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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  an  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  judgment  recovered  against  him  in  the  circuit 
court  of  "Washington  county,  Mississippi,  December  12,  1892. 

The  amended  declaration  averred  the  execution  of  a  certain 
promissoryjDote  by  defejidaj^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  gjter  the  rendition  of  the_  judgment  in 
Mississippi,  defendant  changed  his  domicil  and  residence  to  the 
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,  fjLad^  his  voluntajy  ppt^tinn  in  bank- 
rupf/»yjn  the  district  court  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." 

_  Starges  V.  Crowninshield,  4  Wheat.  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  could 

recover  more  from  his  debtor  ^^^^  ^^^  iin exempted  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  be 
incompatible  with  fundamental  law,  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. 

Proceedings  in  bankruptcy  are,  generally  speaking,  in  thejp!^ 
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  '"'      -  0 

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  distrib^^^^""  amnng  \]\^m 
Av^  of  the  property  of  the  bankrupt.    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^transaction  is  void 
against  creditors  independently  jq£  the  pr^visiooa-X^the  Bank- 
]^pFAct,  its  valTdity  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  months  before   ^_ 

jhe  petition  in  bankruptcy  was  filed,  it  is,  to  the  assi^ee  iii_     ^  ^ 

bankruptcy,  a  closed  proceeding. 

The  counsel  of  the  plaintiffs  in  error  liaye  filed  an  elaborate^ 
argument  to  show  that  assignmentejor  the  benefit  of  creditorg^ 


generally  are  not  opposed  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  not-Xfifluired  for  the  digBOsdtion  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  thejerm.  ^f^  at 


16  JURISDICTION 

veyance.  There  is  nothing  in  the  act  resembling  an  insolvent 
law.  It  does  not  discharge  the  insolvent  from  arrest  or  impriijjon-  _ 
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  as  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^distribute  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  his,  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  creditors  "'^^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  barred  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  the^'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  discharge  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  bankruptcy,  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  from  his  assignees  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  equality  among  creditors  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  between  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  assignment  as  required  the  assignees, 

y  ^  m  the  distribution  of  the  proceeds,  to  conform  to  the  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 : 

The  New  Jersey  statute  of  April  16th,  1846,  the  validity  and 
effect  of  which  are  in  question,  is  aninsolvent  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,  and  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  settlin^_estates  in  the  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  byithe^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. 


0  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  arL afSdavjt__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  authorized ;  the  right  tc 
jpip  R  bond  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^^ 
tlus,  tEat  nothing  short  of  actual  proceedings  in  bankruptcy 
would  prevent  a  recourse  to  the  writ;  and  the_question  may, 
therefore  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  the  warrant  of  arrest  ia  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  for  a  better  junderstanding  of  Jheag 
proyisifing,  it  appears  that  injiig  jBetition  _to  the  courtfor_thg 
benefit  of  the  insolvent  Igjsa-tli^  debtor  is  tomaSe  a  statement 
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,  credjts, 
ahd  estate,  producing,  if  required,  his  books  and  papers  relating 
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,  as  well 
as  those  made  after  arrest  upon  civil  process  are  provided_for,  ' 
and  that  creditors,  upon  accepting  a  dividend  from  the  insolvent 
estate,  are  required  to  execute  releases.  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  of  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  discharge  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  petition  the  court  for  leave  to  assign  his  property  for  the,  c^ 
benefit  oi  creditors  to  be  administered  and  distributed  under    a^ 


^=^--^ 


the  direction  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  state,  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  arrest,  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  power,  butjts^ercisjgijjhjnb 
is  incompatible  with  the  exercise  of  the  samp  powpr  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  of  City 
and  County  of  San  Francisco,  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  on  in  givinc^  credit^ 
andto  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,  and  they 
supersede  all  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.  Law  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;   Continental 


//.* 


§=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  adjudicated  a  bankrupt  upon  a  creditors'  petition  filed  May 
3,  1899.  The  petition  states  that  "Emily  Plotke  has  for  the 
greater  portion  of  six  months  next  preceding_the  date  of  filing 
this  petition  had  her  principal  place  of  business  and  her  domi- 
cile at  Chicago, ' '  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  January  3,  1899,  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  court  is  wholly  without  jurisdiction  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  record  presents  two  questions,  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_appears  over  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  has  re- 
sided fiontinuouslv  in  the  state  of  Missouri  for  the  pfl^t,  ^?l  y^f^r^] 
that  she  carried  on  business  in  Chicago,  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  months,  and  of  no  place  of  business 
for  the  remaining  period  of  limitation,  establishes  a  case  within 
the  meaning  of  the  words  ''greater  portion  thereof,"  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  neither  of_these  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;tadft  byJegislatis^  amendment  only,  and  noLhy-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 
wbprphvJJI  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  former 

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  longest 
period  dnring  .such  six  months'':  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.  Where  jurisdiction  of  the  federal 
courts  is  made  dependent  upon  citizenship  or  other  specific 
fact,  "the  presumption  m  every  stage  oi  the  cause  is  that  it  is 


'without  their  jurisdiction,  unless  the  coijtrary  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  fails  to  show  that^  the  business  was 
^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^"***,^ 
city,  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  St.  Louis,  for  the  purpose  of  gain- 
ingaresidence  to  file  an  application  innSankrujptcy  in  the 
ISoiUhgrnlSStrigLQl  Illinois,  and  to_secure  his  discharge,  and 
With  the  intention  of  going  west  immediately  _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  jurisdiction.  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  which  and  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  intention  of  returning,  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  only,  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  sojourner  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,  1899,  suffered  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  their 
«^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  neither  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 
showjbhat  two  of  the  partners,  Blair  and  Stem,  had  their  onlx. 
place  of  business  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  from  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  doubtja  firm  is  sometimes  said  to  be 
insolvent  when  only  a  deficiency  of  joint  asselB  is'  meant.  But 
as  each  partner  is  liable  in  solido  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  petition  wa^  filftd  in  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 
objections  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- 
ifiended  an  adjudication. 

DODGE,  District  Judge.  *  *  *  There  is  no  dispute  that 
the  bankrupt  was  a  corporation  ^organized  under  the  laws,  of 
New  Jersey,  as  found  in  the  report.  Its  do^jgjle^theref ore  was 
not  in  Massachusetts.  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,  unless,  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  were  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  quarries  operated  were  situated,  eitherjn  VemnQpt 
or  New  York,  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,  ajmajority  of  whom  resided  in  Boston  during  the 
ne  Egrigd,  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 
was  employed,  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  banking  of  the  company  was  dqne  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  supervision  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,nd  most  of_thejC[uarries  rsfeij'ed  to  were  owned 
by  the  Mathews  Slate  Company,  a  corporatign^organized  under 

Jihelaws  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 
the  Mathews  Slate  Company,  except  five  shares  lield  by^its 
dJT'ectoT'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  City  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  agree 
with  the  referee  that  they  show  the  bankrupt's  principal  place 
of  businesg^  iQ .have_been  at  Boston  and  within  this  district. 

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  the  supreme  authority  lay  with  the 
stoc^olders,  a^  that_J|;hey^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>rinciBal  place  of  business,  because. 
all  the  eomponentjparts  of  its^usiness  were  gojar  done  at  or 

.directed  from  that  office,  as  to  make  it  jroper  to  regard  botliJthe 
other  offices,  and  each  quarry,   and  the  mill,  as  subordinate, 

'■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.  These  are  involuntary  pro- 
cgedings,  and  are  resisted  by  the  respondent  on  the  grounds: 
(Ij  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  Jn_re  Duplex  Badiator  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  involuntary  bankruptcy. 
A  wage-earner  is  defined  by  the  bankruptcy  act  as  one  ^^  who 

I  works  for  wages,  salary,  or  hire,^t  a  rate  of  compensation  not 
exeeedtegj^e  thousand  five  hundred  dollars  per  year. '  *  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  labor,  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  bvJM  ,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  including  profits  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 
*  learnings,  *  *  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  /,  ^ 
professional  services,  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  doing  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  receiving  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  respoadent,  giving 
music  lessons  at  so  much  an  hour,  is  not  a  wage-earner  within 
the  meaning  of  the  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  salarjv.  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  appojnted,  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  qji^tion  of  fact  and 
law  raised  by  his  answer  is  as  to  whether  he  was  chiefly  engaged 
inf  arming  or  the  tillage  of  the  sfiil.  *  *  *  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  concludejhat  the  termjwas^ot_limited 
jnerely__tg  tha-production  of  graJns^a^^IgJA'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  oQhus  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  between 
farmingijs.  his  chief  business  an3~'S^aHmgjrMcattl£^ 
8tjar'(^  of  tivtelihta^.    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^fackgy  (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  relies  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_abould  be  held  esfiinpt^  from-the  provisiops 
of  the  bankrupt^acl^n_this_gro^Mtd..un]£^  it  satisfactorily  ap- 
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_385  acres^_were 
run__^^ejd^jemifijit3nd_his  J)rother,  accounting  to  the  father 
for  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  purcFiased  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  hjs  time  were  principally  devoted_^othejmatterj)£_.buying 
and  ma^eting  livp  gtofj^^^^jjifTchief  source  of  his  livelihooiJl 
^agjdto  whictLJlfi-.£hiefly  looked  for  financial  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^pejynasgpt,  specific  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 
under  §  4b  of  the  act  of  July  1,  1898  (c.  541,  30  Stat. 
547  [U.  S.  Comp.  St.  1901,  p.  3423]),  because  he  was  a  person 
chiefly  engaged  in  farming.  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  owned  and  cultivated  a  farTn  j^ 
Logan  county,  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  partnership.  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  affairs.  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  September  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  company  went 
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 
susceptible  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,  which  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  court  is  inclined  to  think  that  the  st^tntQ 
should  be  regarded  as  having  reference^q^the  conditiong^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  controversy  here  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  central  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,  when  _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  in  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  refuge  for  insolyen£iiebtors.  laden  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  became  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  creditors  were 
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^Jbusiness  altogether  and 
1  goingJntpJdjQiidation^^  voluntary  or  involuntary.    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  montM 
precedin^LJhe  filing  of  the  petition,  and  without  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  Matsnn^  10  Am. 
BMlOL-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  bankrupt  is  an  ii^- 
fant  np(^er  the  age  of  21  vearSj  and  it  is  alleged  that  for  such  V''g**</ 
reasonthis^  court  has  nQ_iurisdictiQn-4o-^aat-a.-iii§charge  in  y   ^f^ 
this^roceeding.    Henry  L.  Walrath  filed  his  voluntary  petition         l7 
in  bankruptcy  on  or  about  May  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  judgment  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 tohave  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  first  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-  / 
ijignt,  and  that  Jt  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. 
Infants  with  no  liabilities  except  of  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 
until  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.^Ty_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 
Qpnducted  said  business  in  her  own  name  j  *  *  *  that  the 
said  business,  and  said  goods,  wares,  and  merchandise,  store, 
and  office  fixtures  and  furniture  and  store  accounts  2j:q  her 
separate  personal  property,  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  Constiti^tion  of  the  state  ofJElprida  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,,  TTijgTried  woman  having  separate  statutory  property,  although 
not  a  free  dealer,  ca£_lawfuU:£:  carry  on  business,  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,  except 
that  she  cannot  be  held  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,  Jacob  iT 
A.  Funk,  then  residing  in  Livingston  county,  111.,  wasduly  ad- 
judged to  be  insane  by  the  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^ 

ij.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  whether  Funk  can  be  adjudged_a_bankrupt  for 
acts  done  by  him  afterjhe^^gatgjof^e  adji^dication  of  insanity, 
and  the  appointment  of  a  guardian  for  his  person  and  property. 
By  §  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  present  bankrupt  act  confers 
upon  tnfe  courts  of  bankruptcy  the  right  to  settle  the  estates  of 
insolvent  decedents  unless  jurisdiction  in  the  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  to  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^jjt  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|ter  the  pe- 
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  the  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  not  com- 
mit  it.  On  the  trial  of  such  an  issue,  the  adjudication  of  luna^ 
may,  perhaps,  be  offered  as  prima  facie  evidence  of  insanity, 
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  triedJaLihejuryare  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 
Francis  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.     The  firm,  even    ^ 
with  the  separate  estates  of  the  partners,  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  popularity,  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  collaterjdjike  that  of  a  surety,  but  primary  and 
direct,  whateverj>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  relations.  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  do 
not  perceive  that_theclause  imports  that  the  partnership  could 
^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  of  191Q  a  corporation  was  not 
entitled  to  become  a  voluntary  bankrupt,  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  petition  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  presence  of  assets  has  not  been  specificallvjree^nized  andiaid 
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  adjudicated  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,  insolvency  in  fact,  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  bankruptcy  statutes  (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 

dgemed  to  be  repugnant  to  the  policy^of  the  bankruptcy  lawa^ 
and^  as  a  necessary  consequence,  constituted  an  act  of  bank- 
ruptcy,  per  se.  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  the  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  arejeoncemed  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 
cases  would  be  upon  tne  pemioningjcre^tgr£3g;;3gte^fe_iyid 
"prove  suclrinsotVency.  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  defendant  controverts  these  allegations,  and  avers 
that  his^  property,  at  a  fair  valuation,  is  worth  $3,000  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  defendant  insolvent  when  the  judgment  was  entered  against 
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  fii^t  section  (subdivision  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  valuation  than  the^ market  value;  that  is,  what  the  prop- 

'  '  erty  will  probably  bring,  or  is  worth  in  the  general  market,  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  value.  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  debtor ,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  attachment, 
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  theory  that  the 
debts  will  in  fact  be  paid  by  the  appropriation  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  may  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  found  that  one  exception 
is  expressly  made,  it  excludes,  by  almost"  absolute  inference, 
a  deduction  tnat  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  which  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  some  improvements  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. 

/  As_to  the  remailidpr  of  hi8-jM!0jieily^-L-fiud.nojajLrEQse-Qnubi§. 
/  part  to  cover  orconceal  any  part  of  it  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'  propert;;^;^_at  a  fair  valuation,  therefore,  exceeded  his 
liabilities  by  $161.26,  at  the  time  of  the  entryof  the  judgment 

and  levy.  ^^  — ■ —      "" 

It  follows  that  he  was  not  insolvent,  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  whether^the  Huttig  Manufacturing  Company  received^ 

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

property  of  D.  Winter,  bajakrupt.  _  A&J:he  mortgage  was  taken 

within  the  prohibited  period  of  four  months  we  proceed  to 

inquire  whether  Winter  was  then  insolvent,  andif  so^  whether 

the  manufacturing  company  or  its  agents  acting  therein  had  / 

reasonable  cause  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.     Hisjjadebtedne^  arose  from  lending  his  credit 

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

Winter  &  Co.,  and  from  holding  bi]|x|Relf  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 
the  manufacturing  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  either  event  we  thinkjthe  amount  of  the  debt  directly 
aflfectejLJX_Winter 's  solvency.  ^  surety  of 'indxirser  for  a  ItRrrk, 
rupt  has  It^p^i  TipI^I  tn  h^  fl,  (>]'f>(lit,or  within  tl^ft  mf>aning  of  t)tfi 
banlrrnptf^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  the  guaranty  may  have  been  oral  and  therefore  within  the 
statute~ot  trauas~of  Iowa  where  the  transaction  occurred  is 
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  would  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,  and  which  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  altogether  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^reejor^  more  creditors  who  have  provable  claims 
against  any  person  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  Tapper  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  action  of  ejectment,  tried  at  Davie  Superior  Court 
of  Law  at  Fall  Term,  1840,  before  his  Honor  Judge  Pearson. 

Both  parties  claimed  under  one  Sheeks.  The  defendaiit  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,  and  had  contracted  ver- 
bally  to  buy^jthe  JanjLiQ^iliiP^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^ 
Hoskins,  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;  that  the  $700  paid'waslier  money,  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  offered  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  husband,  taking  by  operation 
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  herself  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,  the  inten- 
tions of  the  parties  and  the  true  character  of  the  transaction, 
upon  which  the  deed  was  made  to  Hoskins,  were  fairly  sub- 
mitted  to  them.  It  must,  therefore,  beassumed,  "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  not,  and  the  former  paid  it ;  and,  being  for  the  pur- 
chase  money  of  this  very  land,  the  title  could  not  be  taken  from 
her,  without  making  her  whole.    As  between  these  parties,  that 
cannot  be  denied.     But  it  is  contended,  the  bad  faith  towards 
the  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 

0  [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  CQpveyance  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  plaintiff,  as  purchaser  of  George  Kimmel's  estate  ^ 
sheriff's  sale,  bi:Qught_ejectinent  againstjiim.  It  appeared  from 
the  evideiice,  that  Obadiah,  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  tgurth  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  exception  can  be  taken  to  the  general  ch^ge, 
nor  to  the  answer  to  the  points,  except  the  fourth.  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  children  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  at  the  request  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. 

Qn  the  22d  of  December,  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_therejie  an  appearance  from  circumstances  that  the  plaintiff 
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  the  more  artfuO 
debtorjwill  fix  a  more  secure  cover  for  his  property,  by  chang-/ 
ing  it  into  money,  or  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 
)  evidence  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  trustee  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  not  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  the  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.    But  we  do  not 
ilinderstand  that  thejuse  which_the  minor  makes  of  hjs^arnings 
lis  the  test  of  his  right  to  those  earnings j  nor  that  the  contin- 
luing  liability  of  the  father  to  support  the  minor  is  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  continued  receipt  b,y_the_minor  of  support 
from    his    father    is    coropetent    evidence    upon    the    question, 
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  follows  that  the,^laintiffs^4vtiough 
assumed  to  ^^  existing  crediJoTs  of  the  father,  had  no  claim  on 
the  twenty  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  Virginia  issued 


jt'  Petersburgh,  in  that  commonwealth,  a  policy  of  insurance  on 
the  life  of  Thomas  L.  Hume,  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  Hartford  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  Connecticut  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  dollars,  the  amount  of  such  pxopss^jwjth  interest,  shall 
inure  to  the  benefit^^FtEe  "creditors  of  the  person  paying  the 
premiums ;  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^  American  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  October, 
1881,  inso,ls;ejtJ:» jlis  widow^  :^jjli^  G^Hume,  and  six  minor  chjl- 
^v^^^Bz-S^iJ^^^i^i^^^'SLWm-  November  2d,  1881,  the  Central^  National 
-^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 ; 
that  her  mothtef-Md^furnishM--Hjime  wjth  about  a  thousand 
ddlars  annually,  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.  Blackford,  agent  for  the  Mary- 
land company^estified,  under  objection,  that  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  ^nsolvpnt  at  the  time  the  insurance  was 

effected,  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  comppusfltioTi  fx)  Y^-^^-t^^-^^ 
him^  but  to  his  representatives.  So  the  creditoclias  an  insurable 
interest  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  survives  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^ould  not  have  atany  tim^jdispoaedjjf  thes£_ 
policies^  withoiit^_thejeonsent  of  the  beneficiarY_:  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  thls^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^ 
creditors'.     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  intent 
)f  the  donor  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  devote  a  moiierate^p^OEJiQii^of  his^ar^^ 
%_seeurity  for  support  already,  or  which  could  thereby  be,  law-^ 
fgllyobtained,  arieast  to  the  extent  of  requiring  that,  under^ 
safikjgircumitances,  the  fraudulent  intent  ^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  conveved-this 
farm  to  one  jluff^for  $6,100,  and  with  that  money  he  bought 
160  acres  of  farming  land  in  Franklin  f.nimty  in  thejrtate  oi. 
Kgaaag,  and  caused  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_broughtan  action 
upon  this  .iudgment,  and  obtained  a  judgment  in  that  action, 
and  a  reijarno^f  execution  unsat^^  in  the  District.  Court  „Qf 
Franklin  county,  in  the  state  of  Kansas.^  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. vested  equitable  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  this  actinn  in  which 
they  have  janyjvested  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  the  property 
Qf  its  debtor.  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  In  re^WiI_- 
123  Fed.  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  subjected  himself  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-^fittlement  of  Lord  Montfort, 
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,  whjch  were  the  household  goods  belonging  to  Lord 
IVInjtfnrt,  ?^t  his  InrHsliip's  bniif^pJri^tmvTi,  anH  which  were  very 
minutely  particularized  in  a  schedule  annexed  to  the  settle- 
ment, \y^re__all_  conyeyed_tothe  plaintiffs,  as  trustees,  for  the 
use  of  LordMontfort  for  life,  remainder  to  Lady  Montfort  for 
her  life».i:emainder  to  the  first  and  other  sons  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  approved 
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  take  it  out  of  the  statute.  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  frmdulent.  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.  The  question,  therefore,  in  every  case  is, 
whether Jthfi_act.dQnfi_^a  ftgytaj^  transaction^jir-'cp^^ptliPT'  ijf^g  '**/*< 
a  trick-anxL,contrivance  to  defeat  creditore.  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. 
There  is  not  a  sus;gestion  of  any  intention  to  defraud,  or  the 
most__distaBt_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  fraudulent  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  circumstance  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  which^a  certain  feigned,  covenous,  and 
fraudulent  judgment  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^ 
distrained  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,  defendants, 
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  agreed  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  defendant  Atlee  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- 
exer,  swore  that  he  did  not  sign  the  instrument  for  the  purpose 
of  defeating  the  plaintiffs'  distress  ;^ 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  defendants  were  privy  to  the  actual 
judgment  and ^eiration^_^^£ded  upon  the  power  of  attorney 
prepared  by  Wild  their  agent,  or  merely  to  the  general  object 
oj  obtaining  possession_of  the  property  to  prevent  the  plaintiffs 
from  satisfying  their  demand  in  prejudice  to  the  general 
creditors.  The  jury  found,  that  the  defendants  were  privy  to 
the  means  used  as  well  as  to  the  general  object,  and  found  a 
verdict  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  defend- 
ants implicated  in  any  fraud?  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.  Nor  was  the  judgment  confessed 
in  prejudice  of  any_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,  no 
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,  setting  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 
consequences  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,  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  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,  they  not  being 
legally  her  children,  but  strangers  to  her.  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  many  ^ 
.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  consideration.  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  consideration.  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  facilities  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  twelve 

{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  against  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  Freeman  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'"oilaw,  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  cftp  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  contest  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  another,  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 
anbther  creditor'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  and  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,  which  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  comforts  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  conscience,  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  apprehensions  that  a  court  of  law  will 
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  redemption.  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  payment  of  her  debts,  the  deficiency  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  becomingjbe  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  the  instrument 
is  set  aside  l>y  any  creditor ;  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  validity  of   ^ 
the  conveyance_by  Henry  G.  Livingston  to  Gilbert^spinwall.      ^^ 

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  his  marriage,  and  with\ 
a  view_to^jt,  he  agreed  withes  wife 's  father  to  settle  on  her,  \ 
andjher  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  time  of 
I  th£_ggttlement  of  his  real  estate  upon  his  wife  ;~and^li''greaFpart 
1  of  the  lands  so  settled  were  purchaaad.withl-property  procured 
by  that  same  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  presumption  of  fraud  in  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  the  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^creditors,  where  it  is 
a  provisiOTi  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  conveyance  to  a  wife  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,  that 


tlie  claims  oijustice,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  malting  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  the  present  case  was  large,  and  the 
disposition  extravagant,  being  of  the  greater  part  of  the  real 
estate ;  and  we  havg-^O-gZ^dence  of  sufficient  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  AnneHarlan  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.  Noble,  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  that  JohnB.  Noble  paid  for  these  lots^and 
j  directed  the  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  must 
appear  that  it  was  made  in  contemplation  of  future  indebted- 
ness, and,  until  this  was  shown,  the  plaintiffs  could  not  call  upon 
the  defendants  to  prove  the  conaderation  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,  the  statute_13 
Elizabeth  does  not  make  voluntary  conveyances  void  as  to  f  ature 
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  limited  means  from  making  any 
settlement  whatever  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,  what  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  defendant  relying^ugon 
h5^  ownersEip^^oT  the  property~inr"question.  The  answer,  deny- 
ing the  material  allegations  of  the  bill^  specifically  raises  the 


25— Schell    V.    Gamble^ 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,  Beatty  made 
the  transfer  for  the  purpose  of  making  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 
not  organized  until  five  years  after  the  conveyance  by  Beatty, 
obtained_aJu(dgment  against  him  on  an  accommodation  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  Haggrman  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  frau9~~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[ayor  of  the  claimant  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  recovery,  on  April25, 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  against  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.  That  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  defendant,  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 
fraudulent^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.  The  second 
class  of  cases  is  wh^e_^ropierty  legally_liable_tQ_execution  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  the 
/  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. — ' '  There  is  a  large  class  of  cases  falling  under  the  in- 
fluencej  though  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? 
There  is  nothing^  either  in  the  letter  or  in  the  spirit  in  the 
statute  ^JgUzabeth  to  require  tha  rourts  to  hold  that  it  has  no 
application  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^judged  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       ^  0 
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  privilege  or  right  of  a  fiduciary- 
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  interpret  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  no  actual  existing  lien  upon  this  after-acquired  prop- 
erty until  the  taking  of  possession,  yet  there  was  a  positive 
agreement,  as  contained  in  the  mortgage  and  existing  of  record, 
under  which  the  inchoate  lien  might  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  under  §  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  immaterial  that  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  on  January  6,  1905.  Prior  to  September  6,  1904.  the  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^^034.60  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,  and  asked  that  it  be  paid  in  full  out  of  the 
proceeds  of  the  sale  inpreference  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,  attaching  creditors,  and  judgment  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  preferential  payment 
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  one  in  bankruptcy,  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  of  a  pure  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 
out  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  another  unjustly  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  law  would 
imply  an  ohligfation  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  be  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  bank,  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 
liable,  without  a  surrender  of  the  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 
"elassj^  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  any 
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  to 
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  actually  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  materially  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  months  before  the  adjudication  in  bank- 
ruptcy. The  mortgage  securing  the  $2,000  note  was  executed  a 
few  days  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^court  held  the  mortgage  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  used  in  the  statut^^,  in  order 
Jx>  create  a  penalty,  aitnough  nowhere  expressly  or  even  by  clear 
implication  found  in  the  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  the  law  haJT 
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  of  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  implication,  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  the  title  to  its  real 
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  discharge  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  bajatarupJLjQL 
the  Supreme  Court  of  the  state  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  insolvency,  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  immaterial  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  expressly  or  by  implication  admit  its  willing- 
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  that  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  the 
petition  jjidjhe  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  bankrupt, 
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  this  Jaw  which  sanctions  the 
bringing  of  a  suit  bv  a  receiver  to  recover  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  merely,  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 

absolute^  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_the  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  not 
j  change  the  essential  character  ofj^he^ability,  nor  deterpaine 
/  whether  a  claim  for  ajimony  isTm^ite ^ature,  contractual  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  judgment^  but  is  rather  a  legal_means  of 
enforcing  the  obligation_of_thejiusband  and  father  to  support 
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  to  pay  the  debt.  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  in 
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_action  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  & 
Valentine  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  plaintiff'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' 
the  proceeds  _of  such  jales  to  their  own  use,  they~f alsely  and 
fraudulently  represented  to  him  tha,t  they  still  had  the  stock  on 
hand  and  were  carrymgjt  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  fraudsror~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  plain-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  negligence  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  additional  and  distinct  class  of  claims,  the 
whole  section,  as  indicated  by  its  title,  being  devoted  to  thi 
general  subject  of  debts  which  are  provable ;  the  one  subsectiop 
(a)  dealing  with  those  which  are  of  a  fixed  and  more  or  less 
absolute  character,  such  as  judgments,  costs,  bills,  notes,  and  ac- 
counts, and  the  other  (b)  with  those  which  require  to  be  liqui- 
dated, such  as  damages  for  torts;  the  word  "debt,"  as  defined 
by  the  act — §1  (11) — including  a  "demand  or  claim,"  and 
being  thus  broad  enough  to  embrace  both.  This  construction, 
moreover,  is  made  necessary,  as  it  is  said,  in  order  to  bring  the 
section  into  harmony  with  other  parts  of  the  act. 

To  the  contrary  of  this,  however,  it  is  declared  in  Dunbar  v. 


;404  ADMINISTRATION 

Dunbar,  190  U.  S.  340,  350,  23  Sup.  Ct.  757,  761,  47  L.  ed.  1084, 
that: 

* '  This  paragraph,  '  b, '  *  *  *  adds  nothing  to  the  class  of 
debts  which  might  be  proved  under  paragraph  'a'  of  the  same 
section.  Its  purpose  is  to  permit  an  unliquidated  claim,  com- 
ing within  the  provisions  of  §  63a,  to  be  liquidated  as  the  court 
should  direct." 

It  is  true  that  this  is  somewhat  aside  from  the  immediate 
question  before  the  court,  which  was  whether  a  discharge  in 
bankruptcy  operated  to  release  a  contingent  liability,  such  as 
an  annuity,  which  a  husband  upon  his  divorce  agreed  to  pay  to 
his  wife  for  the  support  of  herself  and  their  minor  children. 
But  it  is  not  to  be  assumed  that  a  construction  deliberately  an- 
nounced in  this  way  was  not^  considered  by  the  whole  couji;,  or 
went  out  unadvisedly,  so  as  to  stand  as  mere  dictum.  The  law 
is  as  it  is  declared  to  be  by  the  Supreme  Court  speaking  by  one 
or  the  other  of  its  judges,  and  is  not  to  be  put  aside  upon  any 
such  suggestion,  except  as  there  is  no  other  alternative.  That 
the  question  is  still  open  and  undisposed  of,  however,  notwith- 
standing what  is  so  held,  is  confidently  affirmed  upon  the 
strength  of  Crawford  v.  Burke,  195  U.  S.  176,  25  Sup.  Ct.  9,  49 
L.  ed.  147,  where  in  discussing  this  section  of  the  act  it  is  said : 

"Paragraph  *a'  *  *  *  includes  debts  arising  upon  con- 
tracts, express  or  implied,  and  open  accounts,  as  well  as  for  judg- 
ments and  costs.  As  to  paragraph  'b,'  two  constructions  are 
possible:  It  may  relate  to  all  unliquidated  demands,  or  only 
to  such  as  may  arise  upon  such  contracts,  express  or  implied,  as 
are  covered  by  paragraph  *a,'  " 

It  is  upon  the  latter  expression  that  the  appellants  particu- 
larly rely.  But  whatever  encouragement,  standing  by  itself,  it 
may  seem  to  lend,  the  court  is  careful  to  add : 

"Whether  the  effect  of  paragraph  *b'  is  to  cause  an  unliqui- 
dated claim,  which  is  susceptible  of  liquidation,  but  is  not  liter- 
ally 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  provisions  of  paragraph 
'a'  as  one  'founded  upon  an  open  account,  or  upon  a  contract  ex- 
press or  implied,'  and  might  have  been  proved  under  §  63a  had 
plaintiff  chosen  to  waive  the  tort,  and  take  his  place  with  the 
other  creditors  of  the  estate." 

Taking  it  altogether,  therefore,  this  utterance  does  not  seem 
to  carry  us  very  far. 


TORT  CLAIMS 


405 


Assuming,  however,  that  the  question  is  an  open  one,  let  us 
see  to  what  an  independent  consideration  of  it  leads.  The  argu- 
ment is  that  the  right  to  prove  must,  in  justice,  be  coextensive 
with  the  release  to  be  obtained,  and  that,  as  it  is  plainly  pro- 
vided (§17)  that  the  bankrupt  shaU  be  discharged  from  lia- 
bility for  all  but  certain  excepted  torts,  it  must  be  that  all 
which  are  not  so  excepted  are  entitled  to  come  in.  As  said  by 
Mr.  Justice  Brown,  in  Crawford  v.  Burke,  supra: 

**It  certainly  could  not  have  been  the  intention  of  Congress 
to  extend  the  operation  of  the  discharge  under  §  17  to  debts  thati 
were  not  provable  under  §  63a.''  ^ 

The  one  section,  according  to  this,  is  to  be  read  in  the  light  of 
the  other,  and  that  construction  adopted  which  will  consist  with 
both. 

Care  is  to  be  taken,  however,  in  this  comparison,  not  to  reverse 
the  order  of  importance  in  which  they  are  to  be  considered.  Nor 
in  case  of  conflict  to  press  the  argument  too  far.  If  any  sec- 
tion is  controlling  in  this  regard,  it  is  the  section  which  declares 
what  debts  are  provable,.and  not  the  contrary.  It  is  not  so  much, 
in  other  words,  that  a  tort  of  the  character  which  we  have  here 
is  discharged  by  the  one,  as  that  it  is  made  provable  by  the  other, 
that  gives  it  a  standing  against  the  estate.  Even  if  the  one  were 
true  of  it  and  not  the  other,  the  right  to  come  in  would  not  be 
established,  it  beiag  possible  that  there  is  a  lapse  in  the  law  in 
this  respect,  the  result  of  imperfect  adjustment,  upon  amend- 
ment; a  conclusion  to  be  avoided,  if  it  can  be,  but  not  at  the 
expense  of  that  part  of  the  statute  which  must  necessarily 
govern. 

The  strength  of  the  argument  in  favor  of  claims  for  torts  be- 
ing provable,  as  is  thus  intimated,  resides  in  the  section  with 
regard  to  discharges,  where  it  is  provided: 

^'  §  17.  Debts  not  Affected  by  a  Discharge. — a.  A  discharge  in 
bankruptcy  shall  release  a  bankrupt  from  all  of  his  provable 
debts,  except  such  as  (1)  are  due  as  a  tax  levied  by  the  United 
States,  the  state,  county,  district,  or  municipality  in  which  he  re- 
sides; (2)  are  liabilities  for  obtaining  property  by  false  pretenses 
or  false  representations,  or  for  wilful  and  malicious  injuries  to 
the  person  or  property  of  another,  or  for  alimony  due  or  to  be- 
come due,  or  for  maintenance  or  support  of  wife  or  child,  or  for 
seduction  of  an  unmarried  female,  or  for  criminal  conversation ; 
(3)  have  not  been  duly  scheduled  in  time  for  proof  and  allow- 
ance, with  the  name  of  the  creditor  if  known  to  the  bankrupt. 


o 


406  ADMINISTRATION 

unless  such  creditor  had  notice  or  actual  knowledge  of  the  pro- 
ceedings in  bankruptcy;  or  (4)  were  created  by  his  fraud,  em- 
bezzlement, misappropriation,  or  defalcation  while  acting  as  an 
officer  or  in  any  fiduciary  capacity. ' ' 

As  originally  passed,  instead  of  the  word  ^.^liabilities,"  in 
clause  2,  were  the  words .''judgments_in_ actions'';  and  after  the 
word  "for"  were  the  words  "frauds,  or";  while  nothing  what- 
ever was  said  as  to  alimony,  maintenance,  seduction,  or  criminal 
conversation.  Claims  grounded  in  fraud  or  the  other  causes 
of  action  specified  had,  therefore,  as  the  law  then  stood,  to  be 
reduced  to  judgment  in  order  to  be  saved  from  the  effect  of  a 
discharge.  Crawford  v.  Burke,  195  U.  S.  176,  25  Sup.  Ct.  9, 
49  L.  ed.  147;  BuUis  v.  O'Beime,  195  U.  S.  606,  25  Sup.  Ct. 
118,  49  L.  ed.  340.  The  reason  why  this  distinction  was  made 
is  not  clear,  but  it  was  probably,  as  suggested,  in  order  to  avoid 
the  temptation  to  claimants  to  try  and  bring  their  cases  within 
the  exception,  and  to  do  away  with  the  necessity  for  going  into 
conflicting  evidence  in  order  to  do  so.  /  Other  cases  of  false  pre- 
tense, misrepresentation,  or  willful  and  malicious  injury,  not 
so  protected,  were  thus  apparently  left  to  be  released  by  a  dis- 
charge.! And,  as  the  distinction  is  now  removed  by  the  substitu- 
tion of  the  word  "liabilities"  for  "judgments,"  and  the  excep- 
tion still  further  enlarged  by  the  addition  of  seduction  and 
criminal  conversation,  the  argument  is  that  all  torts  not  so  ex- 
cepted, being  left  to  be  operated  upon  by  a  discharge,  must  have 
the  reciprocal  right  to  come  in  and  be  proved  against  the  estate, 
if  a  manifest  inconsistency,  not  to  say  injustice,  is  to  be  avoided. 
It  must  be  confessed  that  this  is  not  easy  to  meet.  Seduction 
and  criminal  conversation  are  torts,  pure  and  simple,  and  can- 
not be  resolved  away,  like  some,  as  being  possibly  tied  up  to  a 
contract.  And  if  it  was  considered  necessary  to  except  these 
by  name,  without  which  a  discharge  would  release  them,  why  are 
not  other  torts  such  as  the  one  which  we  have  here,  growing  out 
of  negligence  or  nuisance,  in  the  same  situation  ?  Slightly  modi- 
fying the  words  of  Mr.  Justice  Brown  in  Crawford  v.  Burke, 
supra:  If  no  tort  could  be  made  the  basis  of  a  provable  debt, 
why  were  certain  torts  excepted  ?  Nor  is  the  force  of  this  weak- 
ened by  the  fact  that,  according  to  the  decision  in  Tinker  v.  Col- 
well,  193  U.  S.  473,  24  Sup.  Ct.  505,  48  L.  ed.  754,  criminal  con- 
versation, at  least  when  reduced  to  judgment,  was  already  taken 
car^  of,  the  same  as  maintenance  and  alimony,  as  to  which,  to 
that  extent,  the  amendment  of  1903  may  be  regarded  as  merely 


TORT  CLAIMS  407 

declaratory.  Audubon  v.  Shufeldt,  181  U.  S.  575,  21  Sup.  Ct. 
735,  45  L.  ed.  1009 ;  Dunbar  v.  Dunbar,  190  U.  S.  340,  23  Sup. 
Ct.  757,  47  L.  ed.  1084;  Wetmore  v.  Markoe,  196  U.  S.  68,  25 
Sup.  Ct.  172,  49  L.  ed.  390. 

