chancellor continues), to be affected by this act, must be shewn 
to be feigned, covinous, and fraudulent, and made with an intent 
to delay, hinder, or defraud creditors: But if this case were 
held to be within the statute, it would be the overthrow of all 
true and plain dealing and bargaining between man and man;; 
for, as a purchaser cannot know the circumstances of the ven-j 
dor, it would prevent all dealing and bargaining between mani 
and man, and counteract the object of the statute. The statut^ 
in order to prevent this inconvenience, has by the 6th section 
provided that the act shall not extend to any conveyance upon 
good consideration and bona fide to any person not having at 
the time of such conveyance any manner of notice or knowledge 
of such covin, fraud, or collusion. A conveyance, therefore, can- 
not be invalidated by this act if there has been a bona fide pur- 
chaser. ' ' 

In Thompson v. Webster (4 Drew. 628), . Vice-Chancellor 
Kindersley said (4 Drew. 632), with regard to the general prin- 
ciple of the act, "The principle now established in this. The 
language of the act being that any conveyance of property is 



174 PREREQUISITES TO ADJUDICATION 

void against creditors if it is made with intent to defeat, hinder, 
or delay creditors, the court is to decide in each particular case 
whether on all the circumstances it can come to the conclusion 
that the intention of the settlor in making the settlement was to 
defeat, hinder, or delay his creditors." 

r^t is obvious that the intent of the statute is not to provide 
/equal distribution of the estates of debtors among their cred- 
(itors — there are other statutes which have that object; nor is it 
the intent of this statute to prevent any honest dealing between 
one man and another, although the result of such dealing may 
be to delay creditors. And cases have been cited accordingly 
where deeds of this nature have been held good, though the re- 
sult of them has been that creditors have been not only delayed 
but excluded. 
j— The effect on a deed of this sort of its being for good consid- 
^ eration is very great. It does not necessarily shew that the deed 
may not be void under the statute, because in many cases good 
consideration has been proved, and yet the object of the deed 
has been to defeat and delay creditors ; such has been, therefore, 
for an unconscientious purpose, and the fact that there has been 
good consideration will not uphold the deed. But nevertheless 
it is a material ingredient in considering the case, and for very 
obvious reasons: the fact that there is valuable consideration 
shews at once that there may be purposes in the transaction other 
than the defeating or " delaying of creditors, and renders the 
case, therefore, of those who contest the deed more difficult. In 
the case of Harman v. Richards, the Lord Justice Turner, then 
Vice-Chancellor, makes this observation (10 Hare, 89) : "It re- 
mains to be considered whether the settlement which was thus 
made for valuable consideration Avas also made bona fide, for a 
deed, though made for valuable consideration, may be affected 
by nvala fides. But those who undertake to impeach for mala 
fides a deed which has been executed for valuable consideration, 
have, I think, a task of great difficulty to discharge." 

Lord Hatherley, when Vice-Chancellor, adopted the same view 
in the case of Holmes v. Penney (3 K. & J. 90), which has been 
discussed before me, and the same point was stated with even 
more force by Lord Justice Giffard in Freeman v. Pope (Law 
Rep. 5 Ch. 538). He said in that case (Law Rep. 5 Ch. 544), 
"I do not think that the Vice-Chancellor need have felt any 
difficulty about the case of Spirett v. Willows (3 D. J. & S. 293), 
but he seems to have considered that in order to defeat a volun- 



FRAUDULENT CONVEYANCES 175 

tary settlement there must be pr(X)f of an actual and express 
intent to defeat^creditors. T ^at, h owever, is not so. There is 
one class of cases, no doubt, in which an actual and express 
intent is necessary to be proved, that is in such cases as Holmes 
V. Penney (3 K. & J. 90), and Lloyd v. Attwood (3 De G. & J. 
614), where the instruments sought to be set aside were founded 
on valuable consideration; but where a settlement is voluntary, 
then the intent may be inferred in a variety of ways, ' ' I there- 
fore proceed to inquire, looking to all the circumstances of the 
case and at the nature of the instrument itself, whether I can or 
ought to infer an intent to defraud creditors in the parties to the 
deed. I say in the parties to the deed, because it appears to me 
to be plain that whatever fraudulent intent there may have been 
in the mind of Judith Johnson, it would not avoid the deed 
unless it was shewn to have been concurred in by Alice, who 
became the purchaser under the deed. It has not been con- 
tended, and it could not be contended, that the mere fraudulent 
intent of the vendor could avoid the deed, if the purchaser 
were free from that fraud. 

[HIS LORDSHIP then adverted to the provision which had 
been made before the date of the deed for the other children of 
Judith Johnson, and continued : — ] 

Having regard to the condition of the family, the deed was a" 
highly proper one; the sons had left the home, and were pro- 
vided for by the dispositions which their father had made of the . 
residue of his property ; Mrs. Johnson was possessed of this farm 
and of nothing else; the two single daughters living with her 
must have been objects of her anxiety and care; she was bed- 
ridden and not likely to recover; the farm was practically car- 
ried on by Alice. Thereupon this deed was executed with the 
obvious intention of making over to the daughters that farm 
which their mother hoped they would reside on after her decease, 
to avoid the heavy succession duty which would ensue if she 
allowed the farm to pass to them under her will, t hey not being 
le gally her children, but strangers to he r. The deed is, I ot)t 
serve, framed on the model of the previous deed, which had) 
been executed by her husband on his death-bed. 

Now, it is important to inquire what was the indebtedness of 
Mrs. Johnson when she executed the deed. She appears to have 
had some current debts, mostly, if not entirely, in respect of the 
farming business. She owed a Mr. Simpson, a witness in the 



.^i 



176 PREREQUISITES TO ADJUDICATION 

case, an account for saddlery, the whole of which (with possible 
one unimportant exception) was due in respect of the carrying 
on of the farm. She owed her sister Sarah Golden £80, and I 
cannot infer that that money was borrowed for any other pur- 
pose than carrying on the farm, because it is for the plaintiff 
to shew that that was so, and he has had Sarah Golden in the 
box and has not asked her anything about it. The sum of £120 
was owing from Judith Johnson to her brother William Golden, 
the plaintiff. That sum was borrowed by William Johnson, and 
when she became the owner of the farm she adopted the debt by 
executing a promissory note, and there was a mortgage debt 
upon the farm, which had also been a debt of William Johnson. 
It appears by the evidence that Mrs. Johnson was a person of 
good repute among her friends, as a respectable and honest 
woman, who paid her way, and was in no difficulty. Beyond 
what I have mentioned she does not appear to have owed any- 
thing except ordinary current debts, and was not pressed by a 
single creditor. That was the state of things when this instru- 
ment was executed. One other fact I must mention with regard 
to the state of the family, which is this, that litigation had been 
going on which led to some alienation of feeling between Mrs. 
Johnson and other members of the family, and which made it 
more natural that she should desire the whole of this farm to 
go for the benefit of her two daughters. Mr. Gillam appears to 
have been the most natural person to select as trustee of the 
deed, if the purpose of the parties was honest and fair. From 
what I have seen of him, I do not believe he is a person who 
would have been a party to a deed which was intended to be 
I kept secret, or to be entered into for the purpose of fraud. I 
think his selection as trustee is an indication of the good faith 
with which the transaction was conceived. 

With regard to what took place under the deed, it appears to 
me that there was neither concealment nor publication. Mrs. 
Johnson's name continued to be used as before with regard to 
the farm. The daughter continued to make the payments, and 
there was no material change in the way that things were car- 
ried on. 

/ The circumstances, looked at independently of the result of 
/ the deed, therefore lead me to the conclusion that the intention 
of the parties was to make a perfectly honest family arrange- 
ment, under which the daughters were to undertake the burden 



tj^\- "V of the parties was to make a perfectly honest family arrange- 
kjijT ment, under which the daughters were to undertake the burden 
^^ \of paying their mother's debts, and in consideration of that, to 



FRAUDULENT CONVEYANCES 177 

take immediately that farm which in all probability they would 
otherwise have received by will upon their mother's death. 

Then it is said, and said truly, that a person must generally 
be taken to intend the result of his acts. That is often, but by 
no means always, true, because, although no doubt the immediate 
and main result of our acts must be the object of our intention, 
there are many collateral results of acts which are not only not 
objects of our intention, but against our wish. There are man y ^ 
.unintentional results of intentional acts^ The operation of the 
deed, it is said in this case, was to defeat and delay creditors, 
therefore it is said that that must have been intended. That 
argument has been presented in two ways. In the first place it 
has been observed that the deed contained a provision only for 
the payment of creditors whose debts had been contracted in 
connection with carrying on the farm : It is said that there must 
have been debts of other descriptions, and that there was in fact 
one debt at any rate of another description. But it does not 
appear to me to be shewn that that debt was present to the mind 
of the settlor, Mrs. Johnson, or to the mind of her daughter; 
and nothing is more probable, if I were to speculate upon the 
intention, than that Mrs. Johnson, having adopted the debt of 
WiUiam Johnson, after a deed conceived in similar terms, would 
have anticipated that her daughters must in like manner adopt 
the debt of their uncle under this deed. It appears plain from 
the case of Holmes v. Penney (3 K. & J. 90), that the mere fact 
of a bona fide creditor being defeated is not of itself sufficient 
to set aside a deed founded on valuable consideration. In this^ 
case, if I uphold the deed, it seems probable that the plaintiff i 
will have no remedy in respect of his debt. In that case, by up- 
holding the deed, the plaintiff was excluded from all remedy in 
respect of his debt, and that debt must have been plainly present 
to the mind of the settlor, but the Vice-Chancellor thought that 
the only object of the brother, who was the purchaser of the 
estate, was to make an honest family arrangement with regard 
to it. So it appears to me, in the present case, that the object jifj^,, ^^1 
of the mother and daughters was to make an honest family set- / r~ 
tlement of the property. 

Then again it is said that with respect to many creditors who 
are included in the covenant, they are defeated and delayed, be- 
cause before the execution of the deed they had a right against 
the property, and after the execution of the deed they would 
only have a right to the enforcement of the covenant. But that 

H. & A. Bankruptcy — 12 



178 PREREQUISITES TO ADJUDICATION 

is the result of almost any dealing. If I am indebted and sell 
my estate, my creditors lose their right of proceeding against 
the estate, and can only proceed against the purchase money. 
So in a variety of cases visible chattels or real estate are con- 
verted into chases in action, and if creditors could complain of 
that it would, as Sir Thomas Plumer pointed out, ' ' restrain hon- 
est dealings and transactions between man and man." 

There is only one other point on which I wish to observe, 
although it has not been put to me. It appears plain, that though 
valuable and good consideration was given by the daughters, that 
consideration cannot have been the full value of the estate. But 
it also appears to me to be plain that when a h(yna fide and hon- 
est instrument is executed for which valuable consideration is 
^ given, and the instrument is one between relatives, the court 
cannot say that the difference between the real value of the estate 
and the consideration given is a badge of fraud, and if it is not 
abadge_ofJ^raud, or evidence of an intention to defeat creditors, 
IjjTiasiio relation to the case. »t •?;« m 

I have come, therefore, to the conclusion upon the whole of 
the case, that the instrument impeached was executed in good 
faith and for a valuable consideration, that it was an honest 
family arrangement, and was executed without any intention to 
defraud or delay creditors. That being so, I dismiss the action 
with costs. f^X}^ ' ij^*^ *^ *iKi;T> v. '.;i 'i'>,f <'»i> '. ; 

.}r*^ V^ .!^ CRUMB AUGH v. KUGLER 

^^!> -' T ^ ^^' ^^' ^'^^ 

3w^ t/>-^ (Supreme Court of Ohio. December Term, 1853) 

fyf^ CALDWELL, J. This is a bill filed by the creditors of Mat- 

thias Kugler, the principal object of which is to set aside cer- 
tMnconveyances made by him to his children in March, ISiT. 
At the time of these conveyances, Matthias Kugler was pos- 
sessed of property (according to the estimate of the master to 
whom this case was referred) of the value of $176,540.65, and 
was indebted to the amount of $98,327.86. About $146,000 of 
the property consisted of real estate — on which were several 
mills and distilleries. On the 13th of March, 1847, Matthias 
Kugler conveyed to different members of his family what in the 
aggregate amounted to $105,674.74. On the property thus con- 
veyed, over $40,000 of Kugler 's indebtedness was secured by 



FRAUDULENT CONVEYANCES 179 

mortgage — the grantees took the property subject to the liquida- 
tion of these incumbrances. Schultz and Kugler, two of the 
grantees, also executed a mortgage to Matthias Kugler, Sen., to 
secure the payment of about $15,000 more of the indebtedness. 
The amount of Kugler 's indebtedness intended to be secured hy^ 
this family arrangement amounted to about $55,800. The 
amount of Kugler 's indebtedness left wholly unprovided for by 
the arrangement, is stated by the master in the alternative ; upon / 
one hypothesis, it amounts to $42,599.55, and on the other to| 
$47,190.05. 

The master estimates the property retained by Kugler, at the 
time of the conveyance to his family, at $70,837.93; the real 
estate he values at $51,152, and the personalty at $19,685.93. 
This estimate, the master reports, is made by setting down to 
Kugler 's sole account several tracts of land that had been con- 
veyed to Kugler and wife, and stood in their names, and the 
half of which, it is contended, belonged to Mrs. Kugler 's heirs. 
Deducting the one-half of the value of the properly thus sit- 
uated, the real estate retained by Kugler would amount, accord- 
ing to the master's estimate, to $28,376^ and^ the' entire assets, 
reaTand personal, retained, to $48,061.93. This latter the court 
regard as the true estimate. The property in the joint names 
of Kugler and wife, was the property that formerly belonged 
to Mrs. Kugler 's father, Christian Waldsmith. On the death of 
Christian "Waldsmith, Mrs. Kugler, as heiress, became entitled 
to one-seventh. A petition was filed by some of the heirs for 
partition ; Kugler and wife elected to take the property, and the 
sheriff conveyed it to them jointly, on Kugler giving bond to 
pay the other heirs. Although Kkigler may have considered this 
property as his, and liable to the payment of his debts, yet Mrs. 
Kugler had the legal title to the one-half by the conveyance, 
and was the owner of one-seventh previous to that time. The 
title had remained in their joint names since 1817, and we think 
the one-half of the property belonged to Mrs. Kugler, and at 
her death descended to her heirs, and could in no way be liable 
for Kugler 's debts. Kugler continued, after the conveyances,! 
to carry on an extensive business, until some time in 1849, when 
he failed ; his mill and distillery were destroyed by fire, and he | 
became largely insolvent. 

It is said, on the part of the complainants, that these convey- 
ances were fraudulent, as to the creditors of Matthias Kugler. 

The first question that we propose to consider, is whether 



180 PREREQUISITES TO ADJUDICATION 

there was any actual fraud intended by Kugler in thus dispos- 
ing of his property. 

Wherever a person, largely indebted, gives away a large 
amount of his property, witnout amply providing for the pay- 
ment of his debts, a suspicion of fraud will generally attach to 
the transaction. There are, however, connected with this case 
many circumstances going to rebut any suspicion that fraud was 
imtended. Kugler was engaged at the time in a very extensive 
business; the arrangement does not appear to have been made 
with any intention of stopping business, although the convey- 
ance of this property necessarily curtailed his operations; for 
two years after, however, he continued to operate extensively. 
From the number and amount of his debts that he afterward 
contracted, it would appear that he still had credit, and must 
have been regarded as a responsible man. 

After the conveyance, he commenced paying off his indebted-, 
ness that existed at that time, and although the evidence does 
not furnish us with any certain data on the subject, yet it 
appears that he succeeded in paying off the principal part of 
that indebtedness. The most of the debts that he now owes are 
such as were contracted after the conveyance, or such as were 
secured by it. It was very natural, considering the advanced age 
of Matthias Kugler, that he should find it necessary to con- 
tract his business. His sons and sons-in-law had been doing 
business for him at his different milling and distillery estab- 
jlishments. By making the conveyances as he did, he could free 
himself from a large portion of his indebtedness, establish sev- 
eral members of his family in business on their own account, 
and free himself from the harassing care of such an extensive 
j and complicated business. He acted as if he intended to retain 
Vthe property reserved; he says in his answer, that he intended 
the Germany property at his death for his son Jacob; his con- 
duct accords with this statement; no conveyance is made to 
Jacob, and he enters into partnership with him. 
^ It may be said, however, that Matthias Kugler gave away too 

imuch of his property, considering the amount of his indebted- 
ness. In reference to this, we would say, in the first place, that 
from the manner in which Mr. Kugler obtained and used the 
property, and treated it, that he made no distinction between 
that which stood in the names of himself and wife jointly, and 



FRAUDULENT CONVEYANCES 181 

his other property, and regarded it as liable to the payment 
of his debts; which opinion, although erroneous, would lead 
him to believe that he had retained for the payment of his debts 
more than twenty thousand dollars' worth of property, above 
what he really had. But, supposing we are mistaken in this 
supposition, still the amount of property retained that abso- 
lutely belonged to Matthias KHigler is valued at more than all 
his indebtedness. A part of this property consisted of a mill 
and distillery which Kugler had been carrying on for many 
years; if his business in future should be profitable, he would 
be able to pay his debts, and he no doubt continued it in the 
expectation that it would be so. Kugler 's conduct and busi- 
ness transactions, after these conveyances were made, show that 
they were not made with any intention of suspending business; 
on the contrary, they show that his business, although disas- 
trously, was vigorously pursued, and he only suspended when 
he was compelled to do so. We think from the whole facts in 
the case, that although, as future events proved, this family 
arrangement was improvidently made, yet that no actual fraud 
was intended at the time it was consummated, on the creditors 
of M. Kugler, Nor is there any circumstance to induce the belief 
that any fraud was intended as to subsequent creditors. 

But, although we do not think that any fraud was intended 
by the parties to these conveyances, the question still remains, 
whether they operated to the prejudice of creditors. 

These several conveyances must be considered in the light of 
gifts. It is true, that part consideration was received in most 
of the cases; yet we think that does not change the character 
of the transaction. Although other motives no doubt induced 
the arrangement, yet the ruling object was to make an advance- 
ment to the several grantees. Now, a man largely indeBted, as 
Kugler was, can not make a gift of his property without the 
most careful regard to the rights of his creditors. And such 
gift is never upheld, unless property, clearly and beyond doubt, 
is retained sufficient to pay all the donor's debts. See King's 
Heirs v. Thompson and wife, 9 Peters, 220 ; Salmon v. Bennett, 
1 Conn. 543; Jackson v. Peck, 4 Wend. 303; Hinde v. Long- 
worth, 11 Wheaton, 199; Seward v. Jackson, 8 Cow.; Jackson 
V. Form, 4 Con. 604; Gale v. Williamson, 8 Mees. & Welsby, 
409 ; Seward v. Vanwyck, 1 Edw. Ch. 334 ; Brackett v. Waite, 



IT 



/ 



182 PREREQUISITES TO ADJUDICATION 

4 Vt. 389; Usher v. Hazletine, 5 Greenl. 474; Chambers v. 
Spencer, 5 Watts, 404 ; Morteer v. Hissim, 3 Penn. 165 ; Wallace, 
108 ; Lessee of Burget v. Burget, 1 Ohio, 482 ; Brice v. Meyers, 

5 Ohio, 124 ; Lessee of Douglass v, Dunlap, 10 Ohio, 162 ; Miller 
V. Wilson, 15 Ohio, 114 ; Tremper v. Barton, 18 Ohio, 423 ; Creed 
V, Lancaster Bank, 1 Ohio St. 1. 

Now, how was it in this case? The property retained by 
Kugler, liable to the payment of his debts, amounted to about 
$48,000. His debts, at the lowest calculation, amounted to 
$42,000, and they probably amounted to $47,000. But taking 
the amount of indebtedness at the lowest estimate, $42,000, and 
experience teaches us that, owing to the expenses incident to 
the sale, and the sacrifice almost universally attending forced 
sales, the amount of property reserved would not have paid the 
/'debts, if subjected to that purpose. Kugler, then, not having 
/ reserved property clearly ample to pay his debts, was not in a 

(situation to make the gifts good, and the conveyances, as to all 
debts in existence at the time of their execution, must be held 
as of no effect. 
The next question that arises in the case is, whether the con- 
veyances not being good as to the prior creditors, the subsequent 
creditors can avail themselves of that objection? 

Now, we have previously determined, that these conveyances 
were made without any intentional fraud as to either prior or 
subsequent creditors. If Kugler had not been in debt, he would 
have had a perfect right to distribute his property amongst his 
children; no person could have objected. No policy of law, 
or principle of justice, would have been violated; his gift of 
his property would have been as valid as a sale. It is only be- 
cause that, being in debt, he is bound in good faith to have a re- 
gard, in the disposition of his property, to the just claims of his 
creditors — to regard the obligation which he has incurred to 
them — that any objection can be made to the transaction. This 
principle does not apply at all to the subsequent creditors ; lEey 
give credit to their debtor as he is — for what he has, not for what 
he once had. We must then regard the conveyances, as to subse- 
Iquent creditors, and all persons other than the creditors, then 
loccupying that relation, as good. See United States Bank v. 
Housman, 6 Paige Ch. 535; Saxton v. Wheat., 8 Wheat. 229; 
Hinde v. Longworth, 11 Wheat, 199 ; Parker v. Proctor et al., 9 



FRAUDULENT CONVEYANCES 



183 



f 



Mass. 374, 4 Wash. C. C. 137 ; Lush v. Wilkinson, 5 Vesey, Jr. 
387 ; 9 Peters 220, 12 Vesey, Jr. 155. * • * 
Decree for complainants.^* - 

CHURCH V. CHAPIN j^^^^ ^ 

35 Vt. 223 t^lju^^ ?H-«-*'t ^ ^ 

(Supreme Court of Vermont. February Term, 1^62) ii^^^^y 

Eip.ctmeTit. The plaintiff claimed title under a warranty deed (?.a^cC» uI 
from one Fortin Church to him, dated October 29th, 1855. ^^^wt^'Jf-su 

The defendant offered in evidence certified copies of the^ 
record of a judgment in favor of one Deborah Church against *^'^*-*^ 
Fortin Church, rendered in 1858, for $524.50, for which sum 
execution issued May 4th, 1858; also, a copy of this execution 
and the officer's return thereon, showing a levy of the same 
upon the premises in question; also, a warranty deed from 
Deborah Church to the defendant, Chapin, dated April 4th, 
1859, to all of which the plaintiff objected, but the court ad- 
mitted them, and the plaintiff excepted. 

It appeared in evidence that at the date of the deed from 
Fortin Church to the plaintiff, Fortin Church was a single man, 
without issue, and of about sixty-four years of age ; that at the 
time of the execution of the deed, Fortin Church also executed, 
under seal, a bill of sale to the plaintiff of all his personal 
property, except clothing, cash on hand and debts due; and at 
the same time the plaintiff executed to Fortin Church a mort- 
gage deed of all the real estate described in the deed of Fortin 
Church to the plaintiff, conditioned for the payment of certain 
debts of Fortin Church, amounting to about $850, for the pay- 
ment to certain nephews and nieces of the said Fortin (twenty- 
eight in number), of $100 each, and for the maintenance, care 
and support of the said Fortin Church during his natural life. 
The plaintiff was a nephew of Fortin Church, and immediately 
took possession of the personal property conveyed, and entered 
upon the support of Fortin Church. The conditions named in 
the mortgage constituted the consideration of said conveyance. 
There was no provision that the plaintiff should pay the debt of 



/ 



14— See 20 Cyc. 453-461, for ref- 
erences to many cases involving the 
same or similar questions. 



184 PREREQUISITES TO ADJUDICATION 

Deborah Church, nor any evidence that the plaintiff or Fortin 
Church at the time of the conveyance supposed she had a debt 
against Fortin Church; but they were both aware that she 
claimed that Fortin Church was indebted to her, and that was 
a subject of conversation between Fortin Church and the plain- 
tiff at the time. 

It appeared that said judgment was recovered for the per- 
sonal services of Deborah Church for Fortin Church as his house- 
keeper from 1850 to the spring of 1855 ; that Deborah was a 
single woman of between fifty and sixty years of age, without 
any other home, and that the plaintiff, though knowing to the 
fact of Deborah Church's working for Fortin Church, supposed 
that she was making it her home with her brother, Fortin 
Church, and did not suppose that she was at work for pay. 
iThere was no evidence tending to show that said conveyance 
Iwas made for the purpose of defrauding Deborah Church, or 
[that there was any intentional fraud on the part of the plaintiff 
lor Fortin Church. 

The plaintiff offered evidence to prove that at the time of 
the conveyance to him no actual indebtedness to Deborah 
Church from Fortin Church existed, to which the defendant 
objected. The court rejected the evidence, to which the plaintiff 
excepted. 

It appeared in this connection that Deborah Church 's suit was 
commenced in August, 1856, and was defended throughout by 
the plaintiff, as agent of Fortin Church, and in consequence of 
his taking the conveyance of Fortin Church's property. 

It appeared that at the time of the conveyance from Fortin 
Church to the plaintiff, the cash on hand and debts due, reserved 
by Fortin Church, in said bill of sale, consisted of $100 cash on 
hand, a debt of about $200 against one Bardwell, of Walpole, 
New Hampshire, a note of $75 against James Church, of 
Townshend, Vermont, notes against the Stones, of Westminster, 
Vermont, of about $300, a note against one Sawtell, of Bellows 
Falls, of about $400, and notes against men by the name of 
Phillips, in the state of New York, then amounting to about 
$1,100. All of these debts were considered good except the 
note against Sawtell. The notes against the Phillipses were 
secured by mortgage in New York, and were intended to be 
made a gift to the sons of his sister, their mother, by Fortin 
Church, and were soon after so disposed of. The plaintiff had 
nothing to do with these debts due or cash on hand, except that 



FRAUDULENT CONVEYANCES 185 

it appeared that there were other debts against Fortin Church, 
amounting to about $200, not mentioned in said mortgage, which 
the plaintiff afterwards paid at Fortin Church's request, and 
Fortin Church gave him notes sufficient to pay him for so doing. 
It appeared that it was the understanding between the plaintiflf/ 
and Fortin Church that the plaintiff was to have all of Fortin/' 
Church's personal property at Fortin 's decease, and they sup- 
posed the last clause in the bill of sale was sufficient to convey 
said debts and personal property at Fortin Church's decease. 
The court intimated an opinion to the plaintiff's counsel that 
the conveyance to the plaintiff by Fortin Church, being a dis- 
position of his property to collateral relations, and to secure 
his own maintenance, must be treated, in law, as a voluntary 
conveyance, and that as the claim of Deborah Church existed 
prior to the conveyance and was known to both parties, and 
subsequently matured into a judgment after full defence made 
by the plaintiff, it became conclusively, as to him, a prior \ 
existing debt of the grantor, which would render the conveyance 
inoperative as to her, notwithstanding the plaintiff might have 
acted in perfect good faith in the whole transaction, and that 
the amount and kind of property retained by the grantor, as 
above stated, could not be properly regarded as an ample pro- 
portion of his estate for the security and indemnification of hi$ 
creditors, and that the title of Deborah Church thus acquired 
must be regarded as paramount to that of the plaintiff. Where- 
upon the court directed a verdict for the defendant, and the 
plaintiff excepted to the foregoing decision. 

PECK, J. The question in this case is which of these parties 
acquired the better title from Fortin Church. The plaintiff 
shows title by deed from Fortin Church, dated October 29th, 
1855. The defendant shows title by levy of an execution in 
favor of Deborah Church against Fortin Church, in 1858, for 
between $500 and $600, issued on a judgment recovered in 
1858, in a suit commenced in 1856, and by deed from Deborah 
Church to the defendant, dated April 4th, 1859. Nothing 
appears invalidating the deed to the plaintiff as against Fortin 
Church. The question is whether it is good against his creditors, 
or rather against the creditor under whose levy the defendant 
claims. The case finds that in the execution of the deed to the 
plaintiff there was no fraud in fact, or actual intent to defraud 
creditors generally, or to defraud this particular creditor. A«- 



186 



PREREQUISITES TO ADJUDICATION 



<> 



suming for the present that Deborah Church was a creditor 
of Fortin Church in respect of the debt or claim for which 
she levied, at the date of Fortin Church's deed to the plaintiff, 
the question arises whether upon the facts stated in the excep- 
tions, the amount, nature and character of the consideration of 
that deed was such as to render it valid against Deborah Church 
as such creditor, or whether as to her and the defendant who 
has her title, it is to be treated, as the county court treated it, 
as a voluntary conveyance and inoperative against her levy. 
On reference to the judge's minutes of the testimony referred 
to, and the deed and bill of sale, it appears that the amount of 
property conveyed to the plaintiff by Fortin Church on that occa- 
sion was, in round numbers, from $7,000 to $10,000. Thejeonsid- 
I eration for this property is all expressed in the mortgage deed 
I from the plaintiff to Fortin Church, from which it appears that 
j the plaintiff was to pay certain specified debts of his grantor, 
1 amounting to about $850, and pay to the children of certain 
\ persons named $100 each, as they should respectively arrive 
\&t the age of twenty-one years, and also support Fortin Church 
j during his natural life. It appears there were twenty-eight of 
these children, who were the nephews and nieces of the plaintiff's 
grantor. If the $850 and the $2,800 constituted the whole con- 
sideration for this property, it would be regarded as so far 
below the real value of the property as to render the conveyance 
void as against existing creditors, on the ground of inadequacy 
of con sideration . A debtor cannot give away his property, ancl 
there f)y deprive his creditors of all means of collecting their 
debts. He must be just before he is generous ; or in other words, 
he must not be generous at the expense of justice to his creditors. 
If such is the effect the gift is void as to creditors. Nor can 
this principle be avoided by having a partial consideration. In 
such case the gift is equally void, at least to the extent of the 
want of conside ration . But in this case there 'IS'a 'fiirther con- 
sideration, the agreement of the plaintiff to support the grantor 
during life. The amount or value of this part of the considera- 
tion is in its nature so uncertain, depending so much on future 
contingencies, the duration of life and the future wants and 
\requirements of the grantor, that it can not be assumed that 
the consideration was inadequate in amount. The question 
must turn upon the character of the consideration. The $850 
which the plaintiff agreed to pay to the two creditors named in 
th^ mortgage deed can not be objected to as to its character; 



FRAUDULENT CONVEYANCES 187 

and although the grantor in this disposition of his property 
made no provision for the payment of the debt to Deborah 
Church, she can not set aside that deed on the ground that the 
grantor gave preference to other creditors. Whether the $2,800 
the plaintiff agreed to pay to the collateral relatives of the 
grantor should also be so considered, is not so clear. On the 
one hand it may be said that although it was a gift as between 
such relatives and the grantor, yet as between him and the 
plaintiff it was to be a payment, and that the want of con- 
sideration as between the plaintiff's grantor and the persons to 
whom the grantor required the plaintiff to make the payment, 
can not affect the deed. On the other hand it may be said that 
as the plaintiff was a party to this arrangement by which this 
grantor was giving away this portion of the consideration of the 
deed, and not having paid or legally bound himself to the 
donees to pay to them, he ought not to be allowed to stand 
upon this agreement with the grantor, and thus perfect the gift 
to the detriment of creditors, a gift which the grantor, as to 
creditors, had no right to make. But we do not find it neces- 
sary to decide whether this agreement to pay the $2,800 in the\ 
manner stipulated, is a good consideration to that amount as| ^ 
against creditors or ,not, because the remaining portion of thej '^^ f^' 
consideration, the agreement for support for life, is not of suchj-sj^ >^ - 
a character as will sustain the deed if the creditors are thereby ^' 

deprived of the means of collecting their debts. It is true 
that as between the parties to the deed it is a valuable con- 
sideration, and in this respect a deed founded on it differs from 
a gift; but as to creditors it is not different from a deed ofi 
gift. It has long been settled that a party can not either by/ 
gift or in consideration of an agreement for support for life,| 
convey his property without reserving what is amply sufficient^ 
for the payment of his then existing debts. If we allow the 
plaintiff the benefit of the $850 and the $2,800, as a good con- 
sideration to that extent, there is still, at the lowest estimate 
of the property, between $3,000 and $4,000 of the consideration 
accounted for in no other way than by the agreement for sup- 
port. Where there is a partial, but not a full consideration 
good against creditors, whether the deed is voidable in ioto, or 
only to the extent of the want of consideration, is a question 
not material in this case, as the amount of the consideration rest- 
ing on the agreement for support exceeds the amount of the levy 
in question. The levy must prevail over the deed, unless the 



188 PREREQUISITES TO ADJUDICATION 

property of the grantor not conveyed is sufficient to prevent 
that result. 

XK creditor has no right to impeach a conveyance of his debtor 
/on the ground that it was voluntary, or without sufficient con- 
/ sideration, unless it would operate, if allowed to stand, to his 
\4etriment in the collection of his debt. The debtor is bound to 
reserve property ample for the payment of his debts. Whether 
the property reserved is what will be deemed ample for this 
purpose, does not depend entirely on the amount and value, as 
the real end to b€ accomplished is, that the deed or conxeyance 
shall not deprive creditors of the means of collecting their debts. 
Hence the nature and situation of the property is to be regarded 
as well as the amount and value, in view of the facilities the 
creditors have left for the collection of their debts. In this 
case the debtor conveyed all his property except $100 cash on 
hand, and debts due him. These debts amounted nominally to 
$2,075, due from various individuals. The debt of $400 against 
Sawtell may be thrown out, as Sawtell had failed and become 
insolvent. This leaves the amount due the grantor $1,675. 
In relation to the Phillips' debt of $1,100 and the Bardwell debt 
of $200, the debtors resided out of this state, so that they could 
not be reached by process in this state; as debts due from per- 
sons residing out of the state are not attachable by trustee 
process, except in some particular cases. The cash on hand 
was in point of law liable to attachment if so situated that an 
officer could obtain possession of it without committing a tres- 
psiss on the person of the owner; but it is not probable that it 
would be accessible for the purposes of attachment so as to be 
available to a creditor, especially as the amount was so small. 
Deducting the $400 debt as worthless, there was but $375 of 
the debts reserved by the grantor that was attachable, and that 
only by trustee process. The grantor owed about $200 besides 
this debt for which the levy was made and the debts the plaintiff 
agreed to pay. This $200 the plaintiff paid, and it was repaid 
to him out of the debts the grantor reserved. There is another 
fact stated worthy of consideration ; that is, at the time Fortin 
Church made the conveyance in question, it was his purpose to 
, give the $1,100 debt to certain collateral relations in the state 
kof New York, where the debtor resided, and it was soon after so 
disposed of. The bill of sale to the plaintiff also professed to 
transfer all the personal property that Fortin Church might 
own at his decease, and the parties so understood ite legal 



FRAUDULENT CONVEYANCES 189 

effect. The rule that a party who conveys his property without 
sufficient consideration, such as will be valid against creditors, 
must reserve property ample for the payment of his existing/ 
debts, is from its nature somewhat general and indefinite ; anc^ 
whether sufficient is reserved in a given case to answer this pur- 
pose, depends, as already stated, on the amount and nature, in 
connection with the character and situation, of the property in 
reference to the facilit ies it affords the creditors for collecting^ 
their debts. We think upon all the facts appearing in this case 
the conveyance must be regarded as invalid as against the lGvy-sj2^ , 
ing creditor, if she was a creditor at the time of this conveyance, ^^ 
in respect of this debt. This conclusion is the more just since 
"it" appears that the grantee knew at the time he took the con- 
veyance, that this creditor had rendered services for the grantor, 
and that she claimed he was indebted to her for such services, 
and yet he took the deed and bill of sale without any provision! 
for the payment of this debt. 

The only remaining question is whether the county court erred 
in excluding certain evidence offered by the plaintiff. The case 
states that "the plaintiff offered evidence to prove that at the 
time of said conveyance to him, no actual indebtedness to said 
Deborah Church from said Fortin Church existed" which was 
excluded by the court. If this offer is to be construed as an 
offer merely to show the time when the debt accrued, and that 
it accrued subsequent to the conveyance, the decision was 
erroneous, as the evidence would not necessarily tend to impeach 
the judgment. A judgment, even between the same parties, is 
conclusive only of such facts as must have been found to warrant 
the judgment. This judgment may be correct, and yet the debt 
not have existed till after the conveyance. But we do not so 
understand the offer. The offer evidently was to show that no 
debt ever existed on which the recovery was had, for the excep- 
tions state that ii appeared that the judgment was recovered for 
the services of Deborah Church (Fortin Church's sister) as his 
house-keeper from 1850 to the spring of 1855. The deed was not 
executed till October, 1855. The offer therefore must be under- 
stood as an offer to show that the judgment was founded on no 
actual^ indebtednesSj;_ and not an offer to prove that the debt 
accrued after the conveyance. The evidence offered tended 
directly to impeach the judgment. The judgment is clearly con- 
clusive on this point upon Fortin Church. But in order to entitle 
a creditor to impeach a conveyance of his debtor for want of 



190 PREEEQUISITES TO ADJUDICATION 

sufficient consideration where there is no fraud, it must appear 
that he was a creditor, and a judgment in his favor against the 
grantor is not conclusive against the grantee who is no party 
to it. He may, as a general rule, show that the judgment was 
collusive, and not founded on an actual indebtedness or liability. 
But in this case the plaintiff can not be regarded as a stranger 
to the judgment, as it appears that the suit was defended by this 
plaintiff not only as agent of Fortin Church, but also in his own 
behalf to protect the property conveyed to him by the defendant 
in that suit. Under such circumstances the plaintiff can not be 
permitted again to try the question of indebtedness. He is bound 
by the result of that suit. 

The judgment of the county court is affirmed.^** 

C^^'^ It"^^^ ^^ GORMLEY V. POTTER 




29 Oh. St. 597 
(Supreme Court of Ohio. December Term, 1876) 

Motion for leave to file a petition in error to reverse the judg- 
ment of the District Court of Cuyahoga county. 

The original petition was filed by Abel H. Potter and others, 
judgment creditors of Patrick Gormley, against said Patrick and 
Ann his wife, Edward Flynn, and the West Side Home and Loan 
Association. 

The plaintiffs below having recovered a judgment against Pat- 
irick Gormley and one Edward Keegan, caused an execution 
/ issued thereon to be levied on the real estate described in the 
I petition. 

The petition avers, in substance, that with intent to defraud 
his creditors, Patrick Gormley had, previous to the levy, con- 
veyed the premises to Edward Flynn, who, for the purpose of 
consummating the fraud, conveyed the same to the wife of 
Patrick. The West Side Home and Loan Association held a 
mortgage on the premises. 

The object of the petition was to have the conveyances from 
Patrick to Flynn, and from Flynn to Patrick's wife, set aside, 
and the property sold free from all claims on account thereof, 

14a — See further "Walker v. Cady, v. Johnson, 70 Me. 258; Kelsey v. 

106 Mich. 21, 63 N. W. 1005; Har- KeUey, 63 Vt. 41, 13 L. E. A. 640. 

ris V. Brink, 100 Iowa, 366, 69 N. C/. Tibbals v. Jacobs, 31 Conn. 428. 
W. 684, 62 Am. St. Eep. 578 ; Egery 



FRAUDULENT CONVEYANCES 191 

and to adjust the liens between the plaintiffs and the loan asso- 
ciation. 

The ease was taken to the District Court by appeal, where a 
decree was rendered, granting the plaintiffs the relief prayed 
for. 

It is claimed that the petition is defective in not averring that 
the judgment debtor had no other real or personal estate subject 
to execution for the payment of the plaintiffs' judgment. , 

For this alleged defect, leave is asked to file a petition in error / 
to reverse the judgment of the District Court. 

WHITE, J. The ruling of the District Court is correct. The 
mistake of the plaintiff in error is in regarding the original peti- 
tion as in the nature of a creditor's bill to reach equities of the 
judgment debtor. 

The action is not founded on § 458 of the code. In order to 
maintain an action under that section, it is necessary to aver that 
the judgment debtor has not personal or real property subject 
to levy on execution sufficient to satisfy the judgment. 

The land in controversy was subject to levy on execution, and 
the levy upon it was properly made. The conveyance to Flynn by 
the judgment debtor, and by Flynn to the debtor's wife, having 
been made with intent to defraud creditors, was, as against the 
creditors, absolutely void. As respects the rights of creditors, 
the land was still the property of the judgment debtor, and sub- 
ject to execution as fully as if the conveyance had not been made. 

The petition was founded upon the fact that the land had been 
taken in execution, and had for its object the removal of the 
cloud cast upon the title by the fraudulent conveyance. The 
removal of this cloud was in the interest of both the debtor and 
the creditors by enabling the property to be sold at a better price. 
That a suit may be maintained for this purpose, has been several 
times declared by this court. Sockman v. Sockman, 18 Ohio, 
366 ; Beaumont et al. v. Herrick, 24 Ohio St. 455, 456. 

Whether, at the time of making the conveyance, the debtor""] 
retained sufficient property to satisfy his creditors, would be a / 
proper subject of inquiry in determining the character of the ; 
conveyance. '' 

But if the conveyance is found to be fraudulent as to creditors, 
and thus the property was properly taken in execution, neither 
the debtor nor his fraudulent grantee can require the creditor 
to abandon his levy, on the ground that the debtor has other prop- 



192 PREREQUISITES TO ADJUDICATION 

erty which might have been taken by the creditor. Westerman v. 

"Westerman, 25 Ohio St. 500. Before a valid levy can be made 

C on land, the goods and chattels of the judgment debtor subject to 

( levy must be first exhausted by the officer having the execution. 

This is averred to have been done in the present case before the 

l^levy was made on the lands in controversy. 

The case of Bomberger et al. v. Turner et al., 13 Ohio St. 264, 
relied on by the plaintiff in error, was an action brought under 
§ 458 of the code, to subject the equitable interest of the debtor 
in certain lands which had descended to his heirs, to the payment 
of a decree obtained against him in his lifetime. There had been 
no levy in that case, and it was averred in the petition that the 
conveyance was made in trust for the debtor. That case stands 
on a different footing from the present, and is no authority 
against the decision of the court below. * • * 
Leave refused. , e . t\ . "Ly 

^^y5l»>^ ^^ ^ ^ijpf^^ V. FREEMAN 

^r><M><^,--*^^^^ 59 Ala. 612 

Supreme Court of Alabama. December Term, 1877) 

1^^^ 4i(^ Oil the 29th day of December, 1857, Fleming Fjreeman sold and 
1^ A/^'iecuted to Joseph B. Bibb a deed of conveyance of t welve 

{JT^ "(^ihundred and eighty-five acres of land situated in the county of 
"^ ftyi^ Montgomery. The deed contained the usual covenants of war- 
j^ ranty. The pursMser entered upon and took possession of the 

^J\h^ ^/^remises, for which he paid nineteen thousand two hundred and 
^\ _yjj^ seventy-five dollars. 

^Jl^\\|4^ "About the 23rd day of November, 1859, one Jesse Boseman, as 
X\jf^^^ the guardian of Daniel Flinn (a minor), instituted a suit in the 
Circuit Court of Montgomery county against Joseph B. Bibb to 
recover of him about eighty acres of land held by Bibb under 
the deed of Freeman. Due notice of the pendency of this suit 
was given to Freeman; and at the June term, 1868, of the 
Montgomery Circuit Court, a judgment for the land and 
damages for its detention, was rendered agai nst Bibb . In Sep- 
tember, 1869, Joseph B. Bibb made his will and died. By it 
/ James M. Newman was named as executor. He accepted the 

appointment and entered upon the discharge of his duties. 

In the meantime Fleming Freema n had become totally in- 
solvent, ""b-iry';^ ■~ 



FRAUDULENT CONVEYANCES 193 

For the purpose of recovering damages for the breach of 
covenants contained in the deed executed by Freeman to Bibb 
on the 29th day of December, 1857, Newman filed a bill of com- 
plaint in the Chancery Court of Talladega county on the 10th 
day of July, 1872. The complainant sought to set aside the fol- 
lowing deeds of conveyances^ and to subject the land ther^^ 
described to the payment of the said damages: -. 

"The State of Alabama, Montgomery county. Know all men 
by these presents, that I, Fleming Freeman, of the county and 
state aforesaid, for and in consideration that David H. Remson 
shall come and abide on my plantation, known as the Taylor 
plantation, and plant a portion thereof under an agreement 
made between the said Remson and myself, bearing date with 
this instrument, and for the further consideration of good-will 
and affection which I bear to said Remson and his family, give, 
grant and convey unto said Remson the following described 
lands, viz. : Southeast quarter of section twenty-two, southwest 
quarter of section twenty-three, northeast quarter and southeast 
quarter of section twenty-seven, and northwest quarter and 
southwest quarter of section twenty-six — all in township sixteen 
and range eighteen — to have and to hold the same to him, sub- 
ject to the following conditions and trusts, viz.: During my 
life I am to have the right to cultivate such portions of said 
lands as is authorized under the agreement between said Remson 
and myself as above named. After my death, the said David 
H. Remson, should he survive me, shall hold the said lands dur- 
ing his life-time for his own use and benefit, and at his death 
the said lands shall be vested in Caroline N. Remson, wife of 
said David H. Remson should she then be living, and all the 
children of the said David H., excepting Charles F. F., and 
Seaborn W., the oldest children of said Caroline N., for whom 
other provision has been made. But should the said Caroline 
N. not be living at the death of the said David H. Remson, then 
the said lands shall vest in all the children of the said David 
H. Remson, excepting the said Charles F. F. and Seaborn W. 

"And I, Nancy Freeman, the wife of the said Fleming Free- 
man, for the good-will and affection I bear to the said David 
H. Remson and his family, do hereby relinquish all right of 
dower in the real estate herein described, and hereby join in this 
conveyance. 

* * In witness of all of which, we the said Fleming Freeman and 

H. & A. Bankruptcy — 13 



194 PREREQUISITES TO ADJUDICATION 

Nancy Freeman have hereunto set our hands and seals this 

day of January, 1859. 

"Fleming Freeman, 
''Nancy Freeman." 
"The State of Alabama, Montgomery county. By these pres- 
ents, I, Fleming Freeman, and Nancy Freeman, wife of Fleming 
Freeman, of the above state and county, do make this codicil to 
a deed of gift made to David H, Remson, his wife, Caroline N. 
Remson and children, bearing date January, 1859, and recorded 
in the office of the judge of probate of said county on the 16th 
day of May, 1859. One of the considerations of the deed of gift 
as described above, requires the said Remson to live and abide 
on the plantation, and to plant a portion thereof under an 
agreement made between said Remson and myself, said agree- 
ment bearing date with the deed of gift, thereby depriving said 
Remson and family from moving or leaving said plantation, in 
the event they should think proper to do so. Now, for the pur- 
pose of securing the Taylor tract of land, as described in the 
deed of gift, to the said Caroline Remson and her children by 
the said D. H. Remson, we do hereby declare all articles of 
agreement affecting or in the least detrimental to his interest or 
her interest, null and void, and of no further value, and we do 
furthermore, in consideration of the good-will and affection which 
we bear to said Remson and family, give, grant and convey unto 
Caroline Remson and children, the following described lands 
as described in the deed of gift to said D. H. Remson and 
family, viz. : Southeast quarter of section twenty-two, south- 
west quarter section twenty-three, northeast quarter, southeast 
quarter section twenty-seven, northeast quarter of southwest 
quarter of section twenty-six — all in township sixteen and range 
eighteen — to have and to hold the same during her life, and 
after her death to the said D. H. Remson 's children. It is 



furthermore expressly understood that this deed of gift is nol. 
to take effect until after the death of myself and my wife, Nancy 
Freeman. In fee simple whereof we have hereunto set our 
Handstand seals, this ninth of May, in the year of our I^ord 
one thousand eight hundred and sixty-four. 

"F. Freeman (L. S.), 
"Nancy Freeman (L. S.)." 
I f At the time of the execution of the foregoing deeds, the 
i grantor was not in debt, and possessed great wealth. 
'' The chancellor, on the final hearing, dismissed the bill of com- 



FRAUDULENT CONVEYANCES 



195 



plaint for want of equity. After the decree, and before an 
appeal was taken, the complainant died. Mrs. Martha D. Bibb 
was then appointed administratrix de bonis non, with the will 
annexed. Upon her petition, the suit was revived, and an appeal 
was taken to the Supreme Court. 



BRICKELL, C. J. The law in this state is settled, that as 
to (existing creditors) a voluntary conveyance by a debtor is by 
presumption'"oi law, absolutely void, though no fraudulent 
intent is imputable to donor or donee, and though the donor 
may have reserved from the conveyance property more than 
sufficient for the satisfaction of all debts and demands against 
him. Miller v. Thompson, 3 Port. 196; Foote v. Cobb, 18 Ala. 
585 ; Gunnard v. Eslava, 20 Ala. 732 ; Thomas v. De Graffen- 
reid, 17 Ala. 602 ; Moore v. Spence, 6 Ala. 506 ; Stiles & Co. v. 
Lightfoot, 26 Ala. 443 ; Huggins v. Perrins, 30 Ala. 396. i^ 



15 — The same doctrine is estab- 
lished in several other states. In 
New Jersey — Gardner v. Kleinke, 
46 N. J. Eq. 90; Horton v. Bam- 
ford, 79 N. J. Eq. 356; in Ken- 
tucky—Carrol's Stats. (1907) 
§ 1907; in Virginia — Fink v. Denny, 
75 Va. 663 ; in West Virginia — 
Lockhard v. Beckley, 10 W. Va. 87. 
This doctrine is founded upon the 
decision of Chancellor Kent in Eeade 
V. Livingston, 3 Johns. Ch. 481. 

"It was at one time the rule that 
a voluntary conveyance by one in- 
debted at the time was fraudulent 
as a matter of law towards his cred- 
itors. No evidence was allowed to 
rebut the presumption of fraud. 
Beade v. Livingston, 3 Johns. Ch. 
481, 8 Am. Dec. 120. This rule was 
subsequently deemed to be too se- 
vere by the courts, and the less 
stringent rule was adopted that, 
while a conveyance by a person in- 
debted was presumptively and prima 
facie fraudulent, the presumption 
might be rebutted by proof to the 
contrary. Seward v. Jackson, 8 
Cow. 406. This presumption, how- 
ever, is not to be overthrown by 
mere evidence of good intent or 



generous impulses or feelings. It 
must be overcome by circumstances 
showing on their face that there 
could have been no bad intent, such 
as that the gift was a reasonable 
provision and that the debtor still 
retained sufficient means to pay his 
debts. He can no more delay his 
creditors by such voluntary convey- 
ance than he can actually defraud 
them." Cole v. Tyler, 65 N. Y. 73, 
78. 

' ' To authorize the setting aside 
of a conveyance as fraudulent, the 
evidence must show that the grantor, 
at the time of making it. did not 
have enough other property subject 
to execution to pay his debts, and 
that the conveyance was either with- 
out consideration, or that the 
grantee accepted it with knowledge 
of the grantor 's fraudulent purpose. 
Pennington v. Flock, 93 Ind. 378. 
The proof in this case, upon the 
points above suggested, was unsat- 
isfactory. Fraud is not presumed, 
but must be proved by the party 
alleging its existence." Andrews 
V. Flanagan, 94 Ind. 383. 

For citations of many cases on 



196 PREREQUISITES TO ADJUDICATION 

It is equally well settled, that a creditor within the statute 
of frauds (Code of 1876, §2124), as to whom a voluntary 
conveyance is void, is not necessarily one having a demand for 
money which is due, or running to maturity, or one having an 
existing cause of action. Whoever has, or may have a claim or 
demand upon a contract in existence at the time the voluntary 
conveyance is executed, is a creditor within the meaning of the 
statute. Foote v. Cobb, supra. A contingent claim, is as fully 
protected, as a claim that is certain and absolute. The cove- 
nantee of a covenant of general warranty, who is evicted by a 
title paramount and outstanding at the time the covenant is 
entered into, is regarded as a creditor, not from the time of evic- 
tion, but from the time the covenant was executed ; and a sub- 
sequent voluntary conveyance, is, as to him, void. Gunnard v. 
Eslava, swpra.^^ 

In the application of the principle that voluntary conveyances 
are, as matter of law, conclusively presumed fraudulent and 
void as to existing creditors, the definition of a voluntary con- 
veyance must be steadily kept in view. It is a conveyance 
founded merely and exclusively on a good, as distinguished 
from a valuable consideration, on motives of generosity and 
affection, rather than on a benefit received by the donor, or 
detriment, trouble, or prejudice to the donee. If the donor 
/receives a benefit, or the donee suffers detriment, as the con- 
Isideration of the conveyance, the consideration is valuable, not 
good merely. However inadequate such consideration may be 
— however trivial the benefit to the one, or the damage to the 
other, the conveyance is not voluntary. The inadequacy, is a 
circumstance which with other facts, may impart an actual 
intent to hinder, delay and defraud the creditors of the grantor, 
but it does not change the character of the conveyance — does not 
convert it into a voluntary conveyance. Bump on Fraud. Con. 
262. The intent of the party making it, determines its validity 
or invalidity, whatever may be its form, or the consideration 
it recites. If he intends to give, and the donee accepts with 
knowledge of the intention, the conveyance is voluntary. If he 
intends to sell, and there is a valuable consideration, the con- 
veyance is not voluntary. The true inquiry therefore is, was 
the transaction in which the conveyance originates, a gift, or 

above propositions see Bigelow, Fr. 16 — Cf. Evans v. Lewis, 30 Oh. 

Conv. (Knowlton's ed.) 206, et seq. St. 11. 



FRAUDULENT CONVEYANCES 197 

a sale. Van Wyek v. Seward, 18 Wend. 386. In this case, a 
conveyance was made by a father of real estate to his son, requir- 
ing the latter to pay his sisters such an amount as the father 
should decree their portion of his estate. Though the son by 
accepting the conveyance, became liable to pay the daughters 
the amount the father should declare, the conveyance was held 
voluntary. The manifest intent of the donor was to dispose of 
the lands to and among his children from motives of affection. 

After a careful examination of the conveyance made by Free- 
man, in January, 1859, to Remson, its^terins, limitations, and 
conditions, and a consideration of the cotemporaneous agreement 
to which it refers, so far as the contents of that agreement are 
shown by the evidence, — of the relation of the parties, the cir- 
cumstances surrounding them, when the conveyance was exe- 
cuted, and their subsequent conduct in reference to it, we cft p jf^ 
discover no substantial ground on which the conveyance can be ^/f'*' 
regarded as a sale, and not as a gift — as founded on a valuable 
consideration, and not merely and exclusively on generosity and 
affection. The element of value, which it is supposed entered 
into the consideration, freeing the conveyance from the char- 
acter of voluntary, is that it was made in pursuance of a promise 
by the donor to give the lands to Remson, if the latter would 
move from his residence in the county of Talladega, and reside 
on the lands, cultivating them under the cotemporaneous agree- 
ment to which reference has already been made. 

It is often a matter of great difficulty, to discern the line 
which separates promises creating legal obligations, from mere 
gratuitous agreements. Each case depends so much on its own 
peculiar facts and circumstances, that it affords but little aid 
in determining other cases of differing facts. The promise, or 
agreement, the relation of the parties, the circumstances sur- 
rounding them, and their intent, as it may be deduced from 
these, must determine the inquiry. If the purpose is to confer 
on the promisee, a benefit from affection and generosity the 
agreement is gratuitous. If the purpose is to obtain a quid 'pro 
quo — if there is something to be received, in exchange for which 
the promise is given, the promise is not gratuitous, but of legal 
obligation. Erwin v. Erwin, 25 Ala. 241. In Kirksey v. Kirk- 
sey, 8 Ala. 131, a brother-in-law, wrote to the widow of his 
brother, living sixty miles distant, that if she would come and 
see him, he would let her have a place to raise her family. 
Shortly after, she broke up and removed to the residence of her 



198 PREREQUISITES TO ADJUDICATION 

brother-in-law, who for two years furnished her with a com- 
fortable residence, and then required her to give it up. The 
promise was held gratuitous, though the sister-in-law in conse- 
quence of it had sustained the loss and inconvenience of break- 
ing up and moving to the residence of the promisor. In For- 
ward V. Armstead, 12 Ala. 124, a father residing in this state, 
promised a son residing in North Carolina, to give him a par- 
ticular plantation in this state, and slaves, if he would remove 
to and settle upon it. The son was induced by the promise to 
break up his residence in North Carolina at a loss, and was 
put to expense and inconvenience in removing to this state. The 
promise was declared gratuitous, and that the father could 
not be compelled to perform it specifically. The inconvenience 
and loss the son sustained, was insisted on as furnishing a valu- 
able consideration for the promise. But the court said: "It 
seems to us, that the expense incurred in a removal under such 
inducements, does not furnish the test whether the engagement 
is to be considered a contract, instead of a gratuity, because 
expense, or at least trouble, which is equivalent to it, must 
always be incurred ; but as we have before indicated, the test 
is, whether the thing is to be paid in consideration of the 
removal, instead of being given from motives of benevolence, 
kindness, or natural affection." 

The conveyance refers to the cotemporaneous agreement be- 
tween the donor and the adult, active donpe who was free from 
disability. It is shown that agreement was in writing, and has 
been lost. Its terms according to the evidence of the donor, 
and one of the donees, who are the only witnesses speaking of 
them, were, that Remson should remain on the lands conveyed, 
and superintend their cultivation, and that of two other planta- 
tions, the property of the donor. The fact is not distinctly 
stated, but it is of necessary inference from the facts stated that 
each of these three plantations were supplied with hands and 
every other necessary appliance for cultivation, the property 
of the donor. To their cultivation, Remson was to contribute no 
more than his personal services in superintending them. From 
all three plantations he was to receive one-fifth of the products 
of cultivation — receiving no more from the cultivation of the 
lands conveyed, than from the plantations not conveyed. If 
compensation was intended to be paid him for removing from 
his home in Talladega to the lands conveyed — for loss and in- 
convenience sustained in the removal — for personal services 



FRAUDULENT CONVEYANCES 199 

rendered, or to be rendered, it was to be derived from the 
share of the products of the cultivation of the several planta- 
tions, to which the agreement entitled him. We can not regard 
these as forming part of the consideration of the conveyance of 
the lands. 

When the conveyance was executed, Remson was involved in 
debt, and the donor was of ample fortune. A relationship existed 
between them, the donor not having probably nearer relatives 
than Remson and his family, and none so far as is shown, whose 
condition appealed more strongly to his sympathy. The con- 
veyance does not vest the right to immediate absolute posses- 
sion until the death of the donor. At his death it confers on 
Remson a life estate only, with remainder to his wife if she 
survives him, and all their children except two, for whom other 
provision has been made. The wife of the donor joins in the 
conveyance for the purpose of releasing her contingent right 
of dower, and the release is expressed to be in consideration of 
good will and affection borne to said David H. Remson and 
family. The whole scheme of the conveyance is testamentary. 
We do not mean to say that it is a will, though it may closely 
approach it — but it is a disposition by deed from motives of 
affection, to take effect after the death of the donor. It has^H, 
the elements, qualities, limitations and. terms to be found in. a 
voluntary conveyance executed by parties sustaining the rela- 
tions of the parties to it, surrounded by the circumstances sur- 
rounding them, and but few, if any, of the elements of a sale 
between parties contracting on a valuable consideration. We 
repeat we cannot doubt it was founded on no other considera- 
tion than love and affection — that the parties never thought of 
buying and selling — and that the stress of subsequent and unan- 
ticipated events, has induced them to suppose that there was 
some other consideration for it than affection and benevolence. 
Without closing our eyes to the truth of the transaction — to 
the motives we irresistibly feel must have actuated the donor, 
and to the intent of the parties collected from the circumstances 
surrounding them, we cannot hesitate to pronounce the con- 
veyance voluntary. It is consequently void as against the 
appellant. 

The decree of the chancellor is reversed and a decree here 
rendered granting the complainant the relief prayed for. * * * 



200 PREREQUISITES TO ADJUDICATION 

BOOTHE 



-Fr^-Z.. -^-^ .SHELLEY V 

d^oS*-'^ - ^ k^' 73 Mo. 74 




^>.¥^ (Supreme Court of Missouri. October Term, 1880) 



NORTON, J. This is an action for the recovery of the posses- 
sion of a stock of goods, on the trial of which defendant obtained 
judgment, from which the plaintiffs have appealed. The stock 
of goods in question had been seized by defendant, Boothe, as 
sheriff of Jackson county, by the levy of a writ of attachment 
sued out at the instance of J. W. Wood & Co., creditors of the 
firm of Woy & Smith, as the property of said Woy & Smith. 
Plaintiffs, after the goods were thus seized, brought this suit 
and replevied the goods so levied upon. Plaintiffs base their 
jh ^ claim to the goods on the ground that Woy & Smith, before the 

' levy of the attachment sued out by Wood & Co., had transferred 

the goods in payment of the debts of certain of their creditors, 
of whom plaintiffs were one, and that under this transfer the 
goods had been sold and bought by plaintiffs and the proceeds 
applied to the payment of the debts of Woy & Smith. The 
defendant, on the other hand, claims that said transfer was 
made by said Woy & Smith with the intent and for the purpose 
of hindering, delaying and defrauding said Wood & Co. in the 
collection of their debt against said Woy & Smith, for the col- 
lection of which they had a suit pending at the time of said 
transfer, and that plaintiffs accepted the goods with knowledge 
of these facts. The c ontes t is virtually between two creditors of 
Woy & Smith, and the evidence adduced on the trial tended to 
establish each one of the above theories, and the only question 
presented for our determination is, whether the court in giving 
instructions properly declared the law. 

The instructions given on behalf of plaintiffs recognize to the 
fullest extent the doctrine that the debtor has a.cl£ar^aJid undis- 
puted right to prefer one creditor to a nother, and apply his 
property to the payment of one set of creditors to the exclusion 
of other creditors, and when this is done in payment of hcma 
fide debts the transaction will be upheld, although in doing so 
the act of the debtor had the effect, and it was his intention, to 
defer or hinder another creditor, who at the time had a suit 
pending against him. While the instructions given on behalf 
of the plaintiffs covered their theory of the case, those given for 
defendant, especially the third, which authorized the jury to 



FRAUDULENT CONVEYANCES 201 

find for the defendant if they believed that at the time the goods 

were transferred, plaintiffs were aware of the fact that it was 

the intention of Woy & Smith, in making it, to hinder and delay 

Wood & Co. in the collection of their debt, go farther, we think, 

than the law warrants. The third instruction is as follows :\ 

'■*TF"Woy & Smith, in making the conveyance of the goods in yu^tJ^^^^ 

suit, intended to delay J. W. Wood & Co., their creditors, and 

if the plaintiff, either by himself or his agent present at the 

sale, was aware of such intent, then you will find for they 

defendant. ' ' 

There is a class of cases to which the doctrine asserted in 
the instruction applies; as, if one knowing of judgment and 
execution against another, goes and purchases his goods in order 
to defeat the execution, or if one knowing that a debtor is sell- 
ing his property to hinder, delay or avoid the payment of his 
debts, buys it, and pays the full value of it, thereby enabling 
the debtor to carry out his fraudulent design, such sales will 
be adjudged fraudulent because the purchaser becomes a par- rr _JLJ2j 
ticipant in the iniquitous purpose of the debtor. But cases of^ Cbv^^\»»±» ^""^ 
this kind should not be confounded with those which. oiJy ^S^'i^j 
amount to giving a preference of one creditor over another, v ' U 
A debtor may give a preference to a particular creditor or set 
of creditors by a direct payment or assignment, if he does so 
in payment of his or their just demands, and not as a mere 
screen to secure the property to himself. The pendency of 
anbth er credito r's suit is immaterial, and the transaction is 
valid" though done to defeat that creditor's claim. Kuykendall 
v. McDonald, 15 Mo. 416 ; Murray v. Cason, 15 Mo. 415 ; State 
V. Benoist, 37 Mo. 500 ; Bump on Fraud. Con. 350, 351 ; Potter 
V. McDowell, 31 Mo. 74. The right of a debtor to prefer one 
creditor over another necessarily implies the right of such 
creditor to accept such preference. While the effect of sucn\ 
preference must, to the extent that it is made, necessarily be to I 
defer or to hinder or delay other creditors, the mere knowledge j 
of the preferred creditor that such will be its effect, and the \ 
debtor intended it should have that effect, will not be sufficient / 
to avoid the transaction as to a creditor not preferred. But if 
in such case it further appears from the circumstances attend- j 
ing the transaction that the preferred creditor was not acting | 
from an honest purpose to secure the payment of his own debt, I 
but from a desire to aid the debtor in defeating other creditors, 
or in covering up his property, or in giving him a secret' 



(Vvvr«;><?t^-^^ 



202 PREREQUISITES TO ADJUDICATION 

interest therein, or in locking it up in any way for the debtor's 
own use and benefit, he will not be protected, and the sale 
would be fraudulent as to other creditors, because in such cases 
the fraud of the debtor becomes the fraud of the preferred 
creditor because of his participancy therein. Judgment reversed 
and cause remanded, in which all concur.^'' 

/>{i ' ^ B]|NSON V. BENSON 

657 



^ ^^^r^^ ^ ^^^^"^^^253, 16 Atl 
lA^iK •' V, - Crionrt of Annpals of Marvland. 



k ^'-\Z^ 



(Court of Appeals of Maryland. February 8, 1889) 

4-t><>*-^gT0NE, J. Joseph M. Brian became security on the guar- 
dian bond of Thales A. Linthicum, who was the guairdiarL_of 
- the complainant, !^izabeth H. Benson, about the year 1868. 
The said Joseph M. Brian died in 1878, and the guardian, 
Linthicum, in 1880. The same year in which he died Brian 
conveyed all his property to his two children, a son and a 
daughter. Linthicum, the guardian, died insolvent, and, before 
any final settlement of his guardian accounts, and after his 
Wath, it was discovered that he was largely indebted to his 
jward. It also turned out that the other two securities on the 
guardian bond were totally insolvent, and Mrs. Benson then filed 
the bill in this case to set aside the deeds made by Brian to his 
children as fraudulent and void against her; and whether these 
deeds are fraudulent and void as against her is the first and 
most important point in the case. 