It  is  to  be  observed,  however,  that  the  construction  which  is 
contended  for  grows  out,  not  of  positive,  but  exceptive,  legis- 
lation. It  is  not  declared  what  debts  shall  be  released,  but  what 
shall  not  be.  And  they  must,  in  terms,  be  first  provable,  in  order 
to  be  excepted,  and  not  the  contrary.  The  only  difficulty  that  is 
experienced,  also,  is  with  regard  to  the  changes  introduced  by 
the  amendment  of  1903,  in  part,  as  we  have  seen,  unnecessary ;  as 
to  which,  it  may  well  be  that  in  providing,  out  of  extra  caution, 
that  certain  things  should  not  be  discharged,  care  was  not  taken 
to  note  the  possible  effect  upon  other  parts  of  the  law,  or  to 
adjust  them  to  this,  producing  the  present  want  of  harmony. 
For,  after  all  has  been  said,  it  must  be  recognized  that  there  is 
a  want  of  harmony  between  these  two  different  parts  of  the  stat-  X-tC^v 
ute,  not,  indeed,  as  originally  enacted,  but  now,  as  they  stand,  v-^^-l 
after  amendment.  The  one  section  (17)  with  regard  to  the 
effect  of  a  discharge  assumes  that  torts  generally  are  provable  "^^^^A 
and  proceeds  acccordmglv :  while  the  other  (63)  makes  nojiCQr 
vision  for  anything  of  the  kind,  except  by  a  construction  which 
it  is  safe  to  say  was  not  in  contemplation  when  it  was  passed, 
and  cannot  consistently  be  read  into  it.  The  true  view  to  be 
taken  ot  it  has  been  already  indicated.  The  first  of  the  two  para- 
graphs into  which  it  is  divided  is  given  up  to  an  enumeration 
of  the  debts  which  are  entitled  to  be  proved  against  the  estate, 
among  which  is  to  be  found  everything  in  the  way  of  a  fixed 
obligation,  or  which,  as  being  of  a  commercial  character,  a 
bankrupt  could  expect  to  be  relieved  from;  and,  complete  in  it- 
self, it  is  not  to  be  added  to.  The  other  paragraph  plainly  has 
to  do  with  a  mere  matter  of  procedure;  how  unliquidated 
claims  founded  upon  open  account  or  contract,  specified  in  the 
preceding  paragraph,  may  be  liquidated  or  settled.  Nor  can  it 
properly  be  made  to  serve  any  other  purpose.  Argument  may 
amplify  this,  but  cannot  make  it  clearer.  And  as  so  interpreted 
a  claim  for  damages,  such  as  the  one  before  us,  is  not  included 
among  debts  which  are  made  provable.  This,  if  not  the  latest 
deliverance  of  the  statute  (the  amendment  of  1903  having  to  be 
accorded  that  position),  as  the  one  devoted  specifically  to  the 
subject,  must  control.    26  Am.  &  Eng.  EncycL  Law  (2d  ed.)  68. 

It  may  be  that  the  conclusion  which  is  so  reached,  if  it  is  to 


4D8  ADMINISTRATION 


;jpx.vT;w.T^\i^"i«j 


abridge  correlatively  the  effect  of  a  discharge,  is  not  altogether 
favorable  to  the  bankrupt,  who  is  interested  in  being  relieved 
from  his  liabilities  to  the  fullest  extent  possible.  But  this  ques- 
tion is  not  before  the  court,  and  it  will  be  time  enough  to  meet 
it  when  it  is. 

There  was  no  error,  therefore,  in  the  rejection  of  the  appel- 
lants' claim,  and  the  judgment  is  affirmed. 

GRAY,  Circuit  Judge  (concurring).  While  concurring  in 
the  result  reached  by  the  majority  of  the  court,  and  to  some 
extent  in  the  reasoning  employed  in  reaching  that  result,  I  am 
constrained  to  think  that  the  ratio  decidendi  of  the  court  be- 
low is  that  upon  which  our  decision  should  rest.  Without 
attempting  to  amplify  or  paraphrase  the  opinion  of  the  learned 
judge  of  that  court  (In  re  United  Button  Co.  [D.  C]  140  Fed. 
495),  it  is  sufficient,  in  referring  to  §  17,  to  again  note  that  the 
debts  which  "a  discharge  in  bankruptcy  shall  release,"  are 
such  debts  only  as  are  provable  under  §  63,  and  the  debts  which 
are  excepted  from  discharge,  being  among  others  liabilities  for 
certain  torts,  are  also  necessarily  provable  debts.  If  it  be  said 
that  "wilful  and  malicious  injuries  to  the  person  or  property  of 
another,"  and  "seduction"  or  "criminal  conversation"  are 
torts,  pure  and  simple,  and  as  such  incapable  of  liquidation  and 
proof  under  §  63,  it  may  be  replied  that  liabilities  for  such  torts, 
when  reduced  to  judgment,  are  provable,  and  come  within  the 
classification  of  §  17a  (2)  as  "liabilities"  for  certain  torts.  Be 
this  as  it  may,  it  is  true,  however,  that  even  if,  out  of  abundant 
caution,  certain  of  the  torts  which  are  included  in  the  excepting 
clause  could  not  have  been  liquidated  and  proven  under  §  63, 
still  the  fact  that  the  excepting  clause  in  this  respect  overlaps 
provable  debts  and  includes  some  that  are  not  provable,  does  not 
nullify  the  qualifying  effect  of  the  word  "provable,"  as  limiting 
the  debts  to  be  excepted,  as  well  as  these  which  are  discharged  by 
§  17,  and,  as  said  in  the  majority  opinion  of  this  court,  cannot 
serve  to  abrogate  or  qualify  the  description  of  provable  debts 
as  contained  in  §  63. 

In  this  view,  the  two  sections,  63  and  17,  are  not  necessarily 
irreconcilable.® 

6_As  to  provability  of  claim  for  Works,  23  Fed.  880.  But  cf.  In 
profits  for  infringement  of  patent  re  Pavement  Co.,  156  Fed.  583;  In 
iee  In  re  Boston  &  Fairhaven  Iron      re  Awning  Hood  Co.,  187  Fed.  611. 


(M/yurrd   ljf\  \K^  ^ 


UNLIQUIDATED  CLAIMS  409 

C.  Contract  Claims 

1.  Unliquidated  Claims  i  i^ 

GRANT  SHOE  CO.  v.  LAIRD  CO.     1^^^  \)^ 

212  U.  S.  445,  53  L.  ed.  591,  29  Sup.  Ct.  332 

(United  States  Supreme  Court.    February  23,  1909) 

Mr.  Justice  HOLMES  delivered  the  opinion  of  the  court: 
This  ease  comes  up  on  a  certificate  conceriling  the  jurisdiction 
of  the  District  Court  on  the  following  facts :  The  W.  M.  Laird 
Company  filed  a  petition  in  bankruptcy  against  the  Frederic  L. 
Grant  Shoe  Company,  alleging  acts  of  bankruptcy,  and  setting 
up  a  claim  for  $3,732.80  for  the  breach  of  an  express  warranty 
of  shoes  sold  to  it  by  the  latter.  The  shoe  company  answered, 
denying  the  foregoing  allegations,  and  denying  that  the  claim 
alleged  was  a  provable  claim.  The  case  coming  on  to  be  tried 
before  a  jury,  it  moved  the  court  to  dismiss  the  proceeding  for 
want  of  jurisdiction.  The  motion  was  denied,  and  insolvency 
and  acts  of  bankruptcy  being  admitted,  the  claim  was  liquidated 
at  $3,454,  the  shoe  company  offering  no  evidence.  The  shoe  com- 
pany was  adjudged  a  bankrupt,  and,  at  the  same  time,  the  judge 
certified  that  the  jurisdiction  of  the  court  to  make  such  an  adju- 
dication on  a  claim  for  unliquidated  damages  was  the  only  ques- 
tion in  issue.  Afterwards  this  writ  of  error  was  brought,  the 
taking  of  jurisdiction  being  the  only  error  assigned. 

Coming  to  the  question  certified,  we  are  of  opinion  that  the 
decision  of  the  courts  below  was  right.  The  argument  to  the 
contrary  is  based  on  the  letter  of  the  statute,  and  is  easily  stated 
and  understood.  By_|  596  petitions  to  have  a  debtor  adjudged 
a  bankrupt  may  be  filed  only  by  creditors  who  have  provable 
claims.  By  §  63&,  "Unliquidated  claims  against  the  bankrupt 
may,  pursuant  to  application  to  the  court,  be  liquidated  in  such 
manner  as  it  shall  direct,  and  may  thereafter  be  proved  and 
allowed  against  his  estate."  The  word  "thereafter"  shows,  it 
is  said,  that  they  are  not  yet  proved  to  exist  when  merely  pre- 
sented and  sworn  to.  Therefore  it  does  not  yet  appear  that  there 
is  any  foundation  for  the  proceeding,  in  the  requisite  amount 
or  even  the  existence  of  the  claim.  But  there  must  be  a  proceed- 
ing in  court  before  a  liquidation  can  take  place,  and,  therefore, 
the  claim  cannot  be  liquidated  until  a  proceeding  is  started  in 


410  ADMINISTRATION 

some  other  way.  In  short,  the  e'laiin  upon  which  the  petition 
is  based  must  be  provable  when  the  petition  is  filed,  and  this 
claim  was  not  provable  then,  since,  by  the  express  words  of  the 
act,  it  had  to  be  liquidated  before  it  could  be  proved. 

On  the  other  hand,  by  the  equally  express  words  of  §  63a, 
among  the  debts  that  may  ])e  proved  are  those  founded  upon  a 
contract,  express  or  implied.  Again,  by  §  17,  the  discharge  is 
of  all  "provable  debts"  with  certain  exceptions,  and  it  would 
not  be  denied  that  this  claim  would  be  barred  by  a  discharge. 
Tindle  v.  Birkett,  205  U.  S.  183,  51  L.  ed.  762,  27  Sup.  Ct  Rep. 
493.  If  the  argument  for  the  plaintiff  in  error  is  sound,  a  cred- 
itor for  goods  sold  on  a  quantum  valebant  would  be  as  badly 
off  as  the  petitioner,  and  both  of  them  might  be  postponed  in 
reducing  their  claims  to  judgment  until  it  was  too  late.  The  in- 
timation in  Tindle  v.  Birkett,  supra,  and  Crawford  v.  Burke, 
195  U.  S.  176,  49  L.  ed.  147,  25  Sup.  Ct.  Rep.  9,  are  adverse  to 
such  a  result.  The  whole  argument  from  the  letter  of  the  statute 
depends  on  reading  "provable  claims"  in  §  596  as  meaning 
claims  that  may  be  proved  then  and  there  when  the  petition  is 
filed.  But,  if  it  can  be  seen  then  and  there  that  the  claims  are 
of  a  kind  that  can  t>e  proved  In  ttlg1?foceedings,  the  words  are 
satisfied ;  and  further,  no  reason  appears  why  a  liquidation  may 
not  be  ordered  on  the  filing  of  the  petition,  to  ascertain  whether 
it  is  filed  rightly  or  not. 

It  is  said  that  an  unfounded  claim  of  this  sort  might  be  used 
/    .        as  a  weapon  to  enforce  an  unjust  demand  or  to  make  a  solvent 
'A  but  struggling  debtor  bankrupt.    Re  Big  Meadows  Gas  Co.,  113 

\  \  .Jfr  Fed.  974.  But  an  unjust  demand  may  be  made  for  a  liquidated 
ii^*^  sum,  also,  and  Ave  have  mentioned  the  injustice  on  the  other  side. 
L^  .  Again,  it  has  been  suggested  that  a  cause  of  action  for  a  breach 
of  warranty  really  is  for  deceit,  and  sounds  in  tort,  claims  for 
torts  not  being  mentioned  among  the  "debts  which  may  be 
proved"  in  §  63a.  Re  Morales,  105  Fed.  761.  No  doubt  at  com- 
mon law  a  false  statement  as  to  present  facts  gave  rise  to  an 
action  of  tort,  if  the  statement  was  made  at  the  risk  of  the 
speaker,  and  led  to  harm.  But  ordinarily  the  risk  was  not  taken 
by  the  speaker  unless  the  statement  was  fraudulent ;  and  it  was 
precisely  because  it  was  a  warranty, — that  is,  an  absolute  un- 
dertaking by  contract  that  a  fact  was  true, — that,  if  a  warranty 
was  alleged,  it  was  not  necessary  to  lay  the  scienter.  Sehuch- 
ardt  V.  Allen,  1  Wall.  350,  17  L.  ed.  642 ;  Norton  v.  Doherty,  3 
Gray,  372,  63  Am.  Dec.  758.    In  other  words,  a  claim  on  a  war- 


{ 


CONTINGENT  CLAIMS  411 

ranty,  as  such,  necessarily  was  a  claim  arising  out  of  a  con- 
tract, even  if,  in  case  of  actual  fraud,  there  might  be  an  inde- 
pendent claim  purely  in  tort. 
Judgment  affirmed  J 


Contingent  Claims  zi"^-  , 


MOCH  V.  MARKET  ST.  NAT.  BANK    ^^  -U)  "^     • 


In  re  GERSON 
107  Fed.  897,  47  C.  C.  A.  49  € ,.nx}Ji^ 

(Circuit  Court  of  Appeals,  Third  Circuit.    April  22,  1901) 

ACHESON,  Circuit  Judge.  The  question  presented  by  this 
appeal  is  whether  the  liability  of  a  bankrupt  indorser  of  commer- 
cial paper,  whose  liability  did  not  become  absolute  until  after  the 
filing  of  the  petition  in  bankruptcy,  may  be  proved  against  his 
estate  after  such  liability  has  become  fixed,  and  within  the  time 
limited  for  proving  claims.  By  the  first  section  of  the  bankrupt 
law, — the  act  of  July  1,  1898, — it  is  declared  that  the  word 
' '  debt, ' '  as  used  in  the  act,  shall  include  ' '  any  debt,  demand,  or 
claim  provable  in  bankruptcy. "  §  63  declares  what  debts  of 
the  bankruptcy  may  be  proved  and  allowed  against  his  estate, 
and  ranges  the  provable  debts  in  five  subdivisions,  numbered 
from  1  to  5,  inclusive.  For  present  purposes  we  need  quote  only 
two  of  those  subdivisions,  namely : 

"  (1)  A  fixed  liability,  as  evidenced  by  a  judgment  or  an  in- 
strument 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  pay-, 
able  and  did  not  bear  interest;"  ''(4)  founded  upon  an  open 
account,  or  upon  a  contract  express  or  implied." 

Clearly  the  liability  of  an  indorser  is  within  the  very  words 
of  this  fourth  subdivision.  As  was  said  by  the  Supreme  Court 
in  Martin  v.  Cole,  104  U.  S.  30,  37,  26  L.  ed.  647,  the  contract 
created  by  the  indorsement  of  commercial  paper  is  an     express 

7 — As  to  provability  of  claim  for      v.  Magwire,  15  Wall.  549;   Beed  v. 
damages  for  breaches  of  covenants       Pierce,  36  Me.  455. 
for  title  in  deed  of  land  see  Eiggin 


412  ADMINISTRATION 

contract, ' '  and  ' '  its  terms  are  certain,  fixed,  and  definite. ' '  The 
iudorser's  engagement  is  to  pay  a  sum  certain  at  a  fixed  date, 
to  wit,  the  amount  of  the  bill-  or  note  at  its  maturity,  if  it  is 
not  paid  upon  due  presentment  by  the  party  primarily  liable, 
upon  due  notice  of  its  dishonor  being  given  to  the  indorser.  If 
it  can  be  affirmed  that  such  an  unmatured  liability  is  not  a 
"debt,"  in  a  technical  sense,  certainly  it  is  a  "demand"  or 
"daim^'  and  comes,  it  seems  to  us,  within  the  scope  of  the 
fourth  subdivision  of  §  63  of  the  act.  The  primary  purpose  of 
the  bankrupt  act  was  to  relieve  insolvent  debtors  from  their 
pecuniary  liabilities,  and  to  secure  ratable  distribution  of  their 
estates  among  their  creditors.  It  is  not,  then,  to  be  lightly  be- 
lieved that  congress  intended  to  exclude  from  the  operation  and 
benefits  of  the  act  unmatured  indorsements  of  commercial  paper, 
which  in  every  commercial  community  so  often  constitute  a  large 
proportion  of  the  indebtedness  of  failing  debtors.  Of  course,  if 
not  provable,  such  liabilities  are  not  discharged.  Now,  a  con- 
struction leading  to  results  so  foreign  to  the  general  purpose 
of  the  law  is  not  to  be  adopted  unless  plainly  required  by  the 
language  of  the  act.  We  cannot  see  that  such  an  interpretation 
is  demanded  by  anything  contained  in  the  act.  The  first  and 
fourth  subdivisions  of  §  63  are  distinct  provisions,  and  are,  we 
think,  independent  of  each  other.  We  are  unable  to  agree  to 
the  proposition  that  subdivision  1  qualifies,  and  is  to  be  carried 
down  and  read  into,  subdivision  4.  On  the  face  of  the  act  they 
are  distinct.  Moreover,  reasonable  effect  can  be  given  to  both 
by  treating  them  as  separate  and  independent  clauses.  There 
are  well-known  instruments — for  example,  surety  bonds — under 
which  the  liability  is  contingent  on  future  defaults,  and  where 
the  amount  of  liability  is  wholly  uncertain,  depending  on  the 
nature  of  the  default.  To  instruments  of  this  character,  where 
the  liability  is  remote  and  is  uncertain  in  amount  and  other-, 
wise,  subdivision  1  is  fairly  referable;  but  we  think,  with* the 
court  below,  that  the  contract  created  by  the  indorsement  of  com- 
mercial paper  is  not  governed  by  that  subdivision,  but  falls 
within  subdivision  4,  which  embraces  debts,  claims,  or  demands 
founded  upon  contracts,  express  or  implied.  Accordingly  the 
order  of  the  District  Court  allowing  the  claim  of  the  Market 
Street  National  Bank  against  the  estate  of  the  bankrupt,  Joel 
J.  Gerson,  is  affirmed. 


CONTINGENT  CLAIMS  413 

PHILLIPS  et  al.  v.  DREHER  SHOE  CO.    ^  ^'^t^.  - 

112  Fed.  404  '^r-C^  :  '''^    -^.j^ 

(District  Court,  M.  D.  Pennsylvania.    January  9,  1902)  ^^:  y^^ct 

ARCHBALD,  District  Judge.  On  September  16,  1901,  H.  L. 
Phillips  and  nine  others,  all  of  Selins  Grove,  Pa.,  filed  a  cred- 
itors'  petition  against  W.  A.  Dreher  and  Floyd  A.  Wetherby, 
traHing  as  the  Dreher  Shoe  Company,  of  the  same  place,  to  have 
them  declared  bankrupts  on  the  ground  that  they  were  insolvent, 
and  had  made  an  assignment  for  the  benefit  of  creditors.  In 
the  petition  they  set  forth  that  they  were  creditors  of  the  said 
company  having  provable  claims  amounting  in  the  aggregate  to 
$1,000,  each  of  the  petitioners  being  an  indorser  or  surety  upon 
one  of  a  series  of  ten  notes  for  $100  each,  signed  by  the  Dreher 
Shoe  Company,  dated  May  1,  1901,  and  payable  in  one  year  from 
date;  these  notes  having  been  discounted  by  the  First  National 
Bank  of  Selins  Grove,  and  then  held  by  it.  On  this  showing  a 
subpoena  and  order  to  show  cause  were  issued,  returnable  Oc- 
tober 26th,  and  duly  served.  No  response  was  made  at  the  return 
day  by  the  alleged  bankrupts,  but  on  October  28th  Fr.  Otto 
MuUer  and  two  other  creditors  came  in  and  obtained  a  rule  to 
show  cause  why  the  proceedings  should  not  be  dismissed  be- 
cause the  petitioners  did  not  hold  provable  claims,  and  in  this, 
on  November  19th,  the  alleged  bankrupts  and  two  other  creditors 
joined.  A  copy  of  one  of  the  notes — which  are  all  alike — was 
produced  at  the  argument,  and  shows  that  the  petitioners  axe 
not  indorsers,  but  joint  makers  with  the  Dreher  Shoe  Company.  Jrf  ~l^a 
But,  however  that  may  be,  they  were  at  the  time  of  filing  the  -^-vf- 
petition,  and  still  are,  sureties,  and  no  more.  The  bank  holds  ,^^/- 
the  notes,  by  which  they,  as  well  as  the  principal  debtors,  are 
bound ;  and,  while  it  declines  to  move,  and  has  at  the  same  time 
notified  the  sureties  that  they  will  be  looked  to,  nothing  has  been 
done  to  enforce  the  obligations,  which  are,  in  fact,  not  yet  due; 
nor  have  the  sureti^g  pair!  or  been  called  upon  to  pay  them.  Un-^ 
der  such  f.iygiF'Sitapr'.e.^  it  is  djfFianU,  to  s^p  bnw  f.hf»  profipAdinjgx 
oan  be  naaintained.  On  each  of  the  notes  referred  to  the  debt 
or  claim  is  that  of  the  holder  of  the  obligation  to  whom  it  is  due, 
the  surety  having  no  direct  interest  in  it,  being  only  secondarily 
or  contingently  liable.  He  may  pay  the  debt,  and  become  the! 
holder,  with  all  the  rights  incident  thereto ;  but  unless  and  until  | 
he  does  he  occupies  a  secondary  and  subordinate  petition.    The 


414  ADMINISTRATION 

right  to  move  is,  in  the  first  instance,  lodged  in  the  one  who  is 
actually  possessed  of  the  obligation  of  the  debtor.  The  surety 
has,  however,  an  interest  to  protect,  which  the  bankruptcy  law 
recognizes ;  and,  in  order  to  accord  him  what  it  considers  a  proper 
f  measure  of  relief,  it  provides  in  §  57*  that  "whenever  a  creditor, 
\  whose  claim  against  a  bankrupt  estate  is  secured  by  the  indi- 
\  vidual  undertaking  of  any  person,  fails  to  prove  such  claim,  such 
1  person  may  do  so  in  the  creditor's  name,  and  if  he  discharge 
[  such  undertaking  in  whole  or  in  part,  he  shall  be  subrogated  to 
that  extent  to  the  rights  of  the  creditor. ' '  No  one  has  any  rights 
I  under  the  bankrupt  law  outside  of  what  it  gives  him,  and  those 
of  a  surety  are  defined  by  this  section,  beyond  which  he  cannot 
go.  By  it  he  has  the  right  to  prove,  in  case  the  principal  cred- 
itor fails  to  do  so.  He  does  not,  indeed,  have  to  discharge  the 
obligation  in  order  to  have  this  privilege,  but,  in  case  he  does 
do  so,  in  whole  or  in  part,  he  becomes  entitled  to  that  extent 
to  the  right  of  subrogation,  and,  in  any  event,  when  he  proves 
the  debt,  he  proves  it  not  in  his  own  name,  but  in  that  of  the 
original  holder.  In  re  Christ^nsen,  2  Nat.  Bankr.  N.  1094.  The 
particular  point  to  be  noticed  in  the  present  connection  with 
regard  to  the  position  of  the  surety  is  that  he  only  has  a  right 
to  prove  in  case  the  principal  creditor  fails  to  do  so,  and  the 
latter  cannot  be  said  to  fail  until  he  has  had  an  opportunity  and 
passed  it  by,  which  can  only  occur  when,  by  proceedings  duly 
instituted,  the  estate  of  the  debtor  has  been  drawn  into  the  bank- 
ruptcy court  to  be  there  administered,  and  all  parties  have  been 
called  upon  to  make  known  their  claims.  "When  that  has  been 
done,  and  he  neglects  to  act,  the  surety,  so  as  not  to  be  preju- 
diced, may  himself  prove  the  debt  in  his  stead.  This,  so  far  as 
I  can  see,  is  all  the  relief  given  by  the  act,  and,  whether  adequate 
or  inadequate,  it  must  suffice.  It  follows  from  this  that  at  the 
outstart  the  surety  who  has  not  taken  up  the  obligation  has 
no  provable  claim,  and  therefore  has  no  standing  to  petition.  It 
is  not  provided  in  the  law  that  at  that  stage  he  can  intervene, 

(either  in  his  own  name  or  in  the  name  of  the  creditor,  and  in- 
stitute involuntary  proceedings.  All  that  he  can  do  is  to  prove 
the  claim  later  on,  if  the  creditor  fails  to  do  so  after  somebody 
else  has  moved.  This  is  the  view  taken  by  In  re  Riker,  18  Nat. 
Bankr.  R.  393,  Fed.  Cas.  No.  11,833,  a  case  arising  under  the 
act  of  1867,  where  the  provisions  were  fully  as  favorable  to  the 
surety  as  here.  Two  of  the  petitioners  there  were  indorsers  on 
notes  of  the  debtor,  which  had  been  turned  over  for  value  to  a 


CONTINGENT  CLAIMS  415 

third  party,  in  whose  hands  they  had  been  dishonored  at  ma- 
turity, and  the  indorsers  notified  that  they  would  be  held;  and, 
notwithstanding  that  their  liability  was  so  fixed,  it  was  decided 
that  they  were  not  entitled  to  petition.  "It  seems,"  says 
Choate,  J.,  "the  notes  objected  to  were  not  demands  due  abso- 
lutely to  the  petitioning  creditors,  but  on  which,  in  case  the 
holders  should  not  prove,  they  could  make  proof  *  *  •  in 
the  creditor's  name  or  otherwise.  The  holder  is  the  creditor, 
who,  in  the  first  instance,  has  exclusively  the  right  to  prove; 
and  the  liability  of  the  maker  to  the  indorsers  is  only  contingent 
in  its  nature,  and  his  claim  is  only  provable  in  a  certain  event, 
which  cannot  happen  until  after  the  adjudication,  viz.,  the 
neglect  of  the  holder  to  prove."  This  is  squarely  to  the  point, 
and  confirms  my  own  reading  of  the  law.  Nor  do  I  find  anything 
to  contravene  it  in  Mace  v.  Wells,  7  How.  272,  12  L.  ed.  698,  or 
In  re  Nickodemus,  3  Nat.  Bankr.  R.  230,  Fed.  Cas.  No.  10,254, 
relied  on  by  counsel  for  the  petitioners.  I  am  forced,  therefore, 
to  conclude  that  the  sureties  had  no  standing  to  institute  the 
present  proceedings,  which  must  accordingly  fall. 

The  rule  is  made  absolute,  and  the  petition  and  all  proceed-        i^  , 
ings  thereunder  are  dismissed.^  y  .--  t^'-' 


SWARTS  V.  SIEGEL  et  al.  ''f^  }^'-        x 

117  Fed.  13,  54  C.  C.  A.  399  a.     -    n    ^ 


(Circuit  Court  of  Appeals,  Eighth  Circuit.    July  21,  1902)^ 


jjf 


SANBORN,  Circuit  Judge.    These  are  appeals  from  the  decree 
of  the  District  Court  directing  that  the  claim  of  F.  Siegel  & 
Bro.  against  the  estate  of  the  Siegel-Hillman  Dry  Goods  Com-     ^^  "^ 
pany,  a  corporation  and  a  bankrupt,  be  disallowed  unless  the       -     l 
claimants  repay  to  the  trustee  the  sums  of  $14,600  and  $5,219,63,    ,.}*:M* 
which   the   court  held  to  constitute   preferences  given  to  the     ^  , 
claimants  which  they  were  required  to  surrender  under  §  57gr        V^ 
of  the  bankrupt  act  of  1898.    The  claimants  appealed  from  this     I.   <^ 
decree  because  it  required  them  to  restore  the  $14,600  and  the    • 
$5,219.63  as  a  condition  of  the  allowance  of  their  claim.     The 
trustee  appealed  from  it  because  it  did  not  require  the  claimants 

8 — See  Insley  v.  Garside,  121  Fed.  fi^ 

699;    In    re    Dr.    Vorhees    Co.,    187  ^^'^ -*,/;, 

Fed.  611,  629,  633.  .^:..y^;...V.«^:i^^?t-t^^  j^ 


h    f 


416  ADMINISTRATION 

to  repay  to  him  $20,000  more  as  a  condition  of  the  allowance  of 
their  claim, 

1.  *  *  *  Four  months  prior  to  February  6,  1900,  when 
the  dry  goods  company  was  adjudicated  a  bankrupt,  the  Fourth 
National  Bank  of  St.  Louis  held  the  promissory  notes  of  this 
corporation  for  $25,000  upon  which  the  claimants,  F.  Siegel  & 
Bro.,  had  indorsed  their  names  before  the  notes  were  discounted 
for  the  purpose  of  giving  them  credit,  so  that  they  became 
^accommodation  makers  thereon.  Within  four  months  preceding 
the  filing  of  the  petition  in  bankruptcy,  the  dry  goods  company, 
while  it  was  insolvent,  paid  to  the  bank  $14,600  on  some  of  these 
notes,  and  the  bank  innocently  received  these  payments.  On 
December  30,  1899,  when  the  petition  in  bankruptcy  was  filed, 
the  bank  held  a  claim  against  the  corporation  for  $10,600  and 
interest  upon  some  of  these  notes  which  had  been  indorsed  by 
the  claimants,  and  for  $35,000  upon  other  notes  of  the  bankrupt 
which  had  not  been  so  indorsed.  After  the  adjudication  in 
bankruptcy  Siegel  &  Bro.  paid  $10,535.46,  the  amount  which 
remained  due  upon  some  of  these  notes  which  they  had  indorsed, 
and  one  of  the  items  of  their  claim  against  the  estate  of  the  bank- 
rupt is  the  amount  which  they  so  paid.  Their  claim  consists  of 
various  items  aggregating  about  $35,000.  The  court  below  di- 
rected the  disallowance  of  their  claim  unless  they  refunded  the 
$14,600  which  the  bank  had  received  on  the  notes  which  Siegel  & 

Bro.  had  indorsed. 

********* 

[After  discussing  the  question  of  subrogation,  the  court  con- 
tinued] : 

There  is  another  reason  why  Siegel  &  Bro.  are  not  entitled  to 
the  allowance  of  their  claim  unless  the  $14,600  is  repaid.  It  is 
that  they  were  creditors  of  the  dry  goods  company  when  that 
.  ^\  I  amount  was  paid  to  the  bank.  A  creditor  is  ' '  one  who  gives 
•^  ^/  credit  in  business  transactions. ' '  Cent.  Diet.  p.  1341,  tit. ' '  Cred- 
itor." Siegel  &  Bro.  gave  credit  to  the  dry  goods  company  in  a 
business  transaction.  They  signed  its  notes,  became  absolutely 
liable  to  pay  them,  and  thereby  gave  it  credit.  If  they  had  simply 
indorsed  them,  and  thus  become  only  contingently  liable,  the  same 
result  would  have  followed.  One  who  loans  his  credit  to  another 
is  as  much  his  creditor  as  one  who  loans  his  money  to  him.  A 
creditor  is  "one  who  has  the  right  to  require  the  fulfillment  of 
an  obligation  or  contract."  Bouv.  Law  Diet.  p.  435.  An  in- 
dorser,  an  accommodation  maker,  or  a  surety  on  a^  obligation 


CONTINGENT  CLAIMS  417 

of  a  debtor  has  a  right  to  require  the  fulfillment  of  the  obliga- 
tion or  contract  of  that  debtor.    "  'Creditor'  shall  include  any- 
one who  owns  a  demand  or  claim  provable  in  bankruptcy."    §  1, 
subd.  9,  Bankr,  Law  1898.    "Debts  of  a  bankrupt  may  be  proved 
and  allowed  against  his  estate  which  are   (1)   a  fixed  liability 
•     *     *     (4)   founded  upon  an  open  account  or  upon  a  con- 
tract express  or  implied. "    §  63.    Provision  is  here  made  for  the 
proof  of  two  classes  of  debts, — those  which  evidence  fixed  liabili- 
ties of  the  debtor,  and  those  founded  upon  contracts  which  evi- 
dence contingent  or  uncertain  liabilities.    The  debt  of  a  principal 
debtor  to  his  indorser,  his  accommodation  maker,  or  his  surety 
before  the  latter  has  paid  the  obligation  is  a  contingent  liability 
founded  upon  contract,  and  falls  directly  within  the  terms  and 
meaning  of  subdivision  4  of  this  section.     To  make  assurance 
doubly  sure,  however,  congress  expressly  provided  that  "when- 
ever a  creditor,  whose  claim  against  a  bankrupt  estate  is  se- 
cured by  the  individual  undertaking  of  any  person,  fails  to 
prove  such  claim,  such  person  may  do  so  in  the  creditor's  name, 
and  if  he  discharge  such  undertaking  in  whole  or  in  part  he  shall 
be  subrogated  to  that  extent  to  the  rights  of  the  creditor. ' '    §  57*. 
An  indorser,  an  accommodation  maker,  or  a  surety  on  the  obliga- 
tion of  a  bankrupt  is  a  person  whose  individual  undertaking 
secures  the  claim  against  the  bankrupt  estate  of  the  holder  of  that 
obligation,  and  by  the  terms  of  this  section  he  may  prove  that 
claim  whenever  the  creditor  fails  to  do  so.     The  langua^  is 
broad,  comprehensive,  and  without  exception.    He  has  the  same 
right  to  prove  it  before  as  after  he  discharges  the  obligation  in 
whole  or  in  part,  and  if  he  is  an  indorser  he  has  the  same  right 
to  make  his  proof  before  as  after  his  liability  ceases  to  be  con- 
tingent and  becomes  fixed.     The  last  clause  of  the  paragraph, 
"and  if  he  discharge  such  undertaking  in  whole  or  in  part  he 
shall  be  subrogated  to  that  extent  to  the  rights  of  the  creditor, ' ' 
neither  limits  the  class  who  may  prove  their  claims  under  this 
paragraph  to  those   who  have   discharged  their  undertakings 
entirely  or  partly,  nor  in  any  way  restricts  the  class  which  the 
earlier  portion  of  the  paragraph  permits  to  establish  their  de- 
mands against  the  estate  of  the  bankrupt.    Oii  the  other  hand,  it 
adds  emphasis  and  certainty  to  the  patent  meaning  of  the  earlier 
portion  of  the  para^aph  that  the  indorser  or  surety  may  prove 
the  claim  in  the  name  of  the  holder  of  the  bankrupt's  obligation 
whenever  the  creditor  fails  to  do  so,   and  before,  as  well  as 
after,  the  surety  discharges  his  undertakings,  because,  while  such 

H.  &  A.  Bankruptcy — 2  7 


418  ADMINISTRATION 

proof  in  the  name  of  the  creditor  would  send  the  dividends  to 
the  original  holder  of  the  claim,  the  latter  portion  of  the  para- 
graph adds  the  provision  that  if  the  surety  discharges  his  un- 
dertaking he  shall  then  be  subrogated  to  the  rights  of  the  original 
holder,  and  hence  to  the  right  to  receive  the  dividends.  §§  57 i 
and  63  (4)  were  obviously  intended  to  prevent  the  injustice  that 
would  be  inflicted  upon  indorsers  and  sureti^  for  the  bankrupt 
whenever  the  holders  of  their  obligations^ should  elect  to  make  no 
proof  of  their  claims  against  the  bankrupt  estates,  and  to  rely 
exclusively  upon  the  liabilities  of  the  sureties  if  the  latter  were 
not  allowed  to  prove  the  claims.  These  sections  have  accom- 
plished their  purpose.  The  remedy  they  provided  is  as  broad 
and  comprehensive  as  the  evil  which  they  were  passed  to  pre- 
vent, and  an  indorser  or  a  surety  has  a  provable  claim  against 
the  estate  of  a  bankrupt,  and  is  his  creditor  under  the  act  of 
1898  before,  as  well  as  after,  his  liability  becomes  fixed. 

An  indorser,  an  accommodation  maker,  or  a  surety  on  the 
'obligation  of  a  bankrupt  is  a  creditor  under  the  act  of  1898, 
and  a  payment  on  such  an  obligation  by  the  principal  debtor 
while  insolvent  to  the  innocent  holder  of  the  contract  within 
four  months  before  the  filing  of  the  petition  for  adjudication  in 
bankruptcy  will  constitute  a  preference  which  will  debar  the 
indorser,  accommodation  maker,  or  surety  from  the  allowance 
of  any  claim  in  his  favor  against  the  estate  of  the  bankrupt 
unless  the  amount  so  paid  is  first  returned  to  that  estate.  Bankr. 
Act  1898  (30  Stat.  544)  §§  1  (9),  57%  63a  (1,  4)  ;  Landry  v. 
Andrews,  6  Am.  Bankr.  R.  281,  284,  48  Atl.  1036 ;  In  re  Rea,  82 
Iowa,  231,  239,  48  N.  W.  78 ;  Cutler  v.  Steele,  85  Mich.  627,  632, 
48  N.  W.  631 ;  Dunnigan  v.  Stevens,  122  111.  396,  401,  404,  13 
N.  E.  651,  3  Am.  St.  Rep.  496 ;  Ahl  v.  Thornor,  1  Fed.  Cas.  220, 
222  (No.  103)  ;  Sill  v.  Solberg  (C.  C),  6  Fed.  468,  474,  477; 
Scammon  v.  Cole,  21  Fed.  Cas.  627,  628  (No.  12,432) ;  Cooking- 
ham  v.  Morgan,  6  Fed.  Cas.  454,  455  (No.  3,183)  ;  In  re  Gerson 
(D.  C),  105  Fed.  891;  Bartholow  v.  Bean,  18  Wall.  635,  21  L. 
ed.  866;  In  re  Waterbury  Furniture  Co.  (D.  C),  114  Fed.  255. 

This  conclusion  has  not  been  reached  without  a  careful  com- 
parison of  the  pertinent  provisions  of  §§38  and  39  of  the  bank- 
rupt act  of  1867  (14  Stat.  535,  536),  and  a  thoughtful  perusal 
of  the  opinions  in  Singer  v.  Sloan,  Fed.  Cas.  No.  12,899 ;  Thomas 
V.  Woodbury,  Fed.  Cas.  No.  13,916;  Bean  v.  Laflin,  Fed.  Cas. 
No.  1,172;  Corbett  v.  Woodward,  Fed.  Cas.  No.  3,223;  and 


CONTINGENT  CLAIMS  419 

Swarts  V.  Siegel  (C.  C),  114  Fed.  1001.  This  portion  of  our 
labors^  however,  has  been  fruitless  chiefly  for  the  reason  that 
'  the  language  of  the  act  of  1898  upon  this  subject  appears  to  us 
T6  b6  too  plain  lor  exegesis  or  interpretation.  Attempted  judicial 
'coilstnietion  of  the  unequivocal  language  of  a  statute  or  of  a 
contract  serves  only  to  create  doubt  and  to  confuse  the  judgment. 
There  is  no  safer  or  better  settled  canon  of  interpretation  than 
that  when  language  is  clear  and  unambiguous  it  must  be  held  to 
mean  what  it  plainly  expresses,  and  no  room  is  left  for  con- 
struction. Knox  Co.  V.  Morton,  15  C.  C.  A.  671,  673,  68  Fed. 
787,  789 ;  Railway  Co.  v.  Sage,  17  C.  C.  A.  558,  565,  71  Fed.  40, 
47;  U.  S.  V.  Fisher,  2  Cranch,  358,  399,  2  L.  ed.  304;  Railway 
Co.  V.  Phelps,  137  U.  S.  528,  536,  11  Sup.  Ct.  168,  34  L.  ed.  767. 
The  accepted  and  customary  definition  of  the  term  *  *  creditor, ' ' 
its  definition  in  the  act  of  1898,  the  clear  terms  and  patent 
meaning  of  the  provisions  of  that  act  upon  the  subject  under 
discussion,  the  better  reasons  and  the  greater  weight  of  authority, 
all  converge  to  establish  and  sustain  the  conclusion  that  an  in- 
dorser,  an  accommodation  maker,  or  a  surety  for  a  bankrupt  is 
his  creditor;  and  the  result  is  that  whether  we  are  governed  by 
the  general  definition  of  the  term,  or  by  the  specific  provisions 
of  the  statute,  Siegel  &  Bro.  held  a  provable  claim  against  the 
estate  of  the  dry  goods  company,  and  were  its  creditors  when 
the  $14,600  was  paid  to  the  bank ;  and  as  that  payment  depleted 
the  estate,  and  its  enforcement  will  enable  Siegel  &  Bro.  to  ob- 
tain a  larger  percentage  of  their  claim  out  of  the  estate  of  the 
bankrupt  than  other  creditors  of  the  same  class  will  receive, 
their  claim  against  the  estate  cannot  be  allowed  unless  the  $14,600 

is  first  returned  to  the  trustee. 

*     *     * 

The  result  is  that  the  claim  of  F.  Siegel  &  Bro.  against  the  A  yu^p  J 
estate  of  the  bankrupt  cannot  be  lawfully  allowed  unless  before  j 
its  allowance    *     *     *    the  sum  of  $14,600  is  paid  back  to  the  A 
trustee  either  by  the  Fourth  National  Bank  of  St.  Louis  or  by  i  ^  "^  7 
Siegel  &  Bro.     *    *     *     The  decree  which  is  challenged  by  these  ^     "^c4  « 
appeals  is  reversed,  and  the  case  is  remanded  to  the  court  be- 
low, with  directions  to  enter  orders  and  take  further  proceed- 
ings herein  not  inconsistent  with  the  views  expressed  in  this 
opinion  and  in  the  opinion  in  the  case  of  Swarts  v.  Fourth  Nat. 
Bank,  which  is  filed  herewith.  ' 


420  ADMINISTRATION  '      . 

GODING  V.  ROSCENTHAL 

180  Mass.  43,  61  N.  E.  222 

(Supreme  Judicial  Court  of  Massachusetts.     October  18,  1901) 

BARKER,  J.    By  the  execution  of  the  bond  of  March  29,  1898, 
to  Aug,  in  which  the  present  plaintiff  was  a  surety  for  the 
present  defendant,  the  latter  incurred  an  obligation  to  the  pres- 
ent plaintiff. to  reimburse  him  any  amount  which  he  might  be 
compelled  as  surety  to  pay  upon  the  bond.     This  obligation  was 
in  force  when,  on  February  13,  1900,  the  present  defendant's 
petition  in  bankruptcy  was  filed.     It  was  an  obligation  founded 
upon  an  implied  contract,  and  it  was  evidenced  by  an  instrument 
in  writing,  and  in  one  sense  it  was  a  fixed  liability.    But  no  debt 
was  absolutely  owing  at  the  time  of  the  petition.     The  obliga- 
tion was  contingent  upon  the  happening  of  a  breach  of  the  bond 
and  a  payment  by  the  surety.    The  payment  by  the  surety  was 
not  until  June  12,  1900,  and  there  seems  to  have  been  no  breach 
j   of  the  bond  before  that  date.     Therefore  neither  the  obligee  in 
\  the  bond  nor  the  surety  could  prove  in  the  bankruptcy  proceed- 
/  ings  a  claim  foulided  upon  the  bond,  unless  merely  contingent 
/  claims  are  provable  under  the  bankruptcy  act  of  1898.    The  ulti- 
/  mate  decision  of  that  question  is  yet  to  be  made  by  the  Supreme 
Court  of  the  Unit^  States.    But  in  Morgan  v.  Wordell,  178  Mass. 
350,  59  N.  E.  1037,  this  court  assumed  that  such  claims  were 
not  provable  under  the  act,  and  we  follow  that  view  in  the 
present  case. 

Exceptions  sustained.® 

HAYER  V.  COMSTOCK 

115  Iowa  187,  88  N.  W.  351 

(Supreme  Court  of  Iowa.    December  20,  1901) 

GIVEN,  C.  J.  1.  The  agreed  statement  of  facts  is  as  follows : 
"On  May  26,  1900,  the  following  agreed  statement  of  facts  was 
filed  with  the  clerk  of  the  Wright  County  District  Court,  to-wit : 
'It  is  hereby  agreed  by  and  between  the  plaintiff  and  the  de- 
fendant in  the  above-entitled  action  that  on  December  2,  1893, 

9 — Smith  V.  McQuillin,  193  Mass.  ;  liams  &  Co.  v.  U.  S.  Fidelity,  etc., 
289;  pgilby  v.  Hunro,  101  N.  Y.  Co.,  11  Ga.  App.  635,  75  S.  E. 
Supp.  753,  52  Misc.  170;  R.  P.  Wil-       1067,  ace. 


CONTINGENT  CLAIMS  421 

the  plaintiff,  C.  F.  Hayer,  signed  the  note  attached  to  this  state- 
ment as  surety  for  the  defendant ;  that  the  defendant  failed  and 
neglected  to  pay  said  note;  that  on  April  1,  1899,  the  plaintiff 
had  to,  and  did,  pay  the  full  amount  of  said  note,  to-wit,  $193.66, 
to  the  State  Bank  of  Eagle  Grove,  Iowa,  and  that  no  part  of 
said  amount  has  been  repaid  him;  that  in  December,  1898,  the 
defendant  filed  his  petition  in  the  District  Court  of  the  United 
States  for  the  Northern  District  of  Iowa,  and  was  duly  and 
legally  adjudged  a  voluntary  bankrupt  under  the  acts  of  Con- 
gress relating  to  bankruptcy ;  that  said  note  was  duly  scheduled 
in  said  bankruptcy  proceedings  as  one  of  defendant 's  liabilities ; 
that  in  such  schedule  the  State  Bank  of  Eagle  Grove,  Iowa, 
payee  of  said  note,  was  named  as  the  owner  and  holder  thereof, 
and  was  duly  notified  of  each  step  in  said  bankruptcy  proceed- 
ings as  required  by  law ;  that  in  December,  1898,  plaintiff,  C.  P. 
Hayer,  was  informed  by  others  of  the  pendency  of  said  bank- 
ruptcy proceedings,  and  had  actual  knowledge  thereof  after  the 
filing  of  the  petition,  although  he  was  not  listed  as  a  creditor 
therein ;  that  on  April  3,  1899,  this  defendant  was  by  the  judg- 
ment of  said  United  States  Court  discharged  from  all  his  debts ; 
that  a  certificate  of  such  discharge  was  issued  by  said  court  and 
delivered  to  defendant,  a  copy  of  which  certificate  is  attached 
to  defendant's  answer  herein,  and  is  hereby  made  a  part  of  this 
statement  of  facts.'  "  The  certificate  of  discharge  is:  "From 
all  debts  and  claims  which  existed  on  the  6th  day  of  December, 
A.  D.  1898,  on  which  day  the  petition  for  adjudication  was  filed 
by  him,  except  such  debts  as  are  by  law  excepted  from  the 
operation  of  such  discharge  in  bankruptcy,"  This  claim  is  not 
of  the  class  excepted  by  law.  The  plaintiff  claims  that  as  he 
had  not,  as  surety,  paid  the  note  at  the  time  the  petition  for 
adjudication  in  bankruptcy  was  filed,  there  was  no  debt  then 
due  to  him,  and  he  could  not  have  his  claim  scheduled  against 
the  bankrupt's  estate;  that  he  had  no  provable  claim;  and  that 
the  discharge  does  not  apply  to  his  claim;  while  the  defendant 
contends  that  under  the  facts  the  discharge  does  apply,  and 
that  therefore  the  court  erred  in  rendering  judgment  against 
him. 

§  17  of  the  bankruptcy  law  of  1898,  under  which  this  pro- 
ceeding was  had,  provides  that  ' '  a  discharge  in  bankruptcy  shall 
release  a  bankrupt  from  all  of  his  provable  debts,"  except  cer- 
tain debts  of  which  this  is  not  one.  §  63,  in  specifying  debts 
which  may  be  proved  and  allowed,  names  the  following,  among 


422  : ; ,  /ADMINISTRATION 

others:  "  (1)  A  fixed  liability  as  evidenced  by  judgment  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  recoverable  at  that 
date  or  with  a  rebate  of  interest  upon  such  as  were  not  then 
payable  and  did  not  bear  interest.  *  *  *  (4)  Founded  upon 
an  open  account,  or  upon  a  contract  express  or  implied."  §  16 
provides  that  the  liability  of  the  surety  for  a  bankrupt  shall  not 
be  altered  by  the  discharge  of  such  bankrupt,  and  paragraph 
"V  of  §  57  is  as  follows:  "Whenever  a  creditor,  whose  claim 
against  a  bankrupt  estate  is  secured  by  the  individual  under- 
taking of  any  person,  fails  to  prove  such  claim,  such  person  may 
do  so  in  the  creditor's  name,  and  if  he  discharge  such  undertak- 
ing in  whole  or  in  part  he  shall  be  subrogated  to  that  extent  to 
the  rights  of  the  creditor."  Paragraph  4  of  order  No.  21  of 
"General  Orders  and  Forms  in  Bankruptcy  Established  by  the 
Supreme  Court  of  the  United  States"  (18  Sup,  Ct.  vii.)  is  as 
follows:  "(4)  The  claims  of  persons  contingently  liable  for 
the  bankrupt  may  be  proved  in  the  name  of  the  creditor  when 
known  by  the  party  contingently  liable.  When  the  name  of  the 
creditor  is  unknown  such  claim  may  be  proved  in  the  name  of 
the  party  contingently  liable;  but  no  dividend  shall  be  paid 
upon  such  claim,  except  upon  satisfactory  proof  that  it  will 
diminish  the  pro  tanto  original  debt." 

(This  debt  was  a  fixed  liability  evidenced  by  an  instrument  in 
wj^jtiag,  and  absolutely  owing  by  the  defendant  at  the  time  of 
the  filing  of  the  petition  in  bankruptcy,  and  therefore  might  be 
proved  against  the  estate  as  it  was.    It  is  the  fact  that  the  bank- 
rupt absolutely  owed  this  fixed  liability,  evidenced  in  writing,  at 
the  time  of  the  filing  of  the  petition,  that  made  it  provable, 
regardless  of  the  person  to  whom  it  was  owing.    If  the  creditor 
had  failed  to  prove  the  claim,  the  plaintiff  could  have  done  so 
in  its  name,  not  because  the  debt  was  then  due  to  him,  but  be- 
cause it  was  a  fixed  liability,  evidenced  in  writing,  and  abso- 
lutely owing  by  the  defendant.    Being  proved  as  it  was  by  the 
creditor,  it  was  not  required  that  the  surety  should  take  any 
,  further  steps.    We  do  not  overlook  the  distinctions  that  exist  as 
between  liability  of  the  debtor  to  the  creditor  and  his  liability 
!  to  his  surety,  but  we  emphasize  the  fact  that  it  was  the  fixed 
I  liability,  evidenced  in  writing,  "absolutely  owing"  by  the  de- 
I  f  endant,  that  made  this  a  provable  claim  against  his  estate.    Said 
paragraphs  in  §  57  and  in  the  general  orders  of  the  Supreme 


CONTINGENT  CLAIMS  423 

Court  recognize  the  right  of  the  surety  to  protect  himself  before 
payment,  and  when  his  liability  is  contingent,  and  to  share  in 
the  dividends  of  the  estate  after  payment.  Mace  v.  Wells,  7 
How.  275,  12  L.  ed.  698,  decided  under  the  bankruptcy  law  of 
1841,  is  quite  identical  in  its  facts  with  this  case,  and  it  was 
there  held  that  the  plaintiff  was  not  entitled  to  recover.  The 
fourth  section  of  the  law  provided  that  "a  discharge  and  certi- 
ficate, when  duly  granted,  shall  in  all  courts  of  justice  be  deemed 
a  full  and  complete  discharge  of  all  debts,  contracts  and  other 
engagements  of  such  bankrupt  which  are  provable  under  this 
act,"  etc.  By  the  fifth  section,  "endorsers,  bail,  or  other  per- 
sons having  uncertain  or  contingent  demands  against  such  bank- 
rupt, shall  be  permitted  to  come  in  and  prove  such  debts  or 
claims  under  this  act,  and  shall  have  a  right  whenever  debts  and 
claims  become  absolute  to  have  the  same  allowed  them,"  etc. 
The  court  says :  ' '  Wells,  as  surety,  was  within  this  section,  and 
might  have  proved  his  demand  against  the  bankrupt.  He  had 
not  paid  the  last  note,  but  he  was  liable  to  pay  it  as  surety,  and 
that  gave  him  a  right  to  prove  the  claim  under  the  fifth  section. 
And  the  fourth  section  declares  that  from  all  such  demands  the 
bankrupt  shall  be  discharged.  This  is  the  whole  case.  It  seems 
to  be  clear  of  doubt."  See,  also,  Crafts  v.  Mott,  4  N.  Y.  604. 
We  may  say  as  to  these  sections,  and  the  sections  of  the  present 
law  quoted  above,  as  is  said  in  the  recent  case  of  In  re  Dillon 
(D.  C),  100  Fed.  627,— that  "the  provisions  of  the  two  acts, 
though  quite  differently  worded,  yet  reach  in  most  respects  the 
same  results. ' '  Under  both  cases  the  surety  can  get  nothing  by 
way  of  dividend  unless  he  pays  the  original  debt,  in  whole  or 
in  part.  If  he  discharges  the  whole  debt,  then,  under  the  clause 
above  quoted  of  §  19  of  the  Acts  of  1867,  and  under  §  57,  par. 
"i,"  of  the  bankrupt  act  of  1898,  he  stands  in  the  place  of  the 
original  creditor,  or  is  subrogated  to  his  rights.  This  is  true 
whether  the  payment  be  made  before  or  after  the  bankruptcy. 
Plainly,  the  words  "if  he  discharge  such  undertaking, "  in  §  57, 
par.  "i,"  are  not  limited  to  the  time  before  adjudication.  In 
this  Case  of  Dillon  it  is  said  "That  if  Claffin,  the  creditor,  had 
proved  the  original  debt  to  him  at  the  time  of  the  bankruptcy, 
as  he  might  ordinarily  have  done,  MeGuire  [the  surety],  on  his 
subsequent  payment  of  a  part  of  the  Claffin 's  debt,  would  be 
subrogated  to  that  extent  to  Claffin 's  rights.  It  follows,  also, 
that,  since  Claffin  has  not  proved  the  debt,  McGuire  must,  if  he 
wishes  to  prove,  do  so  in  Claffin 's  name.    As  he  has  not  done 


424  ADMINISTRATION 

this,  bis  claim  must  be  disallowed,  without  any  question  of  set-off, 
and  the  referee's  judgment  is  therefore  affirmed."  In  this  case 
the  creditor  had  proved  the  claim,  and  nothing  further  was  re- 
quired of  the  surety  to  entitle  him  to  share  in  the  dividends  in 
case  of  payment  by  him.  Defendant  cites  In  re  Burka  (D.  C), 
104  Fed.  326,  which  holds  that  the  rights  of  creditors  generally 
relate  to  the  date  of  the  filing  of  the  petition,  and  that  a  claim 
for  legal  services  not  then  in  existence  cannot  be  proved  against 
the  estate,  and  is  not  released  by  discharge.  As  already  said, 
this  was  a  fixed  liability,  evidenced  in  writing,  and  absolutely 
owing  by  the  defendant  at  the  time  of  the  filing  of  the  petition ; 
and  these  facts  render  it  a  provable  claim,  regardless  of  whether, 
by  transfer  or  otherwise,  the  person  to  whom  he  owed  it  was 
changed  or  not.  Such,  we  think,  is  the  plain  intent  of  the  law, 
and  the  discharge  of  the  defendant  operated  to  defeat  the  plain- 
tiff's action. 

It  follows  from  this  view  of  the  law  and  facts  that  the  judg- 
ment of  the  District  Court  must  be  reversed.^*^ 

^^   -''^    ^    ^  ^'^^  DUNBAR  v.  DUNBAR 


a-'' 


W    ^  '   <^  ^-1?^  U.  S.  340,  47  L.  ed.  1084,  23  Sup.  Ct.  757 

ijifJ^-^W^^^I^;^  ^United  States  Supreme  Court.    June  1,  1903) 

Jir^'^j  r}  The  defendant  in  error,  being  the  plaintiff  below,  brought  her 
r^  action  in  October,  1899,  against  the  plaintiff  in  error,  in  the 
Municipal  Court  of  Boston,  to  recover  moneys  alleged  to  be  due 
upon  a  contract,  which  was  set  forth  in  the  complaint.  Issue 
was  joined  and  the  case  tried  before  a  single  justice,  and  judg- 
ment ordered  for  the  defendant,  with  costs.  An  appeal  was 
taken  to  the  Superior  Court  of  the  county  of  Suffolk,  and  that 
court  ordered  judgment  for  the  plaintiff  for  one  branch  only 
of  her  claim.  The  case  was  reported  to  the  Supreme  Judicial 
Court  for  the  commonwealth,  and  that  court  ordered  the  court 
below  to  enter  judgment  for  the  plaintiff  for  both  branches  of 
her  claim  (180  Mass.  170,  62  N.  E.  248),  and  the  case  was  re- 
manded to  the  Superior  Court  for  the  purpose  of  entering  such 
judgment.     Pursuant  to  the  directions  of  the  Supreme  Court, 

10— Smith  V.  "Wheeler,  66   N.  Y.  See  generally   60   U.    of   P.   Law 

Supp.     780,     55     App.     Div.     170;  Eev.  482. 
Sweaney  v.  Baugher,  166  Ind.  557, 

aec  '■'            ^ 


'y^\    4M<|7 


CONTINGENT  CLAIMS  425 

the  Superior  Court  did  enter  judgment  against  the  defendant 
for  both  branches  of  her  claim,  for  the  sum  of  $851.60  and  costs. 
The  defendant  then  obtained  a  writ  of  error  from  this  court, 
directed  to  the  Superior  Court  of  Massachusetts,  where  the  record 
remained. 

The  case  shows  these  facts:  The  parties  were  husband  and 
wife,  who,  in  1889,  were  living  apart,  the  husband  in  Ohio  and 
the  wife  in  Massachusetts,  In  May,  1889,  the  attorney  for  her 
husband  came  to  Massachusetts  and  saw  Mrs.  Dunbar,  and  told 
her  that  her  husband  was  about  to  seek  a  divorce  from  her.  The 
wife  at  this  time  had  no  means,  and  the  two  sons  of  the  marriage, 
then  respectively  nine  and  twelve  years  old,  were  living  with 
her.  The  purpose  of  the  visit  of  the  attorney  was  to  obtain 
some  assurance  from  her  that  she  would  not  contest  the  case, 
and,  if  she  did  not,  that  the  husband  would  make  provision  for 
aiding  in  the  support  of  herself  and  her  sons  until  they  arrived 
of  age.  The  wife  denied  any  intended  desertion  of  her  husband, 
but  the  result  of  the  negotiations  after  the  wife  had  taken 
counsel  of  friends  was  to  give  assurance  to  the  attorney  that  no 
defense  would  be  interposed  if  he  made  some  suitable  provision 
for  herself  and  her  children. 

Upon  the  return  of  the  attorney  to  Ohio,  a  suit  for  divorce  was 
commenced  by  the  husband,  and  the  summons  served  by  publi- 
cation. No  appearance  was  made  and  there  was  no  opposition 
to  the  decree  of  divorce,  which  was  obtained  in  July,  1889.  It 
adjudged  that  the  marriage  contract  theretofore  existing  be- 
tween the  parties  was  thereby  dissolved,  and  both  parties  released 
from  the  obligation  of  the  same,  and  "that  the  custody  of  the 
children  of  such  marriage,  one  boy,  Harry  H.  Dunbar,  aged 
twelve  years,  and  Willie  W.  Dunbar,  aged  nine  years,  be,  and 
the  same  are,  to  remain  in  charge  and  under  the  control  of  the 
said  Lottie  E.  Dunbar,  the  said  Horace  B.  Dunbar  to  have  the 
privilege  of  seeing  said  children  at  all  reasonable  times." 

The  ground  of  divorce  was  stated,  and  the  court  found  ' '  upon 
the  evidence  adduced  that  the  defendant  has  been  guilty  of 
wilful  absence  for  more  than  three  years  last  past  from  plaintiff, 
and  that,  by  reason  thereof,  the  plaintiff  is  entitled  to  a  divorce 
as  prayed  for." 

After  the  divorce  the  husband  sent  to  a  friend  of  his  wife,  to 

.  be  delivered  to  her  in  performance  of  his  agreement,  a  written 

\  contract,  in  which  he  bound  himself  to  pay  to  Lottie  E.  Dunbar, 

of  Ashburnham,  Mass.,  $500  yearly,  so  long  as  she  remained  un- 


426  ADMINISTRATION 

married,  in  monthly  instalments.  In  that  contract  he  also 
agreed  to  pay  ' '  to  our  children,  Harry  H.  Dunbar  and  Willie  W. 
Dunbar,  the  sum  of  $250  each,  yearly,  until  they  each  attain  the 
age  of  fourteen  years;  after  that  age  they  are  to  be  paid  by  me 
such  extra  allowance  as  will  give  them  a  good  and  sufficient  edu- 
cation befitting  their  station  in  life,  and  a  suitable  maintenance 
until  each  attains  the  age  of  twenty-one  years."  This  writing 
was  signed  by  the  husband  and  acknowledged  before  a  notary 
public  of  Hamilton,  Ohio. 

Payments  upon  this  contract  were  made  by  the  husband,  but 
in  1896  they  had  become  somewhat  in  arrears,  and  disputes  arose 
as  to  the  validity  of  the  agreement.  Thereafter  another  contract 
was  entered  into  and  payments  were  made  as  called  for  in  that 
contract  until  some  months  prior  to  December  2,  1898.  On  such 
last-named  date  the  defendant  was  adjudged  a  bankrupt,  on 
his  voluntary  petition  in  bankruptcy,  in  the  United  States  Dis- 
trict Court  in  bankruptcy,  southern  district  of  Ohio,  western 
division,  and  on  April  24,  1899,  was  discharged  from  all  debts 
and  claims  provable,  under  the  act  of  Congress  relating  to  bank- 
ruptcy, against  his  estate,  existing  on  the  2d  day  of  December, 
1898. 

In  the  schedule  of  the  defendant  it  appeared  that  he  named 
the  plaintiff  as  a  creditor,  as  follows: 

Lottie  E.  Dunbar,  Charlestown,  Mass $    540 

Alimony  due  up  to  present  time. 
Lottie  E.  Dunbar,  Charlestown,  Mass 1,300 

Alimony  payable  yearly. 

The  plaintiff,  at  the  first  meeting  of  the  creditors  in  bank- 
ruptcy proceedings,  which  was  held  before  a  referee  appointed 
therein,  appeared  by  an  attorney,  who  produced  and  filed  his 
power  of  attorney,  and  filed  her  claim  for  $691.63,  for  instalments 
on  the  contract  due  to  December  2,  1898.  The  husband  had  paid 
nothing  on  the  contract  since  some  time  before  December  2,  1898, 
and  finally  the  wife  commenced  an  action  to  recover  the  amounts 
due  therefrom. 

The  following  is  a  copy  of  the  contract  sued  on : 
"Controversies  having  arisen  concerning  the  agreement  here- 
tofore made  between  Horace  B.  Dunbar  and  Lottie  E.  Dunbar 
in  September,  1889,  in  consideration  of  said  Lottie  E.  Dunbar's 
forbearance  of  suit  on  such  controversies,  and  in  settlement  of 
all  such  controversies,  and  in  substitution  of  said  agreement  of 


CONTINGENT  CLAIMS  427 

September,  1889,  and  in  further  consideration  of  the  release  by- 
Lottie  E.  Dunbar  and  in  satisfaction  of  all  claims  under  said 
original  agreement,  Horace  B.  Dunbar  agrees  with  the  said  Lot- 
tie E.  Dunbar  as  follows: 

''That  said  Horace  B.  Dunbar  will  pay  to  Lottie  E.  Dunbar 
during  her  life,  or  until  she  marries,  for  her  maintenance  and 
support,  yearly,  the  sum  of  $500,  and  will  pay  to  her  yearly  for 
the  support  and  maintenance  of  her  child,  Harry  H.  Dunbar, 
the  sum  of  $400  until  he  shall  attain  the  age  of  twenty-one  years ; 
and  shall  pay  to  her  yearly  for  the  support  and  maintenance  of 
her  child,  Willie  W.  Dunbar,  the  sum  of  $400  until  he  shall  attain 
the  age  of  twenty-one  years,  all  said  sums  to  be  paid  in  equal 
monthly  instalments  between  the  1st  and  10th  of  each  and  every 
month, — the  first  instalment  being  for  the  month  of  May,  1896, 
shall  be  paid  between  the  1st  and  10th  of  June,  1896. 

"And,  in  addition  to  the  foregoing,  said  Horace  B.  Dunbar 
agrees  to  pay  the  further  sum  of  $100  between  the  1st  and  10th 
of  July,  1896,  over  and  above  the  instalment  otherwise  due  for 
said  month. 

"And  the  said  Lottie  E.  Dunbar  hereby  agrees  that  she  has 
not,  nor  shall  she  have,  any  other  claim  or  demand  against  Horace 
B.  Dunbar  for  contribution  to  her  support  and  maintenance,  or 
for  the  support,  maintenance,  or  education  of  said  children,  save 
and  except  as  fixed  and  limited  by  this  agreement." 

Properly  signed  by  both  parties  and  witnessed. 

The  particulars  of  her  claim  were  stated  as  follows: 

Horace  B.  Dunbar  to  Lottie  E.  Dunbar,  Dr. 

1.  To  instalments  due  under  covenant  for  alimony  from 

December,  1898,  to  October  1,  1899,  ten  months,  at 
$41.66  a  month $416.60 

2.  To  monthly  allowance  due  her  for  support  and  main- 

tenance of  Willie  W.  Dunbar,  from  December, 
1898,  to  October  1,  1899,  ten  months,  at  $33.33  a 
month 333.30 


$749.90 


The  defendant  pleaded  his  discharge  in  bankruptcy  as  a  bar, 
and  the  Supreme  Judicial  Court  of  the  state  held  that  it  was 
not  good. 


428  ADMINISTRATION 

Mr.  Justice  PECKHAM,  after  making  the  foregoing  statement 
of  facts,  delivered  the  opinion  of  the  court: 

Had  the  provisions  of  this  contract,  so  far  as  contracting  to 
pay  money  for  the  support  of  his  wife  is  concerned,  been  em- 
bodied in  the  decree  of  divorce  which  the  husband  obtained  from 
his  wife  in  Ohio  on  the  ground  of  desertion,  the  liability  of  the 
husband  to  pay  the  amount  as  alimony,  notwithstanding  his 
discharge  in  bankruptcy,  cannot  be  doubted.  Audubon  v.  Shu- 
/  feldt,  181  U.  S.  575,  45  L.  ed.  1009,  21  Sup.  Ct.  Rep.  735.  We 
are  not  by  any  means  clear  that  the  same  principle  ought  not 
to  govern  a  contract  of  this  nature  when,  although  the  judgment 
of  divorce  is  silent  upon  the  subject,  it  is  plain  that  the  con- 
tract was  made  with  reference  to  the  obligations  of  the  husband 
to  aid  in  the  support  of  his  wife,  notwithstanding  the  decree. 
The  facts  appearing  in  this  record  do  not  show  a  case  of  any 
moral  delinquency  on  the  part  of  the  wife,  and  the  contract, 
considering  the  circumstances,  might  possibly  be  held  to  take 
the  place  of  an  order  or  judgment  of  the  court  for  the  payment 
of  the  amount,  as  in  the  nature  of  a  decree  for  alimony.  We  do 
not  find  it  necessary,  however,  to  decide  that  question  in  this 
case,  because,  in  any  event,  we  think  the  contract  as  to  the 
support  of  the  wife  is  not  of  such  a  nature  as  to  be  discharged 
by  a  discharge  in  bankruptcy. 

Conceding  that  the  bankruptcy  act  provides  for  discharging 
some  classes  of  contingent  demands  or  claims,  this  is  not,  in  our 
opinion,  such  a  demand.  Even  though  it  may  be  that  an  annuity 
dependent  upon  life  is  a  contingent  demand  within  the  mean- 
ing of  the  bankruptcy  act  of  1898  (30  Stat,  at  L.  544,  c.  541,  U.  S. 
Comp.  Stat.  1901,  p.  3418),  yet  this  contract,  so  far  as  regards 
the  support  of  the  wife,  is  not  dependent  upon  life  alone,  but  is 
to  cease  in  case  the  wife  remarries.  Such  a  contingency  is  not 
one  which,  in  our  opinion,  is  witliin  the  purview  of  the  act,  be- 
cause of  the  innate  difficulty,  if  not  impossibility,  of  estimating 
or  valuing  the  particular  contingency  of  widowhood.  A  simple 
annuity  which  is  to  terminate  upon  the  death  of  a  particular  per- 
son may  be  valued  by  reference  to  the  mortality  tables.  Mr. 
Justice  Bradley,  in  Riggin  v.  IMagwire,  15  Wall.  549,  21  L.  ed. 
232,  speaking  for  the  court,  said  that  so  long  as  it  remained  un- 
certain whether  a  contract  or  engagement  would  ever  give  rise 
to  an  actual  duty  or  liability,  and  there  was  no  means  of  remov- 
ing the  uncertainty  by  calculation,  such  contract  or  engagement 
was  not  provable  under  the  bankruptcy  act  of  1841  [5  Stat,  at 


CONTINGENT  CLAIMS  429 

L,  445,  c.  9].  The  5th  section  of  that  axit  gave  the  right  to  prove 
"uncertain  and  contingent  demands,"  but  it  was  held  that  a 
contract  such  as  above  described  was  not  within  that  section. 

It  was  remarked  by  the  justice  in  that  case  that,  if  the  con- 
tract had  come  within  the  category  of  annuities  and  debts  pay- 
able in  future,  which  are  absolute  and  existing  claims,  that  the 
value  of  the  wife 's  probability  of  survivorship  after  death  of  her 
husband  might  have  been  calculated  on  the  principle  of  life 
annuities. 
h  But  how  can  any  calculation  be  made  in  regard  to  the  continu- 
j  anee  of  widowhood  when  there  are  no  tables  and  no  statistics  by 
^  which  to  calculate  such  contingency?  How  can  a  valuation  of 
a  probable  continuance  of  widowhood  be  made?  Who  can  say 
what  the  probability  of  remarrying  is  in  regard  to  any  particu-  1 
lar  widow  ?  We  know  what  some  of  the  factors  might  be  in  the  ' 
question:  inclination,  age,  health,  property,  attractiveness,  chil- 
dren. These  would,  at  least,  enter  into  the  question  as  to  the 
probability  of  continuance  of  widowhood,  and  yet  there  are  no 
statistics  which  can  be  gathered  which  would  tend  in  the  slightest 
degree  to  aid  in  the  solving  of  the  question. 

In  many  cases  where  actions  are  brought  for  the  violation  of 
contracts,  such  as  Pierce  v.  Tennessee  Coal,  I.  &  R.  Co.,  173  U.  S. 
1,  43  L.  ed.  591,  19  Sup.  Ct.  Rep.  335 ;  Roehm  v.  Horst,  178  U.  S. 
1,  44  L.  ed.  953,  20  Sup.  Ct.  Rep.  780,  and  Schell  v.  Plumb,  55 
N.  Y,  592,  it  is  necessary  to  come  to  some  conclusion  in  regard 
to  the  damages  which  the  party  has  sustained  by  reason  of  the 
breach  of  the  contract,  and  in  such  cases  resort  may  be  had  to 
the  tables  of  mortality,  and  to  other  means  of  ascertaining  as 
nearly  as  possible  what  the  present  damages  are  for  a  failure  to 
perform  in  the  future ;  but  we  think  the  rules  in  those  cases  are 
—not  applicable  to  cases  like  this,  under  the  bankruptcy  act. 

Taking  the  liability  as  presented  by  the  contract,  if  the  mor- 
tality tables  were  referred  to  for  the  purpose  of  ascertaining  the 
value  so  far  as  it  depended  upon  life,  the  answer  would  be  no 
answer  to  the  other  contingency  of  the  continuance  of  widow- 
hood; and  if,  having  found  the  value  as  depending  upon  the 
mortality  tables,  you  desire  to  deduct  from  that  the  valuation  of 
the  other  contingency,  it  is  pure  guesswork  to  do  it. 

It  is  true  that  this  has  been  done  in  England  under  the  Eng- 
lish bankruptcy  act  of  1869  [32  &  33  Vict.  c.  71,  §  31].  In  Ex 
parte  Blakemore  (1877)  L.  R.  5  Ch.  Div.  372,  it  was  held  by  the 
Court  of  Appeal  that  the  value  of  the  contingency  of  a  widow's 


430  ADMINISTRATION 

luarrying  again  was  capable  of  being  fairly  estimated,  and  that 
proof  must  be  admitted  for  the  value  of  the  future  payments  as 
ascertained  by  an  actuary.  That  decision  was  made  under  the 
31st  section  of  the  bankruptcy  act  of  1869.  James,  Lord  Justice, 
said: 

"No  doubt  it  is  uncertain  whether  the  appellant  will  marry 
again,  just  as  the  duration  of  any  particular  life  is  uncertain. 
But,  though  the  duration  of  any  particular  life  is  uncertain, 
the  expectation  of  life  at  a  given  age  is  reduced  to  a  certainty 
when  we  have  regard  to  a  million  of  lives.  The  value  of  the 
expectation  of  life  is  arrived  at  by  an  average  deduced  from 
practical  experience." 

Although  the  English  statute  makes  it  necessary  to  arrive  at 
a  conclusion  upon  this  point,  yet  there  is  no  "practical  expe- 
rience" as  to  the  chances  of  the  continuance  of  widowhood,  such 
as  may  be  referred  to  where  the  probable  continuance  of  life  is 
involved.  In  the  latter  ease  we  liave  the  experience  tables  in 
regard  to  millions  of  lives,  and,  under  such  circumstances,  there 
is,  as  Lord  Justice  James  said,  almost  a  certainty  as  to  the  valua- 
tion to  be  put  on  such  a  contingency.  But  under  the  English 
statute,  the  31st  section  makes  every  kind  of  debt  or  liability 
provable  in  bankruptcy  except  demands  in  the  nature  of  unliqui- 
dated damages  arising  otherwise  than  by  reason  of  a  contract  or 
promise,  so  long  as  the  value  of  the  liability  is  ' '  capable  of  being 
ascertained  by  fixed  rules,  or  assessable  only  by  a  jury,  or  as 
matter  of  opinion. ' '  So,  under  that  act,  in  Ex  parte  Neal,  L.  R. 
14  Ch.  Div.  579,  there  was  a  separation  deed  between  husband 
and  wife,  and  the  husband  was  to  pay  an  annuity  to  the  wife, 
which  was  terminable  ' '  in  case  the  wife  should  not  lead  a  chaste 
life;  in  case  the  husband  and  wife  should  resume  cohabitation; 
and  in  case  the  marriage  should  be  dissolved  in  respect  of  any- 
thing done,  committed,  or  suffered  by"  the  other  party,  after 
the  date  of  the  deed.  The  annuity  was  also  to  be  proportionately 
diminished  in  the  event  of  the  wife's  becoming  entitled  to  any 
income  independent  of  the  husband,  exceeding  a  certain  amount 
a  year.  After  the  execution  of  the  deed  the  husband  went 
through  bankruptcy,  and  it  was  held  that  the  value  of  the  annu- 
ity was  capable  of  being  fairly  estimated  and  was  provable  in 
the  liquidation.  In  that  case,  speaking  of  the  31st  section  of  the 
act  of  1869,  it  was  stated  that  "words  more  large  and  general 
it  is  impossible  to  conceive;  they  cover  every  species  of  contin- 
gency. ' '    It  was  also  stated  that  it  was  ' '  difficult  to  see  how  any 


CONTINGENT  CLAIMS  431 

case  could  arise  which  would  not  come  \\athin"  the  language  of 
this  act.  Bramwell,  Lord  Justice,  said:  "But  for  the  present 
bankruptcy  act,  our  decision  must  have  been  the  same  as  that  in 
Mudge  V.  Rowan"  (1868)  L.  R.  3  Exch.  85 ;  but  he  said  that  the 
present  bankruptcy  act  was  very  different  in  its  terms  from  the 
act  which  was  in  force  when  that  case  was  decided. 

In  the  case  of  Mudge  v.  Rowan,  L.  R.  3  Exch.  85,  there  was 
a  deed  of  separation  between  husband  and  wife,  in  which  the 
husband  convenanted  to  pay  an  annuity  to  his  wife  by  quarterly 
instalments,  the  annuity  to  cease  in  the  event  of  future  cohabi- 
tation by  mutual  consent.  It  was  held  that  this  was  not  an  an- 
nuity provable  under  the  bankruptcy  act  of  1849,  12th  and  13th 
Vict.  c.  106,  §  175 ;  nor  a  liability  to  pay  money  under  the  24th 
and  25th  Vict.  c.  134,  §  154. 

The  175th  section  of  the  act  of  1849  expressly  provided  that 
the  creditor  might  prove  for  the  value  of  any  annuity,  which 
value  the  court  was  to  ascertain.    Kelly,  Chief  Baron,  said: 

' '  The  annuity  seems  to  me  to  be  so  uncertain  in  its  nature  as 
to  be  impossible  to  be  valued.  In  many  cases  the  commissioner 
of  bankruptcy  may  have  to  deal  with  contingencies  the  value 
of  which  depends  on  a  variety  of  considerations,  and  where  the 
valuation  is  very  difficult.  But  here  I  am  at  a  loss  to  see  any 
single  circumstance  upon  which  a  calculation  of  any  kind  could 
be  based." 