These deeds were executed by Brian a short time — a few 

months — before his death. The consideration set forth in the 

deed to his daughter professed to be love and affection. The 

consideration set forth in the deed to his son was the sum of 

/ $17,000 ; but the son proves that he did not pay his father a 

I dollar in money, but claims to have paid, subsequently, debts 

\ due by his father to ahout thaTamount. The deed executed by 

17— See Dumas v. Clayton, 32 In re Banks, 207 Fed. 662, the 

App. Cas. D. C. 566; Jackson v. Court held that a payment of one 

Citizens Bank & Trust Co., 53 Fla. dollar to a creditor whose claim 

265, 44 So. 516; Cron v. Cron, 56 was barred by the statute of lim- 

Mich. 8, 22 N. W. 94; Crawford v. itations did not amount to a fraud- 

Neal, 144 U. S. 585; Griswold v. ulent conveyance, though the pay- 

Szwanek, 82 Neb. 761, 118 N. W. inent was made just before going 

1073, 21 L. E. A. (N. S.) 222. See into bankruptcy, 
also in^ra. Preferences, pp. 247-366. 






FRAUDULENT CONVEYANCES 203 

Brian to his daughter was for real estate only, and was executed 
on the 3d of September, 1878. The deed to his son was exe- 
cuted on the following day, and embraced all the property, both 
real and personal, of the said Joseph M. Brian, except what he 
had before given to his daughter. 

There is no evidence in the record of the value of the prop- 
erty given to his daughter, but there is evidence of the value of 
the real estate given to the son, and it seems to have been worth 
about $40,000, or perhaps a little more. There was, a consider- 
able amount of personal property which passed to the son under 
the deed to him, which, if we understood his evidence correctly, 
was intended as compensation to the son for services rendered 
the father. Simultaneous with the execution of these deeds, the 
father, Joseph M. Brian, entered into a written agreement with 
his children by which each agreed to pay him, if he demanded 
it, $500 a year. If he demanded any money from one, he 
promised to demand an equal amount from the other, so that 
he might not be a greater burden on one than the other; and 
all arrears of his annuity were to be considered as paid and ' 
settled at the time of his death, so that his personal representa-, 
tive, if any, could make no claim for such arrears. 

The recital of these facts shows conclusively the character of 
this whole transaction. A man advanced in life and of con- 
siderable wealth about two months before his death conveys all 
his property to his children. His son is to pay his debts, and his 
share was probably for that reason greater by the amount of 
such debts than his daughter 's. The deed to his daughterjwas • /, 
confessedly a purely voluntary conveyance, and the deed to the ^"^-^-^^ 
son, upon the proof, is also a voluntary convej'^ance. The son 
did not pay a dollar for the property. All he professes to have 
done was to pay some debts of the father, not amounting at 
most to half the value of the real estate alone that he got. It 
needs no authority for so plain a proposition that the son was 
not, under these circumstances, a purchaser for a valuable con- 
sideration, and to be treated as such. The deeds, the agree- 
ment, and the proof show that Mr. Brian's object was to divide 
his property between his children in his life-time, retaining only 
an annuity sufficient for his wants for his life. 

There is nothing Jn this record to show that Mr. Brian con- j e^^^ 
templated any fraud whatever. He may not, and probably did . 

not, apprehend any loss oiTaccount of his being on this guardian 1r*^^ 
bond; but, whether he did or did not. these deeds cannot avail / 



204 PREREQUISITES TO ADJUDICATION 

against the claim of these complainants, and must be declared, 
yo^A as against them, fraudulent and void. To hold otherwise would 
be to declare that an obligor on a bond might always relieve him- 
self when loss was apprehended by giving his property to his 
wife or child. * * * 

"We are therefore of opinion that the proceeds of the sale were 
properly in the hands of the guardian, and that his security 
is liable therefor. While, as we have said, the deeds, the sub- 
ject of controversy here, are void against the claims of the com- 
plaining creditors, and the property must be sold if necessary to 
v.^ ( pay them, yet it is proper to state that Joseph M. Brian, Jr., 
. ^ I is entitled out of the proceeds of the property that he received 
'^A, ( from his father, if such sale should be made, to be allowed a 
credit for all the debts due bona fide from his father, and which 
he can show that he paid after he received a deed for the prop- 
erty. The decree must be reversed, and the case remanded, that 






a decree may be entered in conformity with this opinion.^* 

' .i^^^^^^jp^^^'^^ALBWm V. SHORT 

S^" \JiI-''^ ? 125 N. Y. 553, 26 N. E. 928 

5-^*^ A^' (Court of Appeals of New York. February 24, 1891) 

r^ t^/ FINCH, J. The findings of fact in this case establish that 
tu f^ i,. the conveyance of the house and lot to Mrs. Short by Mrs. Sperry 
*4>v<>^ '^ was made and accepted with an intent on the_part of both 
J^.p*j^ grantee and grantor to hinder , delay, and defraud the creditors 
. of the latter. The conveyance was not voluntary, for it was 
-n/vfi made in part in consideration of a debt of about $8,000 which 
..^■"'^ the findings show was an honest debt, and justly due to the 
grantee from the grantor. The conclusion of a fraudulent 
intent on the part of Mrs. Short was therefore essential to a 
recovery, and was established by proof that the balance of the 
consideration for the transfer was made up of a false and pre- 
tended debt for board and washing, which was wholly fictitious, 
and never in fact existed, and which both parties to the transac- 
tion falsely concocted to make up a full and fair consideration 
for the conveyance. The existence or the falsity of that in- 
debtedness was therefore an essential and vital element in the 

18 — For references to many cases 
in accord see 20 Cyc. 421. Cf. Ex 
parte Mercer, 12 Q. B. D. 290. 



FRAUDULENT CONVEYANCES 205 

controversy; and the appellants claim that, in the effort to 
show it to have been a fabrication, evidence was admitted against 
Mrs. Short of declarations made by Mrs. Sperry, at a period 
preceding the conveyance, which bore directly upon the validity 
of the disputed debt, and were inadmissible as against Mrs. 
Short. Mrs. Parker, a witness for the plaintiff, was permitted 
to testify that, just prior to the assignment, she had a conversa- 
tion with Mrs. Sperry, in the absence of Mrs. Short, in the course 
of which Mrs. Sperry said : "I think I shall sell this house. It 
costs so much to keep it up just for Mary's and ray board." 
The defendants had asserted that such board was an honest debt 
due to Mrs. Short from her mother; and the plaintiff, that it 
was paid and extinguished as it accrued by the rent of the house, 
and that by agreement the board was to be furnished in exchange 
for the rent which would otherwise have been due from Mrs. 
Short on account of her occupation. The declaration sworn to 
by Mrs. Parker tended to show the truth of plaintiff's conten- 
tion, but was made in the absence of Mrs. Short, constituted no 
part of the res gestcB, and was inadmissible as against the 
grantee, in whose behalf the objection was made. But it is a 
conclusive answer to this allegation of error that Mrs. Short 
herself, when examined as a witness, admitted all and more 
than what the objectionable evidence tended to prove. She 
acknowledged that during her occupation of the house her mother 
paid all the taxes and insurance, and almost all the charges for 
repairs; and further testified: "I don't remember saying to 
Mrs. Sherwood that I boarded my mother and Mary for the 
rent of the house; did their washing; that, while I thought a 
great deal of my sister, I thought it was hard I should pay the 
rent, and that my sister should receive it. I would not say I 
didn't. I don't remember. I don't know when I said it. That 
was the arrangement under which I was in the house." She 
said again, at a later period of her examination : "I had loaned 
my mother this money. I boarded her and my sister, and 
did their washing, for this house, — for the rent of the house. 
* * * I was not to pay any rent, only in that way, — only 
to board them in that way, and do their washing. That was to 
pay my rent. And that arrangement continued down to the 
time I received my deed." Of course, these admissions made 
the declarations to Mrs. Parker wholly superfluous and imma- 
terial. Mrs. Parker was also permitted to narrate other declara- 
tions of Mrs. Sperry, made prior to the conveyance, under 



206 PREREQUISITES TO ADJUDICATION 

objection. These were, in substance, that it was preposterous 
to suggest that she should make presents to her daughters be- 
cause they took care of her when she was sick; that they only 
did their duty. In answer to the objection interposed in behalf 
of Mrs. Short, the court held the declarations not competent, 
but, to accommodate the witness, allowed them to be detailed, 
conditioned upon their being stricken out if not made compe- 
tent. In the further progress of the trial, both Mrs. Short and 
Mrs. Sperry testified to the transfer to the former by the latter 
of some "ranch stock" a few months before the assignment, and 
added that it was done as remuneration for the services ren- 
dered during Mrs. Sperry 's sickness. The declarations sworn 
to by the witness tended to show that the mother did not regard 
the services of her daughters during her illness as constituting 
a debt which she was in any manner bound to repay ; and that 
is the sole element of value in the proof. But exactly that, Mrs. 
Short herself finally admitted. She said expressly that for her 
services in the illness referred to she neither asked nor expected 
any pay ; that the transfer of the ranch stock was a present ; that 
it was given to her, and so constituted a gift, rather than a pur- 
chase. If it be still suggested that the declaration proved 
showed an existing unwillingness to make her a present, the fact 
was both immaterial and harmless; for the admitted delay of 
at least eight years shows the same thing much more forcibly, 
and leaves no doubt about the su^ested lack of inclination. 

But another class of evidence was received under objection. 
The plaintiff proved several instances of transfers of property 
by Mrs. Sperry to persons other than Mrs. Short prior to the 
conveyance to the latter; and it was objected in her behalf that 
she could not be affected by transactions to which she was not 
a party, and of which she had no knowledge. But the plaintiff 
was bound to prove the fraudulent intent of Mrs. Sperry, both 
as against herself and as against Mrs. Short, and as against the 
latter by evidence competent as against her. The acts and trans- 
fers of Mrs. Sperry pertinent to the question of her intent 
were admissible against both to establish that intent, and are 
not to be excluded because they do not also bear upon the intent 
of Mrs. Short. It is not necessary that the same fact offered 
tin evidence should tend to establish both intents. If it proved 
^Mrs. Sperry 's alone, but was a kind of evidence competent 
against Mrs. Short, no error would follow its admission. It 



FRAUDULENT CONVEYANCES 207 

would tend to prove one branch of the issue, leaving the other 
to be met in some different way. 

There are some other objections to evidence, but of so little im- 
portance as not to justify discussion. They related principally 
to the declarations of Mrs. Sperry on the day of the assignment 
and conveyance, and pending the preparation of those instru- 
ments, and were either within the res gestae, or wholly imma- 
terial, in view of the ultimate course of the trial. 

The contention that the conveyance to Mrs. Short may be 
sustained to the extent of the adequate and honest part of the 
consideration is fully answered by the authorities which hold 
that, where the deed is fraudulent against creditors, it is wholly 
void, and cannot stand to any extent as security or indemnity. 
Boyd V. Dunlap, 1 Johns. Ch. 478 ; Dewey v. Moyer, 72 N. Y. 
70; Billings v. Russell, 101 N. Y. 226, 4 N. E. Rep. 531. A 
different rule would put a premium upon fraud. Almost in- 
variably, some honest consideration is made the agency for 
floating a scheme of fraud against creditors; and, if that may 
always be saved, nothing is lost by the effort, and the tempta- 
tion to venture it is increased. We are thus unable to find in 
the record any error which will justify a reversal. Indeed, 
since the ground of recovery against the defendants rests almost 
wholly upon the single fact of a false and fraudulent considera-' 
tion fabricated by the joint act of both grantor and grantee, and 
distinctly admitted by each to have been without an honest 
foundation, the questions of evidence raised can hardly be said 
to have affected the ultimate result. The judgment should be 
affirmed, with costs. All concur, except Ruger, C. J., and 
Xndrews, J,, not voting.^^ 

19 — For many cases in accord, see terference by allowing the deed of 
20 Cyc. 638. the real estate to stand as a security 
~^*i do not discover, from a view only for such consideration as has 
of the pleadings and proofs, such been shown by the younger Dunlap. 
traces of actual and direct fraud There appears to be very consider- 
as to feel myself warranted in di- able inadequacy of price, even ad- 
recting the conveyance of the real mitting the consideration expressed 
estate to be delivered up and can- in the deed; and to allow the deed 
celled as absolutely null and void. to stand as security only for the 
* * * The only question with true sum due would be doing justice j c^ V 
me has been whether the plaintiffs to the parties, and granting a relief/ . "^V 
ought to be left to their legal rem- which cannot be afforded at law.' ^ 
edy, or whether the case affords A court of law can hold no middle 
sufficient ground for a limited in- course. The entire claim of each 






Tt^t-^u^ 



208 PREREQUISITES TO ADJUDICATION 

^'"^^ "^'^^Ji^^ M WILSON V. WALRATH 

i^^-*^^"*^.^^ JU-t .^103 Minn. 412. 115 N. W. 203 



^^^^^J^< • ^ 103 Minn. 412, 115 N. W. 

"■v^ T( Supreme Court of Minnesota. February 21, 1908) 



v/**-'^ 



ELLIOTT, J. This was an action in replevin, in which the 
plaintiff sought to recover possession of an automobile. The 
case was tried by the court without a jury, and findings of fact 
and conclusions of law were made in favor of the defendant. 
From the judgment entered thereon the plaintiff appealed to this 
court. 

The principal facts are undisputed. The ultimate conclusion 
only is questioned. If the findings of facts are sustained by 
the evidence, the conclusions of law were properly drawn. 
One Spargo sold the automobile in question to the appellant, 
Wilson, who paid full consideration therefor, but agreed to allow 
Spargo to retain possession of the property for certain purposes 
and under certain conditions for a specified time. While in 
possession, Spargo mortgaged the machine to Walrath, who 
had no knowledge of the sale to Wilson. The court found as 
a fact that the evidence does not prove that the sale to Wilson 
"was made in good faith and without intent to injure, delay, 
or defraud creditors and subsequent purchasers in good faith 
of said Spargo." If the evidence sustains this finding of fact, 
the respondent must prevail in this court. 

party must rest and be determined decisive and dubious aspect that 
at law on the single point of the they cannot either be entirely sup- 
validity of the deed; but it is an pressed or entirely supported with 
ordinary case, in this court, that a satisfaction and safety." Chancel- 
deed, though not absolutely void, lor Kent, in Boyd v. Dunlap, 1 
yet, if obtained under unequitable Johns. Ch, 478; Clark v. Sherman, 
circumstances, should stand only as 128 Iowa, 353, 103 N. W. 982; 
a security for the sum really due. Griswold v. Szwanek, 82 Neb. 761, 

• * * A deed fraudulent in fact 118 N. W. 1073, 21 L. R. A. (N. S.) 
is absolutely void, and it is not per- 222; Horton v. Bamford, 79 N. J. 
mitted to stand as a security, for Eq. 356, 81 Atl. 761; McGovern v. 
any purpose of reimbursement or Motor Co., 141 Wis. 309, 124 N. W. 
indemnity; but it is otherwise with 269; Pringle v. Olshinetsky, 17 Ont. 
a deed obtained under suspicious or L. R. 38, 11 Ont. W. E. 871. 
unequitable circumstances, or which See Dickinson v. Way, 3 Rich, 
is only constructively fraudulent. Eq. 412 ; Johnston v. Bank, 3 Strobh. 

* * * Nothing can be more Eq. 263; Robinson v. Stewart, 10 
equitable than this mode of dealing N. Y. 189. 

with these conveyances of such in- 



FRAUDULENT CONVEYANCES 209 

1. There is a line of cases which holds that, while delivery 
is not essential to pass title as between the vendor and vendee 
of personal property, it is necessary for such purpose as against 
every one but the vendor. Under this rule, when the same goods 
are sold to different persons by conveyances equally valid, he 
who first lawfully acquires the possession will hold them as 
against the other. The motives and intentions of the parties 
are immaterial, as the doctrine rests upon the general principle 
that, where one of two innocent persons must suffer, the loss 
should fall on him whose acts or omissions have made or con- 
tributed to make the loss possible. Lanfear v. Sumner, 17 Mass. 
110, 9 Am. Dec. 119; Crawford v. ForristaU, 58 N. H. 114; 
Burnell v. Robertson, 10 111. 282 ; Stephens v. Gifford, 137 Pa. 
219, 20 Atl. 542, 21 Am. St. Rep. 868; Norton v. Doolittle, 32 
Conn. 405. For other cases see 2 Mechem on Sales, § 981. 
Closely connected with this doctrine, but resting on other prin-l 
ciples, is the rule which makes the retention of possession byj 
the vendor conclusive evidence of fraud. This doctrine also 
rests upon grounds of assumed public policy. It prevails by 
virtue of statutes or decisions based on the common law in a 
number of states. 2 Mechem on Sales, § 984 ; 20 Cyc. 539, note 
13.20 Iq the greater number of states, however, the rule is estab- 
lished that the mere retention of possession by the vendor is 
presumptive evidence only of a fraudulent and colorable sale, 
and the vendee is permitted to overthrow this presumption by 
evidence which establishes his good faith and want of knowledge 
of any fraudulent intent on the part of the vendor. 20 Cyc. 

20 — See the extensive note in 24 that all absolute sales of chattel 

L. E. A. (N. S.) 1127-1154, where property, where possession is per- 

the cases and statutes are collected. mitted to remain with the vendor, 

The matter of whether the reten- are fraudulent per se, and void as 

tion of possession is consistent with to creditors and purchasers, unless 

the deed or not has been deemed in the retention of possession by the 

some cases to have been of impor- vendor is consistent with the provi- 

tance. Hopkins v. Scott, 20 Ala, sions of the deed of transfer or 

179; Hempstead v. Johnston, 18 bill of sale. In all such cases the 

Ark. 123; Clayton v. Brown, 17 Ga. vendor's possession is not merely 

217; Bass V. Pease, 79 111. App, evidence of fraud, but, by legal in- 

308; Edwards v. Harben, 2 T. E. ference, is fraud in itself, and can 

587; Martindale v. Booth, 3 B. & A. not be rebutted although the parties 

498. In Bass v. Pease, supra, the may have acted in the best of 

Court said: "Ever since the case faith." But see Clow v. Woods, 5 

of Thornton v. Davenport, 1 Scam. S. & E. 275; also Bigelow on Ft. 

296, the rule has been, in Illinois, Conv. (Knowlton's ed.) 404, et seq. 
H. & A. Bankruptcy — 14 



210 PREREQUISITES TO ADJUDICATION 

536 et seq. The statutes are referred to in the notes to 2 
Mechem on Sales, §§ 960, 961. 

2. In the thirteenth year of Elizabeth there was enacted the 
famous statute which made all conveyances not made bona fide 
and for value, with intent to injure and delay or defraud the 
creditors, void as to such creditors. St. 13 Eliz. c. 5. A later 
statute extended this protection to subsequent purchasers as 
well as creditors. St. 27 Eliz. c. 4. These statutes did not in 
terras apply to personal property, but from the time of Sir 
Edward Coke's decision in Twyne's Case, 3 Co. Rep. 80b, 5 Eng. 
Rul, Cas. 2, sales of personal property made with intent to delay 
and defraud creditors or subsequent purchasers have been re- 
garded as within the provisions of the statutes. The question 
soon arose whether, under these statutes, possession by the vendor 
was fraudulent per se, and therefore conclusive, or merely pre- 
sumptively fraudulent. In Twyne's Case, in speaking of the 
indicia of fraud, it was said that ''continuance of the posses- 
sion in the donor is the sign of trust for himself. ' ' In Edwards 
V. Harben, 2 T. R. 587, it was held that, "if there be nothing 
but the absolute conveyance without the possession, that in 
point of law is fraudulent. ' ' For some time thereafter this was 
the established rule in the English courts, but it was finally held 
that the proper construction of the statute made such a con- 
veyance presumptively fraudulent only. Hale v. Metropolitan 
Co., 28 L. J. Ch. 777; Gregg v. Holland, [1902] 2 Ch. 360. 
To clear up the difficulty which arose under the statute. Parlia- 
ment enacted the various bills of sale acts, which are fully 
discussed and explained by Lord Blackburn in Cookson v. 
Swire, 9 A. C. 653-670 (1884). See, also, references to these 
acts and decisions thereunder in notes to the fifth English edi- 
tion of Benjamin on Sales, p. 496, and appendix, p. 1029, and 
in the note to Twyne's Case in 5 Eng. Rul. Cas. 27-39. See, 
also, Mr, Bennett's note to the sixth American edition of Benja- 
min on Sales, pp. 458-462, and Jones on Chattel Mortgages, 
§ 320 et seq. In the United States Edwards v. Harben was 
followed by Chancellor Kient in Sturtevant v. Ballard, 9 Johns. 
(N. Y.) 337, 6 Am. Dec. 281, and by the Supreme Court of the 
United States in Hamilton v. Russell, 1 Cranch (U. S.) 309, 
2 L, ed, 118. But in Warner v. Norton, 20 How. (U. S.) 448, 
15 L. ed. 950, Mr. Justice McLean stated that "for many years 
past the tendency has been in England and the United States 
to consider the question of fraud as a fact for the jury under 



dee the burden of rebutting the statutory presumption of fraud- '"^ 
ulent intent hy proving his own good faith and want of knowl- 



FRAUDULENT CONVEYANCES 211 

the instruction of the court." This is now the established doc- 
trine of the court. Jewell v. Knight, 123 U. S. 426, 8 Sup. Ct. 
193, 31 L. ed. 190; Smith v. Craft, 123 U. S. 436, 8 Sup. Ct. 
196, 31 L. ed. 267. See note 18 L. R. A. 604.2 1 

§ 3496, Rev. Laws 1905, and the previous statutes which are 
embodied therein, were enacted for the purpose of removing 
any doubts as to whether the retention of possession by the ven- 
dor is conclusive or only presumptive evidence of fraud. It/ 
provides in express terms that such possession shall be presumedf 
to be fraudulent and void as against subsequent purchasers in', 
good faith, unless those claiming under such sale make it ap- 
pear that the sale was made in good faith and without any intent 
to defraud such purchasers. The effect is to east upon the ven- 

edge of fraudulent intent on the part of the vendor. Leqve v. 
Smith, 63 Minn. 24, 65 N. W. 121. The statute controls this 
case. If Wilson proved that he purchased the machine in good 
faith without knowledge of any intent on the part of Spargo 
to defraud his creditors or subsequent purchasers, he was en- 
titled to the possession of the property. It is conceded that on 
April 5, 1906, Spargo owed Wilson $250, the proceeds of an old 
machine which had been sold by Spargo for Wilson. The money 
had been retained for some time with the consent of Wilson. 
Spargo then owned a Jackson machine, which he used for dem- 
onstrating purposes. Wilson wished to purchase a new machine, 
and after various negotiations he purchased the Jackson ma- 
chine for $1,000, which was substantially its actual value. In 
payment he at the time gave Spargo $700 in cash and satisfied 
the debt for $250 and accumulated interest. Wilson was inter- 
ested in country banks, and his business called him away from 
home a great deal of the time. It was necessary that the ma- 
chine should be stored in some garage. Spargo, being agent 
for the Jackson automobile, and having no other machine of 
that mak§ on hand, wished to retain possession of this machine 
for a time and use it for demonstrating purposes. It was there- 
fore agreed and stated in the bill of sale that Spargo might 
retain possession of the machine for 30 days and in the mean- 
time use it for demonstrative purposes, in consideration of which 

21 — Federal courts, however, will applicable. Etheridge v. Sperry, 
follow the law of the state properly 13^ tJ. S. 266, 277. 



212 PREREQUISITES TO ADJUDICATION 

he was to store the machine and keep it in repair. Spargo's 
business and personal standing was good, and Wilson had no 
reason to suspect, and did not suspect, that Spargo was in- 
solvent. It appears from all the evidence that if he had made 
special investigations he would have found that Spargo's stand- 
ing was good. Spargo kept the machine in his garage after the 
expiration of the 30 days and continued to use it in his busi- 
ness. During this time he mortgaged it to the respondent, 
Walrath, who had no knowledge of the previous sale to Wilson 
\and acquired his lien in good faith for value. Neither Wil- 
^n's bill of sale nor Walrath 's mortgage was recorded. Wal- 
<Tath finally took possession of the machine, and in this action 
Wilson sought to recover possession from him. 

A careful examination of the evidence compels the conclusion 
that Wilson was entitled to a finding of fact to the effect that 
he purchased the automobile in good faith and without any 
intent to hinder, delay, or defraud Spargo's creditors, or sub- 
sequent purchasers from Spargo. Wilson certainly acted in 
good faith in the matter, if such a thing is possible when the 
vendor is allowed to retain possession of the chattel. He paid 
full value for the property, and this in itself is persuasive evi- 
dence of his good faith. The respondent says that the appel- 
lant was not prejudiced by reason of his absence from the trial, 
"because no One disputed his good faith in buying the automo- 
bile." It is not contended that there was any actual bad faith 
on the part of Wilson. In his brief the respondent thus states 
his position. The sale was not accompanied with immediate 
delivery and followed by an open and continuous change of 
possession, within the meaning of § 3496, Rev. Laws 1905 ; and 
hence, "while in this case it may be true that on April 25, 1906, 
appellant in the utmost good faith purchased the automobile, but 
from that time on the action of the appellant in permitting and 
agreeing to allow Mr. Spargo, the vendor, to keep and use that 
machine in exactly the same manner after the sale as before, was 
a fraud per se upon any person who might either purchase or 
take the same as security without notice of the rights of a prior 
purchaser. ' ' This is the doctrine of Lanf ear v. Sumner, 17 Mass. 
110, 9 Am. Dec. 119, and the other cases of the group to which 
reference has been made. As an abstract principle of law, that 
doctrinift is sound and controlling when applied to appropriate 
facts and conditions. But the effect which shall be given to pos- 
session under the particular circumstances disclosed in this rec- 



FRAUDULENT CONVEYANCES 213 

ord is declared by the statute, and the statute should not be dis- 
regarded and annulled by the application of the doctrine of 
equitable estoppel. Upon the evidence Wilson sustained the 
burden which the statute imposes upon him, and the finding of 
the trial court was thus erroneous. 

We are inclined to believe that the court was misled by cer- 
tain statements made in the case of Flanigan v. Pomeroy, 85 
Minn. 264, 88 N. W. 761, which approve the doctrine of Lan- 
fear v. Sumner. In that case it appeared that Hogan was the 
owner of a horse which he desired to sell. Flanigan agreed to 
pay $350 for the horse, and paid $10 on account, ,with the un- 
derstanding that he should pay the balance before 11 o'clock the 
next day and then get the horse. Before the time had elapsed 
Boynton offered to purchase the horse from Hogan, and was 
informed that another party had an option which expired at 
11 o'clock. Flanigan failed to appear within the time limit, 
and Hogan sold the horse to Boynton, who paid the purchase 
price in full and took possession of the property, Flanigan, 
claiming that the title of the horse passed to him at the time 
of the payment of the $10, brought an action in replevin and 
was defeated. The trial court did not make a finding that 
Flanigan was a purchaser in good faith, and, as this was neces- 
sary to his right to recover, the order was properly affirmed on 
that ground. As an additional reason why Boynton was en- 
titled to retain possession of the horse, the court referred with 
approval to the doctrine of Lanfear v. Sumner, and cited cer- 
tain cases in which that doctrine has been approved. The case 
was properly decided upon the first ground stated, and the ad- 
ditional reason given in the opinion must be regarded as no 
longer meeting with the approval of this court. 

The judgment is therefore reversed, and a new trial granted. 

FORD LUMBER & MFG. CO. v. CURD ^ ^Va. 

150 Ky. 738, 150 S. W. 991 ^'^'C'^^ <:<^ 

(Court of Appeals of Kentucky. November 26, 1912) / 

CARROLL, J. This suit was brought by the appellant com- 
pany to subject to the payment of a debt it had against the 
appellee John P. Curd a house and lot conveyed to the appellee 
Anna Curd, his wife, upon the ground that the conveyance was 
fraudulent and made for the purpose of defeating the collection 



214 PREREQUISITES TO ADJUDICATION 

of its debt. The lower court dismissed the suit, and to reverse 
that judgment this appeal is prosecuted. 

The debt sued on by the appellant was created by John P. 
Curd some time prior to February 10, 1908, on which date he 
executed to the company his note for the amount due. In 
August, 1908, the property sought to be subjected was conveyed 
to Anna Curd ; the consideration being $1,150. Of this amount, 
$100, perhaps something over, was paid on the consideration of 
the vendor, and a few days after the conveyance was made the 
Home & Savings Fund Company advanced to the Curds about 
$1,000, to satisfy the remainder due on the purchase price and 
took a mortgage on the property. At the time, or perhaps before, 
this transaction occurred, John P. Curd had become a member 
of this Home & Savings Fund Company, the dues in which were 
$2.30 a week, and the purpose of obtaining the money from the 
Home & Savings Fund Company was to enable the Curds to 
pay off the mortgage debt in weekly installments. The evi- 
dence shows that the first payment, of about $100, made to the 
vendor, was paid out of money tliat Mrs. Curd had received 
from the estate of her parents; but the weekly payments of 
$2.30 to the Home & Savings Fund Company were paid by Mrs. 
Curd out of money given to her by her husband. The evidence 
further shows that Curd earned, from August, 1908, to August, 
1911, when the suit was brought, about $20 a week, and that he 
gave the money so earned to his wife, who, with this money, in 
addition to $4 a week received from a boarder, paid all the 
expenses of the house and family, which consisted of herself 
and husband and two children, and was able to save out of it a 
few dollars each week. It is also shown that she was an in- 
dustrious, thrifty, economical woman, and that she did the cook- 
ing for the family and all the household work, except occa- 
sionally when she had a young girl to help her. 
f On these facts it is the contention of counsel for appellant 
that as the weekly payments made on the house were, in fact, 
made by Curd out of money earned by him, the property should 
be subjected to the debt sued on; while counsel for appellee 
insist that Curd had the legal right to give to his wife, for the 
; support of his family, the wages he received, and if she saved 
I enough out of this to pay the weekly dues to the Home & Savings 
^ Fund Company, thus reducing the debt against the house, no 
'fraud was practiced on the appellant, and it cannot subject the 



FRAUDULENT CONVEYANCES 215 

property to the extent of the payments so made in satisfaction 
of its debt. 

As the evidence shows that Mrs. Curd paid, out of her own 
money, the initial payment on the property, there is, of course, 
no fraud attached to this feature of the case, and we may put 
it aside without further comment. The remaining question is: 
Does the fact that the property was conveyed to Mrs. Curd, and 
the weekly payments made out of money earned by her hus- 
band a nd given to her, constitute such fraud, in the meaning of 
the law, as w6llld Authorize the court to subJtJCl the piupeitj' '- 
_to appellant's aebt to the extent of the weekly payments? We 



think this question must be answered in the negative, as it was 
by the lower court. 

The cases of Gross v. Eddinger, 85 Ky. 168, 3 S. W. 1, 8 Ky. 
Law Rep. 829 ; Brooks- Waterfield Co. v. Frisbie, 99 Ky. 125, 35 
S. W. 106, 18 Ky. Law Rep. 555, 59 Am. St. Rep. 452 ; Black- 
bum V. Thompson, Wilson & Co., 66 S. W. 5, 23 Ky. Law Rep. 
1723, 56 L. R. A. 938 ; and Patton v. Smith, 130 Ky. 819, 114 
S. W. 315, 23 L. R. A. (N. S.) 1124— relied on by counsel for 
appellant, do not, in our opinion, support his contention that 
the appellant should succeed in this case. We approve of those 
opinions and the principles of law announced in them ; but they 
are plainly distinguishable from the case at bar. In the Gross 
case the husband, by his exclusive business effort, accumulated 
in a few years $3,000 or {^4^000, w hich was invested in the name 
of his wife, and the court held, under the facts of that case, it 
was plainly the purpose of the husband to defraud his creditors 
by attempting to place the income from a profitable business, 
conducted by him, in the name of his wife and beyond their 
reach. In the Brooks- Waterfield case, Frisbie, who was a suc- 
cessful and prosperous business man, accumulated several thou- 
sand dollars, in the course of a few years, and invested it in 
real estate in the name of his wife, and the court subjected, at 
the instance of his creditors, the property in the name of his 
wife, to the extent of $3,000 to the payment of his debts. In the 
Blackburn case, the husband, who was conducting a profitable 
line of business, invested, in the name of his wife, some $2,500 
realized from his business, and the court held that the scheme 
of permitting his wife to take the title to property that was paid 
for in this way by the husband was a fraud upon his creditors. 



216 PREREQUISITES TO ADJUDICATION 

In the Patton case the husband, in a few years, by industry and 
business ability, accumulated several thousand dollars, with 
which land was bought and the title taken in the name of the 
wife, and it was held that the husband could not, by this method, 
defeat the claims of his creditors, and so much of the property 
as represented the result of his business capacity was subjected 
to the payment of his debts. In all of these cases it appeared 
that the earnings or profits made by the husband were greatly 
in excess of the amount necessary to comfortably provide a 
home and support for his family, and the court in substance 
said that a husband engaged in a successful and prosperous busi- 
ness, by which he was able to accumulate considerable estate, 
would not be permitted to invest his accumulations in property 
in the name of his wife, and thus defeat his creditors. But we 
have here a very different state of case. Curd, with a wife and 

f CtK.^ two children to support, was earning a salary of $20 a week, or 
$80 a month, not more than sufficient to provide for and support 
his family, if his wife had not been an industrious, economical, 
good housekeeper. If, in place of handing to his wife every 
week all of his meager salary, Curd had seen proper, as many 
husbands do, to spend a part of the money in _purchasing plpa^u 
ures and comf orts for himself and family, or if he had given 
the money to his wife and she had spent it, as many wives do, 
in extravagant living, his creditors could not have reached any 
part of it, because he would have been entitled to the $20 re- 
ceived each week, under the exemption laws of the state. But 

\ -^-i^. even if it was not so exempt, no court would have compelled him 
to set aside, out of this salary, a certain sum each week for the 
benefit of his creditors, or have required him to live more 
economically than he desired to, and in this way save a portion 
of his wages for his creditors. 

Where the earnings of the husband are not more than rea- 
sonably sufficient to comfortably provide for and support his 
family, hire household labor, and furnish his wife and children 
with some of the pleasures of life, he may give his earnings to 
his wife, and if she is willing to deny herself the pleasures and 
little luxuries that she might have, and to dress plainly and live 
frugally, and do her own cooking and household work in place 
of hiring help to do it, and by this close economy in the manage- 
ment of her personal and household affairs is able to save enough 



FRAUDULENT CONVEYANCES 217 

to buy an humble home, his creditors cannot take it from her. 
Anderson v. Mundo, 77 S. W. 926, 25 Ky. Law Rep. 1644. 
The judgment dismissing the petition is afifirmed.22 



LYNCH 'S ADM 'R v. MURRAY "^-^ 

86 Vt. 1, 83 Atl. 746 ' C 



(Supreme Court of Vermont. May 14, 1912) 






HASELTON, J. This is a bill in chancery brought by the 
administrator de banis nmi of the estate of Thomas Lynch. The 
bill is founded on P. S. 2863, which authorizes an executor or 
administrator, where there is a deficiency of assets, to maintain 
a suit to set aside a fraudulent conveyance made by the deceased 
person whom he represents. The conveyance in question was 
made by Thomas Lynch to William Murray, the defendant, June 
20, 1898. The case was heard on bill, answer, master's report, 
and defendant's exceptions thereto, and on the defendant's 
motion for a decree in his favor, and it was decreed that the 
conveyance in question is void as to the creditors of Lynch and 
of his estate to the extent of the deficiency of the assets of the 
estate to pay such creditors. There were further provisions in 
the decree the propriety of which, except as herein noticed, is 
not questioned, provided the decree, so far as above recited, was 
rightly made. The decree is in substantial conformity with that 
directed by this court in its mandate in the well-considered case 
of McLane v. Johnson, 43 Vt. 48. Murray, the defendant, 
appeals. 

It is claimed by Murray that it does not appear by the report 
that the conveyance to him was made with an actual fraudulent 
intent on the part of Lynch. It appears from the report that 
Lynch had owned and occupied the farm for about 10 years 
before the conveyance in question and that during most of that 
time, a period of about 10 years, he had kept in his family one 
McCabe, who had left shortly before the conveyance, and who 
claimed that there was due to him from Lynch a large sum on 
account of labor done by the former for the latter ; that McCabe 
threatened to bring suit on such claim; that Lynch hearing of 
the threatened, or contemplated, action of McCabe consulted his 

22— Cf. Trefethen v. Lyman, 90 son v. McKenna, 21 R. I. 117, 42 
Me. 376, 38 Atl. 335, 60 Am. St. Atl. 510, 79 Am. St. Eep. 793. 
Eep. 271, 38 L. R. A. 190; Robin- 



218 PREREQUISITES TO ADJUDICATION 

close friend Murray as to what should be done under the cir- 
cumstances ; and that the two called upon a third person to draw 
the deed in question; and that, after it had been properly exe- 
cuted, Lynch delivered it to Murray, and Murray took it and had 
it recorded. The farm was then worth $1,800. It was unin- 
cumbered except by a mortgage of $600. There was no con- 
sideration for the deed of Lynch 's equity of redemption, but 
Murray assumed the comparatively small mortgage. Lynch be- 
lieved that he had more than paid MeCabe and that the latter 's 
.^claim was unfounded and unjust, but feared that the latter 
might obtain a large judgment on his claim, and he gave the 
deed for the purpose of so transferring the apparent title to the 
property that it could not be reached in execution by McCabe. 
Lynch told Murray that McCabe had been more than paid, and 
it was agreed between Lynch and Murray at the time of the 
giving of the deed that on settlement of the McCabe claim the 
property should be deeded back to Lynch. 

The master does not in terms find that the conveyance 
was fraudulent, but the facts found as above stated are equiva- 
lent to a finding that the conveyance was actually fraudulent; 
for, as has well been said, actual fraud means "fraud according 
to the common conscience." And it is that conscien ce, and not 
Lynch 's or Murray's, which determines the character of this 
conveyance. Bigelow, Fraudulent Conveyances (Knowlton's 
ed.) 1, 444. Even though Lynch did not believe that he owed 
McCabe, it was the latter 's right, if he thought otherwise, to 
bring suit and liave his rights determined, not by the judgment 
of Lynch, but by the judgment of the court, and it was the duty 
of Lynch, so far as his property not exempt would enable him, 
to satisfy any such judgment, and so the conveyance was made 
with the fraudulent intent of defeating the right of McCabe 
and of avoiding the duty of Lynch, and was an actual fraud 
upon one who, as was contemplated, might become a judgn[ient 
creditor in consequence of claims existing at the time of the 
conveyance. Foster v. Foster, 56 Vt. 540 ; Corey v. Morrill, 71 
Vt. 51, 42 Atl. 976; Kimball v. Thompson, 4 Cush. 441, 447, 
50 Am. Dec. 799 ; Rogers v. Evans, 3 Ind. 574, 56 Am. Dec. 537. 

With great good sense, the Statute of Elizabeth counted as 
fraudulent conveyances which tended "to the let or hindrance 
of the due course and execution of law and justice." 13 Eliz. 
e. 5, cl. 1. 

To say that fears of an unjust judgment against Lynch af- 



FRAUDULENT CONVEYANCES 219 

f ected the character of the transaction would be much like say- ^''y^..^.^^ 
ing that a mob is justified in hanging or burning one charged [] 
with crime because of apprehensio ns that a court of law wil l 
unjustly acquit him. ' ' ~~ 

It is further claimed by Murray that there is no finding 
in the report that he had any fraudulent intent in taking the 
deed, and that he must be considered as an innocent grantee. 
But the facts above stated permit but one conclusion; that is, 
that he was in collusion with Lynch; that he took the deed in 
furtherance of the fraudulent intent of Lynch and for the pur- 
pose of effectuating it. It is therefore to be presumed that the 
trial court drew that conclusion. Davenport v. Crowell, 79 Vt. 
419, 65 Atl. 557 ; Johnson v. Paine, 84 Vt. 84, 78 Atl. 732 ; Per- 
kins V. Perley, 82 Vt. 524, 74 Atl. 231. 

We have then a case of a conveyance given by the grantor 
and taken by the grantee with the actual fraudulent intent on 
the part of both of defeating such existing claim, if any, as 
McCabe might succeed in establishing through regular proceed- 
ings in a court of justice. 

The defendant claims that this was not a voluntary con- 
veyance, on the ground that Murray assumed to pay the mort- 
gage on the farm. As we have seen, the farm at the time of the 
conveyance was worth $1,800, the mortgage was $600, and noth- 
ing was paid for the valuable equity of redemptio n. This could 
be levied upon by creditors, and its alienation without considera- 
tion was within the statute. The circumstance of the assump- 
tion of the mortgage, and other circumstances connected there- 
with, do not tend to relieve the transaction of its fraudulent 
character in view of the fact that it was agreed between the 
parties that, when the McCabe claim was put out of the way, 
the property should be deeded back to Lynch. In view of that] 
agreement, the assumption of the mortgage seems to have been! 
intended rather to give a fair aspect to the fraud than to make 1 
the transaction bona fide. Bigelow, Fraudulent Conveyances 
(Knowlton's ed.) 39, 122; Spencer v. Caverhill (Iowa) 133 N. 
W. 450, 453 ; First National Bank v. Bertschy, 52 Wis. 438, 9 
N. W. 534; Lyons v. Haddock, 59 Iowa, 682, 13 N. W. 737; 
Randall v. Vroom, 30 N. J. Eq. 353 ; Stutson v. Brown, 7 Cow. 

732 ; Welcome v. Batchelder, 23 Me. 85. 

* * * 

Decree affirmed and cause remanded. 



220 PREREQUISITES TO ADJUDICATION 

^ h^T*^' HOLLOWAY v. MILLARD 

-i. ^^ ^{j^ 1 Madd. 225 

r*L ^t - jb-i^'^ (Chancery. February 25-Mareh 4, 1816) 

1 "^"^ This was a creditor's bill, filed against the executors of S. H. 
^ "^ and also against the trustees, and cestuis que trust, under a 

voluntary settlement made by her, praying an account against 
the executors; and that if it should appear that her estate was 
ingu|fieient for the paym ent of her debts, the de ficiency might 
be made good" ouToTl^he property of which the voluntary settle- 
ment had been made, and that a competent part might be sold 
for that purpose. 

S. H. by her will, 29th April, 1809, gave all her real estate, 
etc., to the use of M. Lewis (since deceased), and the defendant, 
John Millard, their heirs and assigns, in trust to sell the same, 
and apply the produce in aid of her personal estate, in discharge 
of her debts, etc., and gave the residue to F. T. Lewis and 
Millard were appointed executors. 

By a settlement, dated 22nd of December, 1810, S. H., after 
reciting that she was entitled as one of four co-heiresses to a 
fourth part of certaip estates, estimated at the value of £170,000, 
parts of which estate had been contracted to be sold, she cove- 
nanted and agreed with the trustees Lewis and Millard, that, out 
of her share of the monies to be produced by the sale of the 
estates, she would pay them £36,000 sterling, upon trust, to invest 
the same in government securities, and apply the dividends as 
she should appoint, and for want of appointment to pay the same 
to her for her life, and after her decease, then upon the trusts 
mentioned in the deed, in favor of the defendants, the cestuis que 
trust. By a codicil, 5th March, 1811, S. H. confirmed her will, 
and the settlement. The £36,000 was afterwards paid to the 
trustees, and they invested the same in government securities, 
and applied the dividends and the principal according to the 
trusts of the settlement. 

The^ill did not state that the deceased was indebted at the 
time she made the voluntary settlement; but charged that it 
was made in favor of an illegitimate child, and others, and that 
the whole was voluntary, and made without good or valuable 

(consideration, and void against the plaintiffs, who were creditors 
subsequent to the settlement. 



FRAUDULENT CONVEYANCES 221 

THE VICE-CHANCELLOR. Two questions have been made 
in this cause; 1st. Whether a voluntary settlement by one not 
indebted, in favor of an illegitimate child, and others, can be 
impeached by creditors subsequent to the settlement; and 2dly. 
Whether the plaintiff, though he has not stated in his bill 
that the settler was indebted when she made the settlement, is 
entitled to an inquiry as to that fact, the bill being a creditor's 
bill. 

With respect to the first point, it appears, that S. H. being 
entitled to £42,500, makes a settlement to the extent of £36,000. 
It is a pure voluntary settlement in favor of strangers (for the 
illegitimate child cannot be considered otherwise than as a 
stranger), without pecuniary consideration, or consideration of 
blood, by one not indebted at the time. It has been strongly 
insisted that, though a voluntary settlement by one not indebted, 
is good against future creditors, if made in favor of a wife or 
child; yet, that if made in favor of strangers, as in this case, 
it is not effectual against future creditors. 

It was not from any doubt on this point, but only from its 
general importance, and in deference to the argument, that I 
thought it right to look into the cases. 

Let us first see how it stands independent of authority. The 
word "voluntary" is not to be found either in the statute of 
the 13th Eliz. c. 5 (upon which the present question arises), or 
in the 27th Eliz. c. 4. The 13th Eliz. is pointed only against 
"fraudulent" conveyances, as appears from the preamble; and 
such conveyances only are thereby invalidated. Fraudulent con- 
veyances are such, to use the words of the preamble, as are ' ' de- 
vised and contrived of malice, fraud, covin, collusion, or guile, 
to the end, purpose, and intent, to delay, hinder, or defraud 
creditors." This conveyance is not one of that description. It 
is not fraudulent merely because it is voluntary. A voluntary 
conveyance may be made of real or personal property, without 
any consideration whatever, and cannot be avoided by subse- 
quent creditors, unless it be of the description mentioned in the 
statute. If a person having £1,000 a year, and not indebted at 
the time, gives away £500 a year, the gift is not fraudulent, un- 
less it were made with an intent to defeat subsequent creditors. 
Its being voluntary is primu facie evidence, where the party is 
loaded with debt at the time, of an intent to defeat and defraud 
his creditors; but if unindebted, his disposition is good. There 
is no suggestion in the bill that this settler was indebted at the 



222 PREREQUISITES TO ADJUDICATION 

time; she was not in trade; and the settlement did not include 
all her property ; £6,000 being left unsettled. She was culpable 
in becom ingjbe parent of such a child, but the child being born, 
it was her duty to protect and provide for it. A voluntary dis- 
position, even in favor of a child, is not good, if the party is 
indebted at the time. (Fitzer v. Fitzer, 2 Atk. 511. Taylor v. 
Jones, 2 Atk. 600.) 

A dictum of Lord Hardwicke, in Townshend v. Windham (2 
Ves. sen. 10), has been much relied on. Supposing Lord Hard- 
wicke 's words to be correctly reported, they only amount to 
this, that he is speaking aflfrrmatively, when a voluntary deed will 
be good, and so far the proposition is true ; but it is not thence 
to be inferred, that every voluntary conveyance not in favor of 
a child is bad against subsequent creditors. If, in that passage, 
the words ''for a child" had been omitted, still the proposition 
would have been correct, and I have Lord Hardwicke 's authority 
for saying so, as will appear from some determinations of his, 
which I shall notice. In Walker v. Burroughs (1 Atk. 93), his 
Lordship says, "It has been said, all voluntary settlements are 
void against creditors, equally the same as they are against 
subsequent purchasers under the statute 27th Eliz. c. 4 ; but this 
will not hold; for there is always a distinction upon the two 
statutes (the 13th Eliz. c. 5, and the 27th Eliz. c. 4.) It is 
necessary on the 13th Eliz. to prove at the making of the settle- 
ment, tile person conveying was indebted at the time, or imme- 
diately' after the execution of .the deed, or otherwise it would be 
attended with bad consequences, because the statute extends to 
goods and chattels, and such construction would defeat every 
provision for children and families, though the father was not 
indebted at the time." In another passage in the same case, he 
says, ' ' Where a man has died indebted, who in his lifetime made 
a voluntary settlement, upon application to this court to make 
it subject to his debts as real assets, the court have always de- 
nied it, unless you show he was indebted at the time the con- 
veyance was executed. ' ' Now here, you observe, the proposition 
is laid down generally, that a voluntary settlement by one not 
indebted, is good against subsequent creditors; and it is not 
said, that to be good such voluntary settlement must be made in 
favor of a child. In Russell v. Hammond (1 Atk. 15), Lord 
Hardwicke expresses himself in the same manner. In that case 
it was also determined, that where a father took back an annuity 
to the value of the estate comprised in the settlement, it was 



FRAUDULENT CONVEYANCES 223 

tantamount to a continuance in possession, and a circumstance 
of fraud; and he relieved the creditors against the settlement; 
but it does not therefore follow that every interest taken back 
for life is to be considered as fraudulent, but only where it is 
so reserved for the purpose of defeating future creditors. The 
meaning, therefore, of what Lord Hardwicke said in Townshend 
V. Windham, is clearly ascertained by what he said in the other 
cases to which I have alluded. In Lush v. Wilkinson (5 Ves. 
384), a bill by a creditor subsequent to a voluntary settlement 
made by one not indebted at the time, seeking to impeach the 
settlement, was dismissed; and in Kidney v. Coussmaker (12 
Ves. 155), a voluntary settlement was held to be fraudulent only 
against such as were creditors at the time. In Sykes v. Hastings, 
recently determined at the Rolls (A. D. 1814), the same rule 
was acted upon, though the settlement was made under very- 
extraordinary circumstances. It is clear, therefore, from the 
authorities, that a voluntary settlement of real or personal prop 
erty, by a person not indebted at the time, nor meaning a fraud 
is good against subsequent creditors. * * * > 

The bill, so far as regards the defendant, F. T., and the other 
parties interested in the settlement, must be dismissed with 
costs; and the usual decree taken for an account against the 
representatives of S. H.^^ 



;!f^ 



JENKYN V. VAUGHAN ^ vL'^^'^ 

3 Drew. 419 ^-^ ?? '^SZ '^/^ 

(High Court of Chancery. January 15, 1856) " ^v "'^♦t 

This was a bill to set aside certain indentures of post-nuptial ; '''h-v^ 
settlement made by George Concannen, as being fraudulent and ry* 

void against creditors. 

The bill was filed by simple contract creditors of Concannen 
against the executrix of his will; against the sole acting trustee 
of one of the deeds ; and against the widow ; the latter being the 
real and substantial defendant. 

In 1834 Concannen had insured his life for £1,000 ; in 1833 for 
£800; and in 1832 for £300. 

In 1834 he assigned the £800 policy to Gillson for securing an 
advance. 

23— In re Lane-Fox [1900], 2 Q. 
B. 508 ace. 



:^j-' 



224 PREREQUISITES TO ADJUDICATION g 

In 1842 he assigned the three policies to trustees to secure cer- 
tain benefits to his wife, reserving to himself an absolute power 
of revocation. 

In 1844 he made his will, by which he gave certain property, 
not including the policies, to his wife; and he gave his residue 
to Fanny Vaughan, whom he made his executrix. 

In 1845 he revoked the deed of 1842, and reassigned the policies 
to trustees (one of whom disclaimed, leaving "W. D. Lewis, a 
.defendant, the sole trustee) on trusts for his wife, again re- 
(serving an absolute power of revocation. 

He kept the deed in his own hands, and paid the premiums on 
the policies during his life ; and died in 1852, largely indebted. 

The debts of the plaintiff arose in 1852. 

It was admitted that at the dates of the settlements Con- 
cannen was indebted in considerable amounts, besides the mort- 
gage debt secured by the deed of 1834; and there was one in 
particular to a person named Bouverie, the state of which is 
noticed in the judgment. But on the evidence it was not clear 
whether all these previous debts had been liquidated at the 
dates of the settlements, or whether some of them did not still 
subsist at the time when the plaintiff's debt accrued. 

The principal question was, whether, under these circum- 
stances, the plaintiff could sustain a bill to set aside the volun- 
tary settlements? 

THE VICE-CHANCELLOR. The first question, is, whether, 
in the case of a voluntary settlement, a creditor, whose debt 
accrued subsequently to the execution of the deed, can file a bill 
for the purpose of setting it aside. Now it is not in dispute that 
(^ a subsecnient creditor is entitled to participate ^if th e instrument 
i s set aside l>y any cred itor ; and I am not aware that in that 
case there is any distincti^*between the two classes of creditors, 
those who were so before, and those who became so after the 
deed. I believe they all participate pro rata. It is clear there- 
fore that a subsequent creditor has an equity to some extent, 
viz., a right to participate in the division of the property if the 
settlement is set aside. 

Prima facie then, if a subsequent creditor has an equity, one 
would suppose there could be no reason to prevent him from 
filing a bill to enforce it; it is indeed possible that there may 
be cases where a person who has an equity to participate has not 



FRAUDULENT CONVEYANCES 



225 



the right to file a bill; but, prima facie, when a party has an 
equity, he may file a bill to enforce it. 

Now the statute of 13 Eliz. e, 5, which is referred to in this 
case, avoids deeds which are made with intent to defraud or 
delay creditors. The instrument must be made with the intefit 
to defraud creditors. Now, no doubt an instrument may be 
executed for the purpose of defrauding subsequent creditors; 
and, with regard to creditors being so at the time, it is estab- 
lished that it is not necessary to show from anything actually 
said or done by the party, that he had the express design by the 
deed to defeat creditors; but if he includes in it property to 
such an amount that, having regard to the state of his property, 
and to the amount of his liabilities, its effect might probably be 
to delay or defeat creditors, if the court is satisfied of that, the 
deed is within the meaning of the statute. 

In cases where a subsequent creditor files a bill, it occurs to 
me that much may depend on this (supposing there is no evi- 
dence of anything to show the fraudulent intention but the fact 
of the settlor being indebted to some extent), — whether, at the 
time of filing the bill, any of the debts remain due which were 
due when the deed was executed. In such a case, as any of theS 
prior creditors might file a bill, it appears to me that a subse- 1 
quent creditor might do so too; but if at the time of filing the/ ^^ /(J, 
bill no debt due at the execution of the deed remains due, the^ > 
distinction may be that then a subsequent creditor could not file i / 
a bill, unless there were some other ground than the settlor being / 
indebted at the date of the deed to infer an intention to defraudj\ / 
creditors. However, I do not find any such rule laid down, and 
I shall not take upon myself to lay it down positively. But if 
a subsequent creditor files a bill, and you can show that the 
person who executed the deed, though indebted at the time he 
made it, has since paid every debt, it is very difficult to say 
that he executed the settlement with an intention to defeat or 
delay creditors, since his subsequent payment shows that he had 
not such an intention. But it appears to me, in the absence o" 
authority to the contrary, that a subsequent creditor may file a 
bill, if any debt due at the date of the deed remains due at the 
time of filing the bill. 

When we look at the authorities, we find that in two or three 
cases, where the question has been raised as to the plaintiff's 
right to file a bill, being a subsequent creditor, and debts ante- 

H. & A. Bankruptcy — 15 



226 



PREREQUISITES TO ADJUDICATION 



A* . L 



^ 



cedent have been shown still to subsist, the court, having its 

attention drawn to that, has made a decree in favor of the 

creditor. 

/ In this case I find sufficient prima fctcie evidence to lead me 

) to the conclusion that something still remains due in respect of 

\ the debts which existed at the date of the deed ; there is sufficient 

I prima facie evidence to justify me in directing an inquiry. 

I put aside the mortgage debt secured on the policies of in- 
surance. The policies, so far as the mortgage debt extended, 
were the property of the mortgagee ; and what was retained and 
settled was only that which remained after satisfaction of the 
mortgage debt; I put that aside. 

But, as to the debt to Bouverie, there is sufficient evidence to 
induce me to direct an inquiry. The evidence on that debt goes 
to this, — ^that to the best of the knowledge and belief of the 
witness the debt consists of a balance of monies advanced by 
Bouverie to Concannen, some part of which at least was ante- 
cedent to the date of the settlement. 

It appears to me that that justifies inquiry; and there are 
besides various claims, which may turn out to establish debts 
due at the date of the deed remaining unpaid. 

But, in addition to the circumstances arising out of this debt 
and the claims, it appears that the property which Concannen 
left is extremely trivial; and at his death it is proved that he 
was indebted to the extent of many thousands ; so that it is not 
unnatural to suppose that there are still debts unsatisfied which 
were due at the date of the deed. 

As to the intention to delay creditors, it is not immaterial that 
both deeds are made with general powers of revocation, which 
enable the settlor to deal with the property, and that he retained 
possession of the deeds till the time of his death ; and it does not 
appear that any notice was given to any of the insurance offices. 
All these circumstances are not, it is true, conclusive of fraudu- 
lent intention ; but they have an important bearing on the ques- 
tion of fraudulent or improper design. 

I think, therefore, that I ought to direct inquiries, which will 
be in the usual form, the form adopted in the cases cited.^^ 



M. 



24 — See Freeman v. Pope, supra, 
p. 165; Ideal Co. v. Holland [1907], 
2 Ch. 157. 



Cf. Lane v. Newton, 140 Ga. 415, 
78 S. E. 1082. 



FBAUDULENT CONVEYANCES 227 

READE V. LIVINGSTON ^^^**^ /^ ""^-^ 
3 Johns. Ch. 481 -^-tUx^ -/^4^ 

(Court of Chancery, New York. September 28, 1818) ^^^.^^^ 




THE CHANCELLOR. This case turns upon the vali dity of ^ 
the conveyance_by Henr y G. Livi ngsto n to Gilb ert^ spinwal l. ^^ 

The bill charges that Livingston was indebted to John Reade, ^ ^^ 
the plaintiff's intestate, as early as the year 1800, in $6,000, and /^a**- ^ 
that, in August term. 1807, Reade obtainecLa-judgmfiat against '^^^^'-''^•^l 
H. G. L., for upwards of that sum, and that $3,072 of it remains ^ 

unpaid. That by deed, dated the 7th of December, 1805, H. G. L. 
conveyed his lands, to the amount in value of $45,000, to Aspin- 
wall, in trust for his wife, and that he had no other property to 
satisfy the balance of the judgment. 

The answer of H. G. L., and of his wife, admitted that in 
1800, there were sundry unsettled accounts between the parties, 
and that they were finally, by rule of court, referred to referees, 
and that the judgment upon such reference was rendered, as 
charged in the bill ; they admit further, that the lands included 
in the deed to Aspinwall, composed the greater part of the real 
estate of H. G. L., though they deny the lands to be of the value 
charged. H. G. L. states that, ^ rior to h is m arriage, and with\ 
a view_ to^jt, he agreed with es wife 's fath er to settle on her, \ 
andjhe r childreii7 ^30, 000, and that the deed was executed in I 
pursuance of that agreement. He admits the sum of $1,392.92 | 
to be still due upon the judgment, and that Reade might have 
obtained satisfaction out of his personal estate ; and he declares, 
that he was then worth little or no property, though, at the 
time of his marriage, he was worth $80,000. 

It appears, by the proof taken in the cause, that the judgment 
was founded upon two bonds dated in the year 1794; that the 
consideration of them was a farm sold by Reade to H. G. L., and 
that with the proceeds, or by the exchange of that farm, H. G. L. 
procured the greater part of the lands included in the deed of 
settlement. That he was married as early as the year 1791, and/ 
that at the date of the judgment he owned personal property to 
$1,000 ; but it does not appear that he possessed any real prop- 
erty free from incumbrance. Valentine Nutter, the wife 's father, 
says that his wife, Mrs. Nutter, informed him just previous to 
the marriage that H. G. L. had promised to settle $30,000 on his 
daughter, and that H. G. L. frequently, after the marriage, 



228 PREREQUISITES TO ADJUDICATION 

admitted the promise, and at last, at the repeated request of the 
witness, executed the deed. 

The deed to Aspinwall contains no reference to, or recital of, 
any previous agreement; but it is simply a deed in fee, for the 
consideration of $5,000, and in trust to convey the lands, and 
the rents and profits thereof, as the wife of H. G. L., by deed or 
will, should direct; and, in default of such direction, in trust 
for her heirs. 

I have stated, perhaps, as much of the pleadings and proofs 
as may be requisite to a full understanding and discussion of 
the important legal questions involved in the case. 
/ xl._ G. L . owed_the-.Y£ry debt now in question, at the ti me of 
I th£_ggttl emen t of his real estate upon his wife ;~and^li''greaFpart 
1 of the lands so settled were purchaaad.withl-proper ty pro cured 
by that sam e debt. The deed of settlement was not made until 
14 years after the marriage, when it is admitted, that, in the 
.meantime, his estate had diminished one-half. It had no refer- 
ence or allusion to any ante-nuptial contract, nor is there any 
evidence in writing of such an agreement. 

Upon such a state of facts, my earliest impressions were 
against the soundness of the defense ; and I apprehend, there is 
not a case to be met with that gives any colorable support to 
such a settlement against such a creditor. But after the elaborate 
argument which has been made in favor of the deed, I have con- 
sidered it due to the counsel, as well as to the importance of every 
question of this nature, to look into the cases, and to give to 
every topic of argument a careful investigation. 

[After concluding that a voluntary settlement as to existing 
creditors is conclusively presumed to be fraudulent, the chan- 
cellor continued] : 

With respect to the claims of subsequent creditors, there is 
more difficulty in arriving at the conclusion ; and I am not called 
upon in this case to give any definitive opinion, for there are no 
such creditors before the court. But since the subject has been 
examined, I would suggest what appears to me at present, but 
with my mind still open for further discussion and considera- 
tion, to be the better opinion from the cases ; it is, that the pre- 
sumption of fraud as to these creditors, arising from the circum- 
stance, that the party was indebted at the time, is repelled by 
the fact of these debts being secured by mortgage, or by a pro- 
vision in the settlement; that if no such circumstance exists, 
they are entitled to impeach the settlement by a bill properly 



FRAUDULENT CONVEYANCES 229 



;) 



adapted to their purpose, and charging and proving indebtedness 
at the time, so that their rights will not depend on the mere 
pleasure of the prior creditors, whether they will, or will not 
impeach the settlement, that the question then arises. To what 
extent must the subsequent creditors show a prior indebtedness 
Must they follow the dictum of Lord Alvanley, and show in 
solvency, or will it be sufficient to show any prior debt, however 
small, as is contended for by Mr. Atherley, with his usual ability, 
in his Treatise on Marriage Settlements? (Ath. Mar. Set. pp. 
212 to 219.) I should apprehend, that the subsequent creditors 
would be required to go so far, and only so far, in showing debts, 
as would be sufficient to raise reasonable evidence of a fraudu- 
lent intent. To show any existing debt, however trifling an^ 
inevitable (to which every person is, more or less, subject), 
would flot surely support a presumptio n of f raud i n fact i no 
voluntary settlement in any possible case could stand upon that 
construction. I should rather conclude, that the fraud in tire 
voluntary settlement was an inference of law, and ought to be 
so, as far as it concerned existing debts; but that, as to subse- 
quent debts, there is no such necessary legal presumption, and 
there must be proof of fraud in fact; and the indebtedness at 
the time, though not amounting to insolvency, must be such as 
to warrant that conclusion. It appears, in all the cases (and 
particularly in the decision of Sir Thomas Plumer since the pub- 
lication of Mr. Atherley 's treatise), that a marked distinction 
does exist, under the statute of 13 Eliz., between prior and sub- 
sequent creditors, in respect to these voluntary settlements ; and 
it is now settled that the settlement is not void, as of course, 
against the latter, when there were no prior debts at the time. 

The law in Massachusetts seems to be laid down according to 
this view of the subject. 

In Bennett v. Bedford Bank (11 Tyng, 421), there was a 
voluntary conveyance to a son by a father, indebted at the time, 
but not in embarrassed circumstances, or equal in debt to the 
value of his property. The debt to the plaintiff did not accrue 
until several years afterwards. It was held by the court, that 
as there was no fraud in fact, the deed in this case was good 
against the subsequent creditor, "and against all persons but 
such as were creditors at the time." 

But there is a case, recently decided by the Supreme Court of 
Errors of Connecticut (Salmon v. Bennett, 1 Day's Conn. Rep. 



230 



PREREQUISITES TO ADJUDICATION 



N. S. p. 525), which lays down a rule somewhat different from 
that which I have deduced from the English cases. 

The question arose in an action of ejectment. The plaintiff 
had purchased Virginia lands of Sherwood, in 1794, and paid 
him the purchase money. In 1809, by a decree in chancery, the 
sale was annulled, on the ground of fraud, and the purchase 
money decreed to be refunded, on condition that the plaintiff 
executed a release. This was done, and he afterwards, in 1814, 
levied an execution founded on that decree, on lands which 
Sherwood owned in 1794, but which he had conveyed to his son 
in 1798, in consideration of natural affection only, and which 
lands the son had, in 1802, conveyed to the defendant, with 
knowledge of the deed to the son. It was proved, that when 
Sherwood executed the deed of gift, he was not indebted to any 
person, except to the plaintiff, in the manner stated, and that 
the lands conveyed did not contain more than one-eighth part 
of his real estate. But it was admitted that long before the levy 
of the execution, he had conveyed all his real estate, and was 
at that time, destitute of property. 