Martin,  Baron,  said: 

"This  contingency  depends  on  an  infinite  variety  of  circum- 
stances, into  which  it  is  idle  to  suppose  a  commissioner  could 
inquire. ' ' 

Channell,  Baron,  concurring,  said: 

"The  tendency  of  recent  legislation,  and  the  course  of  recent 
decisions,  has  been  to  free  a  debtor  who  becomes  a  bankrupt, 
from  all  liability  of  every  kind ;  but  I  do  not  think  an  order  of 
discharge  a  bar  to  such  a  claim  as  the  present.  *  *  *  i  quite 
admit  that,  to  bring  an  annuity  within  the  act  of  1849,  it  is  not 
necessary  to  have  any  actual  pecuniary  consideration.  I  also 
feel  that  in  many  eases  the  difficulty  of  calculating  the  present 
value  of  contingencies  may  be  very  great,  and  yet  they  may  be 
within  the  acts.  But  here  it  appears  to  me  that  the  difficulty  is 
insuperable." 

In  Parker  v,  Ince  (1859)  4  Hurlst.  &  N.  52,  there  was  a  bond 
conditioned  to  pay  an  annuity  during  the  life  of  the  obligor's 
wife,  provided  that  if  the  obligor  and  his  wife  should  at  any 


432  ADMINISTRATION 

time  thereafter  cohabit  as  man  and  wife  the  annuity  should 
cease,  and  it  was  held  that  the  annual  sum  thus  covenanted  to 
be  paid  by  the  defendant  was  not  an  annuity  within  the  175th 
section  of  the  bankruptcy  law  or  consolidation  act  of  1849,  nor 
a  debt  payable  upon  a  contingency  within  the  177th  section,  nor 
a  liability  to  pay  money  upon  a  contingency  within  the  178th 
section,  and  consequently  the  discharge  in  bankruptcy  was  no 
bar  to  an  action  for  a  recovery  of  a  quarterly  payment  due  on 
the  bond.    Martin,  Baron,  said: 

"That  cannot  be  such  an  annuity  as  would  fall  within  the 
175th  section,  because  a  value  cannot  be  put  upon  it.  How  is 
it  possible  to  calculate  the  probability  of  a  man  and  his  wife, 
who  are  separated,  living  together  again?  Their  doing  so  de- 
pends on  their  character,  temper,  and  disposition,  and,  it  may 
be",~a  variety  of  other  circumstances.  Then,  is  it  money  payable 
upon  a  contingency  within  the  178th  section  ?    I  think  it  is  not. ' ' 

It  is  only,  therefore,  by  reason  of  the  extraordinarily  broad 
language  contained  in  the  31st  section  of  the  English  bankruptcy 
act  of  1869  that  the  English  courts  have  endeavored  to  make  a 
fair  estimate  of  the  value  of  a  contract  based  on  the  continuance 
of  widowhood,  even  though  the  value  was  not  capable  of  being 
ascertained  by  fixed  rules,  nor  assessable  by  a  jury,  but  was 
simply  to  be  estimated  by  the  opinion  of  the  court  or  of  some 
one  intrusted  with  the  duty. 

In  the  Blakemore  Case,  L.  R.  5  Ch.  Div.  372,  after  the  an- 
nouncement of  the  judgment,  the  report  states  that  it  was  then 
arranged  that  it  should  be  referred  to  an  actuary  to  ascertain 
the  annuity  as  a  simple  life  annuity,  and  to  deduct  from  that 
value  such  a  sum  as  he  should  estimate  to  be  the  proper  deduc- 
tion for  the  contingency  of  widowhood.  In  other  words,  it  was 
left  to  the  actuary  to  guess  the  proper  amount  to  be  deducted.  ^^ 

No  such  broad  language  is  found  in  our  bankruptcy  act  of 
1898.  §  63a  provides  for  debts  which  may  be  proved,  which, 
among  others,  are:  (1)  "A  fijced  liability,  as  evidenced  by  a 
judgment  or  an  instrument  in  writing,  absolutely  owing  at  the 
time  of  the  filing  of  the  petition  against  him,  whether  then  pay- 
able or  not,  with  any  interest  thereon  which  would  have  been 
recoverable  at  that  date,  or  with  a  rebate  of  interest  upon  such 

11 — In   Victor   v.    Victor    [1912],  provision  in  the  agreement  that  the 

1  K.  B.  247,  it  was  held  that  an  an-  annuity  should  cease  upon  the  par- 

nuity  provided  for  in  a  separation  ties  resuming  cohabitation.     See  10 

agreement   was   provable    despite   a  Mich.  L.  Eev.  476. 


CONTINGENT  CLAIMS  433 

as  were  not  then  payable  and  did  not  bear  interest."  (4) 
"Founded  upon  an  open  account  or  upon  a  contract,  express  or 
implied. ' ' 

In  §  636,  provision  is  made  for  unliquidated  claims  against 
the  bankrupt,  which  may  be  liquidated  upon  application  to  the 
court  in  such  manner  as  it  shall  direct,  and  may  thereafter  be 
proved  and  allowed  against  his  estate.  This  paragraph  &,  how- 
ever, adds  nothing  to  the  class  of  debts  which  might  be  proved 
under  paragraph  a  of  the  same  section.  Its  purpose  is  to  permit 
an  unliquidated  claim,  coming  within  the  provisions  of  §  63a,  to 
be  liquidated  as  the  court  should  direct. 

We  do  not  think  that  by  the  use  of  the  language  in  §  63a  it 
was  intended  to  permit  proof  of  contingent  debts  or  liabilities 
or  demands  the  valuation  or  estimation  of  which  it  was  substan- 
tially impossible  to  prove. 

The  ian^age  o±  §  b3a  of  the  act  of  1898  differs  from  that  con- 
tained in  the  bankruptcy  act  of  1867,  and  also  from  that  of  1841. 
The  act  of  1867,  §  19  (14  Stat,  at  L.  517,  525,  c.  176,  carried  into 
the  Revised  Statutes  as  §  5068 ) ,  provided  expressly  for  cases  of 
contingent  debts  and  contingent  liabilities  contracted  by  the 
bankrupt,  and  permitted  applications  to  be  made  to  the  court  to 
have  the  present  value  of  the  debt  or  liability  ascertained  and 
liquidated,  which  was  to  be  done  in  such  manner  as  the  court 
should  order;  and  the  creditor  was  then  to  be  allowed  to  prove 
for  the  amount  so  ascertained. 

§  5  of  the  act  of  1841  (5  Stat,  at  L.  440,  c.  9)  provides  in  terms 
for  the  holders  of  uncertain  or  contingent  demands  coming  in 
and  proving  such  debts  under  the  act.  But  neither  the  act  of 
1841  nor  that  of  1867  would  probably  cover  the  case  of  such  a 
contract  as  the  one  under  consideration. 

Cases  have  been  cited  showing  some  contingent  debts  which 
were  held  capable  of  being  proved  under  the  bankruptcy  act  of 
1898,  among  which  are  Moch  v.  Market  Street  Nat.  Bank,  47  C. 
C.  A.  49,  107  Fed.  897,  Circuit  Court  Appeals,  Third  Circuit, 
1901,  and  Cobb  v.  Overman,  54  L.  R.  A.  369,  48  C.  C.  A.  223,  109 
Fed.  65.  Circuit  Court  of  Appeals,  Fourth  Circuit,  1901.  And 
under  former  bankrupt  acts,  the  cases  of  Fisher  v.  Tifft  (1878), 
12  R.  I.  56;  Hey  wood  v.  Shreve  (1882),  44  N.  J.  L.  94,  and 
Shelton  v.  Pease  (1847),  10  Mo.  473. 

The  contingency  in  the  case  of  Moch  v.  Market  Street  Nat. 
Bank,  47  C.  C.  A.  49,  107  Fed.  897,  wb&  that  the  bankrupt  was 
the  indorser  of  commercial  paper  not  due  at  the  time  of  filing  the 

H.  &  A.  Bankruptcy— 28 


aH^' 


434  ADMINISTRATION 

petition,  and  it  was  held  that  under  §  63a,  subdivision  4,  the 
creditor  might  prove  against  the  estate  of  the  bankrupt  after  the 
liability  had  become  fixed. 

In  Cobb  V.  Overman,  54  L.  R.  A.  369,  48  C.  C.  A.  223, 109  Fed. 
65,  the  bond  of  the  bankrupt  to  secure  payment  to  the  obligee  of 
an  annuity  for  life  was  held  to  be  properly  proved  under  §  63a. 
clause  1. 

These  cases,  it  will  be  seen,  do  not  come  within  the  principle 
of  the  case  at  bar.  The  other  cases  arising  under  the  acts  of  1867 
and  1841  do  not  affect  this  case. 

The  Massachusetts  court  held  the  debt  herein  not  provable, 
upon  the  authority  of  Morgan  v.  Wordell,  178  Mass.  350,  55  L. 
R.  A.  33,  59  N.  E.  1037,  and  Goding  v.  Roscenthal,  180  Mass. 
43,  61  N.  E.  222.  Mr.  Justice  Barker,  in  delivering  the  opinion 
of  the  Supreme  Judicial  Court  of  Massachusetts  in  the  latter 
case,  said: 

"But  in  Morgan  v.  Wordell,  178  Mass.  350,  55  L.  R.  A.  33,  59 
N.  E.  1037,  this  court  assumed  that  such  claims  were  not  prov- 
able under  the  act,  and  we  follow  that  view  in  the  present  case. ' ' 

We  think  the  contract,  so  far  as  it  related  to  the  payment  to 

the  wife  during  her  life  or  widowhood,  was  not  a  contingent 

liability  provable  under  the  act  of  1898. 
*     *     * 

The  judgment  is  affirmed.*^ 

jy  In  re  ROTH  &  APPEL 

^^^  181  Fed.  667, 104  C.  C.  A.  649 

(Circuit  Court  of  Appeals,  Second  Circuit.     August  2,  1910) 


On  August  14,  1907,  Adolph  Boskowitz,  the  appellant,  entered 
into  an  indenture  of  lease  with  the  firm  of  Roth  &  Appel,  the 
present  bankrupts,  wherein  he  let  to  them  certain  premises  in 
the  city  of  New  York  for  the  term  of  five  years  from  February 
1,  1908,  at  the  annual  rental  of  $3,000,  payable  quarterly  in 
advance.    The  lease  contained  the  following  provision : 

*'In  case  the  lessee  is  declared  bankrupt,  the  lease  shall  ter- 
minate and  the  lessor  has  a  right  to  re-enter,  in  which  case  the 

12 — The   part  of   the   opinion   in  port  of  the  children  was  not  prov- 

which  the  court  concluded  that  the  able,   is  omitted.     See  Wetmore  v. 

claim    based    upon    the    husband's  Markoe,  ante,  p.  384. 
contract  to  pay  money  for  the  sup- 


CONTINGENT  CLAIMS  435 

lessee  agrees,  as  a  part  consideration  hereof,  that  it,  and  its  legal 
representatives,  will  pay  to  the  lessor  and  his  legal  representa- 
tives on  the  first  day  of  each  month,  as  upon  rent  days,  the  dif- 
ference between  the  rents  and  sums  reserved  and  agreed  to  be 
paid  by  the  lessee  and  those  otherwise  reserved  or  with  due  dili- 
gence collectible,  on  account  of  rents  of  the  demised  premises  for 
the  preceding  month,  up  to  the  end  of  the  term  remaining  at 
the  time  of  the  entry.  Such  re-entry  shall  not  prejudice  the 
right  of  the  lessor  to  recover  for  rent  accrued  or  due  at  the  time 
of  such  re-entry, ' ' 

On  January  20,  1908,  a  petition  in  involuntary  bankruptcy 
was  filed  against  said  Roth  &  Appel,  and  on  May  27,  1908,  they 
were  adjudicated  bankrupts.  On  April  29,  1908,  prior  to  the 
adjudication,  the  appellant  relet  the  premises  for  the  remainder 
of  the  term  to  another  tenant,  who  entered  into  possession  on 
July  1,  1908.  The  rental  under  the  new  lease  was  at  the  rate 
of  $175  per  month  from  July  1,  1908,  to  February  1,  1909,  and 
at  the  rate  of  $250  per  month  thereafter.  On  July  14,  1908,  the 
appellant  filed  his  claim  made  up  in  substance  of  the  following 
items. 

(1)  Full  rent  from  February,  1908,  to  July,  1908 $1,250 

(2)  Difference  between  rent  reserved  and  rent  stipulated 

in  new  lease  from  July,  1908,  to  February,  1909 . . .      525 


$1,775 


The  trustee  moved  to  expunge  the  claim  upon  the  ground  that 
it  was  not  provable  in  bankruptcy.  The  referee  expunged  from 
the  claim  so  much  as  embraced  the  difference  in  rents  arising  sub- 
sequent to  the  time  of  filing  the  claim,  and  allowed  the  balance. 
The  trustee  and  the  appellant  both  filed  petitions  to  review  the 
referee 's  order  and  the  District  Court  expunged  the  entire  claim. 
The  opinion  of  the  district  judge  is  printed  in  174  Fed.  64. 

Adolph  Boskowitz  appeals  from  the  order  expunging  his  claim. 

NOYES,  Circuit  Judge  (after  stating  the  facts  as  above). 
Rent  is  a  sum  stipulated  to  be  paid  for  the  use  and  enjoyment  of 
land.  The  occupation  of  the  land  is  the  consideration  for  the  rent, 
[f  the  right  to  occupy  terminate,  the  obligation  to  pay  ceases. 
Consequently,  a  covenant  to  pay  rent  creates  no  debt  until  the 
timestipulated  for  the  payment  arrives.  The  lessee  may  be 
evicted  by  title  paramount  or  by  acts  of  the  lessor.    The  destruc- 


436  ADMINISTRATION 

tiou  or  disrepair  of  the  premises  may,  according  to  certain  statu- 
tory provisions,  justify  the  lessee  in  abandoning  them.  The  lessee 
may  quit  the  premises  with  the  lessor's  consent.  The  lessee  may 
assign  his  term  with  the  approval  of  the  lessor,  so  as  to  relieve 
himself  from  further  obligation  upon  the  lease.  In  all  these 
cases  the  lessee  is  discharged  from  his  covenant  to  pay  rent.  The 
time  for  payment  never  arrives.  The  rent  never  becomes  due. 
It  is  not  a  case  of  dehitum  in  prcesenti  solvendum  in  futuro. 
On  the  contrary,  the  obligation  upon  the  rent  covenant  is  alto- 
gether contingent."  Watson  v.  Merrill,  136  Fed.  362,  69  C.  C.  A. 
185,  69  L.  R.  A.  719.  See,  also,  Coke  on  Littleton,  292&;  Wood 
V.  Partridge,  11  Mass.  492 ;  Bordman  v.  Osborn,  23  Pick.  (Mass.) 
299. 

It  follows  from  these  principles  that  rent  accruing  after  the 
filing  of  a  petition  in  bankruptcy  againgt  the  lessee  is  not  provable 
against  his  bankrupt  estate  as  ' '  a  fixed  liability  *  *  *  abso- 
lutSy"owing  at  the  time  of  the  filing  of  the  petition, ' '  within  the 
meaning  of  §  63a.  (1)  of  the  bankruptcy  act  of  1898.  It  is  not 
a  fixed  liability,  but  is  contingent  in  its  nature.  It  is  not  abso- 
lutely owing  at  the  time  of  the  bankruptcy,  but  is  a  mere 
possible  future  demand.  Both  its  existence  and  amount  are 
contingent  upon  uncertain  events.  Watson  v.  Merrill,  supra; 
Atkins  V.  Wilcox,  105  Fed.  595,  44  C.  C.  A.  626,  53  L.  R.  A. 
118.  Also  In  re  Rubel  (D.  C.)  166  Fed.  131;  In  re  Mahler  (D. 
C.)  105  Fed.  428;  In  re  Hayes,  etc.,  Co.  (D.  C.)  117  Fed.  879; 
In  re  Amstein  (D.  C.)  101  Fed.  706;  In  re  Jefferson  (D.  C.) 
93  Fed.  948;  In  re  Inman  &  Co.  (D.  C.)  171  Fed.  185. 

Even  under  the  bankruptcy  acts  of  1841  (Act  Aug.  19,  1841, 
c.  9,  5  Stat.  440)  and  1867  (Act  March  2,  1867,  c.  176,  14  Stat. 
517),  which,  unlike  the  present  act,  expressly  permitted  the 
proof  of  contingent  demands,  claims  for  unaccrued  rent  were  not 
provable.  Ex  parte  Houghton,  1  Low.  554,  Fed.  Cas.  No.  6,725, 
In  re  May,  9  N.  B.  R.  419,  Fed.  Cas.  No.  9,325,  and  Bailey  v. 
Loeb,  11  N.  B.  R.  271,  Fed.  Cas.  No.  739,  were  cases  under  the 
act  of  1867.  Bosler  v.  Kuhn,  8  Watts  &  S.  (Pa.)  183,  was  under 
t|ie  act  of  1841. 

\   ^>     ,.1^'The  authorities  are  not  entirely  in  accord  upon  the  question 
-  whether  a  lease,  containing  the  usual  provisions,  is  terminated 

by  bankruptcy.  In  some  cases  it  has  been  held  that  bank- 
ruptcy destroys  the  relation  of  landlord  and  tenant  and  prac- 
tically annuls  the  lease.  In  re  Jefferson,  supra;  In  re  Hayes,  etc., 
Co.,  supra.    See,  also.  Bray  v.  Cobb  (D.  C.)  100  Fed.  270,  re- 


(^' 


/i.i- 


CONTINGENT  CLAIMS  437 

versed  in  Cobb  v.  Overman,  109  Fed.  65,  48  C.  C.  A.  223,  54 
L.  R.  A.  369.  In  other  cases  it  is  held  that  bankruptcy  does 
not  sever  such  relation,  that  the  tenant  remains  liable,  and  that 
the  obligation  to  pay  rent  is  not  discharged  as  to  the  future, 
unless  the  trustee  elect  to  retain  the  lease  as  an  asset.  Watson 
V.  Merrill,  supra;  In  re  Hinckel  Brewing  Co.  (D.  C.)  123  Fed. 
942.    See,  also.  In  re  Ells  (D.  C.)  98  Fed.  968. 

In  our  opinion  the  latter  view  is  the  correct  one.  We  think 
the  early  law,  as  stated  in  J^x~plirL«  Ilaughton,  supra,  is  the 
law  under  the  present  bankruptcy  statute,  applicable  in  the  case 
of  leases  having  the  usual  covenants  and  conditions.  In  that 
case  the  court  said: 

"The  earlier  law  of  England,  which  we  have  adopted  in 
this  country,  was  that  the  assignees  of  a  bankrupt  have  a  rea- 
sonable time  to  elect  whether  they  will  assume  a  lease  which 
they  find  in  his  possession ;  and,  if  they  do  not  take  it,  the  bank- 
rupt retains  the  term  on  precisely  the  same  footing  as  before, 
with  the  right  to  occupy,  and  the  obligation  to  pay  rent.  If  they 
do  take  it,  he  is  released,  as  in  all  other  cases  of  valid  assign- 
ment, from  all  liability,  excepting  on  his  covenants;  and  from 
these  he  is  not  discharged  in  any  event." 

This  reasoning  leads  by  another  course  to  the  same  conclu- 
sion already  reached.  If  the  lessee  remain  liable  upon  the  lease 
after  his  bankruptcy  in  cases  where  it  is  not  assumed  by  the 
trustee,  it  necessarily  follows  that  his  estate  is  not  liable  thereon. 
With  a  few  exceptions,  not  applicable  here,  that  which  is  not 
dischargeable  in  bankruptcy  is  not  provable  in  bankruptcy. 

The  claim  in  this  case  was  regarded  in  the  report  of  the 
referee  as  a  demand  for  installments  of  rent  falling  due  accord- 
ing to  the  terms  of  the  lease  subsequent  to  the  time  of  filing  the 
petition  in  bankruptcy,  and  the  question  considered  in  such 
report  was  whether  demands  of  that  character  are  provable  in 
bankruptcy.  So  the  claim  was  assumed  to  be  of  that  character 
by  the  district  judge,  and  was  ordered  expunged  upon  that 
assumption.  Regarding,  then,  the  claim  as  one  for  unaccrued 
rent,  it  is  clear,  upon  the  principles  already  examined,  that 
it  was  not  provable  against  the  bankrupt  estate  under  the  first 
clause  of  §  63a  of  the  bankruptcy  act. 

But,  while  there  may  be  a  question  whether  the  demand  as 
covering  the  period  prior  to  the  re-entry  by  the  lessor  might  not 
be  considered  a  claim  for  rent  as  such,  it  is  clear  that  the  demand 
for  the  difference  between  the  rent  reserved  and  the  rent  stipu- 


438  ADMINISTRATION 

lated  in  the  new  lease  is  not  such  a  demand,  but  is  based  upon 
the  indemnity  provision  in  the  lease  shown  in  the  foregoing 
statement  of  facts. 

The  lease  in  the  present  case  is  not  a  lease  containing  the  usual 
covenants  and  conditions.  It  contains  unusual  provisions.  As 
we  have  seen,  it  expressly  provides  that  in  case  the  lessee  is  de- 
clared bankrupt  the  lease  shall  terminate  and  the  lessor  shall 
have  the  right  to  re-enter.  Under  such  a  lease  as  this  the 
trustee  could  not  adopt  the  lease  against  the  lessor's  objection. 
The  lessor  had  the  right  to  terminate  it,  and  did  t^erminate  it,  by 
re-entry.  And  when  he  terminated  it  the  obligation  of  the  bank- 
rupts as  lessees  terminated.  The  question  in  this  case — at  least 
with  respect  to  a  large  part  of  the  claim — is  not,  in  its  essence, 
whether  rent  to  accrue  in  the  future  is  provable  against  a  bank- 
rupt estate,  but  whether  a  claim  founded  upon  an  agreement  to 
indemnify  a  landlord  for  loss  of  rents  following  bankruptcy  is 
provable. 

Undoubtedly  the  parties  to  a  lease  may  agree  that  bankruptcy 
shall  terminate  it,  and  that,  upon  such  termination,  aU  future 
installments  of  rent  shall  at  once  become  due  and  payable.  In 
such  a  case,  the  installments  may  be  regarded  as  consolidated 
by  the  contract,  or,  perhaps,  as  falling  due  by  way  of  penalty. 
Not  improbably  claims  based  upon  such  leases  are  provable  in 
bankruptcy.  Thus  in  the  case  of  In  re  Pittsburg  Drug  Co.  (D. 
C.)  164  Fed.  482,  where  a  lease  provided  that,  on  default  in  the 
payment  of  any  rent,  the  rent  for  the  entire  term  should  at  once 
become  due  and  payable,  it  was  held  that,  on  the  bankruptcy  of 
the  lessee  while  in  default,  the  entire  rent  was  "a  fixed  liability 
absolutely  owing,"  and  provable  against  the  bankrupt  estate. 
But  the  convenant  of  indemnity  in  the  present  lease  was  of  a 
very  different  nature.  It  called  for  tbe  payment  of  no  fixed  and 
certain  sum.  Its  purpose  was  merely  to  guarantee  against  pos- 
sible loss. 

The  inquiry,  then,  is  as  to  the  status  of  the  lessor's  demand 
upon  this  indemnity  covenant  at  the  time  when  the  petition  in 
bankruptcy  was  filed ;  for  it  is  held  that  that  is  the  time  when 
the  provability  of  claims  against  the  estate  of  a  bankrupt  is  fixed. 
Thus  in  the  case  of  In  re  Pettingill  (D.  C.)  137  Fed.  145,  it  was 
said: 

"Under  that  act  the  provability  of  a  claim  depends  upon  its 
status  at  the  time  the  petition  is  filed.  If,  at  that  time,  the 
claim  is  provable,  within  the  definition  of  §  63,  it  may  be  proved. 


CONTINGENT  CLAIMS  439 

If,  at  that  time,  it  does  not  fall  within  that  definition,  but  does 
so  at  some  later  time,  it  cannot  be  proved." 

See,  also,  Swarts  v.  Fourth  National  Bank,  117  Fed.  5,  54 
C.  C.  A.  387;  In  re  Bingham  (D.  C.)  94  Fed.  796;  Watson  v. 
Merrill,  supra;  In  re  Adams  (D.  C.)  130  Fed.  381;  In  re  Swift, 
112  Fed.  320,  50  C.  C.  A.  264. 

Now,  when  the  petition  was  filed,  the  first  step  toward  declar- 
ing the  lessee  bankrupt  was  taken.  It  was  not  certain  that  bank- 
ruptcy would  follow ;  but,  if  it  did  follow,  the  lessor  would  have 
the  right  to  re-enter  and  terminate  the  lease.  Notwithstanding 
the  provision  that  the  lease  should  terminate  in  case  the  lessees 
should  be  declared  bankrupt,  and  the  lessor  should  have  the  right 
to  re-enter,  the  lease  was  undoubtedly  terminable  by  the  re-entry, 
and  not  by  the  bankruptcy.  In  re  Ells  (D.  C.)  98  Fed.  967. 
But  the  lessor  was  not  obliged  to  re-enter,  and  whether  he  would 
do  so  or  not  was  manifestly  dependent  upon  uncertainties.  In- 
deed, looking  at  the  claim  as  it  existed  either  at  the  time  of  the 
petition  or  the  adjudication,  it  was  altogether  contingent  in  its 
nature : 

(1)  It  was  uncertain,  as  just  pointed  out,  whether  the  lessor 
would  re-enter  and  terminate  the  lease. 

(2)  In  case  the  lease  was  terminated,  it  was  uncertain  whether 
there  would  be  any  loss  in  rents.  If  the  rent  received  by  the 
landlord  from  the  new  tenant  equaled  or  exceeded  that  stipu- 
lated in  the  lease,  there  would  be  no  loss,  and,  consequently,  no 
foundation  for  any  claim  upon  the  indemnity  covenant. 

The  case  of  In  re  Ells  (D.  C.)  98  Fed.  967,  already  referred 
to,  is  in  point.  In  that  case  the  lease  contained  a  provision  that 
the  landlord  might  re-enter  and  resume  possession  if  the  bank- 
rupt should  be  "declared  bankrupt  or  insolvent  according  to 
law,"  and  the  lessee  covenanted  that  in  case  of  such  termination 
of  the  lease  he  would ' '  indemnify  the  lessor  against  all  loss  of  rent 
or  other  payments  which  he  may  incur  by  reason  of  such  termi- 
nation during  the  remainder  of  the  term, ' '  and  the  landlord  re- 
entered upon  the  bankruptcy  of  the  tenant.  It  was  held  that 
the  claim  of  the  landlord  for  the  difference  between  the  present 
letting  value  of  the  premises  and  the  rent  reserved  for  the  re- 
mainder of  the  term  could  not  be  proved  against  the  bankrupt 
estate  of  the  lessee.    Judge  Lowell  said  (p.  968)  : 

"The  contract  was  one  of  indemnity  for  loss  of  rent  and  other 
payments,  and  would  be  broken  only  after,  and  so  far  as,  rent 
had  been  lost  and  payments  had  been  made.     *     *     *     At  the 


440  ADMINISTRATION 

time  of  the  adjudication  the  claim  in  this  case  was  contingent, 
first,  upon  the  determination  of  the  lease  by  the  lessor  for  breach 
of  the  covenant ;  and,  second,  upon  a  subsequent  loss  of  rent  by 
the  lessor.  If  the  lessor  permitted  the  lease  to  continue,  or  if  the 
rent  subsequently  obtained  by  him  equalled  or  exceeded  that 
provided  in  the  lease,  the  claim  would  not  arise.  *  *  *  The 
provisions  of  the  act  of  1898  concerning  the  proof  and  allow- 
ance of  contingent  claims  differ  materially  from  those  contained 
in  the  acts  (k  1841  and  1867.  *  *  *  Even  under  the  broad 
provisions  of  the  act  of  1867  above  referred  to,  it  was  held 
that  a  provision  in  a  lease  that  the  lessors  might  re-enter  and 
relet  the  premises  at  the  risk  of  the  lessees,  who  should  remain 
liable  for  the  rent,  and  be  credited  with  the  sums  actually  re- 
alized, did  not  give  rise  to  a  provable  contingent  claim.  Ex  parte 
Lake,  2  Low,  544,  Fed,  Cas.  No.  7,991.  The  provision  above 
quoted  of  the  lease  here  in  question,  though  not  identical  with 
that  in  Ex  parte  Lake,  yet  resembles  it  so  closely  as  to  be  essen- 
tially similar.  If  the  contingent  claim  arising  in  Ex  parte  Lake 
could  not  be  proved  under  the  act  of  1867,  it  is  clear  that  the 
contingent  claim  arising  in  this  case  cannot  be  proved  under 
the  act  of  1898," 

See,  also.  In  re  Shaffer  (D.  C.)  124  Fed.  111. 

For  these  reasons,  we  are  satisfied  that  the  claim  in  question 
as  based  upon  the  indemnity  covenant  is  contingent,  and  not 
provable  against  the  bankrupt  estate  under  the  first  clause  of 
§  63a  of  the  bankruptcy  act. 

But  this  does  not  dispose  of  all  of  the  appellant's  conten- 
tions. It  is  urged,  in  effect,  that  the  claim,  whether  regarded 
as  a  demand  for  rent  or  as  based  upon  the  indemnity  provision, 
is  "a  debt  founded  upon  an  express  contract,"  and  provable 
under  the  fourth  clause  of  §  63a,  irrespective  of  the  question 
whether  it  is  of  such  character  as  to  be  provable  under  the  first 
clause. 

The  principal  cases  cited  in  support  of  this  contention  are 
In  re  Smith  (D,  C.)  146  Fed.  923,  and  Moch  v.  Market  St.  Nat. 
Bank,  107  Fed.  897,  47  C,  C.  A.  49,  which  hold  that  the  liability 
of  a  bankrupt  indorser  of  commercial  paper,  which  does  not 
become  absolute  until  after  the  filing  of  the  petition,  is  a  debt 
founded  upon  contract  within  §  63a  (4),  and  provable  against 
the  bankrupt  estate  after  it  becomes  fixed  within  the  time  allowed 
for  proving  claims. 

It  is  not  necessary  for  the  purposes  of  the  present  case  that 


CONTINGENT  CLAIMS  441 

we  should  go  so  far  as  to  dispute  the  conelusions  reached  in  these 
decisions.  While  a  contract  of  indorsement  is  contingent,  the 
extent  of  the  liability  is  at  all  times  ascertainable,  and  it  might 
be  that  such  a  contract  would  be  provable  without  it  following 
that  an  indemnity  contract  covering  possible  loss  of  rents — both 
the  existence  and  extent  of  the  liability  upon  which  are  uncertain 
and  contingent — would  be  provable. 

The  present  bankruptcy  statute,  unlike — as  we  have  seen — 
the  acts  of  1841  and  1867,  does  not  provide  for  the  proof  of  con- 
tingent claims.  Taking  the  fourth  subdivision  of  §  63a  as  being 
independent  of  the  first  subdivision,  still  there  is  nothing  to  indi- 
cate that  it  was  intended  to  embrace  wholly  contingent  demands. 
Indeed,  it  is  only  by  reading  §  636 — which  permits  the  liquida- 
tion of  unliquidated  demands — in  connection  with  said  fourth 
clause  of  63a,  that  any  ground  is  shown  for  contending  that  a 
claim  like  the  one  in  question  can  be  proved.  But  this  con- 
struction expands  the  provisions  of  §  63a  by  those  of  63&,  and 
it  is  well  settled  that  such  a  construction  cannot  be  adopted. 
§  636  adds  nothing  to  the  class  of  debts  provided  under  63a.  It 
merely  permits  the  liquidation  of  an  unliquidated  claim  prov- 
able under  the  latter  provision.  In  Dunbar  v.  Dunbar,  190  IT.  S. 
340,  23  Sup.  Ct.  757,  47  L.  ed.  1084,  the  Supreme  Court  of  the 
United  States  said : 

*'§  63a  provides  for  debts  which  may  be  proved,  which,  among 
others,  are :  ( 1 )  '  A  fixed  liability,  as  evidenced  by  a  judgment 
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  recoverable  at 
that  date  or  with  a  rebate  of  interest  on  such  as  were  not  then 
payable  and  did  not  bear  interest;'  (4)  'founded  upon  an  open 
account,  or  upon  a  contract  express  or  implied.'  In  §  636  pro- 
vision is  made  for  unliquidated  claims  against  the  bankrupt, 
which  may  be  liquidated  upon  application  to  the  court  in  such 
manner  as  it  shall  direct,  and  may  thereafter  be  proved  and 
allowed  against  his  estate.  This  paragraph  'b,'  however,  adds 
nothing  to  the  class  of  debts  which  might  be  proved  under 
paragraph  'a'  of  the  same  section.  Its  purpose  is  to  permit  an 
unliquidated  claim,  coming  within  the  provisions  of  §  63a,  to  be 
liquidated  as  the  court  should  direct.  We  do  not  think  that  by 
the  use  of  the  language  in  §  63a  it  was  intended  to  permit  proof 
of  contingent  debts  or  liabilities  or  demands  the  valuation  or 
estimation  of  which  it  was  substantially  impossible  to  prove." 


p.^^l 


442  ADMINISTRATION 

In  Dunbar  v.  Dunbar,  supra,  the  case  of  Moch  v.  Market  St. 
Nat.  Bank,  supra,  was  distinguished. 

But,  while  it  is  not  necessary,  in  order  to  reach  a  decision  in 
this  case,  to  determine  whether  63a  (4)  is  subject  to  the  limita- 
tion contained  in  63a  (1) — ^that  debts  to  be  provable  must  be 
absolutely  owing  at  the  time  of  filing  the  petition — we  think  it 
the  better  view  that  it  is  so  limited.  If  it  is  not  so  limited,  the 
limitations  in  the  first  subdivision  are  practically  of  no  effect. 
All  claims  upon  instruments  in  writing  not  provable  under  the 
first  clause,  because  not  absolutely  owing  at  the  time  of  the 
petition,  might  be  proved  as  claims  founded  upon  a  "contract 
express  or  implied"  under  the  fourth  clause,  if  no  limitations 
are  attached  to  the  latter.  We  cannot  regard  this  interpreta- 
tion as  tenable.  We  think  that  the  different  clauses  of  63a 
should  not  be  considered  as  independent,  but  should  be  read 
together,  and  that  the  said  limitation  in  the  first  clause  should 
be  considered  as  repeated  in  the  fourth  clause.  This  interpre- 
tation of  the  section  is  supported  by  authority.  Thus  In  re 
Swift,  112  Fed.  316,  50  C.  C.  A.  270,  already  referred  to,  the 
Circuit  Court  of  Appeals  for  the  First  Circuit  said : 

"That  part  of  the  present  bankruptcy  act  which  describes 
what  debts  may  be  proved  does  not  repeat  at  all  points  the  words 
'owing  at  the  time  of  the  filing  of  the  petition,'  but  it  is  im- 
possible to  consider  it  other  than  as  though  it  did  thus  repeat 
them." 

And  In  re  Adams  (D.  C),  130  Fed.  381,  the  court  said: 

"But  a  creditor  cannot  prove  for  an  indebtedness  arising 
between  the  filing  of  the  involuntary  petition  and  adjudication. 
This  appears  from  the  analogy  of  §  63a  (1),  (2),  (3),  and  (5), 
as  applied  to  the  interpretation  of  clause  (4).  In  clauses  (1) 
and  (4),  for  example,  the  limit  of  time  must  be  the  same,  inas- 
much as  clause  (4)  includes  clause  (1),  and,  if  clause  (4)  were 
less  limited  in  point  of  time,  the  limit  imposed  upon  clause  (1) 
would  become  nugatory. ' ' 

For  these  reasons,  we  think  that  the  claim  of  the  appellant, 
whether  regarded  as  one  for  unaccrued  rent  or  for  indemnity 
for  lo^_of  rent,  was  not  provable  against  the  bankrupt  estate 
un3er  either  |  63a  (1)  or  63a  (4),  and  was  properly  expunged 
I  by  the  District  Court. 

The  order  of  the  District  Court  is  affirmed,  with  costs.^* 

13 — See  Colman   Co,   v.   Withoft, 
195  Fed,  250, 


"''?''^ 


CONTINGENT  CLAIMS  443 

BRITISH  &  AMERICAN  MORTGAGE  CO.  v.  STUART 

210  Fed.  425,  127  C.  C.  A.  157 

(Circuit  Court  of  Appeals,  Fifth  Circuit.     January  6,  1914) 

SHELBY,  Circuit  Judge.  The  petitioner  had  a  mortgage  on 
the  bankrupt's  real  estate,  which  contains  the  following  stipu- 
lations as  to  attorney's  fees: 

"That  the  parties  of  the  first  part  hereby  agree  to  pay  the 
attorney's  fees,  and  all  other  expenses  which  may  be  incurred 
by  the  said  mortgagee,  its  successors  or  assigns,  in  th«  collection 
of,  or  in  attempting  to  collect  the  several  sums,  herein  secured, 
by  a  foreclosure  of  the  mortgage,  or  otherwise,  or  for  enforcing 
or  attempting  to  enforce  any  of  the  terms  or  provisions  hereof, 
with  or  without  suit,  for  the  payment  of  which  this  conveyance 
is  a  lien,  including  solicitor's  fees  for  a  foreclosure  by  suit  in 
equity,  and  this  mortgage  shall  stand  as  security  for  the  same, 
and  it  shall  be  no  defense  as  to  such  solicitor's  fees,  or  other 
costs,  fees,  or  expenses  for  a  foreclosure  in  equity,  that  a  fore- 
closure might  have  been  made  under  any  power  herein,  the 
course  of  procedure  being  optional  with  the  holder,  and  it  being 
the  purpose  and  intent  hereof  to  secure  such  holder  in  the  col- 
lecting of  principal  and  interest — thereby  secured — net  of  every- 
thing." 

The  controversy  here  is  as  to  a  claim  for  attorney 's  fees  based 
on  the  foregoing  agreement. 