One question was whether the deed to the son, being voluntary, 
was not fraudulent as against the plaintiff ; and as the opinion of 
the court was on this point, I need not notice any other. It was 
also made a question, at the bar, whether the plaintiff was to be 
deemed an existing creditor at the time of the deed to the son; 
but as the court assumed the fact of an existing indebtedness 
at the time of the conveyance, I need not notice that point. 

The judgment of the court was in favor of the defendant, 
and the opinion of eight of the judges, as delivered by the chief 
justice was, that a distinction existed in the case of a voluntary 
conveyance, bgiffi^en t he children of the^antor_and strangers ^ 
'^d that mere indebtedness at the time ^jill_jiot^_in_all_caseSj_ 
rgoder a volaatary conveyance void as to^credit ors, where it is 
a provisi OTi for a child; that an actual or express intent to de- 
fraud need not be proved, for this would be impracticable in 
many instances where the conveyance ought not to be estab- 
lished, and it may be collected from the circumstances of the 
case ; that if there be no fraudulent intent, and the grantor be 
/in prosperous circumstances, unembarrassed, and not consider- 
/ ably indebted, and the gift a reasonable provision for the child, 
leaving ample funds unencumbered, for the payment of the 
\ grantor's debts, the voluntary conveyance to the child will be 
Vyalid against existing creditors. But if the grantor be con- 



FRAUDULENT CONVEYANCES 231 

giderably indebted_a5d_embarrassedi_^and on the eve of bank- 
ruptcy, or iF the gift be unreasonable, disproportioned to his 
property, and leaving a scanty provision for his debts, the con- 
veyance will be void, though there be no fraudulent intent. And 
it was concluded, that, under the circumstances of that case the 
indebtedness of the grantor, at the time, to the plaintiff, was 
not sufficient to affect the conveyance to his son. 

The court do not refer to authorities in support of their opin- 
ion, and, perhaps, they may have intended not to follow, strictly, 
the decisions at "Westminster Hall, under the statute of 13 Eliz. 
I can only say that, according to my imperfect view of those 
decisions (and by which I consider myself governed), this case 
was not decided in conformity to them ; but I make this observa- 
tion with great deference to that court. There may be loose 
sayings, and mere notes of cases, from which nothing very cer- 
tain or intelligible can be deduced; but I ^have not been able to 
find the case in which a mere ^voluntary conveyanc e to a wi fe or 
child has been plainly and directly held good against a creditor 
existing at the time. The cases appear to me to be upon that point 
uniformlyTnlEvbr of the creditor. The vice-chancellor, in Hollo- 
way V. Millard, says, in so many words, that "a, voluntary dis- 
position, even in favor of a child, is not good, if the party is 
indebted at the time." The cases of St. Amand v. Barbara, 
Fitzer v. Fitzer, Taylor v. Jones, and, indeed, the general lan- 
guage throughout the cases, seem to me to establish this point. 
So Lord Hardwicke observed, in Lord Townshend v. Windham, 
that, * ' He knew of no ease on the 13 Eliz. where a man, indebted 
at the time, makes a mere voluntary conveyance to a child, with- 
out consideration, and dies indebted, but that it shall be con- 
sidered as part of his estate for the benefit of his creditors." 
In a preceding part of the same page, he said expressly, there 
was "no such case," unless the conveyance was '*in consideration 
of marriage, or other valuable consideration ; ' ' and he draws the 
distinction between prior and subsequent creditors, in saying 
that if the voluntary conveyance of real estate, or a chattel in- 
terest, was by one not indebted at the time, and was for a child, 
and no particular evidence or badge of fraud as against subse- 
quent creditors, it would be good. The decision in that case 
was, that a general power of appointment given over an estate, 
in lieu of a present interest in it, having been executed volun- 
tarily, though for a daughter, was to be deemed assets in favor 
of creditors. 



232 PREREQUISITES TO ADJUDICATION 

If the question rests not upon an actual fraudulent intent (as 
is admitted in all the cases) , it must be a case of fraud in law, 
/arising from the fact of a voluntary disposition of property, 
) while indebted; and the inference founded on that fact cannot 
/ depend on the particular circumstances, or greater or less de- 
/ gree of pecuniary embarrassment of the party. These are mat- 
ters for consideration, when we are seeking, as in the case of 
subsequent creditors, for actual fraud. I apprehend it is, upon 
the whole, better and safer not to allow a party to yield to 
7 temptation or natural impulse, by giving him the power of 
/ placing property in his family beyond the reach of existing 
/ creditors. He must be taught by the doctrines of the court, th at 



tl ie claims oijustic e,aja.pHog4c)Llhose^of""affection. The inclina- 
tion of my mind is strongly in favor of the policy and wisdom 
of the rule, which absolutely disables a man from preferring, 
by any arrangement whatever, and with whatever intention, by 
gifts of his property, his children to his creditors. Though hard 
cases may arise in which we should wish the rule to be otherwise, 
yet, as a permanent regulation, more good will ensue to families, 
and to the public at large, by a strict adherence to the rule, than 
by rendering it subservient to circumstances, or by mal t ing it to 
depend_upon a fraudulent intent, which is so diffigult to_ggcer- 
tain^and frequently so painful to infer. 

The effect of these donations, by a debtor, inter vivos, is much 
discussed by Voet in his commentaries, on the Digest, lib. 39, 
tit. 5, De Donationibus, s. 20; and he concludes that the prop- 
erty in the hands of the donee is chargeable with the existing 
debts of the donor. Ex eo autem, quod donator competentiae 
gaudens beneficio deducit prima aes alienum, facUis est decisio 
qiKiestumis, utrum donatis omnibus bonis, aut majore eorum 
■parte, donatarius ad aes alienAim dona/ntis solvendum obUgatus 
sit? — Aequum haudforet, ex liberalitate^defuncticreditores ejus, 
donations antiquiores (nam qui postea demum credideru/nt, ex 
donatione praecedente jam perfecta videri nequeunt fraitdati 
esse) credito suo defraudari, satiusque visum, donata revocori per 
actionem PauUanam, etiarni a dmiatorio in bona fide posit o ao 
fraudis haud participe. Dum melior esse debuit conditio credi- 
tarum de damno evitando agentium, quam donatarU agentis de 
lucro captando. Secundum hodierni juris simplicitatem donatar- 
ium a creditoribus donatoris recta via absqiic circuitu ad solven- 
dum aes alienum donuntis compelli posse, post multos alios citatos 
tradit. Graenewegen, ad. I., 28 ff. h. t. 



FRAUDULENT CONVEYANCES 233 

This learned civilian makes the same distinction that our law 
does, between debts existing at the time, and debts created subse- 
quent to the gift. 

The same doctrine, on this subject, in all essential respects, is 
adopted in France. The gift of specific articles does not charge 
the donee with the debts of the donor, unless the latter knew, or 
ought to have known, that he was not solvent at the time; in 
which case the gift is held to be fraudulent. But in other more 
general dispositions of the whole, or part, of his estate, the prop- 
erty in the hands of the donee is subject to the existing, though 
not to the future, debts, to the value of the gift. ( Trait e des 
Donat. entre vifs. § 3, art. 1, % 2. Oewvres pasth. de Pothier, 
torn. 6.) 

2. Oeuvres posth. de Pothier, torn. 6.) 

The question does not arise, in this case, as to what extent 
these voluntary dispositions of property can be reached. Hero 
the land itself exists in the hands of the trustee for the wife, 
and we have no concern, at present, with the question, how far 
gifts of chattels, of money, of choses in action, of corporate, of 
public stock, or of property alienated to a &07wi fde purchaser, 
can be affected. The debt in t he present case was large , and the 
disposition extravagant, being of the greater part of the real 
e state ; and we havg-^O-gZ^dence of su fficient property left un- 
^neumbered. Even if we were to enter into the particular cir- 
cumstances of the case, I should have no doubt of the justice of 
the creditor's claim. 

I shall, accordingly, decree, that a reference be had to ascer^ 
tain the balance of principal and interest due to the plaintiff, \ 
and that so much of the lands, included in the conveyance to I 
Gilbert Aspinwall, as the master shall judge sufficient to satisfy / 
that amount, with costs, be sold; and that the said G. A. be/ 
directed to join in the conveyance. 

Decree accordingly. y, ^/_Y 

HARLAN V. MAGLAUGHLIN .*c^WV ^^ li A^ 

90 Pa. St. 293 *J*^=^^ c^£.,^ ^ 

(Supreme Court of Pennsylvania. October 6, 1879) A^ '"-/-r«*^ 

Ejectment by Maud Maglaughlin and Wilmer K. Maglaughlin,Ly- ' - 



^f^t '^ 



by their guardian, William A. Coffey, against AnneH arlan and 
David Sip^e for two lots in Carlisle, Pennsylvania. ^^"^ ' 

On March 31, 1859, John Mell conveyed by a deed a lot of p'^-^^ , 
ground to Isabella Noble, wife of John B. Noble, for $50. This 



234 PREREQUISITES TO ADJUDICATION 

deed was duly recorded August 27, 1859. To the same grantee 
William Blair conveyed, by deed, a lot of ground on March 20, 
1865, for $200, which deed was recorded March 28, 1868. On 
March 5, 1869, John B. Noble made a note payable to Christ. 
Kindler, upon which suit was brought, and judgment recovered 
for $129.47, with interest from 22d September, 1869. A fi. fa. 
and vend. ex. issued upon this judgment and the above-men- 
tioned lots were sold, as the property of John B. N oble, in 1870, 
to Charles E.^IagTaugHITn, whose~Tieirs ^ring this ejectment. 
Isabella Noble, dying about 28th June, 1875, letters of ad- 
ministration on her estate were issued to J. J. Good, who, under 
an order of the Orphans' Court of Cumberland County, sold 
the above lots, October 31, 1877, to David Sipe, one of the 
defendants. 

At the trial, before Herman, P. J., the plaintiff gave evi- 
f dence tending to show th at JohnB . Noble paid for these lots^and 
j direct ed th e name of his wife to be used as that of the grantee 
tHerein. There was also evidence that, whenjthe_first_deed w^ 
ma^eZ Noble was indebted to different parties, in the sums^of 
$3.37, and $60, payment of which was not shown; that, in the 
year 1859, after the Mell deed was made, debts were contracted 
to the following amounts: May 10th, $18; May 20th, $45; 
November 29th, $39 (reduced October 14, 1861, to $35.49) ; in 
the year 1860, as follows : January 13th, $60, which was paid; 
February 22d, $21.92, likewise paid; judgment April 14, 1860, 
for $5 penalty, for use of scales at suit of Borough of Carlisle ; 
and in 1862, May 14th, $4.02, which was paid; another, originally 
$65, but, 26th November, 1862, reduced to $6.50. 
/ As_evidence_of^ fraudulent^ on the part of Noble in 

having these conveyances made toKis wife, one Foote testified 
that Noble "told me before the war, in 1859, that he was in a 
I good bit of trouble, and that he was going to put what he had, 

\his property, over into Belle 's hands. He called his wife Belle. ' ' 
* « • 

The verdict was for the plaintiffs. Defendants took this writ, 
and, inter alia, assigned for error the answers to the above points. 

MR. JUSTICE GORDON delivered the opinion of the court. 

tThe court below fell into an error which pervades every part 
: this case. A single point and answer will serve to develop 
this error, and determine the material questions involved in this 
controversy. The counsel for the defendants below, plaintiffs 



FRAUDULENT CONVEYANCES 235 

in error, asked the court to say to the jury that "to_rendfi]L.a 
voluntary conveyance void, as to subsequent creditors, it mus t 
appear that it was made in contemplation of future indebted- 
ness, and, until this was shown, the plaintiffs c ould not call upon 
the defen dants to p r ove the con aderation for the couv^^^CfiJtlL- 
Isabella Noble_throu^h whom they claim title." The court an- 
swered: "This would be so, if , at^'the time of the voluntary con- \ 
veyance, no debts of the grantor existed, the recovery of which / 
would be thereby delayed, hindered or defeated. Where there 
are existing debts at the time, and the conveyance has delayed, 
hindered or defeated their recovery, this circumstance raises a 
suspicion of fraud from which an intent to defraud subsequent 
as well as existing creditors may be inferred." 

This language is borrowed from the case of Thompson v. 
Dougherty, 12 S. & R. 448, where it is applied, as in the case in 
hand, to debts contracted after the execution of the voluntary 
grant. It is, however, mere obiter dicta, not called for by the 
facts in the case, and not true in law. Notwithstanding the many 
loose declarations in the books to the contrary, t he sta tute_13 
Elizabeth does not make voluntary conveyances voi d as to f atur e 
creditors7~unIess th_ei:e_ -i&.Jsome2 evidence ^o_indicate_that the 
grantor intended to withdraw his property from the^each_of 
such creditors :_Snyder v. Christ, 3 "WrigEt^499. And it is 
properly said^in Williams v. Davis, 19 P. F. Smith 21, that even 
an expectation of future indebtedness will not render a voluntary 
conveyance void where there is no fraud intended by such con- 
veyance. And so, also, in Thompson v. Dougherty, Mr. Justice 
Duncan, citing Saxton v. Wheaton, 8 Wheat. 229, says, "Chief 
Justice Marshall decided that a post-nuptial settlement on a 
wife and children by a man who is not indebted at the time, 
was valid against subsequent creditors, and that the statute does 
not apply to such creditors if the conveyance be not made with 
a fraudulent intent." A similar ruling will be found in Town- 
send V. Maynard, 9 Wright 198, and in Greenfield's Estate, 2 
Harris 489, In the latter case, which involved a deed of trust 
of all the grantor's property, it was alleged by Mr. Justice Bell, 
to be a sound rule of law that subsequent indebtedness cannot 
be invoked to invalidate a voluntary settlement made by one not 
indebted at the time, or who reserves sufficient to pay all existing 
debts, unless there be something to show that the settlement was 
made in anticipation of future indebtedness. It is further said 
that though some doubt was thrown on this principle by Thomp- 



236 PREREQUISITES TO ADJUDICATION 

son V. Dougherty, it was afterwards dissipated by Mateer v. 
Hissim, 3 P. & W. 161. Furthermore, the case of Snyder v. 
Christ, above mentioned, which is very like the case in hand, 
settled any doubts that may previously have existed as to the 
effect of subsequent indebtedness. For though it seems to have 
been generally admitted that the statute is not operative as to 
such indebtedness, yet the admission has been so beclouded by 
apparently inconsistent dicta and qualifications, as to render its 
meaning obscure and unintelligible. The settlement is good 
against after contracted debts if the settlor is unindebted at the 
time, or if he has made provision for existing debts, and so on. 
But how, if there be existing debts not provided for, and how if 
the settlement is fraudulent as to such debts? Will the settle- 
ment, in such case, be void as to all future indebtedness? Is 
there no place for repentance and atonement by the after pay- 
ment of existing debts, or may after creditors, notwithstanding 
such payment, avoid the deed? Justice Duncan answers these 
questions by saying : "If the jury find a prior indebtedness and 
any of that class of creditors is defeated by the settlement, then, 
my opinion is, that the property conveyed is to be considered as 
part of the estate of the debtor for the benefit of all his creditors. 
I know no midway. When a statute declares a matter void it 
thrusts all to destruction like a tyrant, while the common law, 
like a nursing father, makes that void where the fault is and 
preserves the rest." In this, singularly enough, the fact is 
overlooked that the statute makes the gift or deed void, only, 
as to those who may be hindered, delayed or defrauded thereby, 
and that in this it follows the common law. This oversight, how- 
ever, would seem to be accounted for by the fact that the opin- 
ion of Chief Justice Spencer in Anderson v. Roberts, 18 Johns. 
526, is adopted, wherein it is said, that the Statute of 13 Eliza- 
beth protects creditors whose debts accrue subsequently to the 
fraudulent conveyance equally as those whose debts were due 
when it was made. 

/it would seem to be on this that Justice Duncan founds the 
/ assertion, already referred to, that the existence of prior debts 
/ creates a suspicion of fraud, which can only be repelled by show- 
ing that the subsequent creditors were provided for in the set- 
\Jtlement. This, as it stands, is unintelligible ; for one cannot pro- 
vide for what he does not anticipate ; if he has no future debts 
in contemplation, how is it possible to make provision for them ? 
It, in fact, simply amounts to saying that the statute is operative 



FRAUDULENT CONVEYANCES 237 

upon subsequent, as well as present, indebtedness. In like man« 
ner, it has been said, the settlor must not only retain property 
enough to satisfy present debts, but also to answer the reason- 
able probabilities of the future. But this rule is unreasonable 
in this, thatjtj)revents men of l imited means from m aking an y 
settlem ent wha tever upon their wives^nd children, a result cer- 
taTnly notjeontempTated by the statute^ Besides this, the attempt 
to keep men and women in judicTal leading strings all their 
lives, to direct what they shall or shall not do with their own 
property, is a matter which commends itself neither to sound 
legal reason nor to common sense. If a man is in debt, he may 
not give away his property until he has paid or provided for 
such debt; the reason for this is found in the principles of com- 
mon honesty. If he contemplates future indebtedness, he must, 
for a like reason, provide for it, but he must not provide for 
what he does not anticipate, and for what may never occur. And' 
if, without concealment, a man chooses to give away all his 
estate, or settle it upon his wife and children, w hat right has a 
subsequent creditor to complain? It did him no harm ; he gave 
the~grantoTHo'credit because©? such property ; he is, therefore, 
neither cheated nor impoverished by such gift. Furthermore, 
if A, by a voluntary conveyance, defrauds B this year, how is 
C, whose debt has no existence until ten years after, defrauded 
by that same conveyance ? It certainly will not do to say that 
because B was cheated therefore C is cheated, for between B 
and C there is no possible connection or privity. But if C has 
not been defrauded by the grant, then, if the statute means 
what it most expressly says, he cannot impeach it. 

We turn, therefore, with satisfaction to the case of Snyder v. 
Christ, where we have the plain and unambiguous declaration, 
that the subsequent creditor can avail himself only of that fraud 
which is practiced against himself. The doctrine thus announced 
is made the more positive in that it is said, if the creditor knew 
of the voluntary conveyance when he gave the credit, he could 
not be defrauded thereby, and, hence, could not impeach it. 

This case, not only from the direct manner in which the prin- 
cipal subject of discussion is treated, but also by reason of the 
facts upon which it depends, must be regarded as a final deter- 
mination of the question in hand. 

These facts are briefly as follows: John Snyder, being the 
owner of a tract of one hundred acres of land, conveyed it to 
one John Reger, in trust for the use of himself and wife for 



) 



238 PREREQUISITES TO ADJUDICATION 

their joint lives and the life of the survivor of them, with re- 
mainder to two children of the wife, and to such children as 
the grantors might have. This was all the real estate Snyder 
owned, and it was in proof, that at the date of the deed, his 
debts amounted to some $200, and that his personal property- 
did not exceed in value $150. Furthermore, he had expressed 
apprehensions of a claim for damages for a breach of promise 
suit of marriage, and, within a few days after the making of the 
deed, he had borrowed $200, and had also contracted the debt, 
on_a judgment for which the property in suit was sold. 
/ Here, then, we have every element necessary for a test case. 
I A voluntary deed in trust of all the grantor's real estate, pro- 
viding, inter alia, for himself for life ; existing debts unprovided 
for, and as to which this deed was undoubtedly fraudulent; no 
r property reserved for the reasonable probabilities of the future, 
I an immediate contraction of subsequent debts, and an expressed 
^apprehension of a pending claim for damages. It was, never- 
theless, held, that of these facts the subsequent creditor could 
not avail himself, unless he could further show that a fraud was 
intended against himself. In other words, these facts standing 
alone, did not make for him even a prima facie case. 

Snyder v. Christ was followed in Monroe v. Smith, 29 P. F. 
Smith 459, in which it was said that a deed, void as to existing 
creditors, by reason of the grantor's fraud, is not necessarily 
void as to subsequent creditors; that it is bad only as to those 
it is intended to defraud. 

It is scarcely necessary to say that these cases rule the one 
now under consideration. The deed of John Mell to Isabella 
Noble was executed on the 31st of March, 1859, and was re- 
corded in August of the same year. The deed of William Blair 
to Mrs. Noble was made March 20, 1865, and was recorded 28th 
^f March, 1868. The judgment of Kindler v. John B. Noble, 
upon which the property in dispute was sold, was founded on a 
note dated March 5, 1869, ten years after the date of the first 
deed, and nearly three years after the date of the second. "When, 
in addition to this, we reflect that Noble 's debts at no time were 
large ; that the testimony of Foote relates to declarations made 
by Noble ten years before Kindler 's debt had an existence; that 
there is not one particle of evidence, direct or indirect, that a 
fraud was intended on future creditors, we must certainly eon- 



FRAUDULENT CONVEYANCES 



239 



r 



elude that the plaintiffs had no ease, and that the court should 
so have instructed the jury. 

The judgment is reversed, and venire facias de novo awarded.^^ 

WASHINGTON NAT. BANK v. BEATTY^ ^-"ff^ ^ 

77 N. J. Eq. 252, 76 Atl. 442 AJ*-*"^ v^^ 

(Court of Errors and Appeals of New Jersey. June 21, iMO) yftx/ y ^i 

DILL, J. This appeal from the Court of Chancery brings up 
for review a judgment dismissing the biU in a creditor 's action 
to set aside_a voluntary conveyance of real estate. The bill 
charges the transaction as l&eing^* in violation of the statute en- 
titled 'An act for the prevention of frauds and perjuries,' ap- 
proved March 27, 1874." Rev. St. 1874, p. 299. There is no 
element in the case, either by way of pleading or proof ,Jhat-jtlie^ 
complainant bank gave any credit to the defenda nt relyin g^ugon 
h5^ ownersEip^^oT the property~inr"question. The answer, deny- 
ing the material allegations of the bill^ specifically raises the 



25— Schell V. Gambl e^ JL53_Cal. 
448; Cartersville First Nat. Bank 
V, Bayless, 96 Ga. 684; Springer v. 
Bigford, 160 111. 495; Stumph v. 
Bruner, 89 Ind. 556; Brundage v. 
Chenoworth, 101 Iowa, 256; Shep- 
pard V. Thomas, 24 Kan. 780; Wil- 
liams V. Kemper, 99 Minn. 301; 
Simmons v. Ingram, 60 Miss. 886; 
Cole V. Cole, 231 Mo. 236; Ayers v. 
Woleott, 66 Neb. 712; Crawford v. 
Beard, 12 Ore. 447; Aldons v. 01- 
verson, 17 S. D. 190; Schreyer v. 
Scott, 134 U. S. 405, ace. 
T"^"It is true, that it has been held 
! in some cases, that where a con- 
veyance by a debtor was fraudulent 
in its inception as to his creditors 
at the time, it will be so treated as 
! to subsequent creditors. But these 
' cases must rest upon one of two 
; principles, the property was either 
i so situated that it enabled the debt- 
or to obtain credit upon the faith 
of it, or the fraudulent vendee was 
regarded as a trustee under the 
secret arrangement between the 



parties, and in virtue of such secret^ 
understanding, bound at least so far 
as his word or such contract could 
bind him, to account to the fraudu- 
lent vendor. * * * In the pres- 
ent case, however, it is neither 
shown that the debts were con- 
tracted upon the faith of the prop- 
erty, nor that the defendant was in 
any manner a trustee for, or ac- 
countable to, her husband." Winn 
V. Barnett, 31 Miss. 653. 

"It seems that the fraudulent in- 
tent should relate to or affect sub- 
sequent creditors, and the burden 
of proving the necessary ingredients 
of the fraud is placed upon the sub- 
sequent creditors. Where it is not 
simply a case of subsequent cred- 
itors seeking to share with prior 
creditors in the proceeds, but the 
case is, as here, that of a subse- 
quent creditor alone seeking to in-> 
validate the conveyance, and subject/ 
the land to sale for his benefit, tha 
prior creditor, to defraud whomi 
alone the conveyance was made, hav-[ 



240 



PREREQUISITES TO ADJUDICATION 



issue that the firm of commission merchants, hereinafter referred 
to, were not at the time of the conveyance or subsequently, 
creditors of the defendant, within the purview of the statute. 

The essential facts of the case are within a narrow scope. In 
1894, David C. Beatty, a farmer, consigned certain farm produce 
to a firm of commission merchants in New York. They failed to 
remit the proceeds. Beatty, in his wrath, exposed to public 
view a card on which he had written ' ' All fruit shippers beware 
of" [naming the commission merchants]. "They are damned 
frauds." Two days later, the commission merchants wrote, 
threatening to sue him for $100,000 damages. This so alarmed 
the farmer that he put his property out of his hands, transferring 
the farm which he owned and the mortgages he held on another 
farm to his son without consideration, and at once duly recorded 
the conveyances. The complainant offered no evidence to con- 
trovert Beatty 's statement that the commission merchants were 
frauds in that they converted to their own use proceeds due him. 
The case shows affirmatively that the commission merchants 
never did more than to threaten Beatty and never proceeded, in 



ling been paid by the grantee, the 
/plaintiff §luiuld_show jyiatJbhfi_con- 
) veyan££iJS5:a»-iM2fintijiuiiig^_frauxl^and 
not rely solely on the fact that it 
I was made to defraud the prior cred- 
itor. " Stumph V. Bruner, 89 Ind. 
556, 561. 

' ' Now it is true that the fact that 
a person has entered into a haz- 
ardous business, or engaged in a 
speculative enterprise, at or soon 
after the execution of a voluntary 
conveyance, is strong evidence of a 
fraudulent intent. It evinces a de- 
sire to reap the benefit for himself 
if successful, and escape responsi- 
bility if unlucky. Nevertheless, 
each case must stand upon its own 
footing, and no legal rule can be 
adopted as to the quantity of proof 
or the particular complexity of facts 
which will annul a conveyance upon 
this ground. The character of the 
business, the degree of pecuniary 
hazard incurred, the amount of 
property remaining in the grantor, 
the value of the property conveyed. 



the acts and words occurring coin- 
cidently with the transaction, are 
to be viewed together in solving the 
question of fraudulent intent." 
Hagerman v. Buchanan, 45 N. J. 
Eq. 292, 302. 

"It is doubtless true, as con- 
tended by the defendant, that a 
finding of fraud as to subsequent 
creditors would not be warranted 
by the simple proof that the trans- 
fer was made with a design to set- 
tle the property upon the defendant 
so that it should not be exposed to 
the hazards of his future business 
or liable for any future debts which 
he might contract. Winchester v. 
Charter, 12 Allen. 606, 611; Mowry 
V. Reed, 187 Mass. 174, 177, and 
cases cited. It must further appear 
that at the time of the conveyance 
he had an actual intent to contract 
debts and a purpose to avoid by 
the conveyance the payment of them. 
Stratton v. Edwards. 174 Mass. 374, 
378, and cases cited." Gateley v. 
Kappler, 208 Mass. 426, 428. 



FRAUDULENT CONVEYANCES 241 

any way, to establish the verity of their claim for damages, 
never sued him, and never obtained any judgment against him, 
but v^^ere content to let the matter stand in statu quo until the 
statute of limitations had intervened. Admittedly, B eatty mad e 
the transf er for the p urpose of maki ng himself judgment proof 
against, these commission merchants, if they should sue him and 
if the judgmenFshould go~against him. There is no evidence of 
any other claims or debts against Beatty. The bank^whichjwag 
n ot organized until five years after the con veyance b y Beatty, 
obtained_aJ u(dgment against him on an accommoda tion note^ 12 
years after the transfer, and to collect this judgment it now 
seeks to set asi3re~the"3eeH. The vice chancellor below dismissed 
the bill, holding: First. That under the evidence the commis- 
sion merchants whose threat to bring suit induced the transfers,,.^ 
were, within the meaning of the statute of frauds^ creditors at/ / 
the Jime the, transfers were made, and that the deeds were fraud-, 
ulent as to them. Second. That a conveyance made for the pur^ 
pose of defrauding a single existing creditor is not void as 
against subsequent creditors, the incurring of the debts to whom , 
was not within the contemplation of the debtor at the time when 
the conveyance was made. 

We concur in the action of the vice chancellor in dismissing 
the bill, but not with his conclusions of law. Taking them in' 
their inverse order, the first legal question is whether a creditor 
whose debt is contracted subsequent to the execution of a deed, 
which is fraudulent as against a single existing creditor, in 
order to have such deed set aside, must show not only that the 
deed was fraudulent as to such existing creditor, but also that 
it was made with intent to defraud such persons as should, sub- 
sequent to its date, become creditors of the grantor. The vice 
chancellor held to the afiirmative of this proposition, relying to 
some extent upon the statement of Vice Chancellor Pitney in 
Gray v. Folwell, 57 N. J. Eq. 446, at p. 456, 41 Atl. 869, and 
following the rule laid down by Vice Chancellor Van Fleet in 
Gardner v. Kleinke, 46 N. J. Eq. 90, 18 Atl. 457. In our judg- 
ment the rule laid down by Vice Chancellor Van Fleet in Gard- 
ner V. Kleinke, supra, and the holding of the vice chancellor in 
this case below, in accordance therewith, were erroneous. 

The effect of the statute is to make a voluntary deed fraud- 
ulent as against existing creditors, without regard to the inten- 
tion with which it was executed. It is fraudulent in law. This 
was settled in 1879 by this court in Haston v. Castner, 31 N. J. 

H. & A. Bankruptcy — 16 



242 PREREQUISITES TO ADJUDICATION 

Eq. 697, The effect of a voluntary conveyance upon the rights 
of subsequent creditors was decided by us in 1889. Hagerman 
V. Buchanan, 45 N. J. Eq. 292, 17 Atl. 946, 14 Am. St. Rep. 732. 
It is true that it was considered by the Court of Chancery in 
/Gardner v. Kleinke, supra, that Hag grman v. Buchanan estab- 
j lished^e~principTe that a subsequent creditor was not entitled 
to have a voluntary conveyance set aside unless he could show 
that it was made with intent to defraud such persons as should, 
subsequent to its date, become creditors of the grantor. The 
following language of Mr. Justice Reed in the opinion was cited 
by Vice Chancellor Van Fleet as requiring that conclusion: "A 
voluntary settlement can be attacked by a subsequent creditor 
only upon the ground of the e2dstejHieuja£^aii_actual intent in the 
mind of the parties, at the time of the execution of the convey- 
ance, to hinder, delay, or defraud creditors by means of the 
deed." But the citation does not justify the conclusion. In 
fact, it declares that the test is an actual intent in the mind of 
the grantor to defraud creditors — not subsequent creditors alone, 
but any creditors — and that this is the principle intended to be 
established by that decision is made plain by the subsequent 
language of the opinion, where Mr. Justice Reed, speaking of 
\ subsequent creditors, says: *'An actual fraudulent intent to 
\ defraud some creditors must be proved." 
' The true rule is that, when a conveyance is attacked by a sub- 
sequent creditor, the question to be determined is whether the 
conveyance was fraudulent. The question is the same when 
attacked by an existing creditor ; the only difference is the method 
of proof. When an existing creditor attacks the conveyance, and 
shows that his debt was incurred before, and was existing at 
the time when, the conveyance was made, the law, without fur- 
ther proof, raises a conclusive presumption of fraud so far as 
^at creditor is concerned. When^^iov^^r^ the_convejj^nce is 
I attaskejl, bjrjL_subsgquent^ credit^ he^ must proye fra u9~~a8 u 
lfactj^that^,^an actual f ra^idulent Jntent _to defraud_some 
Vereditor. ' ' By some creditor is meant any creditor, either exists 
ing at the time when the conveyance is made or subsequently. 
If this be shown, the conveyance is proven to be fraudulent, and 
it may be set aside at the instance of any class of creditors, with- 
out regard to the time when the debt came into existencc^*^ 

26 — See 20 Cyc. 424, note 12, for Co., 115 Ala, 668; Buchanan v. Wil- 

many eases in accord. liams (Ark.), 160 S. W. 190; Mu- 

27 — Prestwood v. Troy Fertilizer lock v. Wilson, 19 Colo, 296; Wood- 



FRAUDULENT CONVEYANCES 243 

The next question is whether, under the evidence, the com- 
mission merchants, who asserted the claim for damages upon an 
alleged liability, were proven to be existing lawful creditors or 
other persons named in the statute entitled to set aside the con- 
veyance as fraudulent against them. 

It was necessary for the bank, as a subsequent creditor, to 
prove; (1) A voluntary conveyance; (2) an existing creditor 
or other person having a lawful claim or debt within the mean- 
ing of the statute; (3) an actual intent on the part of the de- 
fendant by means of the deed to delay or hinder some creditor, 
existing or subsequent. 

Conceding that an actual intent on the part of the defendant 
to defeat ajiy judgment which the commission merchants might 
have obtained is proven, the question still remains whether they 
come within the purview of the statute. The rule, both in Eng- 
land (Twyne's Case, 3 Coke, 82), and in this state, is that the 
statute extends its protection to all persons having a valid cause 
of action arising from torts as well as from contracts. Boid v. 
Dean, 48 N. J. Eq. 193, 21 Atl. 618 ; Post v. Stiger, 29 N. J. Eq. 
554 ; Scott V. Hartman, 26 N. J. Eq. 89 ; Thorp v. Leibrecht, 56 
N. J. Eq. 499, 39 Atl. 361.28 Nevertheless, a tort claimant, to 
place himself in the position of a lawful creditor or person 
competent under the statute to set aside a voluntary convey- 
ance, must reduce his claim to judgment, and thus establish a 
legal debt against the fraudulent grantor. When his claim has 
thus been liquidated and established as a lawful debt, he may 
attack a voluntary conveyance made after the liability arose 
and before suit was brought, to defeat his debt, on the theory 
that such judgment when once obtained relates back and es- 
tablishes a debt as of the time when the original cause of action 
accrued.2» 

bury V. Sparrel Print., 187 Mass. proof of an actual intent to de- 

426; Jones v. Light, 86 Me. 437; fraud existing creditors. Upon thia 

Cook V. Lee, 72 N. H. 569; Treze- question the authorities do not seem 

vant V. Terrell, 96 Tenn. 528; Mc- to be in harmony. See Bump, 

Lane v. Johnson, 43 Vt. 48; John- Fraud. Conv. c. 13." But see 

son V. Wagner, 76 Va. 587; Silver- Herschfeldt v. George, 6 Mich. 456; 

nail V. Greaser, 27 W. Va. 550, ace. Hopson v. Paine, 7 Mich. 334. 

In Cole V. Brown, 114 Mich. 369, 28— See Eosen v. Levy, 120 Tenn. 

400, the Court said: "We are not 642, 113 S. W. 1042. 

called upon to determine whether a 29 — See 20 Cyc. 430, for citation 

subsequent creditor can successfully of many cases in accord. 

attack a conveyance by the sole "At the time of the execution of 



244 



PREREQUISITES TO ADJUDICATION 



The complainant failed to bring this case within the rule that 
if after a person has incurred a liability for a tort, and before 
suit brought upon it, he makes a voluntary conveyance or settle- 
ment of his property, and judgment afterwards goes against 
him for the tort, the conveyance is void as against that judg- 
ment. See Boid v. Dean, 48 N. J. Eq. 193, 203, 21 Atl. 618. A 
subsequent creditor who attacks a voluntary conveyance as in 
fraud of a person at the time of the conveyance, claiming dam- 
ages based on the tort of the grantor, must make legal proof of 
the verity and legality of the claim. See Baker v. Oilman, 52 
Barb. (N. Y.) 26. A judgment inJ[ayo r of the claima nt and 
against_the tort-feasor_wouldbe conclusive evidence. What 
further or other proof would be equivalent thereto we are not 
called upon in this case to decide, for the complainant, upon this 
point, offered no evidence. The verity of the claim of the com- 
mission merchants has not been established by any judgment or 
competent proof, and the complainant bank, therefore, failed to 
prove that the commission merchants were lawful creditors or 
other persons within the meaning of the statute, the intent to 
defraud whom would vitiate the conveyance. As against claims 
and demands, the verity of which is never established by any 
judgment or competent proof, the statute does not forbid con- 
veyances or assignments or declare them to be void. 

Therefore, upon the ground stated in this opinion, the judg- 
ment of the court below dismissing_thfi-Jiill,JiL.C(^plainitis 




{ADSWORTH V. 
^ 32 Minn. 



SCHISSELBAUER 

84 

(Supreme Court of Minnesota. May 15, 1884) 

Plaintiff brought this action in the District Court for McLeod 
CountyTalleging injijs complaint the reco very, on A pril25, 188^, 



the conveyances, which Mrs. Lewis, 
the plaintiff below, sought to have 
set aside as fraudulent and void as 
to creditors, she was not a creditor 
of the grantor, Thomas Evans. 
True, she had a valid cause of ac- 
tion against him, at that time, but 
one sounding in tort, and which was 
not asserted even by bringing suit 



thereon, till a month or more there- 
after. The existence of such a cause 
of action clearly does not establish 
the legal relation of debtor and cred- 
itor between the wrongdoer and the 
party injured. Evans v. Lewis, 30 
Oh. St. 11, 14, See Bigelow Fr. 
Conv. (Knowl ton's ed.), p. 194 n. 



FRAUDULENT CONVEYANCES 245 

of a judgment in Justice Court in the same county, in favor of 
one Albrecht and agai nst defendant, A. Schisselbauer, for $66.55, 
the cause of action being a promissory note made by hfm; the 
issuing and return unsatisfied of an execution from the Justice 
Court; the subsequent docketing of the judgment in the Dis- 
trict Court for the same county on January 24, 1883, and an 
assignment to the plaintiff filed in the same court on January 
25, 1883. He also alleges the recovery and docketing of a judg- 
ment in his own favor against the same defendant, on January 
13, 1883, in Justice Court in the same county for $92.40, in an 
action founded on express contract; the issuing and return un- 
satisfied of an execution from the Justice Court; the docketing 
of the judgment~in the DistricT TTourt Tor the same county on 
January 24, 1883. The complaint also states that on January 
25, 1883, and after the assignment to plaintiff, executions on 
the two judgments issued from the District Court, and were 
delivered to the proper officer for service, who returned them 
wholly unsatisfied. T hat on March 24, 1882, and after he hac 
become indebted upon the causes of action on which the judg- 
ments were rendered, the defendant, A. Schisselbauer, and the 
defendant, Barbara, his wife, cgnveyed ^to def endant, Dorman, 
lots 1, 2, 3, 6 and 7 in block 7 in the platted portion of Glencoe 
in McLeod County, and containing more than one acre, with 
intent to defraud the creditors of the former, and especially the 
plaintiff; that Dorman took the deed with knowledge of the 
fraud, and on April 15, 1882, conveyed the same property to 
defendant, Barbara, without any consideration; that both dee3s 
were recorded. ' 

Judgment is demanded _that_jeaclL-o£-tha,^eds ^e ^declared 
f raudu lent^nd void, and be cancelled of record; that each of 
the juHgments be adjudged to be a lien on the real estate, and 
that it be adjudged to be subject to levy and sale on execution 
for the satisfaction of the judgments, with the general prayer 
f** relief. 

A demurrer to the complaint as not stating a cause of action 
was sustained by Macdonald, J., and the plaintiff appealed. 

MITCHELL, J. There are two classes of cases, both com- 
monly called creditors' suits, which, although closely allied, are 
clearly distinguishable. The first, a creditor's suit strictly so- 
called, is where the creditor seeks to satisfy his judgment out 
of the equitable assets of the debtor, which could not be reached 



; 



246 PREREQUISITES TO ADJUDICATION 

on execution. The general rule is that such an action cannot 
be brought until the creditor has exhausted his remedy at law 
by the issue of an execution and its return unsatisfied. This 
was required because equity would not aid the creditor to col- 
lect his debt until the legal assets were exhausted, for, until 
this was done, he might have an adequate remedy at law. The 
execution had to be issued to the county where the debtor re- 
sided, if a resident of the state. Its issue to another county 
would not suffice. Reed v. Wheaton, 7 Paige, 663. T he second 
cl ass of cases is wh ^e_^ropierty legally_liable_tQ_ex ecution has 
been fraudulently conveyed or incumbered by the debtor, and the 
creditor brings the action to set aside the conveyance or in- 
cumbrance as an obstruction to the enforcement of his lien ; for, 
though the property might be sold on execution notwithstand- 
ing the fraudulent conveyance, the creditor will not be required 
to sell a doubtful or obstructed title. In the latter class of 
cases, the prevailing doctrine is that it is not necessary to allege 
that an execution has been returned unsatisfied, or that the 
debtor has no other property out of which the judgment can be 
satisfied; for that is not the ground upon which the court of 
equity assumes to grant relief in such cases, but upon the theory 
that the fraudulent conveyance is an obstruction which prevents 
the creditor 's lien from being efficiently enforced upon the prop- 
erty. As to him the conveyance is void, and he has a right to 
have himself placed in the same position as if it had never been 
/ made. The fact that other property h^s been retained by th e 
/ debtor may be evidence that the conveyance is not fraudulent ; 
1. but if the grantee's title be tainted with fraud, he has no right 
Mo say that all other means to satisfy the debt shall be exhausted 
before he shall be disturbed. Botsford v. Beers, 11 Conn. 369 ; 
Weightman v. Hatch, 17 111. 281 ; Vasser v. Henderson, 40 
Miss. 519. 

I There is much conflict of authority as to how far the creditor 
I must first proceed at law. It has been held inf some cases that 
if an execution has not been returned unsatisfied, an execution 
must be issued and the action brought in aid of an execution 
then outstanding. Such seems to be the latest view of the courts 
of New York, after much vacillation and conflict of decision. 
Adsit V. Butler, 87 N. Y. 585. But the prevailing and, as we 
think, on principle, the better rule is that the creditor need 
only proceed at law far enough to acquire a ii6ijiE^_^fi. JSQp- 
erty sought to be reached before filing his bill to set_aside a 



S-^^LlJbu.-*^ '^ ^^• 



PREFERENCES 247 

fraudulent conveyances The extent to which he must proceed ^ 
to do this will depend on the nature of the property. If it be 
personal, there must be a levy, for until this is made he has no 
lien. If it be real estate, it is enough to obtain judgment, and / 
docket it in the county where the lands are situated. 1 Am/ 
Lead. Cas. 54, 55; 2 Barb. Ch. Pr. 160; Bump on Fraudulent 
Conveyances, 523; Weightman v. Hatch, supra; Newman v. 
Willetts, 52 111. 98 ; Vasser v. Henderson, supra; Dodge v. Gris- 
wold, 8 N. H. 425 ; Tappan v. Evans, 11 N. H. 311 ; Cornell v. 
Radway, 22 Wis. 260; Clarkson v. De Peyster, 3 Paige, 320; 
Dunham v. Cox, 10 N. J. Eq. 437-466. The lien on the land, 
and the right to sell it in satisfaction of the debt, is the basis 
of the right to have the deed set aside. 

This was a suit to set aside a fraudulent conveyance of real 
estate executed by the judgment debtor, and hence falls within 
the second class. It follows from what has been said that it was \ 
not necessary to issue an execution at all before commencing 
the present action. Hence it is wholly immaterial that it does 
not appear that it was directed to the county where the debtor 
resided. In our view the complaint is good. 

Order reversed. 



<. 



J 



2. PREFERENCES 3^ 

Note. — ' ' The re is a large class of cases falling under the in - 
fluencej tho ugh not under the language until recent times, of 
bankruptcy laws, in which conveyances, transfers, and payments 
by debtors to any of their creditors, even when made with express 
intent to defeat other creditors equally entitled to payment, 
have from the beginning been treated as not within the statute 
of Elizabeth. If one went no further than the statute itself, 
one might well suppose that here the doctrine of liberal construc- 
tion had been rejected. Why, it might naturally be asked, were 
such cases relegated to bankruptcy laws, nay to actual proceed- 
ings in bankruptcy or winding-up, — for even the bankruptcy 
laws do not meet these cases except in bankruptcy proceedings? 
T here is no thing^ either in the letter or in the spirit in th e 
statute ^JgUzabeth to require tha rourts to h old that it has no 
applic ation to sucE "casesj and yet it has always been held that 

30 — Under the bankruptcy law sirable to cover here the subject in 
preferences are important in sev- all its phases, rather than to split 
eral connections. It has seemed de- it up. 



248 PREREQUISITES TO ADJUDICATION 

I the statute of Elizabeth was not a statute touching bankruptcy 
or insolvency. 

"'The explanation of the apparent anomaly sometimes given, 
that a debtor ought to have the right to pay creditor A in pref- 
erence to creditor B, if he choose to so, is not satisfactory; for 
that is virtually saying that the debtor may defraud B, The 
true explanation appears to be that there existed already, at 
the time the statute of Elizabeth was passed, an Act of Bank- 
ruptcy, and that another Act of the kind was passed in the very 
same year with our statute. Questions of preference of course 
fell within either of these other statutes. Still there is reason 
to regret that the statute of Elizabeth was not so construed as 
to cover all cases of bankruptcy not deemed to be covered by 
the bankruptcy laws, such as preferences by an insolvent arising 
in other proceedings than those of bankruptcy or winding-up." 
Bigelow on Fr. Conv. (Knowlton's ed.) 73, et seq. See also 
Shelley v. Boothe, ante, p. 200. 

^jy^ • A, (O') Being Insolvent 

A^^rT^^t^ "^^ 144 Fed. 142 

s ^ ^ - '*^ [See this case given cmte, p. 111.] 

■> . •^•■'"/A ^ f 6; y^itUn Four Months 

>^ \\0ESER V. SAVINGS DEPOSIT BANK & TRUST CO. 

>^^^**''^ 148 Fed. 975, 78 C. C. A. 597 

^ '^-t;>^ I^Circuit Court of Appeals, Sixth Circuit. November 22, 1906) 

^ ^// ' LURTON, Circuit Judge. The question in this case is as to 

1L t* whether Mrs. Chadwick's chattel mortgage securing a past in- 

\^ / debtedness to the Savings Deposit & Trust Company of $37,000 

is invalid as a preference under § 60a of the Bankruptcy Law of 

July 1, 1898 (30 Stat. 562, c. 541 [U. S. Comp. St. 1901, p. 

3445]), as amended by Act. Feb. 5, 1903, c. 487, § 13, 32 Stat. 

799 [U. S. Comp. St. Supp. 1905, p. 689]. 

^'" This mortgage was made April 27, 1904. By an agreement 

between the parties it was withheld from record until November 

22, 1904, on which day the mortgagee took actual possession of 

the mortgaged property and put the mortgage to record. On 

December 1, 1904, proceedings in bankruptcy were begun against 




^ 









i(A J(, ■■ ^5 ^'^^^s^sfAXMJiX.. iVJI ^ ^^ < 






PREFERENCES 249 

Mrs. Chadwiek, and in due course she was adjudged a bankrupt. 
By agreement the mortgaged property was placed in the hands 
of the bankrupt receiver for purpose of sale, the rights of the 
mortgagee in the fund to be reserved and adjudicated by the 
court. Thereupon the bankrupt trustee filed a petition attack- 
ing the mortgage as a preference voidable under the bankrupt 
law. The bank consented to the jurisdiction and entered its 
appearance, and filed a cross-petition asserting its right to en- 
force the lien of its said mortgage, and that its claim, when 
determined, be awarded priority by virtue of the lien of its 
said mortgage against the fund in the possession of the court, 
the proceeds of the sale by the trustee of the chattels covered 
by the mortgage. The Disrict Court denied this relief, and the 
cross-petitioner has appealed. The property mortgiC^ea included 
Mrs, Chadwiek 's entire chattel estate, and consisted of house- 
hold furniture, china, bric-a-brac, pictures, jewels, an automo- 
bile, and all chattels in her residence on Euclid avenue, 
Cleveland, and in her barns. 

The transcript recites that it was conceded by the mortgagee 
bank on the hearing below: 

"That at the time the chattel mortgage was executed by 
Cassie L, Chadwiek, to-wit: April 27, 1904, and delivered to 
J. C. Hill, its president, that said Cassie L. Chadwiek was 
insolvent, and that said J. C. Hill as president of said bank had 
reasonable cause to believe at that time that she was insolvent 
and that such condition existed on the 22d day of November, 
1904. It also appeared from the evidence that the effect of 
enforcing such chattel mortgage, if held valid, will be to enable 
said bank to obtain a greater percentage of its debt than any 
other of the bankrupt creditors of the same class." 

The concession brings this transfer squarely within the defi- 
nition of a voidable preference, provided it was such a transfer 
as under the law of Ohio was ' ' required " to be recorded within 
the meaning of § 60a of the bankrupt law of 1898 as amended 
by the act of February 5, 1903. District Judge Tayler, who 
heard this case in the court below, was of opinion that under 
the laws of Ohio, the state wherein the mortgaged property was 
situated, a chattel mortgage is not "required" to be recorded 
within the meaning of the amendment referred to, and that the 
preference related to the date of the actual execution of the 
transfer, and was, therefore, valid as a preference made more 
than four months before the filing of the petition. To support 



250 PREREQUISITES TO ADJUDICATION 

this conclusion he cites § 4150, Ohio Rev. St. 1906, Francisco v. 
Ryan, 54 Ohio St. 307, and In re Shirley, 112 Fed. 301, 50 C. C. 
A. 252, as to the validity of an unrecorded chattel mortgage 
"not accompanied by an immediate delivery and followed by an 
actual and continual change of possession," as against all per- 
sons except "creditors of the mortgagor, subsequent purchasers 
and mortgagees in good faith." To support the proposition that 
an unrecorded lien, good as between the parties under the law 
of the state, is good against a bankrupt trustee, if the lien ante- 
dates the filing of the petition more than four months, the cases 
of Humphrey v. Tatman, 198 U. S. 91, 25 Sup. Ct. 567, 49 L. 
ed. 956, and Rogers v. Page et al., 140 Fed. 596, 72 C. C. A. 164, 
decided by this court, are cited. As to the construction of 
§ 60a before the amendment of 1903, Meyer Brothers Drug Co. 
V. Pipkin Drug Co., 136 Fed. 396, 69 C. C. A. 240, an opinion 
arising under the recording statute of Texas, and decided by 
the Circuit Court of Appeals of the Fifth Circuit, is cited as 
holding that the law has not been changed by the amendment 
of February 5, 1903. It must be conceded that, under the settled 
law of Ohio, this mortgage was valid without recording, as be- 
tween the parties and became good when recorded against all 
creditors who had fastened no lien thereon before, questions of 
actual fraud in withholding it from record out of the way. It 
must also be conceded that prior to the amendment of the bank- 
rupt law by the amending act of February 5, 1903, the pref- 
erence, if free from actual fraud, would relate to the date of 
the making and delivery of the instrument creating it, and, if 
that date was more than four months before the filing of the 
petition for adjudication in bankruptcy, the lien would be good 
against the trustee. Humphrey v. Tatman and Rogers v. Page 
et al., cited above. Both of the cases last cited arose under 
preferences given before the amendment of February 5, 1903. 
What has been the effect of that amendment ? This fact was re- 
ferred to by Mr. Ray of the House Judiciary Committee, who 
explained the amendment in question, when proposed in Con- 
gress, as intended to prevent preferences under unrecorded 
instruments given more than four months before the filing of 
the petition. Touching this he said : 

"By adding to 'A' a clause which shall be equivalent to 
that found in § 3B (1) Act July 1, 1898, c. 541, 30 Stat. 546 
[U. S. Comp. St. 1901, p. 3422]. It seems that as § 60A now 
stands a preferential mortgage may be given and the creditor 



PREFERENCES 251 

preferred, by withholding it from record four months be able' 
to dismiss the trustee suit to recover the same though the paper \ 
was actually recorded within the four months period. See In re 
Wright (D. C. Ga.) 96 Fed. 187; In re Mersman (N. Y.) 7 Am. 
Bankr. Rep. 46." Volume 35, part. 7, Cong. Record, 6,943. 
Before this amendment § 60a read as follows: ,-- 
"A person shall be deemed to have given a preference if, 
being insolvent, he has procured or suffered a judgment to be 
entered against himself in favor of any person, or made a trans- 
fer of any of his property, and the effect of the enforcement of 
such judgment or transfer will be to enable any one of his cred- 
itors to obtain a greater percentage of his debt than any other 
of such creditors of the same class, ' ' 

This section, in its original form, was construed in the cases 
of Humphrey v. Tatman and Rogers v. Page et al., cited above, 
and in several other reported cases as avoiding no preference 
•which originated under an unrecorded transfer made more than 
four months before the beginning of bankruptcy proceedings 
against the maker. Subsequently Mr. Ray became district judge 
for the Northern District of New York, and in the case styled 
In re Hunt (D, C) 139 Fed. 283, he quotes from Collier on 
Bankruptcy (5th Ed.) p, 453, a statement that the amendment 
as offered added after the word * ' required ' ' the words ' ' or per- 
mitted, ' ' and ' ' that the Senate for some reason struck out these 
words, ' ' Judge Ray, from this history, held that because under 
the laws of New York an unrecorded conveyance was good as 
against everybody except subsequent purchasers without notice, 
that it was not ' ' required " to be recorded in order to be effectual 
against a bankrupt trustee. Independently of this legislative 
history. Judge Archbald, in English v, Ross (D. C.) 140 Fed. 
630, and the Circuit Court of Appeals for the Eighth Circuit, 
in First National Bank v. Connett (C. C. A.) 142 Fed. 33, 
reached an opposite conclusion and held that a recording stat- 
ute, which required a conveyance or transfer to be recorded to 
be effectual against a certain class or classes of persons, was a 
law which * ' required ' ' the recording of the transfer in question, 
within the meaning of § 60a as amended. With this conclusion 
we agree. 

Among the reasons which justify this interpretation are these : 

(1) A preference which is an act of bankruptcy by § 3 

should in an harmonious law be voidable by the trustee. By 

that section a transfer made by one "while insolvent" of any 



252 PREREQUISITES TO ADJUDICATION 

portion of his property to oue or more of liis creditors "with 
intent to prefer such creditors over his other creditors" is made 
an act of bankruptcy, and a petition may be filed against such 
person "within four months after the commission of such act." 
With respect to the date of the commission of such act of bank- 
ruptcy, subdivision (1) of the same section provides that the 
date from which the four months begins to run shall be "the 
date of the recording or registering of the transfer or assignment 
when the act consists in having made a transfer of any of his 
property * * * for the purpose of giving a preference as 
hereinbefore provided, * * * if by law such recording or 
registering is required or permitted, or, if it is not, from the 
date when the beneficiary takes notorious, exclusive or continu- 
ous possession of the property unless the petitioning creditors 
have received actual notice of such transfer or assignment. ' ' By 
§ 60a, a definition of a " preference ' ' is given which under § 3 
would constitute an act of bankruptcy and by § 60b, a ' ' prefer- 
ence" so defined is made voidable by the trustee. But, as we 
have seen heretofore, §§ 60a and 60b did not make a preference 
voidable by the trustee unless the preference, whether under a 
recorded or unrecorded instrument, was given within four 
months prior to the filing of a petition in bankruptcy. Thus a 
r 'preference ' ' under § 3, as defined by § 60a, might constitute 
an act of bankruptcy and justify an adjudication if given by an 
j unrecorded instrument more than four months prior to bank- 
j ruptcy and the preference itself be enforced as a perfectly valid 
\act. The plain purpose of the amendment of § 60a was to bring 
^t into harmony with § 3, by making the same period of time the 
test as to whether a preference may be avoided by the trustee, 
under the former, or may constitute an act of bankruptcy under 
r%he latter. The construction given to § 3 should be carried for- 
l ward and given to § 60a as amended ; thus bringing them into 
\consistent relations. "The two," said Judge Arch bald, in Eng- 
lish V. Ross, cited above, ' ' are intimately related, the one in this 
particular being the basis of and dominating the other, and it is 
the failure to realize this and to draw them together as they 
should be that is responsible for any misapprehension. What 
is thus 'required' in the way of recording in the one is also 
'required' as a conveyance in the other and for the same 
purpose. ' ' 

(2) The evil to be corrected was that of secret preferences, 
given by withholding from record instruments which by the 



PREFERENCES 253 

whole policy of recording statutes should be recorded. This evil 
was pointed out by the author of the amendatory act of 1903 
and the object of the amendment of 60a was stated to be the 
remedying of this evil. The law, as it stood, encouraged such 
secret liens and preferences, for, if they could be concealed for 
four months, though acts of bankruptcy, they were not voidable 
by the trustee. If we say that unless the law of the state where 
the transfer is made makes void all such transfers as to all the 
world, that it is not a law which "requires" recording, the evil 
will continue and judges will continue to bewail the iniquity of 
a law which makes such a secret transfer an act of bankruptcy 
and yet holds the preference valid against the bankrupt's estate 
because made more than four months before starting bankrupt 
proceedings against the maker. See the lament of Judge Ray 
In re Hunt, 139 Fed. 286, 287. 

(3) Some effect should be given to the amendment of § 60a 
if the language of the provision will permit. If ' ' required ' ' be 
construed as applying only to a law which makes every such 
transfer absolutely void as to all persons, the amendment will 
be of no effect, for no recording statute, of which we have any 
knowledge, makes void transfers or conveyances as between the 
parties and all of them give effect to such instruments as against 
some classes of persons having actual notice. The amendment 
would be idle, and the evil sought to be remedied would flourish 
as before and the legislative purpose be frustrated. 

(4) In view of all of the foregoing considerations, we reach 
the conclusion that the word ' ' required, ' ' as used in the amend- 
ment, refers to the character of the instrument giving the pref- 
erence or making the transfer, without reference to the fact that 
as to certain persons or classes of persons it may be good or bad 
according to circumstances. If to be valid against certain classes 
of persons, the law of the state ' ' requires ' ' the constructive notice 
of registration it is a transfer which under the amendment is 
"required" to be recorded. This takes account of the purpose 
and policy of recording acts, remedies the evil which flourished 
under the law before the amendment, gives effect to the plain 
purpose of Congress, and gives some effect and force to a pro- 
vision which would otherwise be meaningless, and brings § 3 
and 60a and 60b into harmony of purpose and meaning. ' 

(5) We do not ignore the argument that in § 3 the word "re- 
quired" is followed by the words "or permitted," and that the 
latter words are omitted from the amendment, and that the 



254 PREREQUISITES TO ADJUDICATION 

words "or permitted" were in the act as introduced by the 
author of the bill and retained in the amendment as it passed 
the House, but was dropped in the Senate. 

It is a fact of which we may take notice that it is common to 
recording statutes to set out a list of contracts, conveyances, and 
transfers which may be registered, or as "entitled" or "permit- 
ted" registration. But, if an instrument is not "entitled" or 
"permitted" by law to be recorded, its record is of no effect as 
constructive notice. The effect of recording statutes is limited 
to such instruments as the statute permits record of. Burck v. 
Taylor, 152 U. S. 634, 14 Sup. Ct. 696, 38 L. ed. 578 ; Lynch v. 
Murphy, 161 U. S. 247, 16 Sup. Ct. 523, 40 L. ed. 688 ; Blake v. 
Graham, 6 Ohio St. 580, 67 Am. Dec. 360 ; 24 Encyclopedia of 
Law, p. 142, and cases cited. The Ohio statute concerning the 
recording of chattel mortgages does not require that such mort- 
gages shall be recorded in order to be valid as against the parties 
or purchasers with notice. Only creditors and purchasers with- 
out notice can ignore an unrecorded chattel mortgage, and they 
cannot do so if there immediately followed a delivery and no- 
torious change of possession. Yet the mortgagor or mortgagee 
is entitled or "permitted" to record the instrument, though not 
essential to its validity as against certain classes of persons. 
'■""niVe conclude from the general purpose and policy of record- 
ing statutes that the words "or permitted" are of no vital signi- 
fication in § 3. If the instrument giving the preference is one 
which is "permitted" to be recorded in order to give it validity 
as against certain classes of persons, though perfectly valid with- 
out record as to other classes, it is an instrument "required" to 
be recorded within the meaning of the word as there used. The 
words "required" and "permitted" in the connection used are 
of synonymous legal meaning. The dropping of the words "or 
permitted" by the Senate is, therefore, of no vital signification 
if we are right in regarding § 3 and § 60a as closely connected 
provisions. It is only in extremely doubtful matters of interpre- 
tation that the legislative history of an act of Congress becomes 
important. If the word "required," as used in §§ 3 and 60a, is 
used as referring to the character of the instrument giving the 
preference, and not as to the persons as between whom it may be 
valid without recording or the persons as to whom it is void 
for failure to record, the words ' ' or permitted " in § 3 were 
surplusage, and the Senate might well omit them from the 
amendment, the plain purpose being to tie the two provisions 



PREFERENCES 265 

together. Why they were omitted from the bill as it finally 
passed we can only conjecture. If they had been retained, no 
one would question that the amendment made the preference, 
constituting an act of bankruptcy by § 3, voidable by the trustee 
under §§ 60a and 60b. To say that this plain purpose has failed 
because ' ' or permitted ' ' was inserted by one house and stricken 
out by the other, would be to make nothing of the amendment. 
We should so construe the act as to give it vitality if the words 
of the act will permit. 

Under § 4150, Rev. St. Ohio 1906, a mortgage of chattels, not 
followed by immediate delivery and no actual and notorious 
change of possession, is "required" to be recorded. Otherwise 
it is invalid as to some persons and valid as to others. That such 
a mortgage is "required" by the law of Ohio to be recorded 

within the meaning of § 60a as amended, we have no doubt. 

# * * 

The decree of the court below must be reversed, and the case 
remanded, with direction to proceed in accordance with this 
opinion. ^ y 

InreBECKHAUS 7^ ^i ^A^^"^ 
RASMUSSEN v. McKEY ^u^ , \ -^ ^^ 

A^r^ Jr^^ ^r^, 

177 Fed. 141, 100 C. C. A. 561 A y-^ ^y^^^^ ' oA 

(Circuit Court of Appeals, Seventh Circuit. January 4, 1910) ^ ,» ^^ 

In October, 1907, Beckhaus was adjudged a bankrupt, and' ^^*^ 
respondent came into possession of property consisting of a stock i ^^^ 
of merchandise, fixtures, book accounts, etc., as the property of ///' 
the bankrupt. Rasmussen, petitioner here, filed a petition in the p \J^^^ 
District Court, asking that respondent be ordered to surrender k^ 

the property to the petitioner. The petition was based on a j W"^^ 
written agreement entered into on March 6, 1907, by Beckhaus, -fv^^ 
of the first part, Rasmussen, of the second part, and certain of \ Jf^ 
the pre-existing creditors of Beckhaus, of the third part, whereby '^SP^ 
Beckhaus transferred the property to Rasmussen to hold, use, 
and ultimately dispose of for the benefit of the first and thu:d 
parties. On issues joined the District Cpurt found that on 
March 6, 1907, at and before the time the agreement was made, 
Beckhaus was insolvent, and so remained; that the agreement 
was never recorded; that Rasmussen never took notorious, ex- 
clusive, or continuous possession of the property, but Beckhaus 



|.A>^* 



256 PREREQUISITES TO ADJUDICATION 

o -^ . . . . . . 

was permitted to remain, and did remain, in possession until the 

petition in bankruptcy was filed and respondent came into pos- 
session, first as receiver, and then as trustee ; that Beckhaus 
intended to prefer said third parties, and said third parties had 
reasonable cause to believe that Beckhaus intended by such 
transfer to give them a preference ; and that the effect of the 
enforcement of such transfer would be to enable said third par- 
ties as creditors of Beckhaus to obtain a greater percentage of 
their debts than any other of Beckhaus 's creditors of the same 
class. Being of the opinion that the agreement of transfer, 
within the meaning of § 60a of the bankruptcy act (Act July 1, 
1898, c. 541, 30 Stat. 562 [U. S. Comp. St. 1901, p. 3445]), as 
amended in 1903 (Act Feb. 5, 1903, e. 487, § 13, 32 Stat. 799 
[U. S. Comp. St. Supp. 1909, p. 1314]), was "required" to be 
recorded under the law of Illinois, the District Court adjudged 
^^that the petitioner take nothing. * * • 

§ 1, c. 95, 2 Starr & C. Ann. St. 111. : "Be it enacted by the 
people of the state of Illinois, represented in the General As- 
sembly, that no mortgage, trust deed or other conveyance of 
personal property having the effect of a mortgage or lien upon 
such property, shall be valid as against the rights and interests 
of any third person, unless possession thereof shall be delivered 
to and remain with the grantee, or the instrument shall provide 
for the possession of the property to remain with the grantor, 
and the instrument is acknowledged and recorded as hereinbe- 
fore directed ; and every such instrument shall, for the purposes 
of this act, be deemed a chattel mortgage." 

BAKER, Circuit Judge (after stating the facts as above). 
1. On the basis that the Illinois statute, as construed by the 
courts of the state, does not declare unrecorded chattel mort- 
gages void except as against the rights and interests of innocent 
purchasers or mortgagees and attachment or execution cred- 
itors; that no such "third person" is concerned in these proceed- 
ings; and that the respondent has no standing except as the 
representative of the bankrupt and his general creditors, against 
whom an unrecorded chattel mortgage is valid — the petitioner 
contends that the contract here involved (considered as the 
equivalent of an unrecorded chattel mortgage) , having been 
executed over four months before the petition in bankruptcy 
was filed, cannot be assailed by the respondent as a voidable 



PREFERENCES 257 

preference, because it was not "required by law" to be recorded 
within the meaning of amended § 60a. 

The contention mainly rests on a comparison of original § 3b 
with the history of the amendment to § 60a. § 3b provided that 
the four months within which an act of bankruptcy was avail- 
able as the basis of a petition against an insolvent should "not 
expire until four months after the date of the recording, or 
registering of the transfer * * * when the act consists in 
having made a transfer * * * for the purpose of giving a 
preference * * * if by law such recording or registering is 
reqiiired or permitted, or, if it is not, from the date when the 
beneficiary takes notorious, exclusive or continuous possession 
of the property. ' ' The last sentence of § 60a, * ' Where the pref- 
erence," etc., was added by the amendment of 1903. As passed 
by the House the sentence did not end with "required." The 
continuation was "or permitted, or, if it is not, from the date 
when the beneficiary takes notorious, exclusive, or continuous 
possession of the property transferred. ' ' These last-quoted words 
were stricken out by the Senate. Inasmuch as the present case 
does not involve "possession," but turns wholly upon "record- 
ing," the inquiry is limited to the effect of the excision of the 
words "or permitted" after "required"; and the particular 
question concerns the soundness of the petitioner's proposition 
tliat such excision compels a construction of the amendment as 
adopted, whereby a chattel mortgage, which a trustee in bank- 
ruptcy is assailing as a voidable preference, is not required to be 
recorded unless an examination of the local law shows that the 
chattel mortgage, to be impregnable, must be recorded as notice 
to the persons presently represented by the trustee. 

If, as we are inclined to believe, the Court of Appeals for the 
Sixth Circuit, in In re Loeser (148 Fed. 975), was correct in 
concluding that "the words 'required' and 'permitted' in the 
connection used are of synonymous legal meaning," no effect 
could be attributed to the dropping of the redundant word. 

If they are not synonymous, the omission of "permitted" 
does not imply inevitably (on the basis that no other inference 
can fairly be drawn) that the lawmakers intended that "re- 
quired" should be qualified or limited to less than it would have 
meant if the clause in § 3b and in the original draft of the amend- 
ment to § 60a had ended with "required"; for Congress may 
well have conceived that an insolvent debtor and a diligent cred- 
itor were not necessarily to be dealt with in the same way. That 

H. & A. Bankruptcy — 17 



'\CZtJ 



258 PREREQUISITES TO ADJUDICATION 

is, in the interest of fair and open dealing by those who do busi- 
ness on credit, it might have been thought that an insolvent 
debtor who does not cause a chattel mortgage given to some of 
his creditors, to the exclusion of others, to be recorded, whether 
recording be "required" or only "permitted" by the local law, 
should be liable to be thrown into bankruptcy ; while the diligent 
creditor (diligence being usually favored in the law) should be 
permitted, after four months, to retain his security, if on tak- 
ing it he did all the law "required." See Little v. Hardware 
Co. (133 Fed. 874). 

Whether the words be deemed synonymous or not, the drop- 
ping of "permitted" only eliminated whatever idea pertained to 
that word — it could not affect "required," for "required" 
stands full and untouched, without adverb or clause to cut it 
down. The primal canon of statutory construction is that the 
language actually used be given its full and fair meaning, that 
unqualified words be taken without qualification, and that in the 
absence of ambiguity extraneous matters be not considered. Un- 
der this canon probably nothing more can profitably be said 
than, if recording is required, it is required. If required for 
any purpose, or without purpose, how can it be said to be not 
required? If recording be not required, unless required for all 
purposes, it could never be said to be required where the instru- 
ment is valid between the immediate parties without recording. 
We are further restrained by what seems to us to be the absurd 
consequences of any other ruling. If a good-faith second mort- 
gage had been taken, then according to the petitioner's theory 
the trustee could avoid the preference. But if, as is frequently 
the case, each mortgage was large enough to exhaust the mort- 
gaged property, why should the trustee consume the free assets 
in his hands in carrying on one end of a lawsuit between the 
mortgagees? The trustee could gain nothing for the general 
creditors whichever way the litigation ended, but would be spend- 
ing their pittances to benefit a preferred creditor. The same 
would be true even if the recorded second mortgage was less than 
the value of the mortgaged property ; for, on the hypothesis that 
the trustee has no right to resist the unrecorded first mortgage 
on behalf of the general creditors, the surplus above the second 
mortgage would have to be applied upon the first mortgage. 
Preferential mortgagees and lienholders are "adverse claim- 
ants," entitled to have their rights determined in plenary suits. 
They seek to withhold or diminish the fund which otherwise 



PREFERENCES 259 

would be shared among the general creditors, and the general 
creditors are in fact interested in resisting that reduction. Now 
if the trustee may not assail preferences except in favor of one 
preferred creditor as against another, and if the general cred- 
itors have no interest in such contests except to pray that their 
fund be not therein completely consumed in costs and fees, the 
amendment to § 60a not merely failed to accomplish any bene- 
fit — it brought about a positive injustice. 

"W^hen the amended section is read against the background of 
the nature and purpose of the act, our interpretation, we be- ^ 
lieve, is confirmed. The act is a national act. It practically ""^^"^yC^ 
supplants the state insolvency laws. We think it clear that Con- ^i^ ^^ , 
gress recognized the vast sweep of interstate commerce and meant ^Cf- C 
to free interstate traders from the confusion and harassment *' 

attendant upon a multiplicity of variant local laws. Therefore 
the act in all its parts ought to be interpreted in a national view, 
doing away as far as possible with the variances in the local 
laws. To release an insolvent debtor from his debts is an act of 
grace. Through the whole law runs the clear purpose of extend- 
ing grace only to honest debtors. Honesty, fairness, equity is 
the whole spirit of the law. Nothing is more abhorrent to equity 
than deceitful appearances covering secret preferences. So the 
diligent creditor who obtains security must not help the debtor 
to be dishonest, unfair, secretive; he can hold his security only' 
on condition that he give his fellow creditors a four-months op- 
portunity to determine whether or not they will file a petition! 
in bankruptcy against the debtor. The openness and fairness 
of the preferred creditor are made the terms upon which he may 
retain his preference. In this view the only inquiry is: Does 
the local law require instruments of the kind in question to be 
recorded? There is no need of further investigation into the 
scope or purposes of the local law. There is no concern whether 
or not the trustee represents innocent purchasers, mortgagees, 
attachment or execution creditors. No issue is to be made with 
respect to the validity of the lien claims supposed to be repre- 
sented by the trustee. § 60b, which authorizes the trustee to 
' ' recover the property or its value, ' ' says nothing about the rep- 
resentation of the trustee. It is enough on this point that the 
trustee is trustee, and that the preferred creditor has failed to 
record the instrument of transfer, if by the local law instru- 
ments of that kind are required for any purpose to be recorded. 



260 PREREQUISITES TO ADJUDICATION 

Only by this interpretation can this national law be administered 
with anything like uniformity respecting preferences. 

2. Even if the true interpretation of § 60a compelled us to 
decide this ease upon the meaning of the Illinois statute, with 
due regard to the construction thereof by the Illinois courts, we 
could not agree with the petitioner. 

Recording a mortgage of chattels left in the possession of the 
mortgagor is required "as against the rights and interests of 
any third person." The term "third person" is broad enough 
to include everybody outside of the immediate parties to the 
j instrument and their privies. A simple contract creditor who 
1 has not obtained a judgment is just as much a ' ' third person, ' ' 
1 is just as much a stranger to the mortgage, as is the simple con- 
1 tract creditor who has obtained a judgment. Both have the right 
"to enforce payment, if that can be done. The interests of both 
are prejudiced if the debtor's property is covered by a fraudu- 
lent transfer. If at the time of the fraudulent transfer one 
creditor has obtained a judgment and the other has not, the only 
difference is that one has proceeded farther than the other in 
the enforcement of his rights and the protection of his interests. 
And when it is said that a fraudulent transfer is void only as 
to judgment creditors the expression means no more than that 
a creditor cannot seize his debtor's property until he has ob- 
tained some process which authorizes the seizure. As stated in 
Skilton V. Codington, 185 N. Y. 80, 77 N. E. 790, 113 Am. St. 
Rep. 885 : 

"The rule that a creditor must first recover a judgment is 
simply one of procedure and does not affect the right. There- 
fore, where the recovery of a judgment becomes impracticable, 
it is not an indispensable requisite to enforcing the rights of 
the creditor." 
^•" Our examination of the Illinois cases has led us to conclude 
KW* -» that the Illinois courts have not decided, independently of pro- 
v*^' cedure and having regard solely to rights, that simple contract 
r^X y^- creditors, irrespective of the progress they may have made in 
r j^ suing their debtor, are not "third persons" within the meaning 
and intent of the recording statute. Indeed, we think that the 
case of Long v. Cockern^i goes quite a way towards holding 
that they are. But at all events we consider that the question 

31—128 lU. 29, 21 N. E. 201. 



^^'. 



Y' 



PREFERENCES 261 

is open, and that we are therefore at liberty to adopt the con- 
struction we believe to be sound and righteous. 
The petition to review and revise is dismissed. 



(c) Procuring, Suffering or Permitting a Judgment , t^j»,H.*, ^ 

f 



L 



WILSON BROTHERS v. NELSON i , < 



183 U. S. 191, 46 L. ed. 147, 22 Sup. Ct. 74 
(United States Supreme Court. December 9, 1901) 

The Circuit Court of Appeals for the seventh circuit certified 
to this court the following statement of facts and questions of, 
law. [The facts appear sufficiently in the opinion.] * * * 

*'The questions of law upon which this court [the Circuit 
Court of Appeals] desires the advice and instruction of the 
Supreme Court are: 

"1. Whether the said Cassius B. Nelson, by failure to file his 
voluntary petition in bankruptcy before the sale under such 
levy, and to procure thereon an adjudication of bankruptcy, or 
by his failure to pay and discharge the judgment before the sale 
under such levy, committed an act of bankruptcy, within the 
meaning of § 3a, subd. (3), of the bankrupt act. 

"2. Whether the judgment so entered and the levy of the 
execution thereon was a preference 'suffered' or 'permitted' by 
the said Nelson within the meaning of clause (3) of § 3a of the 
bankrupt law. 

"3. Whether the failure of Nelson to vacate and discharge 
the preference so obtained, if it was one, at least five days before 
the execution sale, was an act of bankruptcy." 

Mr. Justice GRAY, after stating the facts, delivered the opin- 
ion of the court: 

On February 5, 1885, Nelson, in consideration of so much 
money then lent to him by Sarah Johnstone, executed and de- 
livered to her his promissory note for the sum of $8,960, payable 
in five years, with interest until paid. Attached to that note 
was an irrevocable power of attorney, executed by Nelson, in the 
usual form, authorizing any attorney of a court of record in his 
name to confess judgment thereon after its maturity. The in- 
terest on the note was paid until November 1, 1898. At that 
date Nelson, as he well knew, was, and long had been, and ever 
since continued to be, insolvent. On November 21, 1898, Sarah 



262 PREREQUISITES TO ADJUDICATION 

Johnstone caused judgment to be duly entered in a court of 
Wisconsin upon the note and the warrant of attorney for the 
face of the note and costs. Upon that judgment, execution was 
issued to the sheriff, who on the same day levied on Nelson's 
goods, and on December 15, 1898, sold the goods by auction, and 
applied the proceeds thereof in part payment of the judgment. 
This proceeding left Nelson without means to meet any other of 
•nhis obligations. The judgment was entered and the levy made 
without the procurement of Nelson and without his knowledge 
or consent. The judgment and levy were unassailable in law, 
and could not have been vacated or discharged by any legal pro- 
ceedings, except by his voluntary petition in bankruptcy. On 
December 10, 1898, a petition in bankruptcy was filed against 
Nelson; and the questions certified present, in various forms, 
the question whether Nelson committed an act of bankruptcy 
within the meaning of § 3, cl. 3, of the bankrupt act of 1898. 

In considering these questions, strict regard must be had to 
the provisions of that act, which, as this court has already had 
occasion to observe, differ in important respects from those of 
the earlier bankrupt acts. Bardes v. First Nat. Bank, 178 U. S. 
524, 44 L. ed. 1175, 20 Sup. Ct. Rep. 1000 ; Bryan v. Bernheimer, 
181 U. S. 188, 45 L. ed. 814, 21 Sup. Ct. Rep. 557; Wall v. Cox, 
181 U. S. 244, 45 L. ed. 845, 21 Sup. Ct. Rep. 642 ; Pirie v. Chi- 
cago Title & T. Co., 182 U. S. 438, 45 L. ed. 1171, 21 Sup. Ct. 
Rep. 906. 

In § 3 of the bankrupt act of July 1, 1898, c. 541, acts of 
bankruptcy are defined as follows: "Acts of bankruptcy by a 
person shall consist of his having (1) conveyed, transferred, 
concealed, or removed, or permitted to be concealed or removed, 
any part of his property with intent to hinder, delay, or defraud 
his creditors, or any of them; or (2) transferred, while insolvent, 
any portion of his property to one or more of his creditors, with 
intent to prefer such creditors over his other creditors; or (3) 
suffered or permitted, while insolvent, any creditor to obtain a 
preference through legal proceedings and not having, at least 
five days before a sale or final disposition of any property af- 
fected by such preference, vacated or discharged such preference ; 
or (4) made a general assignment for the benefit of his creditors ; 
or (5) admitted in writing his inability to pay his debts and his 
willingness to be adjudged a bankrupt on that ground." [30 
Stat, at L. 544.] 

In the first and second of these an intent on the part of the 



PREFERENCES 263 

bankrupt, either to hinder, delay, or defraud his creditors, or to 
prefer over other creditors, is necessary to constitute the act of 
bankruptcy. But in the third, fourth, and fifth no such intent 
is required. 

The third, which is that in issue in the case at bar, is in these 
words : " (3) suffered or permitted, while insolvent, any creditor 
to obtain a preference through legal proceedings, and not having, 
at least five days before a sale or final disposition of any prop- 
erty affected by such preference, vacated or discharged such 
preference. ' ' 

By the corresponding provision of the bankrupt act of 1867, 
any person who, being bankrupt or insolvent, or in contempla- 
tion of bankruptcy or insolvency, ' ' procures or suffers his prop- 
erty to be taken on legal process, with intent to give a preference 
to one or more of his creditors," "or with the intent, by such 
disposition of his property, to defeat or delay the operation of 
this act," was deemed to have committed an act of bankruptcy. 
Act of March 2, 1867, c. 176, § 39, 14 Stat, at L. 536 ; Rev. Stat. 
§ 5021. 

The ^ctj)f 1898 differs from that of 1867 in wholly omitting 
the clauses, ' ' with intent to give a preference to one or more of 
his creditors" or "to defeat or delay the operation of this act;" 
and in substituting for the words ' * procures or suffers his prop- 
erty to be taken on legal process," the words "suffered or per- 
mitted, while insolvent, any creditor to obtain a preference 
through legal proceedings,", and not having, five days before a 
sale of the property affected, "vacated or discharged such pref- 
erence. ' ' 

There is a similar difference in the two statutes in regard to 
the preferences declared to be avoided. 

The act of 1867 enacted that if any person, being insolvent, or 
in contemplation of insolvency, within four months before the 
filing of the petition by or against him, "with a view to give a 
preference to any creditor or person having a claim against him, 
or who is under any liability for him, procures or suffers any 
part of his property to be attached, sequestered, or seized on 
execution," or makes any payment, pledge, or conveyance of 
any part of his property, the person receiving such payment, 
pledge, or conveyance, or to be benefited thereby, "or by such 
attachment," having reasonable cause to believe that such per- 
son is insolvent and that the same is made in fraud of this act, 
the same should be void and the assignee might recover the prop- 



264 PREREQUISITES TO ADJUDICATION 

erty. Act of March 2, 1867, c. 176, § 35, 14 Stat, at L. 534 ; 
Rev. Stat. §5128. 

The corresponding provisions of the act of 1898 omit the req- 
uisite of the act of 1867, "with a view to give a preference." 

§ 60 of the act of 1898, relating to ' ' preferred creditors, ' ' 
begins by providing that ''a person shall be deemed to have 
given a preference, if, being insolvent, he has procured or suf- 
fered a judgment to be entered against himself in favor of any 
person, or made a transfer of any of his property, and the effect 
of the enforcement of such judgment or transfer will be to 
enable any one of his creditors to obtain a greater percentage 
of his debt than any other of such creditors of the same class." 

§ 67, relating to * ' liens, ' ' provides, in subd. c, as fol- 
lows: "A lien created by, or obtained in, or pursuant to, any 
suit or proceeding at law or in equity, including an attachment 
upon mesne process, or a judgment by confession, which was 
begun against a person within four months before the filing of 
the petition in bankruptcy by or against such person, shall be 
dissolved by the adjudication of such person to be a bankrupt, 
if (1) it appears that said lien was obtained and permitted while 
the defendant was insolvent, or [and] that its existence and en- 
forcement will work a preference, or (2) the party or parties to 
be benefited thereby had reasonable cause to believe the defend- 
ant was insolvent and in contemplation of bankruptcy, or (3) 
that such lien was sought and permitted in fraud of the pro- 
visions of this act." 

The same section provides, in subd. /, "that all levies, judg- 
ments, attachments, or other liens obtained through legal pro- 
ceedings against a person who is insolvent, at any time within 
four months prior to the filing of a petition in bankruptcy against 
him, shall be deemed null and void, in ease he is adjudged a 
bankrupt. ' ' This provision evidently includes voluntary, as well 
as involuntary, bankrupts; for the 1st clause of the 1st section 
of the act, defining the meaning of words and phrases used in 
the act, declares that " 'a person against -^hom a petition has 
been filed' shall include a person who has filed a voluntary 
petition. ' ' 

Taking together all the provisions of the act of 1898 on this 

subject, and contrasting them with the provisions of the act of 

1867, there can be no doubt of their meaning. 

/'The 3d clause of § 3, omitting the word "procure," and the 

/phrase "intent to give a preference," of the former statute, 



PREFERENCES 265 

c 
makes it an act of bankruptcy if the debtor has ''suffered or 
permitted, Avhile insolvent, any creditor to obtain a preference 
through legal proceedings, ' ' and has not ' ' vacated or discharged 
such preference" five days before a sale of the property. By 
§ 60 he is " deemed to have given a preference ' ' if, being insol- 
vent, he has "suffered a judgment to be entered against himself 
in favor of any person, * * * and the effect of the enforce- 
ment of such judgment * * * will be to enable any one of 
his creditors to obtain a greater percentage of his debt" than 
other creditors. By § 67, subd. c, a lien obtained in any suit, 
"including an attachment upon mesne process, or a judgment 
by confession," begun within four months before the filing of 
the petition in bankruptcy, is dissolved by the adjudication in 
bankruptcy, not only if "such lien was sought and permitted 
in fraud of the provisions of this act, ' ' but also if "its existence 
and enforcement will work a preference." And by subd. / of 
the same section "all levies, judgments, attachments, or other 
liens obtained through legal proceedings against a person who 
is insolvent," within the four months, shall be deemed null and 
void in case he is adjudged a bankrupt. 

The act of 1898 makes the result obtained by the creditor, and 
not the specific intent of the debtor, the essential fact. 

In the case at bar, the warrant of attorney to confess judg- 
ment was indeed given by the debtor nearly thirteen years be- 
fore. But being irrevocable and continuing in force, the debtor 
thereby, without any further act of his, "suffered or permitted" 
a judgment to be entered against him, within four months be- 
fore the filing of the petition in bankruptcy, the effect of the en- 
forcement of which judgment would be to enable the creditor to 
whom it was given to obtain a greater percentage of his debt 
than other creditors; and the lien obtained by which, in a pro- 
ceeding begun within the four months, would be dissolved by 
the adjudication in bankruptcy, because "its existence and en- 
forcement will work a preference." And the debtor did not, 
within five days before the sale of the property on execution, 
vacate or discharge such preference, or file a petition in bank- 
ruptcy. By failing to do so, he confessed that he was hopelessly 
insolvent, and consented to the preference that he failed to 
vacate. 

The cases on which the appellee relies, of Wilson v. City Bank, 
17 Wall. 473, 21 L. ed. 723 ; Clark v. Iselin, 21 Wall. 360, 22 L. 
ed. 568 ; and Tenth Nat. Bank v. Warren, 96 U. S. 539, 24 L. 



266 PREREQUISITES TO ADJUDICATION 

ed. 640, have no application, because they were decided under 
the act of 1867, which expressly required the debtor to have 
acted with intent to give a preference. 

The case of Buckingham v. McLean, 13 How. 150, 14 L. ed. 
90, arose under the still earlier Bankrupt Act of August 19, 1841, 
c. 9, § 2 (5 Stat, at L. 442). And the point there decided was 
that a power of attorney to confess a judgment was an act of 
the bankrupt creating a ' ' security, ' ' which that bankrupt act in 
express terms declared void only if made in contemplation of 
bankruptcy and for the purpose of giving a preference or 
priority over general creditors. 

The careful change in the language of the provisions of the 
Bankrupt Act of 1898 from those of the former Bankrupt Acts 
upon the subject must have been intended by congress to pre- 
vent a debtor from giving a creditor an irrevocable warrant of 
attorney which would enable him, at any time during the in- 
solvency of the debtor, and within four months before a peti- 
tion in bankruptcy, to obtain a judgment and levy the execution 
on all the property of the bankrupt, to the exclusion of his other 
creditors. 

The answer to the second and third questions certified must 
be that the Judgment so entered and the levy of the execution 
thereon were a preference "suffered or permitted" by Nelson, 
within the meaning of clause 3 of § 3 of the bankrupt act ; and 
that the failure of Nelson to vacate and discharge, at least five 
days before the sale on execution, the preference so obtained, 
was an act of bankruptcy ; and it becomes unnecessary to answer 
the first question. 

Second cmd third questions answered m the affirmative.^^ 

1 ^^ ^' CITIZENS BANKING CO. v. RAVENNA NAT. BANK 

%^ . (United States Supreme Court. June 8, 1914) 

p- "JV Mr. Justice VAN DEVANTER delivered the opinion of the 
■X/^ court : 

Upon a petition filed in the District Court for the Northern 
District of Ohio by one of her creditors, Cora M. Curtis was ad- 

ji 32 — The Chief Justice, Mr. Jus- The dissenting opinion by Mr. Jus- 
11 tice Shiras, Mr, Justice Brewee, tice Shiras is omitted. 

and Mr. Justice Peckham dissented. In Duncan v. Landis, 106 Fed. 



PREFERENCES 267 

judged a bankrupt. In addition to matters not requiring notice, 
the petition charged that within four months next preceding its 
filing the respondent committed an act of bankruptcy, in that 
(a), while insolvent, she suffered and permitted the Citizens 
Banking Company to recover a judgment against her for 
$1,598.78 and costs, in the Common Pleas Court of Erie County, 
Ohio, and to have an execution issued under the judgment and 
levied on real estate belonging to her, whereby the company ob- 
tained a preference over her other creditors, and (b) at the 
time of the filing of the petition, which was one_day less than 
four months after the levy of the execution, she had not vacated 
or discharged the levy and resulting preference. 

The company appeared in the bankruptcy proceedings and 
challenged the petition on the ground that it disclosed no act of 
bankruptcy, but the court, deeming that such an act was charged, 
overruled the objection, and, there being no denial of the facts 
stated in the petition, g ^judg ed the respondent a bankrupt. The 
company appealed to the Circuit Court of Appeals, and that 
court, having briefly reviewed the opposing views touching the 
point in controversy (121 C. C. A. 250, 202 Fed. 892), certified 
the case here, with a request that instruction be given on the 
following questions : 

"(1) Whether the failure by an insolvent judgment debtor, 
and for a period of one day less than four months after the levy 
of an execution upon his real estate, to vacate or discharge such 
levy, is a 'final disposition of the property' affected by the levy, 
under the provisions of § 3a (3) of the bankruptcy act of 1898 
[30 Stat, at L. 546, c. 541, U. S. Comp. Stat. 1901, p. 3422]. 

"(2) Whether an insolvent debtor commits an act of bank- 
ruptcy, rendering him subject to involuntary adjudication as a 
bankrupt under the bankruptcy act of 1898, merely by inaction ^ 
for the period of four months after the levy of an execution 
upon his real estate." 

It will be observed that no reference is made to an accom- 
^ished or impending disposal of the property in virtue of the 
levy, although the mode of disposal prescribed by the local law 
is by advertisement and sale. 2 Bates's Anno. Stat. (Ohio) 
§§ 5381, 5393. 

839, the Court of Appeals for tbe elusion as the dissenting Justices 
Third Circuit, by a vote of two to above, 
one, had arrived at the same con- 



re 



'-^^^^ 



268 PREREQUISITES TO ADJUDICATION 

The answers to the questions propounded turn upon the true 
construction of J 3.a (3) of the bankruptcy act, which declares: 

"Acts of bankruptcy by a person shall consist of his having 
* * * (3) suffered or permitted, while insolvent, any creditor 
to obtain a preference through legal proceedings, and not having 
at least five days before a sale or final disposition of any prop- 
erty affected ^yy such preference vacated or discharged such 
preference." 30 Stat, at L. 544, c. 541, U. S. Comp. Stat. 1901, 
p. 3418. 

Looking at the terms of this provision, it is manifest that the 
act of bankruptcy which it defines consists of three elements. 
/ The first is the insolvency of the debtor ; the second is suffering 
A^ij^^ * or permitting a creditor to obtain a preference through legal 

proceedings; that is, to acquire a lien upon property of the 
debtor by means of a judgment, attachment, execution, or kindred 
proceeding, the enforcement of which will enable the creditor 
to collect a greater percentage of his claim than other creditors 
of the same class; and the third is the failure of the debtor to 
vacate or discharge the lien and resulting preference five days 
before a sale or final disposition of any property affected. Only 
through the combination of the three elements is the act of 
bankruptcy committed. Insolvency alone does not suffice, nor 
is it enough that it be coupled with suffering or permitting a 
creditor to obtain a preference by legal proceedings. The third 
element must also be present, else there is no act of bankruptcy 
within the meaning of this provision. All this is freely conceded 
by counsel for the petitioning creditor. 

The questions propounded assume the existence of the first two 
elements, and are intended to elicit instruction respecting the 
proper interpretation of the clause describing the third ; namely, 
"and not having, at least five days before a sale or final dis- 
position of any property affected by such preference, vacated or 
discharged such preference." It is to this point that counsel 
have addressed their arguments. 

Without any doubt this clause shows that the debtor is to have 
until five days before an approaching or impending event within 
which to vacate or discharge the lien out of which the preference 
arises. What, then, is the event which he is required to antici- 
pate! The statute answers, "a sale or final disposition of any 
property affected by such preference. ' ' As these words are part 
of a provision dealing with liens obtained through legal proceed- 
ings, and as the enforcement of such a lien usually consists in 






PREFERENCES 269 

selling some or all of the property aif eeted, and applying the pro- 
ceeds to the creditor's demand, it seems quite plain that it is to 
such a sale that the clause refers. And as there are instances in 
which the property affected does not require to be sold, as when 
it is money seized upon execution or attachment, or reached by 
garnishment, * * * it seems equally plain that the words 
"or final disposition" are intended to include the act whereby 
the debtor's title is passed to another when a sale is not re- 
quired. No doubt, the terms "sale or final disposition," ex- 
plained as they are by the context, are comprehensive of every 
act of disposal, whether by sale or otherwise, which operates as 
an enforcement of the lien or preference. 

But we do not perceive anything in the clause which suggests 
that the time when the lien is obtained has any bearing upon 
when the property must be freed from it to avoid an act of bank- 
ruptcy. On the contrary, the natural and plain import of the 
language employed is that it will suffice if the lien is lifted five |>Y v^>> 
days before a sale or final disposition of any of the property f f^ 

affected. This is the only point of time that is mentioned, and * 
the implication is that it is intended to be controlling. 

To enforce a different conclusion counsel for the petitioning 
creditor virtually contends that the clause has the same meaning 
as if it read, "and having failed to vacate or discharge the 
preference at least five days before a sale or final disposition of 
any of the property affected, or, at most, not later than five days 
before the expiration of four months after the lien was obtained. ' ' 
But we think such a meaning cannot be ascribed to it without 
rewriting it, and that we cannot do. The contention puts into 
it an alternative which is not there, either in terms or by fair 
implication, and to which Congress has not given assent. Indeed, ^ 
it appears that in the early stages of its enactment the bank- I 
ruptcy bill contained a provision giving the same effect to a fail- ' 
ure to discharge the lien within a prescribed period after it 
attached as to a failure to discharge it within a designated num- 
ber of days before an intended sale; and that during the finaj,-^ 
consideration of the bill that provision was eliminated and the 
one now before us was adopted. This, of course, lends strength 
to the implication otherwise arising that the clause names the 
sole test of when the lien must be vacated or discharged to avoid 
an act of bankruptcy. 

The contention to the contrary is sought to be sustained 
by a reference to §§ 3b, 67c, and 67f. But we perceive noth- 



^^cf, 



270 PREREQUISITES TO ADJUDICATION 

ing ill those sections to disturb the plain meaning of § 3a (3). 
It defines a particular act of bankruptcy, and purports to be 
complete in itself, as do other subsections defining other acts 
of bankruptcy. § 3b deals with the time for filing petitions in 
bankruptcy and limits it to four months after the act of bank- 
ruptcy is committed. It says nothing about what constitutes 
an act of bankruptcy, but treats that as elsewhere adequately 
defined. §§ 67c and 67f deal with the retrospective effect of 
adjudications in bankruptcy, the former declaring that certain 
liens obtained in suits begun within four months before the 
filing of the petition shall be dissolved by the adjudication, 
and the latter that certain levies, judgments, attachments, and 
other liens obtained through legal proceedings within the same 
period shall become nuU and void upon the adjudication. Both 
assume that the adjudication will be grounded upon a sufficient 
, act of bankruptcy, as elsewhere defined, and give to every ad- 
( judication the same effect upon the liens described, whether it 
be grounded upon one act of bankruptcy or another. And what 
is more in point, there is no conflict between § 3a (3) and the 
sections indicated. All can be given full effect according to 
their natural import without any semblance of interference be- 
tween § 3a (3) and the others. 

But it is said that unless § 3a (3) be held to require the ex- 
tinguishment of the lien before the expiration of four months 
from the time it was obtained the result will be that in some in- 
stances the lien will not be dissolved or rendered null through 
the operation of §§ 67c and 67f, because occasionally the full 
four months will intervene before an act of bankruptcy is com- 
mitted, and therefore before a petition can be filed. Conceding 
i that this is so, it proves nothing more than what is true of all 
liens obtained through legal proceedings more than four months 
prior to the filing of the petition. And while it may be true, as 
is suggested, that if the debtor is not restricted to less than four 
months within which to extinguish the lien there will be in- 
stances in which general creditors will be affected disadvan- 
tageously, it must be reflected that there also will be instances 
in which an honest and struggling debtor will be able to ex- 
tinguish the lien the requisite number of days before a sale or 
final disposition of any of the property affected, and thereby to 
avoid bankruptcy, without injury to any of his creditors. But 
with this we are not concerned. The advantages and disadvan- 



PREFERENCES 271 

tages have been balanced by Congress, and its will has been ex 
pressed in terms which are plain and therefore controlling. 

Lastly, it is said that the term ''final disposition" is not used 
in the sense hereinbefore indicated, but as denoting the status 
which a lien acquires through the lapse of four months before 
the filing of a petition in bankruptcy. This is practically a 
reiteration of the contention already noticed, but probably is 
intended to present if from a different angle. It overlooks, as 
we think, the influence which rightly must be given to the con- 
text, and also the manifest inaptness of the term to express the 
thought suggested. When one speaks of a sale or fiTial disposition 
of property, he means by final disposition an act having sub- 
stantially the effect of a sale, — a transfer of ownership and con- 
trol from one to another, — and especially is this true when he 
is referring to a sale or final disposition in the enforcement of a 
lien. We regard it as entirely clear that the term is so used in 
this instance, and that it signifies an affirmative act of dispc^a^l, 
not a mere lapse of time which leaves the lien intact and still 
requiring enforcement. To illustrate, let us take the instance 
of a provisional attachment of real property, which the creditor 
is not entitled to enforce unless he sustains the demand which is 
the subject of the principal suit; and let us suppose that the 
debtor defends against the demand, and that the suit is pend- 
ing and undetermined four months after the levy. Of course, 
an adjudication in bankruptcy upon a petition filed thereafter 
would not disturb the attachment. But could it be said that 
the property attached was finally disposed of at the end of the 
four months? An affirmative answer seems quite inadmissible. 

We conclude that both of the questions propounded by the 
Circuit Court of Appeals should be resolved in the negative. 

As shown by the reported cases, some diversity of opinion has 
arisen in other Federal courts in disposing of similar questions 
(Re Rome Planing MiU, 96 Fed. 812, 815 ; Re Vastbinder, 126 
Fed. 417, 420; Re Tupper, 163 Fed. 766, 770; Re Windt, 177 
Fed. 584, 586; Re Crafts-Riordon Shoe Co., 185 Fed. 931, 934; 
Folger V. Putnam, 114 C. C. A. 513, 194 Fed. 793, 797; Re 
Truitt, 203 Fed. 550, 554), and so we deem it well to observe 
that the conclusion here stated has been reached only after full 
consideration of those cases. 

Questions answered "No." 




s^ 



272 PREREQUISITES TO ADJUDICATION 

(d) Transfer of Bankrupt's Property 
i * ^ ^\^' JAQUITH V. ALDEN 

^ 189 U. S. 78, 47 L. ed. 717, 23 Sup. Ct. 649 

(United States Supreme Court. April 27, 1903) 

Statement by Mr. Chief Justice FULLER: 

F. N. Woodward et al. filed their petition in bankruptcy, and 
were adjudicated bankrupts November 26, 1901. They had 
become insolvent August 15, and on that day were not indebted 
to G. Edwin ^Iden, who afterwards, in ignorance of the in- 
solvency, made sales to Woodward et al., and received payments 
from them therefor in the regular course of business, and with- 
out any idea or intention on the part of Alden of obtaining a 
preference thereby, the sales and payments being as follows : 

Sales 

Rubber $289.46 

" 657.89 

" 644.28 

*' 535.99 

Cartage .50 

Asbestine 10.40 

Payments 

Payment of bill Aug. 17 $289.46 

Payment of bill Aug. 28 657.89 

Payment of bill Sept. 30 644.28 

The merchandise sold Woodward et al. was manufactured by 
them, and the result of the transactions was to increase their 
estate in value. Alden^ petitioned to be allowed to^proye his 
claim of $546.89. 

The referee disallowed the claim unless at least the amount of 
$633.88 was surrendered to the estate. The district judge re- 
versed the judgment of the referee and allowed the claim, and 
the decree of the District Court was aflSrmed by the Circuit Court 
of Appeals (118 Fed. 270) on the authority of Dickson v. 
Wyman, 55 L. R. A. 349, 49 C. C. A. 574, 111 Fed. 726. There- 
upon an appeal to this court was allowed and a certificate granted 
under § 25, 6, 2. 

Mr. Chief Justice FULLER delivered the opinion of the court : 
The facts found established that on August 15 the aggregate 



Aug. 


17, 1901 




28, - 


Sept. 


30, - 


Oct. 


18, " 


Oct. 


18, - 




31, " 


Sept. 


4, 1901. 


Sept. 


28, 1901. 


Oct. 


29, 1901. 



PREFERENCES 273 

of the property of the bankrupts was not, at a fair valuation, 
suflB.cient in amount to pay their debts, but that Alden was 
ignorant of this, and, in good faith and in the regular course of 
business, sold material to the bankrupts, and received payment 
therefor several times between August 15 and November 26, 
when the petition was filed, on which day the amount of $546.89 
for material delivered shortly before had not been paid. All the 
material so sold to them was manufactured by the bankrupts, 
and increased their estate in value. 

The question is whether the payments made to Alden (or 
either of them) were preferences within § 60 of the bankruptcy 
act of 1898 [30 Stat, at L. 562, c. 541, U. S. Comp. Stat. 1901, p. 
3445], which must be surrendered, under § 575^, before his claim 
could be allowed. * * * 

In Pirie v. Chicago Title & T. Co., 182 U. S. 438, 45 L. ed. 
1171, 21 Sup. Ct. Rep. 906, the Circuit Court of Appeals for the 
Seventh Circuit had affirmed an order of the District Court for 
the Northern District of Illinois, rejecting a claim of Carson, 
Pirie, & Company against the estate of Frank Brothers, bank- 
rupts, and the case was then brought to this court on findings 
of fact and conclusions of law of the Circuit Court of Appeals, 
made and filed "pursuant to the requirements of subdivision 3, 
rule 36 of General Orders in Bankruptcy." The first three of 
the findings were as follows: 

*"' First. That on February 11, 1899, August Frank, Joseph 
Frank, and Louis Frank, trading as Frank Brothers, were duly 
adjudged bankrupts. 

"Second. That for a long time prior thereto appellants 
carried on dealings with the said bankrupt firm, said dealings 
consisting of a sale by said appellants to said Frank Brothers of 
goods, wares, and merchandise amounting to the total sum of 
$4,403.77. 

"Third. That said appellants, in the regular and ordinary 
course of business, and within four months prior to the adjudi- 
cation in bankruptcy herein, did collect and receive from said 
bankrupts as partial payment of said account for such goods, 
wares, and merchandise so sold and delivered to said Frank 
Brothers, the sum of $1,336.79, leaving a balance due, owing and 
unpaid, amounting to $3,093.98." 

It was further found that, at the time this payment was made, 
Frank Brothers were hopelessly insolvent, to their knowledge; 
but that Carson, Pirie, & Company had no knowledge of such 

H. & A. Bankruptcy — 18 



^' 






274 PREREQUISITES TO ADJUDICATION 

insolvency, nor had reasonable cause to believe that it existed; 
nor did they have reasonable cause to believe that the bank- 
rupts, by the payment, intended thereby to give a preference; 
and that they had refused to surrender to the trustee the amount 
of the payment made to them by the bankrupts, as a condition 
of the allowance of their claim. Upon the facts the Circuit 
Court of Appeals concluded, as matter of law, that the payment 
made ' ' at the time and in the manner above shown ' ' constituted 
a preference ; and that, by reason of the failure and refusal of 
Carson, Pirie, & Company to surrender the preference, they were 
not entitled to prove their claim. 

The judgment below was affirmed by this court, and it was 
held that a payment of money was a transfer of property, and 
when made on an antecedent debt by an insolvent was a prefer- 
ence within § 60a, although the creditor was ignorant of the in- 
solvency, and had no reasonable cause to believe that a prefer- 
ence was intended. The estate of the insolvent, as it existed at 
the date of the insolvency, was diminished by the payment, and 
the creditor who received it was enabled to obtain a greater per- 
centage of his debt than any other of the creditors of the same 
class. 

In the present case all the rubber was sold and delivered after 
theTjankrupts' property had actually become insufficient to pay 
their debts, and their estate was increased in value thereby to 
an amount in excess of the payments made. The account was a 
running account, and the effect of the payments was to keep it 
alive by the extension of new credits, with the net result of a 
gain to the estate of $546.89, and a loss to the seller of that 
amount, less such dividends as the estate might pay. In these, 
circumstances the payments were no more preferences than if 
the purchases had been for cash, and, as parts of one continuous 
bona fide transaction, the law does not demand the segregation 
of the purchases into independent items so as to create distinct 
pre-existing debts, thereby putting the seller in the same class as 
creditors already so situated, and impressing payments with the 
character of the acquisition of a greater percentage of a total 
indebtedness thus made up. 

We do not think the slight variation in the dates of sales and 
payments affords sufficient ground for the distinction put for- 
ward by counsel between the payments of September 4 and 28 
and the payment of October 29 (which he concedes should be 
upheld) in their relation to the rubber furnished August 17 and 



PREFERENCES 275 

28 and September 30. All the material was sold and delivered 
after August 15, and neither of the items can properly be 
singled out as constituting outstanding indebtedness, payment 
of which operated as a preference. ,. 

The facts as found in Pirie_V;_Chicago Title & T. Co. were so ' i ^ ^ * 
entirely different from those existing here that this case is not "^ 

controlled by that. In view of similar vital differences it has been 
held by the Circuit Court of Appeals for the first circuit (Dick- 
son V. Wyman, 55 L. R. A. 349, 49 C. C. A. 574, 111 Fed. 726), 
second circuit (Re Sagor, 9 Am. Bankr. Rep. 361), third cir- 
cuit (Gans V. EUison, 52 C. C. A. 366, 114 Fed. 734), eighth 
circuit (Kimball v. Rosenham Co., 52 C. C. A. 33, 114 Fed. 85), 
that payments on a running account, where new sales succeed 
payments, and the net result is to increase the value of the es- 
tate, do not constitute preferential transfers under § 60a. 

Judgment affirmed.^^ 

Mr. Justice WHITE and Mr. Justice McKENNA, not being 
able to concur in the reasons by which the court, in the opinion 
just announced, distinguishes this ease from that of Pirie v. 
Chicago Title & T. Co., and deeming the latter case controlling 
in this, dissent. 

NEW YORK COUNTY NATIONAL BANK v. MASSEY /) ' ^^ 

192 U. S. 138, 48 L. ed. 380, 24 Sup. Ct. 199 "^^ )1, 

(United States Supreme Court. January 4, 1904) 

Mr. Justice DAY delivered the opinion of the court: 
This is an appeal from the judgment of the Circuit Court of 
Appeals for the second circuit, reversing the order of the District 
Court affirming the order of the referee in bankruptcy, allowing 
a claim against the estate of Stege & Brother. This claim was| 
allowed against the contention of the trustee of the bankrupt, I 
that it could not be proved until the bank should surrender a J 
certain alleged preference given to it in contravention of the^ 
bankrupt act. The Circuit Court of Appeals reversed the order 
of the District Court, holding that the bank must first surrender 
the preference before it could be allowed to prove its claim. 

33 — See Yaple v. Dahl-Millikan 
Grocery Co., 193 U. S. 526; Wild & -i 

Co. V. Trust Co., 153 Fed. 562. f ' ' ^JUa*. 



276 PREREQUISITES TO ADJUDICATION 

54 C. C. A. 116, 116 Fed. 342. The Circuit Court of Appeals 
made the following findings of fact : 

"For a number of years past the bankrupts, George H. Stege 
and Frederick H. Stege, were engaged, in the city and county 
of New York, in the business of dealing in butter, eggs, etc., at 
wholesale, under the firm name and style of Stege & Brother. 
On January 27, 1900, they filed a voluntary petition of bank- 
ruptcy in the District Court, with liabilities of $67,232.49 and 
assets of $20,729.66, and upon the same day were duly adju- 
dicated bankrupts. Among their liabilities there was an in- 
debtedness of $40,000 to the New York County National Bank 
for money loaned upon four promissory notes for $10,000 each. 
The money was loaned to the bankrupts and the notes were 
originally given as follows: 

"April 26, 1899, $10,000, 6 months, due October 26, 1899. 

"April 26, 1899, $10,000, 7 months, due November 26, 1899. 

"June 26, 1899, $10,000, 4 months, due October 26, 1899. 

"August 2, 1899, $10,000, 4 months, due December 2, 1899. 

"None of these notes were paid when they fell due, but were 
all renewed as follows : 

"October 26, 1899, $10,000, 3 months, due January 26, 1900. 

"November 26, 1899, $10,000, 75 days, due February 9, 1900. 

"October 26, 1899, $10,000, 3 months, due January 26, 1900. 

"December 2, 1899, $10,000, 69 days, due February 9, 1900. 

* ' On January 23, 1900, in the morning, the bankrupts went to 
the New York County National Bank and asked the officers to 
have the two notes of $10,000 each, which fell due on January 
26, extended. The bankrupts at that time informed the bank 
officers that they were unable to pay the notes then about to fall 
due. In the afternoon of the same day, January 23, 1900, the 
bankrupts again called upon the bank officers, and at that time 
they delivered to them a statement of their assets and liabilities, 
which statement was not delivered until after the deposit of 
$3,884.47 had been made on that day. This statement as of 
January 22, 1900, showed their assets to be $19,095.67 and their 
liabilities $65,864.61. 

* ' The bankrupts kept their bank account in the New York 
County National Bank since May 6, 1899. On January 22, 1900, 
their balance in the bank was $218.50, On the same day they 
deposited in that account $536.83; on January 23, 1900, $3,- 
884.47 ; on January 25, 1900, $1,803.95, making a total of $6,- 
225.25 deposited in the three days mentioned. Of this amount 



>s^/ 



PREFERENCES 277 

there was left in the bank account on the day of the adjudica- 
tion in bankruptcy, January 27, 1900, the sum of $6,209.25, the 
bank having honored a check of Stege Brothers after the date of 
all these deposits. 

"At the first meeting of creditors, February 9, 1900, the New 
York County National Bank filed its claim for $33,790.25. 

* * In its proof of claim the bank credited upon one of the notes /? 
which became due on January 26, 1900, the deposit of $6,209.25. ,/^<- 
The claim was allowed by the referee in the sum of $33,750.25, "^"^ /J. 
being $40,000 less the amount on deposit in bank ($6,209.25) *"'".-> 
and a small rebate of interest on the unmatured notes. Some 
of the creditors at this meeting reserved the right to move to 
reconsider the claim of the New York County National Bank; 
the referee granted this request. Afterwards the trustee, as the 
representative of the creditors, moved before the referee to dis- 
allow and to expunge from his list of claims the claim of the ^> 
New York County National Bank unless it surrendered the 1 ' *y 
amount of the deposit, namely, $6,209.25, which had been credited 4<- 
by the bank upon one of the notes. The referee denied that 
motion, and an appropriate order was made and entered. The 
trustee thereupon duly filed his petition to have the question 
certified to the district judge. The district judge on the 25th 
day of November, 1901, made an order affirming the order of 
the referee. From that order an appeal was duly taken by the 
trustee to the Circuit Court of Appeals. The deposits were made 
in the usual course of business ; at the time they were made Stege 
Brothers were insolvent." 

As a conclusion of law, the Court of Appeals held that the 
deposit would amount to a transfer enabling the bank to obtain 
a greater percentage of the debt due to it than other creditors 
of the same class, and that allowance of the claim should be 
refused unless the preference was surrendered. This case re- 
quires an examination of certain provisions of the bankrupt law. 
§ 68 of that law provides : 

" § 68. Set-offs and counterclaims : 

*' (a) In all cases of mutual debts or mutual credits between 
the estate of a bankrupt and a creditor, the account shall be 
stated and one debt shall be set off against the other and the 
balance only shall be allowed or paid. <iAy >j^T ' < 

*' (b) A set-off or counterclaim shall not be allowed in favor 
of any debtor of the bankrupt which (1) is not provable against 
the estate, or (2) was purchased by or transferred to him after 



278 



PREREQUISITES TO ADJUDICATION 



- u>^' 



^. 



!a^ 



•Ct-^-^ 



the filing of the petition or within four months before such filing, 
with a view to such use and with knowledge or notice that such 
bankrupt was insolvent or had committed an act of bankruptcy. ' ' 

§ 60 provides (prior to the amendment of February 5, 1903) : 

" § 60. Preferred creditors : a. A person shall be deemed to 
have given a preference if, being insolvent, he has * * * 
made a transfer of any of his property, and the effect of the 
• • * transfer will be to enable any one of his creditors to 
obtain a greater percentage of his debt than any other of such 
creditors of the same class. ' ' 

§ 57gr provides (prior to amendment of February 5, 1903) : 
"Claims of creditors who have received preferences shall not be 
allowed unless such creditors shall surrender their preferences. ' ' 

Considering, for the moment, § 68, apart from the other sec- 
tions, subdivisions a contemplates a set-off of mutual debts or 
credits between the estate of the bankrupt and the creditor, with 
an account to be stated and the balance only to be allowed and 
paid. Subdivision h makes certain specific exceptions to this 
allowance of set-off, and provides that it shall not be allowed in 
favor of the debtor of the bankrupt upon an unproved claim or 
one transferred to the debtor after the filing of the petition in 
bankruptcy, or within four months before the filing thereof, with 
a view to its use for the purpose of set-off, with knowledge or 
notice that the bankrupt was insolvent or had committed an act 
of bankruptcy. Obviously, the present case does not come 
within the exceptions to the general rule made by subdivision b. 
It cannot be doubted that, except under special circumstances, 
or where there is a statute to the contrary, a deposit of money 
upon general account with a bank creates the relation of debtor 
and creditor. The money deposited becomes a part of the gen- 
eral fund of the bank, to be dealt with by it as other moneys, to 
be lent to customers, and parted with at the will of the bank, 
and the right of the depositor is to have this debt repaid in 
whole or in part by honoring checks drawn against the deposits. 
It creates an ordinary debt, not a privi lege or r ight of a fiduciar y- 
character . National Bank v. Millard, JU Wall. 152, 19 L. ed. 
897. Or, as defined by Mr. Justice White, in the case of Davis 
V. Elmira Sav. Bank, 161 U. S. 288, 40 L. ed. 702, 16 Sup. Ct. 
Rep. 505: "The deposit of money by a customer with his 
banker is one of loan, with the superadded obligation that the 
money is to be paid, when demanded, by a check. ' ' Scammon v. 
Eimball, 92 U. S. 369, 23 L. ed. 485. It is true that the findings 



PREFERENCES 279 

of fact in this case establish that at the time these deposits were 
made the assets of the depositors were considerably less than 
their liabilities, and that they were insolvent, but there is noth- 
ing in the findings to show that the deposit created other than 
the ordinary relation between the bank and its depositor. The 
check of the depositor was honored after this deposit was made, 
and for aught that appears Stege Brothers might have required 
the amount of the entire account without objection from the 
bank, notwithstanding their financial condition. 

We are to interpr e t statutes, not to make them. Unless other 
sections of the law are controlling, or, in order to give a har- 
monious construction to the whole act, a different interpretation 
is required, it would seem clear that the parties stood in the 
relation defined in § 68a, with the right to set off mutual debts, 
the creditor being allowed to prove but the balance of the debt. 

§ 68« of the bankruptcy act of 1898 is almost a literal repro- 
duction of § 20 of the act of 1867. [14 Stat, at L. 526, c. 176.] 
So far as we have been able to discover the holdings were uniform 
under that act that set-off should be allowed as between a bank 
and a depositor becoming bankrupt. Re Petrie, 7 Nat. Bankr. 
Reg. 332, 5 Ben. 110, Fed. Cas. No. 11,040 ; Blair v. Allen, 3 Dill. 
101, Fed. Cas. No. 1,483 ; Scammon v. Kimball, 92 U. S. 362, 23 
L. ed. 483. In Traders' Nat. Bank v. Campbell, 14 Wall. 87, 20 
L. ed. 832, the right of set-off was not relied upon, but a deposit 
was seized on a judgment which was a preference. 

But it urged that under § 60a this transaction amounts to 
giving a preference to the bank, by enabling it to receive a 
greater percentage of its debts than other creditors of the same 
class. A transfer is defined in § 1 (25) of the act to include the 
sale and every other and different method of disposing of or 
parting with property, or the possession of property, absolutely 
or conditionally, as a payment, pledge, mortgage, gift, or se- 
curity. While these sections are not to be narrowly construed so 
as to defeat their purpose, no more can they be enlarged by 
judicial construction to include transactions not within the scope 
and purpose of the act. This section, 1 (25), read with §§ 57 g 
and 60a, requires the surrender of preferences having the effect 
of transfers of property "as payment, pledge, mortgage, gift, 
or security which operate to diminish the estate of the bankrupt 
and prefer one creditor over another. ' ' 

The law requires the surrender of such preferences given to 
the creditor within the time limited in the act before he can 



^/, 



280 PREREQUISITES TO ADJUDICATION 

prove his claim. These transfers of property, amouuting to 
preferences, contemplate the parting with the bankrupt's prop- 
erty for the benefit of the creditor, and the consequent diminu- 
tion of the bankrupt's estate. It is such transactions, operating 
to defeat the purposes of the act, which, under its terms, are 
preferences. 

As we have seen, a deposit of money to one's credit in a bank 
does not operatteto diminish the estate of the depositor, for when 
he parts with the money he creates at the same time, on the 
part of the bank, an obligation to pay the amount of the deposit 
as soon as the depositor may see fit to draw a check against it. 
It is not a transfer of property as a payment, pledge, mortgage, 
gift, or security. It is true that it creates a debt, which, if the 
creditor may set it off under § 68, amounts to permitting a 
creditor of that class to obtain more from the bankrupt's estate 
than creditors who are not in the same situation, and do not 
hold any debts of the bankrupt subject to set-off. But this does 
^ ^^ "jjiiot, in our opinion, operate to enlarge the scope of the statute 
l]rr /'defining preferences so as to prevent set-off in cases coming 
■- ^<^^ l| within the terms of § 68a.. If this argument were to prevail, it 
^ix.^ CK would, in cases of insolvency, defeat the right of set-off recog- 
nized and enforced in the law, as every creditor of the bankrupt 
holding a claim against the estate subject to reduction to the full 
amount of a debt due the bankrupt receives a preference in the 
fact that, to the extent of the set-off, he is paid in full. 

It is insisted that this court in the case of Pirie v. Chicago 
Title & T. Co., 182 U. S. 438, 48 L. ed. 1171, 21 Sup. Ct. Rep. 
906, held a payment of money to be a transfer of property within 
the terms of the bankrupt act, and when made by an insolvent 
within four months of the filing of the petition in bankruptcy, 
to amount to a preference, and that case is claimed to be de- 
cisive of this. In the Pirie Case the turning question was 
whether the payment of money was a transfer within the mean- 
ing of the law, and it was held that it was. There the payment 
of the money within the time named in the bankrupt law was a 
parting with so much of the bankrupt's estate, for which he re- 
ceived no obligation of the debtor but a credit for the amount 
on his debt . This was held to be a transfer of property within 
the meaning of the law. It is not necessary to depart from the 
ruling made in that case, that such payment was within the 
operation of the law, while a deposit of money upon an open 
account subject to check, not amounting to a payment, but 



PREFERENCES 281 

creating an obligation upon the part of the bank to repay upon 
the order of the depositor, would not be. Of the case of Pirie 
V. Chicago Title & T. Co., it was said in Jaquith v. Alden, 189 
U. S. 78, 82, 47 L. ed. 717, 719, 23 Sup. Ct. Rep. 649,650: "The 
judgment below was aflSrmed by this court, and it was held that 
a payment of money was a transfer of property, and when made 
on an antecedent debt by an insolvent was a preference within 
§ 60a, although the creditor was ignorant of the insolvency, and 
had no reasonable cause to believe that a preference was intended. 
The estate of the insolvent, as it existed at the date of the in- 
solvency, was diminished by the payment, and the creditor who 
received it was enabled to obtain a greater percentage of his 
debt than any other of the creditors of the same class. ' ' 

In other words, the Pirie Case, under the facts stated, shows 
a transfer of property to be applied upon the debt, made at the 
time of insolvency of the debtor, creating a preference under 
the terms of the bankrupt law. That case turned upon entirely 
different facts, and is not decisive of the one now before us. 
It is true, as we have seen, that in a sense the bank is permitted 
to obtain a greater percentage of its claim against the bankrupt 
than other creditors of the same class, but this indirect result is 
not brought about by the transfer of property within the mean- 
ing of the law. There is nothing in the findings to show fraud 
or collusion between the bankrupt and the bank with a view to 
create a preferential transfer of the bankrupt's property to the 
bank, and in the absence of such showing we cannot regard the 
deposit as having other effect than to create a debt to the bank- 
rupt, and not a diminution of his estate. 

In our opinion the referee and the District Court were right 
in holding that the amount of the deposit could be set off against \ ^{^ 
the claim of the bank, allowing it to prove for the balance, and 
the Circuit Court of Appeals, in holding that this deposit 
amounted to a preference, to be surrendered before proving they 
debt, committed error. -^ 

Judgment of the Circuit Court of Appeals reversed, and that 
of the District Court affirmed; cause remanded to latter court. 

Mr. Justice McKENNA dissents.^* 

34 — See Studley v. Boylston Nat. Cf. In re Starkweather & Albert, 

Bank, 229 U. S. 523, where the de- 206 Fed. 797; In re National Lum- 

positor paid the notes by checks ber Co., 212 Fed. 928; Merchants' 

drawn on the account. Nat. Bank v. Ernst, 231 U. S. 60. 



/^ 



282 PREREQUISITES TO ADJUDICATION 

Uj'^f^^^^^ THOMPSON V. FAIRBANKS 

196 U. S. 516, 49 L. ed. 577, 25 Sup. Ct. 306 

(United States Supreme Court. February 20, 1905) 

The plaintiff in error, by this writ, seeks to review a judgment 
of the Supreme Court of the State of Vermont in favor of the 
defendant in error. 75 Vt. 361, 56 Atl. 11. The facts upon 
which the judgment rests are as follows: On the 30th day of 
June, 1900, Herbert E. Moore, of St. Johnsbury, in the State of 
Vermont, filed his voluntary petition in bankruptcy in the United 
States District Court for the District of Vermont, and on the 
3d day of July, 1900, Moore was by the court duly adjudged a 
bankrupt, and on the 15th of September, 1900, the plaintiff in 
error was appointed a trustee in bankruptcy of Moore's estate, 
and duly qualified. He commenced this action in the County 
Court of Caledonia County, in the State of Vermont, on the first 
Tuesday of June, 1901, against the defendant Fairbanks, to 
recover from him the value of certain personal property alleged 
to have belonged to the bankrupt Moore on the 16th day of 
May, 1900, and which was, as alleged, sold and converted by 
Fairbanks, on that day, to his own use, the value of the property 
being $1,500, as averred in the declaration. The defendant filed 
his plea and gave notice that upon the trial of the case he would 
give in evidence and rely upon, in defense of the action, certain 
special matters set up in the plea. The case was, by order of 
the County Court, and by the consent of the parties, referred 
to a referee to hear the cause and report to the court. It was 
subsequently heard before the referee, who filed his report, find- 
ing the facts upon which the decision of the case must rest. He 
found that before June, 1886, the bankrupt Moore bought a 
livery stock and business in St. Johnsbury village, in the State 
of Vermont. At the time of this purchase the defendant was 
the lessor of the buildings in which the business was conducted, 
and it continued to be carried on in those buildings. Moore, in 
making the purchase, had assumed a mortgage then outstanding 
on the property, and a short time before March 1, 1888, the 
defendant assisted him to pay this mortgage by signing a note 
with him for $1,425, payable to the Passumpsic Savings Bank of 
St. Johnsbury. Subsequently defendant signed notes, which, 
with accrued interest, were merged in one, dated March 1, 1900, 
for $2,510.75, due on demand to said savings bank, signed by 



PREFERENCES 283 

the bankrupt and by the defendant as his surety. This note had 
not been paid when the case was referred to the referee. The 
defendant also signed other notes payable to the First National 
Bank of St. Johnsbury, which were merged into one, and, by 
various payments made by Moore, it was reduced to $525, and 
on June 4, 1900, it was paid by the defendant. All these notes 
had been signed by the defendant to assist Moore in carrying 
on, building up, and equipping his livery stable and livery busi- 
ness, and as between them the notes belonged to Moore to pay. 
On April 15, 1891, Moore gave the defendant a chattel mort- 
gage on the livery property to secure him for these and other 
debts and liabilities. The property was described in the mort- 
gage as follows : ' ' All my livery property, consisting of horses, 
wagons, sleighs, vehicles, harnesses, robes, blankets, etc., also all 
horses and other livery property that I may purchase in mv 
business or acquire by exchange." 

The condition contained in the mortgage was, that if Moore 
should ' ' well and truly pay, or cause to be paid, to the said Henry 
Fairbanks all that I now owe him, or may owe him hereafter by 
note, book account, or in any other manner, and shall well and 
truly save the said Henry Fairbanks harmless, and indemnify 
him from paying any commercial paper on which he has become 
or may hereafter become holden in any manner for my benefit 
as surety, indorser, or otherwise, then this deed shall be void; 
otherwise of force." 

This mortgage was acknowledged, and the affidavit, as pro- 
vided by the Vermont statute, was appended, showing the justice 
of the debt and the liability contemplated to be secured by the 
mortgage, and the mortgage was duly recorded on the 18th day 
of April, 1891, in the St. Johnsbury clerk's office, by the town 
clerk thereof. On March 5, 1900, Moore gave the defendant an- 
other chattel mortgage on this livery stock, which, on March 23, 
1900, defendant assigned to the Passumpsic Savings Bank, and 
that bank has ever since been its holder and owner. This mort- 
gage was given to secure defendant against all his liabilities for 
Moore. 

On the 7th of May, one John Ryan sued out a writ in assump- 
sit against Moore to recover some $500, and an attachment on 
the livery stock was levied in that suit by the deputy sheriff. 
This attachment remained in force until dissolved by the bank- 
ruptcy proceedings, and the suit is still pending in the State 
Court of Vermont. 



284 PREREQUISITES TO ADJUDICATION 

Uuder the agreement contained in the chattel mortgage of 
April, 1891, Moore made sales, purchases, and exchanges of 
livery stock to such an extent that on March 5, 1900, there only 
remained of the livery property on hand April 15, 1891, two 
horses. These sales, exchanges, and purchases were sometimes 
made by Moore without communication with or advice from the 
defendant, and frequently after consultation with him. The 
livery stock, as it existed on May 16, 1900, was all acquired by 
exchange of the original stock, or with the avails of the old 
stock, or from the money derived from the business. Some years 
after the execution of the chattel mortgage of April 15, 1891, 
Moore became embarrassed, and finally, shortly prior to March 
5, 1900, he became and continued wholly insolvent. On May 
16, 1900, the defendant, acting under the advice of counsel, and 
with the consent of Moore, took possession, under the mortgage 
of April 15, 1891, of all the livery property then on hand, and 
on June 11, 1900, caused the same to be sold at public auction 
by the sheriff. It is for the net avails of this sale, amounting to 
$922.08, which the sheriff paid over to the defendant, that this 
suit is brought. The Passumpsic Savings Bank on September 
15, 1900, proved its note of $2,510.75 as an unsecured claim 
against the bankrupt estate of Moore, as the mortgage held by 
the bank as security had been given by Moore in March, 1900, to 
defendant, and by him assigned to the bank within four months 
of the filing of the petition in bankruptcy. 

For the purpose of defeating the effect of the defendant taking 
possession of the livery property under his chattel mortgage of 
April, 1891, the trustee in bankruptcy presented a petition to 
the United States District Court of Vermont for leave to inter- 
vene as plaintiff in the Ryan attachment suit, and to have the 
lien of Ryan's attachment preserved for the benefit of the gen- 
eral creditors. This petition was dismissed by that court. The 
referee found that the defendant and his counsel knew, when he 
took possession of the livery property, under his mortgage, that 
Moore was insolvent, and was considering going into bankruptcy. 
The referee also found that he did not intend to perpetrate any 
actual fraud on the other creditors, or any of them, but he did 
intend thereby to perfect his lien on the livery property, and 
make it available for the payment of his debt before other com- 
plications by way of attachment or bankruptcy arose, and he 
understood at that time that it was probable that the Ryan at- 
tachment would hold good as against his mortgage. All the prop- 



PREFERENCES 285 

erty of which defendant took possession was acquired by Moore 
with the full understanding and intent that it should be covered 
by the defendant's mortgage of April 15, 1891. 

Mr. Justice PECKHAM, after making the foregoing state- 
ment of facts, delivered the opinion of the court: 

This is a contest between a trustee in bankruptcy representing 
the creditors of the bankrupt, and the defendant, the mortgagee 
in a chattel mortgage dated and executed April 15, 1891, and 
duly recorded April 18 of that year. The defendant has paid 
some $500 of the indebtedness of the bankrupt for which de- 
fendant was liable as indorser on a note, and he remains liable 
to pay the note of $2,510.75, held by the Passumpsic Savings 
Bank, which was signed by him as surety. 

The property taken possession of by the defendant under the 
chattel mortgage was sold by a deputy sheriff on the 11th of 
June, 1900, and the net avails of the sale, amounting to $922.08, 
have been paid over by the officer who made the sale, to the 
defendant. 

This suit is brought by the trustee to recover from the defend- 
ant those net avails on the theory that the action of the defend- 
ant in taking possession and making the sale of the property 
was unlawful under the provisions of the bankrupt act. 

The defendant had assisted the bankrupt in the purchase of 
the property and had indorsed notes for him in order to enable 
him to carry on the business of conducting a livery stable. This 
mortgage, to secure him for these payments and liabilities, was 
given some seven years before the passage of the bankrupt act, 
and at the time it was given it was agreed by the parties to it that 
the bankrupt might sell or exchange any of the livery stock cov- 
ered by it, as he might desire, and should, by purchase or ex- 
change, keep the stock good, so that the defendant's security 
should not be impaired, and it was also agreed that all after* 
acquired livery property should be covered by the mortgage as 

security for the debts specified therein. 

* * • 

There is no pretense of any actual fraud being committed or 
contemplated by either party to the mortgage. Instead of tak- 
ing possession at the time of the execution of the mortgage, the 
defendant had it recorded in the proper clerk's office, and the 
record stood as notice to all the world of the existence of the lien 
as it stood when the mortgage was executed, and that the de- 



286 PREREQUISITES TO ADJUDICATION 

fendant would have the right to take possession of property sub- 
sequently acquired, as provided for in the mortgage. The bank- 
rupt was, therefore, not holding himself out as unconditional 
owner of the property, and there was no securing of credit by 
reason of his apparent unconditional ownership. The record 
gave notice that he was not such unconditional owner. There 
was no secret lien, and if defendant cannot secure the benefit 
of this mortgage, which he obtained in 1891, as a lien upon the 
after-acquired property, yet prior to the title of the trustee for 
the benefit of creditors, it must be because of some provision of 
the bankruptcy law, which we think the court ought not to con- 
strue or endeavor to enforce beyond its fair meaning. 