After  the  adjudication  in  bankruptcy,  George  Stuart,  the 
trustee  of  the  bankrupt,  filed  a  petition  in  the  District  Court  to 
sell  the  land  described  in  the  mortgage,  free  of  liens,  and  the 
mortgagee,  petitioner  here,  was  made  a  party  to  the  proceeding. 
It  filed  an  answer,  and  also  filed  proof  of  the  mortgage  debt  and 
proof  of  the  attorney's  fees  for  services  rendered  in  and  con- 
nected with  said  proceedings  "according  to  stipulations  in  the 
mortgage;"  but  the  services  were  all  rendered  after  the  filing 
of  the  petition  in  bankruptcy.  No  question  is  made  as  to  the 
rendition  of  the  services,  nor  of  the  fact  that  they  were  fairly 
worth  $250,  the  amount  claimed.  The  referee  allowed  the  mort- 
gage debt  as  proved,  but  disallowed  the  claim  for  attorney's 
fees,  and  the  District  Court  confirmed  the  referee 's  order.  The 
petitioner  seeks  to  revise  and  reverse  the  order  disallowing  the 
attorney's  fees. 

For  a  clear  understanding  of  the  question  to  be  considered 


444  ADMINISTRATION 

later,  it  is  first  necessary  to  ascertain  the  effect  and  proper  con- 
struction of  stipulations  in  notes  and  mortgages  to  pay  attorney's 
fees  for  their  enforcement  and  collection.  Such  stipulations  are 
generally  held  to  be  valid,  and  they  are  sustained  in  Alabama, 
where  the  mortgaged  land  is  situated.  Munter  &  Faber  v,  Linn, 
61  Ala.  492.  The  agreement  here  is  for  no  fixed  sum ;  but  such 
an  agreement,  if  made  for  a  definite  sum,  would  not  be  conclusive 
as  to  the  amount  on  the  parties.  It  could  only  be  enforced  for 
such  an  amount  as  was  reasonable.  Unless  the  services,  or  some 
of  the  services,  covered  by  the  stipulation,  are  performed,  there 
can  be  no  collection  or  enforcement  of  such  contract.  It  follows 
that  the  obligation  to  reimburse  the  mortgagee  or  payee  for  costs 
of  enforcement  or  collection  is  contingent,  creating  no  liability 
unless  the  services  provided  for  are  performed  or  partly  per- 
formed. If  the  debt  is  paid  promptly  at  maturity,  no  services 
of  an  attorney  being  required  or  rendered,  no  attorney's  fees 
can  be  added  to  the  amount  of  the  note  or  mortgage.  The  cred- 
itor would  not  be  permitted  to  make  a  profit  by  collecting  fees 
he  did  not  have  to  pay.  Until  the  claim  becomes  due  and  the 
services  of  the  attorney  are  rendered,  no  debt  exists,  on  account 
of  such  stipulation,  to  be  added  to  the  amount  of  the  note  or 
mortgage.  Springstead  et  al.  v.  Crawfordsville  State  Bank,  34 
Sup.  Ct.  195,  231  U.  S.  541,  58  L.  ed.  —  (decided  December  22, 
1913)  ;  Williams  v.  Flowers,  90  Ala.  136,  137,  7  South.  439,  24 
Am.  St.  Rep.  772 ;  McCabe  v.  Patton,  174  Fed.  217,  98  C.  C.  A. 
225. 

The  stipulation  which  we  have  copied  from  the  mortgage  names 
no  sum  which  was  to  be  paid  as  attorney 's  fees.  It  fixes  no  time 
of  payment.  The  payment  is  to  be  made  for  attorney's  fees 
' '  incurred  by  the  said  mortgagee  *  *  *  jn  the  collection  of, 
or  in  attempting  to  collect,  the  several  sums, ' '  etc.  It  is  obvious 
that  it  was  not  in  the  contemplation  of  the  parties  that  an  at- 
torney would  be  employed  to  collect  or  attempt  to  collect  the 
mortgage  debt  before  it  was  due.  When  the  mortgage  became 
due,  without  the  aid  of  attorneys  and  without  expense,  so  far 
as  it  appears,  the  debt  was  extended  for  four  years — a  period 
not  yet  expired.  So  it  cannot  be  that  any  debt  on  such  account 
was  due  and  "absolutely  owing"  at  the  date  of  bankruptcy, 
according  to  the  terms  of  the  contract. 

The  petition  in  bankruptcy  was  filed  against  Vandiver  by  his 
creditors  on  September  19,  1912,  and  he  was  adjudicated  a  bank- 
rupt on  October  10, 1912.    Up  to  that  time  nothing  had  occurred 


CONTINGENT  CLAIMS  445 

which  would  authorize  the  addition  of  any  sum  to  the  amount 
of  the  mortgage  on  account  of  attorney's  fees;  the  mortgagee 
had  not  been  required,  nor  had  anything  happened  to  authorize 
him,  to  employ  and  compensate  an  attorney  and  add  the  fees  to 
the  amount  of  the  mortgage. 

So  we  have  the  important  if  not  the  controlling  facts  shown 
by  the  record  that,  at  the  date  of  the  filing  of  the  petition  in 
bankruptcy,  no  debt  for  attorney's  fees  existed;  and,  the  mort- 
gage not  being  due,  the  time  had  not  arrived  when  such  debt 
could  have  been  created. 

The  bankruptcy  act  designates  the  debts  which  may  be  proved 
against  a  bankrupt's  estate.  The  claim  presented  here  is  one 
"evidenced  *  *  *  by  an  instrument  in  writing,"  and,  if 
provable,  it  must  be  under  §  63a,  the  relevant  part  of  which  is 
as  follows: 

"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  judgment  or  an  instrument  in 
A^Titing,  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  payable  and  did 
not  bear  interest.  *  *  *"  Bankruptcy  Act  (Act  July  1, 
1898,  c.  541,  30  Stat.  562  [U.  S.  Comp.  St.  1901,  p.  3447] )  §  63a. 

The  limitation  is  to  claims  "absolutely  owing  at  the  time  of 
the  filing  of  the  petition  against  him."  For  accuracy  and  uni- 
formity of  administration,  some  time  had  to  be  fixed.  The  lan- 
guage used  excludes  the  idea  that  debts  may  be  proved  which 
did  not  exist  and  which  the  bankrupt  did  not  owe  at  the  time 
fixed — the  date  of  the  filing  of  the  petition.  Subdivision  5  of 
the"  same  section  forbids  the  proving  of  interest  which  accrues 
on  judgments  ' '  after  the  filing  of  the  petition. ' '  When  a  dis- 
charge is  granted,  it  only  discharges  provable  debts,  and  "none 
post-dating  the  petition  in  bankruptcy  are  affected  by  the  dis- 
charge." Collier  on  Bankruptcy  (8th  ed.)  312;  §17,  Bank- 
ruptcy Act,  The  property  owned  by  the  bankrupt  at  the  date 
of  bankruptcy  vests  in  the  trustee,  but  property  acquired  after 
the  adjudication  does  not  pass  to  the  trustee.  §  70,  Bankruptcy 
Act;  In  re  Parish  (D.  C),  122  Fed.  553.  The  date  of  the  filing 
of  the  petition  is  all-important  in  setting  the  time  at  which  the 
bankrupt's  condition  becomes  fixed  in  relation  to  debts  provable 
against  his  estate.    This  is  shown  pointedly  by  a  class  of  cases 


446  ADMINISTRATION 

relating  to  court  costs.  Where  part  of  such  costs  are  incurred 
before  the  filing  of  the  petition  and  part  afterwards,  the  part 
incurred  before  the  filing  is  provable  against  the  estate  and  dis- 
chargeable, and  the  part  incurred  afterwards  is  not  provable  or 
dischargeable.     1  Remington  on  Bankruptcy,  §  692. 

In  McCabe  v.  Patton,  174  Fed.  217,  98  C.  C.  A.  225,  the  ques- 
tion was  on  the  allowance  of  attorney's  fee  provided  for  in  the 
notes.  The  court  held  that,  to  be  allowed,  it  must  meet  the  re- 
quirements of  being  ' '  a  fixed  liability  as  evidenced  by  *  *  * 
an  instrument  in  writing  absolutely  owing  at  the  time  of  the 
filing  of  the  petition  against  him,"  The  claim  was  rejected  for 
want  of  proof  of  the  rendition  of  collection  services  before  the 
date  of  bankruptcy.  In  re  Gebhard  (D.  C),  140  Fed.  571,  the 
attorney's  fee  was  rejected  because  no  attorney  was,  in  fact, 
employed  by  the  creditor  "until  after  the  bankruptcy."  In  re 
Garlington  (D.  C),  115  Fed.  999,  the  attorney's  fees  were  re- 
jected because  the  note  had  not  matured  at  the  time  of  the  bank- 
ruptcy. And  In  re  Keeton,  Stell  &  Co.  (D.  C),  126  Fed.  426, 
the  note  had  become  due,  but  had  not  been  placed  in  the  hands 
of  an  attorney  prior  to  the  filing  of  the  petition  in  bankruptcy, 
and  the  fees  were  disallowed.  In  re  Jenkins  (D.  C),  192  Fed. 
1000,  a  provision  was  placed  in  chattel  mortgages  for  attorney 's 
fees,  and  the  mortgages  were  placed  in  the  hands  of  an  attorney, 
but  no  services  were  performed  by  him;  and,  subsequently,  on 
the  bankruptcy  of  the  mortgagor,  his  trustee  sold  the  property, 
and  the  question  arose  as  to  the  proof  of  the  attorney's  fees  as 
a  debt  against  the  bankrupt's  estate.  The  claim  was  disallowed. 
See,  also.  In  re  Roche,  101  Fed.  956,  42  C.  C.  A.  115.  The  rule 
that  the  fees,  to  be  provable,  must  have  accrued  before  the  filing 
of  the  petition,  seems  to  be  generally  recognized.  Collier  on 
Bankruptcy  (8th  ed.)  708;  1  Remington  on  Bankruptcy,  §§  670, 
671 ;  1  Loveland  on  Bankruptcy,  619,  §  300. 

In  Merchants'  Bank  v.  Thomas,  121  Fed.  306,  57  C.  C.  A.  374, 
decided  by  this  court,  and  cited  by  the  petitioner,  in  which 
attorney's  fees  provided  for  by  notes  were  allowed  to  be  proved, 
the  notes  had  been  placed  in  the  hands  of  an  attorney  and  he 
had  performed  services  before  the  bankruptcy.  The  case  in 
that  regard  was  wholly  unlike  the  instant  case. 

Although  not  due,  the  mortgage  was  a  provable  debt,  with  the 
rebate  of  interest  prescribed  by  §  63a. 

But  the  petitioner  was  not  obliged  to  prove  his  mortgage  as  a 
debt  against  the  bankrupt's  estate.    1  Jones  on  Mortgages  (6th 


CONTINGENT  CLAIMS  447 

ed.)  §  729.  The  discharge  of  the  bankrupt  would  not  have  af- 
fected his  right  to  enforce  his  mortgage  when  it  became  due  (In 
re  Blumberg  [D.  C]  94  Fed.  476;  Bank  of  Commerce  v.  Elliott, 
6  Am.  Bankr.  Rep.  409,  109  Wis.  648,  85  N.  W.  417;  Paxton  v. 
Scott,  10  Am.  Bankr.  Rep.  80,  66  Neb.  385,  92  N.  W.  611;  2 
Jones  on  Mortgages  [6th  ed.]  §  1236) ;  and  if,  on  its  becoming 
due,  he  was  required  to  resort  to  suit,  it  may  be  that  the  amount 
of  his  attorney's  fees  would  be  a  proper  claim  to  add  to  the 
amount  of  the  mortgage.  But  that  is  far  from  allowing  the 
mortgage  debt  to  be  proved,  with  abatement  of  interest,  before 
it  is  due,  with  the  addition  of  attorney's  fees  which,  under  the 
circumstances,  could  not  have  been  within  the  contemplation  of 
the  parties  when  the  contract  was  made  and  which  were  not 
absolutely  owing  at  the  date  of  bankruptcy. 

In  Riggin  v.  Magwire,  15  Wall.  549,  21  L.  ed.  232,  it  was  held 
that,  although  the  fifth  section  of  the  Bankruptcy  Act  of  1841 
gave  the  right  to  prove  "uncertain  and  contingent  demands," 
so  long  as  it  remains  wholly  uncertain  whether  a  contract  or 
engagement  will  ever  give  rise  to  an  actual  duty  or  liability  and 
there  is  no  means  of  removing  the  uncertainty  by  calculation, 
such  contract  or  engagement  is  not  provable  under  the  act.  The 
same  construction  is  placed  on  the  present  act.  Dunbar  v.  Dun- 
bar, 190  U.  S.  340,  23  Sup.  Ct.  757,  47  L.  ed.  1084.  So  it  seems 
clear  that  the  agreement  as  to  attorney's  fees,  on  its  face  and 
at  the  date  of  bankruptcy,  was  not  provable  as  a  claim  against 
the  bankrupt  estate. 

After  the  date  of  the  filing  of  the  petition,  the  bankrupt  can- 
not audd  to^  theliabilities  of  his  estate.    He  may  create  personal 


liabilities  which  are  not  affected  by  the  bankruptcy  proceedings 
and  against  which  his  discharge,  when  obtained,  will  not  pro- 
tect him.  It  may  be  conceded  (but  we  do  not  so  decide)  that,' 
although  the  mortgage  was  not  due,  the  proceedings  to  sell,  free 
of  liens,  in  the  District  Court  were  equivalent  to  foreclosure,  and 
that  the  mortgagee,  being  called  into  the  litigation,  was  neces- 
sarily required  to  employ  an  attorney,  and  that  such  employ- 
ment would  be  embraced  within  the  clause  of  the  mortgage  re- 
lating to  attorney's  fees,  and  all  this  would  only  show  an  in- 
debtedness or  liability  accruing  after  the  filing  of  the  petition 
in  bankruptcy;  and,  whether  considered  as  a  secured  or  an  un- 
secured claim,  it  was  one  not  provable  flor  dischargeable  under 


448  ADMINISTRATION 

the  provisions  of  the  bankruptcy  act.    In  re  Burka  (D.  C),  104 
Fed.  326. 

The  petition  to  revise  is  denied,  and  the  decree  is  affirmed.^* 

(^.X"^'^^''  InreNEFF 

^  ^  -*  -        •  157  Fed.  57,  84  C.  C.  A.  561 

(Circuit  Court  of  Appeals,  Sixth  Circuit.    November  20,  1907) 

LURTON,  Circuit  Judge.  These  three  appeals  have  been 
heard  together,  as  they  involve  the  provability  of  a  number  of 
claims  against  the  bankrupt  of  like  character.  In  tenor  and 
substance  the  contracts  are  alike.  That  presented  by  Emily  M. 
Nichols  is  an  example  and  is  as  follows : 

"$2,500.00  Bellaire,  Ohio,  Feb.  7,  1905. 

"Two  years  after  date,  I,  we,  or  either  of  us  promise  to  pay 
to  the  order  of  Miss  Emily  M.  Nichols  twenty-five  hundred  and 
no  100  dollars  at  the  office  of  the  Avery-Caldwell  Mfg.  Co.,  upon 
surrender  of  certificate  No.  38  for  2,500  shares  of  preferred 
stock  of  said  company,  value  received  interest  7  per  cent  per 
annum. 

"J.  Brent  Harding, 
"Theodore  Neff." 

Some  of  these  contracts  related  to  the  stock  of  a  manufactur- 
ing corporation,  known  as  the  Avery-Caldwell  Company,  and 
others  to  the  stock  of  the  Federal  Casket  Company.  It  was 
agreed,  as  a  fact,  that  the  contract  set  out  and  others  of  like 
character  were  made  by  the  persons  signing  the  same  as  pro- 
moters, and  to  induce  sales  of  the  stock  of  the  corporations 
named,  and  that  in  consideration  of  this  agreement  the  claim- 
ants became  subscribers  to  the  stock  of  said  companies,  paying 
therefor  the  amount  named  in  each  contract,  and  received  there- 
for the  shares  of  stock  mentioned.  It  was  also  agreed  that  both 
of  these  corporations  were  "insolvent"  before  the  bankruptcy 
of  said  Neff,  and  that  this  stock  was  of  no  value.  The  stock 
certificates  were  filed  as  part  of  the  proof  in  each  case  and  ten- 
dered to  the  trustee.  The  contracts  are  plainly  ^p^^^finpr't"-  to 
purchase  the  shares  of  stock  named  at  the  time  and  price  stated. 
TEey  rest  upon  a  sufficient  consideration,  and  are  written  agree- 

14 — See  in  re  Pettingill,  137  Fed.  In  re  Putnam,  193  Fed.  464;  In  re 
143;   Sayre  v.  Glenn,  87  Ala.  631;      Ellis,  143  Fed.  103. 


CONTINGENT  CLAIMS  449 

ments  to  take  and  pay  for  the  shares  named  and  signed  by  the 
parties  to  be  charged  and  delivered  to  and  accepted  by  the 
promisees.     There  is,  therefore,  nothing  in  the  objection  as  to 
the  contracts  being  invalid  under  the  statute  of  frauds  because 
not  signed  by  claimants  also.    Thayer  v.  Luce,  22  Ohio  St.  62 ;  ^^^.^^^    ^ 
Himrod  Furnace  Co.  v.  Cleveland,  22  Ohio  St.  451 ;  Lee  v.  ->«.v2^  i 
Cherry,  85  Tenn.  707,  4  S.  W.  835,  4  Am.  St.  Rep.  800;  Brown's  t^j^^  y^ 
Statute  of  Frauds,  §  345c.    The  status  of  a  claim  must  depend  ^\  ^ 
upon  its  provability  at  the  time  the  bankrupt  petition  was  filed.    **"  *''*'^ 
At  that  time  it  must  come  within  the  definition  of  §  63  of  the 
bankrupt  act ;  it  cannot  be  benefited  by  its  status  at  a  later  date. 
The  defense  is  that  these  claims  were  not  "fixed  liabilities," 
"absolutely  owing"  at  the  time  of  the  filing  of  the  petition 
against  the  bankrupt.    This  is  based  upon  the  fact  that  the  lia- 
bility of  the  bankrupt  is  made  dependent  upon  the  surrender 
of  the  stock  certificate  at  a  date  which  had  not  then  arrived, 
and  that  it  was  optional  with  the  promisees  to  surrender  or 
keep  the  stock  until  that  time,  and  that  the  liability  of  the 
promisor  was  undetermined  and  contingent  until  such  surrender 
at  the  time  named. 

That  the  promisor  might  refuse  performance  until  the  time 
named  is  true.  But  if,  before  the  time  of  performance,  one 
absolutely  repudiate  liability  and  disavow  unequivocally  any 
purpose  to  perform  at  any  time,  the  other  party  may  treat  such 
repudiation,  at  his  election,  as  a  breach  of  the  agreement  and 
sue  for  his  damages.  This  is  the  rule  as  settled  in  Hochster  v. 
De  La  Tour,  2  El,  &  Bl.  678,  and  approved  by  the  Supreme 
Court  in  Roehm  v.  Horst,  178  U.  S.  1,  20  Sup.  Ct.  780,  44  L. 
ed.  953,  and  by  this  court  in  Foss  Brewing  Co.  v.  Bullock,  16 
U.  S.  App.  311,  59  Fed.  83,  8  C.  C.  A.  14,  and  Edward  Hines 
Lumber  Co.  v.  Alley,  43  U.  S.  App.  169,  73  Fed.  603,  19  C.  C. 
A.  599 ;  McBath  v.  Jones  Cotton  Co.,  149  Fed.  383,  79  C.  C.  A. 
203 ;  Michigan  Yacht  Co.  v.  Busch,  143  Fed.  939,  75  C.  C.  A. 
109.  So,  if  one  of  the  parties  absolutely  disables  himself  from 
performing  the  contract  by  putting  performance  out  of  his 
power,  the  other  party  may  treat  that  as  a  repudiation  and  bring 
his  action  to  recover  damages  then  or  wait  the  time  of  perform- 
ance at  his  election.  This  aspect  of  the  question  of  an  anticipa- 
tory breach  is  well  put  by  Fuller,  chief  justice,  in  Roehm  v. 
Horst,  cited  above,  when  he  says: 

"It  is  not  disputed  that  if  one  party  to  a  contract  has  de- 

H.  &  A.  Bankruptcy — 29 


^.^ 


450  ADMINISTRATION 

stroyed  the  subject-matter,  or  disabled  himself  so  as  to  make 
performance  impossible,  his  conduct  is  equivalent  to  a  breach 
of  the  contract,  although  the  time  of  performance  has  not  ar- 
rived; and  also  that  if  a  contract  provides  for  a  series  of  acts, 
and  actual  default  is  made  in  the  performance  of  one  of  them, 
accompanied  by  a  refusal  to  perform  the  rest,  the  other  party 
need  not  perform,  but  may  treat  the  refusal  as  a  breach  of  the 
entire  contract,  and  recover  accordingly." 

In  Lovell  v.  St.  Louis  Life  Ins.  Co.,  Ill  U.  S.  264,  274,  4  Sup. 
Ct.  390,  395,  28  L.  ed.  423,  the  company  had  failed  and  trans- 
ferred its  business  to  another  company.  The  court  held  that 
this  authorized  one  insured  to  treat  the  contract  as  at  an  end 
and  to  sue  to  recover  back  premiums  paid  although  the  time  of 
performance  had  not  arrived.  Mr.  Justice  Bradley,  for  the 
court,  said: 

"Our  third  conclusion  is  that,  as  the  old  company  totally 
abandoned  the  performance  of  its  contract  with  the  complainant 
by  transferring  all  its  assets  and  obligations  to  the  new  com- 
pany, and  as  the  contract  is  executory  in  nature,  the  complainant 
had  a  right  to  consider  it  as  terminated  by  the  act  of  the  com- 
pany, and  to  demand  what  was  justly  due  to  him  in  that  ex- 
igency. Of  this  we  think  there  can  be  no  doubt.  Where  one 
party  to  an  executory  contract  prevents  the  performance  of  it, 
or  puts  it  out  of  his  own  power  to  perform  it,  the  other  party  may 
regard  it  as  terminated  and  demand  whatever  damage  he  has 
sustained  thereby.  We  had  occasion  to  examine  this  subject  in 
the  recent  case  of  United  States  v.  Behan,  110  U.  S.  339,  4  Sup. 
Ct.  81,  28  L.  ed.  168,  to  which  we  refer." 

See,  also,  Carr  v.  Hamilton,  129  U.  S.  669,  9  Sup.  Ct.  295,  32 
L.  ed.  669. 

Bankruptcy  is  a  complete  disablement  from  performance  and 
the  equivalent  of  an  out  and  out  repudiation,  subject  only  to 
the  right  of  the  trustee,  at  his  election,  to  rehabilitate  the  con- 
tract by  performance.  In  the  case  styled  In  re  Swift,  112  Fed. 
315,  50  C.  C.  A.  264,  this  consequence  was  considered  by  the 
Court  of  Appeals  for  the  First  Circuit  in  a  very  satisfactory 
opinion  by  Putnam,  C.  J.  There  the  obligation  of  a  broker 
to  deliver  certain  shares  of  stock  on  demand  was  held  to  be 
breached  by  bankruptcy,  and  that  no  prior  demand  was  essen- 
tial, a  right  of  action  accruing  simultaneously  with  the  bank- 
rupt petition,  which  was  the  act  of  disablement  to  which  the 


CONTINGENT  CLAIMS  451 

adjudication  related.  In  re  Pettingill  Co.  (D.  C),  137  Fed. 
143, 147,  Judge  Lowell,  in  a  very  able  and  discriminating  opinion 
in  which  the  authorities  are  considered  in  the  light  of  the  re- 
quirements for  a  provable  debt  under  the  present  bankrupt  law, 
reached  the  conclusion  that: 

"If  the  bankrupt,  at  the  time  of  bankruptcy,  by  disenabling 
himself  from  performing  the  contract  in  question,  and  by  re- 
pudiating its  obligation,  could  give  the  proving  creditor  the 
right  to  maintain  at  once  a  suit  in  which  damages  could  be 
assessed  at  law  or  in  equity,  then  the  creditor  can  prove  in 
bankruptcy  on  the  ground  that  bankruptcy  is  the  equivalent  of 
disenablement  and  repudiation.  For  the  assessment  of  damages 
proceedings  may  be  directed  by  the  court  under  §  63h,  Act  July 
1,  1898,  c.  541  (30  Stat.  562,  U.  S.  Comp.  St.  1901,  p.  3447)." 

In  that  case  it  was  held  that  a  contract  guaranteeing  "the 
redemption"  of  corporate  shares,  three  years  after  date  of  issue, 
was  a  provable  claim,  although  the  time  for  "redemption"  had 
not  arrived  at  date  of  bankruptcy. 

It  is  sufficient  that  a  claim  becomes  provable  as  a  consequence 
of  bankruptcy.  The  right  to  sue  for  and  recover  dagames  then 
accrues.  As  Judge  LoweU  puts  it  In  re  Pettingill  Co.,  cited 
above : 

"In  admission  to  proof,  however,  the  claim  need  not  arise 
before  bankruptcy,  nor  need  the  contract  be  broken  theretofore. 
It  is  sufficient  for  proof  if  the  breach  of  contract  and  bankruptcy 
are  coincident." 

The  creditor  by  offering  to  file  his  claim  manifests  his  elec- 
tion to  treat  the  contract  as  broken.  This  the  court  held  he 
might  do.    The  decree  in  each  case  is  affirmed.  ^^ 

In  re  INMAN  &  CO. 

171  Fed.  185  \ 

(District  Court,  N.  D.  Georgia.    June  7,  1909) 

NEWMAN,  District  Judge.    *     *     • 

It  will  be  perceived  from  the  foregoing  that  T.  B.  Ketterson 
was  in  the  employment  of  the  bankrupt  firm  at  the  time  the  pro- 

15 — See  Pennsylvania  Steel  Co.  t.       Fed.    308,    commented    upon    in    27 
N.  Y.  City  Ey.  Co.,  198  Fed.  721,       Harv.  L.  Eev.  469. 
743;  In  re  Scott  Transfer  Co.,  216  ,  *  ^    . 


452  ADMINISTRATION 

ceedings  in  bankruptcy  were  filed,  and  that  the  term  for  which 
he  was  employed  had  not  expired  when  the  bankruptcy  occurred. 
He  seeks  to  prove  a  claim  for  the  unexpired  portion  of  the  time 
of  his  employment.  He  was  allowed  without  objection  the 
amount  that  was  due  him  at  the  time  the  bankruptcy  proceed- 
ings were  instituted,  and,  as  it  was  less  than  three  months,  he 
was  allowed  priority  for  the  same. 

The  question  presented  is  an  interesting  one,  and  is  almost 
without  direct  authority  since  the  passage  of  the  present  bank- 
ruptcy act.  The  right  to  prove,  if  it  exists  at  all,  is  under  para- 
graph 4,  §  63,  of  the  bankruptcy  act  (Act  July  1,  1898,  c.  541, 
30  Stat.  563  [U.  S.  Comp.  St.  1901,  p.  3447]).  §63  provides 
that: 

"Debts  of  the  bankrupt  may  be  proven  and  allowed  against 
his  estate  which  are  *  *  *  (4th)  founded  upon  an  open  ac- 
count or  upon  a  contract  expressed  or  implied." 

§  63&  provides  that : 

"Unliquidated  claims  against  the  bankrupt,  may,  pursuant  to 
application  to  the  court,  be  liquidated  in  such  manner  as  it  shall 
direct,  and  may  thereafter  be  proved  and  allowed  against  his 
estate." 

It  is  conceded  that  if  a  breach  of  contract  had  occurred  prior 
to  the  commencement  of  the  bankruptcy  proceedings,  and  the 
claim  for  damages  on  account  of  the  breach  already  existed, 
that  the  amount  of  such  damages  might  be  liquidated  in  such 
manner  as  the  court  might  direct;  but  the  immediate  question 
is  whether  where  there  is  a  discontinuance  of  employment  grow- 
ing  out  of.  and  resulting  from^  the  tiling  of  a  petition  in  bank- 
ruptcy, and  that  only  the  right  to  damage  exists  and  may  be 
•proved  aild  the  amount  of  sudi  damage  ascertained.  Stating 
tne  inquiry  somewhat  differently,  it  is  this:  Whether,  where 
proceedings  in  involuntary  bankruptcy  are  instituted,  followed 
by  an  adjudication,  and  the  bankrupt  is  a  party  to  a  contract 
of  employment  not  terminated,  this  of  itself  is  a  breach  of  the 
contract  on  the  part  of  the  bankrupt,  or  is  the  contract  simply 
terminated  and  annulled  by  operation  of  law  without  any  de- 
fault on  the  part  of  the  bankrupt  ?    The  latter  being  true,  there 

is  no  cause  of  action  arising  as  for  a  breach  of  contract. 

•     *     « 

[After  citing  the  corresponding  section  of  the  act  of  1867, 
and  referring  and  quoting  from  the  case  of  Dunbar  v.  Dunbar, 
190  U.  S,  340,  supra,  the  court  continued:] 


CONTINGENT  CLAIMS  453 

According  to  this,  §  63&  adds  nothing  to  63a  as  to  the  class 
of  debts  which  may  be  proven,  and  it  was  not  intended  by  §  63a 
to  admit  proofs  of  contingent  debts  or  contingent  liabilities. 
The  liability  here  on  the  part  of  the  employers  was  certainly 
contingent.  It  was  contingent  upon  the  life,  health,  and  ability 
to  render  services  on  the  part  of  the  employe  in  the  future,  and 
contingent  also  upon  the  life  of  the  members  of  the  firm  of  In- 
man  &  Co.  The  death  of  one  member  would  have  dissolved  the 
firm  and  necessitated  the  winding  up  of  its  affairs. 

A  number  of  decisions  have  been  cited  from  other  District 
Courts  and  some  from  Circuit  Courts  of  Appeals  in  other 
circuits.  The  only  one  I  have  seen  in  the  Circuit  Courts  of 
Appeals  for  this  circuit  is  Atkins  v.  Wilcox,  105  Fed.  595,  44 
C.  C.  A.  626,  53  L.  R.  A.  118.  This  was  an  effort  to  prove  a 
claim  for  future  rental  and  the  judgment  of  the  District  Court 
refusing  to  allow  the  claim  was  affirmed.  This  decision  is  in 
line  with  the  decisions  on  the  subject  of  rent  contracts,  and 
it  is  conceded  by  counsel  for  the  claimants  here  that  contracts 
for  future  rent  are  not  provable  under  the  present^bgjija'uptcx 
act.  The  lat^t  decision  1  have  seen  on  this  question  of  the  right 
lo  recover  rent  not  due  is  In  re  Rubel  et  al.  (D.  C.)  166  Fed. 
131.  The  case  was  decided  by  Judge  Quarles  of  the  District 
Court  for  the  Eastern  Division  of  Wisconsin.  In  that  opinion 
it  is  said: 

"The  text-books  and  the  authorities  all  seem  to  concur  in  the 
proposition  that  rent  upon  such  a  lease  which  has  not  accrued 
at  the  time  of  adjudication  cannot  be  proven  as  a  claim  in 
bankruptcy.  Loveland  on  Bankruptcy  (3d  ed.)  265,  268;  Col- 
lier on  Bankruptcy,  479;  In  re  Jefferson  (D.  C.)  93  Fed.  948; 
Bray  v.  Cobb  (D.  C.)  100  Fed.  270;  Atkins  v.  Wilcox,  105  Fed. 
595,  44  C.  C.  A.  626,  53  L.  R.  A.  118 ;  In  re  Hays  and  Foster 
(D.  C.)  117  Fed.  879;  Watson  v.  Merrill,  136  Fed.  359,  69  C.  C. 
A.  185,  69  L.  R.  A.  719,  These  authorities  are  not  in  accord  as 
to  the  method  of  reasoning  by  which  the  conclusion  is  reached. 
Some  of  them  hold  that  the  adjudication  destroys  the  relation 
of  landlord  and  tenant,  and  practically  annuls  the  lease.  Others 
hold  that  the  claim,  not  being  provable  in  bankruptcy,  is  not 
affected  by  the  discharge ;  that  the  bankrupt  remains  bound  by 
his  covenant;  but  that  the  trustee  is  not  bound  thereby.  It  is 
conceded  on  all  hands  that  the  trustee  has  a  reasonable  time 
after  his  appointment  to  determine  whether  he  will  adopt  the 
lease  as  an  asset  of  the  estate,  and  offer  the  same  for  sale,  or 


454  ADMINISTRATION 

whether  he  will  ignore  it  entirely.  For  practical  purposes  it 
makes  no  difference  in  the  instant  case  which  line  of  authority 
is  adopted,  for  either  is  fatal  to  a  recovery  of  rent,  as  such,  for 
the  unexpired  term." 

After  some  other  discussion  immaterial  here  the  judge  con- 
cludes : 

' '  It  may  be  remarked  in  passing  that,  if  application  had  been 
made  to  liquidate  the  claim  pursuant  to  §  636,  the  proceeding 
would  have  been  ineffective  unless  the  claim  were  of  such  a  na- 
ture that,  being  liquidated,  it  might  have  been  proven  under 
§  63a.  Dunbar  v.  Dunbar,  190  U.  S.  340,  350,  23  Sup.  Ct.  757, 
47  L.  ed.  1084.  We  have  seen  that  the  unearned  installment 
of  rent,  although  liquidated  by  a  written  lease,  cannot  be  proven 
under  §  63a,  so  that  the  proceeding  to  liquidate  would  have  been 
unavailable  in  the  instant  case." 

Counsel  for  the  claimants  here  rely  mainly  upon  the  follow- 
ing cases :  In  re  Swift,  112  Fed.  315,  50  C.  C.  A.  264,  In  re 
Stern,  116  Fed.  604,  54  C.  C.  A.  60,  and  In  re  Pettingill  &  Co. 
(D.  C.)  137  Fed.  143,  and  upon  the  cases  therein  cited,  par- 
ticular stress  being  laid  upon  the  case  cited  by  Judge  Lowell, 
Ex  parte  Pollard,  Fed.  Case  No.  11,252  (2  Lowell,  411,  and  17 
N.  B.  R.  228).  The  second  headnote  in  the  latter  case  is  to 
this  effect: 

"The  filing  of  a  petition  in  bankruptcy  by  a  corporation  ipso 
facto  dissolves  the  contract  with  an  employe,  and  is  tantamount 
to  a  dissolution,  and  he  may  have  his  damages  assessed  and 
prove  his  amount  in  a  bankruptcy  court. ' ' 

It  may  be  remarked  that  this  decision.  Ex  parte  PoUard,  was 
under  the  act  of  1867,  which,  as  has  been  stated,  in  reference  to 
the  proof  of  claims  of  this  character  was  entirely  different  from 
the  present  act.  None  of  the  other  cases  relied  upon  were  cases 
of  employer  and  employe.  In  re  Pettingill  &  Co.  (D.  C.)  137 
Fed.  143,  Judge  Lowell  in  the  opinion  says: 

"It  seems,  therefore,  that  the  test  of  provability  under  the 
act  of  1898  may  be  stated,  thus :  If  the  bankrupt  at  the  time  of 
bankruptcy  by  disenabling  himself  from  performing  the  con- 
tract in  question,  and  by  repudiating  its  obligation,  could  give 
the  proving  creditor  the  right  to  maintain  at  once  a  suit  in 
which  damages  could  be  assessed  at  law  or  in  equity,  then  the 
creditor  can  prove  in  bankruptcy  on  the  ground  that  bankruptcy 
is  equivalent  of  disenablement  and  repudiation.    For  the  assess- 


CONTINGENT  CLAIMS  455 

ment  of  damages  proceedings  may  be  directed  by  the  court  under 
§  636  (30  Stat.  562  [U.  S.  Comp.  St.  1901,  p.  3447])." 

Counsel  for  the  claimants  here  also  consider  In  re  Silverman 
(D.  C.)  101  Fed.  219,  as  favorable  to  them.  In  that  case  Silver- 
man Bros,  on  the  9th  day  of  January,  1899,  made  a  deed  of 
trust  of  their  stock  of  goods  in  favor  of  their  creditors.  One 
Swift  was  named  as  trustee  in  the  deed  of  trust,  and  took  pos- 
session of  the  stock  of  goods,  and  on  the  same  day,  Jemuary  9, 
1899,  discharged  from  the  store  the  employes  under  Silverman 
Bros.,  including  one  Rosenberg.  On  the  18th  day  of  January 
thereafter  proceedings  in  involuntary  bankruptcy  were  insti- 
tuted against  Silverman  Bros.,  and  Swift  was  appointed  re- 
ceiver. Rosenberg's  claim  was  based  upon  the  breach  of  his 
contract  of  employment,  and  he  claimed  $1,200  for  the  re- 
mainder of  the  contract  year.  In  the  opinion  in  this  case  Judge 
Philips  says: 

"There  can  be  no  question  but  what  if  on  the  9th  day  of 
January,  1899,  there  was  a  breach  of  the  contract  between 
Silverman  Bros,  and  Rosenberg  by  his  discharge  from  their 
service,  or  by  their  voluntary  act  which  rendered  the  perform- 
ance of  the  contract  on  their  part  impossible,  a  cause  of  action 
at  once  arose  in  favor  of  Rosenberg  against  Silverman  Bros,  for 
damages;  and  it  is  equally  clear  that  the  subsequent  adjudica- 
tion of  bankruptcy  in  February,  1899,  did  not  put  an  end  to 
the  cause  of  action,  as  it  was  then  an  existing  right,  which  the 
mere  adjudication  in  bankruptcy  could  not  destroy.  So  the 
real  question  in  this  case  is  not  whether  an  adjudication  in 
bankruptcy  against  the  employer  would  put  an  end  to  a  con- 
tract with  an  employe  like  the  one  in  question,  so  that  the  dis- 
charge of  the  employe  would  be  under  the  operation  of  the 
bankruptcy  law,  and  not  by  reason  of  the  voluntary  act  of  the 
employer,  but  it  is  whether  or  not  the  act  of  Silverman  Bros,  in 
making  the  deed  of  trust  and  placing  Swift  in  absolute  charge 
of  the  store  and  its  business,  whereby  Rosenberg  was  displaced 
as  manager  and  employe,  did  not  constitute  a  breach  of  the 
contract,  and  create  a  subsisting  cause  of  action,  three  weeks 
before  the  adjudication  in  bankruptcy." 