In Vermont it is held that a mortgage such as the one in 
question is good. The Supreme Court of that state has so held 
in this case, and the authorities to that effect are also cited in 
the opinion of that court. And it is also there held that when 
the mortgagee takes possession of after-acquired property, as 
provided for in this mortgage, the lien is good and valid as 
against every one but attaching or judgment creditors prior to 
the taking of such possession. 

At the time when the defendant took possession of this after- 
acquired property, covered by the mortgage, there had been a 
breach of the condition specified therein, and the title to the 
property was thereby vested in the mortgagee, subject to the 
mortgagor's right in equity to redeem. This has been held to 
be the law in Vermont (aside from any question as to the effect 
of the bankrupt law), both in this case and in the cases also 
cited in the opinion of the Supreme Court of Vermont. The 
taking of possession of the after-acquired property, under a 
mortgage such as this, is held good, and to relate back to the 
date of the mortgage, even as against an assignee in insolvency. 
Peabody v. Landon, 61 Vt. 318, 15 Am. St. Rep. 903, 17 Atl. 781, 
and other cases cited in the opinion of the Supreme Court. 

Whether and to what extent a mortgage of this kind is valid 
is a local question, and the decisions of the state court will be 
followed by this court in such case. Dooley v. Pease, 180 U. S. 
126, 45 L. ed. 457, 21 Sup. Ct. Rep. 308. 

The question that remains is whether the taking of possession, 
after condition broken, of these mortgaged chattels before al- 
though within four months of filing the petition in bankruptcy, 
was a violation of any of the provisions of the bankrupt act. 

The trustee insists that such taking possesMon of the after- 



PREFERENCES 287 

acquired property, under the mortgage of 1891, constituted a 
preference under that act. He contends that the defendant did 
not have a valid lien against creditors, under that act ; that his 
lien might, under other circumstances, have been consummated 
by the taking of possession, but, as that was done within four 
months of the filing of the petition in bankruptcy, the lien was 
not valid. 

Did this taking of possession constitute a preference within 
the meaning of the act? 

It was found by the referee that when the defendant took 
possession of the property he knew that the mortgagor was in- 
solvent and was considering going into bankruptcy, but that he 
did not intend to perpetrate any actueil fraud on the other cred- 
itors, or any of them, but did intend thereby to perfect his lien 
on the property, and make it available for the payment of his 
debts before other complications, by way of attachment or bank- 
ruptcy, arose. He then understood that Ryan 's attachment would 
probably hold good against his mortgage. The question whether 
any conveyance, etc., was in fact made with intent to defraud 
creditors, when passed upon in the state court, is not one of a 
Federal nature. McKenna v. Simpson, 129 U. S. 506, 32 L. ed. 
771, 9 Sup. Ct. Rep. 365 ; Cramer v. Wilson, 195 U. S. 408, 25 
Sup. Ct. Rep. 95, 49 L. ed. 256. It can scarcely be said that the 
.. fipforcement of a lien by the taking possession, with the consent 
of the mortgagor, of after-acquired property covered by a valid 
mortgage, is a conveyance or transfer within the bankrupt act. 
There is no finding that, in parting with the possession of the 
property, the mortgagor had any purpose of hindering, delay- 
ing, or defrauding his creditors, or any of them. Without a find- 
ing to the effect that there was an intent to defraud, there was 
no invalid transfer of the property within the provisions of 
§ 67e of the bankruptcy law. Sabin v. Camp, 98 Fed. 974. 

In the case last cited the court, upon the subject of a prefer- 
ence, held that though the transaction was consummated within 
the four months, yet it originated in October, 1897, and there 
was no preference under the facts of that case. "What was done 
was in pursuance of the pre-existing contract, to which no ob- 
jection is made. Camp furnished the money out of which the 
property, which is the subject of the sale to him, was created. 
He had good right, in equity and in law, to make provision for 
the security of the money so advanced, and the property pur- 
chased by his money is a legitimate security, and one frequently 



288 PREREQUISITES TO ADJUDICATION 

employed. There is always a strong equity in favor of a lien 
by one who advances money upon .the property which is the 
product of the money so advanced. This was what the parties 
intended at the time, and to this, as already stated, there is, 
and can be, no objection rn^la-gi ^r in morals . And when, 
at a later date, but still prior to the filing of the petition in 
bankruptcy, Camp exercised his rights, under this valid and 
equitable arrangement, to possess himself of the property, and 
make sale of it in pursuance of his contract, he was not guilty 
of securing a preference under the bankruptcy law. ' ' 

The principle that the taking possession may sometimes be 
held to relate back to the time when the right so to do was 
created is recognized in the above case. So in this case, although 
there was n o actual existing lien upon this after-acquired prop- 
erty until the t aking of poss ession, yet there was a positive 
agreement, as contained in the mortgage and existing of record, 
under which the inchoate lien m ight be asserted and enforced, 
and when enforced by the taking of possession, that possession 
under the facts of this case, related back to the time of the 
execution of the mortgage of April, 1891, as it was only by vir- 
tue of that mortgage that possession could be taken. The Su- 
preme Court of Vermont has held that such a mortgage gives 
an existing lien by contract, which may be enforced by the 
actual taking of possession, and such lien can only be avoided 
by an execution or attachment creditor whose lien actually 
attaches before the taking of possession by the mortgagee. Al- 
though this after-acquired property was subject to the lien of 
an attaching or an execution creditor, if perfected before the 
mortgagee took possession under his mortgage, yet, if there 
were no such creditor, the enforcement of the lien by taking 
possession would be legal, even if within the four months pro- 
vided in the act. There is a distinction between the bald crea- 
tion of a lien within the^oiiniionths, and tKe enforcement of 
one provided for in a mortgage executed years before the pas- 
sage, of the act by virtue of which mortgage, and because of 
the condition broken, the title to the property becomes vested 
in the mortgagee, and the subsequent taking possession becomes 
valid, except as above stated. A trustee in bankruptcy does not, 
in such circumstances, occupy the same position as a creditor 
levying under an execution, or by attachment, and his rights, 
in this exceptional ease, and for the reasons just indicated, are 



PREFERENCES 289 

somewhat different from what they are generally stated. Muel- 
ler V. Nugent, 184 U. S. 1, 46 L. ed. 405, 22 Sup. Ct. Rep. 269. 

It is admitted on the part of the counsel for the plaintiff in 
error that the rule in Vermont, in cases of chattel mortgages of 
after-acquired property (where possession by the mortgagee 
is necessary to perfect his title as against attaching or execu- 
tion creditors), is that, although such possession be not taken 
until long after the execution of the mortgage, yet the posses- 
sion, when taken (if it be before the lien of the attaching or 
execution creditor), brings the property under the cover and 
operation of the mortgage as of its date, — ^the time when 
the right of possession was first acquired. It was also admitted 
that the Supreme Court of Vermont has held that when a 
chattel mortgage requiring possession of the mortgaged prop- 
erty to perfect it as to third persons was executed more than 
four months before the commencement of insolvency proceed- 
ings, the taking of actual possession of the mortgaged property 
within the four months' period brought that property under 
the mortgage as of its date, and so did not constitute a pref- 
erence voidable by the trustee, although the other elements con- 
stituting a preference were present. Many decisions of the 
Supreme Court of Vermont are cited to this effect. It will be 
observed, also, that the provisions of the state insolvency law in 
regard to void and voidable preferences and transfers were 
identical with similar provisions of the bankruptcy act of 1867. 
Gilbert v. Vail, 60 Vt. 261, 14 Atl. 542. 

Under that law it was Held that the assignee in bankruptcy 
stood in the shoes of the bankrupt, and that "except where, 
within a prescribed period before the commencement of pro- 
ceedings in bankruptcy, an attachment has been sued out against 
the property of the bankrupt, or where his disposition of his 
property was, under the statute, fraudulent and void, his as- 
signees take his real and personal estate, subject to all equities, 
liens, and encumbrances thereon, whether created by his act or 
by operation of law." Yeatman v. New Orleans Sav. Inst., 95 
U. S. 764, 24 L. ed. 589. See also Stewart v. Piatt, 101 U. S. 
731, 25 L. ed. 816 ; Hauselt v. Harrison, 105 U. S. 401, 26 L. ed. 
1075. Under the present bankrupt act, the trustee takes the 
property of the bankrupt, in cases unaffected by fraud, in the 
same plight and condition that the bankrupt himself held it, and 
subject to all the equities impressed upon it in the hands of the 
bankrupt, except in cases where there has been a conveyance or 

H. & A. Bankruptcy — 19 



290 PREREQUISITES TO ADJUDICATION 

encumbrance of the property which is void as against the 
trustee by some positive provision of the act. Re Garcewich, 53 
C. C. A. 510, 115 Fed. 87, 89, and cases cited. 

It is true that in the case in 95 U. S. 764, 24 L. ed. 589, the 
savings institution had a special property in the certificates 
which were the subject of dispute, and had possession of them 
at the time of the bankruptcy proceedings, and it was held that 
the institution was not bound to return them, either to the bank- 
rupt, the receiver, or the assignee in bankruptcy, prior to the 
time of the payment of the debt for which the certificate was 
held. So the state court held in this case, where the defendant 
took possession under the circumstances detailed, by virtue of 
his mortgage, and where he had the legal title to the property 
mortgaged, after condition broken, that the possession thus taken 
related back to the date of the giving of the mortgage, and in 
thus enforcing his lien there was not a violation of any of the 
provisions of the bankruptcy act. 

In Wilson Bros. v. Nelson, 183 U. S. 191, 46 L. ed. 147, 22 
Sup. Ct. Rep. 74, it was held that the bankrupt had committed 
an act of bankruptcy, within the meaning of the bankrupt law, 
by failing, for at least five days before a sale on the execution 
issued upon the judgment recovered, to vacate or discharge the 
judgment, or to file a voluntary petition in bankruptcy. The 
judgment and execution were held to have been such a prefer- 
ence, "suffered or permitted" by the bankrupt, as to amount to 
a violation of the bankrupt act. Although the judgment was 
entered upon the power of attorney given years before the pass- 
age of the bankrupt act, it was nevertheless regarded as ' ' suffer- 
ing or permitting" a preference, within that act. This is not 
such a case. As we have said, there is no finding that the de- 
fendant had reasonable cause to believe that by the change of 
possession it was intended to give a preference. As the state 
court has said, it was rather a recognition of what was regarded 
as a right under the previous agreement contained in the 
mortgage. 

Nor does the existence of the Ryan attachment, or the chattel 
mortgage of March 5, 1900, executed by the bankrupt, and de- 
livered to the defendant, and by him assigned, on the 23d of 
March, 1900, to the bank, create any greater right or title in 
the trustee than he otherwise would have. The trustee moved 
under § 67/, [30 Stat, at L. 565, c. 541, U. S. Comp. Stat. 
1901, p. 3450], on notice to the defendant, for an order that the 



PREFERENCES ' 291 

right or lien under the Ryan attachment should be preserved, 
so that the same might pass to the trustee for the benefit of the 
estate, as provided for in that section. This was denied. And 
unlessi such permission had been granted, the lien of the attach- 
ment was not preserved by the act, but, on the contrary, it was 
dissolved u n der § 67c_ . 

The mortgage assigned to the bank, and the attachment ob- 
tained by Ryan, having been dissolved by the bankrupt proceed- 
ings, the defendant's rights under his mortgage of April 15, 
1891, stood the same as though there had been no subsequent 
mortgage given, or attachment levied. This is the view taken 
by the state court of the effect of the dissolution of the mort- 
gage and attachment liens under the bankrupt act, and we think 
it is the correct one. It is stated in the opinion of the state 
court as follows: 

"It is urged that with the annulment of the attachment, the 
property affected by it passed to the trustee as a part of the 
estate of the bankrupt under the express provisions of § 67/. 
There would be more force in this contention were it not for the 
provision that, by order of the court, an attachment lien may be 
preserved for the benefit of the estate. If there is no other 
lien on the property, there can be no occasion for such order; 
for, on the dissolution of the attachment, the property, unless 
exempt, would pass to the tnistee anyway. It is only when the 
property for some reason may not otherwise pass to the trustee 
as a part of the estate that such order is necessary. We think 
such is the purpose of that provision, and that unless the lien 
is preserved, the property, as in the case at bar, may be held 
upon some other lien, and not pass to the trustee. Re Sentenne 
& Green Co., 120 Fed. 436." 

We think the judgment of the Supreme Court of Vermont 
was right, and it is affirmed.^'' 

In re CUTTING 

145 Fed. 388 

(District Court, W. D. New York. May 7, 1906) 

HAZEL, District Judge. The report of the special master 
herein finds that the alleged bankrupt, Benjamin W. Cutting, 

35— C/. In re Eeynolds, 153 Fed. v. Hand, 206 U. S. 415, 423; Taney 
295. See Security Warehousing Co. v. Penn Nat. Bank, 232 U. S. 174. 



292 PREREQUISITES TO ADJUDICATION 

committed an act of bankruptcy in transferring, while insolvent, 
certain personal property, by executing and delivering chattel 
mortgages thereon, with intent to create an unlawful preference 
under the bankrupt act. The undisputed facts are as follows: 
The opposing creditors, Lazell & Co., at different times, begin- 
ning in the year 1899, loaned and advanced money to the bank- 
rupt, accepting as security therefor a chattel mortgage upon 
si)ecified personal property. Such chattel mortgage was exe- 
cuted and delivered on April 24, 1901, and on February 8, 1902, 
another mortgage was given in renewal thereof to secure amounts 
due and to become due covering the property specified in the 
former mortgage. Subsequently, on March 12 and 13, 1903, re- 
spectively, the debtor gave to said secured creditors two chattel 
mortgages to secure the sum of about $3,000, the amount then 
due, as appears by the testimony of Cutting, which mortgages 
covered the property theretofore mortgaged to them, and in 
addition a so-called Hartman machine, not enumerated in the 
prior incumbrance. The mortgage liens were duly recorded or 
filed in the town clerk's office, as required by the statute of the 
state. It is claimed, however, that the mortgages of March 12 
and 13, 1903, were not continued of force against the creditors 
of the mortgagor or subsequent purchasers or mortgagees in 
good faith, in that c. 528, p. 460, of the Laws of 1896, which 
requires that a statement describing the mortgage, and the 
time and place of its filing, be filed within the 30 days, was 
not complied with. There exists some contrariety of decisions 
in relation to the effect of an omission to strictly comply with 
the provisions of the statute as to whether a mortgage ceased to 
be valid against a creditor at large of the mortgagor, or if a cred- 
itor must be in a situation to seize the mortgaged property pur- 
suant to a lien upon it. This proposition I conceive to be 
definitely decided in the Matter of New York Economical Print- 
ing Co., 110 Fed. 514, 49 C. C. A. 133, where the state court 
authorities are cited and examined by the Circuit Court of Ap- 
peals for this circuit, and which holds that: 

"Only such creditors can take advantage of it [the statute] 
as are armed with some legal process authorizing the seizure 
of the mortgaged property, and are thereby in a position to 
enforce a lien upon it." 

The cases hold that a trustee in bankruptcy takes the property 
in the same plight and condition that the bankrupt himself held 
it, assuming the transaction free from fraud and subject to 



PREFERENCES 293 

the existing equities. Hewit v. Berlin Machine Works. 194 U. S. 
296, 24 Sup. Ct. 690, 48 L. ed. 986 ; Thompson v. Fairbanks, 196 
U. S. 516, 25 Sup. Ct. 306, 49 L. ed. 577. And as between the 
alleged bankrupt and the mortgagees, giving due consideration 
to the facts of this case, it is thought that the mortgages in 
question were neither void nor fraudulent. The contesting cred- 
itors contend that such mortgages were practically j:gnewals 
and covered the identical property; that they were not void as 
against the mortgagees, though given as collateral security for a 
pre-existing debt owing from the bankrupt, and no statement 
having been filed in accordance with the state enactment men- 
tioned. The evidence satisfies me that the transaction was not in 
bad faith, and that no intention existed to defeat the operation 
of the bankrupt act. Hence, it is i mmaterial th at Cutting was, 
or that the mortgagees had reason to believe him, insolvent. The 
bankrupt act does not forbid the giving of other or different 
security within the four months period to replace security pre- 
viously given, if such security is a valid one and of equal value 
as that previously given. The mortgagor might have surren- 
dered the possession of the property of the mortgagees just prior 
to making the new mortgages. Indeed, the mortgagees could 
legally have taken possession thereof in payment of their lien, 
though there had been no compliance with the statute regard- 
ing refiling. As said in Sawyer v. Turpin, 91 U. S. 114, 23 L. ed. 
235: 

' ' The mortgage covered the same property. It embraced noth- 
ing more. It withdrew nothing from the control of the bank- 
rupt, or from the reach of the bankrupt's creditors, that had 
not been withdrawn by the bill of sale. Giving the mortgage in 
lieu of the biU of sale, as was done, was therefore a mere ex- 
change in the form of the security. In no sense can it be re- 
garded as a new preference. The preference, if any, was 
obtained on the l^f}} of Mav. ^ l;|en t.hf> bill qf salp. Yf^ a giygTi^ 
more than four months before the petition in bankruptcy was 
filed. It is too well settled to require discussion that an exchange j 
of securities within the four months is not a fraudulent pref- | 
erence within the meaning of the bankrupt law, even when the 
creditor and the debtor know that the latter is insolvent, if the 
security given up is a valid one when the exchange is made, and 
if it be undoubtedly of equal value with the security substituted 
for it." 

This language, in a ease where the lacts were only slightly 



294 PREREQUISITES TO ADJUDICATION 

different, is not thought inapplicable here. It was held in Re 
Shepherd, 6 Am. Bankr. Rep. 725, that where a new chattel 
mortgage, which was duly recorded, was given within four 
months of filing the petition, in place of a prior mortgage and 
for a valuable consideration, the new mortgage operates as a 
continuance of the prior incumbrance, and, as no lien inter- 
vened before the bankruptcy, there was no illegal preference. In 
Asbury Park Building & Loan Association v. Shepherd, 6 Am. 
Bankr. Rep. 725, it is stated that : 

''The mere exchange of securities within four mouths is not 
a preference within the meaning of the bankrupt law; the rea- 
sons being that the change takes nothing from the other 
creditors. ' ' 

There a new mortgage was substituted for a prior security 
within four months of the filing of the petition in bankruptcy. 
The facts of that case are similar to thase here presented. See, 
also, Stewart v. Piatt, 101 U. S. 731, 25 L. ed. 816. In this case 
the same property was included in the mortgages given by 
Cutting to replace prior ones to secure an indebtedness already 
existing, and, as already stated, in addition thereto the Hart- 
man machine, which inclusion was warranted by a present con- 
sideration of $125, subsequently used by the bankrupt in pay- 
ment of insurance. True, the referee found that the later 
mortgage included property not enumerated in the earlier, but 
a careful comparison of the two instruments indicates otherwise. 
Various of the items were a little differently described, but the 
schedule of personal property attached to the mortgage reason- 
ably identifies the articles as practically the same, with the ex- 
ception of the Hartman machine and the offspring of the stock 

mentioned in the earlier mortgage. 

* * # 

The mortgages to Taylor & Wakeman, claimed to have been 
unlawful transfers in contravention of the bankrupt act, were 
also executed and delivered by the bankrupt as substitutes for 
prior unpaid mortgage liens, and come under the views herein 

expressed. 

* * * 

The petition for adjudication of Benjamin W. Cutting as a 
bankrupt is therefore dismissed. So ordered.^^ 

36— C/. Becker Co. v. Gill, 206 
Fed. 36. 



PREFERENCES 295 

In re GREAT WESTERN MFG. CO. ^ / ia^ 

152 Fed. 123, 81 C.C. A. 341 

(Circuit Court of Appeals, Eighth Circuit. March 4, 1907) 

SANBORN, Circuit Judge. The J. T. Royston Milling Com- 
pany, a corporation, was adjudged a bankrupt upon a petition 
filed o n January 6, 19 05. Prior to September 6, 1904. t he Great 
Western Manufacturing Company, a corporation, had sold, in- 
stalled, and put in operation in the Royston Company's mill at ' 
Fremont, in the state of Nebraska, certain machinery and ma- 
terial, for which at the time of their final acceptance it gave its 
promissory notes for $10^^03 4.60 and an agreement that the title 
and the right to the possession of the machinery and material 
should remain in the vendor until the notes were paid, notwith- 
standing any agreement or security that was or might be taken 
for the performance of the agreement, and that the payment of 
the notes should be secured by a mortgage on the mill and its 
appurtenances, or equivalent security, at the election of the Great 
Western Company. This agreement was first filed in the proper 
county clerk's office on October 8. 1904. On October 10, 1904, 
the vendee made a mortgage on the mill and its appurtenances 
which was recorded in the office of the register of deeds of the 
proper county on the same day. The mill and its appurtenances, 
including the machinery and material sold by the Great Western 
Manufacturing Company, were sold by order of the court below 
for $16,400. The Great Western Company immediately there- 
after filed its claim, an d asked that it be paid in full out of the 
proceeds of the sale in preference to the claims of other creditors. 
The referee allowed the claim for $10,532.50, and denied it any 
preference. The District Court reversed this order, held that the 
agreement was valid and the mortgage a voidable preference, 
and directed that the vendor should be paid in preference to the 
other creditors such a proportion of the $16,400 as the value of 
the machinery and material it sold bore to the value of the mill 
and appurtenances at the time of the sale of the latter. It now 
presents its petition to revise this order because the court below 
did not uphold the mortgage and sustain its claim for a pref- 
erence thereunder for the entire amount of the bankrupt's debt 
to it. The trustee moves to dismiss the petition because it was 
filed more than 10 days after the order assailed was made, and 
because it involves disputed questions of fact which it is alleged 



296 PREREQUISITES TO ADJUDICATION 

can only be determined by appeal, and the trustee prays that if 
the merits of the case are considered the petitioner be denied 
any preference whatever. 

While it is true that counsel do not agree upon the facts, the 
record fairly establishes those which have been stated, and upon 
them the case will be determined. The agreement of conditional 
sale whereby the vendor retained the title to the machinery and 
material until its purchase price was paid did not create a pref- 
erence voidable under the bankruptcy law because it was given 
for a present consideration, for the machinery and material 
which were and continued to be the property of the vendor, and 
because it was made more than four months before the petition 
in bankruptcy was filed. Agreements of this nature which are 
not filed or recorded in the proper public ofiice are voidable by 
purchasers, atta ching creditors, and judg ment creditors only, un- 
der the statuteToTReBraska (Comp. St. 19U1, Neb. c. 32, § 26 ; 
CampbeU Printing, etc., Co. v. Dyer, 46 Neb. 830, 836, 65 N. W. 
904 ; McCormick Harvesting Machine Co. v. Callen, 48 Neb. 849, 
67 N. W. 863), and there was none of either class when the peti- 
jtion in bankruptcy was filed in this case. The contract was there- 
fore valid and enforceable against the bankrupt and against his 
ordinary creditors, and hence against the trustee, for he had no 
better right or title to the property than they, and he suffered 
no prejudice from the order of the court. Hewit v. Berlin Ma- 
chine Works, 194 U. S. 296, 297, 303, 24 Sup. Ct. 690, 48 L. ed. 
986; Thompson v. Fairbanks, 196 *U. S. 516, 25 Sup. Ct. 306, 
49 L. ed. 577 ; York Mfg. Co. v. Cassell, 201 U. S. 344, 352, 26 
Sup. Ct. 481, 50 L. ed. 782. 

The Great Western Company insists, however, that it was en- 
titled to payment of the entire amount of its claim out of the 
proceeds of the trustee's sale of the mill and machinery, be- 
cause the proportion of those proceeds which the value of the 
machinery and material bore to the value of the mill and its 
appurtenances was but one-third, and under the order of the 
court it will sustain a heavy loss, and because it had a mortgage 
upon the entire property given in execution of an agreement 
made more than four months before the petition in bankruptcy 
was filed. The vendor had the right to take the machinery and 
material out of the mill and dispose of it as it saw fit. If it had 
applied to the court to do so and its application had been denied, 
it would have been entitled to recover of the trustee the value of 
its right. But it presented no such claim and made no applica- 



:^^ 



PREFERENCES 297 

tion of that nature. The proceedings in bankruptcy were pend- 
ing from January 6, 1905, until May 25, 1905, before the sale 
was made. It was ordered on May 12, 1905, and the first act of 
the Great Western Company was the filing of a claim for a pref- 
erence in payment out of the proceeds after the sale had been 
made. Its acquiescence in the sale of its property in the mill withi 
that of the bankrupt estopped it from receiving out of the pro-l 
ceeds of the sale of the entire lot any larger proportion than the* 
value of its property bore to the value of the entire property sold. \ 

The mortgage was executed and recorded on October 10, 1904, 
within the four months prior to the filing of the petition in bank- % 

ruptcy. The mortgagor was then hopelessly insolvent. The 
effect of the enforcement of the mortgage will be to enable the 
mortgagee to obtain a greater percentage of its debt than any 
of the bankrupt's other creditors of the same class can obtain, 
and the referee and the court were of the opinion, in which we 
concur, that the mortgagee had reasonable cause to believe when 
the mortgage was made that it was intended to give a preference 
thereby. But counsel persuasively argue that this mortgage 
escapes the ban of § 60 of the bankruptcy law (Act July 1, 
1898, c. 541, 30 Stat. 562 [U. S. Comp. St. 1901, p. 3445]), be- 
cause it was made in the performance of the provision of the 
agreement of conditional sale that the notes of the vendee should 
**be secured by first mortgage on said premises and appurten- 
ances (the mill site and mill), or equivalent security, at the y » 
first party's (the vendor's) election," and the question arises, '^^^ 
is a mortgage or other transfer of an insolvent 's property within 
the four months which is otherwise voidable as a preference pro- \-^ 
tected by an agreement to make it executed prior to the four / ^ 
months? The statutes regarding the filing and recording of 
mortgages and transfers do not condition this issue in the case 
before us, and their effect will not be farther noticed, because 
the statutes of Nebraska do not avoid mortgages as against the 
mortgagors and their ordinary creditors for failure to file or 
record them. They make them voidable against attaching and 
judgment creditors only. Comp. St. Neb, 1901, c. 32, § 14 ; For- 
rester V. Bank, 49 Neb. 655, 68 N. W. 1059 ; Lancaster County 
Bank V. Gillilan, 49 Neb. 165, 68 N. "W. 352. 

Argument by analogy in support of an affirmative answer to 
the question here at issue may well be drawn from In re J. P. 
Grandy & Son (D. C.) 146 Fed. 318, Wilder v. Watts (D. C.) 
138 Fed. 426, McDonald v. Daskam, 53 C. C. A. 554, 116 Fed. 



298 



PREREQUISITES TO ADJUDICATION 



276, and In re Wittenberg Veneer & Panel Co. (D. C.) 108 Fed. 
593, 595, in which assignments of policies of insurance within 
the four mouths pursuant to agreements to make them, executed 
prior to the four months, were sustained under peculiar circum- 
stances and from Sabin v. Camp (C. C.) 98 Fed. 974, in which 
a conveyance within the four months upon a payment of the 
balance of the purchase price was sustained where it had been 
made in performance of a contract executed prior to the four 
months to the effect that the creditor should advance money to 
purchase the property, should have a lien upon it, and the option, 
which he exercised, to buy it at a specified price for the amount 
of the money he had advanced and the cash balance requisite to 
aggregate the required amount. 

But the theory and purpose of the bankruptcy act were to dis- 
j tribute the unexempt property which the bankrupt owned four 
I months before the filing of the petition in bankruptcy against 
' him, share and share alike, among his creditors of the same class. 
To this end every judgment procured or suffered against him, 
every transfer by an insolvent of any of his property, every con- 
ceivable way of depleting it after the commencement of the four 
months the effect of which is "to enable any one of his creditors 
to obtain a greater percentage of his debt than any other of such 
creditors of the same class," is declared to be a voidable pref- 
erence if the creditor lias reason to believe that a preference is 
intended thereby. Act July 1, 1898, c. 541, and Act, Feb. 5, 
1903, c. 487, 30 Stat. 562, 32 Stat. 799 [U. S. Comp. St. 1901, 
p. 3445 ; U. S. Corap. St. Supp. 1905, p. 689] ; Swarts v. Fourth 
National Bank, 54 C. C. A. 387, 389, 117 Fed. 1, 3. An agree- 
ment to mortgage or to transfer is not a mortgage or a transfer. 
The title remains in the owner unincumbered by the mortgage 
until the mortgage or transfer is effected. AVhen the agreement 
is made before, and the mortgage or transfer within, the four 
months, the title stands unincumbered by the latter at the com- 
mencement of the four months, and the proceeds of that title are 
pledged under the bankruptcy law for the benefit of all the 
creditors pro rata. Any subsequent mortgage or transfer with- 
draws that title or a portion of its value from these creditors, 
and a just and fair interpretation and execution of the act de- 
mands that such a mortgage or transfer should be adjudged 
voidable if it is otherwise so, and that the mortgagee or trans- 
feree should be remitted to his original agreement. In this way 
the property at the commencement of the four months and its 



PREFERENCES 299 

value may be preserved for the general creditors, and the mort- 
gagee or transferee may retain every lawful advantage his earlier 
contract confers upon him. Any other course of decision opens 
a new and enticing way to secure preferences, nullifies every 
provision of the law to prevent them, and invites fraud and per- 
jury. Hold that transfers within four months in performance 
of agreements to make them before that time do not constitute) 
voidable preferences, and honest debtors would agree with their/ 
favored creditors before the four months that they would subse- 
quently secure them by mortgages or transfers of their property,! 
and just before the petitions in bankruptcy were filed they would i 
perform their agreements. Dishonest men who made no such 
contracts might falsely testify that they had done so and thus 
by fraud and perjury sustain preferential transfers and mort- 
gages made within the four months to relatives or friends. The 
great body of the creditors would be left without share in the 
property of their debtor and without remedy, and a law con- 
ceived and enacted to secure a fair and equal distribution of the 
property of debtors among their creditors would fail to accom- 
plish one of its chief objects. This court will hesitate long before 
it approves a rule so fatal to the most salutary provisions of the 
bankruptcy law, and our conclusion is : 

A mortgage or transfer of his property by an insolvent debtor 
within four months of the filing of a petition in bankruptcy 
against him, which otherwise constitutes a voidable preference, 
is not deprived of that character or made valid by the fact that 
it was executed in performance of a contract to do so made 
more than four months before the filing of the petition. Wilson 
V. Nelson, 183 U. S. 191, 198, 22 Sup. Ct. 74, 46 L. ed. 147 ; In re 
Sheridan (D. C.) 98 Fed. 406; In re Dismal Swamp Co. (D. C.) 
135 Fed. 415, 417, 418; In re Ronk (D. C.) Ill Fed. 154; Pol- 
lock V. Jones, 124 Fed. 163, 61 C. C. A. 555 ; Anniston Iron & 
Supply Co. V. Anniston Rolling Mill Co. (D. C.) 125 Fed. 974; 
Johnston v. Huff, Andrews & Moyler Co., 133 Fed. 704, 66 C. C. 
A. 534; In re Mandel (D. C.) 127 Fed. 863.^7 In Wilson v. 
Nelson, 183 U. S. 191, 198, 22 Sup.'Ct. 74, 46 L. ed. 147, the 
debtor had given an irrevocable power of attorney to the creditor 
to confess judgment many years before. Judgment was con- 
fessed under it within the four months, and the Supreme Court 

37— Citizens' Trust Co. v. Tilt. 
200 Fed. 410, ace. 




300 PREREQUISITES TO ADJUDICATION 

'held it to be a voidable preference. In re Sheridan (D, C.) 
98 Fed. 406, In re Ronk (D. C.) Ill Fed. 154, and In re Dis- 
mal Swamp Co. (D. C.) 135 Fed. 415, 417, 418, mortgages ex- 
ecuted within the four months in performance of agreements 
to give them made more than four months before the filing of 
the petitions in bankruptcy were held to be voidable prefer- 
ences, and this view seems to be sustained by the terms of the 
bankruptcy act, by the more cogent reasons, and by the weight 
of authority. There was therefore no error in the decision below 
that the mortgage constituted a voidable preference, and that the 
/ limit of the vendor 's preferential right was to receive the pro- 
/ portion of the proceeds of the sale justly attributable to the 
\ machinery and the material the ownership of which it retained.^* 



RICHARDSON v. SHAW 

209 U. S. 365, 52 L. ed. 835, 28 Sup. Ct. 512 

(United States Supreme Court. April 6, 1908) 

Mr. Justice DAY delivered the opinion of the court : 

This case comes here upon a writ of certiorari to the United 
States Circuit Court of Appeals for the second circuit. The 
petitioner, Richardson, brought suit in the District Court of 
the United States for the southern district of New York, as 
trustee in bankruptcy of J. Francis Brown, against John M. 
Shaw and Alexander Davidson, respondents, to recover certain 
alleged preferences. 

Brown, the bankrupt, was a stockbroker transacting business 
in Boston. The respondents, John M. Shaw and Alexander Da- 
vidson, were partners and stockbrokers, transacting business in 
New York as John M. Shaw & Company, and, as customers of 
Brown, they transacted business with him on speculative account 
for the purchase and sale of stocks on margin. The account was 
carried on in Brown's books in the name of "Royal B. Young, 
Attorney," as agent of Shaw & Company. 

The transactions between Brown and Shaw & Company were 
carried on for several months, from February to June, 1903. A 
debit and credit account was opened February 10, when Shaw 
& Company deposited with Brown $500 as margin, which was 

38 — See Tomlinson v. Bank of 
Lexington, 145 Fed. 824. 



PREFERENCES 301 

credited to them on the account, and Brown purchased for them 
certain securities at a cost of $3,987.50, which was charged to 
them on the account. 

By agreement between the parties it was understood and 
agreed that all securities carried on the account or deposited 
to secure the same might be carried in Brown's general loans 
and might be sold or bought at public or private sale, without 
notice, if Brown deemed such sale or purchase necessary for his 
protection. On the accounts rendered by Brown the following 
memorandum was printed: "It is understood and agreed that 
all securities carried in this account or deposited to secure the 
same may be carried in our general loans and may be sold or 
bought at public or private sale, without notice, when such sale 
or purchase is deemed necessary by us for our protection." 

Until the account was closed, on June 26, 1903, Shaw & Com- 
pany from time to time paid to Brown various other sums of 
money as margins, which were credited to them. They also 
transferred to him various securities as margins in place of cash. 
They were charged with interest upon the gross amount of the 
purchase price, and credited with interest upon the margins they 
had deposited with Brown. If at any time the total amount 
of margins in securities or money exceeded 10 per cent, they had 
the right to withdraw the excess. Brown was at no time left 
with a margin less than 10 per cent. Shaw & Company kept a 
"liberal margin," at times rising to 2Sy2 per cent. 

According to the agreement the securities carried in this ac- 
count or deposited to secure the same might be carried in 
Brown's general loans, and such securities were so pledged by 
him, and Young, as agent of Shaw & Company, was informed 
of the fact. The stocks were figured at the market price every 
day and statements rendered to Young. 

The bankrupt. Brown, transacted much of his general busi- 
ness with Brown, Riley & Company, of Boston. He pledged his 
general securities with that company. 

On June 24, 1903, Young, the agent of Shaw & Company, as 
above stated, learned of Brown's precarious financial condition, 
and demanded payment of $5,000 cash from Brown's agent, 
Fletcher. At that time the margins already paid by Shaw & 
Company exceeded the agreed 10 per cent, and Fletcher returned 
to them $5,000 of such margin. 

On the following day, June 25, Young demanded a final set- 
tlement from Brown. At that time Brown was insolvent within 



302 PREREQUISITES TO ADJUDICATION 

the meauing of the bankrupt law, and had been for the two pre- 
ceding months. On June 26 the liquidation of this account was 
effected as follows: Brown, the bankrupt, indorsed to Brown, 
Riley & Company, a note of $5,000, made by one of his debtors, 
and gave them a check for $1,200, thereby increasing his margin 
on the general loan, and agreed that $10,664.13 should be charged 
against his margin and credited to Shaw & Company, and a 
cheek was given by them, through the Beacon Trust Company, to 
the order of Brown, Riley & Company, for $34,919.62, and the 
securities to the value of $45,583.75 were turned over to them. 
None of the certificates of stock which Brown delivered to Shaw 
& Company were the identical certificates which they had deliv- 
ered to Brown as margain. Two certain bonds, known as the 
'"Shannon bonds," had been deposited with Brown. ''^ 

Among the creditors (customers) of Brown on the final day 
of settlement there were a number of general customers upon 
transactions in purchase and sale of stocks by Brown as broker, 
similar to the transactions in the purchase and sale of stocks by 
Brown as broker for Shaw & Company. 

On July 27, 1903, Brown made an assignment, and was ad- 
judicated a bankrupt within four months, and petitioner in this 
case, Henry Arnold Richardson, was elected trustee. 

It was conceded by plaintiff's counsel that it was the custom 
of the market to deliver shares from broker to customer of the 
same amount without regard to whether they were the identical 
shares received. 

This suit was brought to recover the $5,000 paid to Shaw & 
Company June 24, 1903, which sum, it is alleged, was paid to 
them as excessive margins, and, it is alleged, enabled them to 
obtain a preference as one of the creditors of Brown. The second 
cause of action in the suit states that Shaw & Company are in- 
debted to Brown's estate in the sum of $10,664.13, being the 
amount he transferred for their benefit, as above set forth. 

At the close of the plaintiff's case he requested to go to the 
jury upon the issue of defendant's knowledge of Brown's in- 
solvency. The court held that no preference was shown, and 
directed a verdict for defendants. The" judgment was afifirmed, 
77 C. C. A. 643, 147 Fed. 659, 665. 

The ground on which the counsel for the petitioner predicates 
the alleged preferences in this case is that when the stockbroker 
Brown was approached for the settlement of the transaction with 
Shaw & Company, being insolvent and dealing with several eus- 



PREFERENCES 303 

tomers, as to each of whom he had pledged the stocks carried 
for them, and, under the understanding of the parties, being 
under obligation to each of them to redeem the stocks from the 
loan for which they were pledged, this obligation created a right 
of demanding the pledged stocks and securities on the part of 
each of the customers, which put the broker in the debtor class 
and the customers into the creditor class, so that, if the broker 
used his assets to carry out such obligation to a particular cus- 
tomer, whereby the latter was able to redeem his stock from such 
pledge upon payment only of the amount of his indebtedness to 
the broker, with the result that the broker could not carry out 
similar obligations to other customers in like situation, a pref- 
erence is created under § 60 of the bankrupt act, and this, says 
the learned counsel in his brief, under any theory concerning 
the relation of broker and customer, is ''the main proposition 
upon which we hang our appeal." 

This case, therefore, requires an examination of the relations 
of customer and broker under the circumstances disclosed in 
this record; at least, so far as it is necessary to determine the 

question of preference in bankruptcy upon which the case turns. 

* * * 

The rule thus established by the courts of the state where such 
transactions are the most numerous, and which has long been 
adopted and generally followed as a settled rule of law, should 
not be lightly disturbed, and an examination of the cases and 
the principles upon which they rest lead us to the conclusion 
that in no just sense can the broker be held to be the owner of 
the shares of stock which he purchases and carries for his cus- 
tomer. While we recognize that the courts of Massachusetts have 
reached a different conclusion, and hold that the broker is the 
owner, carrying the shares upon a conditional contract of sale, 
and, while entertaining the greatest respect for the supreme judi- 
cial court of that state, we cannot accept its conclusion as to 
the relation of broker and customer under the circumstances 
developed in this case. We say this, recognizing the difficulties 
which can be pointed out in the application of either rule. 

At the inception of the contract it is the customer who wishes 
to purchase stocks, and he procures the broker to buy on his 
account. As was said by Mr. Justice Bradley, speaking for the 
court in Galigher v. Jones, 129 U. S. 193-198, 32 L. ed. 658, 659, 
9 Supt. Ct. Rep. 335, a broker is but an agent, and is bound to 



304 PREREQUISITES TO ADJUDICATION 

follow the directions of his principal, or give notice that he 
declines the agency. 

The dividends on the securities belong to the customer. The 
customer pays interest upon the purchase price, and is credited 
with interest upon the margins deposited. He has the right at 
any time to withdraw his excess over 10 per cent deposited as 
margin with the broker. Upon settlement of the account he re- 
ceives the securities. In this case the broker assumed to pledge 
the stocks, not because he was the owner thereof, but because, 
by the terms of the contract, printed upon every statement of 
account, he obtained the right from the customer to pledge the 
securities upon general loans, and in like manner he secured the 
privilege of selling when necessary for his protection. 

The risk of the venture is entirely upon the customer. He 
profits if it succeeds ; he loses if it fails. The broker gets out of 
the transaction, when closed in accordance with the understand- 
ing of the parties, his commission and interest upon the advances, 
and nothing else. That such was the arrangement between the 
parties is shown in the testimony of the broker 's agent, who testi- 
fied : "If these stocks carried for J. M. Shaw & Company made 
a profit, that profit belongs to Shaw & Company over and above 
what he owed us." 

When Young, the agent of Shaw & Company, demanded the 
stocks, their right of ownership in them was recognized, and, 
while pledged, they were under the control of the broker, were 
promptly redeemed, and turned over to the customer. Con- 
sistently with the terms of the contract, as understood by both 
parties, the broker could not have declined to thus redeem and 
turn over the stock, and, when adjudicated a bankrupt, his 
trustee had no better rights, in the absence of fraud or prefer- 
ential transfer, than the bankrupt himself. Security Warehous- 
ing Co. V. Hand, 206 U. S. 415, 423, 51 L. ed. 1117, 1122, 27 
Sup. Ct. Rep. 720 ; Thompson v. Fairbanks, 196 U. S. 516, 526, 
49 L. ed. 577, 586, 25 Sup. Ct. Rep. 306 ; Humphrey v. Tatman, 
198 U. S. 91, 49 L. ed. 956, 25 Sup. Ct. Rep. 567 ; York Mfg. Co. 
V. Cassell, 201 U. S. 344, 352, 50 L. ed. 782, 785, 26 Sup. Ct. 
Rep. 481. 

It is objected to this view of the relation of customer and 
broker that the broker was not obliged to return the very stocks 
pledged, but might substitute other certificates for those received 
by him, and that this is inconsistent with ownership on the part 
of the customer, and shows a proprietary interest of the broker 



PREFERENCES 305 

in the shares ; but this contention loses sight of the fact that the 
certificate of shares of stock is not the property itself, it is but 
the evidence of property in the shares. The certificate, as the 
term implies, but certifies the ownership of the property and 
rights in the corporation represented by the number of shares 
named. 

A certificate of the same number of shares, although printed 
upon different paper and bearing a different number, repre- 
sents precisely the same kind and value of property as does 
another certificate for a like number of shares of stock in the 
same corporation. It is a misconception of the nature of the 
certificate to say that a return of a different certificate or the 
right to substitute one certificate for another is a material change 
in the property right held by the broker for the customer. Hor- 
ton V. Morgan, 19 N. Y. 170, 75 Am. Dec. 311 ; Taussig v. Hart, 
58 N. Y. 425 ; Skiff v. Stoddard, 63 Conn. 198, 218, 21 L. R. A. 
102, 26 Atl. 874, 28 Atl. 104. As was said by the Court of Ap- 
peals of New York in Caswell v. Putnam, 120 N. Y. 153, 157, 
24 N. E. 287, "one share of stock is not different in kind or value 
from every other share of the same issue and company. They 
are unlike distinct articles of personal property which differ in 
kind and value, such as a horse, wagon, or harness. The stock 
has no earmark which distinguishes one share from another, so 
as to give it any additional value or importance; like grain of 
a uniform quality, one bushel is of the same kind and value as 
another. ' ' 

Nor is the right to repledge inconsistent with ownership of 
the stock in the customer. Skiff v. Stoddard, 63 Conn. 216, 219, 
21 L. R. A. 102, 26 Atl. 874, 28 Atl. 104; Ogden v. Lathrop, 65 
N. Y. 158. It was obtained in the present case by a contract 
specifically made, and did not affect the right of the customer, 
upon settlement of the accounts, to require of the broker the 
redemption of the shares and their return in kind. 

It is true that the right to sell, for the broker's protection, 
which was not exercised in this case, presents more difficulty, and 
is one of the incongruities in the recognition of ownership in 
the customer; nevertheless it does not change the essential rela- 
tions of the parties, and certainly does not convert the broker 
into what he never intended to be and for which he assumes no 
risk, and takes no responsibility in the purchase and carrying 
of shares of stock. 

The broker cannot be converted into an owner without a per- 
il. & A. Bankruptcy — 20 



306 PREREQUISITES TO ADJUDICATION 

vei*sion of the understanding of the parties, as was pertinently 
observed in the very able discussion already referred to in Skiff 
V. Stoddard, 63 Conn. 216, 21 L. R. A. Ill, 26 Atl. 879: "So 
long as the interpretation of the contract preserves as its dis- 
tinctive feature the principal proposition that the customer pur- 
chases merely the right to have delivery to him in the future, 
at his option, of stocks or securities at the price of the day of 
the agreement, and its corollary that the customer derives no 
right, title, or interest in the stocks or securities until final per- 
formance, the difficulties in the way of harmonizing the situation 
are bound to exist. The fundamental difficulty grows out of the 
necessary attempt in some way to transform the customer, who 
enjoys all the incidents and assumes all the risks of ownership, 
into a person who in fact has no right, title, or interest, and to 
create out of the broker, who enjoys none of the incidents of 
ownership, and assumes not a particle of its responsibility, a 
person clothed with a full title and an absolute ownership." 

We reach the conclusion, therefore, that, although the broker 
may not be strictly a pledgee, as understood at common law, he 
is essentially a pledgee, and not the owner of the stock, and turn- 
ing it over upon demand to the customer does not create the 
relation of a preferred creditor, within the meaning of the bank- 
rupt law. 

We cannot consent to the contention of the learned counsel 
for the petitioner, that the insolvency of the broker at once con- 
verts every customer having the right to demand pledged stocks, 
into a creditor who becomes a preferred creditor when the con- 
tract with him is kept and the stocks are redeemed and turned 
over to him. 

In the absence of fraud or preferential transfer to a creditor 
the broker had a right to continue to use his estate for the re- 
demption of the pledged stocks. As this court said in Cook v. 
TuUis, 18 Wall. 332-340, 21 L. ed. 933-937 : 

' ' There is nothing in the bankruptcy act, either in its language 
or object, which prevents an insolvent from dealing with his 
property, selling or exchanging it for other property at any time 
before proceedings in bankruptcy are taken by or against him, 
provided such dealings be conducted without any purpose to 
defraud or delay his creditors or give preference to anyone, and 
does not impair the value of his estate. An insolvent is not 
bound, in the >misf ortune of his insolvency, to abandon all deal- 
ing with his property ; his creditors can only complain if he waste 



PREFERENCES 307 

his estate or give preference in its disposition to one over another. 
His dealing will stand if it leave his estate in as good plight 
and condition as previously." 

The bankrupt act, in § 60a, provides : "A person shall be 
deemed to have given a preference if, being insolvent, he has, 
within four months before the filing of the petition, or after the 
filing of the petition and before the adjudication, procured or 
suffered a judgment to be entered against himself in favor of 
any person, or made a transfer of any of his property, and the 
effect of the enforcement of such judgment or transfer will be 
to enable any one of his creditors to obtain a greater percentage 
of his debt than any other of such creditors of the same class. ' ' 

A creditor is defined to include anyone who owns a demand 
or claim provable in bankruptcy. § 1, sub. 9, Bankruptcy Act 
1898 (30 Stat, at L. 544, c. 541, U. S. Comp. Stat. 1901, p. 
3419). It is essential, therefore, in order to set aside the alleged 
preference, that Shaw & Company, at the time of the transfer, 
should have stood in the relation of creditor to the bankrupt. 
Of course, if the New York rule based upon Markham v, 
Jaudon is correct, and the broker was the pledgee of the cus- 
tomer's stock, there can be no question that, in redeeming these 
stocks for the purpose of satisfying the pledge, no preferential 
transfer under the bankruptcy act resulted. 

In our view we think no different result is reached, so far as 
a preference in bankruptcy is concerned, if the Massachusetts 
cases could be taken to lay down the correct rule of the rela- 
tions between broker and customer. 

That rule is said to have its origin in Wood v. Hayes, 15 Gray, 
375, decided in 1860, in which the opinion, though by Chief 
Justice Shaw, is very brief. It was therein held that the broker 
was a holder of the shares upon conditional contract to deliver 
them to the customer upon the payment of so much money, and 
until the money was paid the right to have performance did not 
accrue. 

In Covell V. Loud, 135 ^lass. 41, 46 Am. Rep. 446, the right 
of the broker was considered after the customer had refused to 
pay the necessary margin, and after the customer had recpested 
the broker to do the l>est he could for him and to sell the stock 
at the broker's board without notice, and it was held that under 
such circumstances the broker was not liable for conversion. 

In Weston v. Jordan, 168 Mass. 401, 47 N. E. 133, the question 
was as to the relation between customer and broker after the 



308 PREREQUISITES TO ADJUDICATION 

broker had parted with the shares after repeated demands by the 
customer and refusal by the broker to deliver the shares, and 
it was held that a valid cause of action arose in favor of the 
customer, whether for breach of contract, or for conversion, it 
matters not. 

In Chase v. Boston, 180 Mass. 459, 62 N. E. 1059, the opinion 
is by Chief Justice Holmes, and the question directly decided 
is whether a broker who held shares of stock in his own name, 
and which he carried for his customer on margin, was required 
to pay a city tax upon the value. It was held that he was. In 
that case the learned justice said : 

"No doubt, whichever view be taken, there will be anomalies, 
and no doubt it is possible to read into either a sufficient number 
of implied understandings to make it consistent with itself. Pur- 
chases on margin certainly retain some of the characteristics of 
ordinary single purchases by an agent, out of which they grew. 
The broker buys and is expected to buy stock from third persons 
to the amount of the order. Rothschild v. Brookman, 5 Bligh, 
N. R. 165, 2 Dow & C. 188 ; Taussig v. Hart, 58 N. Y. 425. He 
charges his customer a commission. He credits him with divi- 
dends and charges him with assessments on stock. However the 
transaction is closed, the profit or loss is the customer's. But 
none of these features is decisive." 

And while the rule dating back to the decision of Chief Justice 
Shaw in 15 Gray was recognized as the law of Massachusetts, 
there is nothing in the case decisive of the question now before us. 

The case most relied upon as showing the preference is Weston 
V. Jordan, supra. It was held in that case that Wheatland, the 
broker (Weston was his assignee in insolvency) had become a 
debtor to the customer Jordan, having parted with the control of 
the shares and substituting none others for them after repeated 
demands for them by the customer. And it was held that when 
the insolvent broker went into the street and bought that kind of 
stocks with his own money, and the customer took the stocks, 
knowing of such purchase, the transaction amounted to a pref- 
erence; and in course of the discussion Mr. Justice Allien, 
referring to the contention of counsel that the Massachusetts rule 
should be reconsidered in view of the rules adopted in New York 
and other states, said: 

"The defendant seeks to have these decisions reconsidered; 
but the facts of the present case do not call for such reconsid- 
eration of the general doctrine. Even if at the outset Jordan 



PREFERENCES 309 

were to be deemed a pledgor, and Wheatland a pledgee, of the 
shares, that relation was changed by what happened after- 
wards. * * * After Wheatland had parted with the control 
of the shares, and after repeated demcmds for them hy Jordan, 
and refusals by Wheatland ta deliver them, Jorda/n had a valid 
ground of action against Wheatland, either for breach of (xm- 
tract or for a conversion; it matters not which." 

The facts in the present case are entirely different from those 
disclosed in the case just cited. In the present case there was 
no demand for the return of the stocks which was refused by 
the broker ; but, recognizing the obligation of the contract, when 
the stocks were demanded the broker proceeded to redeem them 
from the pledge which he had made of them under the right 
given by the contract between the parties, and turned them over 
to the customer. In such case the relation of debtor and creditor 
did not arise as it might upon the refusal, as in Weston v. 
Jordan, to turn over the stocks upon demand. 

After an examination of the Massachusetts cases, Judge Lowell 
held In re Swift, 105 Fed. 493, while following the Massachu- 
setts rule as between broker and customer, that no cause of action 
arose until after demand by the customer. And the same view 
was taken in the same case upon review in the Court of Appeals 
for the first circuit in an opinion by Judge Putnam, 50 C. C. A. 
264, 112 Fed. 315. While both courts held that under the law, 
as defined in the Massachusetts cases, bankruptcy excused de- 
mand, they held that the customer did not become a creditor 
upon insolvency, but only after demand and refusal or its 
equivalent. 

How then stood the parties at the time of the demand for 
the return of these shares of stock? They were held upon a 
contract, which required the broker, upon demand, to turn over 
the shares purchased, or similar shares, to the customer upon 
payment of advancements, interest, and commissions. These 
stocks were redeemed and turned over to him ; as a consequence 
the relation of debtor and creditor as between the broker and 
customer did not arise. 

Upon the principles heretofore discussed, we think the pay- 
ment of the $5,000, on June 24, was not a pref erentia l pa yment 
to a creditor! The customerhad demanded settlement, the 
broker had paid^the $5,000, and on the following day this sura 
was taken into account in settling the account before turning over 






310 PREREQUISITES TO ADJUDICATION 

to the customer the stock belonging to him, according to the 
understanding of the parties. 

We find no error in the judgment of the Court of Appeals, 
and the same is affirmed.^ ^ 

Mr. Justice HOLMES : 

If I had been left to decide tliis case alone I should have 
adhered to the opinion which, upon authority and conviction, 
I helped to enforce in another place. I have submitted a mem- 
orandum of the reasons that prevailed in my mind to my breth- 
ren, and, as it has not convinced them, I presume that I am 
wrong. I suppose that it is possible to say that, after a purchase 
of stock is announced to a customer, he becomes an equitable 
tenant in common of all the stock of that kind in the broker's 
hands; that the broker's powers of disposition, extensive as they 
are, are subject to the duty to keep stock enough on hand to 
satisfy his customers' claims; and that the nature of the stock 
identifies the fund as fully as a grain elevator identifies the grain 
for which receipts are out. It would seem to follow that the 
customer would have a right to demand his stock of the trustee 
himself, as well as to receive it from tlie bankrupt, on paying 
whatever remained to be paid. A just deference to the views of 
my brethren prevents my dissenting from the conclusion reached, 
although I cannot but feel a lingering doubt. 



-rr' 



^ih^^ jt^ CLARKE V. ROGERS 

228 U. S. 534, 57 L. ed. 953, 33 Sup. Ct. 587 
(United States Supreme Court. May 5, 1913) 



Mr, Justice McKENNA delivered the opinion of the court: 
Petition by appellee as trustee in bankruptcy of the estate of 
John 0. Shaw to recover a preference. 

The facts are these : The bankrupt, John O. Shaw, was, for 
a long time prior to the adjudication in bankruptcy, trustee 
under the will of Samuel Parsons, late of Newton, in the county 
of Middlesex, Massachusetts, of two trusts; one for the benefit 
of Charles A., James H., and Henry B. Parsons, and the other 
for the benefit of E. F. and E. A. Parsons. 

39— See Sexton v. Kessler, 225 kiss, 231 U. S. 50; In re Hollins & 
U, S. 90; Gorman v. Littlefield, 229 Co., 212 Fed. 317; Sharp t. Simo- 
U. S. 19; Nat. City Bank v. Hotch- nitseh, 107 Minn. 133. 



PREFERENCES 311 

After proceedings in bankruptcy had been commenced, Shaw 
resigned the trusts, and his resignation was accepted by the 
Probate Court of Middlesex county on the 25th of March, 1908, 
and appellant, George Lemist Clarke, was appointed trustee of 
the trusts and duly qualified. 

In the month of January, 1908, and within four months before "\ 
the filing of the petition in bankruptcy against him, and whilst 
he was insolvent, Shaw was largely indebted to each of the trusts » 
and to himself as trustee, and transferred from himself individu- 1 i 
ally to the trusts and to himself as trustee thereof as follows • ' 
To the trust for C. A. Parsons et al., seven of the $1,000 col- 
lateral trust 4 per cent bonds of the American Telephone & Tele-1 
graph Company (numbers specified) and two $1,000 Chicago, 
Burlington & Quincy Railroad Company 31/^ per cent Illinois 
Division (numbers specified) : to the trust of E. F. and E, A. 
Parsons, twelve $1,000 Northern Pacific-Great Northern 4 per 
cent joint bonds, Chicago, Burlington & Quincy collateral. 

The transfers were made by Shaw with knowledge of his 
insolvency, and with intent to prefer the trusts and himself as 
trustee, and the effect (it is alleged) of such preference, if not 
avoided, will be to enable the trust estates and himself as trustee 
thereof (being one of his individual creditors) to obtain a greater 
percentage of his debts than any other of his creditors of the 
same class. 

The petition prayed that the bonds be declared to be the bonds 
of petitioner, appellee here, and that Clarke, appellant here, be 
ordered to execute such instruments as might be necessary to 
transfer the title to and possession of all the bonds to petitioner. 

The answer of appellant denied only that the transfers were 
made within four months of the bankruptcy, that Shaw was, at 
the time of the transfer, insolvent, that all the trusts were his 
creditoi*s then or have becom.e so since, within the meaning of 
the statute, and denies that he intended by the transfers to give 
a preference, or that they constitute a preference. 

The decree of the district judge was that five of the seven 
Telephone and twelve of the Northern Pacific-Great Northern 
Railroad Company 4 per cent joint bonds, and all of the cou- 
pons thereon payable after January, 1908, were the property 
of the trustee in bankruptcy, appellee here. 

It was further adjudged that the American Telephone & Tele- 
graph Company collateral trust 4 per cent bonds (numbered 
20,818 and 20,819) were in part the property of the appellant 



312 PREREQUISITES TO ADJUDICATION 

as trustee and of appellee as trustee. The bonds were directed 
to be sold. The decree was affirmed by the Circuit Court of 
Appeals. [183 Fed. 518, 106 C. C. A. 64.] 

The District Court found the facts. They are summarized in 
its opinion as follows: 

''The bankrupt, being insolvent, and knowing himself to be 
'insolvent, was discovered by the surety on his bond as trustee 
under the Parsons wiU, not to be in possession of some of 
the securities which formed a part of the trust estate, and which 
should have been in his possession as trustee. He was being 
urged by the surety to make good this shortage. For the pur- 
pose of doing so, he placed the bonds in question in a safe-deposit 
box, taken and agreed on by himself and the surety as a separate 
place of deposit for the securities belonging to this trust. In 
the box were placed also those securities belonging to the trust 
funds which had not gone out of his possession. All the securi- 
ties thus placed in the box and held as constituting the trust 
funds have since remained there. The bankrupt has been re- 
moved as trustee, and the respondent, his successor in the trust, 
has at present the possession and control of the contents of 
the box, including the bonds in question. 

"The bankrupt had at the time more than twenty-five other 
trust estates in his charge as trustee. There was, in the case of 
each, a shortage for which he was responsible, and he knew the 
fact to be so. The total amount of these shortages exceeded 
$350,000. 

"It has not been shown that any of the bonds used as above 
to make good the shortage in the Parsons trust estate, or that 
any of the money wherewith the bankrupt purchased those 
bonds, can be identified as belonging to any one of the other 
trust estates in the bankrupt's charge. He drew 0]it and used 
to purchase certain of the bonds a savings bank deposit of $1,500 
belonging to one of the Parsons trust funds; but with that ex- 
ception the money wherewith the bonds were bought as well as 
the bonds themselves must, for the purposes of the questions to 
be decided, be regarded as the bankrupt's individual property 
ftt the time he set them apart in the manner stated, to be there- 
after held as trust property." 

The question in the case is. Do these facts show a preference 
within the meaning of the Bankruptcy Law? 

Putting to one side the identity of Shaw as an individual and 
Shaw as the trustee of the trusts, there are the elements of a 



PREFERENCES 313 

preference. In other words, there is indebtedness ; Shaw is in- / 
debted to all of the estates of which he was trustee. He used I 
his individual property to pay the indebtedness to the Parsons l 
trust, and he thus gave that trust a preference over the others. • 
It was enabled to the extent of the property transferred to obtain 
a greater percentage of its debts than the other trusts. What, 
then, stands in the way of setting the transfer aside ? The debt"; 
was n2t-a_provable o ne in bankru ptcy, it is contended, and on 
that contention the case is rested, and to it we ma^~3irect our \ 
considerations, and in that the provisions of the statute become J 
necessary elements. 

Section 60a, as amended, is as follows: 

**A person shall be deemed to have given a preference, if, 
being insolvent, he has, within four months before the filing of 
the petition, * * * made a transfer of any of his property, 
and the effect of the enforcement of such * • * transfer 
will be to enable any one of his creditors to obtain a greater 
percentage of his debt than any other of such creditors of the 
same class." 

A creditor is defined to be "anyone who owns a demand or 
claim provable in bankruptcy [and] may include his duly au- 
thorized agent, attorney, or proxy." 

Debt includes any debt, demand, or claim provable in bank- 1 
ruptcy. Transfer includes the sale and every other and differ- / 
ent mode of disposing of or parting with property, or the pos- 
session of property, absolutely or conditionally, as a payment, \ 
pledge, mortgage, gift, or security. ' 

Appellant deduces from these definitions that no question of 
a preference can arise except when the transfer is made to the 
owner of a provable claim, or to his agent, and that no claim is 
provable except when enumerated in § 63a, and none other can 
be liquidated under paragraph b. Of the claims enumerated in 
§ 63a, the fourth is the only one with which we are concerned. 
It is as follows: " (4) Founded on an open account, or upon a 
contract, express or implied. ' ' The final contention of appellant 
is that one, to receive a preference, must be a creditor of the 
bankrupt upon a contract, express or implied. It is not enough 
that there be some kind of legal or equitable claim against the 
bankrupt. These postulates laid down, he builds upon them an 
argument of great technicality to show that the trusts of Shaw 
were not his creditors, and therefore could not receive from him 
a preference. An obligation to the trusts is not denied, but it is 



314 PREREQUISITES TO ADJUDICATION 

ail obligation, it is asserted, which was represented entirely by 
his bond, and had no remedy but by a suit on the bond. The 
liability of Shaw, it is further contended, considered inde- 
pendently of the bond, was in the nature o f a p ure tort liability 
which could not be waived and the remedies of a contract 
availed of. 

That some torts may be waived and be the bases of provable 
I claims is decided in Crawford v. Burke, 195 U. S. 176, 187, 49 
L. ed. 147, 151, 25 Sup. Ct. Rep. 9. Crawford and one Valentine 
were stockbrokers and dealers in investments. They had in their 
possession certain shares of stock which they held as a pledge 
and security for the amount due them by Burke on the stock. 
They sold Burke's reversionary interest in the stock, whereby 
it was wholly lost. He sued them in trover. They set up their 
discharge in bankruptcy. It was held, the court speaking 
through Mr. Justice Brown, to be clear that the debt of Burke 
was embraced within the provisions of paragraph a, as one 
"founded upon an open account, or upon contract, express or 
implied," and might have been proven had he chosen to AKaije 
thetortand take his place with other creditors of the estate. 
Thedischarge in bankruptcy was held on other provisions of 
the act to be a defense. The case was applied and followed 
in Tindle v. Birkett, 205 U. S. 183, 186, 51 L. ed. 762, 764, 27 
Sup. Ct. Rep. 493, in an action to recover damages claimed to 
have been sustained by false and fraudulent representations. 
I It was decided that the claim was one provable under § 63a as 
' ' * founded upon an open account or upon a contract, express or 
implied." It is, however, said that these cases are explained 
and limited in Frederic L. Grant Shoe Co. v. W. M. Laird Co., 
212 U. S. 445, 53 L. ed. 591, 29 Sup. Ct. Rep. 332, to instances 
"where there is a claim arising out of a contract, but of such a 
nature that there is at the same time an independent remedy in 
tort." To make this distinction available, appellant must es- 
tablish his contention that there was no contractual relation, 
either between Shaw and his trusts or the cestuis que trust of 
the trusts ; in other words, that the sole liability was upon Shaw's 
bond. There is no other remedy, is the repeated insistence, and 
that only after a final accounting has been had in the Probate 
Court, showing a liquidated balance due from the accountant. 
Then, and not until then, as we understand appellant, a creditor 
emerges with a provable claim. Appellant, however, halts some- 
what at the logic of his argument, and ventures to say that a 



PREFERENCES * 315 

decision in his favor does not necessarily involve a decision that 
a claim upon the bond of the defaulting trustee could not be 
proved for a dividend in the name of the probate judge. But is 
not this concession in opposition to the relation asserted to exist 
between a provable debt and a transfer of property on account 
of it being a preference? 