The  court  then  holds  that  there  was  such  a  breach  of  con- 
tract, and  fixes  the  amount  that  Rosenberg  would  be  entitled 
to  recover.  I  do  not  consider  this  case  of  In  re  Silverman  au- 
thority either  way. 

In  the  case  of  In  re  Imi>erial  Brewing  Company  (D.  C.)  143 


456  ADMINISTRATION 

Fed.  579,  decided  by  Judge  Philips  for  the  Western  District  of 
Missouri,  it  is  said: 

'  *  The  question  to  be  decided  is :  Did  the  adjudication  in  bank- 
ruptcy against  the  Imperial  Brewing  Company  in  and  of  itself 
constitute  such  a  breach  of  the  contract  as  to  mature  the  whole 
executory  contract,  entitling  the  claimant  to  prove  up  and  have 
allowed  against  the  estate  in  bankruptcy  the  damages  claimed? 
While  the  statement  of  the  petition  is  a  little  indefinite  respect- 
ing the  proceedings  leading  to  the  adjudication,  the  court  will 
take  cognizance  of  its  own  records,  which  show  that  it  was  an 
involuntary  proceeding  in  bankruptcy — necessarily  so  because 
the  corporation  could  not  on  its  own  voluntary  petition  be  ad- 
judged a  bankrupt.  While  the  petition  herein  states  that  the 
Imperial  Brewing  Company  was  permanently  disabled  from 
performing  said  contract  and  repudiated  the  same  in  all  its 
parts,  and  that  it  retired  permanently  from  business  and  was 
hopelessly  insolvent,  etc.,  these  results  are  alleged  to  follow  'by 
reason  of  said  bankruptcy  proceedings.'  At  the  time  of  the 
adjudication  in  bankruptcy,  there  was  no  debt  owing  by  the 
bankrupt  to  the  claimant.  There  had  been  no  delivery  or  tender 
of  delivery  prior  thereto,  and  none  since.  It  may  be  conceded  as 
the  law  of  this  jurisdiction  that  where  a  party  is  bound  from 
time  to  time,  as  expressed  in  the  contract,  to  deliver  articles  to 
be  manufactured  or  products  to  be  grown,  each  parcel  as  deliv- 
ered to  be  paid  for  at  a  certain  time  and  in  a  certain  way,  a 
refusal  by  the  vendee  to  be  further  bound  by  the  terms  of  the 
contract  or  to  accept  further  deliveries  constitutes  a  breach  of 
the  contract  as  a  whole,  and  gives  the  vendor  a  right  of  action 
to  recover  the  damages  he  may  sustain  by  reason  of  such  refusal. 
In  such  case  the  positive  refusal  of  the  vendee  to  perform  when 
tender  is  made,  or  notice  by  him  to  the  vendor  before  maturity 
of  the  time  for  delivery  that  he  will  not  carry  out  the  contract, 
will  release  the  vendor  from  making  any  tender,  and  entitle 
him  to  an  action  in  advance  of  the  fixed  period  for  delivery  on 
his  part  to  recover  damages  as  for  breach  of  the  whole  contract. 
Roehm  v.  Horst,  178  U.  S.  1,  20  Sup.  Ct.  780,  44  L.  ed.  953.  The 
sole  reliance  of  the  claimant  to  bring  it  within  this  rule  for  such 
breach  is  predicated  on  the  adjudication  in  an  involuntary  pro- 
ceeding in  bankruptcy  against  the  vendee.  I  am  unable  to  con- 
sent to  the  proposition  that  such  an  adjudication  in  bankruptcy, 
ex  vi  termini,  is  in  law  tantamount  to  a  refusal  of  the  bankrupt 
to  perform,  or  that  it  thereby  permanently  disabled  itself  from 


CONTINGENT  CLAIMS  457 

performance  to  bring  the  claim  asserted  by  petitioner  within  i 
the  operation  of  the  rule  laid  down  in  Roehm  v.  Horst,  supra." I 

The  judge  then  cites  and  quotes  from  the  opinion  in  Watson  v. 
Merrill,  136  Fed.  359,  69  C.  C.  A.  185,  69  L.  R.  A.  719,  decided 
by  the  Circuit  Court  of  Appeals  for  the  Eighth  Circuit,  and  In 
re  Swift,  supra,  and  says : 

"In  re  Swift,  112  Fed.  315,  50  C.  C.  A.  264,  a  broker  had 
made  a  contract  to  deliver  certain  stock  to  a  customer.  It  was 
held  that  he  made  it  impossible  to  fulfill  his  agreement  to  deliver 
the  stock  by  his  adjudication  in  bankruptcy,  for  the  reason  that 
it  took  the  stock  from  him  and  vested  it  with  all  his  property, 
in  his  trustee.    But  that  is  clearly  not  this  case." 

Judge  Philips  refers  to  In  re  PettingiU  &  Co.,  supra,  in  this 
way: 

"I  may  say  that  I  can  concur  in  the  syllabus  of  that  case 
that,  under  the  bankruptcy  act,  the  provability  of  a  claim  de- 
pends upon  its  status  at  the  time  of  the  filing  of  the  petition 
in  bankruptcy.  If  not  then  a  provable  debt,  as  defined  in  the 
act,  it  cannot  be  proved,  although  it  may  thereafter  come  within 
such  definition,  *  *  *  If,  however,  it  was  intended  to  hold 
that  as  applied  to  an  executory  contract  for  the  sale  of  annual 
crops  to  be  raised  in  successive  years,  where  no  breach  had 
occurred  at  the  time  of  an  involuntary  adjudication  in  bank- 
ruptcy, the  mere  act  of  such  declared  statutory  insolvency  con- 
stituted such  a  breach  of  the  contract  as  to  enable  the  vendor 
to  prove  up  against  the  estate  the  contingent  damages,  as,  on  a 
repudiation  of  the  contract  by  the  vendee,  I  cannot  consent 
thereto.  There  was  no  renunciation  by  the  vendee  company  of 
the  contract  after  the  commencement  of  performance  or  renun- 
ciation before  the  time  for  performance  had  arrived.  Nor  has 
the  vendee  deliberately  incapacitated  itself  or  rendered  per- 
formance of  the  contract  impossible  within  the  rule  laid  down 
in  Roehm  v.  Horst,  178  U.  S.  18,  20  Sup.  Ct.  787,  44  L.  ed.  953. 
As  a  discharge  in  bankruptcy  under  §  1,  cl.  12,  means  no  more 
than  'the  release  of  a  bankrupt  from  all  of  his  debts  which 
are  provable  in  bankruptcy,  except  such  as  are  excepted  by 
the  act,'  and  the  claim  for  damages  for  a  possible  future  breach 
of  a  contract  is  not  a  debt  provable  against  the  estate,  in  the 
absence  of  any  refusal  on  the  part  of  the  bankrupt  to  recog- 
nize the  contract,  and  he  has  not  voluntarily  or  positively  dis- 
abled himself  from  performing  it,  where  its  performance  does 
not  become  obligatory  until  after  the  adjudication  in  bankruptcy, 


458  ADMINISTRATION 

my  conclusion  is  that  the  claim  in  question  is  not  one  provable 
in  bankruptcy.  It  is  a  noteworthy  fact  that,  under  the  bank- 
rupt acts  of  1841  and  1867,  the  right  was  given  to  prove  'un- 
certain and  contingent  demands'  against  the  estate.  This 
provision  was  omitted  from  the  present  bankruptcy  act  of  1898. 
In  my  judgment  this  omission  is  significant." 

The  important  question  in  the  instant  case,  and  the  one  which 
in  my  judgment  is  controlling,  is  discussed  in  the  cases  to  which 
I  shall  now  refer.  The  first  of  these  is  In  re  Jefferson  (D.  C.) 
93  Fed.  948,  decided  by  Judge  Evans  for  the  District  of  Ken- 
tucky.    The  syllabus  in  that  case  is  as  follows: 

"A  lease  for  a  term  of  years,  reserving  rent  payable  in 
monthly  installments,  is  terminated  by  the  adjudication  of  the 
lessee  as  a  bankrupt  during  the  term;  and  the  landlord  has  no 
provable  claim  against  the  tenant's  estate  in  bankruptcy  for 
the  rent  which  would  have  accrued  under  the  lease  after  the 
date  of  such  adjudication." 

The  reasoning  of  the  court  in  the  opinion  to  the  effect  that 
proceedings  in  bankruptcy  terminate  the  relation  of  landlord 
and  tenant  applies,  it  seems  to  me,  with  equal  force  to  the  rela- 
tion of  employer  and  employee.  The  next  case  in  order  is  that  of 
Bray  v.  Cobb  (D.  C.)  100  Fed.  270,  decided  by  Judge  Purnell 
for  the  Eastern  District  of  North  Carolina.  In  the  opnion  he 
says: 

* '  The  relation  of  landlord  and  tenant  is  severed  by  operation 
of  the  bankruptcy  law." 

The  question  was  again  presented  before  Judge  Evans  In  re 
Hays,  Foster  &  Ward  Company  (D.  C.)  117  Fed.  879,  and  the 
opinion  expressed  In  re  Jefferson,  supra,  was  reiterated.  In 
both  cases  the  conclusion  reached  is  based  largely  upon  the  de- 
cisions in  Bailey  v.  Loeb,  2  Fed.  Cas.  376 ;  In  re  Webb,  29  P'ed. 
Cas.  494;  In  re  Breck,  4  Fed.  Cas.  43.  In  Watson  v.  Merrill, 
136  Fed.  359,  69  C.  C.  A.  185,  69  L.  R.  A.  719,  decided  in  the 
Circuit  Court  of  Appeals  for  the  Eighth  Circuit,  the  opinion 
being  delivered  by  Circuit  Judge  Sanborn,  the  court  differs 
from  the  views  expressed  in  the  three  cases  just  referred  to, 
although  it  reaches  the  same  result;  that  is,  that  a  claim  for 
damages  for  a  breach  of  a  contract  in  a  lease  to  pay  install- 
ments of  rent  for  the  use  of  the  premises  at  times  subsequent 
to  the  filing  of  the  petition  in  bankruptcy  is  not  provable  under 
the  bankruptcy  law  of  1898.    In  the  opinion  it  is  said : 

"An  adjudication  in  bankruptcy  does  not  dissolve  or  termi- 


CONTINGENT  CLAIMS  469 

nate  the  contractual  relations  of  the  bankrupt,  notwithstanding 
the  decisions  to  the  contrary  In  re  Jefferson  (D.  C.)  93  Fed.  448; 
Bray  v.  Cobb  (D.  C.)  100  Fed.  270;  and  Re  Hays,  Foster  & 
Ward  Company  (D.  C.)  117  Fed.  879.  Its  effect  is  to  trans- 
fer to  the  trustee  all  the  property  of  the  bankrupt  except  his 
__executory  contracts,  flnd  tQ^vest  in  the  trustee  the  option  to 
assume  or  to  renounce  these.  It  is  the  assignment  of  the  prop- 
erty of  the  bankrupt  to  the  trustee  by  operation  of  law.  It 
neither  releases  nor  absolves  the  debtor  from  any  of  his  contracts 
or  obligations,  but,  like  any  other  assignment  of  property  by 
an  obligor,  leaves  him  bound  by  his  agreements  and  subject 
to  the  liabilities  he  has  incurred.  It  is  the  discharge  of  the 
bankrupt  alone,  not  his  adjudication,  that  releases  him  from 
liability  for  provable  debts  in  consideration  of  his  surrender 
of  his  property,  and  its  distribution  among  the  creditors  who 
hold  them.  Even  the  discharge  fails  to  relieve  him  from  claims 
against  him  that  are  not  provable  in  bankruptcy,  and,  since  the 
filing  of  the  petition  in  bankruptcy  may  not  be  the  basis  of  a 
provable  claim,  his  liability  for  them  is  neither  released  nor 
affected  by  his  adjudication  in  bankruptcy,  or  by  his  discharge 
from  his  provable  debts.  One  agrees  to  pay  monthly  rents  for 
the  place  of  residence  of  his  family  or  for  his  place  of  busi- 
ness, or  to  render  personal  services  for  monthly  compensation 
for  a  term  of  years,  he  agrees  to  purchase  or  to  convey  prop- 
erty, and  he  then  becomes  insolvent  and  is  adjudicated  a  bank- 
rupt. His  obligations  and  liabilities  are  neither  terminated 
nor  released  by  the  adjudication.  He  still  remains  legally  bound 
to  pay  the  rents,  to  render  the  services,  and  to  fulfill  all  his  other 
obligations,  notwithstanding  the  fact  that  his  insolvency  may 
render  him  unable  immediately  to  do  so.  Nor  are  those  who 
contracted  with  him  absolved  from  their  obligations.  If  he  or 
his  trustee  pays  the  stipulated  rents  for  his  place  of  residence 
or  for  his  place  of  business,  the  lessors  may  not  deny  to  the 
payor  the  use  of  the  premises  according  to  the  terms  of  the 
lease.  If  he  renders  the  personal  services,  he  who  contracted 
to  pay  for  them  may  not  deny  his  liability  to  discharge  this 
obligation.  His  trustee  does  not  become  liable  for  his  debts, 
but  he  does  acquire  the  right  to  accept  and  assume  or  to  re- 
nounce the  executory  agreements  of  the  bankrupt  as  he  may 
deem  most  advantageous  to  the  estate  he  is  administering,  and 
the  parties  to  those  contracts  which  he  assumes  are  still  liable  to 
perform  them.     And  so,   throughout  the  entire  field  of  con- 


460  ADMINISTRATION 

tractual  obligations,  the  adjudication  in  bankruptcy  absolves 
from_jio_agreement.  terminates  no  contract^  and  discharges  no 
"Eabilityr  In  re  Curtis,  9  Am.  Bankr.  Rep.  286,  109  La.  1717^ 
South.  125;  In  re  Ells  (D.  C.)  98  Fed.  967,  968;  Witthaus  v. 
Zimmerman,  11  Am.  Bankr.  Rep.  314,  315,  91  App.  Div.  202, 
86  N.  Y.  Supp.  315 ;  White  v.  Griffing,  44  Conn.  437,  446,  447 ; 
In  re  Pennewell,  119  Fed.  139,  55  C.  C.  A.  571." 

It  will  be  seen  from  the  foregoing  that  the  conclusion  reached 
in  this  case  of  Watson  v.  Merrill  was  that  claims  for  future  rent, 
and  probably,  from  the  language  used  in  the  opinion,  for  future 
personal  services,  are  not  provable  in  bankruptcy,  though  the 
reason  given  therefor  is  entirely  different  from  that  given  in 
the  other  cases.  According  to  this  last  opinion  contracts  such 
as  those  in  question  here  will  remain  of  force  and  unaffected  by 
the  bankruptcy  proceedings.  Bailey  v.  Loeb,  2  Fed.  Cas.  376, 
was  decided  under  the  act  of  1867  by  Circuit  Judge  Wood,  after- 
wards a  Justice  of  the  Supreme  Court.  An  extract  from  the 
opinion  in  that  case  will  show  the  view  that  Judge  Wood  enter- 
tained of  the  matter,  as  follows: 

"For  instance,  a  business  man  has  a  manager  or  bookkeeper 
hired  by  the  year,  at  a  salary  payable  quarterly.  At  the  end  of 
two  months  he  is  adjudicated  bankrupt.  His  manager  or  book- 
keeper may  prove  for  a  proportionate  part  of  his  salary  up  to 
the  time  of  the  bankruptcy,  but  he  cannot  prove  for  any  part 
that  may  accrue  and  fall  due  after  the  bankruptcy.  The  clear 
purpose  of  the  bankruptcy  act  is  to  cut  off  all  claims  for  rent 
to  accrue,  or  for  services  to  be  rendered,  after  the  date  of  the 
bankruptcy." 

The  fact  that  this  decision  by  Judge  Wood  was  under  the 
bankruptcy  act  of  1867  strengthens  it  as  an  authority,  because 
it  is  generally  conceded  that  the  bankruptcy  act  of  1867  was 
more  liberal  as  to  the  proof  of  claims  for  contingent  liabilities 
than  is  the  present  act.  In  Malcomson  v.  Wappoo  Mills  et  al. 
(C.  C.)  88  Fed.  680,  Judge  Simonton  held  that: 

"Damages  are  not  recoverable  against  a  corporation  for  its 
failure  to  perform  a  contract  for  the  sale  and  delivery  of  mer- 
chandise, where  performance  was  prevented  solely  by  the  action 
of  a  court  in  appointing  a  receiver  for  the  corporation,  and  en- 
joining all  others  from  interfering  with  its  business  or  property. 
In  such  cases  the  breach  of  contract  is  damnum  absque  injuria." 

It  seems  clear  to  me  that  adjudication  in  bankruptcy  ends 
contracts  for  rent,  and  for  personal  services,  and  I  agree  with 


CONTINGENT  CLAIMS  461 

the  views  expressed  in  the  opinions  in  In  re  Jefferson,  supra, 
Bray  v.  Cobb,  supra,  In  re  Hayes,  Foster  &  Ward  Company, 
supra,  and  Malcomson  v.  Wappoo  Mills  et  al.,  supra.  The  case 
of  James  Dunlap  Carpet  Company  (D.  C.)  163  Fed.  541,  is  a 
case  favorable  to  the  contention  of  the  claimants  here  to  the 
,£^tent  of  allowing  proof  of  claim.  The  difficulty  about  the  case 
to  my  mind  is  that  the  learned  judge  based  his  decision  on  Mocli 
V.  Market  Street  National  Bank,  107  Fed.  897,  47  C.  C.  A.  49. 
In  the  case  of  Moch  v.  National  Bank  the  person  seeking  to 
prove  had  indorsed  for  the  bankrupt  and  the  paper  matured 
after  the  bankruptcy  proceedings  were  instituted.  The  indorser 
paid  the  paper,  and  then  proposed  to  prove  it  as  a  debt  against 
the  bankrupt  in  the  bankruptcy  proceedings.  I  can  see  no  similar- 
ity at  all  between  such  a  case  and  the  case  of  an  employe  seek- 
ing to  prove  for  salary  to  be  earned  by  services  to  be  rendered 
in  the  future.  The  indorsement  in  the  Moch  Case  was  a  definite 
and  fixed  liability  which  the  indorser  had  undertaken  for  the 
bankrupt,  and  it  was  in  existence  before  the  bankruptcy  pro- 
ceedings commenced.  It  matured,  and  the  indorser  was  com- 
pelled to  pay  the  debt  pending  the  bankruptcy  proceedings.  This 
is  entirely  different  from  a  contract  to  render  personal  services. 
Such  services  depend  upon  the  life,  health,  and  ability  other- 
wise of  the  employe  to  render  the  services,  and  also  upon  the 
life,  certainty,  and  perhaps  other  contingencies  as  to  the  em- 
ployer. But  it  is  a  partnership  in  bankruptcy  here,  and  what- 
ever is  true  as  to  individual  cases  there  would  seem  to  be  no 
doubt,  first,  that  a  partnership  is  dissolved  by  the  bankruptcy 
proceedings  (22  Am.  &  English  Cyclopedia  of  Law  [2d  ed.] 
202,  and  30  Cyc.  654,  and  cases  cited  in  both)  ;  and,  second,  if 
the  firm  is  dissolved  by  operation  of  law,  then  certainly  the 
contracts  of  that  firm  are  ended. 

In  Griggs  v.  Swift,  82  Ga.  392,  9  S.  E.  1062,  5  L.  R.  A.  405, 
14  Am.  St.  Rep.  176,  it  is  held  in  the  opinion  by  Chief  Justice 
Bleckley : 

''From  the  very  nature  of  a  contract  for  the  rendering  of 
personal  services  to  a  partnership  in  its  current  business,  where 
nothing  is  expressed  to  the  contrary,  both  parties  should  be  re- 
garded as  having  by  implication  intended  a  condition  dependent 
on  the  one  hand  upon  the  life  of  the  employe,  and,  on  the  other, 
upon  the  life  of  the  partnership,  provided  the  death  in  either 
case  was  not  voluntary." 


462  ADMINISTRATION 

Wood  on  Master  and  Servant,  §  163,  is  then  quoted  with  ap- 
proval to  the  following  effect: 

"  'Where  a  servant  is  employed  by  a  firm,  a  dissolution  of 
the  firm  dissolves  the  contract,  so  that  a  servant  is  absolved 
therefrom;  but,  if  the  dissolution  results  from  the  act  of  the 
parties,  they  are  liable  to  the  servant  for  his  loss  therefrom,  but, 
if  the  dissolution  results  from  the  death  of  a  member  of  the 
firm,  the  dissolution  resulting  by  operation  of  law,  and  not  from 
the  act  of  the  parties,  no  action  for  damages  will  lie.  *  •  * 
So,  if  a  firm  consists  of  two  or  more  persons,  and  one  or  more 
of  them  dies,  but  the  firm  is  not  thereby  dissolved,  the  contract 
still  subsists,  because  one  or  more  of  his  partners  is  still  in  the 
firm,  and  this  is  so  even  though  other  persons  are  taken  into 
the  firm.  The  test  is  whether  the  firm  is  dissolved.  So  long  as 
it  exists,  the  contract  is  in  force,  but,  when  it  is  dissolved,  the 
contract  is  dissolved  with  it,  and  the  question  as  to  whether  dam- 
ages can  be  recovered  therefor  will  depend  upon  the  question 
whether  the  dissolution  resulted  from  the  act  of  God,  the  opera- 
tion of  law,  or  the  act  of  the  parties. '  ' ' 

None  of  the  cases  cited  from  the  United  States  Courts  seem 
to  bear  directly  upon  the  question  immediately  involved  here — 
that  is,  of  the  right  of  an  employe  to  prove  for  future  services — 
except,  perhaps,  the  case  of  James  Dunlap  Carpet  Company, 
supra,  and  with  the  utmost  respect  for  the  learned  judge  decid- 
ing the  case  I  am,  for  the  reason  stated  above,  unable  to  agree 
with  his  conclusion.  I  have,  i>erhaps,  cited  authorities  at  un- 
necessary length,  but  the  question  is  an  interesting  one,  and  is 
presented  in  its  present  shape  for  the  first  time  in  this  district. 
'  I  do  not  believe  that  it  was  the  intention  and  purpose  of  the 
bankruptcy  act  that  contracts  extending  into  the  future  for 
rent  and  personal  services  should  be  left  hanging  over  the 
bankrupt  to  embarrass  and  harass  him  after  his  discharge  in 
bankruptcy.  It  is  said  that  if  this  is  not  true,  and  he  is  relieved 
of  such  liability  by  the  bankruptcy  act,  it  follows  that  claims 
for  such  rent  and  personal  service  should  be  admitted  to  proof 
in  the  bankruptcy  proceedings.  I  do  not  think  this  follows  at 
all.  The  adjudication  in  bankruptcy  ends  all  such  contracts. 
Of  course,  proof  may  be  allowed  for  any  amount  due  prior  to 
the  institution  of  the  proceedings  in  bankruptcy.  It  is  provided 
by  the  bankruptcy  act  that  for  most  personal  services  the  em- 
ploye would  have  priority  for  any  amount  due  him  for  as  much 
as  three  months  preceding  the  bankruptcy  proceedings.     This 


SECURED  CLAIMS  463 

fact  of  priority  of  payment  for  three  months  extending  to  so 
large  a  class  of  employes  is  another  reason  why  I  believe  it  was 
the  intention,  in  passing  this  act,  that  such  contracts  should 
terminate  with  the  adjudication  in  bankruptcy.  All  this  is  cer- 
tainly true  as  to  a  partnership.  The  adjudication  dissolves  it 
by  operation  of  law,  and  that  dissolution  ends  all  its  liabilities 
except  such  as  are  expressed  in  the  act. 

My  conclusion  is  that  the  referee  in  bankruptcy  correctly  de- 
cided that  this  claim  should  not  be  admitted  to  proof. ^<^ 


S^.  -T/H 


D.  Secured  Claims 

SEXTON  V.  DREYFUS  et  al. 

219  U.  S.  339,  55  L.  ed.  244,  31  Sup.  Ct.  256 

(United  States  Supreme  Court,  January  23,  1911) 

Mr.  Justice  HOLMES  delivered  the  opinion  of  the  court: 
In  both  of  these  cases,  secured  creditors,   selling  their  se- 
curity some  time  after  the  filing  of  the  petition  in  bankruptcy, 
and  finding  the  proceeds  not  enough  to  pay  the  whole  amount 
of  their  claims,  were  allowedby  the  referee  to  apply  the  pro-  /Ctv^^.^^ 
ceeds  first  to  interest  accrued  since  the  filing  of  the  petition,    ^  ■ 
then  to  principal,  and  to  prove  for  the  balance.     The  referee     ^'"""^t 
certTfied  the  question  whether  the  creditors  had  a  right  to  the  ^^*-^-w« 
interest.    The  district  judge  answered  the  question  in  the  affirm-  "^^^  Z. 
ative,  giving  the  matter  a  very  thorough  and  persuasive  dis- 
cussion,  and  declining  to  follow  the  English  rule.    Re  Kessler,    f   y  (* 
171  Fed.  751,     On  appeal,  his  decision  was  affirmed  by  a  ma- 
jority of  the  Circuit  Court  of  Appeals.    180  Fed.  979. 

The  argument  certainly  is  strong.  A  secured  creditor  could 
apply  his  security  to  interest  first  when  the  parties  were  solv- 
ent (Story  V.  Livingston,  13  Pet.  359,  371,  10  L.  ed.  200,  206), 
and  liens  are  not  affected  by  the  statute.  §  67c2  [30  Stat,  at  L. 
564,  c.  541,  U.  S.  Comp.  Stat.  1901,  p.  3449].  The  law  is  not 
intended  to  take  away  any  part  of  the  security  that  a  creditor 
may  have,  as  it  would  seem  at  first  sight  to  do  if  the  course 
adopted  below  were  not  followed.  Some  further  countenance  to 
that  course  is  thought  to  be  found  in  §  57/t,  which  provides  that 

16 — See  In  re  James  Dunlap  Car- 
pet Co.,  163  Fed.  541;  In  re  D. 
Levy  &  Sons  Co.,  208  Fed.  479. 


464  ADMINISTRATION 

the  value  of  securities  shall  be  determined  by  converting  them 
into  money  "according  to  the  terms  of  the  agreement,"  for  it 
is  urged  that,  by  construction,  the  right  to  apply  them  to  in- 
terest is  as  much  part  of  the  agreement  as  if  it  had  been  written 
in.  Nevertheless,  it  seems  to  us  that,  on  the  whole,  the  considera- 
tions on  the  other  side  are  stronger  and  must  prevail. 

/  For  more  than  a  century  and  a  half  the  theory  of  the  English 
bankrupt  system  has  been  that  everything  stops  at  a  certain 
date.  Interest  was  not  computed  beyond  the  date  of  the  com- 
qj^ion.    Ex  parte  Bennet,  2  Atk,  527.     This  rule  was  applied' 

1  to  mortgages  as  well  as  to  unsecured  debts  (Ex  parte  Wardell, 
1787;  Ex  parte  Hercy,  1792,  1  Cooke,  Bankrupt  Laws,  4th  ed. 
181  [1st  ed.  Appx.]);  and  notwithstanding  occasional  doubts, 
it  has  been  so  applied  with  the  prevailing  assent  of  the  English 
judges  ever  since  (Ex  parte  Badger,  4  Ves.  Jr.  165 ;  Ex  parte 
Ramsbottom,  2  Mont.  &  A.  79 ;  Ex  parte  Penf old,  4  De  G.  &  S. 
282;  Ex  parte  Lubbock,  9  Jur.  N.  S.  854;  Re  Savin,  L.  R.  7  Ch. 
760,  764;  Ex  parte  Bath,  L.  R.  22  Ch.  Div.  450,  454;  Quarter- 
maine's  Case  [1892]  1  Ch.  639;  Re  Bonacino,  1  Manson,  59). 
As  appears  from  Cooke,  supra,  the  rule  was  laid  down  not  be- 
cause of  the  words  of  the  statute,  but  as  a  fmidamentaljgnn^^ 
We  take  our  bankruptcy  system  from  England,  and  we  naturally 
assume  that  the  fundamental  principles  upon  which  it  was  ad- 
ministered were  adopted  by  us  when  we  copied  the  system, 
somewhat  as  the  established  construction  of  a  law  goes  with  the 
words  where  they  are  copied  by  another  state.  No  one  doubts 
that  interest  on  unsecured  debts  stops.  See  §  63  (1).  Shawnee 
County  V.  Hurley,  94  C.  C.  A.  362,  169  Fed.  92,  94. 

The  rule  is  not  unreasonable  when  closely  considered.  It 
simply  fixes  the  moment  when  the  affairs  of  the  bankrupt  are 
supposed  to  be  wound  up.  If,  as  in  a  well-known  illustration 
of  Chief  Justice  Shaw's  (Parks  v.  Boston,  15  Pick.  198,  208), 
the  whole  matter  could  be  settled  in  a  day  by  a  pie-powder  court, 
the  secured  creditor  would  be  called  upon  to  sell  or  have  his 
security  valued  on  the  spot,  would  receive  a  dividend  upon  that 
footing,  would  suffer  no  injustice,  and  could  not  complain.  Mr, 
under  §  57  of  the  present  act,  the  value  of  the  security  shoiild 
be  determined  by  agreement  or  arbitration,  the  time  for  fix:ing 
it  naturally  would  be  the  date  of  the  petition.  At  that  moment 
the  creditors  acquirve,.A.right.w  rem  against,  the.. assets.  Chem- 
ical Nat.  Bank  v.  Armstrong,  28  L.  R.  A.  231,  8  G.'C  A.  155, 16 
U.   S.  App.  465,  59  Fed.  372,  378,  379;  Merrill  v.  National 


SECURED  CLAIMS  465 

Bank,  173  U.  S.  131,  140,  43  L.  ed.  640,  643,  19  Sup.  Ct.  Rep. 
360.  When  there  is  delay  in  selling  because  of  the  hope  of  get- 
ting a  higher  price,  it  is  more  for  the  advantage  of  the  secured 
creditor  than  of  any  one  else,  as  he  takes  the  whole  advance, 
and  the  others  only  benefit  by  a  percentage,  which  does  not 
seem  a  good  reason  for  allowing  him  to  prove  for  interest  by 
indirection.  Whenever  the  creditor  proves,  his  security  may 
be  cut  short.  That  is  the  necessarily  possible  result  of  bank- 
ruptcy. The  rule  under  discussion  fixes  the  moment  in  all  cases 
at  the  date  [on]  which  the  petition  is  filed;  but  beyond  the  fact 
of  being  compelled  to  realize  his  security  and  look  for  a  new  in- 
vestment, there  is  no  other  invasion  of  the  secured  creditor's 
contract  rights,  and  that  invasion  is  the  same  in  kind  what- 
ever moment  may  be  fixed. 

It  is  suggested  that  the  right  of  a  creditor  having  security 
for  two  claims,  one  provable  and  the  other  unprovable,  to  mar- 
shal his  security  against  the  unprovable  claim  (see  Hiscock  v. 
Varick  Bank,  206  U.  S.  28,  37,  51  L.  ed.  945,  951,  27  Sup.  Ct. 
Rep.  681),  is  inconsistent  with  the  rule  applied  in  this  case.  But 
that  right  is  not  affected  by  fixing  a  time  for  winding  up,  and 
the  bankruptcy  law  does  not  touch  securities  otherwise  than  in 
this  unavoidable  particular.  The  provision  in  §  57h  for  con- 
verting securities  into  money  ac(x>rding  to  the  terms  of  the 
agreement  has  no  appreciable  bearing  on  the  question.  Apart 
from  indicating,  in  accordance  with  §  67rf,  that  liens  are  not  to 
be  affected,  it  would  seem  rather  to  be  intended  to  secure  the 
right  of  the  trustees  and  general  creditors  in  cases  where  the 
security  may  be  worth  more  than  the  debt.  The  view  that  we 
adopt  is  well  presented  in  the  late  Judge  Lowell 's  work  on  Bank- 
ruptcy, §  419 ;  seems  to  have  been  entertained  in  Coder  v.  Arts, 
15  L.  R.  A.  (N.  S.)  372,  82  C.  C.  A.  91,  152  Fed.  943,  950 
(affirmed  without  touching  this  point,  213  U.  S.  223,  53  L.  ed. 
772,  29  Sup.  Ct.  Rep.  436,  16  A.  &  E.  Ann.  Cas.  1008),  and  in 
somewhat  sustained  by  analogy  in  the  case  of  insolvent  banks 
(Merrill  v.  National  Bank,  supra;  White  v.  Knox,  111  U.  S.  784, 
787,  28  L.  ed.  603,  604,  4  Sup.  Ct.  Rep.  686). 

Interest  and  dividends  accrued  upon  some  of  the  securities 
after  the  date  of  the  petition.  The  English  cases  allow  these 
to  be  applied  to  the  after-accruing  interest  upon  the  debt.  Ex 
parte  Ramsbottom;  Ex  parte  Penfold;  and  Quartermaine 's 
Case, — supra.  There  is  no  more  reason  for  allowing  the  bank- 
rupt estate  to  profit  by  the  delay  beyond  the  day  of  settlement 

H.  &  A.  Bankruptcy — 30 


466  ADMINISTRATION 

than  there  is  for  letting  the  creditors  do  so.  Therefore  to  apply 
these  subsequent  dividends,  etc.,  to  subsequent  interest,  seems 
just. 

Decrees  reversed. 

^il  ^  Cy/  (^Jy^    >/>    E.  Claims  Having  Priority 
,     ^^  ^     I   -^^    In  re  ROUSE,  HAZARD  &  CO. 

iw   '^  ^»>-^^  ^^  ^®^-  ^^'  ^^  ^-  ^-  ^-  ^^^ 

j^     1^  Circuit  Court  of  Appeals,  Seventh  Circuit.    January  3,  1899) 

-  q  \  JENKINS,  Circuit  Judge,  delivered  the  opinion  of  the  court. 
^y^t^^  *  *  *  It  appears  that  on  the  1st  day  of  November,  1898, 
j^j'  an  involuntary  petition  was  filed  in  the  court  below  against 

'  i  Rouse,  Hazard  &  Co.,  a  corporation  existing  under  the  laws  of 
5^^'*'^  the  state  of  Illinois,  and  that  on  the  11th  day  of  November, 
1898,  that  corporation  was  adjudicated  a  bankrupt ;  that  on  the 
5th  day  of  November,  1898,  a  petition  was  filed  in  the  court 
below  by  a  large  number  of  workmen,  laborers,  and  servants 
of  Rouse,  Hazard  &  Co.,  asking  for  the  payment  of  their  labor 
claims  accruing  to  them  prior  to  the  filing  of  the  petition,  and 
that  such  claims  be  awarded  priority  in  payment  out  of  the 
bankrupt's  estate.  Rouse,  Hazard  &  Co.,  on  the  31st  day  of 
August,  1898,  suspended  business,  its  property  on  that  date 
being  seized  by  the  sheriff  of  Peoria  county,  111.,  under  execu- 
tions issued  upon  judgments  rendered  against  the  corporation 
in  the  courts  of  the  state  of  Illinois,  and  such  property  remained 
in  the  possession  of  the  sheriff  until  it  was  sold  by  him,  and  the 
proceeds,  under  order  of  the  bankrupt  court,  turned  over  to 
the  temporary  receiver  appointed  under  the  bankruptcy  pro- 
ceedings. The  labor  claims  in  question  accrued  within  three 
months  prior  to  August  31,  1898,  the  date  upon  which  the  cor- 
poration bankrupt  suspended  business  by  reason  of  the  levy  of 
the  executions,  none  of  the  services  for  which  payment  was  sought 
being  rendered  after  that  date.  Specific  objections  were  filed  by 
certain  general  creditors  to  the  allowance  of  priority  of  pay- 
ment of  these  claims,  and  upon  the  hearing  in  the  bankruptcy 
court  it  was  ordered  that  the  claims  for  wages  as  shown  by  the 
receiver's  report  be  approved  as  preferred  claims,  not  exceeding 
by  any  one  claimant  the  sum  of  $300,  and  that  such  claims 
should  be  paid  out  of  the  bankrupt's  estate  in  preference  and 
priority  to  the  general  creditors.    It  is  this  direction  for  the  pay- 


CLAIMS  HAVING  PRIORITY  467 

ment  of  labor  claims  in  priority  to  the  general  creditors  that  is 
asked  to  be  reviewed  here  as  a  question  of  law. 
The  bankrupt  law  (e.  7,  §  646)  provides  that: 
* '  The  debts  to  have  priority,  except  as  herein  provided,  and  to 
be  paid  in  full  out  of  the  bankrupt 's  estate,  and  the  order  of  pay- 
ment shall  be     *     *     *     (4)  wages  due  to  workmen,  clerks  or  / 
servants  which  have  been  earned  within  three"months  before  the 
date  of  the  commencement  of  proceedings,  not  to  exceed  $300  to 
each  claimant.     (5)  Debts  owing  to  any  person,  who  by  the  laws 
of  the  states,  or  of  the  United  States,  is  entitled  to  priority'*^"'"" 
The  laws  of  the  "slate  of  Illinois  with  respect  to  voluntary 
assignments  provides  (Rev.  St.  111.  1898,  p.  172,  c.  10,  §  6)  : 

*  *  That  all  claims  for  the  wages  of  any  laborer  or  servant,  which 
have  been  earned  within  the  term  of  three  months  next  preceding 
the  making  of  such  assignment,  and  which  have  been  filed  within 
said  term  of  three  months  after  such  assignment,  and  to  which  no 
exception  has  been  made,  or  to  which  exception  has  been  made 
and  the  same  having  been  adjudicated  and  settled  by  the  court, 
shall,  after  the  payment  of  the  costs,  commissions  and  expenses 
of  assignment,  be  preferred,  and  first  paid  to  the  exclusion  of  all 
other  demands  and  claims. ' ' 

By  c.  38a,  p.  629,  Rev.  St.  111.  1898,  it  is  provided: 

*  *  That  hereafter,  when  the  business  of  any  person,  corporation, 
company  or  firm  shall  be  suspended  by  the  action  of  creditors,  or 
be  put  into  the  hands  of  a  receiver  or  trustee,  then  in  all  such 
cases  the  debts  owing  to  laborers  and  servants  which  have  accrued 
by  reason  of  their  labor  or  employment,  shall  be  considered  and 
treated  as  preferred  claims,  and  such  laborers  or  employes  shall 
be  preferred  creditors,  and  shall  be  first  paid  in  full,  and  if  there 
shall  not  be  sufficient  to  pay  them  in  full  the  same  shall  be  paid 

from  the  proceeds  of  the  sale  of  the  property  seized. ' ' 

********* 

Coming,  then,  to  the  merits,  it  may  be  remarked  by  way  of 
preface  that  the  several  provisions  of  the  law  of  the  state  of  Illi- 
nois with  respect  to  the  priority  of  payment  to  be  allowed  labor 
claims  are  not  altogether  consistent.  In  the  case  of  voluntary  as- 
signments, the  claim  of  the  laborer  which  is  preferred  must  have 
accrued  within  three  months  next  preceding  the  making  of  the 
assignment.  In  the  case  of  a  suspension  of  business  by  action  of 
creditors  there  is  neither  limit  as  to  time  nor  as  to  amount.  The 
reason  of  the  distinction  is  not  easy  to  understand.  It  is  also  to 
be  observed  that  the  Bankrupt  Court  whose  order  is  here  under 


468  ADMINISTRATION 

review  proceeded  upon  the  theory  that  §  64&,  cl.  4,  applied  as  to 
the  amount,  but  did  not  apply  as  to  time.  Singularly  enough, 
priority  of  payment  of  claiilis  was  allowed  upon  the  theory  that 
the  provision  of  §  64&,  cl,  5,  governed,  and  that,  notwithstanding 
the  previous  provision,  wherever  the  laws  of  a  state  granted 
priority  with  respect  to  payment  of  labor  claims,  those  laws  must 
be  recognized  and  followed.  Yet  here  the  Bankrupt  Court  has 
allowed  priority  with  respect  to  these  claims  without  regard  to 
limitation  of  time,  but  has  imposed  the  limitation  of  the  bankrupt 
act  with  respect  to  amount  when  the  law  of  the  state  under  which 
priority  was  allowed  contains  no  such  limitation. 

The  question  here  is  one  of  construction  of  the  bankrupt  law 
of  the  United  States,  and  is  this:  whether  the  congress,  having 
spoken  by  a  particular  provision  (§  64&,  cl.  4)  with  respect  to  the 
prionty  to  be  allowed  labor  claimants,  and  having  subsequently 
in  the  same  act  (§  646,  cl.  5)  spoken  generally  with  respect  to 
the  recognition  of  the  priorities  allowed  by  the  laws  of  the  state 
or  the  United  States,  the  latter  general  provision  overrides  or  en- 
larges the  prior  special  provision.  The  bankrupt  act,  by  its 
terms,  went  into  full  force  and  effect  upon  its  passage,  July  1, 
1898,  and  *  *  *  was  operative  from  the  date  of  its  passage, 
and  was  effective  from  that  date  to  supersede  the  insolvency  laws 
of  the  several  states.  Manufacturing  Co,  v.  Hamilton  (Mass.)  51 
N.  E.  529;  Blake  v.  Francis-Valentine  Co.,  89  Fed.  691;  In  re 
Bruss-Ritter  Co.  (E,  D.  Wis.)  90  Fed.  651.  *  *  *  What  was 
the  real  intention  of  the  congress  as  expressed  in  clauses  4  and  5 
of  §  646  ?  In  the  first  clause  congress  addresses  itself  to  the  sub- 
ject of  labor  claims,  and  particularly  provides  that  all  wages  that 
have  been  earned  within  three  months  before  the  date  of  the  com- 
mencement of  proceedings  in  bankruptcy,  not  to  exceed  $300  to 
each  claimant,  shall  be  awarded  priority  of  payment.  It  recog- 
nized, it  must  be  assumed,  the  various  provisions  of  law  in  the 
several  states  with  respect  to  this  subject.  It  found  them  not  to 
be  in  harmony,  and  in  some  states — as,  notably,  Illinois — the  laws 
upon  that  subject  not  to  be  consistent  with  each  other.  It  found 
limitation  as  to  time  different  in  the  different  states.  It  found 
that  in  some  of  the  states  priority  of  payment  was  unlimited  as 
to  amount,  and  in  some  limited  to  so  small  a  sum  as  $50.  With 
this  divergence  within  its  knowledge,  the  congress  spoke  to  the 
subject  specially  and  particularly,  and  limited  the  amount  to 
$300,  and,  as  to  time,  to  wages  earned  within  three  months  before 
the  commencement  of  proceedings.    Can,  then,  the  general  pro- 


CLAIMS  HAVING  PRIORITY  469 

vision  of  the  law  following  immediately  thereafter,  allowing  pri- 
ority of  payment  for  all  debts  owing  to  any  person  who,  by  the 
laws  of  the  states  or  the  United  States,  is  entitled  to  priority,  be 
held  to  enlarge  the  prior  provision  so  that  the  statute  should 
be  read  that,  in  any  event,  the  laborer  should  be  entitled  to  pri- 
ority of  payment  in  respect  of  wages  earned  within  three  months 
prior  to  proceedings,  and  in  amount  not  exceeding  $300,  and 
that  wherever  the  laws  of  the  state  of  the  residence  of  the  bank- 
rupt grant  the  laborer  priority  of  payment  without  limit  as  to 
time  or  amount,  or  impose  a  limit  in  excess  of  that  imposed  by 
the  bankrupt  act,  he  shall  be  entitled  to  a  further  priority  in  pay- 
ment according  to  the  law  of  the  particular  state  ?  We  think  not. 
It  is  not  to  be  supposed — unless  the  language  of  the  act  clearly 
so  speaks — that  the  congress  intended  that  in  the  administration 
of  the  act  there  should  be  a  marked  contrariety  in  the  priority 
of  payment  of  labor  claims  dependent  upon  locality.  It  is  an 
elementary  principle  of  construction  that  where  there  are  in  one 
act  or  in  several  acts  contemporaneously  passed  specific  provisions 
relating  to  a  particular  subject,  they  will  govern  in  respect  to 
that  subject  as  against  general  provisions  contained  in  the  same 
act.  See  Suth.  St.  Const.  §  158.  Thus,  in  State  v.  Inhabitants  of 
Trenton,  38  N.  J.  Law,  67,  it  is  said:  "When  the  intention  of 
the  lawgiver,  which  is  to  be  sought  after  in  the  interpretation  of 
a  statute,  is  specifically  declared  in  a  prior  section  as  to  a  par- 
ticular matter,  it  must  prevail  over  a  subsequent  clause  in  gen- 
eral terms,  which  might,  by  construction,  conflict  with  it.  The 
legislature  must  be  presumed  to  have  intended  what  it  expressly 
stated,  rather  than  that  which  might  be  inferred  from  the  use 
of  general  terms."     *     *     * 

Our  conclusion  is  that  congress  having  spoken  specifically  to 
the  subject  of  priority  of  payment  of  labor  claims,  what  it  has 
said  upon  that  subject  expresses  the  particular  intent  of  the  law- 
making power,  and  that  provision  is  not  to  be  tolled  or  enlarged 
by  any  general  prior  or  subsequent  provision  in  that  act.  That 
which  is  given  in  particular  is  not  affected  by  general  words.  So 
that  the  statute  providing  for  the  priority  of  payment  of  debts 
referred  to  in  clause  5  must  be  construed  to  mean  other  debts 
and  different  debts  than  those  specified  in  clause  4.  We  are  not 
unmindful  of  the  particular  hardship  which  our  conclusion,  it 
is  said,  will  work  out  here.  It  arises  from  the  fact  that  under 
the  law  proceedings  in  bankruptcy,  except  by  voluntary  act  of 
the  bankrupt,  could  not  be  commenced  in  time  to  fully  protect 


470  ADMINISTRATION 

these  labor  claimants.  We  regret  that  this  is  so.  It  is  a  mis- 
fortune arising  from  the  provisions  of  the  act,  but  to  remedy 
this  particular  wrong  we  cannot  override  a  recognized  canon 
of  construction  of  statute  law. 

The  prayer  of  this  petition  must  be  allowed,  and  the  order 

of  the  District  Court,     *     *     *     so  far  as  it  allows  priority  of 

payment  to  labor  claims  which  accrued  prior  to  the  1st  day  of 

^  August,  1898,  must  be  set  aside,  and  held  for  naught.     *     *     * 

V    ^  ■  j^ 

1^1!    ^      \  SHROPSHIRE,  WOODLIFF  &  CO.  v.  BUSH  et  al. 
t      ^    ^J^         204  U.  S.  186,  51  L.  ed.  436,  27  Sup.  Ct.  178 

/Av*^    ■*  (United  States  Supreme  Court.    January  7,  1907) 

K 

i  Mr.  Justice  MOODY  delivered  the  opinion  of  the  court: 

The  appellees  are  trustees  of  the  bankrupt  estate  of  the 
Southern  Car  &  Foundry  Company.  The  appellants,  before  the 
commencement  of  the  proceedings  in  bankruptcy,  acquired  by 
purchase  and  assignment  a  large  number  of  claims  for  wages 
of  workmen  and  servants,  none  exceeding  $300  in  amount,  and 
aU  earned  within  three  months  before  the  date  of  the  commence- 
ment of  the  proceedings  in  bankruptcy.  The  District  Court 
for  the  eastern  district  of  Tennessee  rendered  a  judgment  dis- 
allowing priority  to  these  claims,  because,  when  filed,  they 
were  not  "due  to  workmen,  clerts,  or  servants." 

On  appeal  to  the  Circuit  Court  of  Appeals  for  the  sixth  circuit 
that  court  duly  certified  here  for  instructions  the  following  ques- 
tion: 

"Is  an  assignee  of  a  claim  for  wages  earned  within  three 
months  before  the  commencement  of  proceedings  in  bankruptcy 
against  the  bankrupt  debtor  entitled  to  priority  of  payment,  un- 
der §  64  (4)  of  the  bankrupt  act,  when  the  assignment  occurred 
prior  to  the  commencement  of  such  bankruptcy  proceedings?" 

The  question  certified  has  never  been  passed  upon  by  any 
Circuit  Court  of  Appeals,  and  in  the  District  Courts  the  decisions 
upon  it  are  conflicting.  Re  Westlund,  99  Fed.  399 ;  Re  St.  Louis 
Ice  Mfg.  &  Storage  Co.,  147  Fed.  752 ;  Re  North  Carolina  Car  Co. 
[semftie],  127  Fed.  178,  where  the  right  of  the  assignee  to  pri- 
ority was  denied;  Re  Brown,  4  Ben.  142,  Fed.  Cas.  No.  1,974 
[act  of  1867,  14  Stat,  at  L.  517,  c.  176]  ;  Re  Harmons,  128  Fed. 
170,  where,  on  facts  slightly  but  not  essentially  different,  the 
right  of  the  assignee  to  priority  was  affirmed. 


CLAIMS  HAVING  PRIORITY  47X 

The  bankruptcy  law  (act  July  1,  1898,  30  Stat,  at  L.  pp.  544, 
563,  c.  541,  U.  S.  Comp.  Stat.  1901,  p.  3447),  in  §1,  defines 
**debt"  as  including  "any  debt,  demand,  or  claim,  provable  in 
bankruptcy. "  §  64,  under  which  priority  is  claimed  in  this  case, 
is,  in  the  parts  material  to  the  determination  of  the  question,  as 
follows : 

'  *  §  64.  Debts  which  have  priority. —  *  *  *  b.  The  debts 
to  have  priority,  except  as  herein  provided,  and  to  be  paid  in 
full,  out  of  bankrupt  estates  and  the  order  of  payment,  shall  be 
*  *  *  (4)  wages  due  to  workmen,  clerks,  or  servants 
which  have  been  earned  within  three  months  before  the  date  of 
the  commencement  of  proceedings,  not  to  exceed  three  hundred 
dollars  to  each  claimant ;     *     *     *  " 

The  precise  inquiry  is  whether  the  right  of  prior  pajrment  thus 
conferred  is  attached  to  the  person  or  to  the  claim  of  the  wage- 
earner;  if  to  the  person,  it  is  available  only  to  him;  if  to  the 
claim,  it  passes  with  the  transfer  to  the  assignee.  In  support  of 
the  proposition  that  the  right  is  personal  to  the  wage-earner,  and 
enforceable  only  by  him,  it  is  argued  that  it  is  not  wages  earned 
within  the  prescribed  time  which  are  given  priority,  but  wages 
"due  to  workmen,  clerks,  or  servants;"  that  when  the  claim  is 
assigned  to  another  it  is  no  longer  "due  to  workmen,  clerks,  or 
servants,"  but  to  the  assignee ;  and  therefore,  when  presented  by 
him,  lacks  one  of  the  characteristics  which  the  law  makes  essen- 
tial to  priority.  In  this  argument  it  is  assumed  that  the  wages 
must  be  "due"  to  the  earner  at  the  time  of  the  presentment  of 
the  claim  for  proof,  or,  at  least,  at  the  time  of  the  commencement 
of  the  proceedings  in  bankruptcy.  Without  that  assumption  the 
argument  fails  to  support  the  conclusion.  But  the  statute  lends 
no  countenance  to  this  assumption.  It  nowhere  expressly  or  by 
fair  implication  says  that  the  wages  must  be  due  to  the  earner 
at  the  time  of  the  presentment  of  the  claim,  or  of  the  beginning 
of  the  proceedings,  and  we  find  no  warrant  for  supplying  such 
a  restriction.  Regarding,  then,  the  plain  words  of  the  statute, 
and  no  more,  they  seem  to  be  merely  descriptive  of  the  nature 
of  the  debt  to  which  priority  is  given.  When  one  has  incurred 
a  debt  for  wages  due  to  workmen,  clerks,  or  servants,  that  debt, 
within  the  limits  of  time  and  amount  prescribed  by  the  act,  is 
entitled  to  priority  of  payment.  The  priority  is  attached  to  the 
debt,  and  not  to  the  person  of  the  creditor ;  to  the  claim,  and  not 
to  the  claimant.  The  act  does  not  enumerate  classes  of  creditors 
and  confer  upon  them  the  privilege  of  priority  in  payment,  but, 


472  ADMINISTRATION 

on  the  other  hand,  enumerates  classes  of  debts  as  "the  debts  to 
have  priority." 

In  this  case  the  Southern  Car  &  Foundry  Company  had  in- 
curred certain  debts  for  wages  due  to  workmen,  clerks,  or 
servants,  which  were  earned  within  three  months  before  the 
date  of  the  commencement  of  proceedings  in  bankruptcy.  These 
debts  were  exactly  within  the  description  of  those  to  which  the 
bankruptcy  act  gives  priority  of  payment,  and  they  did  not  cease 
to  be  within  that  description  by  their  assignment  to  another. 
The  character  of  the  debts  was  fixed  when  they  were  incurred, 
and  could  not  be  changed  by  an  assignment.  They  were  pre- 
cisely of  one  of  the  classes  of  debts  which  the  statute  says  are 
"debts  to  have  priority." 

The  question  certified  is  answered  in  the  affirmative,  and  it 
is  so  ordered. 

In  re  McDAVID  LUMBER  CO. 

190  Fed.  97 

(District  Court,  N.  D.  Florida.    September  25,  1911) 

SHEPPARD,  District  Judge.  This  cause  comes  here  for 
consideration  on  petition  of  Wm.  F.  Lee  for  review  of  the  ruling 
of  C.  L.  Shine,  Esq.,  referee  in  bankruptcy,  and  involves  the 
question  of  priority  of  liens  attaching  to  the  lumber  and  other 
products  of  a  sawmill  plant  in  due  course  of  administration  in 
a  court  of  bankruptcy. 

The  McDavid  Lumber  Company,  bankrupt,  was  lately  engaged 
in  manufacturing  lumber  and  operated  a  large  plant  when  pro- 
ceedings in  bankruptcy  were  begun.  The  company  was  adju- 
dicated a  bankrupt  in  June,  1910.  Wm.  F.  Lee  was  employed 
as  bookkeeper  for  the  company,  and  by  his  petition  before  the 
referee  sought  to  declare  his  lien  on  the  stock  of  lumber  and 
fixtures  of  the  company  for  wages  due  him  for  the  month  of 
April  and  a  part  of  May,  1910,  at  the  rate  of  $115  per  month. 
It  is  disclosed  by  the  petition  that  the  stock  of  lumber,  the  greater 
portion  of  which  was  produced  during  Lee's  employment,  com- 
prised the  principal  assets  of  the  company.  Three  months  prior 
to  Lee's  employment,  to  wit,  on  January  10,  1910,  the  McDavid 
Lumber  Company  executed  a  chattel  mortgage,  based  upon  the 
present  consideration  of  $1,  to  the  Hayward  Export  Company, 
embracing  all  the  lumber  and  timber  of  whatsoever  kind  which 


CLAIMS  HAVING  PRIORITY  473 

should  be  manufactured  at  the  mill  of  said  company  from  the 
1st  of  January,  1910,  to  the  1st  of  January,  1911 ;  this  mortgage 
provided  that  the  export  company  should  advance  80  per  cent, 
of  the  value  of  the  output  of  the  mill  each  month,  and  further 
stipulated  that  the  export  company  should  be  the  selling  agent 
of  the  lumber  company  for  all  its  product,  excepting  interior 
stock.  The  advances  to  the  extent  of  80  per  cent,  were  secured 
by  a  mortgage  based  upon  the  whole  output,  and  included  all 
the  lumber  and  timber  stored  upon  the  yards  of  the  company 
during  the  existence  of  the  mortgage. 

The  further  point  is  made  by  Lee's  petition  that  the  mort- 
gage of  the  export  company  was  not  recorded  until  the  15th  of 
April,  1910,  15  days  after  Lee's  employment  by  the  McDavid 
Lumber  Company;  but  actual  notice  of  its  existence  is  nowhere 
negatived  by  the  petition,  although,  as  will  later  appear,  notice 
of  the  mortgage  is  not  material  in  view  of  the  determination  of 
the  question  certified  to  this  court,  Lee  by  his  petition  seeks 
to  have  his  claim  for  wages  declared  a  preference  over  the 
mortgage  of  the  export  company  on  the  proceeds  of  the  product 
embraced  in  the  mortgage,  and  that  the  export  company  which 
has  disposed  of  the  lumber  be  required  to  pay  his  claim  for 
wages. 

The  Hayward  Export  Company  interposed  a  demurrer  to 
Lee's  petition,  the  first  ground  of  which  is  only  necessary  to  be 
considered  at  this  time,  viz.: 

"  (1)  The  allegations  of  the  petition  show  that  the  rights  of 
the  Hayward  Export  Company  under  its  mortgage  and  contract 
of  sale  are  superior  to  the  rights  of  petitioner  in  the  proceeds 
of  the  lumber." 

The  referee  upon  the  hearing  before  him  sustained  the  de- 
murrer, and  it  is  this  order  which  is  certified  here  on  petition 
of  Lee  for  review. 

The  contest  seems  to  have  waged  so  far  over  the  priority  of 
the  respective  liens  of  contestants,  the  mortgage  of  the  export 
company,  and  the  statutory  lien  of  the  laborer  as  created  by 
§2198,  Gen.  St.  Florida  1906,  which  provides: 

"That  liens  prior  in  dignity  to  all  others  accruing  thereafter 
shall  exist  in  favor  of  bookkeepers,  clerks,  etc.,  upon  the  stock 
and  fixtures  and  other  property  of  merchants  and  corpora- 
tions. ' ' 

Whether  the  statutory  lien  in  favor  of  Lee  should  be  declared 
superior  to  the  mortgage  of  the  Hayward  Export  Company, 


474  ADMINISTRATION 

which  antedated  the  performance  of  any  labor  by  Lee,  was  the 
question  before  the  referee,  and  was  decided  by  him  in  favor  of 
the  mortgage  lien.  If  the  question  were  to  be  settled  by  state 
statute  and  without  reference  to  the  order  of  distribution  of  the 
estates  of  bankrupts  provided  by  the  federal  bankruptcy  act, 
the  referee  may  have  decided  rightly.  It  v^dll  be  conceded  that 
the  bankrupt  act  (§  67d)  recognizes  liens  generally  in  the  prior- 
ity precisely  as  the  state  law  fixes  them,  when  the  bankruptcy 
act  is  silent,  or  where  by  its  terms  priority  is  left  for  state  regu- 
lation. When,  however,  the  lien  of  the  laborer  for  his  wages 
earned  within  three  months  of  his  employer's  bankruptcy  is 
given  preference  in  the  distribution  of  the  assets  of  the  estate, 
it  is  immaterial  whether  under  the  state  law  his  claim  is  or  is 
not  superior  to  the  mortgage  lien.  It  was  earnestly  insisted  at 
the  argument  that  the  bankruptcy  act  (§  64b)  does  no  more 
than  provide  for  the  order  of  distribution  of  the  assets  after 
satisfaction  has  been  made  of  valid  liens  recognized  by  §  67d. 
When  Congress,  however,  provides  the  order  of  payment  and 
gives  preference  to  a  certain  class  of  claims,  such  as  taxes,  cost 
of  administration,  and  wages  in  limited  amounts  for  a  definite 
time,  such  legislation  can  have  no  other  effect  in  reality  than  to 
create  a  lien  in  favor  of  the  claims  thus  preferred.  Undoubt- 
edly it  was  intended  by  Congress  that  when  property  of  em- 
ployers should  be  placed  in  bankruptcy  and  beyond  the  reach 
of  those  who  had  aided  in  its  creation,  to  charge  and  impress 
such  property  to  the  limited  extent  noted  with  a  preference  by 
law  second  only  to  taxes  and  cost  of  administration.  Those 
entering  into  contracts  with  employers  of  labor  for  manufac- 
tured product  must  contemplate  the  relation  of  the  labor  to  the 
finished  product  and  should  be  held  to  know  that,  in  case  bank- 
ruptcy overtakes  the  enterprise,  the  assets  resulting  from  the 
administration  of  such  trust  shall  be  distributed  in  the  course 
provided. 

Nor  does  the  adoption  of  this  principle  destroy  the  probity  of 
contracts  or  work  greater  hardship  to  secured  creditors  than 
would  fall  unhappily  to  the  lot  of  that  creditor  class  who  live 
from  hand  to  mouth,  if  a  different  construction  were  adopted. 
The  priority  of  laborers'  claims  when  they  are  based  upon  pro- 
ductive or  operating  expense  of  a  quasi  public  corporation  is  a 
salutary  doctrine  long  established  in  this  country  predicated 
upon  the  theory  of  public  interest  and  of  public  benefit  as  well 
as  pecuniary  advantage  to  the  security  holders;  the  operating 


CLAIMS  HAVING  PRIORITY  475 

expenses  of  such  corporations  are  recognized  by  the  courts  as  a 
first  lien  on  the  property  of  such  corporations.  Burnham  v. 
Brown,  111  U.  S.  776,  4  Sup.  Ct.  675,  28  L.  ed.  596 ;  Southern 
R.  Co.  V.  Carnegie  Steel  Co.,  176  U.  S.  257,  20  Sup.  Ct.  347,  44 
L.  ed.  458. 

What  substantial  reason  would  justify  any  distinction  in  the 
protection  the  law  secures  to  the  flagman  of  the  railroad  train 
whose  wages  are  preferred  over  the  interest  of  the  bondholder, 
and  the  laborer  in  the  sawmill  whose  handiwork  is  a  constructive 
force  in  the  product  of  the  plant,  which  not  only  pays  the  inter- 
est on  the  mortgage,  but  returns  the  investment? 

That  sound  legal  philosophy  established  by  numerous  and 
powerful  decisions  of  the  Supreme  Court  recognizing  the  prior- 
ity of  labor  engaged  in  the  service  of  quasi  public  corporations 
because  of  the  public  convenience  and  necessity  of  continued 
operation,  fortunately,  is  being  gradually  and  wisely  extended 
to  the  legal  preservation  of  the  rights  of  the  laborer  whose  toil 
produces  the  output  which  pays  the  interest  and  enhances  the 
value  of  the  mortgage  security.  L'Hote  v.  Boyett,  85  Miss.  636, 
38  South.  1 ;  Dickinson  v.  Saunders,  129  Fed.  20,  63  C.  C.  A. 
666. 

It  was  well  said  by  the  Court  of  Appeals  of  the  First  Circuit, 
in  Dickinson  v.  Saunders,  supra,  discussing  the  effect  of  the  fed- 
eral bankruptcy  act  regulating  priority: 

"Turning,  therefore,  either  to  the  local  statute,  or  to  what 
for  the  federal  courts  is  the  higher  authority,  the  bankrupt  act, 
the  priority  in  favor  of  creditors  of  the  class  of  interveners  in 
this  case  is  declared  as  a  rule  of  administration,  not  only  for 
quasi  public  corporations,  but  for  all  corporations,  and  in  the 
federal  statute  for  corporations  and  individuals. ' ' 

It  was  further  observed  by  the  learned  court  in  this  instruct- 
ive case  that  the  statute  of  Massachusetts  could  not  control  ad- 
ministration in  bankruptcy  in  the  federal  court. 

When  the  order  of  distribution  of  a  bankrupt  estate  has  been 
expressly  laid  down  by  Congress  that  order  should  be  observed 
by  the  federal  court  in  administration  in  bankruptcy.  As  said 
by  Collier  in  his  admirable  work  on  Bankruptcy  ( [7th  ed.] 
742): 

"The  bankrupt  act  not  only  controls  the  state  law  in  case  of 
absolute  conflict,  but  by  its  express  legislation  on  these  priorities 
excludes  the  state  law  altogether." 

And  again,  as  said  by  Judge  Lowell,  when  both  a  state  statute 


476  ADMINISTRATION 

and  the  bankrupt  act  gives  priority  to  the  same  class  of  debts, 
the  bankrupt  act  supersedes  the  state  law.  Dickinson  v.  Lewis, 
129  Fed.  20,  63  C.  C.  A.  666;  In  re  Lewis  (D.  C.)  99  Fed.  935; 
In  re  Erie  Lbr.  Co.  (D.  C.)  150  Fed.  823;  In  re  Tebo  (D.  C.) 
101  Fed.  420. 

It  is  clear  that  the  trust  fund  arising  from  the  administration 
is  distinctly  charged  by  the  act  in  favor  of  wages  to  the  extent 
provided  by  §  64b,  and,  if  it  cannot  be  said  to  constitute  tech- 
nically a  lien,  its  effect  is  tantamount  to  any  claim  or  privilege 
created  by  state  statute.  It  will  not  be  denied  that,  where  liens 
have  attached  before  bankruptcy  administration  and  are  not  dis- 
solved by  the  act,  they  will  be  respected  as  criteria  in  the  order 
for  distribution  of  the  estate,  except  preferred  claims  under  the 
bankruptcy  act  which  unquestionably  supersedes  the  state  law. 
In  re  Laird,  109  Fed.  557,  48  C.  C.  A.  538.  It  should  be  the 
policy  of  the  law  and  the  primary  duty  of  society  to  protect  the 
wages  of  the  laborer  in  every  contingency.  Congress  has  indi- 
cated its  purpose,  and  courts  should  declare  the  law.^" 


/ 


SECTION  III  ,,, 

THE  TRUSTEE        6^^        > 
A.    Appointment         5^    ' 


In  re  EAGLES 

99  Fed.  695 

(District  Court,  E.  D.  North  Carolina.    February  16,  1900) 

PURNELL,  District  Judge.  The  referee  certifies  for  review 
the  following  record: 

"I,  C.  C.  Fagan,  one  of  the  referees  in  bankruptcy  of  said 
court,  do  hereby  certify  that  the  first  meeting  of  the  creditors 
herein  was  held  in  Tarboro,  N.  C,  on  February  12,  1900,  at 
which  claims  were  proven,  and  the  eleqtion  of  a  trustee  entered 
upon;  that  nine  (9)  creditors,  whose  proven  claims  amounted 
to  two  thousand  and  eighty-four  and  '^Koo  dollars,  voted  for 
Stamps  Howard,  Esq.,  as  trustee,  and  twenty-six  (26)  creditors, 
whose  proven  claims  amounted  to  two  thousand  and  eight  hun- 
dred and  twenty-five  and  ^%oo  dollars,  voted  for  Henry  Gillaim, 

17 — See  the  discussion  of  the  sub- 
ject in  78  Cent.  L.  Jour.  313. 


APPOINTMENT  OF  TRUSTEE  477 

Esq.,  as  trustee ;  that  questions  arose  as  to  the  right  of  Howard 
&  Co.  and  George  Howard  to  vote,  in  the  selection  of  the  trustee, 
$712  due  the  former,  and  $1,000  due  the  latter,  both  of  which 
claims  are  reported  and  proven  as  secured  by  the  assignment  of 
collaterals  of  bankrupts,  fully  set  forth  in  schedule;  that  ques- 
tion also  arose  as  to  who  was  entitled  to  vote  a  certain  indebt- 
edness duly  proven  by  B.  F.  Eagles,  and  due  him  by  Eagles  and 
Crisp,  bankrupts,  for,  $2,886,36,  and  which  is  hypothecated  with 
George  Howard  as  collateral  security  for  the  sum  of  one  thou- 
sand dollars,  the  amount  due  and  secured  to  George  Howard  as 
above.  Howard  &  Co.  and  George  Howard  claimed  the  right  to 
vote  their  debts  of  $712  and  $1,000  in  the  election  of  a  trustee, 
and  offered  to  vote  the  same  for  Stamps  Howard,  Esq.  The 
referee  was  of  opinion  that  the  said  creditors,  being  secured  by 
collaterals,  were  not  entitled  to  participate  in  the  selection  of  a 
trustee,  unless  they  first  surrendered  their  securities.  George 
Howard  claimed  the  right  to  vote  the  debt  of  $2,886.36  due  to 
and  proven  by  B.  F.  Eagles,  and  deposited  with  him  as  collateral 
security  for  $1,000  due  by  bankrupts  as  aforesaid,  and  offered 
to  vote  the  said  indebtedness  for  Stamps  Howard  as  trustee.  B. 
F.  Eagles,  to  whom  the  debt  is  due,  claims  the  right  to  vote  said 
indebtedness,  and  offers  to  vote  the  same  for  Henry  Gillaim,  as 
trustee.  The  referee  was  of  opinion  that  B.  F.  Eagles  was  en- 
titled to  vote  said  indebtedness  in  the  selection  of  a  trustee,  and 
the  same  was  voted  for  Henry  Gillaim.  The  referee  declared 
Henry  Gillaim  duly  elected  trustee,  and  fixed  his  bond  at  the 
sum  of  $2,500.  Attorneys  for  the  said  Howard  &  Co.  and  George 
Howard  object  to  the  above  rulings  and  decision  of  the  referee, 
and  ask  that  the  same  be  certified  to  the  judge  of  the  district 
court  for  review." 

It  would  not  be  inappropriate  for  referees  to  follow  the  fa- 
miliar practice  of  "explaining  the  object  of  the  meeting"  to 
creditors  and  attorneys  not  familiar  with  the  practice  in  the 
courts  of  bankruptcy.  Many  questions  similar  to  those  presented 
may  thus  be  solved,  thus  saving  time,  frequently  so  essential  in 
a  proper  adjustment  of  estates.  The  meeting  is  for  business,  and 
must  be  held  in  strict  accordance  with  the  notice,  at  the  time  and 
place  specified,  not  at  some  other  time,  sooner  or  later,  or  an- 
other place,  though  near  by.  Adjournments  may  be  had  if  the 
business  requires  it,  but  all  adjournments  are  the  same  meeting, 
in  contemplation  of  law.  If  no  creditor  appears,  the  meeting  is 
as  effectual  as  if  they  were  present  or  represented.     The  court, 


478  ADMINISTRATION 

judge,  or  referee  is  not  authorized  or  required  to  wait  for  or 
"count  a  quorum."  If,  in  such  case,  the  schedules  disclose  no 
assets,  the  court  may  order  that  no  trustee  be  appointed.  Rule 
15. 

The  referee  should  be  punctually  present  at  the  time  and  place 
specified  in  the  notice.  He  or  the  judge  presides,  and  his  duties 
are  judicial.  He  does  not  otherwise  participate.  The  bankrupt 
is  required  and  should  be  actually  present  at  the  first  meeting. 
It  is  a  creditors'  meeting,  and  they  (the  referee  and  bankrupt) 
are  there  to  assist  the  creditors, — the  first  as  an  officer  of  the 
law,  and  the  other  to  aid  him  in  so  doing.  Thus  aided,  the  ref- 
eree should,  in  most  cases,  be  able  to  pass  upon  all  claims  which 
have  been  or  may  be  presented  at  the  meeting.  Bankr.  Act, 
§  55c.  Having  thus  passed  upon  the  claims  presented,  a  cred- 
itor to  participate  in  and  vote  at  such  meeting  must  own  an  un- 
secured claim,  provable  in  bankruptcy,  and  must  not  only  have 
roved  such  claim,  but  had  it  allowed.    Id.  §§  56a,  56b;  In  re 

ill.  Fed.  Cas.  No.  6,481;  In  re  Altenheim,  Id.  268.  Secured 
creditors  cannot  vote  at  such  meetings,  unless  their  claims  exceed 
the  amount  of  the  security  held  by  them,  and  then  only  for  such 
excess  as  shall  be  allowed  by  the  court.  Bankr.  Act,  §  56b.  An 
attorney,  agent,  or  proxy  can  represent  and  vote  for  such  cred- 
itors, but,  before  being  permitted  to  do  so,  should  be  required  to 
produce  and  file  written  authority  from  the  creditor,  which 
should  be  filed  by  the  referee  as  a  part  of  his  record.  In  re 
Sugenheimer  (D.  C.)  91  Fed.  744.  Creditors  holding  claims 
which  are  secured  or  have  priority  are  not,  in  respect  to  such 
claims,  entitled  to  vote.  To  do  so,  such  security  or  priority 
must  be  surrendered.  In  re  Saunders,  Fed.  Cas.  No.  12,371; 
Bankr.  Act,  §57g;  In  re  Conhaim  (D.  C.)  97  Fed.  924.  This 
provision  illustrates  the  homely  maxim,  of  Heywood,  hoary  with 
the  age  of  over  four  centuries,  that  one  cannot  eat  his  cake  and 
have  his  cake  too.  The  creditor  must  decide.  He  can  make  a 
surrender,  thus  becoming  an  unsecured  creditor,  and  participate 
with  other  creditors  in  the  management  of  the  estate,  or  he  can 
stand  on  his  security  or  priority.  He  cannot  do  both.  He  can- 
not run  with  the  hare  and  hold  with  the  hounds,  as  boys  who 
run  rabbits  would  express  it,  quoting  a  sixteenth  century  au- 
thority. 

Assisted  as  indicated  by  the  schedules,  the  bankrupt,  and 
others  interested,  creditors  present,  it  would  seem  the  court  could 
pass  on  all  or  most  of  the  claims  without  difficulty  or  delay.    If 


APPOINTMENT  OF  TRUSTEE  479 

a  particular  claim  is  objected  to,  the  question  should  be  heard  as 
soon  as  feasible,  and,  if  the  court  (judge  or  referee)  is  not  satis- 
fied with  the  weight  of  evidence,  the  hearing  may  be  postponed, 
and  heard  at  some  subsequent  time.  The  act  of  1867  provided 
expressly  for  such  postponement,  and  the  act  of  1898  does  not 
prohibit,  but,  by  lodging  a  large  discretion  in  the  court,  war- 
rants and  contemplates  it.  On  a  decision,  the  allowance  or  rejec- 
tion of  a  claim  of  $500  or  over,  both  may  be  reviewed  by  the 
court  of  appeals.  Bankr.  Act,  §  25,  subd.  3.  The  effect  of  allow- 
ing or  postponing  the  hearing  on  a  particular  claim  affects  only 
the  creditor's  right  to  vote  at  the  first  meeting  of  creditors.  If 
made  to  appear  the  result  would  be  changed  by  such  vote  or 
votes,  the  judge  or  referee  may  set  aside  the  result,  and  order  a 
new  vote  to  be  taken.  When  it  appears  the  right  to  vote  would 
not  affect  the  business  of  the  estate,  the  proceedings  would  not 
be  disturbed  to  allow  a  creditor  to  exercise  the  right  to  vote 
when  it  would  be  barren  of  results.  A  creditor  who  has  received 
a  preference  must  surrender  such  preference  before  he  can  par- 
ticipate in  a  meeting  of  creditors.  By  the  adjudication,  the 
estate  of  the  bankrupt  is  in  the  custody  of  the  court.  If  the 
preference  is  by  the  assignment  of  securities,  the  creditor  can- 
not realize  on  such  securities,  or  release  the  debtor  of  the  bank- 
rupt, except  through  the  bankrupt  court.  See  In  re  Cobb  (D. 
C.)  96  Fed.  821,  and  authorities  cited.  Such  creditor  should 
prove  and  file  his  claim,  and  his  preference,  if  valid,  will  be 
protected  by  the  court,  but  he  cannot  participate  in  meetings  as 
an  unsecured  creditor.  In  a  proceeding  like  the  one  at  bar,  the 
creditors  of  the  partnership  elect  the  trustee,  but  an  individual 
creditor  of  one  of  the  partners  cannot  vote  for  a  trustee  of  the 
partnership.     Bankr.  Act,  §  5b. 

Applying  the  foregoing  principles,  which  are  thus  fully  dis-/ 
cussed,49Life§_^;^efit^f£efereeSj  to  the  case  at  bar,  the  rulings' 
of  the  referee  are  affirmed.  The  claim  of  $712  due  Howard  & 
Co.,  and  that  of  $1,000  due  George  Howard,  "reported  and 
proven  as  secured  by  the  assignment  of  collaterals  of  bankrupt, 
fully  set  forth  in  schedule,"  are  not  such  claims  as  would  entitle 
the  creditor  holding  such  claim  to  participate  in  the  first  meet- 
ing of  creditors  or  vote  for  a  trustee. 