We have considered the contentions of appellant somewhat 
minutely, so as to fully present them. The lower courts, while 
giving attention to the technical elements of appellant's argu- 
ments, cut through them to apply the fundamental purpose of 
the Bankruptcy Law; that is, equality between creditors. The 
District Court, following Bush v. Moore, 133 Mass. 198, decided 
in 1882 under a provision of the Massachusetts insolvency law 
which w^as similar to the provision in the Bankruptcy Act of the 
United States, found no difficulty in the same person, considered 
in different capacities, acting as giver and receiver of a fraudu- 
lent preference. The Court of Appeals met the contention of 
appellant that there must be a contractual relation, and decided 
that it existed, both on account of the bond and independently 
of the bond. The court said : " It is true that, in the ordinary 
course, enforcing the bond would be at the end of the proceed- 
ings, and not at the beginning. Notwithstanding, as the equita- 
ble rules which govern bankrupts always look to the end, and 
disregard the intervening details as only steps to reach the end, 
there was in this case a contract from the beginning, — that is, 
the bond, — which was capable of liquidation on the rules ex- 
plained in Tindle v. Birkett, 205 U. S. 183, 51 L. ed. 762, 27 
Sup. Ct. Rep. 493. * * * Aside from this and independently 
of the bond, we believe there is an obligation resting on a de- \ 
faulting testamentary trustee to restore the value of the assets \ 
embezzled, which is of contractual character." ' 

But this, appellant contends, is to evolve ' jtwo moral persons 
o ut of one embezzler. " The criticism only can be made by put- 
ting out of view wliat the "one embezzler" represents. He is 
one being, but acts in more than one capacity, and in all of his 
capacities he has duties and obligations. The relation of a trustee 
to the trust property is not the same as his relation to his in- 
dividual property. He certainly may incur obligations to the 
trust. He can only satisfy the obligations out of his individual 
property, and by doing so may deplete it, make it deficient, to 
satisfy its obligations. These are realities, not fictions. We must 
overlook essential things to disregard them, and hence the de- 



316 PREREQUISITES TO ADJUDICATION 

cision in Bush v. Moore, supra. Moore was the guardian of his 
son, and wrongfully appropriated to his own use the moneys of 
his ward. Within six months preceding his insolvency, and 
being insolvent, intending to restore the funds he had appro- 
priated, he deposited in the defendant bank the necessary sum 
derived from his private property. His assignees in insolvency 
sued in equity to recover the sum as a preference, alleging that 
he at the time was insolvent, and acted in contemplation of in- 
solvency. The Massachusetts statute made void any payment or 
conveyance of property by an insolvent "to any creditor or 
person having a claim against him" and gave power to the 
assignee to recover the property. 

These contentions were made: (1) The ward was not a 
creditor of the guardian or a person having a claim against him. 
(2) The act of the guardian did not constitute a preference which 
was avoidable by reason of his insolvency. (3) Had the mis- 
appropriation continued, there would have been no claim by 
the ward which could have been the foundation of a suit. 
(4) His remedy was to summons the guardian into the Probate 
Court, and then, upon adjudication there, or if he failed to 
account, there would have been only the remedy for failure to 
account or to comply with the decree of the court. 

The contentions, it will be observed, were like those made in 
the case at bar. They were all rejected. It was held that the 
title to the property continued in the ward, the guardian having 
its custody only, and, he having wrongfully used it, there was a 
just claim on the part of the ward that the integrity of the fund 
should be restored. The court said : ' ' The title to the property 
of one under guardianship continues always in the ward; the 
guardian has its custody merely. If, availing himself of that 
custody, he wrongfully uses it, there is a just claim on the part 
of the ward that the integrity of the fund shall be restored. It 
is not important in what form the ward is compelled to seek 
his remedy, or that the wrongful act of the guardian will not 
immediately afford a ground of action aigainst him. Even if, 
upon a settlement in the Probate Court, it might have been held 
that the lawful and proper charges of the guardian would ex- 
ceed the amount of his spoliations, there was not the less a just 
claim that the ward's property which had been unlawfully dealt 
with should be replaced." 

To the contention that two persons were necessary to consum- 
mate a preference, one to transfer and the other to receive the 



PREFERENCES 317 

property, the court answered: ''But where the same person 
acts as the giver and receiver of the security, the concurrence 
and participation of two parties to the fraudulent preference 
exists. * * * One individual acting in two capacities, as 
debtor and on behalf of the creditor, may constitute the two per- 
sons contemplated by the statute. ' ' And, supplying the element 
of knowledge of the insolvency and the preference required by 
the statute, the court said that the ward was bound by the knowl- 
edge of his guardian. 

The case is certainly determinative of appellant's contention 
that accounting in the Probate Court was necessary as a condi- 
tion to a provable claim, or that a suit on a bond was the only 
remedy available for the misappropriation of the funds by a 
guardian. This applies as well to a trustee ; and that there may 
be a contractual obligation of one trust to another under the 
laws of Massachusetts is decided in Bremer v. Williams, 210 
Mass. 256, 96 N. E. 687. In that case a person who was the sole 
trustee of two separate estates paid the taxes due from one of 
them with money embezzled from the other. It was held that 
the new trustee of the latter could maintain suit in equity to 
recover from anothe r unjust ly enriched by the embezzlement. 
The liability of the lafter to the former, the court said, grew out 
of an implied or constructive obligation, and did not rest upon 
an express trust : and, being such, the statute of limitations 
would be a bar in equity as well as in law. In other words, the 
court recognized that from the misuse of the funds the l aw would 
im ply an ohlig fat ion to repay . This ruling brings the case at 
bar within Crawford v. Burke and Tindle v. Birkett, even if 
their application be as limited as appellant contends. It may 
be questioned if they are so limited. They recognize the rela- 
tion of § 63a to § 17. § 17 excludes certain debts from discharge ; 
among others, those created by the bankrupt's "fraud, em- 
bezzlement, misappropriation, or defalcation while acting as an 
officer or in any fiduciary capacity. ' ' It was said in Crawford v. 
Burke: "If no fraud could be made the basis of a provable 
debt, why were certain frauds excepted from the operation of 
the discharge?" The question was pertinent in view of the lan- 
guage of the section. It provides that "a discharge in bank- 
ruptcy shall release a bankrupt from all of his provable debts, 
except such as," etc. The relation of the section was also recog- 
nized in Friend v. Talcott, 228 U. S. 27, 57 L. ed, 718, 33 Sup. 
Ct, Rep. 505. It is there declared that § 17 enumerates the 



"iUN 



318 PREREQUISITES TO ADJUDICATION 

debts provable under § 68a which are not discharged. Aiiioug 
them, we have seen, are those created by fraud, embezzlement, 
misappropriation, or defalcation in any fiduciary capacity. It 
would seem, therefore, to follow that the conversion of trust 
funds creates a liability provable in bankruptcy. 

The Court of Appeals expressed the hardship of a contrary 
conclusion. "Moreover," the court said, "it will be a great 
hardship if the various estates of which Shaw was trustee can- 
not recover any part of their loss of about $350,000 by sliaring 
in his bankrupt estate. This might, of course, in this instance, 
be but a very small dividend ; but in another instance it might 
be very near the face of the default. Any construction which 
would leave such a result as that cannot, of course, be accepted 
unless fairly forced upon us." [106 C. C. A. 69, 183 Fed. 523.] 

In this, we think, the court was right. Equality between credit- 
ors is necessarily the ultimate aim of the Bankrupt Law, and to 
obtain it we must regard the essential nature of transactions, 
not their forms or accidents. As we have said, there may be 
an unity of the person in the individual and the trustee, of the 
individual and the guardian; we must look beyond it to the 
difference in his capacities and the duties and obligations result- 
ing from it. These duties and obligations are as distinct and 
insistent as though exercised by different individuals, and have 
the same legal consequences. The unity of the person h£is, of 
course, an effect. It constitutes such relationship between the 
different capacities exercised as to impute knowledge of their 
exercise and for what purpose exercised. Bush v. Moore, 133 
Mass. 198 ; Atlantic Cotton Mills v. Indian Orchard Mills, 147 
Mass. 282, 9 Am. St. Rep. 698, 17 N. E. 496 ; Rogers v. Palmer, 
102 U. S. 263, 26 L. ed. 164; Atlantic Bank v. Merchants' Bank, 
10 Gray, 532, cited in United States v. State Nat. Bank, 96 U. S. 
30, 36, 24 L. ed. 647, 648. 

Decree affirmed. 

Mr. Justice HOLMES concurs in the result. 

IN RE BANKS 

207 Fed. 662 

^(District Court, N. D. New York. September 15, 1913) 

RAY, D, J. The referee has allowed the claim of John 
Quencer at the sum of $792.03 and the claim of Philip Quencer 
at the sum of $701.26. The allowance of these claims is chal- 




d 



^ ' yl , rt ^ 't^^Jt-t^t^^uL^^tJL^ f .Lx^ CLv. 



PREFERENCES 319 

lenged on the ground that they were barred by the six years' 
statute of limitations at the time the petition in bankruptcy was 
filed, and that the bar of the statute had not been removed by 
part payment or by an acknowledgment of the debt in writing, as 
provided by § 395 of the Code of Civil Procedure of the state of 
New York, which provides that : 

' ' An acknowledgment or promise contained in a writing, signed 
by the party to be charged thereby, is the only competent evi- 
dence of a new or continuing contract, whereby to take a case 
out of the operation of this title. But this section does not alter 
the effect of a payment of principal or interest." 

On the 7th day of September, 1912, the bankrupt, Ira 0. 
Banks, signed and verified his petition and schedules in voluntary 
bankruptcy, which were filed September 12, 1912, and adjudi- 
cation made. In the schedules of debts owing the bankrupt 
listed, "Philip Quencer, WatertOAvn, N. Y., note, $250," and 
''John Quencer, Perch River, N. Y., note, $250," and no men- 
tion was made therein of any other debt owing them or either 
of them or of the consideration for the note, if there was one. 
After the trustee was appointed and qualified, and September 
25, 1912, Philip Quencer filed his verified claim for : 

71 tons of hay at $9.50 $674.50 

September, 1904, by cash 200.00 

$474.50 
Interest for 8 years 227.76 

$702.26 
1912. Received 1.00 

Balance due $701.26 

October 14, 1912, John Quencer filed his claim with the referee 
for: 

66 tons of hay at $11 $726.00 

Interest to April 1, 1905 xj.i. ,, 23.23 

$749.23 
April 1, 1905, cash 200.00 

$549.23 



320 PREREQUISITES TO ADJUDICATION 

Interest to September 1, 1912 244.40 



$793.68 
September, 1912, cash 1.00 



$792.63 
— ^with interest from September 1, 1912. 

In the verified claims filed there is no mention of or reference 
to a note or notes. The claims state : ^ 

"That the consideration of said debt is as folllows: 'Goods, 
wares and merchandise sold and delivered to the said bankrupt 
at his special instance and request. ' * * * Nor has any note 
or other evidence of said debt been received except as herein 
stated. ' ' 

As stated no note is mentioned in the claim. The total of all 
claims of other creditors proved is $721.69. 

As to the claim of Philip Quencer it is asserted that on the 
10th or 11th of September, 1912, some five days after the petition 
was verified and one or two days before it was filed. Banks paid 
to Quencer the sum of $1 and stated to him that he wanted to 
pay him the dollar to renew the debt. As to the claim of John 
Quencer, it is asserted that on the 10th or 11th day of Septem- 
ber, 1912, Banks paid to him the sum of $1 and stated that he 
paid it to him for the purpose of renewing the debt. What debt 
was not mentioned. 

It is, of course, true that until a bankrupt files his petition in 
bankruptcy, he is the owner of all his property and may sell or 
incumber it, except in fraud of creditors or in violation of some 
provision of law, as he sees fit. Even after the petition is filed 
and down to the time of the adjudication, the title remains in 
the bankrupt, but during that time he holds in a sort of trust 
capacity for creditors. 

A debtor as a general rule may at any time acknowledge a 
debt against which the statute of limitations has run and renew 
same by a promise in writing which identifies the debt or by a 
partial payment of the specific debt. A recognition of the debt 
by a part payment thereof operates as a new promise to pay the 
remainder. If, as against the trustee and the creditors, this 
renewal of the debt cannot be effected by an acknowledgment of 
the debt made in the schedules and filed with the petition, still 
if the acknowledgment in writing is made before the petition is 
filed or a part payment of the specific debt is made before the 



PREFERENCES 321 

filing of the petition, in the absence of fraud on the law or col- 
lusion, I see no reason why the transaction is not valid, unless 
made under such circumstances as to amoimt to a preference. 
If within four months of filing a petition the debtor makes a 
payment on an outlawed debt intending at the time to go into 
bankruptcy knowing his insolvency, and the person receiving 
the payment knows^^fijosolvency and has reasonable cause~fo^ 
belie Yg that a preference is intended, i^3'6^td^^tjt»e7such a pay:^ 
ment as would renew the debt. The transaction would b e in. 
fraud of the Bankruptcy_Act. The transaction could be repu- 
diated by the trustee and the payment recovered. 

By § 60a of the Bankruptcy Act, as amended, it is provided 
that: 

' ' A person shall be deemed to have given a preference if, being 
insolvent, he has, within four months before the filing of the 
petition * * * or made a transfer of any of his property, 
and the effect of the enforcement of such * * * transfer 
wiU be to enable any one of his creditors to obtain a greater 
percentage of his debt than any other of such creditors of the 
same class." 

And § 60b provides that : 

" If a bankrupt shall * * * have made a transfer of any 
of his property, and if, at the time of the transfer, * * * 
the bankrupt be insolvent and * * * the transfer then 
operates as a preference, and the person receiving it or to be 
benefited thereby, or his agent acting therein, shall then have 
reasonable cause to believe that the enforcement of such * * * 
transfer would effect a preference, it shall be voidable by the 
trustee and he may recover the property or its value from such 
person, ' ' 

§ 57g of the act provides that : 

**The claims of creditors who have received preferences, void- 
able under § 60, subdivision b, * * * shall not be allowed 
unless such creditors shall surrender such preferences, convey- 
ances, transfers, assignments, or incumbrances." 

If, then, the payment to renew a debt be made on the eve of 
bankruptcy (that is, the filing of a petition) and be made under 
such circumstances and with such knowledge as to constitute the 
giving and receipt of a preference, the claim cannot be allowed 
unless the preference is surrendered. The amount of the pay- 
ment is immaterial. If the payment is recovered (that is, was 

H. & A. Bankruptcy — 21 



322 PREREQUISITES TO ADJUDICATION 

in fraud of the law), then how can it operate to renew the debt? 
It leaves the whole matter as if no payment had been made. 

It is plain that Banks knew his insolvency and intended to 
prefer both John and Philip Queneer. "What knowledge did 
they have? So far as appears, these claimants had not taken 
any proceedings to collect or reduce their claims to judgment, 
except one of them says he had spoken of the debt, we may 
infer, when he met Banks. All deny that the claimants had any 
knowledge of the contemplated bankruptcy proceedings prior to 
the filing of the petition. All fail to remember anything that 
was said at the time the $1 payments were made, except the 
statement of Banks that he wanted to pay the $1 to renew the 
debt. 

The alleged renewal of the debts by listing claims in the 
schedules, "creditors whose claims are unsecured, * * * 
Philip Queneer, Watertown, N. Y., note, $250; John Queneer, 
Perch River, N. Y., note, $250" — cannot be held to renew these 
claims on accounts two years outlawed when it appears that no 
note whatever was given. It appears in such case that the debtor 
had notes in mind, not an account for goods, wares, and mer- 
chandise sold and delivered. If he intended to renew a note, he 
certainly did not intend to renew an account for hay for which 
no note had been given. 

"The general rule is that a new promise, whether made before 
or after the bar is complete, will avoid the operation of the 
statute of limitations." 25 Cyc. 1328; Winchell v. Hicks, 18 
N. Y. 558 ; Esselstyn v. Weeks, 12 N. Y. 635 ; Wright v. Par- 
menter, 23 Misc. Rep. 629, 52 N. Y. Supp. 99. 

See the many cases cited in note, 25 Cyc. 1328. 

"The general rule is that an acknowledgment or promise to 
pay, in order to take the debt out of the statute, must satisfac- 
torily and certainly appear to refer to the very debt in ques- 
tion." Stafford v. Bryan, 3 Wend. (N. Y.) 532; Clark v. 
Dutcher, 9 Cow. (N. Y.) 674; 25 Cyc. 1330, and cases there cited. 

In re Currier (D. C.) 27 Am. Bankr. Rep. 597, 601, 602, 192 
Fed. 695, the bankrupt filed his voluntary petition in bankruptcy 
not knowing that he had sufl6.eient property to pay all his debts 
when in fact he did have. He scheduled the valid existing 
claims against him and included and scheduled an outlawed 
claim. This was duly approved and allowed. Later the bank- 
rupt discovered that he had property more than sufficient to pay 
all his debts, and he (the bankrupt) then moved to expunge the 



PREFERENCES 323 

scheduled outlawed claim and that it be disallowed. No creditor 
objected or had objected to the proof and allowance of that 
claim, nor did the trustee in their behalf. This court discussed 
the whole situation, but all that it decided was that under such 
circumstances the bankrupt himself, and wholly in his own 
interest and in order to secure for himself the balance of his 
own estate after paying the claims which were not outlawed prior 
to maMng his schedules, could not allege that a claim which he 
scheduled as valid and subsisting was outlawed and barred by 
the statute ; and that under the circumstances the creditor whose 
claim was barred when the petition was filed could share in dis- 
tribution only after the others were paid in full. 

Here creditors are objecting through the trustee who repre- 
sents them. Here the question of the effect of a partial pay- 
ment on an outlawed claim on the eve of filing a voluntary peti- 
tion in bankruptcy as between creditors, those whose claims were 
and those whose claims were not barred by the statute of limi- 
tations at that time, is in question. In re Currier the question 
was between a solvent but alleged bankrupt in his own interest 
and his creditors. 

There are very substantial reasons why an insolvent person I 
on the eve of going into voluntary bankruptcy should not be 
permitted, as against his creditors whose claims are not barred 
by the statute of limitations, to renew by a small partial pay- 
m^ent thereon those claims which are barred by the statute. 
Creditors whose claims are barred by the statute usually do not 
seek to enforce them by suit and judgment as they feel assured 
the debtor will plead the statute. If, then, a person who has 
been out of business seven or eight or more years, and who has 
no judgments against him and no claims against him which have 
accrued due within six years but does owe debts to a large 
amount barred by the statute, starts in business and obtains 
credit and purchases and has in possession a large amount of 
property recently purchased on credit, but finds himself unable 
to meet his obligations, he may make a small payment on each 
of his outlawed debts and then go into bankruptcy and both 
ancient and modem creditors, so to speak, will share in the dis- 
tribution of the proceeds of such recently acquired property. 
This would operate as a fraud on his creditors whose claims were 
not barred by the statute. Still if there was no collusion and 
no reasonable cause on the part of the creditors receiving the 
payments to believe that a preference was intended, and the 



324 PREREQUISITES TO ADJUDICATION 

defense of the statute is personal to the creditor until after a 
petition is filed, how can the court hold that such renewal by 
part payment is forbidden by any law ? § 67e of the bankruptcy 
act provides that : 

**A11 * * * transfers * * * of his property or any 
part thereof made, or given by a person adjudged a bankrupt 
under the provisions of this act subsequent to the passage of this 
act and within four months prior to the filing of the petition 
with the intent and purpose on his part to hinder, delay, or 
defraud his creditors, or any of them, shall be null and void as 
against the creditors of such debtor, except," etc. 

And the property so transferred remains a part of the bank- 
rupt's estate. It would seem, not from direct evidence but from 
some statement or question asked, that some person had obtained 
a judgment against Banks, and we may infer that this was the 
reason of his going into bankruptcy. This is surmise, however. 
Assume this to be the case, we further infer that Banks made 
up his mind that all his creditors should share in his estate, those 
whose claims were barred by the statute and those whose claims 
were not so barred, and hence he made the payments referred 
to after the execution of, but before filing, his petition. Assume 
this to have been his purpose, was the transfer of the $1 on the 
occasion in question one ' ' with the intent and purpose on his part 
(Banks) to hinder, delay, or defraud his creditors or any of 
them ? " I am not prepared so to hold. So far as this court is 
informed, it has not been held that a payment made on account 
or on a note for the express purpose of renewing an outlawed 
claim of itself is or operates as a fraud on creditors within the 
meaning of the statute. 

Suppose we take the position that the payment of the $1 on 
each of these claims, after the petition was verified but before it 
was filed, was the creation of new debts or obligations, and I 
am not able to find any law which wiU prevent their proof and 
allowance. The status of the claim must be determined as it 
existed at the time the petition was filed. Suppose the parties 
had figured up the accounts and Banks had given promissory 
notes intermediate the verification of the petition in bankruptcy 
and its filing, would or would not the claim be provable ? I am 
of the opinion that Banks, as against his other creditors, in the 
absence of fraud and collusion, had the right to renew these 
claims at any time before he filed his petition. It does not ap- 
pear that the Quencers, or either of them, knew Banks was 



PREFERENCES 325 

insolvent. It seems to me that the law has not prohibited the 
renewal of outlawed claims under such circumstances. 

It is contended that there is nothing to show that the bank- 
rupt intended to pay anything on an account or debt due for 
hay sold and delivered, but that the evidence discloses an intent 
to make a payment on a promissory note. A few days before 
the payments were made, the bankrupt made up his schedules 
of indebtedness which were attached to and formed a part of his 
petition in bankruptcy. Here he stated that he owed to John 
Quencer a note of $250 and to Philip Quencer a note of $250 ; 
that is, debts evidenced by such notes. The consideration of 
these notes is not mentioned in the schedules. It is evident that 
Banks at that time had in mind claims against himself in favor 
of the Quencers evidenced by notes, $250 to each. The date of 
the notes was not given. So far as appears, this was his state of 
mind and these the debts he had in mind when he went to the 
Quencers on the occasions mentioned. There was no conversa- 
tion as to any indebtedness except Banks handed to each $1 and 
said he wanted to pay or paid the dollar to renew the debt. In 
fact, so far as the proof goes, no note had been given to one of 
the Quencers, but a note of $400 had been given to the other 
which he had handed back, under what conditions and for what 
reason does not appear. In fact, as the referee finds. Banks 
owed a balance to each of the Quencers for hay sold and de- 
livered and nothing else; the claim, however, being barred by 
the statute. The contention is, nothing having been said regard- 
ing the nature or character of the debt, that Banks had notes in 
mind and intended to make a payment on notes and not on an 
account or claims for hay sold and delivered. But if there was 
only one claim or debt, and that for hay, is it material that 
Banks supposed he had given a note for the debt when in fact 
he had not ? It is only material that a specific indebtedness was 
recognized and a payment made to apply on it as a partial pay- 
ment of a greater indebtedness. If it was stated that the dollar 
was paid to renew the debt, a larger debt than $1, and there 
was but one debt, here is a plain recognition of a larger sum 
due than the amount paid and an implied promise to pay the 
remainder. If the debt was for hay, is it material that it was 
not evidenced by a promissory note as Banks supposed? On 
this subject see Crow v. Gleason, 141 N. Y. 489, 493, 494, 36 N. 
E. 497. This case is cited and approved Brooklyn Bank v. 
Barnaby, 197 N. Y. 210, 90 N. E. 834, 27 L. R. A. (N. S.) 843. 



326 PREREQUISITES TO ADJUDICATION 

See, also, Hughes v. Eddy Valve Co., 147 App. Div. 356, 131 
N. Y. Supp. 744, and Murphy v. Walsh, 113 App. Div. 428, 99 
N. Y. Supp. 346. I think the claimants brought themselves 
within the principles enunciated in the cases cited. 

I cannot hold that a payment made immediately before bank- 
ruptcy, or filing a petition in bankruptcy, to renew an outlawed 
debt and to enable the creditor to come in and share in the dis- 
tribution, the one receiving it having no reasonable cause to be- 
lieve it will operate as a preference, is a fraud on creditors or 
the law. * * * 

On the whole, I am of the opinion that the order of the referee 
allowing the claims should be affirmed. So ordered. 

(e) EiMbbling Creditor to Ohtam Greater Percentage Than 
4/ Others of Same Class *^ 

SWARTS v. FOURTH NAT. BANK OF ST. LOUIS 

117 Fed. 1, 54 C. C. A. 387 



y fc^ (Circuit Court of Appeals, Eighth Circuit. July 21, 1902) 



'y ^ On February 6, 1900, the Siegel-Hillman Dry Goods Company, 
\/ a corporation, was adjudged a bankrupt on the petition of its 
^ «L creditors, which was filed on X^eeember 30, 1899. Four months 
f\ ^ before the filing of the petition, the Fourth National Bank of 
* St. Louis held a claim of $60,000 against this corporation, which 

was evidenced by a series of promissory notes signed by the 
company, and indorsed by H, A. Loeb and B. Hillman, which 
amounted to $35,000, and by another series of promissory notes 
signed by the corporation, and indorsed by H. A. Loeb, B, Hill- 
man, L. Regenstein, and F. Siegel & Bro., which aggregated 
$25,000. All the indorsements were placed upon these notes 
before they were discounted for the accommodation of the cor- 
poration, and for the purpose of giving credit to the notes, so 
that the indorsers stood in the relation of makers to the bank, 
and of accommodation makers or sureties to the dry goods com- 
pany. Within four months preceding the filing of the petition 
; in bankruptcy, the dry goods company, while it was insolvent, 
jmid- io the ba nk, which did not have reasonable cause to believe 
', that it was intended thereby to give a preference, the sum of 

40 — As to who is a "creditor" 
see tn/ro, Tit. Provable Claims, pp. 
384-476. 



PREFERENCES 327 

$My6QQL,upon some of the notes which were indorsed by Siegel 
& Bro. On February 21, 1900, Siegel & Bro. paid the $10,400 
and interest which remained unpaid upon the notes which they 
had indorsed, and subsequently proved up this payment as a 
claim against the estate of the bankrupt. The bank proved its 
claim against the bankrupt's estate for $35,000 and interest, 
based upon the notes which had been indorsed by Ivoeb and Hill- 
man, but which did not bear the names of Regenstein or Siegel 
& Bro. The trustee moved to expunge the claim of the bank . 
unless it surrendered the $14,600 which it had received from I 
the estate of the bankrupt within four months preceding the/ 
filing of the petition. The referee granted the motion. The Dis- 
trict Court reversed this decision, and directed the referee to 
deny the motion. From the decree to this effect, the trustee has 
appealed to this court. 

i 
SANBORN, C. J., after stating the case as above, delivered 

the opinion of the court. 

May a creditor of a bankrupt whose claim is evidenced by * 
numerous promissory notes secured by different indorsers or 
accommodation makers accept from the insolvent, within four 
months of the filing of the petition in bankruptcy against him, 
payment in part of the notes secured by the solvent indorsers, 
and then obtain the allowance of that portion of his claim 
against the bankrupt upon which the solvent indorsers were not 
lia ble, without a surrender of th e payment he has thus obtained ? 
This is the primary question which this case presents. 

No one can become familiar with the bankrupt law of 1898 
without a settled conviction that the two dominant purposes of 
the framers of that act were : (1) The protection and discharge 
of the bankrupt; and (2) the distribution of the unexempt 
property which the bankrupt owned four months before the 
filing of the petition in bankruptcy against him, share and share 
alike, among his creditors. All the earlier sections of the act 
are devoted to the security and relief of the bankrupt, and, when 
the distribution of his property is reached, the provisions relat- 
ing to it are all drawn from the standpoint of the insolvent, and 
not from that of his creditors. The rights and privileges of the 
bankrupt, and the equal distribution of his property, dominate 
every provision, while the rights, wrongs, benefits, and injuries 
of his creditors are always incidental, and secondary to these 
controlling purposes. § 60a contains the legal and controlling 




-} ''^\ 



328 PREREQUISITES TO ADJUDICATION 

definition of the preference specified in |_57^ and the other parts 
of the bankrupt act. 30 Stat. c. 541, pp. 562, 560; Kimball v. 
E. A. Rosenham Co. (C. C. A.) 114 Fed. 85, 7 Am. Bankr. R. 
718, 719 ; Pirie v. Trust Co., 182 U. S. 438, 21 Sup. Ct. 906, 45 
L. ed. 1171. But this definition of a preference was not written 
from the station of the creditor, but from that of the debtor. 
It is not the act of the creditor, but the act of the debtor, which 
gives it, — ^which produces it. The controlling thought is not 
the benefit or injury to the creditor, but the equal distribution 
of the property of the bankrupt among the holders of the prov- 
able claims against him. 

It is contended that there was no preference by the payment 
by the bankrupt of the $14,600 to the bank on the notes of its 
solvent indorsers, because the bank derived no benefit there- 
from. It is said that the bank would have received the full pay- 
ment of these notes from the indorsers of the bankrupt if noth- 
ing had been paid upon them by the corporation. The argu- 
ment assumes a fact which does not really exist, for the pre- 
sumption always is that cash in hand is more valuable and useful 
than the legal liability of any party to pay it. But, if the bank 
had derived no benefit from this payment, its legal effect would 
not have been different. When the authors of paragraph 60a 
prepared the legal definition of a preference, they were neither 
considering nor dealing with the promises, liabilities, payments, 
or acts of others than the bankrupt. They were treating of his 
property, and of the claims of his creditors against that prop- 
erty. The dominant purpose of the prohibition of a preference 
was not to benefit or injure, or to prevent the benefit or injury, 
of any creditor or class of creditors, but to prevent the debtor 
from making any disposition of his property which would pre- 
vent its equal distribution, — to prevent him from doing anything 
which would result in the payment out of his property of a 
larger percentage upon any claim than others of the same class 
would receive. The plain intention of Congress, and the legal 
effect of the paragraph, were to make every transfer of any of 
the insolvent's property, by means of which a larger percentage 
would be paid out of his estate to any creditor, or on any claim, 
than every other creditor and every other claim of the same 
class would receive, a preference to be surrendered or avoided 
under the other provisions of the statute. The meaning and 
effect of § 60a are the same as though it declared every transfer 
of his property by an insolvent to be a preference which has the 



PREFERENCES 329 

effect to "enable aity^One of his creditors to obtain a greater 
percentage of his debt" out of the property of the insolvent 
* ' than any other of such creditors of the same class. ' ' The test 
of a preference, under the act, is the payment, out of the bank- 
rupt's property, of a larger percentage of the creditor's claim 
•than other creditors of the same class receive, and not the benefit 
or injury to the creditor preferred. Marshall v. Lamb, 5 Q. B. 
115, 126, 127. 

Four months before the filing of the petition in bankruptcy, 
the bank had a claim against the estate of the insolvent for 
$60,000. Within that four months, it received $14,600 out of 
his estate, so that, when the petition in bankruptcy was filed, 
instead of a claim for $60,000 against the insolvent, it held $14,- 
600 of his money, and a claim against him for $45,400. The 
statement of these facts is itself a demonstration that if the bank 
can retain this money, and procure the allowance of the balance 
of its claim, it will receive a greater percentage of its debt out 
of the estate of the insolvent than other creditors of the same 
class who receive no such payments. The insolvent has in- 
creased the funds of the bank $14,600, and it has diminished by 
$14,600 the property to be distributed among its creditors ; and 
it is the depletion of the estate, to pay a larger percentage upon 
one claim against it than others of the same class will receive, 
against which the provisions of § 60a and § 57g are specifically 
leveled. The conclusion is irresistible that the payment to the 
bank of the $14,600 gave it a preference over the other creditors 
of the bankrupt of the same class. 

It is, however, strenuously argued that, if the payment of this 
$14,600 created a preference, the bank should not be required to 
surrender it, because, after the adjudication in bankruptcy, 
Si^el & Bro., the solvent indorsers, paid the $10,400 remaining 
unpaid on the notes which they had indorsed, and proved this 
payment as a part of their claim against the estate of the bank- 
rupt, while the claim which the bank has presented consists en- 
tirely of notes upon which Siegel & Bro. are not indorsers. But 
how does the fact that, since the filing of the petition in bank- 
ruptcy, the bank has assigned a portion of its claim to Siegel & 
Bro., by operation of law or otherwise, relieve it from its dis- 
ability to prove any of its claim until it surrenders its prefer- 
ence? The bankrupt act prohibits the allowance of any claim 
of a creditor who has received a preference unless he has sur- 
rendered that preference. "The claims of creditors who have 



330 PREREQUISITES TO ADJUDICATION 

received preferences shall not be allowed unless such creditors 
shall surrender their preferences. ' ' § 57 g. The unequivocal 
language and the unquestionable legal effect of this section are 
to prohibit the allowance of any claim of a creditor who has 
received a preference, either upon that or upon any other claim 
he holds against the estate of the bankrupt, unless he has first 
surrendered his preference. Strobel & Wilken Co. v. Knost (D. 
C.) 99 Fed. 409; Electric Corp. v. Worden, 39 C. C. A. 582, 99 
Fed. 400; In re Conhaim (D. C.) 97 Fed. 924; In re Rogers 
MilUng Co. (D. C.) 102 Fed. 687; Collier, Bankr. (3d ed.) pp. 
318, 319. 

Under the act of 1898, the rights of claimants to share in the 
distribution of the estate of the bankrupt are fixed by the status 
of their claims at the time of the filing of the petition in bank- 
ruptcy. § 63 ; In re Bingham (D. C.) 94 Fed. 796. The petition 
in this case was filed on December 30, 1899. At that time the 
bank held a claim against the estate of the dry goods company 
for $45,400, $35,000 of which was evidenced by the notes of the 
bankrupt indorsed by Loeb and Hillman, while $10,400 was evi- 
denced by the notes of the bankrupt indorsed by Loeb, Hillman, 
Regenstein, and Siegel & Bro. Siegel & Bro. were the only sol- 
vent indorsers. Our attention is here challenged to a late de- 
cision of the Circuit Court of Appeals for the seventh circuit in 
Doyle V. Bank, 24 Nat. Corp. Rep. 406, 116 Fed. 295, in which 
it is held that a creditor who holds a promissory note of the 
bankrupt, secured by an indorser, is in a different class from 
one who holds the bankrupt's note without any indorser, within 
the meaning of paragraph 60a, so that the bankrupt may pay 
the former's note without creating any preference which must 
be surrendered by the creditor before his claim based upon the 
unindorsed note can be allowed. This decision is cited to sup- 
port the position that the bank is in a different class with its 
claim upon the $35,000, from that in which it is with its claim 
for $10,400. It must be conceded that, if a creditor holding the 
bankrupt 's note with no indorser is in a different class from one 
holding it with one indorser, one holding his note with two in- 
dorsers must be in a different class from either of the others, 
because the third note is marked by exactly the same difference 
from the second note as the second is from the first, the differ- 
ence of one indorser, — ^while the difference between the first note 
and the third note is twice as great. Nor, if it be conceded that 
a creditor with one indorser is in a different class from one with 



PREFERENCES 



331 



no indorser, can it be successfully contended that a creditor with 
four indorsers, some of whom, are solvent, as is the case in 
respect to the $10,400 here in question, is in a different class from 
one with two indorsers who are insolvent, as in the case of the 
notes for $35,000 under consideration. The character of the 
court which rendered this decision, the learning and ability of 
the judges who compose it, and the great respect its opinions 
always command, have impelled us to a careful consideration of 
the conclusion it announces, and of the opinion which support^ 
it. But their logical effect is to create such a multitude of classes 
of creditors, to so confuse the administration of that portion of 
the bankrupt law which treats of preferences, and to open so 
plain a way to the nullification of paragraph 57g of the bank- 
rupt act, that we hesitate to follow them. If a debtor may pay 
his indorsed paper within four months of the filing of the peti- 
tion in bankruptcy against him, without creating a preference 
of the creditor so paid, that will bar the allowance of his claim 
on open account or on unindorsed paper, the way to payments 
and transfers by a bankrupt which will actually prefer credi- 
tors, but which will not fall under the ban of the bankrupt law, 
is plain and smooth. All that the debtor needs to do, to evade 
the provisions of this act for the surrender of preferences, is to 
give indorsed paper for the part of his debts which he proposes 
to pay, and the creditor may then receive the actual, and escape 
the legal, preference with impunity. We are not yet prepared 
to adopt a rule fraught with such consequences. 

While it is true that the bankrupt act does not define the word 
"elass j^ nor in terms state what creditors are in the same class, 
it creates some classes, and specifies others, and it seems to us 
that the meaning of the word "class" in the act should, if pos- 
sible, be derived from the statute itself. § 64, after directing the 
payment of certain expenses of administration, creates three 
classes of creditors, — parties to whom taxes are owing, employes 
holding claims for certain wages, and those who, by the laws of 
the states or of the United States, are entitled to priority. 
§§ 56&, 57e, and 57/i provide for the treatment and disposition 
of claims secured by property, and of claims which have priority. 
The creditors who hold these various claims, and the general 
creditors of the estate, constitute the classes of creditors of which 
the bankrupt act treats. Now, if any one of these various classes 
is taken by itself and examined, it will be seen that each one of 
the creditors in the same class always receives the same per- 






fe« 



51 



332 PREREQUISITES TO ADJUDICATION 

centage upon his claim, out of the estate of the bankrupt, that 
every other creditor of his class receives. "Where the estate is 
insufficient to pay the claims of different classes in full, the 
classes receive, out of the bankrupt estate, different percentages 
of their claims, but creditors of the same class receive the same 
percentage. The test of classification is the percentage paid upon 
the claims out of the estate of the bankrupt. 

Here, again, in considering this question of classification, it is 
well to bear in mind that this act was drawn from the station of 
the bankrupt, and that its primary purposes were to relieve the 
bankrupt, and to distribute his property equally among his 
creditors. The test of a preference, as we have seen, is whether 
or not a transfer or payment will have the effect to pay on one 
claim a larger dividend, out of the estate of the bankrupt than 
that estate will pay on other claims of the same class. It is its 
effect upon the equal distribution of the estate of the bankrupt, 
not its effect upon the creditor, that determines the preference. 
The same dominant thought controls and determines the classifi- 
cation of the creditors. Those creditors who are entitled to re- 
ceive out of the estate of the bankrupt the same percentage of 
their claims are in the same class, however much their owners 
may have the right to collect from others than the bankrupt. 
Their relations to third parties, their right to collect of others, 
the personal security they may have through indorsements or 
guaranties, receive no consideration, no thought. It is the rela- 
tion of their claims to the estate of the bankrupt, the percentages 
their claims are entitled to draw out of the estate of the bank- 
rupt, and these alone, that dictate the relations of the creditors 
to the estate, and fix their classification and their preferences. 

Now take the case in hand, or the simpler case of a creditor 
who has one of the bankrupt 's notes with a solvent indorser and 
another without any indorser. He is entitled to receive the same 
percentage out of the estate of the bankrupt on his indorsed note 
that he is on that which is not indorsed. It is true that he has 
the right to collect the former of the indorser. But, if he does, 
the indorser may prove the note, and receive exactly the same 
percentage upon the claim that the original creditor would re- 
ceive upon the note which was not indorsed. § 57t. The two 
notes bear exactly the same relation to the estate of the bank- 
rupt whether indorsed or not, — whether paid by the indorser or 
not, — and for this reason they and their holders stand in the 
same class. They are in the same class because it is the relation 



PREFERENCES 333 

of the creditors, and their claims to the estate of the bankrupt, 
and not their relation to third parties, that determines their 
rights, and fixes their status, under the bankrupt act of 1898. 
We are not persuaded that a creditor who holds an indorsed note 
of a bankrupt is in a different class from one who holds his note 
without an indorsement, under § 60a of the bankrupt act, be- 
cause the legal result of such a conclusion would lead to the 
creation of new and numerous classes of creditors not specified 
in the bankrupt act ; because that conclusion would open a plain 
way to evade the provisions of § 57gr; because the definition of 
the term "class" as used in the bankrupt act should be derived 
from that statute itself; and because the true test of the classifi- 
cation of creditors under that act is the percentage which, in 
the absence of preferences, their claims are entitled to draw out 
of the estate of the bankrupt, and the holder of an unindorsed 
note is entitled to the same percentage from the estate as the 
holder of an indorsed note. Creditors who, in the absence of 
preferences, are entitled to receive the same percentage upon 
their claims out of the estate of the bankrupt, are members of 
the same class. Those who are entitled to different percentages 
are of different classes. The result is that the bank as holder of 
the notes for $10,400, upon which there were four indorsers, 
was in the same class as it was as the holder of the notes for 
$35,000, on which there were but two indorsers. On December 
30, 1899, it had received a preference of $14,600, and it was 
forbidden to prove any part of its claim until it surrendered this 
preference. 

These facts fastened upon the entire claim of the bank an 
attribute of disqualification for allowance. The ban of the 
statute was upon the claim. The act declares that the claims of 
creditors who have received preferences shall not be allowed un- 
less the creditors surrender their preferences. This disqualifica- 
tion inheres in every part, every dollar, of the claim of the bank. 
The holder of this claim could not qualify it for allowance by 
transferring the whole or a part of it to another, nor could 
Siegel & Bro. accomplish this result by paying the notes on 
which they were indorsers, and becoming their owners by subro- 
gation. Every part of the claim, whether retained by the bank 
or assigned to another, remained, and will remain, disqualified 
for allowance until the $14,600 whose payment constitutes the 
preference is surrendered. The claim of the bank, therefore, 
must be expunged unless it repays to the trustee the $14,600 



334 PREREQUISITES TO ADJUDICATION 

which it received from the insolvent within four months prior to 
the filing of the petition in bankruptcy. * • • 



\l> 



(f) Intent to Prefer 

TOOF V. MARTIN 

13 Wall. 40 

(United States Supreme Court. December Term, 1871) 

Error to the Circuit Court for the District of Arkansas; the 
case being thus : 

The 35th section of the bankrupt act of 1867, thus enacts : 

"That if any person, being insolvent, or in contemplation of 
insolvency, with a view to give a preference to any creditor or 
person having a claim against him * * * makes any as- 
signment, transfer, or conveyance of any part of his property 
* * * (the person receiving such assignment, transfer, or 
conveyance, having reasonable cause to believe such person is 
insolvent, and that such assignment or conveyance is made in 
fraud of the provisions of this act) , the same shall be void, and 
the assignee may recover the property, or the value of it, from 
the person so receiving it or so to be benefited. ' ' 

With this enactment in force, Martin, assignee in bankruptcy 
of Haines and Chetlain, filed a bill in the District Court for the 
Eastern District of Arkansas, against J. S. Toof, C. J. Phillips, 
and F. M. Mahan, trading as Toof, Phillips & Co. (Haines and 
Chetlain being also made parties), to set aside and cancel cer- 
tain conveyances alleged to have been made by these last in 
fraud of the above-quoted act. 

Haines and Chetlain were, in February, 1868, and had been 
for some years before, merchants, doing business under the firm 
name of W. P. Haines & Co., at Augusta, Arkansas. On the 
29th of that month they filed a petition for the benefit of the 
bankrupt act, and on the 28th of May following were adjudged 
bankrupts, and the complainant was appointed assignee of their 
estates. On the 18th of the previous January, which was about 
six weeks before the filing of their petition, they conveyed an 
undivided half-interest in certain parcels of land owned by 
them at Augusta, to Toof, PhiUips & Co., who were doing busi- 
ness at Memphis, in Tennessee, for the consideration of $1,876, 
which sum was to be credited on a debt due from them to that 
firm. At the same time they assigned to one Mahan, a member 



X%A^A/i^\/Jf^^'^ 






PEEFERENCES 335 

of that firm, a title-bond which they held for certain other real 
property at Augusta, upon which they had made valuable im- 
provements. The consideration of this assignment was two drafts 
of Mahan on Toof, Phillips & Co., each for $3,034, one drawn 
to the order of Haines, and the other to the order of Chetlain. 
The amount of both drafts was credited on the debt of Haines 
& Co. to Toof, Phillips & Co., pursuant to an understanding to 
that effect made at the time. There was then due of the pur- 
chase-money of the property, for which the title-bond was given, 
about $700. This sum Mahan paid, and took a conveyance to 
himself from the obligor who held the fee. 

The biU. charged specifically that at the time these conveyances 
were made the bankrupts were insolvent or in contemplation of 
insolvency ; that the conveyances were made with a view to give 
a preference to Toof, Phillips & Co., who were the creditors of 
the bankrupts; that Toof, Phillips & Co. knew, or had reason- 
able cause to believe, that the bankrupts were then insolvent, 
and that the conveyances were made in fraud of the provisions 
of the bankrupt act. 

It also charged that the assignment of the title-bond to Mahan 
was in fact for the use and benefit of Toof, Phillips & Co., for 
the purpose of securing the property or its value to them in 
fraud of the rights of the creditors, and that this purpose was 
known and participated in by Mahan. 

The answer, admitting a large amount of debts at the time 
of the conveyances in question, denied that the bankrupts were 
then "insolvent," asserting, on the contrary, "that at the time 
aforesaid said Haines & Co. had available assets in excess of 
their indebtedness to the extent of $16,000." It also denied 
that there was a purpose to give a preference ; asserting that the 
conveyances of the land were made because Haines & Co., not 
having cash to pay the debt due Toof, Phillips & Co., were will- 
ing to settle in property; and it denied that the title-bond was 
assigned to Mahan for the benefit of Toof, Phillips & Co., or 
that they paid for the same; but on the contrary averred that 
Mahan bought the property and paid for it himself, and for his 
own use and benefit, out of his own funds. 

Appended to the bill were several interrogatories, the first of 
which inquired whether at the time of making the transfers to 
Toof, Phillips & Co. the indebtedness of W. P. Haines & Co. was 
not known to be greater than their immediate ability to pay; 
and to this Toof, Phillips & Co. answered that at the time of 



336 PREREQUISITES TO ADJUDICATION 

making these transfers they did not believe Haines & Co, were 
able to pay their debts in money, but that they were able to do 
so on a fair market valuation of the property they owned, and 
of their assets generally. 

Chetlain, one of the bankrupts, testified that on the 18th of 
January, 1868, Haines & Co. could not pay their notes as they 
came due; that previous to this time they had contemplated 
bankruptcy, and that he had had several conversations with 
Mr. F. M. Mahan, relative to their finances, and had told him 
the amount, or near the amount, of their debts. His advice was 
to get extensions, and he would help them get through; that 
after his promises to advance them more goods, they concluded 
not to go into bankruptcy, but to go on in business ; that he told 
Mahan that Haines & Co. could not pay out ; and in a conversa- 
tion with him previous to the transfer of the real estate, he, 
Chetlain, told Mahan that such was the state of the finances of 
Haines & Co. that if he would assume their liabilities, and give 
them a receipt, Haines & Co. would turn over all their assets to 
him. He did not accept. 

He also testified that about the 1st of January, 1868, the 
sheriff levied on the goods belonging to Haines & Co., in their 
storehouse in Augusta, on an execution in favor of one Weghe, 
which caused them to suspend business for a few days, until the 
levy was dissolved by order of the sheriff, at or about the 15th 
day of January, 1868. Mahan was in Augusta at the time of 
this levy, and Haines & Co. had an interview with him in regard 
to it. 

During the entire autumn and winter preceding these trans- 
fers, Haines & Co. did not pay, except to Toof, Phillips & Co., 
more than $500 on all their debts; and in the latter part of 
December, 1867, and the first part of January, 1868, some of 
the creditors sent agents to collect money from them, but got 
none, because Haines & Co. had no funds to pay them. 

A witness, Frisbee, testified that he had assisted Mr. Haines 
in making up his balance-sheet "about the 1st of January, 1868, 
and that the result was that their available assets were not 
sufficient to pay their debts." 

' Another witness, an agent for an express company, testified 
that he received, about the last of December, 1867, or January, 
1868, notes from Toof, Phillips & Co. and another firm, against 
Haines & Co. for collection ; that he presented them for payment 
to Haines & Co., and that they said they could not pay them at 



PREFERENCES 337 

that time. They did not pay them to him. He knew something 
of the financial condition of Haines & Co., and of their debt to 
Toof, Phillips & Co., and of complaints of other parties, and 
something of their business through the country, and from all 
these facts he thought it doubtful about their being able to pay 
their debts. This was during the months of December, 1867, 
and January, 1868 ; and he wrote to Toof, Phillips & Co. that he 
thought they had better look to their interests, as his conviction 
was that it was doubtful about their being able to collect their 
debt from Haines & Co. Shortly after writing this letter Mahan 
came round to look after the matter. 

The property described in the title-bond assigned to Mahan, 
which he stated that he purchased as an investment on private 
account for $7,000, was shown by the testimony of Chetlain to 
have been worth only $4,000, and by the testimony of a witness, 
Hamblet, to have been worth only $3,500, and it was valued by 
the bankrupts in their schedules at $4,000. Both of the bank- 
rupts testified that it was understood at the time the title-bond 
was assigned to Mahan, that the amount of the two drafts given 
by him on Toof, Phillips & Co. for it, should be credited to 
Haines & Co. on their indebtedness to that firm. 

The schedules of the bankrupts annexed to their petition 
showed that their debts at the time of their transfers to Toof, 
Phillips & Co., exceeded $59,000, while their assets were less 
than $32,000. 

On the other hand there was some testimony to show that 
some persons thought that they could get through, etc., etc. 

The District Court decreed the conveyances void, and that the 
title of the property be vested in the assignee, the latter to refund 
the amount of the purchase-money advanced by Mahan to obtain 
the deed of the land described in the title-bond, less any rents 
and profits received by him or Toof, Phillips & Co., from the 
property. This decree the Circuit Court affirmed. 

In commenting upon the answer of Toof, Phillips & Co., al- 
ready mentioned, which, in reply to the interrogatory, "whether 
at the time of the transfer to them the indebtedness of Haines & 
Co. was not greater than their ability," admitted that they did 
not believe Haines & Co. "able to pay their debts in money/* 
the Circuit Court said: 

"Here is a direct confession of a fact that in law constitutes 
insolvency, and it is idle for the defendants to profess ignorance 
of the insolvency of the bankrupts in face of such a confession. 

H. & A. Bankruptcy — 22 



338 PREREQUISITES TO ADJUDICATION 

If the bankrupts could not pay their debts in the ordinary course 
of business, that is, m money, as they fell due, they were in- 
solvent, and if the defendants did not know that this consti- 
tuted insolvency within the meaning of the bankrupt act, it was 
because they were ignorant of the law. ' ' 

But that court examined all the testimony, and in affirming 
the decree of the District Court, rested the case upon it, as well 
as upon this answer. From the decree of the Circuit Court, 
Toof, Phillips & Co., brought the case here. 

Mr. Justice FIELD delivered the opinion of the court. 

The bill presents a case within the provisions of the first 
clause of the thirty-fifth section of the bankrupt act. That clause 
was intended to defeat preferences to a creditor, made by a 
debtor when insolvent or in contemplation of insolvency. It de- 
clares that any payment or transfer of his property made by 
him whilst in that condition, within four months previous to the 
filing of his petition, with a view to give a preference to a credi- 
tor, shall be void if the creditor has at the time reasonable cause 
to believe him to be insolvent, and that the payment or transfer 
was made in fraud of the provisions of the bankrupt act. And 
it authorizes in such case the assignee to recover the property or 
its value from the party who receives it. 

Under this act it is incumbent on the complainant, in order to 
maintain the decree in his favor, to show four things : 

1st. That at the time the conveyances to Toof, Phillips & Co. 
and Mahan were made the bankrupts were insolvent or con- 
. , . templated insolvency ; 

f .. 2d. That the conveyances were made with a view to giv€ a 
preference to these creditors ; 

3d. That the creditors had reasonable cause to believe the 
bankrupts were insolvent at the time ; and, 

4th. That the conveyances were made in fraud of the pro- 
visions of the bankrupt act. 

1st. The counsel of the appellants have presented an elaborate 
argument to show that inability to pay one's debts at the time 
they fall due, m money, does not constitute insolvency, within 
the provisions of the bankrupt act. The argument is especially 
addressed to language used by the district judge when speaking 
of the statement of the appellants in answer to one of the in- 
terrogatories of the bill, to the effect that at the time the trans- 
fers were made they did not believe the bankrupts were able to 



PREFERENCES 339 

pay their debts im, money, but were able to do so on a fair 
market valuation of their property and assets. The district 
judge held that this was a direct confession of a fact which in 
law constitutes insolvency, and observed that "if the bankrupts 
could not pay their debts in the ordinary course of business, 
that is, in money, as they fell due, they were insolvent. ' ' 

The rule thus laid down may not be strictly correct as applied 
to all bankrupts. The term insolvency is not always used in 
the same sense. It is sometimes used to denote the insujBficiency 
of the entire property and assets of an individual to pay hia 
debts. This is its general and popular meaning. But it is also 
used in a more restricted sense, to express the inability of a 
party to pay his debts, as they become due in the ordinary 
course of business. It is in this latter sense that the term is 
used when traders and merchants are said to be insolvent, and 
as applied to them it is the sense intended by the act of Con- 
gress. It was of the bankrupts as traders that the district judge 
was speaking when he used the language which is the subject of 
criticism by counsel. 

With reference to other persons not engaged in trade or com- 
merce the term may perhaps have a less restricted meaning. 
The bankrupt act does not define what shall constitute insol- 
vency, or the evidence of insolvency, in every case. 

In the present case the bankrupts were insolvent in both senses 
of the term at the time the conveyances in controversy were 
made. They did not then possess sufficient property, even upon 
their own estimation of its value as given in their schedules, to 
pay their debts. These exceeded the estimated value of the 
property by over twenty thousand dollars. And for months 
previous the bankrupts had failed to meet their obligations as 
they matured. Creditors had pressed for payment without suc- 
cess; their stock of goods had been levied on, and their store 
closed by the sheriff under an execution on a judgment against 
one of them. It would serve no useful purpose to state in detail 
the evidence contained in the record which relates to their con- 
dition. It is enough to say that it abundantly establishes their 
hopeless insolvency. 

2d. That the conveyances to Toof, Phillips & Co. were made 
with a view to give them a preference over other creditors hardly 
admits of a doubt. The bankrupts knew at the time their in- 
solvent condition. A month previous they had made up a bal- 
ance sheet of their affairs which showed that their assets were 



340 PREREQUISITES TO ADJUDICATION 

insufficient to pay their debts. They had contemplated going 
into bankruptcy in December previous, and were then pressed 
by numerous creditors for payment. Their indebtedness at the 
time exceeded $50,000, and except to Toof, Phillips & Co. they 
did not pay upon the whole of it over $500 during the previous 
fall and winter. Making a transfer of property to these credi- 
tors, under these circumstances, was in fact giving them a pref- 
erence, and it must be presumed that the bankrupts intended 
this result at the time. It is a general principle that every one 
must be presumed to intend the necessary consequences of his 
acts. The transfer, in any case, by a debtor, of a large portion 
of his property, while he is insolvent, to one creditor, without 
making provision for an equal distribution of its proceeds to all 
his creditors, necessarily operates as a preference to him, and 
must be taken as conclusive evidence that a preference was in- 
tended, unless the debtor can show that he was at the time 
ignorant of his insolvency, and that his affairs were such that 
he could reasonably expect to pay all his debts. The burden of 
proof is upon him in such case, and not upon the assignee or 
contestant in bankruptcy. 

No such proof was made or attempted in this case. But, on 
the contrary, the evidence shows that the conveyances were 
executed upon the expectation of the bankrupts, and upon the 
assurance of Toof, Phillips & Co., that in consequence of them 
they would continue to sell the bankrupts goods on credit, as 
they had previously done; and that no arrangement was made 
by the bankrupts with any other of their creditors, either for 
payment or security, or for an extension of credit. 

The fact that the title-bond was assigned, and the property 
for which it was given was conveyed to Mahan alone, and not 
to Toof, Phillips & Co., does not change the character of the 
transaction. Mahan was a member of that firm, and the con- 
veyance was made to him with the understanding that the sum 
mentioned as its consideration should be credited on the in- 
debtedness of the bankrupts to them. Both of the bankrupts 
testified that such was the understanding at the time. The pre- 
tense that Mahan bought the lots as an investment on private 
account will not bear the slightest examination. It is in proof 
that the lots at the time were only worth $4,000 at the outside, 
yet the consideration given was nearly $7,000. Toof, Phillips & 
Co. might well have been willing to credit this amount on their 
claim against insolvent traders in consideration of obtaining 



PREFERENCES 341 

from them the possession of property of much less value, but it 
is incredible that an individual, seeking an investment of his 
money, would be careless as to the difference between the actual 
value of the property and the amount paid as a consideration 
for its transfer to him,^ ^ 

3d. From what has already been said it is manifest not only 
that the bankrupts were insolvent when they made the con- 
veyances in controversy, but that the creditors, Toof, Phillips 
& Co., had reasonable cause to believe that they were insolvent. 
The statute, to defeat the conveyances, does not require that the 
creditors should have had absolute knowledge on the point, nor 
even that they should, in fact, have had any belief on the sub- 
ject. It only requires that they should have had reasonable 
cause to believe that such was the fact. And reasonable cause 
they must be considered to have had when such a state of facts 
was brought to their notice in respect to the affairs and pecuniary 
condition of the bankrupts as would have led prudent business 
men to the conclusion that they could not meet their obligations 
as they matured in the ordinary course of business. That such 
a state of facts was brought to the notice of the creditors is 
plainly shown. Chetlain, one of the bankrupts, testifies that 
previous to the execution of the conveyances he had several con- 
versations with Mahan respecting their finances, and told him 
the amount or near the amount of their indebtedness, and that 
they could not pay it. Mahan advised them to get extensions, 
and said that he would help them to get through. Chetlain also 
testifies that such was the state of the finances of the bankrupts 
that on one occasion, in conversation with Mahan, they offered 
to turn over to him their entire assets if he would assume their 
liabilities and give them a receipt, and that he declined the offer. 

It also appears in evidence that the levy by the sheriff upon 
the stock of goods of the bankrupts, already mentioned, which 
was made in January, 1868, caused a temporary suspension of 
their business, and that Mahan was in Augusta at the time and 
had an interview with the bankrupts on the subject of the levy. 

It also appears that about the last of December, 1867, or the 
first of January, 1868, Toof, Phillips & Co. sent notes of the 

41— See Wager v. Hall, 16 Wall. Donald & Sons, 178 Fed. 487; Kim- 

584, 602; Western Tie & Timber merle v. Farr, 189 Fed. 295. 
Co. V. Brown, 196 U. S. 502 ; Nay- See also First Nat. Bank v. Jones, 

Ion & Co. V. Christiansen Harness 21 Wall. 325. 
Mfg. Co., 158 Fed. 290; In re Mc- 



342 PREREQUISITES TO ADJUDICATION 

bankrupts which they held to an agent in Augusta for collec- 
tion. The agent presented the notes for payment to the bank- 
rupts and was told by them that they could not pay the notes at 
that time. The agent then wrote to Toof, Phillips & Co., that 
they had better look to their interests, as his conviction was that 
it was doubtful whether they would be able to collect their debts. 
Shortly after this Mahan went to Augusta to look after the mat- 
ter, and whilst there the conveyances in controversy were made. 

It is impossible to doubt that Mahan ascertained, while thus 
in Augusta, the actual condition of the affairs of the bankrupts. 
The facts recited were sufficient to justify the conclusion that 
they were insolvent, or at least furnished reasonable cause for a 
belief that such was the fact. 

4th. It only remains to add that the creditors, Toof, Phillips 
& Co., had also reasonable ground to believe that the conveyances 
were made in fraud of the provisions of the bankrupt act. This, 
indeed, follows necessarily from the facts already stated. The 
act of Congress was designed to secure an equal distribution of 
the property of an insolvent debtor among his creditors, and any 
transfer made with a view to secure the property, or any part 
of it, to one, and thus prevent such equal distribution, is a 
transfer in fraud of the act. That such was the effect of the 
conveyances in this case, and that this effect was intended by 
both creditors and bankrupts, does not admit, upon the evi- 
dence, of any rational doubt. A clearer case of intended fraud 
upon the act is not often presented. 

Decree affirmed. 

V 

V GOODLANDER-ROBERTSON LUMBER CO. et al. v. 

ATWOOD 

^\)^ 152 Fed. 978, 82 C. C. A. 109 

\ . (Circuit Court of Appeals, Fourth Circuit. April 9, 1907) 



V 



-*■: 



McDowell, D. J. On March 27, 1906, three of the creditors 
of W. J. Atwood, a dealer in lumber in Norfolk, Va., filed a 
petition, praying that Atwood be adjudicated an involuntary 
bankrupt. The alleged act of bankruptcy was the payment by 
Atwood to the Hardwood Lumber Company, a creditor, of $160 
on February 27, and of $121.15 on March 6, 1906, being then 
insolvent, with intent to prefer the said lumber company over 
his other creditors. The plea of the bankrupt to the petition 



PREFERENCES 343 

consisted of a denial of the commission of the act of bankruptcy 
alleged in the petition. A jury trial was not demanded, and the 
evidence was adduced orally before the trial court, whereupon 
an order was entered dismissing the petition. The petitioning 
creditors have appealed. 

It appears that the Hardwood Lumber Company sustained no 
relation to the alleged bankrupt other than that of one of sev- 
eral creditors, and that no sort of reason existed why Atwood 
should have desired or intended to prefer such creditor to an y 
other creditors. The collections were made by an attorney, and 
the payments were made in the ordinary course of business and 
to avoid suit. At the time the payments were made Atwood was 
insolvent in the sense in which the word is used in the bank- 
rupt act (Act July 1, 1898, c. 541, 30 Stat. 544, § 1, cl. 15 [U. S. 
Comp. St. 1901, p. 3419]). He was indebted to about the sum 
of $20,000 — but much of this was not then due, and his salable 
property did not exceed $1,500. He did have, however, a knowl- 
edge of a rather technical and not easily learned business and 
a custom or * * good will ' ' which has been apparently disregarded 
by counsel for appellants. The question in the case is whether 
or not the payments were made (Bankr. Act. § 3, cl. 2) with 
intent to prefer. From a careful reading of the evidence we 
are satisfied that Atwood did not regard himself as insolvent; 
that he made the two payments in question, as he had been doing 
previously, in the ordinary course of business, and without intent 
to prefer the creditor. He did know that his cash receipts were 
not at all times sufficient to enable him to meet the bills against 
him promptly. But he did not regard himself as doomed to fail- 
ure. In fact the evidence leads us to believe that he expected 
to continue in business, to meet his obligations as they fell due 
and that he had by no means lost hope of ultimate success. The 
sums which he paid were just debts, then due, rather trifling in 
amount when considered in connection with the business he was 
doing, and they were paid in order to be able to continue in busi- 
ness and to avoid suit. If Congress had intended that a payment 
made under such circumstances as we have here should be an 
act of bankruptcy, the language of § 3, cl. 2, of the act would 
have been very different. As it is written, the law makes such 
payments acts of bankruptcy only when made with ' 'intent t o 
prefer." " ^ 

It is argued that every man is presumed to intend the neces- 
sary consequences of his acts. But the defendant had no reason 



f/VA-itu. ^O-^'^ ^^"^ f^*^<-\..^ iw*^'-»^- 



344 PREREQUISITES TO ADJUDICATION 

to suppose that such consequences would be an involuntary peti- 
tion in bankruptcy, the seizure of his property by a receiver 
and the consequent ruin of his credit and destruction of his 
business. The consequences of making the payments in ques- 
tion reasonably to be expected were a continuance in business 
with the prospect of an ultimate payment of all of the creditors 
in full. An intent to prefer is an intent that some particular 
creditor shall receive a greater percentage of his debt than the 
other creditors of the same class. In the case at bar the evidence 
negatives the existence of such intent. 

The judgment of the trial court is affirmed. 



i^ 



MACON GROCERY CO. et al. v. BEACH 

156 Fed. 1009 

(District Court, S. D. Georgia, N. D. October 1, 1907) 



SPEER, District Judge. The Macon Grocery Company and 
other creditors made petition, by which it was sought to obtain 
an adjudication of involuntary bankruptcy against Asa N. 
Beach. The indebtedness of Beach amounted to about $13,000. 
The amount of his assets is not stated, and the proceeding is 
obviously brought as a basis for an equitable application to the 
bankruptcy court, designed to subject large values which in one 
way and another had been conveyed by Beach to a Miss Julia 
Dixon, whose agent for a long time he had been. Miss Dixon is 
an aged and infirm lady, and Beach was the adopted child of 
her parents. Her property consisted of plantations, other real 
estate, and money. It is contended by the petitioning creditors 
that, while Beach pretended to be the agent for Miss Dixon, they 
both entered into a general scheme to defraud his creditors. 
This, it is insisted, was evidenced through the execution by Beach 
of mortgages to Miss Dixon to secure an alleged indebtedness to 
her of $11,817. To give the court jurisdiction to make a de- 
cree or decrees canceling the conveyances of Beach to Miss Dixon, 
and recovering for the benefit of creditors the property he con- 
veyed, it must first be made to appear that Beach is a bankrupt 
as alleged. 

To accomplish this, the plaintiffs make four averments of 
bankruptcy. The first is that Beach, while insolvent, drew a 
draft on Little, Williams & Co., cotton brokers, in favor of the 
Louisville Drug Company, for $19.85, and that this payment was 



PREFERENCES 345 

made on October 1, 1901, with intent to prefer the'dnig company 
over other creditors. The second is that the defendant did on 
the same date pay to J. J. Keith, one of his creditors, the sum 
of $2.75, with intent to give him a preference. The third is an 
alleged preference given to R. L. Bostiek, by draft on Little, 
WiUiams & Co. for $100. This was paid on September 17, 1901. 
The fourth is an alleged preference in favor of the Bank of 
Louisville by the payment of $500. To these charges Beach 
made answer. The answer did not admit insolvency; but this 
was admitted in judicio by his attorney, and also by his brief 
presented to the court. He denied that the acts specified were 
acts of bankruptcy. The first, third, and fourth payments, he 
alleged, were made by him as the agent of Miss Dixon, and with 
her means. As to the second charge, he admitted the payment 
of the $2.75 to Keith, but denied that this was done with intent 
to give him a preference. He also answered that he was chiefly 
engaged in farming and the tUlage of the soil, and for this reason 
insisted that he could not, in terms of the law, be adjudged an 
involuntary bankrupt. 

On the issues thus made much testimony was taken by the con- 
tending parties. Finally, by agreement and consent of counsel, 
the evidence and the issues presented were referred to J. N. 
Talley, Esq. (who is the standing master in chancery), as special 
master, with direction to report "his findings and the conclu- 
sions upon the law and the evidence, for such action of the court 
in the premises as shall seem proper. " In an elaborate report, 
scrutinizing every phase of the controversy, the master finds, 
first, that Beach is not entitled to exemption from the operation 
of the bankruptcy law and that he is not chiefly engaged in agri- 
culture. He then sustains the contentions of Beach as to the 
first, third, and fourth alleged acts of bankruptcy, and finds that 
such payments were made in behalf of Miss Dixon, and not by 
Beach from his own assets. The counsel for both parties prob- 
ably recognizing that by their consent reference they have desig- 
nated a tribunal whose findings on the facts will rarely be dis- 
turbed by the court (Chicago Motor Vehicle Co. v. American 
Oak Leather Co., 141 Fed. 520, 72 C. C. A. 576, Kimberly v. 
Arms, 129 U. S. 512, 9 Sup. Ct. 355, 32 L. ed. 764), no excep- 
tion is made by the defendant to the finding that Beach is not 
exempt from the operation of the law because of his contention 
that his chief pursuit is agriculture, and none by the petitioners 



346 



PREREQUISITES TO ADJUDICATION 



to the findings on the first, third, and fourth grounds, that the 
several payments were made as agent for Miss Dixon. 

The master, however, finds that Beach, while insolvent, com- 
mitted an act of bankruptcy, as set forth in the second charge, 
for the reason that while insolvent, and within four months prior 
to the filing of the petition in bankruptcy, he paid the sum of 
$2.75 to J. J. Keith, one of his creditors. This payment is not 
denied. It is evidenced by the receipt from Keith, which recites 
the items of the account. This is as follows: 



''Louisville, Ga., Jan. 22, 1902. 
"Mr. A. N. Beach, to J. J. Keith, Dr. Fancy Groceries, Finest 
Soda Water and Cream. 
1901. 

June 13 To Soda Water $.05 

22 " Bar Soap 05 

July 6 ' ' Lemonade 05 

" " Soda 05 

9 * ' Lemonade 05 

" " Soda 05 

20 * * Lemonade 05 

" " Coca Cola 05 

24 " Lemonade 05 

August 26 " " 05 

Sept. 5 " " 05 

6 " " 05 

7 " 1 Dressed Doll 2.15 



$2.75 



"Received from A. N. Beach cash for above acct. 

* ' Oct. 7th, 1901. J. J. Eeith, Jne. ' ' 



The question to be determined, then, is: Does this payment 
by Beach, while insolvent, constitute an act of bankruptcy? 
The oral evidence in the record with regard to this alleged pref- 
erence is found solely in the testimony of Beach himself, as 
follows : 

"On October 7, 1901, I paid $2.75 to J. J. Keith. It was my 
debt. The consideration of the debt is shown by the items on 
the receipted bill. * * * l got the dressed doll for a present. 
When I paid this little bill to J. J. Keith on October 7, 1901, I 
owed for mercantile debts something like $13,000, including the 



PEEFERENCES 347 

debts due the petitioning creditors. In addition to those of 
petitioning creditors, I owed several thousand dollars of other 
debts. When I paid this debt to J, J. Keith, I did not have in 
mind any of my mercantile and other creditors. I did not pay 
this debt to J. J. Keith in order to prefer him over my other 
creditors. In paying this account, it was not my purpose to give 
J, J. Keith an advantage over my creditors. I did not consider 
the amount paid Keith a debt." 

The relating statutory clause is § 3« (2) of the bankruptcy 
act (Act July 1, 1898, c. 541, 30 Stat. 546 [U. S. Comp. St. 1901, 
p. 3422]), as follows: 

"Acts of bankruptcy by a person shall consist of his having 
• * * (2) transferred, while insolvent, any portion of his 
property to one or more of his creditors, with intent to prefer 
such creditors over his other creditors." 

Can it be, in view of the trivial amount paid by Beach, the 
character of his purchases, and the general aspect of the trans- 
action, that this must be regarded as a transfer of a portion of 
his property to a creditor, with intent to prefer such creditor 
over his other creditors, which will cast his entire estate into 
bankruptcy. Very great respect should be accorded to the find- 
ing of the master, who resolved this question in the affirmative. 
His report was thoroughly considered, and his reasoning is im- 
pressive. It is also true that to adopt literally the deliverances 
of many courts of acknowledged authority would be to sustain 
his finding. The strong consensus of opinion on this topic among 
the courts is clearly stated in Webb v. Sachs, 15 N. B. R. 171, 
Fed. Cas. No. 17,325. The decision is by the District Court of 
Oregon. There it was held that : 

"If a debtor, with knowledge of his insolvency, does an act 
which operates as a preference to one of his creditors, he is pre- 
sumed to have so intended, as that is the necessary consequence 
of his act; and the additional fact that such debtor was really 
moved to give such preference for any other or particular rea- 
son, such as to save costs or satisfy the ^licitations of an im- 
portunate creditor, or preserve his good will, or keep up his 
business, does not affect such presumption. Whatever the 
debtor's motive may be, he is presumed to intend the natural 
and necessary consequences of his acts. ' ' 

See, also, Johnson v. Wald, 93 Fed. 640, 35 C. C. A. 522, 2 
Am. Bankr. Rep. 84 (opinion by Circuit Judge Shelby of the 
Fifth Circuit) ; Morgan & Co. v. Mastick, 2 N. B. R. 521, Fed. 



348 PREREQUISITES TO ADJUDICATION 

Gas. No. 9,803 ; Miller v. Keys, 3 N. B. R. 224, Fed. Gas. No. 
9,578; In re Smith, 3 N. B. R. 377, Fed. Gas. No. 12,974; In re 
Silverman, 4 N. B. R. 523, Fed. Gas. No. 12,855 ; In re Oregon 
Printing Go., 13 N. B. R. 503, Fed. Gas. No. 10,559. 

It is also held, with strong reason, that the testimony of a 
party himself that he had not a preferential intent is entitled 
to very little weight, where such intent is plainly presumable. 
Oxford Iron Co. v. Slafter, 13 Blateh. 455, 14 N. B. R. 380, Fed. 
Gas. No. 10,637 ; In re Wright Lumber Go. (D. G.) 114 Fed. 1011. 
Many other authorities might be cited to the same tenor and 
effect. It will be found, however, that in each of these cases a 
substantial preference had been made, that the preferential 
intent was always inferable, and that the consequent injury to 
other creditors was significant and distinct. The basic reason 
upon which all of these determinations are founded is substan- 
tially that every person of a sound mind is presumed to intend 
the necessary, natural, and legal consequences of his deliberate 
acts. In each case the insolvency of the bankrupt was conceded 
or proven. Then, when he has made a payment to a particular 
creditor, he is presumed to have the intent to prefer him, as it 
will enable that creditor to obtain a greater percentage of his 
debt than will inure to others. But if the payment on the debt 
is of that infinitesimal sort that it can have no perceptible con- 
sequence, is an intent to prefer a necessary, natural, and legal 
consequence of such payment ? It would seem that the substan- 
tial or important character of a payment or transfer must ex 
necessitate possess large evidential effect to show the intent to 
prefer. This may be gathered from the statement of Mr. Justice 
Field, in Toof v. Martin, 13 Wall. 40, 20 L. ed. 481. Speaking 
for the court in that case, that great jurist declares: 

"It is a general principle that every one must be presumed 
to intend the necessary consequences of his act. The transfer 
in any case by the debtor of a large part or all his property while 
he is insolvent to one creditor, without making provision for an 
equal distribution of its proceeds to all his creditors, necessarily 
operates as a preference to him. * * *" 

If this is true, the converse would seem also true. If the al- 
leged bankrupt, although aware of his insolvency, should make 
a payment of an amount not a large part of his means, but utterly 
trivial — a payment to which no creditor, in the absence of liti- 
gation, would possibly object — it is at least debatable whether 
such payment must necessarily demonstrate the unlawful intent 



PREFERENCES 349 

to give a preference to one creditor to the injury of others. The 
doctrine which we are discussing, and which the courts have so 
strongly stated, presupposes that the payment is injurious to the 
other creditors. But where the facts show that no injury, of 
which the law would or could take an account, would result, 
the reason of the rule ceasing, it seems that the rule itself would 
cease. This is illustrated by the remarks of Judge Bellinger in 
Re Gilbert, 112 Fed. 951, 8 Am. Bankr. Rep. 101, in the District 
Court of Oregon, decided in 1902. The case was a petition for 
involuntary bankruptcy, and the learned judge observed: 

"The presumption arising from the transfer of property is 
affected by the amount of such transfer. Thus, where the trans- 
fer was of all one 's property, this was held to afford a violent — 
almost conclusive — presumption of an intent to prefer, where 
other creditors were unprovided for. * * * in this case the 
transfer was of a comparatively small part of the property of 
A. T, Gilbert — so small that the expediency of resorting to a 
bankruptcy court, rather than permit a distribution of the assets 
of the bank through the pending proceedings in the State Court, 
may be doubted. If the preferences complained of are set aside, 
it will add not more than 1 per cent, to the dividends to be paid 
the general creditors." 

Again, in Re Douglass Coal & Coke Co. (D. C.) 131 Fed. 769, 
it was held that the small size of the payment may be looked to 
as a circumstance, in connection with others, to justify the con- 
clusion that no preference was intended. The language of the 
court is as follows : 

"Payments of comparatively small sums of money by an in- 
solvent corporation to each of a number of its creditors, made in 
the usual course of business, do not raise a presumption of an 
intent to prefer such creditor over its other creditors, so as to 
establish an act of bankruptcy by a transfer of property with 
intent to prefer, within [the] bankruptcy act. * * *" 

A fortiori, would one trifling payment to one creditor fail 
to evoke such presumption. The ruling in that case was by the 
referee, but the District Court of the Eastern District of Ten- 
nessee, in aflBrming the referee, while recognizing the insolvency 
of the defendant, observed: 

"I nevertheless do not think that a presumption of intent to 
prefer should be indulged against an insolvent debtor by the 
mere act of paying certain creditors small sums in the usual 
course of business, and apparently in the effort to keep its busi- 



350 PREREQUISITES TO ADJUDICATION 

aess going, unless there is other and further evidence showing 
a specific intent to thereby give such creditors an undue pref- 
erence over others, although such might be the effect of the 
payment. ' ' 

Again, in Driggs v. Moore, 3 N. B. R. 602, Fed. Cas. No. 4,083, 
it was held that payments, made in the usual and ordinary course 
of trade, and at the time the debt matures, and in the usual 
mode of paying debts, are prima facie valid. 

These citations are perhaps ample to show that the authorities 
are not in entire accord upon this question. From their consid- 
eration we have reached the conclusion that even though a bank- 
rupt has knowledge of his insolvency, if the payment is trivial 
and is made for the current and obvious expenses of one's daily 
life and habits, there is no hard and fast rule which will oblige 
the court to regard the transaction inimical to the bankruptcy 
law; nor, by parity of reasoning, do we deem the court obliged 
to conclude, because the other creditors might each have received 
an infinitesimal benefit, if the payment had not been made, that 
such payment necessarily, naturally, and logically shows an 
intent to prefer such creditor over the other creditors. Indeed, 
the payment here upon which the creditors rely seems to afford 
a fit occasion for the application of the maxim, *'De minimis 
non curat lex." Since the debts of Beach amounted to $13,000, 
and since his payment to Keith was of only $2.75, the disad- 
vantage which each creditor suffered because of such payment 
was less than 1/4000 of his debt. For instance, one of the peti- 
tioning creditors, whose claim amounts to $84, would receive but 
a fraction over 1 cent. Can such a payment, then, justify the 
presumption that Beach intended a preference? We do not 
think so. The transaction was a bagatelle. It was neither im- 
moral nor fraudulent. To apply the general presumption here 
would make it dangerous for a person in insolvent circumstances 
to buy and pay for a sack of fliour, a flitch of bacon, or a bag 
of potatoes. To avoid bankruptcy, his family must starve. The 
soda water and lemonade to the value of 50 cents, with which 
Beach allays the thirst proper to his clime, were inexpensive 
refreshments, as innocuous as the "cup which cheers, but not 
inebriates." More debatable is the effect of coca cola. But his 
purchase of this mysterious elixir amounted to only 5 cents. The 
bar of soap, worth five cents, is without the pale of judicial dis- 
cussion. It is true that there was a dressed doll, the price of 
which was more extravagant. This was $2.15. Beach testifies 



PREFERENCES 351 

that it was * ' for a present. ' * The evidence fails to disclose upon 
whom this marvel of art and fashionable millinery was bestowed. 
It, however, appears that Beach is a bachelor — an "old bach- 
elor," we may presume — and perhaps the "dressed doll" made 
happy the heart of some tiny maiden, whose lovely face and 
graceful form brought back to the veteran and hapless heart of 
the alleged bankrupt the memory of features which "love used 
to wear, ' ' in the words of Ossian, * * sweet and sad to the soul, 
like the memory of joys that are gone. ' ' 

We conclude, therefore, that the payment of 60 cents for soda 
water, coca cola, and one bar of soap, and $2.15 for a dressed 
doll, in the absence of all other evidence to that end, does not 
raise the presumption of an intent to give to the creditor paid a 
preference over his other creditors. Since it appears from the 
record that this is the only transaction upon which bankruptcy 
is now charged or assigned, the finding of the master on the 
second alleged ground of bankruptcy, namely, the payment to 
Keith of $2.75, is overruled. 

A decree wiU be entered accordingly. 

V 

(g) Reasonable Cause to Believe that a Preference Would he 

Effected 

In re F. M. & S. Q. CARLILE 

199 Fed. 612 

(District Court, D. North Carolina. September 30, 1912) 

CONNOR, District Judge. The controversy presented by the 
record relates to the validity of the transfer of certain choses 
in action made to the receiver of the Bank of Tarboro by the 
bankrupts withinfour months prior to the institution oJ pro- 
ceedings in bankruptcy, to secure an overdraft due the bank. 
• • « 

Proceeding, therefore, to a disposition of the case as disclosed 
by the transcript, I note that the referee bases his conclusion upon 
the language of § 60a, quoting it in his opinion. The solution 
of the question presented by the contention made by the trustee 
is dependent upon the construction of § 606. A preference under 
§ 60a is not voidable, nor does it, under § 57 g, as amended by the 
act of 1903, prevent the preferred creditor from proving his 
claim for any balance remaining due after exhausting the prop- 
erty transferred. It will be noted that § 57g, as originally en- 



352 PREREQUISITES TO ADJUDICATION 

acted, precluded a creditor, who had received a preference as 
defined by § 60a, from proving his debt until he had surrendered 
the property transferred. Subsequent to, and by reason of, the 
decision in Pirie v. Chicago Title & Trust Co., 182 U. S. 438, 
21 Sup. Ct. 906, 45 L. ed. 1171, Congress amended § o7g, so that 
only a preference as defined by § 606 prevented the creditor from 
proving the balance of his debt without surrendering his pref- 
erence. 

At no time did the Bankrupt Act of 1898 give to the trustee 
the right to recover property transferred within four months 
prior to proceedings in bankruptcy, unless the elements pre- 
scribed by § 606 were shown to exist. A preference, as defined by 
§ 60a, is without any effect upon the right of the creditor, since 
the amendment of 1903 to § 57g. It would be a strange conclusion 
that a simple preference under § 60a. entitled the trustee to 
recover the property transferred, when, under %57g, as amended, 
he can prove his debt without surrendering the preference. 

We are thus brought to inquire whether, under the provisions 
of § 606, the testimony before the referee entitles the trustee to 
recover the property transferred by the bankrupt on August 11, 
1911 ; that is, does the testimony establish the allegation that the 
transfer constituted a voidable preference ? § 606 defines such 
a preference, so far as applicable to this case, as (1) a transfer 
of property, (2) within four months before the filing of the peti- 
tion in bankruptcy, (3) by a person who is insolvent, (4) when 
the person to whom the transfer is made shall then have reason- 
able cause to believe that the enforcement of such transfer will 
effect a preference. When these essential elements are found in a 
transaction between a bankrupt and his creditor, it is provided 
that — 

"it shall be voidable by the trustee and he may recover the prop- 
erty or its value. ' ' 

For the definition of the word "preference," as used in § 606, 
recourse must be had to § 60a. We there find that, in order that 
a transfer, etc., shall operate as a preference, within the meaning 
of the act, it must — 

"enable the creditor, to whom the transfer is made, to obtain a 
greater percentage of his debt than any other such creditors of 
the same class." 

I Thus it is seen that § 60a defines a "preference," §606 a 
["voidable preference," § 67e a "fraudulent preference," under 
[the Bankrupt Act, and § 70e a "transfer of property," fraudu- 



PREFERENCES 353 

lent under the state law. For the definition of a preference, 
which is declared to be an act of bankruptcy, see § 3. Without 
question, the evidence before the referee establishes a preference 
within the terms of § 60a, leaving in controversy the sole ques- 
tion whether it brings such preference within the terms of § 60&, 

The_burden_of ^roof is upon the trustee. Loveland on Bank- 
ruptey (4th'edT§ 544; Barbour v. Priest, 103 U. S. 293, 26 L. 
ed. 478. Judge Sanford in Kim merle v. Farr, 189 Fed. 295, 111 
C. C. A. 27 ( Sixth Circuit) , says that the burden of proof is on 
the trustee in bankruptcy, seeking to avoid as a preference a 
transfer of property made by a bankrupt, to prove by sufficient 
evidence all of the essential elements of a voidable preference. 
The question discussed in that case, whether it is essential to 
show that the creditor knew of the debtor's intention to create 
a preference, is eliminated by the amendment of 1910 ; the words 
inserted in § 60& by the amendment of 1903, "had reasonable ;?/• 
cause to believe that it was intended thereby to give a prefer- 
ence," being stricken out. Loveland on Bankruptcy (4th ed.) 
§'l92. 

Did Pennington, or his attorney, who drew and took the trans- 
fer, have reasonable cause to believe that the effect of the 
transfer would be to give a preference, as defined by § 60a? 
F. M, Carlile was the only witness examined before the referee. 
He says that, when Pennington was appointed receiver of the 
Bank of Tarboro, in June, 1911, the firm of F. M. & S. Q. Carlile 
was overdrawn $1,263.78; that they owed the bank $700 by note, 
and another note of $1,000 secured by mortgage on real estate ; 
that they executed the transfer to Pennington in the office of 
Mr. Gilliam, one of his attorneys, for notes and accounts amount- 
ing to about $1,050, and a promise to deliver in ten days there- 
after $300 more; that at the time he executed the transfer he 
thought his firm was entirely solvent, and so represented to Mr. 
GiUiam ; that he stated to Mr. Gilliam that they had $1,000 sol- 
vent accounts, $570 notes secured by mortgages, $1,700 cash ac- 
count (about), $5,000 stock (about), $800 hearse and wagon 
(about), and at the same time represented that the liabilities of 
said firm, other than its indebtedness to the Bank of Tarboro, 
did not exceed $3,000 ; that at that time he had no idea that the 
firm would go into bankruptcy within four months from said 
date; that he assured Mr. Gilliam that, by giving them the ex- 
tension, they would be able to liquidate all of the firm's obliga- 
tions; that Mr. Pennington asked him about securing the 

H. & A. Bankruptcy — 23 



354 PREREQUISITES TO ADJUDICATION 

overdraft — said he would grant the extension if the collaterals 
were put up. This is all that was said about it. He did not say 
that if they were not put up he would ' ' push them for it, ' ' Their 
purpose in making the transfer was not to give the bank a pref- 
erence, but to secure the overdraft. There is no evidence that 
Pennington had any information in regard to the financial con- 
dition of Carlile. 

The only other evidence introduced was the schedule, filed by 
the bankrupts, October 14, 1911, from which it appears that they 
owed debts, secured, $5,305 (it appears that the property mort- 
gaged was of sufficient value to pay these debts) , and $5,627.04 
unsecured debts. The schedules show stock valued at $4,000, notes 
secured by title retained to furniture purchased $1,300, notes 
for pianos, title retained, $670, hearse and wagon $515, and debts 
due on open accounts $1,500. It does not appear that either Mr, 
Pennington or Mr. Gilliam had any knowledge of, or information 
in regard to, the indebtedness of the firm, other than that due 
the bank, or any other knowledge or information in regard to 
the character, etc, of the property other than that given by 
bankrupts. Certainly, if they were justified in accepting that 
information — that is, if they had no good and sufiicient reason to 
doubt the truth of it — there was nothing in the statement calcu- 
lated to create a reasonable belief that the firm was insolvent; 
that is, that the bankrupts were making false statements, and 
that, in accepting the transfer, they were receiving a preference. 
The referee finds, I presume, from the account of the trustee, 
that he has not, after diligent effort, been able to realize more 
than $3,624 cash from the property. This finding, however, is 
of little probative value in ascertaining what information Mr. 
I Pennington or his attorney had on the subject on August 11, 
I 1911. There is no evidence in the record in respect to the moral 
character of the bankrupts, the manner in which they had been 
conducting business, or their commercial credit. Nor is there any 
evidence in regard to the extent or character of their dealings 
with the bank — ^whether their account was frequently overdravim, 
or how long the overdraft had existed. There is nothing to 
indicate that the receiver had been, prior to his appointment, 
connected with the bank, or was acquainted with the relations 
existing between the bank and the bankrupts. It does not appear 
that the receiver did anything more than a prudent and faithful 
discharge of his duty demanded. While the overdraft was large 
for men of their worth, we may take notice of the fact that, for 



PREFERENCES 355 

some reason, the bank went into the hands of the receiver in mid- 
summer, at a season when, in this section, cash business is dull 
and money scarce. While prudent banking would suggest that 
customers be called upon to either cover the overdraft or give 
security, yet the mere fact that a customer of a bank, carrying 
a stock of $4,000, etc., has overdrawn for $1,263, would not, of 
itself, be calculated to create a reasonable apprehension of in- 
solvency. 

The correct rule is well stated by Mr. Justice Bradley in Grant 
V. National Bank, 97 U. S. 80, 24 L. ed. 971, in which he says: 

"Some confusion exists in the cases as to the meaning of the 
phrase 'having reasonable cause to believe such a person is insol- 
vent. ' Dicta are not wanting which assumes that it has the same 
meaning as if it had read ' having reasonable cause to suspect 
such person is insolvent.' But the two phrases are distinct in 
meaning and effect. It is not enough that a creditor has some 
cause to suspect the insolvency of his debtor ; but he must have 
such a knowledge of facts as to induce a reasonable belief of 
his debtor's insolvency, in order to invalidate a security taken 
for his debts. To make mere suspicion a ground of nullity in 
such a case would render the business transactions of the com- 
munity altogether too insecure. It was never the intention of the 
framers of the act to establish any such rule. A man may have 
many grounds of suspicion that his debtor is in failing circum- 
stances, and yet have no cause for a well-grounded belief of the 
fact. He may be unwilling to trust him further, he may feel 
anxious about his claim, and have a strong desire to secure it, and 
yet such belief as the act requires may be wanting. Obtaining 
additional security, or receiving payment of a debt, under such 
circumstances, is not prohibited by the law. * * * The 
debtor is often buoyed up by the hope of being able to get 
through with his difficulties long after his case is, in fact, des- 
perate, and his creditors, if they knew anything of his embarrass- 
ments, either participate in the same feeling, or at least are 
willing to think that there is a possibility of his succeeding. To 
overhaul and set aside all his transactions with his creditors, 
under such circumstances, because there may exist some grounds 
of suspicion of his inability to carry himself through, would make 
the bankrupt law an engine of oppression and injustice. ' ' 

In the language of Mr. Justice Bradley in the opinion cited, 
the evidence before the referee falls far short of establishing that 
the receiver had reasonable cause to believe that Carlile was in- 




PREREQUISITES TO ADJUDICATION 

solvent at the time the transfer was executed. Mr. Collier, in his 
excellent work on Bankruptcy, at p. 669, says : 

"It has been held that it is not necessary for a creditor to 
know, or have reasonable cause to believe, that the debtor is 
insolvent when a mortgage or pledge is made within the four 
months period to secure an antecedent debt. ' ' 

In support of this guarded statement the author cites In re 
Mills (D. C.) 162 Fed. 42, 20 Am. Bankr. Rep. 501. An exami- 
nation of the "headnote" (No. 4) sustains the statement of Mr. 
Collier and the referee's conclusion in this case. An examina- 
tion of the case, as reported, explains how the error found its 
way into the "headnote." The referee, in an elaborate report, 
finds as a fact that the creditor had, not only reasonable cause 
to believe that the debtor was insolvent, but that the officers of 
the trust company well knew that he was insolvent. On p, 48 of 
162 Fed. the referee says : 

"The referee further holds that, when a mortgage or pledge 
is made to secure an antecedent debt, within four months of 
the filing of petition in bankruptcy against him, it is not neces- 
sary that the creditor should have reasonable cause to believe 
that the debtor was then insolvent ; a different rule applying to 
such a case from that which governs when there is an absolute 
payment of a pre-existing debt" — saying that the law is "di- 
rectly so held by the Circuit Court of Appeals in this (the 
Fourth) circuit, in Farmers' Bank v. Carr, 127 Fed. 690 [62 
CCA. 446]." 

An examination of the case does not sustain the construction 
put upon it. It does not very clearly appear from the report 
how the question arose, but it is manifest, from Judge Simon- 
ton's opinion, that the conclusion reached by the court was based 
upon the fact that the preferred creditor had notice of such 
facts as should have created a reasonable belief of the debtor's 
insolvency. It will be found that the cases cited by the referee 
(McNair v. Mclntyre, 113 Fed. 113, 51 C C A. 89 ; In re Hill 
[D. C] 140 Fed. 984; In re Pease [D. C] 129 Fed. 446) do not 
sustain his conclusion. So much of the report (p. 48) as dis- 
cusses this question is entirely unnecessary and surplusage, be- 
cause he had found the fact of actual notice of insolvency upon 
which the ultimate conclusion was based. It will be noted that, 
when the report came before Judge Purnell, District Judge, he 
wrote no opinion, simply stating that "the findings of fact are 
supported by ample proof" and "are in all respects confirmed." 



PREFERENCES 357 

It is true that he also says that the conclusions of law are also 
confirmed; but a reasonable construction of the Last words used 
by the judge restricts the conclusion of law to such as are applic- 
able to the findings of fact. The case, as thus explained, is in 
harmony with the uniform current of authority and the manifest 
meaning of the statute. 

I have deemed it proper to make this reference to the error 
into which one, following the "headnote" and the language of 
the referee in that ease, may be led because of the fact that the 
case is from this district. In view of the fact that the parties 
have submitted to the jurisdiction, and by their actions waived 
all questions of regularity of procedure, I have discussed and 
decided the questions presented, thus saving time and expense 
in the final settlement of the estate. The error into which the 
referee fell is the result of supposing that the case was governed 
by § 60a, instead of § 606. He does not find, because in his view 
of the law it was not material to inquire, whether the receiver 
or his attorney had a reasonable ground to believe that Carlile 
was insolvent. I am of the opinion that he was correct in finding 
that the transfer operated as a preference as defined by § 60a., 
but was in error in holding that this entitled the trustee to re- ^ 
cover the property. I am further of the opinion that the evidence 
does not establish a voidable preference within the definition of 
§ 606. There is no suggestion that the transfer was void under 
§ 67e. The trustee, therefore, is not entitled to recover the prop- 
erty in controversy. 

The order of the referee is reversed. ^ivry- 

HEWITT V. BOSTON STRAW BOARD CO. 

214 Mass. 260, 101 N. E. 424 

(Supreme Judicial Court of Massachusetts. April 1, 1913) 

Contract by the trustee in bankruptcy of the Corperdix Paper 
Tube Company, a corporation, for the amount of a preference 
alleged to have been paid to the defendant by the bankrupt. 



BRALEY, J. It having appeared that at a fair valuation the 
bankrupt's property at the date of transfer was insufficient in 
amount to pay its debts, the judge was warranted in finding it 
to have been insolvent as defined by the act itself. Act 1898, 



358 PREREQUISITES TO ADJUDICATION 

c. 541, § 1, subsec. 15 ; Eau Claire Nat. Bank v. Jackman, 204 
U. S. 522, 532, 27 Sup. Ct. 391, 51 L. ed. 596. See Bailey v. 
Wood, 211 Mass. 37, 44, 45, 97 N. E. 902, Ann. Cas. 1913A, 950. 
But even if the corporation was insolvent, the plaintiff must 
show that * ' the person receiving it or to be benefited thereby, or 
his agent acting therein, shall then have reasonable cause to be- 
lieve that the enforcement of such * * * transfer would 
effect a preference. * * *" Act 1898, c. 541, §606, as 
amended by Act 1910, c. 412, § 11 ; Kaufman v. Tredway, 195 
U. S. 271, 25 Sup. Ct. 33, 49 L. ed. 190 ; Beals v. Quinn, 101 
Mass. 262; Otis v. Hadley, 112 Mass. 100. The bankrupt's prop- 
erty had been attached by the defendant to enforce payment of 
an antecedent unsecured indebtedness for goods sold and deliv- 
ered, and after effecting a sale of nearly one-half of the manu- 
facturing plant, the bankrupt transferred within four months 
prior to the date of adjudication, and in part satisfaction of the 
debt, three promissory notes received in part payment from the 
purchaser. MiHt: 

Where there is reasonable cause to believe, that at the date 
of transfer within the statutory period the debtor is insolvent, 
and payment is accepted of a debt overdue, it is immaterial 
whether the creditor actual ly believes what may have been dis- 
closed as to the true state of ailairs. If he prefers to draw in- 
ferences favorable to himself, and to ignore information which 
would have led to knowledge that his debtor was in failing cir- 
cumstances, he cannot set up his own judgment to the contrary 
even if honestly entertained, as a reason why he should be per- 
mitted to retain a prohibited advantage. Forbes v. Howe, 102 
Mass. 427, 3 Am. Rep. 475 ; Whipple v. Bond, 164 Mass. 182, 41 
N. E. 203 ; In re George, 1 Lowell, 409, 411, Fed. Cas. No. 5,325; 
Toof V. Martin, 13 Wall. 40, 20 L. ed. 481. 

By the express words of the amendatory act, which are merely 
declaratory of the rule of law, that knowledge possessed by an 
agent may be imputed to his principal, the d,efendant is bound 
by the information acquired by its attorney who made the attach- 
ment and acted for it in effecting the settlement. Rogers v. 
Palmer, 102 U. S. 263, 26 L. ed. 164 ; Sartwell v. North, 144 Mass. 
188, 10 N. E. 824. The judge from the statements of the bank- 
rupt's officers well might find that the defendant's attorney upon 
being fully informed as to the impaired resources of the bankrupt 
company, and understanding the object as well as the legal 



PREFERENCES 359 

effect of the transfer, expressed himself as willing to take the h 
hazard of a recovery back by the trustee, if bankruptcy inter- i 
vened. The bankrupt and the defendant must be presumed toj| 
have known that what had been done resulted in a preference, ' 
even if the form of transfer consisted of securities received by 
the bankrupt from a third party. Sawyer v. Turpin, 2 Lowell, 
29, Fed. Cas. No. 12,410 ; Western Tie & Lumber Co. v. Brown, 
196 U. S. 502, 509, 25 Sup. Ct. 339, 49 L. ed. 571 ; Dickinson v. 
National Security Bank of Richmond, 110 Fed. 353, 49 C. C. A. 
84; Bankr. Act 1898, c. 541, §60, subsecs. "a" and "b," as 
amended by Act 1903, c. 487, § 13, and Act 1910, c. 412, § 11. 

It is maintained, however, that the evidence does not disclose 
the class of creditors to which the defendant belonged, and there 
is no preference, because it cannot be determined whether a 
greater percentage of its debt had been obtained than the amount 
which other creditors of the same class would receive. Act 1898, 
c. 541, §60, subsec, ''a." The defendant at the date of the 
transaction ranked with the class of unsecured creditors shown 
by the list of accounts payable, which apparently were provable 
debts. It is not even suggested that they could have been paid 
in full by the bankrupt, although entitled to share equally with 
the defendant in the distribution of its property. Nor is it con- 
tended that the trustee has received sufficient assets to enable 
him to satisfy fully the claims which have been allowed. Kim- 
ball V. Dresser, 98 Me. 519, 57 Atl. 787. A transfer of the char- 
acter shown mater ially diminished the bankrupt's estate. If 
allowed to stand it would defeat the purpose of the Bankruptcy 
Act, which, after priorities are satisfied, is the distribution of 
the bankrupt's property equally among all his creditors, whether 
secured or unsecured. Act 1898, c. 541, §§ 63, 64, 67 and the 
several subsections ; In re Hapgood, 2 Lowell, 200, Fed. Cas. No. 
6,044 ; Swarts v. Fourth Nat. Bank of St. Louis, 117 Fed. 1, 54 
C. C. A. 387 ; Jackman v. Eau Claire Nat. Bank, 125 Wis. 465, 
479, 104 N. W. 98, 115 Am. St. Rep. 955 ; Nat. Bank of Newport 
V. Nat. Herkimer County Bank, 225 U. S. 178, 32 Sup. Ct. 633, 
56 L. ed. 1042. 

The plaintiff accordingly can recover the amount of the notes // rAoA 
with interest from the date of the preferential payment. Clarion ' 
First Nat. Bank v. Jones, 21 Wall. 325, 22 L. ed. 542. 

Exceptions overruled. 




360 PREREQUISITES TO ADJUDICATION 

(h) Surrender of Preference 
' / KEPPEL V. TIFFIN SAVINGS BANK 
197 U. S. 356, 49 L. ed. 790, 25 Sup. Ct. 443 
(United States Supreme Court. April 3, 1905) 

Charles A. Goetz became a voluntary bankrupt on October 12, 
1900. George B. Kieppel, the trustee, sued the Tiffin Savings 
Bank in an Ohio court to cancel two real-estate mortgages exe- 
cuted by Goetz, one to secure a note for $4,000 and the other a 
note for $2,000. The mortgage to secure the $4,000 note was 
made more than four month s before the adjudication in bank- 
ruptcy. The mortgage securing the $2,000 note was executed a 
few day s before the bankruptcy, the mortgagor being at the 
time insolvent and intending to prefer the bank. The bank de- 
fended the suit, averring its good faith and asserting the validity 
of both the securities. In a cross petition the enforcement of 
both mortgages was prayed. The ^cour t held the mort gage secur - 
ing the $4,000 note to be valid, and the mortgage, secuxing the 
$2,000 note to be void. The trustee appealed to a circuit court, 
where a trial de ■wm'o was had. At such trial the attorney for 
the bank stated to the court that the bank waived any claim 
to a preference as to the $2,000 note, but that he could not assent 
to a judgment to that effect. A judgment was entered sustain- 
ing the security for the $4,000 note and avoiding that for the 
$2,000 note. 

The bank subsequently sought to prove that it was a creditor 
of the estate upon the note for $2,000, and upon two other unse- 
cured notes, aggregating $835. The referee refused to allow 
the proof, upon the ground that, as the bank had compelled the 
trustee to sue to cancel the security, and a judgment nullifying 
it had been obtained, the bank had lost the right to prove any 
claim against the estate. The district judge, upon review, re- 
versed this ruling. The Circuit Court of Appeals to which the 
issue was taken, after stating the case as above recited, certified 
questions for our determination. 

Mr. Justice WHITE, after making the foregoing statement, 

delivered the opinion of the court : 

The following are the questions asked by the Court of Appeals : 
''First. Can a creditor of a bankrupt, who has received a 

merely voidable preference, and who has in good faith retained 



PREFERENCES 361 

such preference until deprived thereof by the judgment of a 
court upon a suit of the trustee, thereafter prove the debt so 
voidably preferred? 

"Second. Upon the issue as to the allowance of the bank's 
claims, was it competent, in explanation of the judgment of the 
Ohio Circuit Court in favor of the trustee and against the bank 
in respect to its $2,000 mortgage, to show the disclaimer made in 
open court by the attorney representing the bank, of any claim 
of preference, and the grounds upon which the bank declined to 
consent to a judgment in favor of the trustee ? 

** Third. If the failure to 'voluntarily' surrender the mort- 
gage given to secure the $2,000 note operates to prevent the allow- 
ance of that note, does the penalty extend to and require the 
disallowance of both the other claims?" 

Before we develop the legal principles to the solution of the 
first question, it is to be observed that the facts stated in the 
certificate and implied by the question show that the bank acted 
in good faith when it accepted the mortgage and when it subse- 
quently insisted that the trustee should prove the existence of the 
facts which, it was charged, vitiated the security. It results 
that the voidable nature of the transaction alone arose from 
§ 67e of the act of 1898, invalidating "conveyances, transfers, 
or encumbrances of his property made by a debtor at any time 
within four months prior to the filing of the petition against him, 
and while insolvent, which are held null and void as against the 
creditors of such debtor by the laws of the state, territory, or 
district in which such property is situate" [30 Stat, at L. 565, 
c. 541, U. S. Comp. Stat. 1901, p. 3449] , and giving the assignee 
a right to reclaim and recover the property for the creditors of 
the bankrupt estate. 

On the one hand, it is insisted that a creditor who has not 
surrendered a preference until compelled to do so by the decree 
of a court cannot be allowed to prove any claim against the 
estate. On the other hand, it is urged that no such penalty is 
imposed by the bankrupt act, and hence the creditor, on an 
extinguishment of a preference, by whatever means, may prove 
his claims. These contentions must be determined by the text, 
originally considered, of § 57g of the bankrupt act, providing 
that "the claims of creditors who have received preferences shall 
not be allowed unless such creditors shall surrender their pref- 
erences." We say by the text in question, because there is no- 
where any prohibition against the proof of a claim by a creditor 



362 PREREQUISITES TO ADJUDICATION 

who has had a preference, where the preference has disappeared 
as the result of a decree adjudging the preferences to be void, 
unless that result arises from the provision in question. We say 
also from the text as originally considered, because, although 
there are some decisions, under the act of 1898, of lower Federal 
courts, which are referred to in the margin,^^ denying the right 
of a creditor to prove his claim, after the surrender of a prefer- 
ence by the compulsion of a decree or judgment, such decisions 
rest not upon an analysis of the text of the act of 1898 alone con- 
sidered, but upon what were deemed to have been analogous pro- 
visions of the act of 1867 and decisions thereunder. We omit, 
therefore, further reference to these decisions, as we shall here- 
after come to consider the text of the present act by the light 
thrown upon it by the act of 1867 and the judicial interpretation 
which was given to that act. 

The text is, that preferred creditors shall not prove their claims 
unless they surrender their preferences. Let us first consider 
the meaning of this provision, guided by the cardinal rule which 
requires that it should, if possible, be given a meaning in accord 
with the general purpose which the statute was intended to 
accomplish. 

We think it clear that the fundamental purpose of the provi- 
sion in question was to secure an equality of distribution of the 
assets of a bankrupt estate. This must be the case, since, if a 
creditor having a preference retained the preference, and at the 
same time proved his debt and participated in the distribution 
of the estate, an advantage would be secured not contemplated 
by the law. Equality of distribution being the purpose intended 
to be effected by the provision, to interpret it as forbidding a 
creditor from proving his claim after a surrender of his prefer- 
ence, because such surrender was not voluntary, would frustrate 
the object of the provision, since it would give the bankrupt 
estate the benefit of the surrender or cancellation of the prefer- 
ence, and yet deprive the creditor of any right to participate, 
thus creating an inequality. But it is said, although this be 
true, as the statute is plain, its terms cannot be disregarded by 
allowing that to be done which it expressly forbids. This rests 
upon the assumption that the word ''surrender'' necessarily 

42— Ee Greth, 112 Fed. 978; Ee 
Keller, 109 Fed. 118, 126, 127; Ee 
Ownings, 109 Fed. 623. 



PREFERENCES 363 

implies only voluntary action, and hence excludes the right to 
prove where the surrender is the result of a recovery compelled 
by judgment or decree. 

The word "surrender," however, does not exclude compelled 
action, but, to the contrary, generally implies such action. That 
this is the primary and commonly accepted meaning of the word 
is shown by the dictionaries. Thus, the Standard Dictionary 
defines its meaning as follows: "1. To yield possession of to 
another upon compulsion or demand, or under pressure of a su- 
perior force ; give up, especially to an enemy in warfare ; as, to 
surrender an army or a fort." And in Webster's International 
Dictionary the word is primarily defined in the same way. The 
word, of course, also sometimes denotes voluntary action. In the 
statute, however, it is unqualified, and generic, and hence em- 
braces both meanings. The construction which would exclude 
the primary meaning, so as to cause the word only to embrace 
voluntary action, would read into the statute a qualification, and 
this in order 'to cause the provision to be in conflict with the pur- 
pose which it was intended to accomplish, — equity among cred- 
itors. But the construction would do more. It would exclude, 
the natural meaning of the word us ed in the statut^^, in order 
Jx> c reate a penalt y, aitnough nowhere expressly or even by clear 
implication found in t he statute. This would disregard the ele- 
mentary rule that a penalty is not to be readily implied, and, on 
the contrary, that a person or corporation is not to be subjected 
to a penalty unless the words of the statute plainly impose it. 
Tiffany v. National Bank, 18 WaU. 409, 410, 21 L. ed. 862, 863. 
If it had been contemplated that the word "surrender" should 
entail upon every creditor the loss of power to prove his claims 
if he submitted his right to retain an asserted preference to the 
courts for decision, such purpose could have found ready expres- 
sion by qualifying the word ' ' surrender " so as to plainly convey 
such meaning. Indeed, the construction which would read in the 
qualification would not only create a penalty alone by judicial 
action, but would necessitate judicial legislation in order to de- 
fine what character and degree of compulsion was essential to 
prevent the surrender in fact from being a surrender within the 
meaning of the section. 

It is argued, however, that courts of bankruptcy are guided 
by equitable considerations, and should not permit a creditor 
who has retained a fraudulent preference until compelled by a 
court to surrender it, to prove his debt, and thus suffer no other 



564 PREREQUISITES TO ADJUDICATION 

loss than the costs of litigation. Thefallacy lies in assuming that 
the courts have power to inflict penalties, although th e law ha JT 
not imposed them . Moreover, if the statute be inteFpreted as it 
IS insisted it should be, there would be no distinction between 
honest and fraudulent creditors, and therefore every creditor who 
in good faith had acquired an advantage which the law did not 
permit him to retain would be subjected to the forfeiture simply 
because he had presumed to submit his legal rights to a court for 
determination. And this accentuates the error in the construc- 
tion, since the elementary principle is that courts are created to 
pass upon the rights of parties, and that it is the privilege o f the_ 
citizen to submit his claims to the judicial tribunals, — especially 

(in the absence of malice and when acting with probable cause, — 
without subjecting himself to penalties of an extraordinary 

I character. The violation of this rule, which would arise from 
the construction, is well illustrated by this case. Here, as we 
have seen, it is found that the bank acted in good faith, without 
knowledge of the insolvency of its debtor and of wrongful intent 
on his part, and yet it is asserted that the right to prove its law- 
ful claims against the bankrupt estate was forfeited simply be- 
cause of the election to put the trustee to proof, in a court, of 
the existence of the facts made essential by the law to an invali- 
dation of the preference. 

We are of opinion that, originally considered, the surrender 
clause of the statute was intended simply to prevent a creditor 
from creating inequality in the distribution of the assets of the 
estate by retaining a preference, and at the same time collecting 
dividends from the estate by the proof of his claim against it, 
and consequently that whenever the preference has been aban- 
doned or yielded up, and thereby the danger of inequality has 
been prevented, such creditor is entitled to stand on an equal 
footing with other creditors and prove his claims. 

Is the contention well founded that this meaning which we de- 
duce from the text of the surrender clause of the present act is 
so in conflict with the rule generally applied in bankruptcy acts, 
and is, especially, so contrary to the act of 1867 and the con- 
struction given to it, that such meaning cannot be considered to 
have been contemplated by Congress in adopting the present 

act, and hence a contrary interpretation should be applied? 

* * * 

It follows that the construction which we at the outset gave 
to the text of the act of 1898, instead of being weakened, is abso- 



PREFERENCES 365 

lutely sustained by a consideration of the act of 1867, both be- 
fore and after the amendment of 1874, and the decisions con- 
struing the same, since in the present act, as we have said, there 
is nowhere found any provision imposing even the modified pen- 
alty which was expressed in the amendment of 1874. The con- 
tention that, because the act of 1898 contains a surrender clause, 
therefore it must be assumed that Congress intended to inflict the 
penalty originally imposed by § 39 of the act of 1867, must rest 
upon the erroneous assumption that that penalty was the result 
of the surrender clause alone. But this, as we have seen, is a 
misconception, since from the great weight of judicial authority 
under the act of 1867, as well as by the express enactment of 
Congress in the amendment of 1874 and the decisions which con- 
strued that amendment, it necessarily results that the penalty 
enforced under the act of 1867 arose not from the surrender 
clause standing alone, but solely from the operation upon that 
clause of the express prohibition contained in § 39 of that act. 
When, therefore, Congress in adopting the present act omitted 
to re-enact the provision of the act of 1867, from which alone the 
penalty or forfeiture arose, it cannot in reason be said that the 
omission to impose the penalty gives rise to the implication that 
it was the intention of Congress to re-enact it. In other words, 
it cannot be declared that a penalty is to be enforced because the 
statute does not impose it. 

And, irrespective of this irresistible i mplication, a general con- 
sideration of the present act persuasively points out the purpose 
contemplated by Congress in refraining from re-enacting the 
penalty contained in § 39 of the act of 1867. Undoubtedly the 
preference clauses of the present act, differing in that respect 
from the act of 1867, as is well illustrated by the facts of this 
case, include preferences where the creditor receiving the same 
acted without knowledge of any wrongful intent on the part of 
the debtor, and in the utmost good faith. Pirie v. Chicago Title 
& T. Co., 182 U. S. 454, 45 L. ed. 1179, 21 Sup. Ct. Rep. 906. 
Having thus broadened the preference clauses so as to make 
them include acts never before declared by Congress to be illegal, 
it may well be presumed that Congress, when it enacted the sur- 
render clause in the present act, could not have contemplated 
that that clause should be construed as inflicting a penalty upon 
creditors coming within the scope of the enlarged preference 
clauses of the act of 1898, thereby entailing an unjust and 
unprecedented result. 



^^.^ju-^t- m ^ f^ 



~\A>."-^^ 1 



LfU,U CnX^fu^ /iftwr: t^ dU^,<4^ (pf^'l-^/i* 



366 PREREQUISITES TO ADJUDICATION 

Our coiiclusian, therefore, is that the first question propounded 
must be answered in the affirmative, and that the two other ques- 
tions require no response. 

And it is ordered accordingly .^^ 



dr\ 



3. ASSIGNMENTS FOB BENEFIT OF CREDITORS 

/ WEST CO. V. LEA 

174 U. S. 590, 43 L. ed. 1098, 19 Sup. Ct. 836 



.^ [See this case given ante, p. 104] 

/• J '^ MISSOURI-AMERICAN ELECTRIC CO. v. HAMILTON- 
'>^^^ BROWN SHOE CO. 



9^ 



165 Fed. 283, 91 C. C. A. 251 

(Circuit Court of Appeals, Eighth Circuit. November 16, 1908) 

SANBORN, Circuit Judge. This is an appeal from an adjudi- 
cation in bankruptcy of the Missouri-American Electric Com- 
pany, a corporation of the state of Missouri, upon a creditors' 
petition filed February 16, 1907, upon the grounds (1) that on 
October 7, 1906, the corporation, while insolvent, made a general 
assignment of all its property to the American Electric Company, 
a corporation of the state of New Jersey, and (2) that on October 
17, 1906, the Missouri Company, while insolvent, paid to the 
American Company, one of its creditors, $18,000, with intent to 
prefer the latter to its other creditors, and that the latter com- 
pany at that time had reasonable cause to believe that it was in- 
tended to give it a preference over other creditors similarly 
situated by this payment. There was no evidence of any pay- 
ment of $18,000 or any like sum to the American Company 
within four months of the filing of the petition, except the trans- 
fer of the money and property which was subject to the written 
instruments executed on October 17, 1906, which the appellees 
insist constitute a general assignment for the benefit of the credit- 
ors of the Missouri Company under § 3a(4) of the bankruptcy 
law of 1898 (Act July 1, 1898, c. 541, 30 Stat. 546 [U. S. Comp. 
St. 1901, p. 3422] ) . The decision of the merits of the case turns 
upon the legal effect of those writings. The charges of the com- 

43 — The dissenting opinion of Mr. and Mr. Justice Brown concurred 
Justice Day is omitted. Mr. Jus- in the dissent. 
tice Haelan, Mr. Justice Brewer, 



ASSIGNMENTS 367 

mission of the acts of bankruptcy were denied by the Missouri 
Company, the issues were tried by the District Court, evidence 
which fills more than 200 pages of the printed transcript was 
adduced, the court closed the hearing while the Missouri Com- 
pany was still introducing its evidence in defense and before it 
had rested, that company excepted to this premature closing of 
the case, and the court rendered a decree adjudging it a bank- 
rupt. * * * 

Was the assignment of October 17, 1906, a general assignment! 
for the benefit of the creditors of the Missouri Company within 
the meaning of § 3a (4) of the bankruptcy act of 1898 and hence 
an act of bankruptcy? A general assignment conveys all or 
substantially all the property of the debtor, while an assignment 
which conveys but a portion of it is a partial assignment, and not 
a general assignment. United States v. Hooe, 3 Cranch, 73, 90, 
2 L. ed. 370 ; Bock v. Perkins, 139 U. S. 628, 641, 11 Sup. Ct. 
677, 35 L. ed. 314; United States v. Rowland, 4 Wheat. 108, 114,j 
4 L. ed. 526 ; United States v. Langton, 26 Fed. Cas. 862, 864, 
No. 15,560; United States v. Clark, 25 Fed. Cas. 447, 451, No. 
14,807 ; Mussey v. Noyes, 26 Vt. 462, 474, 475. This assignment 
did not convey the real estate of the assignor, which was about 
one-fourth of its property in value after the amount of the in- 
cumbrance upon the real estate had been deducted from its total 
value. It is true that the assignment transferred the proceeds 
of any sale of this real estate that had been made, or that should 
be made, but none had been made, and the Missouri Company 
retained the absolute possession, use, control, and power of dis- 
position of it. Notwithstanding the assignment the assignor re- 
tained the right and the power to use, to rent, and never to sell 
the real estate. An absolute transfer by a debtor of both the 
legal and the equitable titles to the assignee in trust for his 
creditors, so that the grantor retains no control of its use and no 
power to dispose of it, is indispensable to a valid assignment of 
such property for the benefit of creditors. Sandmeyer v. Dakota 
Fire & Marine Ins. Co., 2 S. D. 346, 352, 50 N. W. 353, and cases 
there cited ; Smith & Keating Imp. Co. v. Thurman, 29 Mo. App. 
186, 191. The conveyance here in question made no such transfer 
of the real estate of the debtor. 

A general assignment for the benefit of creditors is ordinarily 
a conveyance by a debtor without consideration from the grantee 
of substantially all his property to a party in trust to collect the 
amounts owing to him, to sell and convey the property, to dis- 



368 PREREQUISITES TO ADJUDICATION 

tribute the proceeds of all the property among his creditors, and 
to return the surplus, if any, to the debtor. A conveyance of 
his property by a debtor directly to his creditor, or to his credit- 
ors, for their benefit, is not a general assignment for the benefit 
of creditors because it raises no trust, Mussey v. Noyes, 26 Vt. 
462, 474, 475 ; Anniston Iron & Supply Co. v. Anniston Rolling 
Mill Co. (D, C), 125 Fed. 974. This conveyance is an assign- 
ment by a debtor to its largest creditor in payment of the latter 's 
debt of a part of the debtor's property in consideration of the 
release of its debt by this creditor and of the latter 's agreement 
to pay all other creditors of the grantor out of the proceeds of 
the property assigned. The apparent purpose and effect of it is 
a sale of the remainder of the part of the debtor's property de- 
scribed in the assignment after all its other debts have been paid 
out of it to the debtor's chief creditor in consideration of the 
latter 's release and discharge of its claim against the debtor. 
The controlling rule for the interpretation of written instru- 
ments is that the intention of the parties should be jiidduced from 
them and given effect. Bock v. Perkins, 139 U. S. 628, 635, 11 
Sup. Ct. 677, 35 L. ed. 314. In the courts of the state of Mis- 
souri, of the state under whose laws the grantor in this convey- 
ance was organized and in which its real estate and its place of 
business were situated, it is an established rule of construction 
that no instrument shall be held to constitute an assignment for 
the benefit of creditors unless it clearly appears either that the 
grantor intended that it should so operate or that such was its 
necessary legal effect. Dry Goods Co. v. Grocer Co., 68 Mo. App. 
290, 295 ; Haase v. Distilling Co., 64 Mo. App. 131, 135 ; Harga- 
dine v. Henderson, 97 Mo. 375, 387, 11 S. W. 218; Jaffrey v. 
Mathews, 120 Mo. 317, 328, 25 S. W. 187 ; Brookshier v. Mutual 
Fire Ins. Co., 91 Mo. App. 599, 605. 

In Becker v. Rardin, 107 Mo. Ill, 117, 17 S. W. 892, a debtor 
had conveyed to one of his creditors his stock of goods, the cred- 
itor had satisfied his claim, and had agreed to pay the claims of 
certain other creditors in consideration of that conveyance. The 
parties further agreed in the instrument of conveyance that the 
goods should be invoiced, a part at first cost and a part at their 
then cash value, that, if the invoice value proved to be less than 
the aggregate amount agreed to be paid by the grantee to the 
creditors named therein the debtor would assign accounts re- 
ceivable sufficient in amount to make up that aggregate, and 
that if the invoice value should prove to be more than that aggre- 






ASSIGNMENTS 369 

gate, then the balance above that amount should be paid to a 
third party for the benefit of other parties not named in the 
instrument. The Supreme Court of Missouri held that the con- 
veyance did not constitute a voluntary assignment for the benefit 
of creditors. 

Because the assignment of October 17, 1906, did not convey 
substantially all but only a portion of the property of the Mis- 
souri Company, because it did not transfer th e title to its rea l 
estate to the assignee, but left the real estate, its use, control, and 
power oi disposition in the grantor, because it was the intention 
of the grantor when it made the instrument to sell the remainder 
of a part of its property after its other debts had been paid out 
of the proceeds of that part to its chief creditor in consideration 
of a dischar ge of its obligation to it, and it was not its purpose, 
nor was it the legal effect of the assignment of October 17, 1906, 
to make a general assignment of the property of the debtor for 
the benefit of its creditors, our conclusion is that that instrument 
was not such an assignment and its execution was not an act of 
bankruptcy. The result is that the creditors failed to establish 
the averments of acts of bankruptcy contained in their petition, l 
and the adjudication in bankruptcy must be reversed, and the/ 
case must be remanded to the court below with directions to dis- 
miss the petition. 

It is so ordered.*^ 

COURTENAY MERCANTILE CO. v. FINCH Ji^^*''^'"^ 

194 Fed. 368, 114 C. C. A. 328 

(Circuit Court of Appeals, Eighth Circuit. March 7, 1912) 

WM. H. MUNGER, D. J. The Courtenay Mercantile Com- 
pany, a corporation, becoming insolvent in November, 1910, exe- 
cuted and delivered the following instrument: 

** Minneapolis, Minn., March 3, 1911. 

"Assignment, Courtenay Mercantile Co. to P. S. Preston. 

"This agreement, made this 10th day of November, 1910, by 
and between Courtenay Mercantile Company, a corporation, of 
Courtenay, in the county of Stutsman, state of North Dakota, 
party of the first part, and Percival S. Preston, of the city of 
Minneapolis, county of Hennepin, and state of Minnesota, party 

44 — See In re Heleker Bros. Mer- 
cantile Co., 216 Fed. 963. 
H. & A. Bankruptcy — 24 



370 PREREQUISITES TO ADJUDICATION 

of the second part, witnesseth : That the party of the first part, 
in consideration of the premises and the mutual promises herein 
contained and the sum of one dollar to it in hand paid by the 
party of the second part, has granted, bargained, sold, conveyed, 
and assigned, and by these presents does bargain, grant, sell, con- 
vey, and assign, unto said party of the second part, his succes- 
sors and assigns, forever, all and singular its stock of goods, 
wares, and merchandise, book accounts, notes and all claims de- 
mands, and ehoses in action, with all evidences thereof and 
securities thereto pertaining, and all its lands, tenements, and 
hereditaments, wherever situate, to have and to hold the same 
unto the said party of the second part, his successors and assigns, 
forever, in trust, nevertheless, for the uses and purposes follow- 
ing, which the second party agrees to fulfill, to wit: 

" (1) To take possession of said property, and to sell and dis- 
pose of same at public or private sale, with all reasonable dili- 
gence, and to convert the same into money; also to collect all 
claims, demands, and bills receivable hereby assigned, or to set- 
tle, compromise, and compound any thereof that are doubtful, 
or to sell and dispose of the same and reduce them to money as 
soon as may be, and with and out of the proceeds of such sales 
and collections : 

"(2) To pay and discharge all the just and reasonable ex- 
penses, costs, and charges of executing and carrying into effect 
the trust hereby created, including reasonable compensation to 
the party of the second part for his services and expenses paid 
or incurred (including counsel fees) in executing the same. 

" (3) To pay and discharge in full, if the residue of such pro- 
ceeds be sufficient, all the debts and liabilities due or owing by 
the party of the first part, including interest thereon, to those of 
his creditors who shall become parties hereto by signing this 
agreement or copy thereof, and who shall in consideration of the 
premises undertake and agree, upon payment made, whether in 
whole or in part, as herein provided, to fully release, discharge, 
and absolve the party of the first part from and of all indebted- 
ness to them, or either of them, now due or owing. 

* * And if the residue of said proceeds shall not be sufficient to 
pay said debts and liabilities and interest in fuU, then to apply 
the same so far as they will extend pro rata to the payment of 
said debts and liabilities and interest. And if, after payment as 
aforesaid, there shall be any surplus, to pay such surplus to the 
party of the first part, his executors, administrators, or assigns. 



ASSIGNMENTS 371 

The words 'party of the first part' herein shall be construed to 
mean parties of the first part. 

' ' In witness whereof, the said party of the first part has here- 
unto set his hand and seal the day and year first above written. 

"Courtenay Mercantile Co., 

' ' [ Corporate Seal. ] By J. B. Durkee, President. ' ' 

This instrument was duly acknowledged and filed for record. 
Thirty-eight creditors, whose claims aggregated a little over 
$7,000, accepted the terms of the instrument. Twenty-four cred- 
itors, whose claims aggregated a little over $40,000, either refused 
or failed to signify their acceptance. On the 30th of January, 
1911, certain creditors filed a petition in bankruptcy, praying 
that the said Mercantile Company be adjudged bankrupt, charg- 
ing as the act of bankruptcy that on the 10th day of November, 
1910, it made a general assignment for the benefit of its creditors 
to one Percival S. Preston, being the instrument heretofore men- 
tioned. The Courtenay Mercantile Company filed its answer to 
the petition in involuntary bankruptcy, denying that it com- 
mitted the act of bankruptcy alleged, or that it was insolvent. 
The case came on for trial, and was heard upon a stipulation as 
to the facts — the stipulation showing that, by the instrument 
above mentioned, the Courtenay Mercantile Company conveyed 
to Preston all of its property of every kind and nature ; that the 
above-mentioned instrument was executed by the Courtenay Mer- 
cantile Company and delivered to Preston pursuant to a resolu- 
tion of the board of directors of the Courtenay Mercantile Com- 
pany; that Preston accepted the trust, and entered upon the 
discharge of his duties as trustee. The court held that the fore- 
going instrument was a general assignment within the meaning 
of the bankrupt law, and hence an act of bankruptcy, and ad- 
judged the company a bankrupt. The Courtenay Mercantile 
Company brings the case here on appeal, and the single question 
is presented as to whether the above agreement was a general 
assignment within the meaning of the bankrupt law. 

It is first to be observed that the instrument conveyed all of 
the property of the alleged bankrupt to a trustee, who was not 
a creditor, and for the benefit of creditors. No right of redemp- 
tion remained, and bankrupt retained no interest, excepting to 
receive whatever property, if any, should remain after the entire 
payment of its indebtedness. In re Thomlinson Company, 154 
Fed. 834, 83 C. C. A. 550, this court, passing upon the question 



372 PREREQUISITES TO ADJUDICATION 

as to what was a general assignment within the meaning of the 
bankrupt law, said : 

"The 'general assignment' there contemplated is to be taken 
in its generic sense, and embraces any conveyance at common 
law or by statute by which the parties intend to make an absolute 
and unconditional appropriation of the property conveyed to 
raise funds to pay the debts of the vendor, share and share alike. 
Appolos V. Brady, 1 C. C. A. 299, 49 Fed. 401 ; Bartlett v. Teah 
(C. C), 1 Fed. 768; In re Gutwillig (D. C), 90 Fed. 475; Id., 
34 C. C. A. 377, 92 Fed. 337; In re Sievers (D. C), 91 Fed. 366; 
Davis V. Bohle, 34 C. C. A. 372, 92 Fed. 325. Such a conveyance 
inevitably thwarts operation of the bankruptcy act. * * * 
The instrument in question does not contain any of the elements 
of a mortgage, as insisted upon by bankrupt 's counsel. The idea 
that it was intended as a security for the ultimate payment of 
the debts of the vendor, or that a reservation of a right to redeem 
whenever the vendor shall pay its debts was intended, is not 
remotely suggested by any of the terms of the instrument; in 
other words, there is no right of redemption reserved. The pro- 
vision at the end of the instrument, requiring a surplus, if any, 
to be paid to the vendor, cannot be regarded as such reservation. 
It is nothing more than an expression of what the law implies. 
If, after all the property had been disposed of, and all the 
creditors had been fully paid, and all the expenses satisfied, any 
surplus remained, it belonged as a matter of law to the debtor, 
and no formal statement to that effect can change the legal and 
obvious import of the instrument from a general assignment for 
the payment of debts to a provision for their security in the 
nature of a chattel mortgage. ' ' 

The rule thus announced is entirely applicable to the instru- 
ment executed by the Courtenay Mercantile Company ; the only 
difference between the two being that, in the instrument of the 
Courtenay Mercantile Company, there was a provision that the 
proceeds should be distributed among the creditors who accepted 
the terms of the instrument. This certainly did not change its 
character. So far as the Courtenay Mercantile Company was 
concerned, they conveyed all their property to the trustee for 
the benefit of their creditors, and the instrument speaks of the 
date of its execution and delivery. It could not be known at 
that time but that all of the creditors would accept its provisions. 
Had all the creditors accepted, it certainly would have operated 
as a general assignment. We do not think that the question as 
to whether an instrument of that character constitutes a general 



APPOINTMENT OF A RECEIVER 373 , , 

alignment or a mortgage is dependent upon the subsequent event ^ '/l/^f- e^ 
of its acceptance by each and all of the debtor's creditors. In ^ ^ 
GrifSn V. DutTon, 165 Fed. 626, 91 C. C. A. 614, the Court of 
Appeals of the First Circuit, said: 

"Nor is it necessary that the assignment should be valid for 
all purposes; as, for instance, that the creditors should assent 
thereto.. The language of the bankruptcy act is general. It 
makes no distinction between strictly valid instruments and those 
which may be invalid for certain purposes. To limit its opera- 
tion to those assignments which are in all respects valid would 
be contrary to the intent and purpose of the act. ' ' 

To the same effect, see In re Meyer, 98 Fed. 976, 39 C. C. A. 
368. 

It is established by the foregoing authorities that a general 
assignment for the benefit of creditors, within the inhibition of 
the bankrupt law, need not necessarily be one which is valid 
according to the state law. If its legal effect is a transfer of all 
the debtor's property to a trustee for the benefit of all creditors, 
share and share alike, who shall come in and prove their claims, 
and thus accept its terms, it constitutes a general assignment. 

We are cited to the case of Joas v. Jordan, 21 S. I), 379, 113 
N. W. 73, where the Supreme Court of South Dakota, construing 
a similar instrument, held that it was not an assignment, but a 
mere security, as it was for the benefit only of those creditors 
who assented to its conditions. The court in that case was con- 
struing an instrument with reference to the statutory laws of that 
state, and was not dealing with the question of an assignment 
under the bankrupt law. Our attention has not been called to 
any case by the Supreme Court of North Dakota holding that 
such an instrument is a security in the nature of a chattel 
mortgage. 

We are clearly of the opinion that the instrument in question / 

was a general assignment for the benefit of creditors, within the 
purview of the bankrupt law, and the decree is affirmed. 

4. APPOINTMENT OF A RECEIVER ', 

IN RE SPALDING 

139 Fed. 244, 71 C. C. A. 370 

(Circuit Court of Appeals, Second Circuit. June 10, 1905) 

WALLACE, C. J. This is an appeal from an adjudication of 
bankruptcy, and is brought by a creditor who interposed an an- 



374 PREREQUISITES TO ADJUDICATION 

swer to the petition and contested the proceeding and by the 
executor of Spalding. The acts of bankruptcy upon which the ' 

I adjudication was based were the_ appointment and putting jn 
charge of a receiver of the property of the alleged ba jatarupJLjQL 
the Supreme Court of the sta te ot jSJew York" The petition for ' 
the adjudication alleged the commission of several other acts of 
bankruptcy of Spalding, but none of the averments in respect 
thereto were sufficient in form and substance. The referee in 
bankruptcy by whom the proceeding was heard found that they 
had not been proved. His findings in this respect were not over- 
ruled by the District Court, and we have not been able to find 
in the record sufficient evidence to support the averments. 

We are unable to agree with the court below that the proofs 
establish the commission by Spalding of the acts of bankruptcy 
particularly referred to. These acts of bankruptcy are those 
enumerated by subdivision a (4) of § 3 of the bankrupt act (Act 
July 1, 1898, c. 541, 30 Stat. 546 [U. S. Comp. St. 1901, p. 3422] ). 
§ 3 provides that acts of bankruptcy by a person * ' shall consist 
of his having * * * a (4), made a general assignment for 
the benefit of his creditors; or being insolvent applied for a re- 
ceiver or trustee for his property; or because of insolvency a 
receiver or trustee has been put in charge of his property under 
the laws of a state, of a territory, or of the United States. ' ' 

Until the amendments of 1903 to the bankrupt act, the appoint- 
ment of a receiver of the property of an insolvent, whether an 
individual or a corporation, was not of itself an act of bank- 
ruptcy ; and this was so whether the appointment was made upon 
the application of the insolvent or upon the application of credit- 
ors. The making of a general assignment for the benefit of 
creditors was an act of bankruptcy by the terms of subdivision 
a (4), and upon the theory that the appointment of a receiver 
was equivalent in its results to a general assignment made by the 
insolvent to a trustee the jurisdiction of the bankruptcy courts 
had been sought occasionally by creditors who petitioned for an 
adjudication of bankruptcy alleging such appointment to have 
been a general assignment for the benefit of creditors; 
but it was decided that § 3 did not include as one of 
the enumerated acts of bankruptcy the appointment by a court 
of a receiver or trustee of the property of an insolvent, and that 
the "general assignment" of subdivision a (4) meant the ordi- 
nary common-law general assignment made voluntarily by the 



APPOINTMENT OF A RECEIVER 375 

grantor, and those which in many of the states, being regulated 
by statute, are known as "statutory general assignments." Re 
Empire Metallic Bedstead Company, 98 Fed. 981, 39 C. C. A. 
372; Vaccaro v. Security Bank of Memphis, 103 Fed. 436, 43 
C. C. A, 279. In the former of these cases this court held that 
the procurement by an insolvent of the appointment of a receiver 
of his property by a state court could not be held to be an act 
of bankruptcy upon the ground that it produces results equiva- 
lent to those brought about by a general assignment for the 
benefit of creditors, and that the acts of bankruptcy enumerated 
by the statute could not be enlarged by construction so as to 
include transactions similar or analogous to, but not identical 
with, those specified. Doubtless these decisions were influential 
in leading to the amendments of 1903. It is significant that • 
these amendments are ingrafted upon original subdivision a (4), 
thus indicating that what was in the mind of Congress was a 
transfer which was equivalent in its results to a general assign- 
ment by operating to transfer to a trustee all of the property 
of an insolvent for the benefit of his creditors. The making o£ i 
a general assignment by a debtor was always regarded as a^conJ ' 
^ssion of his insolvenc y, and it has sometimes been decided thai 
such an assignment made by a person who was not insolvent at 
the time, or did not suppose himself to be insolvent, was void, as4 
manifesting an intent to hinder and delay creditors in the col-| 
lection of their debts. Some of these decisions are referred to 
in Van Nest v. Yoe, 1 Sandf . Ch. 4. Apparently what Congress 
intended by the amendment was to place a receivership, whether 
the appointment was procured by the initiation of the insolvent 
or whether it was procured by the application of his creditors, 
upon the same footing as a general assignment by an insolvent, 
and, when it had occurred, to permit the courts of bankruptcy 
to administer the estate, and have it distributed conformably 
with all the provisions of the bankrupt act. It will be observed 
that the first of the amendatory provisions confines the act of 
bankruptcy to the appointment of a receiver or trustee upon the 
application of the insolvent, while the second is a broader pro- 
vision, and applies whenever a receiver or trustee has been put 
in charge of the insolvent's property ''because of insolvency." 
The petition for an adjudication did not allege such an act of 
bankruptcy as is enumerated in the first of these provisions, and 
the question to be considered consequently, is whether the proofs 



376 PREREQUISITES TO ADJUDICATION 

sustain the averment of the petition that a receiver had been put 
in charge of Spalding's property "because of his insolvency." 
It appeared by the proofs that the receiver was appointed in an 
action brought by the corporation W. & J, Sloane, a creditor of 
Spalding, to set aside a conveyance and transfer of certain real 
and personal property of Spalding, made, as was alleged, with 
intent to hinder, delay, and defraud his creditors, and particu- 
larly the plaintiff. The plaintiff made application to the Su- 
preme Court for the appointment of a receiver pendente liie, 
and the order appointing the receiver, in granting the applica- 
tion, recites the ground for the appointment as follows : 

"That the plaintiff is a judgment creditor of the defendant, 
Robert H. Spalding, and that its executions against his property 
issued by its judgments have been returned wholly unsatisfied; 
that the defendant, Robert H. Spalding, has been conveying, 
mortgaging, and otherwise disposing of his property in fraud of 
the plaintiff's rights and just demands, and is threatening to 
make further conveyances and dispositions thereof in fraud of 
the rights and just demands of the plaintiff." 

Giving subdivision a (4) the construction which its language 
demands, we are of the opinion that it does not make a receiver- 
ship an act of bankruptcy unless it was procured upon the appli- 
cation of the insolvent himself, and while insolvent ; and does not 
make the putting a receiver in charge of the property of an in- 
solvent an act of bankruptcy unless this was done because of 
insolvency ; and if the latter provision applies to any case where 
the trustee has not been put in charge pursuant to some statute 
of the state, or a receiver put in charge by a court acting under 
statutory authority, it certainly applies only when this has been 
done because of insolvency. In most of the states statutory 
provisions"exist"conferring jurisdiction upon designated courts 
for the appointment of receivers. The statutes of New York 
authorize the appointments of receivers of corporations in cases 
of insolvency, but there is no statute authorizing the appoint- 
ment by any court of a receiver of the property of an individual 
merely upon the ground of his insolvency. The appointment in 
the present case was doubtless made pursuant to § 713 of the 
Code of Civil Procedure, which authorizes the appointment of a 
receiver of "the property which is the subject of the action,** 
upon the application of a party who establishes an "apparent 
right to or interest in the property, where it is in the possession 



ADMISSION IN WRITING 377 

of an adverse party ' ' and when its custody by a receiver becomes 
expedient. 

Inasmuch as in the present case the receiver was not appointed 
upon the application of Spalding, it is immateri al whether 
Spalding was at the time insolvent. It is also immaterial that 
the plaintiff in the action may have alleged as one of the evi- 
dential facts of fraud that Spalding was insolvent. It suffices 
that the court in exercising its authority did not purport to do 
so upon that ground, and that the order appointing the receiver 
and reciting the grounds for the action of the court is conclusive 
to the contrary. The receiver was appointed because the court 
found that Spalding had disposed and was threatening to dis- 
pose of his property with intent to defraud the plaintiff in the 
action and other creditors, and assigned this as the only ground 
for its action in putting a receiver in charge of his property. 
If the court had merely appointed a receiver, without reciting 
the grounds of its judgment, the record could have been referred 
to, or the grounds shown by evidence aliunde. Russell v. Place, 
94 U. S. 608, 24 L. ed. 214 ; Davis v. Brown, 94 U. S. 428, 429, 24 
L. ed. 204. But, having recited the grounds, the recitals cannot 
be contradicted without impeaching the record; and this is in- 
admissible. In re Watts, 190 U. S. 35, 23 Sup. Ct. 718, 47 L. 
ed. 933. That the appointment of a receiver under the circum- 
stances of this case is not such an act of bankruptcy as is con- 
templated by subdivision a (4) is enforced by the consideration 
that such acts as led to the appointment are of themselves acts 
of bankruptcy by the terms of subdivision a(l) of § 3. It is 
not to be presumed that Congress intended to amend the section 
so as to create as an additional act of bankruptcy, one which was 
already included in the section. * * » 

The adjudication of bankruptcy is reversed, with costs, and 
with instructions to dismiss the petitions of the original and in- 
tervening creditors for an adjudication of bankruptcy. 

5. ADMISSION IN WRITING ^ D -t^ 

IN RE WILMINGTON HOSIERY CO. ' 

120 Fed. 179 

(District Court, D. Delaware. January 12, 1903) 

BRADFORD, D. J. This is a motion to dismiss a petition in 
involuntary bankruptcy filed against the Wilmington Hosiery 



378 PREREQUISITES TO ADJUDICATION 

Company, a corporation of Delaware. Only one alleged act of 
bankruptcy is set forth. It is as follows : 

"That said Wilmington Hosiery Company is insolvent and 
that within four months next preceding the date of this petition 
the said Wilmington Hosiery Company committed an act of 
bankruptcy in that it did heretofore, to- wit, on the 28th day of 
August, A. D. 1902, upon petition to the chancellor of the state 
of Delaware, praying for the appointment of receiver for said 
Wilmington Hosiery Company, on the ground of insolvency, 
acknowledged under the oath of its president that said insolvency 
existed and consented to the appointment of such receiver on 
the ground of said insolvency, a certified copy of which petition 
with the answer thereto and the order of the chancellor thereon 
is hereunto annexed, and your petitioners pray may be taken as 
a part of this petition. ' ' 

The petition or bill in chancery contains the following aver- 
ment: 

* * That said respondent corporation has become, and is now, in- 
solvent and unable to pay its debts, and that it will be for the 
benefit of the stockholders and creditors of the said corporation, 
that a receiver be appointed for the purpose of preserving its 
assets, and properly adjusting its business and liabilities." 

It then prays for the appointment of such receiver. The com- 
pany in its answer admitted the truth of the above averment, 
and the chancellor thereupon appointed a receiver as prayed. 
It is properly conceded by the counsel for the petitioners that 
the petition in bankruptcy in its present form cannot be sus- 
tained unless what is alleged as an act of bankruptcy can be 
regarded as an admission by the company in writing of its in- 
ability to pay its debts and its willingness to be adjudged a 
bankrupt on that ground. But such a conclusion is wholly in- 
admissible. While the company admitted in writing its insol- 
vency it did not e xpres sly or by implication a dmit its willin g- 
negs tnbe J^r^judgert a. hanV-nrpt. In tact, although admitting the 
truth, of the averment of insolvency, it did not allege a willing- 
ness to have a receiver appointed; but, if its admission of in- 
solvency carried with it implied consent to the appointment of 
a receiver, the aspect of the case would not be materially dif- 
ferent. A written admission of insolvency and consent to have 
a receiver appointed by the chancellor cannot be regarded as a 
written admission of inability to pay debts and willingness to be 
adjudged bankrupt. No doctrine of equivalency is applicable in 



ADMISSION IN WRITING 379 

this connection. Further, to hold the one equivalent to and of 
the same effect as the other not only would be unwarranted by 
the language and meaning of the bankruptcy act, but would be 
calculated as a precedent to produce uncertainty and confusion 
in its administration. * * * The petition will be dismissed 
with costs. 



V 
V 






CHAPTER III 
ADMINISTRATION 



p^^^y-^,**-^ SECTION I 



RECEIVER 

BOONVILLE NAT. BANK v. BLAKEY 

107 Fed. 891, 47 C. C. A. 43 

(Circuit Court of Appeals, Seventh Circuit. April 9, 1901) 

On February 2, 1899, an involuntary petition in bankruptcy 
was filed against M. Falson, and on February 28th he was ad- 
judged a bankrupt. On March 7th (no trustee having been 
selected) the petitioning creditors asked for the appointment of 
a receiver upon three grounds: (1) That it was necessary for 
some person to take charge of the bankrupt's books, etc., to pre- 
pare a list of creditors; (2) that the estate included realty need- 
ing immediate care and attention; (3) that the bankrupt had 
preferred certain creditors, and that the preferences should be 
recovered by a trustee or receiver. The court thereupon ap- 
pointed Blakey as receiver, who filed a bill in equity against 
several parties (including the Boonville National Bank and the 
People's State Bank) seeking to recover alleged preferences. 
The banks were decreed to pay certain sums to the receiver and 
appeal from the decree. See 95 Fed. 267. 

JENKINS, Circuit Judge [after discussing the timeliness of 
the appeal]. * * * 

The case involves the important question, patent upon the face 
of the bill, whether a receiver in bankruptcy, appointed before 
the selection of a trustee, can maintain suit to recover the 
amount of a preferential payment made by the debtor prior to 
the bankruptcy. * * * 

The authority for the appointment of a receiver in bankruptcy 
proceedings comes from the act and is limited by the act. The 
order of the court appointing him cannot be broader than the 
statute. The receiver is a statutory receiver, and not a general 

380 



RECEIVER 381 

receiver. The latter is appointed by a court of chancery by 
virtue of its inherent power, independent of any statute. His 
authority is derived from, and his duty prescribed by, the order 
of appointment, and he is called a common-law receiver. Herring 
V. Railroad Co., 105 N. Y. 340, 12 N. E. 763. A statutory re- 
ceiver is one appointed in pursuance of special statutory pro- 
visions. He derives his power from the statute, and to it must 
look for the duty imposed upon him. He possesses such power 
only as the statute confers, or such as may be fairly inferred 
from the general scope of the law of his appointment. We are 
therefore referred to the bankrupt act (30 Stat. c. 541) to as- 
certain the power of the bankruptcy court to appoint a receiver, 
and the extent of the power which the act confers upon him. 
By § 2, cl. 3, the courts of bankruptcy are invested with authority 
to "appoint receivers or the marshals upon application of parties 
in interest, m case the court shall find it absolutely necessary for 
the preservation of estates, to take charge of the property of 
the bankrupts after the filing of the petition and until it is dis- 
missed or the trustee is qualified, ' ' and to ( § 2, cl. 5 ) authorize 
the business of the bankrupts to be conducted for limited periods 
by receivers and marshals or trustees, if necessary, in the best 
interests of the estates. These are the sole provisions of the act 
which authorize a receiver and define his duties. There is, how- 
ever, another provision which may properly be considered in 
this connection. In ^ ^ 69 it is provided t hat before adjudication 
upon an involuntary petition, when it shall appear to the judge 
that the property of the alleged bankrupt is being neglected, so 
that it will deteriorate in value, a warrant may be issued to the 
marshal to seize and hold the property subject to further order, 
upon the petitioning creditors giving bond to indemnify the 
alleged bankrupt for the damages he shall sustain if such seizure 
shall be proved to have been wrongfully obtained, and the prop- 
erty, when seized, shall be released upon bond filed by the alleged 
bankrupt conditioned to turn over the property or its value in 
money to the trustee in the event of adjudication of bankruptcy. 
What, then, is the intent of the law with respect to the rights 
and powers of the receiver? The statute requires (§55) that 
the court shall cause the first meeting of creditors to be held not 
more than 30 days after the adjudication, and if, through mis- 
chance, the meeting should not be held within that time, the 
court shall fix the date as soon as may be thereafter when it shall 
be held. § 44 provides that creditors at their first meeting after 



382 ADMINISTRATION 

adjudication shall appoint a trustee, and, failing therein, the 
court shall do so. He is by § 70a vested by operation of law 
with the title as of the date of adjudication, except exemptions, 
to the property of the bankrupt, with power of sale and disposi- 
tion. Subdivision '*e" authorizes the trustee to avoid any trans- 
fer by the bankrupt of his property which any creditor might 
have avoided, and to recover the property so transferred or its 
value. § 60a defines a preference, and § 60& provides that a 
preference within four months of the filing of the petition to one 
having reasonable cause to believe that it was intended thereby 
to give a preference shall be voidable by the trustee, and he may 
recover the property so transferred or its value. We can now 
discover, as we think, the general purpose of this law. It was 
tl^at the property of the bankrupt should be vested in a trustee, 
toj be selected by creditors; that such officer should have the 
general control and management of the estate, and the right to 
recover for the benefit of creditors all property transferred in 
fraud of the act. It contemplated that between the filing of t he 
petition j jid jhe adjudication of bankruptcy an emergency might 
arise with respect to the care of the bankrupt 's property ; and, 
in involuntary cases, for the protection of the property in the 
interval between the filing of the petition and the adjudication, 
the bankruptcy court was authorized to direct the marshal to 
seize and hold the property pending adjudication. So, also, in 
voluntary or involuntary cases, when it was found absolutely 
necessary for the preservation of an estate, the court should 
appoint a receiver or the marshal to take charge of the property 
of the bankrupt until the petition is dismissed or the trustee is 
qualified. It plainly was not contemplated that the receiver or 
the marshal so designated should supersede the trustee or exer- 
cise the general powers conferred upon a trustee. There is no 
such power specifically conferred or any provision in the act 
from which such power can reasonably be implied. Such tempo- 
rary receiver, whether he be the marshal or another, is not a trus- 
tee for the creditors , but is a caretaker and custodian of the 
visible property pending adjudication and until a selection of a 
trustee. If in any sense a trustee, he is trustee for the bank rupt, 
in whom is the title to the property until it passes by operation 
of law as of the date of adjudication to the trustee selected by 
the creditors. The duty required and the power conferred clearly 
are that the receiver or the marahal should take possession of 
property that would otherwise go to waste, and hold it and pre- 



RECEIVER 383 

serve it, so that it might come to the trustee, when selected, with- 
out needless injury. There might also be an occasion when the 
business of the bankrupt ought not, in the interest of the credit- 
ors, to be temporarily suspended, as for example in the case of a 
hotel or other business, where the value of the good wiU required 
that it should be kept a going concern until the trustee should 
be appointed, and for a limited time after the trustee was ap- 
pointed, that he might dispose of it profitably for the creditors. 
We fail to find any provision in thi s Jaw which sanctions t he 
bringing o f a suit bv a receiver to rec over a preferential pay_2 
ment to a creditor. Such a right does not come within the pur- 
p^e tor wJiicli a receiver is authorized, and is neither expressly 
nor impliedly sanctioned. A preferential payment to a creditor 
could not be recovered back by the bankrupt. It could not be 
gainsaid by a creditor, unless through the trustee and under the 
bankrupt act. The transaction is not void even under the act. 
It is voidable m erel y, and voidable only by the trustee . The 
payment is not inherently wrong, being in discharge of an honest 
debt. The trustee, as representative of and in the interest of all 
the creditors, and not of the petitioning creditors alone, is to 
determine in the first instance whether the payment was made 
with a view to give a preference, and whether the creditor re- 
ceiving payment had reasonable cause to believe that it was so 
and if proof is forthcoming. He is to ascertain the facts and to 
determine the probability of successful litigation, and whether 
the creditor sought to be pursued is responsible, so that the 
estate should not be mulcted in unnecessary litigation and costs. 
The receiver or marshal is, in the contemplation of the act, 
merely the temporary custodian selected to take possession of 
visible property liable to waste, and to conserve it until the 
trustee shall be selected by the creditors within the 30 days 
limited, or appointed by the court ; but he is vested with no right 
to avoid a transaction which by the act is specifically given to 
the trustee, and which, but for the act, would not exist. It is 
not within the spirit or letter of the law that the necessity of a 
trustee should be superseded. It is required that at the earliest 
opportunity — at the first meeting of creditors — he should be 
selected. If the creditors therein fail, the duty upon the court 
is imperative — not permissive — to appoint one. The receiver or 
marshal takes possession of the visible property of the bankrupt 
for delivery to the trustee, — not to pursue the debtors of the 



384 ADMINISTRATION 

estate, not to enforce rights of action vested in the trustee alone, 
not to involve the estate in possibly unnecessary litigation. 

We think we should do violence to both the letter and the 
spirit of the act to enlarge the functions of a mere temporary 
custodian, and to construe the law as vesting him with functions, 
powers, and duties which are clearly not contemplated by the 
act. It follows, therefore, that the receiver had no right to de- 
clare void the payments in question and no right to recover the 
sums demanded. That can only be done by the trustee ; for in 
no other officer is the right vested. We do not say that the re- 
ceiver may not, by suit or otherwise, assert or defend his pos- 
session of the visible property which the law has placed in his 
custody. That question is not before us. But he cannot usurp 
the functions of a trustee and avoid payments to creditors when 
no right so to do is conferred by the law. 

* * * the decree is reversed and the cause is remanded, 
with directions to dismiss the bill. * * * 



. {^C^ SECTION II 

Q^ir ' PROVABLE CLAIMS 

i^jk^ A. In General 



|1 



WETMORE v. MARKOE (formerly Wetmore) 

196 U. S. 68, 49 L. ed. 390, 25 Sup. Ct. 172 

(United States Supreme Court. December 19, 1904) 



On June 12, 1890, an action for divorce and alimony was 
begun by Annette B. W. Wetmore, wife of the plaintiff in error, 
in the Supreme Court of the state of New York, and on April 1, 
1892, at special term, the plaintiff in error was found guilty of 
adultery as charged in the complaint, and a divorce was granted 
upon that ground to the defendant in error. The divorce was 

Ancillary Beceiverships. — Before courts of bankruptcy with jurisdic- 

the amendment of 1910 the courts tion to "exercise ancillary jurisdic- 

were not agreed as to the ju- tion over persons or property within 

risdiction of bankruptcy courts to their respective territorial limits in 

appoint ancillary receivers or to en- aid of a receiver or trustee ap- 

tertain ancillary proceedings gener- pointed in any bankruptcy proceed- 

ally. See Collier on Bankruptcy, ings pending in any other court of 

(10th ed.), 26. §2, clause 20, of bankruptcy. " The amendment would 

the bankruptcy act now invests the seem to settle the controversy. 



PROVABLE CLAIMS 385 

absol ute^ and awarded to the wife the custody and care of the 
three minor children of the marriage, and also, as alimony, the 
sum of $3,000 per annum so long as she should live, to be paid 
in quarterly instalments of $750 each on the first day of the 
months of July, October, January, and April of each year. 
There was also granted to the wife the sum of $3,000 annually, 
being $1,000 for the education and maintenance of each of the 
three minor children, to be paid in quarterly instalments, until 
such children should arrive at the age of twenty-one years re- 
spectively. Plaintiff in error was also required to give security 
for the payment of the alimony awarded. The decree did not 
reserve any right of subsequent modification or amendment. On 
January 13, 1899, there was due to the wife from the plaintiff 
in error, for arrears in alimony and allowance under the decree, 
the sum of $19,221.60. Upon that day, upon application to the 
District Court of the United States for the eastern district of 
Pennsylvania, the plaintiff in error was adjudicated a bankrupt. 
The defendant in error made no proof of her claim for alimony 
in the bankrupt proceedings. On June 21, 1900, the plaintiff 
in error was granted a discharge from all debts and claims 
provable under the bankruptcy act. On December 12, 1901, 
plaintiff in error sued out a writ in the Supreme Court of the 
state of New York for an order enjoining and restraining all 
proceedings on behalf of the defendant in error for the collec- 
tion of the arrears of alimony and allowance aforesaid. This 
application was denied, upon the ground, as it appears from 
the memorandum of the judge who rendered the decision, that 
the arrears of alimony were not discharged in bankruptcy. 
From the order denying the application an appeal was taken by 
the plaintiff in error to the appellate division of the Supreme 
Court of the state of New York, where the order below was 
affirmed, 72 App. Div. N. Y. 620. The plaintiff in error there- 
upon appealed to the Court of Appeals of the state of New York, 
and on June 27, 1902, the appeal was dismissed for want of juris- 
diction, without any judgment of affirmance or reversal upon the 
merits, 171 N, Y. 690. A writ of error was sued out seeking in 
this court a reversal of the judgment of the Supreme Court of 
the state of New York. 

Mr. Justice DAY, after making the foregoing statement, de- 
livered the opinion of the court : 

It is conceded in ar'gumfent by counsel for the plaintiff in 

H. & A. Bankruptcy — 25 



386 ADMINISTRATION 

error that this case would be within the decision of this court 
in Audubon v. Shufeldt, 181-U. S. 575, 45 L. ed. 1010, 21 Sup. 
Ct. Rep. 735, if the judgment for alimony had been rendered 
in a court having control over the decree with power to amend 
or alter the same. It is insisted, however, that, there being in 
this case no reservation of the right to change or modify the 
decree, it has become an absolute judgment, beyond the power 
of the court to alter or amend, and is therefore discharged by 
the bankruptcy proceedings. Walker v. Walker, 155 N. Y. 77, 
49 N. E. 663 ; Livingston v. Livingston, 173 N. Y. 377, 61 L. R. 
A. 800, 93 Am. St. Rep. 600, 66 N. E. 123. It may be admitted 
to be the effect of these decisions of the New York Court of 
Appeals that, in the absence of any reservation of the right to 
modify or amend, the judgment for alimony becomes absolute. 
The question presented for decision, in view of this state of the 
law is. Has the decree become a fixed liability evidenced by a 
judgment, and therefore provable against the estate of the bank- 
rupt, within the protection of the discharge in bankruptcy? 
§ 63 of the act of 1898 provides : 

"§ 63. Debts which may be proved: 

"a Debts of the bankrupt may be proved and allowed against 
his estate which are (1) a fixed liability as evidenced by a judg- 
ment or an instrument in writing, absolutely owing at the time 
of the filing of the petition against him, whether then payable 
or not, with any interest thereon which would have been re- 
coverable at that date, or with a rebate of interest upon such 
as were not then payable and did not bear interest." [30 Stat. 
at L. 562, c. 541, U. S. Comp. Stat. 1901, p. 3447.] 
/ It is not contended that this section includes instalments of 
alimony becoming due g,fter_t he adjudication, but the conten- 
[tion is that prior instalments have become an existing liability, 
evidenced by the judgment, and therefore a provable debt. 
While this section enumerates under separate paragraphs the 
kind and character of claims to be proved and allowed in bank- 
ruptcy, the classification is only a means of describing ''debts" 
of the bankrupt which may be proved and allowed against his 
estate. 

The precise question, therefore, is, Is such a judgment as the 
one here under consideration a debt within the meaning of the 
act? The mere fact that a judgment has been rendered does 
not prevent the court from looking into the proceedings with a 
view of determining the nature of the liability which has been 



PROVABLE CLAIMS 387 

reduced to judgment. Boynton v. Ball, 121 U. S. 457, 466, 30 
L. ed. 985, 987, 7 Sup. Ct. Rep. 981. The question presented is 
not altogether new in this court. In the case of Audubon v. 
Shufeldt, 181 U. S. 577, 45 L. ed. 1010, 21 Sup. Ct. Rep. 736, 
Mr. Justice Gray, delivering the opinion of the court said : 

"Alimony does not arise from any business transaction, but 
from the relation of marriage. It is not founded on contract, 
express or implied, but on the natural and legal duty of the hus- 
band to support the wife. The general obligation to support is 
made specific by the decree of the court of appropriate juris- 
diction. Generally speaking, alimony may be altered by that 
court at any time, as the circumstances of the parties may re- 
quire. The decree of a court of one state, indeed, for the present 
payment of a definite sum of money as alimony, is a record 
which is entitled to full faith and credit in another state, and 
may, therefore, be there enforced by suit. Barber v. Barber 
(1858), 21 How. 582, 16 L. ed. 226; Lynde v. Lynde (1901), 
181 U. S. 183, 45 L. ed. 810, 21 Sup. Ct. Rep. 555. But its 
obligation in that respect does not affect its nature. In other 
respects, alimony cannot ordinarily be enforced by action at law, 
but only by application to the court which granted it, and sub- 
ject to the discretion of that court. Permanent alimony is re- 
garded rather as a portion of the husband's estate to which the 
wife is equitably entitled than as strictly a debt; alimony from 
time to time may be regarded as a portion of his current income 
or earnings; and the considerations which affect either can be 
better weighed by the court having jurisdiction over the rela- 
tion of husband and wife than by a court of a different juris- 
diction. ' ' 

In the same opinion Mr. Justice Gray quoted from Barclay v. 
Barclay, 184 111. 375, 51 L. R. A. 351, 56 N. E. 636, in which 
case it was adjudged that alimony could not be regarded as a 
debt owing from husband to wife, which might be discharged 
by an order in bankruptcy, whether the alimony accrued before 
or after the proceedings in bankruptcy : 

' ' The liability to pay alimony is not founded upon a contract, 
but is a penalty imposed for a failure to perform a duty. It is 
not to be enforced by an action at law in the state where the 
decree is entered, but is to be enforced by such proceedings as 
the chancellor may determine and adopt for its enforcement. 
* * * It may be enforced by imprisonment for contempt, 
without violating the constitutional provision prohibiting impris- 



388 ADMINISTRATION 

omnent for debt. The decree for alimony may be changed from 
time to time by the chancellor, and there may be such circum- 
stances as would authorize the chancellor to even change the 
amount to be paid by the husband, where he is in arrears in pay- 
ments required under the decree. Hence, such alimony cannot 
be regarded as a debt owing from the husband to the wife, and, 
not being so, cannot be discharged by an order in the bankruptcy 
court. ' ' 

It is true that, in the cases referred to, the decrees were ren- 
dered in courts having continuing control over them, with power 
, to alter or amend them upon application ; but this fact does no t 
j chang e t he essential ch aracter ofj^he ^ability, nor det erpaine 
/ whether a claim for aji mony isTm ^ite ^atu re, cont ractual so as 
I lolnake it a~debt. The court having power to look behind the 
judgment, to determine the nature and extent of the liability, 
the obligation enforced is still of the same character notwith- 
standing the judgment. We think the reasoning of the Audu- 
bon Case recognizes the doctrine that a decree awarding alimony 
to the wife or children, or both, is not a debt which has been 
put in the form of a jud gm ent^ but is rather a legal_ means of 
enfor cing the obligation_of_theji usband and father to suppor t 
and maintain his wife and children. He owes this duty, not 
because of any contractual obligation, or as a debt due from 
him to the wife, but because of the policy of the law which im- 
poses the obligation upon the husband. The law interferes 
when the husband neglects or refuses to discharge this duty, and 
enforces it against him by means of legal proceedings. 

It is true that in the state of New York at the time this decree 
was rendered there was no power to modify or alter the decree 
for alimony and allowance in the absence of special reservation. 
But this does not change the grounds upon which the courts of 
the state proceeded in awarding the alimony and allowances. 
In the case of Romaine v. Chauncey, 129 N. Y. 566, 14 L. R. A. 
712, 26 Am. St. Rep. 544, 29 N. E. 826, it was held that alimony 
was awarded, not in the payment of a debt, but in the per- 
formance of the general duty of the husband to support the 
wife. This case was quoted with approval by Mr. Justice Gray 
in Audubon v. Shufeldt, 181 U. S. 575, 45 L. ed. 1009, 21 Sup. 
Ct. Rep. 735. 

In Walker v. Walker, 155 N. Y. 77, 49 N. B. 663, and Living- 
ston V. Livingston, 173 N. Y. 377, 61 L. R. A. 800, 93 Am. St. 
Eep. 600, 66 N. E. 123, the effect of the holdings is that a judg- 



PROVABLE CLAIMS 389 

raent for alimony, in the absence of reservation, is a fixed and 
unalterable determination of the amount to be contributed to the 
wife's support after the decree, and is beyond the power of the 
court to change even under the authority of subsequent legis- 
lation. These cases do not modify the grounds upon which ali- 
mony is awarded, and recognize that an alimony decree is a 
provision for the support of the wife, settled and determined by 
the judgment of the court. 

In the case of Dunbar v. Dunbar, decided by this court at the 
October term, 1902 (190 U. S. 340, 47 L. ed. 1084, 23 Sup. Ct. 
Rep. 757), it was held that a contract made after divorce be- 
tween husband and wife, by which the former agreed to pay the 
latter a certain sum of money annually for her support during 
her life, or so long as she remained unmarried, and also to pay 
a certain sum of money to her annually for the support of the 
minor children of the marriage, whose custody was awarded to 
the mother, was not discharged by a subsequent proceeding and 
discharge in bankruptcy. It was further held that the sum 
agreed to be paid for the support of the minor children was but 
,.a recognition of the liability of the father for their support, and 
that the fact tliat the annual instalments were made payable to 
the wife made no difference in the character of the obligation. 
Of this feature of the contract the court, speaking by Mr. Jus- 
tice Peckham, said: 

"In relation to that part of the husband's contract to pay for 
the support of his minor children until they respectively be- 
come of age, we also think that it was not of a nature to be 
proved in bankruptcy. At common law, a father is bound to 
support his legitimate children, and the obligation continues 
during their minority. We may assume this obligation to exist 
in all the states. In this case the decree of the court provided 
that the children should remain in the custody of the wife, and 
the contract to contribute a certain sum yearly for the support 
of each child during his minority was simply a contract to do 
that which the law obliged him to do; that is, to support his 
minor children. * * * ^q think it was not the intention of 
Congress, in passing a bankruptcy act, to provide for the release 
of the father from his obligation to support his children by his 
discharge in bankruptcy, and if not, then we see no reason why 
his contract to do that which the law obliged him to do should 
be discharged in that way. As his discharge would not in any 
event terminate his obligation to support his children during 



390 ADMINISTRATION 

their minority, we see no reason why his written contract 
acknowledging such obligation and agreeing to pay a certain 
sum (which may be presumed to have been a reasonable one) in 
fulfilment thereof should be discharged. It is true his prom- 
ise is to pay to the mother ; but on this branch of the contract it 
is for the purpose of supporting his two minor children, and he 
simply makes her his agent for that purpose." 

"We think this language is equally applicable to the present 
case in that aspect of the decree which provides for the support 
of the minor children. The obligation continues after the dis- 
charge in bankruptcy as well as before, and is no more than the 
duty devolved by the law upon the husband to support his 
children, and is not a debt in any just sense. 

It is urged that the amendment of the law made by the act 
of February 5, 1903 [32 Stat, at L. 797, c. 487], excepting from 
the operation of a discharge in bankruptcy a decree for alimony 
due or to become due, or for the maintenance and support of 
the wife and minor children, is a legislative recognition of the 
fact that, prior to the passage of the amendment, judgments for 
alimony would be discharged. In Dunbar v. Dunbar, 190 U. S. 
340, 47 L. ed. 1084, 23 Sup. Ct. Rep. 757, it was said that this 
amendment, while it did not apply to prior cases, may be referred 
to for the purpose of showing the legislative trend in the direc- 
tion of not discharging an obligation of the bankrupt for the 
support and maintenance of wife and children. The amendment 
may also have been passed with a view to settling the law upon 
this subject, and to put at rest the controversies which had arisen 
from the conflicting decisions of the courts, both state and Fed- 
eral, upon this question. Indeed, in view of the construction 
of the act in this court in Audubon v. Shufeldt, 181 U. S. 575, 
45 L. ed. 1009, 21 Sup. Ct. Rep. 735, it may be said to be merely 
declaratory of the true meaning and sensp^ <»f-the statute. United 
States V. Freeman, 3 How. 556, 11 L. ed. 724; Bailey v. Clark, 
21 Wall. 284, 288, 22 L. ed. 651, 653 ; Cope v. Cope, 137 U. S. 
682, 684, 34 L. ed. 832, 834, 11 Sup. Ct. Rep. 222. The bank- 
ruptcy law should receive such an interpretation as will effectuate 
its beneficent purposes, and not make it an instrument to deprive 
dependent wife and children of the support and maintenance 
due them from the husband and father, which it has ever been 
the purpose of the law to enforce. Systems of bankruptcy are 
designed to relieve the honest debtor from the weight of in- 
debtedness which has become oppressive, and to permit him to 



PROVABLE CLAIMS 391 

have a fresh start in business or commercial life, freed from the 
obligation and responsibilities which may have resulted from 
business misfortunes. Unless positively required by direct enact- 
ment the courts should not presume a design upon the part of 
Congress, in relieving the unfortunate debtor, to make the law 
a means of avoiding enforcement of the obligation, moral and 
legal, devolved upon the husband to support his wife and to 
maintain and educate his children. While it is true in this ease 
the obligation has become fixed by an unalterable decree so far 
as the amount to be contributed by the husband for the support 
is concerned, looking beneath the judgment for the foundation 
upon which it rests, we find it was not decreed for any debt of 
the bankrupt, but was only a means designed by the law for 
carrying into effect, and making available to the wife and chil- 
dren, the right which the law gives them as against the husband 
and father. 

We find no error in the judgment of the Supreme Court of 
the state of New York, and the same is affirmed.^ 

ZAVELLO V. REEVES et al. 

227 U. S. 625, 57 L. ed. 676, 33 Sup. Ct. 365 

(United States Supreme Court. February 24, 1913) 

Mr. Justice PITNEY delivered the opinion of the court : 
Defendants in error sued plaintiff in error November 22, 1907, 
in the City Court of Birmingham, Alabama, declaring upon the 
common counts for moneys due December 10, 1906, and Febru- 
ary 19, 1906, and by an amendment declared upon a promissory 
note for about $250, which was a part of a claim of the defend- 
ants in error that antedated the bankruptcy of the plaintiff in 
error. The defendant (now plaintiff in error) pleaded that on 
November 22, 1905, he filed in the District Court of the United 
States for the northern district of Alabama, his petition in bank- 
ruptcy ; that said court had jurisdiction of said bankruptcy pro- 
ceedings, and duly adjudicated him a bankrupt on that date; 
that subsequently he offered a composition to his creditors, and 
the offer was accepted and a composition made in said proceed- 
ings and duly confirmed by said District Court February 6, 1906, 

1 — See In re Moore, 111 Fed. Co., 188 Fed. 861; James v. Gray, 
145; In re Southern Steel Co., 183 131 Fed. 401. 
Fed. 498; In re Spot-Cash Hooper 



392 



ADMINISTRATION 



r.^ 



a certified copy of the decree of confirmation being attached to 
and made a part of the plea ; that the plaintiffs were then cred- 
itors of the bankrupt, and as such accepted the offer of compo- 
sition and were paid a dividend thereon; that the claim sued 
on herein is a part of and was included in said claim on which 
said dividend was paid, and the claim herein is barred by said 
proceedings and discharged by said composition. The plaintiffs 
replied, (a) that on January 1, 1906 (which date was after the 
adjudication and before the discharge), defendant promised that 
if plaintiffs would lend him $500 for use in paying the considera- 
tion of a composition with his creditors in said bankruptcy pro- 
ceedings, he, defendant, when said composition was confirmed, 
would pay plaintiffs the balance of the demand sued on, after 
deducting therefrom plaintiffs ' share of the consideration of such 
composition; and plaintiffs averred that they accepted defend- 
ant's said offer and promise, and did so lend him the said sum 
of $500 for the said purpose; and (b) for further replication, 
that ^ter the filing of defendant's said petition in bankruptcy, 
and after he had been adjudged a bankrupt, defendant promised 
plaintiffs that he would pay what he owed them, being the same 
demand sued on herein, when his composition in bankruptcy was 
confirmed, and that plaintiffs accepted said promise. To these 
replications the defendant demurred. The City Court overruled 
the demurrers and proceeded to a trial of the issues of fact, which 
resulted in favor of the plaintiffs upon both the common counts 
and the note. The defendant appealed to the Supreme Court of 
Alabama, which affirmed the judgment. 171 Ala. 401, 54 So. 654. 
Whereupon he sued out the present writ of error. 

The case is brought here under § 709, Rev. Stat. (U. S. Comp. 
Stat. 1901, p. 575), the contention being that a right or immunity 
set up and claimed by the plaintiff in error under the Federal 
bankruptcy act was denied by the State Court. See Linton v. 
Stanton, 12 How. 423, 13 L. ed. 1050 ; Mays v. Fritton, 131 U. S. 
cxiv, Appx. and 21 L. ed. 127 ; Hill v. Harding, 107 U. S. 631, 
27 L. ed. 493, 2 Sup. Ct. Rep. 404 ; Rector v. City Deposit Bank, 
200 U. S. 405, 50 L. ed. 527, 26 Sup. Ct. Rep. 289. 

It is not contended that the record imports a secret or fraudu- 
lent agreement between the bankrupt and the plaintiffs at the 
expense of other creditors. The State Court construed the repli- 
cations as not averring secrecy or fraud, saying (171 Ala. 408) : 
' * That an advantage accrued to plaintiffs as the result of the loan 
is true ; but that it came as a result of fraud, collusion, or extor- 



PROVABLE CLAIMS 393 

tion, cannot be read from these replications. On the contrary, 
the advantage, so far as the pleadings show, was the result of 
the advancement made by way of the loan described. There is 
nothing in the replications on which to rest a conclusion that any- 
thing other than the loan induced the promise relied on for recov- 
ery here. ' ' 

This construction of the pleadings is not disputed here. We 
therefore are not in this ease concerned with the general equi- 
table principle that composition agreements are invalid if based 
upon or procured by a secret arrangement with one or more fa- 
vored creditors, in violation of the equality and reciprocity upon 
which such an agreement is avowedly based. Story, Eq. Jur. 9th 
ed. §§ 378, 379; Clarke v. White, 12 Pet. 178, 199, 9 L. ed. 1046, 
1055; Wood V. Barker, L. R. 1 Eq. 139, 35 L. J. Ch. N. S. 276, 
11 Jur. N. S. 905, 13 L. T. N. S. 318, 14 Week. Rep. 47 ; McKewan 
V. Sanderson, L. R. 20 Eq. 65, 44 L. J. Ch. N. S. 447, 32 L. T. 
N. S. 385, 23 Week. Rep. 607 ; Bissell v. Jones, L. R. 4 Q. B. 49, 
9 Best & S. 884, 38 L. J. Q. B. N. S. 2, 19 L. T. N. S. 262, 17 
Week. Rep. 49 ; Ex parte Nicholson, L. R. 5 Ch. 332, 22 L. T. N. 
S. 286, 18 Week. Rep. 411 ; Crossley v. Moore, 40 N. J. L. 27, 34; 
Feldman v. Gamble, 26 N. J. Eq. 494; Dicks v. Andrews, 132 
Ga. 601, 604, 64 S. E. 788, 16 Ann. Cas. 1070. 

Of the questions raised, only three deserve notice. 

(1) It is contended that the transaction set up in the former 
of the two replications mentioned was in violation of the prohibi- 
tion of § 29&, cl. 5 of the bankruptcy act (30 Stat, at L. c. 541, 
pp. 544, 554, U. S. Comp. Stat. 1901, pp. 3418, 3433), which de- 
clares that "a person shall be punished, by imprisonment for 
a period not to exceed two years, upon conviction of the offense 
of having knowingly and fraudulently * * * extorted or 
attempted to extort any money or property from any person as 
a consideration for acting or forbearing to act in bankruptcy 
proceedings." It is sufficient to say that we are unable to see 
in this record anything of extortion or attempted extortion. 

(2) It is contended as to both replications that although a 
debt barred by discharge in bankruptcy may be revived by a 
new promise made after the discharge, this cannot be done by 
a new promise made in the interim between the adjudication 
and the discharge. 

It is settled, however, that a discharge, while releasing the 
bankrupt from legal liability to pay a debt that was provable in 
the bankruptcy, leaves him under a moral obligation that is 



394 ADMINISTRATION 

1 — sufficient to support a new promise t o pay the deb t. And in 
reason, as well as by the greater weight of authority, the date 
of the new promise is immaterial. The theory is that the dis- 
charge destroys the remedy, but not the indebtedness : that, ge]> 

- erally speaking, it relates to the inception of the proceedings , and 

the transfer of the bankrupt's estate for the benefit of creditors 
takes effect as of the same time ; that the bankrupt becomes a free 
man from the time to which the discharge relates, and is as com- 
petent to bind himself by a promise to pay an antecedent obliga- 
tion, which otherwise would not be actionable because of the 
discharge, as he is to enter into any new engagement. And so, 
under other bankrupt acts, it has been commonly held that a 
promise to pay a provable debt, notwithstanding the discharge, 
is as effectual when made after the filing of the petition and 
before the discharge as if made after the discharge. Kirkpatrick 
V. Tattersall, 13 Mees. & W. 766, 1 Car. & K. 577, 14 L. J. Exch. 
N. S. 209, 9 Jur. 214 ; Otis v. Gazlin, 31 Me. 567 ; Homthal v. 
McRae, 67 N. C. 21 ; Fraley v. Kelly, 67 N. C. 78 ; Hill v. Trainer, 
49 Wis. 537, 5 N. W. 926 ; Knapp v. Hoyt, 57 Iowa, 591, 42 Am. 
Rep. 59, 10 N. W. 925 ; Lanagin v. Nowland, 44 Ark. 84 ; Wiggin 
V. Hodgdon, 63 N. H. 39 ; Griel v. Solomon, 82 Ala. 85, 60 Am. 
Rep. 733, 2 So. 322 ; Jersey City Ins. Co. v. Archer, 122 N. Y. 
376, 25 N. E. 338. 

Our attention is not called to any decision in point arising 
under the present bankruptcy act ; but we deem it clear that the 
same rule should be applied. If there is any distinction between 
this and former acts that would require a different rule, it must 
arise from the time to which the discharge is made to relate. 
As to this, § 17 of the act of 1898 declares that "a discharge in 
bankruptcy shall release a bankrupt from all his provable debts, ' * 
with certain exceptions not now pertinent. For the definition of 
"provable debts" we are referred to §63, which is set forth 
in full in the margin.^ Of the several classes of liabilities, those 

2 — § 63. Debts Which May be would have been recoverable at that 

Proved. — a Debts of the bankrupt date or with a rebate of interest 

which may be proved and allowed upon such as were not then payable 

against his estate which are (1) a and did not bear interest; (2) due 

fixed liability, as evidenced by a as costs taxable against an involun- 

judgment or an instrument in writ- tary bankrupt who was at the time 

ing, absolutely owing at the time of the filing of the petition against 

of the filing of the petition against him plaintiff in a cause of action 

him, whether then payable or not, which would pass to the trustee and 

with any interest thereon which which the trustee declines to prose- 



PI^^OVABLE CLAIMS 395 

in clauses 1, 2, and 3 are in terms described as existing at or 
jbefore the filing of the petition.. Clause 5 relates to liabilities 
"founded upon provable debts reduced to judgment after the fil- 
ing of the petition, ' ' etc. ; plainly meaning that they arose before 
its filing. Clause 4 describes simply debts that are "founded 
upon an open account, or upon a contract, express or implied," 
not in terms referring to the time of the inception of the indebt- 
edness. But, readinjy the whole of § 63, and considering it i n 
connection with the spirit and purpose of the act, we deem it 
plain that the debts founded upon open account or upon con- 
tract, express or implied, that are provable under § 63a, cl. 4, 
include only such as existed at the time of the filing of the peti - 
tion in bankruptcy. This court in effect adopted that construc- 
tion when, in promulgating the General Orders and Forms in 
Bankruptcy, 1898, under the authority conferred by § 30, a form 
of discharge was prescribed (Forms in Bankruptcy, No. 59), by 
which it is ordered that the bankrupt "be discharged from all 
debts and claims which are made provable by said acts against 

his estate, and which existed on the — day of , A. D, , 

on which day the petition for adjudication was filed — him; ex- 
cepting such debts as are by law excepted from the operation of 
a discharge in bankruptcy. ' ' And the forms prescribed for proof 
of debts all declare that the indebtedness existed ' ' at and before 
the filing of the said petition." Forms 31 to 36, inclusive. The 
General Orders and Forms, etc., are to be found in 172 U. S. 
700-704, 43 L. ed. 1217, 1218, 18 Sup. Ct. Rep. xxxii.-xxxv. ; 32 
C. C. A. Ixvi.-lxix., 89 Fed. xlii.-xlv. ; 3 Foster, Fed. Pr. 4th ed. 
2526, 2559, 2572. 

The view above expressed as to clause 4 of § 63a is the same 
that has been generally adopted in the Federal District Courts. 
Re Burka, 104 Fed. 326 ; Re Swift, 50 C. C. A. 264, 112 Fed. 
315, 321 ; Re Adams, 130 Fed. 381 ; Coleman Co. v. Withoft, 195 

cute after notice; (3) founded upon rupt's application for a discharge, 

a claim for taxable costs incurred less costs incurred and interests ac- 

in good faith by a creditor before crued after the filing of the petition 

the filing of the petition in an ae- and up to the time of the entry of 

tion to recover a provable debt; such judgments. 

(4) founded upon an open account, b Unliquidated claims against the 

or upon a contract express or im- bankrupt may, pursuant to applica- 

plied; and (5) founded upon prov- tion to the Court, be liquidated in 

able debts reduced to judgments such manner as it shall direct, and 

after the filing of the petition and may thereafter be proved and al- 

before the consideration of the bank- lowed against his estate. 



396 ADMINISTRATION 

Fed. 250, 252; and see Re Roth, 31 L. R. A. (N. S.) 270, 104 
C. C. A. 649, 181 Fed. 667, 673. 

And so, upon the whole matter, we conclude that under the 
present act an express promise to pay a provable debt is good 
although made after the filing of the petition and before 
discharge. 

(3) What has been said disposes at the same time of the conten- 
tion that the promises set up in the two replications under con- 
sideration were discharged by the confirmation of the composition. 
As these obligations were entered into after the adjudication of 
bankruptcy, they were, of course, not provable under § 63, and 
only provable debts are discharged. 

With respect to the money loaned to the bankrupt for use in 
paying the consideration of the composition, it is perhaps worth 
while to remark that § 12 of the act, in prescribing the time and 
mode of offering terms of composition, plainly contemplates that 
a composition in money may be offered, and expressly prescribes 
that an application for the confirmation of a composition may be 
made after, but not before, "the consideration to be paid by the 
bankrupt to his creditors, and the money necessary to pay all 
debts which have priority, and the cost of the proceedings, have 
been deposited in such place as shall be designated by, and sub- 
ject to the order of, the judge. ' ' And the same section provides 
that "upon the confirmation of a composition the consideration 
shall be distributed as the judge shall direct, and the case dis- 
missed. ' ' 

The act, of course, contemplates that the bankrupt may acquire 
the money required for the purposes of the composition by the 
use of his credit. 

Judgment affirmed.^ »^^ * 

' jX -A ^itM' B. Tort Claims 

' /^ VC V^. CRAWFORD et al. v. BURKE 

^ ' " y^ 195 U. S. 176, 49 L. ed. 147, 25 Sup. Ct. 9 

-^' _^ ^ (United States Supreme Court. November 7, 1904) 

j^^ This was an_a ction injrover instituted September 10, 1897, in 

the Circuit Court of Cook county, Illinois, by Burke against 

3 — See In re Swift, 112 Fed. 315; Duquesne Incandescent Light Co., 
In re Neff, 157 Fed. 57; In re 176 Fed. 785. 



TORT CLAIMS 397 

Crawford & Valentine, plaintiffs in error, to recover damages for 
the wilful and fraudulent conversion of certain reversionary 
interests of the plaintiff in 550 shares of Metropolitan Traction 
stock. 

There were ten counts in the declaration. In each of the first 
five counts it was alleged that the 4ef eodant firm jof^Crawf ord & 
V alentine were stock brokers and dealers in investment securi- 
ties; that plaintiff employed the defendants as his brokers and 
agents to buy, hold, and carry stocks for him, subject to his 
order; that defendants had in their possession, or under their 
control, certain shares of the capital stock of the Metropolitan 
Traction Company, which they were holding^as^a^pledge and se- 
curity fOTjtbfi-jamount dlie them'^omlhe plaintiff on said stock ; 
that defendants wrongfully, wilfully, and fraudulently, and with- 
out his knowledge or consent, sold said shares of stock, and wil- 
fully and fraudulently, and with intent to cheat and defraud the 
plaintiff, converted p laintiff's reversionary interest in said stock 
to their use, whereby it was wholly lost. 

In each of the last five counts it was alleged that after defend- 
ants had wrongfully and fraudulently, and without plaintiff's 
knowledge or consent, sold the plaintiff's stock, and converted' 
t he proce eds _of such jales t o the ir own use, they~f alsely and 
fraudulently represented to him tha,t they still had the stock on 
hand and were carrymgj t for him ; that their correspondents in 
Philadelphia, where the stock had been bought, were calling upon 
them for further demands or margins, and that it therefore be- 
came necessary to call upon the plaintiff to make further pay- 
ments on the stock in order to comply with their correspondents' 
demands and to be secured against loss. It was averred in each 
of said counts that such representations were false and fraudu- 
lent, and by means thereof defendants obtained from the plain- 
tiff the aggregate sum of $10,800. 

To this declaration defendants pleaded not guilty, upon which 
issue was joined January 4, 1900, and on May 12, 1900, a jury 
trial was waived in writing. The case rested without action 
until January 3, 1901, when defendants filed their separate pleas 
of puis darrein continuance, setting up that on April 5, 1900, the 
defendants had_received their discharge in bankruptcy, in the 
District Court for the northern district in Illinois, and that plain- 
tiff's claims were provable and not excepted from the operation 
of such discharge. The plaintiff replied, denying that his claim 



398 ADMINISTRATION 

(was provable, and averred that the same was excepted from such 
operation. 

Notwithstanding the plea of puis darrein continna/nce, the 
plaintiff introduced evidence and proved the allegations in his 
declaration, and the amount of damages he had sustained. De- 
fendants were found guilty upon all the counts, and judgment 
entered against them. 

The ease was taken to the Appellate Court, where, it appear- 
ing that one of the justices had taken part in the trial of the 
case below, and that the two remaining justices were unable to 
agree upon the case, the judgment of the Circuit Court was 
affirmed. The judgment of the Appellate Court was also affirmed 
by the Supreme Court of Illinois (201 lU, 581, 66 N, E. 833), 
to review which judgment this writ of error was sued out, 

Mr. Justice BROWN, after making the foregoing statement, 
delivered the opinion of the court : 

A year after this case was put at issue, and upon the opening 
of the trial, defendants tiled their separate pleas puis darrein 
continuance, setting up their discharge in bankruptcy, and aver- 
ring that plaintiff's claim was a provable debt, and the discharge 

a complete defense, 
* • • 

But not%Adthstanding this, plaintiff was permitted to introduce 
evidence in proof of the fraud alleged in his declaration; and 
upon the conclusion of the trial the court found there had been 
a conversion of plaintiff's reversionary interest in the stock, for 
which he ' ' had a right to recover in trover, ' ' and that it was not 
such a debt as was barred by the bankruptcy act. Upon appeal 
to the Supreme Court it was held that it was not necessary to the 
judgment to decide whether the allegations of the declaration 
were admitted by the pleadings, as they were established by the 
proof which had been adduced by plaintiff, ''and, the proposi- 
tions held as law on that branch of the case being correct, judg- 
ment for plaintiff necessarily follows. ' ' That court also held that 
the case, being one of fraud, was not covered by the defendants* 
discharge in bankruptcy. 

The only Federal question involved in the ease is whether the 
Supreme Court of Illinois gave the proper effect to the dis- 
charge pleaded by the defendants. If plaintiff's claim was not 
a provable debt, or was expressly excepted from the operation 
of the discharge the decision of that court was right ; but if it 



TORT CLAIMS 



399 



was covered by the discharge, such discharge was a complete 
defense. 

§ 17 of the bankruptcy act of 1898 contains, among other 
things, the following provisions: 

" § 17. A discharge in bankruptcy shall release the bankrupt 
from all of his provable debts, e^ ^cept such as * * * (2) are ] 
judgments in actions for fraud sror~obtaining property by false 
pretenses or false representations, or for wilful and malicious ^ 
injuries to the person or property of another, * * * or (4) 
were created by his fraud, embezzlement, misappropriation, or 
defalcation while acting as an officer, or in any fiduciary ca- 
pacity." [30 Stat, at L. 550, c. 541, U. S. Comp. Stat. 1901, 
p. 3428.] 

Under this section, whether the discharge of the defendants 
in bankruptcy shall operate as a discharge of plaintiff's debt, it 
not having been reduced to judgment, depends upon the fact 
whether that debt was ' ' provable ' ' under the bankruptcy act, — 
that is, susceptible of being proved ; second, whether it was or was 
not created by defendant's fraud, embezzlement, misappropria- 
tion, or defalcation while acting as an officer or in any fiduciary 
capacity. 

1. Provable debts are defined by § 63, a copy of which appears 
in the margin.* Paragraph a of this section includes debts aris- 
ing upon contracts, express or implied, and open accounts, as 
well as for judgments and costs. As to paragraph b, two con- 
structions are possible: It may relate to all unliquidated de- 
mands, or only to such as may arise upon such contracts, express 
or implied, as are covered by paragraph a. 

Certainly paragraph ftjioes not embrace debts of an unliqui- 
dated character and which in their nature are not susceptible 
of being liquidated, Dunbar v. Dunbar, 190 U. S. 340, 350, 47 
LT~ed. 10E4, 1092, 23 Sup. Ct. Rep. 757. Whether the effect of 
paragraph 6 is to cause an unliquidated claim which is suscept- 
ible of liquidation, but is not literally embraced by paragraph a, 
to be provable in bankruptcy, we are not called upon to decide, 
as we are clear that the debt of the plaintiff was embraced within 
the provision of paragraph a, as one "founded upon an open 
account, or upon a contract, express or implied, ' ' and might have 
b£en proved under § 63a had plaintiff chosen to waive the tort, 
and take his place- with the other creditors of the estate. He 



4 — See note 2, supra. 



400 ADMINISTRATION 

did not elect to do this, however, but brought an action of trover, 
setting up a fraudulent conversion of his property by defendants. 
In the first five counts of his declaration he charges a fraudu- 
lent conversion of his interest in the stock, and, in the last five 
counts, that the defendants had induced him to make further 
payments on such stock in the way of margins, by false and fradu- 
lent representations. 

The question whether the claim thus set forth is barred by 
the discharge depends upon the proper construction of § 17, 
which declares that the discharge in bankruptcy relieves the bank- 
rupt from all of his "provable debts," except such as "* * * 
(2) are judgments in actions for frauds, or obtaining property 
by false pretenses, or false representations, or for wilful and 
malicious injuries to the person or property of another, • * * 
or (4) were created by his fraud, embezzlement, misappropri- 
ation, or defalcation while acting as an officer, or in any fiduciary 

capacity." 
* • * 

2. But it is strenuously insisted by the plaintiff that a claim 
for the conversion of personal property is not within the scope of 
§ 17, because it is not a "provable debt" within the definition of 
§ 63a. Did the latter section stand alone, there would be some 
ground for saying that a claim, though * ' founded upon an open 
account, or upon a contract, express or implied," would not be 
a provable debt, if plaintiff elected to treat the conversion as 
fraudulent, and sue in trover, though he might have chosen to 
waive the tort, and bring an action for a balance due on account. 
An early English case (Parker v. Crole, 5 Bing. 63, 2 Moore & 
P. 150) is cited to the effect that the operation of the discharge 
is determined by the election of the creditor to sue in assumpsit 
or case. A like ruling was made in certain cases under the bank- 
ruptcy acts of 1841 and 1867. Williamson v. Dickens, 27 N. C. 
(15 Ired. L.) 259; Hughes v. Oliver, 8 Pa. 426; Bradner v. 
Strang, 89 N. Y. 299-307. 

But we think that § GSa, defining provable debts, must be read 
in connection with § 17, limiting the operation of discharges, in 
which the provable character of claims for fraud in general is 
recognized, by excepting from a discharge claims for frauds 
which have been reduced to judgment, or which were commit- 
ted by the bankrupt while acting as an officer, or in a fiduciary 
capacity. If no fraud could be made the basis of a provable debt, 
why were certain frauds excepted from the operation of a dis- 



TORT CLAIMS 401 

charge? We are, therefore, of opinion that if a debt originates 
or is "founded upon an open account or upon a contract, ex- 
press or implied," it is provable against the bankrupt's estate, 
though the creditor may elect to bring his action in trover, as 
for a fraudulent conversion, instead of in assumpsit, for a bal- 
ance due upon an open account. It certainly could not have 
been the intention of Congress to extend the operation of the 
discharge under § 17 to debts that were not provable under 
§ 63a. It results from the construction we have given the latter ) 
section that all debts originating upon an open account or upon 
a contract, express or implied, are provable, though plaintiff 
elect to bring his action for fraud. ' 

In the case under consideration defendants purchased, un- 
der the instructions of the plaintiff, certain stocks, and opened 
an account with him, charging him with commission and inter- 
est, and crediting him with amounts received as margins. Sub- 
sequently, and without the knowledge of the plaintiff, they sold 
these stocks, and thereby converted them to their own use. With- 
out going into the details of the facts, it is evident that the plai n-l 
tiff might have sued them in an action on contract, charging them 
■'Jnth the money advanced and with the value of the stock; or in 
an action of trover, based upon their conversion. For reasons 
above given, we do not think that his election to sue in tort de- 
prived his debt of its provable character, and that, as there is no 
evidence that the frauds perpetrated by the defendants were com- j 
mitted by them in an official or fiduciary capacity, plaintiff's 
claim against them was discharged by the proceedings in bank- 
ruptcy. 

The judgment of the Supreme Court of Illinois is therefore 
reversed, and the case remanded to that court for further pro- 
ceedings not inconsistent with this opinion.^ - 

BROWN & ADAMS v. UNITED BUTTON C^'^^^-g,. 






149 Fed. 48, 79 C. C. A. 701 

(Circuit Court of Appeals, Third Circuit. November 10, 1906) 

ARCHBALD, District Judge. The question is whether a claim 
for unliquidated damages, resulting from injury to the property 

5— See Clarke v. Eogers, 228 U. S. ^S^\.%^*'^ 

534, 543, et seq.; Eeynolds v. N. Y. -7 A s-l^ 

Trust Co., 188 Fed. 611, 615. ^ f r-«^ 

H. & A. Bankruptcy — 26 ; 



402 ADMINISTRATION 

of another, not connected with or growing out of any con- 
tractual relation, is provable in bankruptcy. The appellants, 
Brown & Adams, are wool dealers in Boston, Mass., and have a 
warehouse there for the storage of wool which adjoins a building 
formerly used for a number of years by the United Button Com- 
pany, bankrupt, as a factory; the two being simply separated 
by a party wall. Wool in storage needs to be kept at a cool 
and even temperature; and the charge is that, by reason of 
excessive heat from the furnaces of the button company which 
penetrated through the party wall, the wool of the appellants 
was dried out and damaged, losing weight and depreciating in 
price in consequence, to the extent of some $12,000. The button 
company was put into bankruptcy in August, 1904, Just when, 
prior to this time, the damages which are claimed accrued, is 
not made clear, but it is fair to assume that some at least was 
within the year, and the case will be disposed of upon that basis. 
Claiming that the button company is liable for this loss, treat- 
ing it either as the result of negligen ce or nuisance, proof is 
sought to be made for it against the estate, liquidation of the 
damages being suggested through the medium of a bill in equity, 
now pending in the Superior Court for the county of Suffolk, 
Mass., brought by the appellants a^gainst the button company 
pand its trustee. The claim was rejected by the District Court 
' without passing upon the merits, upon the ground that it was 
not provable, and the propriety of that ruling is the question 
here. 

~~ Bankruptcy is supposedly concerned only with commercial 
matters, and was early confined to traders. Loveland, § 3. And, 
while it has been gradually extended and enlarged, the original 
idea has not been altogether departed from. Its purpose is to 
free a person from his debts or to subject him to proceedings on 
account of them. This may not be controlling, but it is sug- 
gestive ; and a construction which goes outside of it has certainly 
to be justified. 

By the bankruptcy act at present in force it is provided : 
"§63. Debts Which May Be Proved.— a. Debts of the bank- 
rupt may be proved and allowed against his estate which are 
(1) a fixed liability, as evidenced by a judgment or an instru- 
ment in writing, absolutely owing at the time of the filing of the 
petition against him, whether then payable or not, with any 
interest thereon which would have been recoverable at that 
date or with a rebate of interest upon such as were not then 



TORT CLAIMS 403 

pa^'able and did not bear interest; (2) due as costs taxable 
against an involuntary bankrupt who was at the time of the 
filing of the petition against him plaintiff in a cause of action 
which would pass to the trustee and which the trustee declines 
to prosecute after notice; (3) founded upon a claim for taxable 
costs incurred in good faith by a creditor before the filing of a 
petition in an action to recover a provable debt; (4) founded 
upon an open account, or upon a contract express or implied; 
and (5) founded upon provable debts reduced to judgments after 
the filing of the petition and before the consideration of the 
bankrupt's application for a discharge, less costs incurred and 
interest accrued after the filing of the petition and up to the 
time of the entry of such judgments." Act July 1, 1898, c. 541, 
30 Stat. 562 [U. S. Comp. St. 1901, p. 3447]. 

This to all intents is complete in itself, being given up to an 
enumeration and specification of the debts which may be proved. 
It is, however, further provided in this same section : 

''b. Unliquidated claims against the bankrupt may , pursu- 
ant to application to the court, be liquidated in such manner 
as it shall direct, and may thereafter be proved and allowed 
against his estate." 

As contradistinguished from the paragraph which precedes 
it, this subsection seems to be concerned with a mere matter of 
procedure, directing how a claim which is open and unsettled — 
such for instance as one "(4) founded upon an open account, 
or upon a contract express or implied" precedently specified — 
may be liquidated and made certain. And whether taken by 
itself, or with reference to the immediate context, this is the 
natural, if not the only, construction to be given to it. 

It is contended, however, by the appellants, that it is in fact 
intended to cover an ad