The  question  propounded,  but  not  presented  in  such  a  way  as 
to  be  properly  passed  upon,  as  to  who  is  entitled  to  vote  the 
claim  of  B.  F.  Eagles,  due  him  by  Eagles  and  Crisp,  bankrupts, 
for  $2,886.36,  may  be  settled  by  an  answer  to  the  question,  was 


480  ADMINISTRATION 

such  claim  allowed?  If  not,  no  one  can  vote  it.  B.  F.  Eagles 
was  a  member  of  the  bankrupt  firm,  and  schedules  his  individual 
property.    §  5ff  of  the  bankrupt  act  provides : 

* '  The  court  may  permit  the  proof  of  the  claim  of  the  partner- 
ship estate  against  the  individual  estates,  and  vice  versa,  and 
may  marshal  the  assets  of  the  partnership  estate  and  individual 
estates  so  as  to  prevent  preferences  and  secure  the  equitable  dis- 
tribution of  the  property  of  the  several  estates. ' ' 

The  schedules  disclose  the  fact  that  the  $1,000  debt  due  George 
Howard  by  B.  F,  Eagles,  partner,  is  secured  by  the  hypotheca- 
tion of  a  note  of  A.  H.  Crisp  (not  of  the  bankrupt  firm),  which 
note  is  secured  by  real-estate  mortgage  and  other  collaterals. 
Other  questions  as  to  this  claim  may  arise  hereafter,  which  are 
not  now  presented  for  review,  as  contemplated  by  the  bankrupt 
act,  and  even  the  question  of  who  is  entitled  to  prove  and  vote 
the  claim  is  not  so  presented.  Howard  cannot  prove  or  vote  the 
claim,  for  he  does  not  own  it.  It  is  only  assigned  as  collateral 
security.  If,  when  reduced  to  money,  the  proceeds  are  in  ex- 
cess of  his  claim,  which  he  cannot  vote,  the  excess  would,  in  a 
marshaling  of  assets,  go  to  the  estate,  and,  if  not  sufficient  to 
satisfy  his  claim,  then  he  would  be  entitled  to  prove,  as  an  unse- 
cured creditor,  any  excess.  How  this  may  be  cannot  now  be 
determined.  B.  F.  Eagles  cannot  prove  the  claim,  because  he  does 
not  own  it.  Aliunde  the  bankrupt  proceedings,  he  would  own 
an  equitable  interest,  but  has  assigned  the  legal  title  to  the 
claim.  Nor  does  the  report  of  the  referee  and  the  schedules 
correspond  in  some  essential  particulars  as  to  this  claim.  Only 
the  right  to  prove  and  vote  the  claim,  which  is  not  properly 
presented,  is  now  considered,  and  the  many  questions  which  may 
arise  are  not  intended  to  be  passed  upon.  It  will  be  in  apt  time 
to  adjudicate  such  questions  should  they  arise  in  the  course  of 
the  administration  of  the  estates  of  the  firm  and  the  partners. 

It  is  impossible  to  say  from  the  report  which  claims  are  in- 
cluded in  the  vote  for  trustee.  If  the  claims  not  entitled  to  vote 
were  included  in  the  vote  for  Mr.  Gillaim  or  Mr.  Howard,  they 
must  be  eliminated,  and_tlifi,one  who  thus  has  a  majority  in  num- 
ber and  amount  of  the  claims  proved  and  allowed  will  be  de- 
clared trustee .  Such  trustee  will  at  once  file  the  bond  fixed  by 
the  creditors,  and  proceed  with  the  administration  of  the  estate 
according  to  the  statute. 


APPOINTMENT  OF  TRUSTEE  481 

In  re  SYRACUSE  PAPER  &  PULP  CO.     7  (r^^^^^Ju-^'^'^ 
164  Fed.  275  ^.^  ^}^^, 

(District  Court,  N.  D.  New  York.    October  5,  1908)  |  jjC^ 

RAY,  District  Judge.    The  petition  in  bankruptcy  was  filed  in     -j^  "^ 
this  ease  June  17,  1908,  not  Au^st  17,  1908,  as  stated  in  the  /^  '    fj^ju 
petition  of  review.    On  the  same  day,  on  all  the  papers  and  a  full  ^fsff-"*^     .1 
hearing  and  examination  of  Geo.  W.  DriscoU  as  to  his  connection    r^^. 
with  and  relations  to  the  alleged  bankrupt,  this  court  appointed  '*' ''  Aitr* 
Frank  P.  Hakes,  of  Cortland,  N.  Y.,  a  person  selected  by  the         ^ 
court  because  of  his  known  integrity,  long  business  experience,       ...|     ^ 
education,  and  good  judgment,  and  entire  disassociation  with   |' 
said  alleged  bankrupt  and  its  officers,  and  said  Driscoll,  receivers    " 
of  the  estate  of  said  paper  and  pulp  company.    I  then  was  and 
still  am  of  the  opinion  that  some  one  fully  acquainted  with  the 
operations  and  business  of  the  company  should  be  associated  in 
the  administration  and  winding  up  of  its  affairs.     Soon  there- 
after, and  early  in  July,  an  order  was  made  for  the  examination 
of  the  officers  of  the  alleged  bankrupt  and  a  full  and  complete 
inspection  of  its  books  and  papers,  to  commence,  as  my  recollec- 
tion serves,  July  20,  1908.    This  order  was  made  on  application 
of  Mr,  Stoltz,  who  represented  certain  creditors,  including  those, 
or  some  of  those,  who  now  object.     This  was  done  to  enable  a 
full  discovery,  so  far  as  practicable,  in  advance  of  the  election  of 
a  trustee.    This  afforded  every  opportunity  to  ascertain  the  real 
creditors  of  the  bankrupt,  etc.    All  the  claims  voted  on  and  ques- 
tioned here  were  included  in  the  schedules  and  appeared  on  the 
books  of  the  company.     If  there  was  valid  objection  to  these 
claims  in  question  here,  or  any  one  of  them,  it  would  have  been 
easy  to  prepare  in  advance,  or  on  the  day  of  the  first  meeting 
of  creditors,  properly  verified  objections  to  the  claims,  which 
could  have  been  filed  on  that  day. 

The  first  meeting  of  creditors  was  duly  called  and  held  on  the 
5th  and  6th  days  of  August,  1908.  At  that  meeting  there  was 
a  lively  contest  over  the  appointment  of  trustees.  Three  tickets 
were  in  the  field.  One  ticket  was  for  the  appointment  of  three 
trustees,  and  the  others  for  the  appointment  of  one  trustee.  The 
minutes  of  the  meeting  show  that  some  informal  proofs  were 
rejected ;  but  no  question  is  raised  as  to  the  propriety  and  legal- 
ity of  such  action.  One  hundred  and  sixty-six  votes  were  cast 
for  each  ticket,  and  Frank  P.  Hakes  of  Cortland,  Frank  M.  Bosr 

H.  &  A-  BanTjruptcy— 31 


482  ADMINISTRATION 

worth,  of  Watertown,  and  George  W.  DriscoU,  of  Syracuse,  on 
one  ticket,  received  85  votes  each,  representing  $215,380.04  of  the 
proved  and  allowed  claims ;  William  A.  McKenzie,  Jr.,  on  another 
ticket,  received  6  votes,  representing  $12,806.08;  and  Geo.  D. 
Chapman,  on  another  ticket,  received  75  votes,  representing  $112,- 
173.52  of  such  claims.  It  is  seen  that  Hakes,  Bosworth,  and  Dris- 
coU had  a  clear  majority  of  4  over  all  and  a  plurality  of  10  over 
Chapman.  The  intelligence  and  general  character  and  ability 
of  Mr.  Driscoll  cannot  be  questioned.  Hakes  and  Bosworth  are 
pre-eminently  fit  for  the  place;  Bosworth  being  skilled  in  the 
business  he  is  to  care  for  and  settle,  and  Hakes  having  proved 
his  ability  and  integrity  while  acting  as  receiver.  From  the  fact 
that  Heath  and  Stoltz  represented  creditors,  or  were  able  to 
control  the  votes  of  creditors,  to  the  number  of  75,  it  is  evident 
they  had  been  working  up  the  election  of  Chapman.  Mr.  Heath, 
or  Mr.  Stoltz,  or  both,  orally  objected  to  the  following  claims: 
Hannawa  Falls  Water  Power  Co.,  $7,299,  on  the  ground  it  was 
a  claim  against  other  companies,  or  one  of  two  other  compa- 
nies. Commercial  National  Bank,  $6,802.37,  on  ground  it  had, 
with  knowledge  of  insolvency,  received  a  preferential  payment 
within  four  months.  National  Bank  of  Auburn,  $25,159.69,  on 
same  grounds.  Salt  Springs  National  Bank,  $7,563.69,  on  same 
ground.  Salt  Springs  National  Bank,  $9,139.50,  same  ground. 
Jeiferson  County  National  Bank,  $15,523,  same  ground.  Utica 
Trust  &  Deposit  Company,  $3,976.19,  same  ground.  State  Bank 
of  Syracuse,  $77,181.15,  same  ground.  Skaneateles  Railway  Com- 
pany, $1,920,  on  ground  services  were  rendered  to  Rose  &  Moses 
Pulp  &  Paper  Company,  Rose  &  Moses  Paper  &  Pulp  Company, 
$36,536.02,  on  ground  it  is  not  a  provable  claim,  and  bankrupt 
not  indebted  to  it  in  any  sum  whatever.  Pottsdam  Paper  Mills, 
$3,941.46;  George  W.  Phelps,  $1,792.25;  George  W,  Phelps, 
$575.75;  G,  Wittner,  $8,100,97;  Battle  Island  Paper  Company, 
$12,585,99;  John  C,  Lutz,  $2,840 — and  also  numerous  small 
claims,  on  the  general  ground,  in  nearly  every  case,  that  it  was 
not  a  provable  claim,  and  that  alleged  bankrupt  was  not  in- 
debted to  the  claimant  in  any  sum,  and  frequently  was  added 
the  objection  that  a  preference  had  been  paid  and  received  with 
knowledge  of  insolvency.  These  general  oral  objections,  not 
reduced  to  writing,  or  signed  by  any  one,  or  verified,  were  made 
to  substantially  every  claim  voted  in  favor  of  Hakes,  Bosworth, 
and  Driscoll. 

The  objections  having  been  made  and  overruled,  no  offer  hav- 


APPOINTMENT  OF  TRUSTEE  483 

ing  been  made  to  substantiate  the  objections  by  proof,  and  noth- 
ing appearing  tending  to  impeach  the  validity  of  the  claims,  the 
referee  announced  that  the  election  of  a  trustee  was  in  order. 
Mr.  Heath  then  objected  to  the  election  of  a  trustee  on  the  ground 
that  he  had  a  right  to  have  the  claims  to  which  he  had  objected, 
and  where  his  objections  were  overruled,  heard  upon  the  evi- 
dence, and  requested  an  adjournment  for  that  purpose.  This 
was  an  objection  to  proceeding  to  the  election  of  a  trustee  with- 
out an  adjournment.  No  evidence  was  offered  to  sustain  the 
objections,  and  there  was  no  claim  made  that  evidence,  if  any, 
to  sustain  the  objections  was  not  then  at  hand.  The  referee  ruled 
that  to  try  out  the  objections  would  take  more  time  than  was 
at  his  disposal,  and  overruled  the  objection.  This  was  equivalent 
to  denying  an  adjournment  for  the  purpose  of  trying  the  various 
and  numerous  objections  on  the  merits.  It  was  evident  to  the 
referee,  and  is  evident  to  the  court,  that  to  have  taken  time  to 
try  out  the  question  of  the  validity  of  these  objections  would  have 
required  weeks  of  time.  The  objections  were  not  verified  or  re- 
duced to  writing.  Evidently  they  were  made  at  random  and  for 
purposes  of  delay.  It  was  essential  to  the  due  administration  of 
the  estate  that  it  proceed  with  reasonable  diligence.  The  oppor- 
tunity given  for  the  examination  of  the  officers  and  books  of 
the  company  had  developed  nothing,  so  far  as  appears,  against 
these  claims.  If  so,  that  record  could  have  been  produced  as  a 
basis  or  ground  for  the  objections.  The  claims,  so  far  as  al- 
lowed and  voted  upon,  were  regular  upon  their  face  and  appar- 
ently valid.  The  claims  stood  proved,  and  were  entitled  to 
allowance,  unless  met  and  overthrown  by  proof.  Whitney  v. 
Dresser,  200  U.  S.  532,  26  Sup.  Ct.  316,  50  L.  ed.  584,  and  cases 
there  cited. 

But  the  allowance  of  a  claim  is  not  final;  for  if,  at  a  later 
time,  it  is  desired  to  open  it  and  try  out  its  validity,  it  can  be 
done.  And  it  is  the  duty  of  the  referee  and  judge  to  afford  such 
a  rehearing  on  a  prima  facie  case.  True,  the  trustee  or  trustees 
represent  the  creditors,  and  this  reopening  of  a  claim  is  done 
by  the  trustees;  but  if  a  creditor,  one  or  more,  makes  a  prima 
facie  case,  and  asks  the  trustee  to  take  measures  for  the  opening 
of  a  claim,  and  he  refuses,  an  appeal  to  the  referee  or  court  would 
effect  the  desired  result,  and  perhaps  result  in  the  removal  of  the 
trustee.  The  referee,  in  the  absence  of  verified  objections,  and  in 
the  absence  of  any  offer  of  evidence  to  sustain  the  oral  objec- 
tions made,  overruled  the  objections  in  most  instances  and  pro- 


484  ADMINISTRATION 

jceeded  to  obey  the  statute,  which  is  imperative  that  the  trustee 
/shall  be  elected  or  appointed  by  the  creditors  at  their  first  meet- 
/  ing.    Bankr.  Act,  July  1,  1898,  c.  541,  §  44,  30  Stat.  557  (U.  S. 
Comp.  St.  1901,  p.  3438)  : 

* '  The  creditors  of  a  bankrupt  shall,  at  their  first  meeting  after 
the  adjudication  *  *  *  appoint  one  trustee  or  three  trustees 
of  such  estate.  If  the  creditors  do  not  appoint  a  trustee  or 
trustees  as  herein  provided,  the  court  shall  do  so. ' ' 

I  do  not  doubt  that  it  is  competent  for  the  [referee]  to  adjourn 
this  first  meeting  of  creditors  for  a  reasonable  time,  and  from 
time  to  time  when  necessary,  and  in  a  proper  case  it  is  his  duty 
so  to  do.    But  when  it  is  apparent,  as  it  was  here,  that  certain 
attorneys  in  their  own  interest  take  it  upon  themselves  to  orally 
object  to  all,  or  substantially  all,  claims  presented  which  may  be 
voted  against  their  nominee  for  trustee,  and  fail  to  file  written 
and  verified  objections,  or  to  offer  then  and  there  some  evidence 
tending  to  support  those  made,  and  it  is  apparent  that  to  try 
out  the  validity  of  such  unsupported  oral  objections  would  un- 
duly postpone  the  election  of  a  trustee  or  trustees,  it  is  the  duty 
of  the  referee  to  obey  the  spirit  and  letter  of  the  law  and  pro- 
ceed with  the  election  of  a  trustee.    Any  other  course  in  such  a 
case  should  not  be  tolerated.    It  is  quite  true  that  the  creditors 
are  to  elect  the  trustee ;  but  it  is  also  true  that  at  the  first  meet- 
ing they  are  to  perform  this  duty,  and  that  they  should  come 
prepared  to  act  with  reasonable  expedition,  and  that  these  matters 
should  not  be  dragged  along  on  mere  oral  objections  to  verified 
claims  apparently  valid,  and  which  are  conceded  by  the  bankrupt 
to  be  valid.    And  verified  claims,  presumptively  valid,  and  which 
are  entitled  to  probative  force,  which  in  effect  prove  themselves, 
should  not  be  held  up  or  denied  allowance  or  participation  in 
the  election  of  trustees  on  mere  oral  objections  in  any  case,  un- 
less some  written  evidence  is  placed  before  the  court  tending  to 
impeach  their  validity,  or  some  oral  evidence  is  offered  at  the 
time  having  that  tendency,  or  it  is  made  to  appear  that  such 
evidence  exists,  but  cannot  be  then  obtained  and  presented. 

As  the  vote  for  trustee  was  being  taken,  objections  were  made 
to  a  vote  being  allowed  on  certain  claims.  The  most  of  these 
objections,  if  not  all,  were  clearly  frivolous.  A  vote  on  the  claim 
of  Mr.  Lattemer  was  objected  to  on  the  ground  that  the  claim- 
ant was  an  employe  of  the  bankrupt  company,  and  therefore  not 
a  proper  person  to  vote  for  the  election  of  a  trustee.  No  such  dis- 
ability is  imposed  by  the  bankruptcy  act  or  by  common  sense.    It 


APPOINTMENT  OF  TRUSTEE  485 

might  be  that  two-thirds  of  the  creditors  of  the  bankrupt  com- 
pany were  employes  of  the  concern.     Are  they  to  be  debarred 
from  voting  on  the  suspicion  that  they  may  have  a  friendly 
feeling  for  the  company  which  has  given  them  employment  ?    A 
vote  on  the  claims  of  John  C.  Lutz  was  objected  to  on  the  ground 
that  he  was  a  stockholder  in  the  corporation,  and  not  a  proper 
person  to  unite  in  the  selection  of  a  trustee.     A  vote  on  the 
claims  of  G.  Wittner  were  objected  to  on  the  same  ground,  with 
the  addition  that  he  was  also  a  director.     The  law  imposes  no 
such  disability  on  the  creditor  of  such  a  corporation  who  hap- 
pens to  be  a  stockholder  or  director  therein,  and  there  is  no 
valid  reason  why  he  should  be  debarred  from  voting  for  trustee. 
*    *    *    Cases  may  arise  where  the  directors  of  a  bankrupt  corpo- 
ration, also  creditors  thereof,  may  seek  to  control  the  election  of 
the  trustee  in  the  interest  of  the  bankrupt  itself,  and  in  opposition 
to  the  interests  of  the  general  creditors.     In  such  a  case  I  do 
not  doubt  that  the  referee  or  judge  has  the  power  to  set  aside 
such  an  election,  if  made ;  but  it  would  be  on  other  grounds  than 
that  the  directors  were  not  entitled  to  vote  for  the  appointment 
of  the  trustee.     In  this  case  there  was  no  combination  of  di- 
rectors ;  no  attempt  to  elect  trustees  in  the  interest  of  the  bank- 
rupt corporation.    As  stated,  two  of  those  elected  and  confirmed 
by  the  referee  are  men  of  the  highest  probity  and  business  abil- 
ity, and  entirely  disinterested;  and  the  inclusion  of  Driscoll, 
familiar  with  all  the  books  and  affairs  of  the  company,  was  wise 
and  proper.     Should  he  attempt  to  hide  or  cover  the  transac- 
tions, or  balk  proper  legal  proceedings,  it  would  be  ground  of 
removal,  and  the  referee  should  not  hesitate  to  report  the  facts, 
and  this  court  would  speedily  remove  him. 

It  was  suggested  on  the  argument  that  there  is  a  possibility 
that  it  will  become  the  duty  of  the  trustees  to  bring  action 
against  some  or  all  the  directors,  including  Driscoll,  and  that  he, 
as  trustee,  cannot  sue  himself  as  director,  or  as  an  individual. 
There  will  be  ample  opportunity  to  cross  that  bridge  when 
reached,  if  it  ever  is;  but  I  am  of  opinion  that  a  trustee  as  such 
may  be  party  complainant  or  plaintiff  as  such,  and  also  defendant 
as  an  individual.  In  this  case  Hakes  and  Bosworth  may  prose- 
cute all  necessary  actions,  making  Driscoll  as  director  or  person- 
ally, or  even  as  trustee,  a  party  defendant,  stating  the  necessity 
for  such  action.  1  Foster's  Fed.  Pr.  p.  148,  §42;  Harding  v. 
Handy,ll  Wheat.  103,  6  L.  ed.  429;  Wisner  v.  Bamett,  4  Wash. 


486  ADMINISTRATION 

C.  C.  631,  642,  Fed.  Cas.  No.  17,914;  Barry  v.  Missouri,  etc. 
(C.  C.)  27  Fed.  1,  per  Wallace,  J. 

The  creditors  and  all  of  them  are  at  liberty  to  examine  the 
directors,  including  Driseoll,  and  if  it  shall  develop  that  he  is  an 
improper  person  to  act  as  trustee,  or  that  his  presence  as  such 
interferes  with  the  due  and  proper  administration  of  the  estate, 
he  can  be  removed.  No  self-respecting  court  would  hesitate  a 
moment  to  take  such  action.  There  was  a  clear  majority  in 
number  and  amount  voting  for  Hakes,  Bosworth,  and  Driseoll. 
I  have  examined  all  the  cases  cited,  and  find  nothing  that  would 

require,  or  even  justify,  the  setting  aside  of  their  appointment. 

•     «     « 

The  order  of  the  referee,  affirming  the  action  of  the  creditors, 
is  therefore  approved  and  affirmed. 


.\ 


^^^ 


^.^*  B.    Property  Acquired 

1.      AS  OF  WHAT  TIME 

JOHNSON  V.  COLLIER 


^ 


y/  222  U.  S.  538,  56  L.  ed.  306,  32  Sup.  Ct.  104 

^  (United  States  Supreme  Court.    January  9,  1912) 

M.  B.  Johnson,  as  executor,  recovered  judgment  against  B.  T. 
Collier,  in  the  city  court  of  Gadsden,  Alabama.  Execution 
thereon  was  levied  July  20,  1906,  on  certain  personal  property. 

Under  a  provision  of  the  Alabama  statute,  Collier  immediately 
filed  with  the  sheriff  a  claim  of  exemption.  On  the  same  day  he 
filed,  in  the  proper  District  Court  of  the  United  States,  a  volun- 
tary petition  in  bankruptcy,  including  this  property  in  his 
schedule  of  assets.  Notwithstanding  the  claim  of  exemption, 
the  sheriff  sold  the  property  at  public  outcry  on  July  30,  1906. 

Thereafter,  on  a  date  not  shown  by  the  record.  Collier  was 
adjudicated  a  bankrupt.  On  August  8,  1906,  before  a  trustee 
was  elected,  he  brought  suit  against  both  Johnson  and  the  sheriff 
for  damages,  on  the  theory  that  the  sale  of  the  property  after 
the  filing  of  the  claim  of  exemption  made  them  trespassers  ah 
initio.  The  defendants  filed  a  plea,  in  which  they  set  up  the 
pendency  of  the  bankruptcy  proceedings,  and  alleged  that  Col- 
lier had  no  title  to  the  cause  of  action,  which  was  in  gremio  legis 
until  the  election  of  the  trustee,  and  for  that  reason  he  could 
not  maintain  a  suit  for  damages  occasioned  by  the  unlawful  sale 


AS  OF  WHAT  TIME  467 

of  property  included  in  the  schedule  of  assets.  A  demurrer  to 
this  plea  was  sustained.  The  jury  found  a  verdict  in  favor  of 
Collier,  which  the  trial  court  refused  to  set  aside.  This  ruling 
was  affirmed,  and  the  case  is  here  on  writ  of  error  from  that 
judgment  of  the  Supreme  Court  of  Alabama. 

Mr.  Justice  LAMAR,  after  making  the  foregoing  statement, 
delivered  the  opinion  of  the  court: 

The  trustee,  with  the  approval  of  the  court,  may  prosecute 
any  suit  commenced  by  the  bankrupt  prior  to  the  adjudication. 
(§  lie.)  But  the  statute  is  otherwise  silent  as  to  the  right  of 
the  bankrupt  himself  to  begin  a  suit  in  the  time  which  intervenes 
between  the  filing  of  the  petition  and  the  election  of  the  trustee. 
There  is  a  conflict  in  the  conclusions  reached  in  the  few  cases 
dealing  with  this  question.  Rand  v.  Sage,  94  Minn.  344,  102 
N.  W.  864;  Rand  v.  Iowa  C.  R.  Co.,  186  N.  Y.  58,  116  Am.  St. 
Rep.  530,  78  N.  E.  574,  9  A.  &  E.  Ann.  Cas.  542;  Gordon  v. 
Mechanics'  &  T.  Ins.  Co.,  120  La.  444,  15  L.  R.  A.  (N.  S.)  827, 
124  Am.  St.  Rep.  434,  45  So.  384,  14  A.  &  E.  Ann.  Cas.  886. 

While  for  many  purposes  the  filing  of  the  petition  operates  in 
the  nature  of  an  attachment  upon  choses  in  action  and  other 
property  of  the  bankrupt,  yet  his  title  is  not  thereby  divested. 
He  is  still  the  owner,  though  holding  in  trust  until  the  appoint- 
ment and  qualification  of  the  trustee,  who  thereupon  becomes 
"vested  by  operation  of  law  with  the  title  of  the  bankrupt"  as 
of  the  date  of  adjudication.     (§70.) 

Until  such  election  the  bankrupt  has  title, — defeasible,  but 
sufficient  to  authorize  the  institution  and  maintenance  of  a  suit 
on  any  cause  of  action  otherwise  possessed  by  him.  It  is  to  the 
interest  of  all  concerned  that  this  should  be  so.  There  must 
always  some  time  elapse  between  the  filing  of  the  petition  and 
the  meeting  of  the  creditors.  During  that  period  it  may  fre- 
quently be  important  that  action  should  be  commenced,  attach- 
ments and  garnishments  issued,  and  proceedings  taken  to  recover 
what  would  be  lost  if  it  were  necessary  to  wait  until  the  trustee 
was  elected.  The  institution  of  such  suit  will  result  in  no  harm 
to  the  estate.  For  if  the  trustee  prefers  to  begin  a  new  action 
in  the  same  or  another  court,  in  his  own  name,  the  one  previously 
brought  can  be  abated.  If,  however,  he  is  of  opinion  that  it 
would  be  to  the  benefit  of  the  creditors,  he  may  intervene  in  the 
suit  commenced  by  the  bankrupt,  and  avail  himself  of  rights 


488  ADMINISTRATION 

and  priorities  thereby  acquired.    Thatcher  v.  Rockwell,  105  U.  S. 
469,  26  L.  ed.  950. 

If,  because  of  the  disproportionate  expense,  or  uncertainty  as 
to  the  result,  the  trustee  neither  sues  nor  intervenes,  there  is 
no  reason  why  the  bankrupt  himself  should  not  continue  the 
litigation.  He  has  an  interest  in  making  the  dividend  for  cred- 
itors as  large  as  possible,  and  in  some  states  the  more  direct 
interest  of  creating  a  fund  which  may  be  set  apart  to  him  as  an 
exemption.  If  the  trustee  will  not  sue  and  the  bankrupt  cannot 
sue,  it  might  result  in  the  bankrupt's  debtor  being  discharged 
of  an  actual  liability.  The  statute  indicates  no  such  purpose, 
and  if  money  or  property  is  finally  recovered,  it  will  be  for  the 
benefit  of  the  estate.  Nor  is  there  any  merit  in  the  suggestion 
that  this  might  involve  a  liability  to  pay  both  the  bankrupt  and 
the  trustee.  The  defendant  in  any  such  suit  can,  by  order  of 
the  bankrupt  court,  be  amply  protected  against  any  danger  of 
being  made  to  pay  twice.  Rand  v.  Iowa  C.  R.  Co.,  186  N.  Y.  58, 
116  Am.  St.  Rep.  530,  78  N.  E.  574,  9  A.  &  E.  Ann.  Cas.  542 ; 
Southern  Exp.  Co.  v.  Connor,  49  Ga.  415, 

i!  There  was  no  error  in  holding  that  the  bankrupt  had  title  to 
the  cause  of  action  and  could  institute  and  maintain  suit 
thereon. 

AflSrmed.^ 

STATE  BANK  OF  CHICAGO  v.  COX 

143  Fed.  91,  74  C.  C.  A,  285 

(Circuit  Court  of  Appeals,  Seventh  Circuit,    January  2,  1906) 

This  is.  a  suit  in  assumpsit,  by  the  trustee  in  bankruptcy,  to 
recover  assets  of  the  bankrupt  which  were  appropriated  by  State 

1 — "The     complainant's     counsel  estate    until    the    trustee    was    ap- 

agrees   that   from   the   time   of   the  pointed.     It  could  not  order  a  sale; 

adjudication   until  the   appointment  it   could  not   permit   a   delivery   of 

of  a  trustee  the  bankrupt  is  civilly  property  admitted  not  to  belong  to 

dead,   and   that  nothing  that  takes  the  bankrupt;    it  could   not  permit 

place  in  the  meantime  can  deprive  a   business   to    be    carried    on;    the 

the    trustee    of    his    right    to    elect  adjudication  would  strike  the  estate 

whether  to  accept  any  asset  of  the  with  a  complete  paralysis  until  nec- 

bankrupt  or  not.     If  that   doctrine  essary  weeks    or   the   usual    months 

were  true,  the  court  would  have  no  had  passed  before  the  appointment 

power  to  authorize  any  action  what-  of  a  trustee.     There   is  nothing  in 

ever  in  respect  to  the  assets  of  the  the  Bankruptcy  Act  which  author- 


AS  OF  WHAT  TIME  48» 

Bank  of  Chicago,  plaintiff  in  error,  through  attachment  and 
garnishee  process,  pending  the  proceedings  in  bankruptcy;  and 
the  writ  of  error  is  from  the  judgment,  upon  verdict,  for  $2,- 
692.36  against  the  bank.  The  bankruptcy  proceedings  were  in 
the  District  Court  of  the  United  States  for  the  Western  District 
of  New  York,  against  Muskoka  Lumber  Company,  a  New  York 
corporation,  upon  petition  for  involuntary  bankruptcy  filed 
August  20,  1901;  and  adjudication  as  a  bankrupt  was  entered 
May  1,  1902.  On  August  21,  1901,  the  plaintiff  in  error  com- 
menced attachment  proceedings  against  the  bankrupt,  in  the 
Circuit  Court  of  Cook  county.  111.,  under  which  property  of  the 
bankrupt  was  seized  and  certain  of  its  creditors  were  served 
with  garnishee  process.  The  John  S.  Owen  Lumber  Company 
followed  with  another  attachment,  through  the  same  attorneys, 
returnable  at  the  same  term,  and  thus  became  a  prorating  attach- 
ment creditor  under  the  Illinois  statute.  §  37,  c.  11,  1  Starr  & 
C.  Ann.  St.  1896  (2d  ed.).  Through  the  attachment  on  the  part 
of  the  plaintiff  in  error  the  sheriff  collected  $286.13  and  the 
garnishees  paid  $2,014.52.  Of  this  aggregate  it  appears  that 
the  share  actually  received  was  $1,902.78;  the  remainder  being 
costs  and  pro  rata  share  of  the  other  attaching  creditor.  The 
trustee  in  bankruptcy  brought  the  present  action,  against  the 
plaintiff  in  error  alone,  May  11,  1903,  no  claim  having  been  filed 
or  appearance  entered  on  its  part  in  the  bankruptcy  proceed- 
ings, and  various  questions  of  pleading  were  raised,  which  in- 
volve no  substantial  controversy  not  otherwise  presented  for 
review,  aside  from  jurisdictional  features  which  are  referred 
to  in  the  opinion.  Upon  issues  joined,  with  the  substantial 
facts  undisputed,  the  case  was  tried  and  resulted  in  a  verdict, 
directed  by  the  court,  against  the  plaintiff  in  error  for  the  entire 
amount  so  realized  and  interest,  without  deduction  for  the  share 
of  the  prorating  attachment. 

SEAMAN,  Circuit  Judge  (after  stating  the  facts  and  dispos- 
ing of  matter  of  jurisdiction  of  the  court  below).     *     *     * 

The  questions  arise  for  review  therefore:  (1)  Whether  the 
trustee  in  bankruptcy  establishes  a  right  of  recovery;  and,  if 
so  (2)  whether  the  true  measure  of  damages  was  awarded.    As 

izes  such  a  conclusion."    Plant  v..     Acme    Harvester    Co.    v.    Beekman 
Gorham  Mfg.  Co.,  174  Fed.  852,  858./      Lumber  Co.,  222  U.  S.  300. 
See  In  re  Pease,  4  Am.  B.  R.  578  j 


490  ADMINISTRATION 

the  material  facts  are  undisputed,  the  inquiry  is  within  narrow 
compass,  if  not  otherwise  free  from  difficulty. 

1.  Upon  the  first  question  the  contentions  are  twofold:  (1) 
That  under  the  present  bankruptcy  act  (Act  July  1,  1898,  c. 
541,  §70,  30  Stat.  565  [U.  S.  Comp.  St.  1901,  p.  3451]),  the 
trustee  is  vested  with  title  to  the  property  of  the  bankrupt,  "as 
of  the  date  he  was  adjudged  a  bankrupt,"  so  that  he  cannot  re- 
cover for  property  theretofore  attached  and  sold;  and  (2)  that 
in  any  view,  if  such  attaching  creditor  obtained  no  greater  per- 
centage than  other  creditors  of  like  class,  the  proceeds  were  not 
recoverable  as  a  preference.  The  attachment  processes  under 
consideration  were  instituted  in  Illinois  on  the  day  following 
the  commencement  of  the  bankruptcy  proceedings  in  New  York, 
but  both  attachment  and  appropriation  of  the  proceeds  were 
prior  to  the  adjudication  of  bankruptcy,  and  the  first-men- 
tioned proposition  is  thus  fairly  involved. 

The  general  purposes  and  scope  of  bankruptcy  enactments,  to 
take  and  administer  all  of  the  assets  of  the  bankrupt  for  pro  rata 
distribution  to  the  unsecured  creditors,  is  well  recognized.  In 
conformity  with  this  view  the  provisions  of  the  present  act,  alike 
with  those  of  the  former  acts,  are  uniform — from  §  1,  cl.  10  (30 
Stat.  544— [U.  S.  Comp.  St.  1901,  p.  3418]),  to  and  including 
§  70,  cl.  5,  in  fixing  the  date  when  the  petition  was  filed  as  the 
time  bankruptcy  jurisdiction  is  established  over  the  property 
then  possessed  by  the  bankrupt,  as  the  date  from  which  the 
sequestration  of  property  becomes  operative  and  with  reference 
to  which  the  validity  or  invalidity  of  the  various  transactions 
affecting  the  estate  must  be  ascertained.  As  well  remarked  by 
Mr.  Chief  Justice  Fuller,  speaking  for  the  Supreme  Court,  in 
Mueller  v.  Nugent,  184  U.  S.  1,  14,  22  Sup.  Ct.  269,  46  L.  ed.  405 : 

"It  is  as  true  of  the  present  law  as  it  was  of  that  of  1867  that 
the  fiOling  of  the  petition  is  a  mveat  to  all  the  world,  and  in 
effect  an  attachment  and  injunction  (Bank  v.  Sherman,  101  U. 
S.  403,  25  L.  ed.  866),  and  on  adjudication  title  to  the  bank- 
rupt's property  became  vested  in  the  trustee  (§§70,  21e,  30 
Stat.  565,  52  [U.  S.  Comp.  St.  1901,  pp.  3451,  3430]),  with 
actual  or  constructive  possession,  and  placed  in  the  custody  of 
the  bankruptcy  court." 

In  this  court  the  view  is  clearly  expressed  in  the  opinion  by 
Judge  Jenkins,  In  re  Rodgers,  60  C.  C.  A.  567,  578,  125  Fed. 
169: 

"The  filing  of  the  petition,  followed  by  seizure  and  by  ad- 


AS  OF  WHAT  TIME  491 

judication  in  bankruptcy,  is  a  seizure  of  the  property  by  the 
law  for  the  benefit  of  creditors,  and  an  appropriation  of  it  to 
the  payment  of  the  debts  of  the  bankrupt.  It  is  a  seizure  of 
the  property  by  legal  process,  equal  in  rank  to  and  of  the  same 
force  and  effect  as  by  execution  or  attachment." 

In  other  words,  it  is  the  established  doctrine  that  bankruptcy! 
proceedings  are  in  rem,  and  when  commenced  all  of  the  property 
tHen  held  by  the  bankrupt  or  for  his  use  (aside  from  exemp- 
tions) is  subjected  to  the  jurisdiction  of  the  bankruptcy  court, 
and  that,  when  bankruptcy  is  adjudicated,  the  sequestration  ^ 
reaches  all  such  property  at  least,  and  becomes  operative  from 
the  institution  of  proceedings,  as  "a  caveat  to  all  the  world," 
preventing  interference  by  attachments  or  other  means  in  deroj 
gation  of  the  interests  of  the  estate.  In  re  Pekin  Plow  Co.,  50 
C.  C.  A.  257,  259,  112  Fed.  308 ;  Chesapeake  Shoe  Co.  v.  Seldner, 
58  C.  C.  A.  261,  264,  122  Fed.  593;  Loveland's  Bankruptcy  (2d 
ed.)  366;  Collier  on  Bankruptcy  (5th  ed.)  553.  While  title 
rests  in  the  bankrupt  up  to  adjudication,  and  in  form  until  a 
trustee  qualifies,  it  is  subject  to  the  pending  sequestration,  and 
no  rights  can  be  acquired  thereunder  which  are  not  equally 
amenable.  The  formal  title  of  the  bankrupt  to  the  estate  passes 
to  the  trustee  (§  70a)  "by  operation  of  law"  as  of  the  date  of 
adjudication,  but  the  trustee  is  vested  as  well  under  subdivisions 
(4)  and  (5)  with  property  transferred  in  fraud  of  creditors, 
and  "property  which  prior  to  the  filing  of  the  petition"  the 
bankrupt  "could  by  any  means  have  transferred"  or  which 
might  have  been  levied  upon  and  sold.  Thus  the  narrow  con- 
struction of  the  first-mentioned  provision,  which  is  sought  for 
escape  from  liability  for  the  plain  violation  of  the  act  through 
the  seizure  in  question,  not  only  ignores  these  succeeding  and 
comprehensive  clauses,  but  it  would  nullify  the  terms  and  entire 
policy  of  the  act  for  the  protection  of  creditors  against  spolia- 
tion of  estates  subject  to  bankruptcy  proceedings. 

We  are  clearly  of  opinion  that  such  rights  of  action,  arising 
out  of  transactions  prohibited  by  the  act,  vest  in  and  are  en- 
forceable by  the  trustee,  unaffected  by  the  date  when  the  legal 
title  passes  from  the  bankrupt  to  the  trustee.  In  re  Pekin  Plow 
Co.,  50  C.  C.  A.  257,  259,  112  Fed.  308 ;  In  re  Garcewich,  53 
C.  C.  A.  510,  513, 115  Fed.  87;  In  re  Breslauer  (D.  C),  121  Fed. 
910,  914;  Chesapeake  Shoe  Co.  v.  Seldner,  58  C.  C.  A.  261,  265, 
122  Fed.  593.     The  question  is  not  raised  in  Clarke  v.  Larre- 


492  ADMINISTRATION 

more,  188  U.  S.  486,  23  Sup.  Ct.  363,  47  L.  ed.  555,  but  the 
recovery  affirmed  in  that  ease  could  rest  on  no  other  view. 

In  reference  to  the  further  contention  that  the  proceeds  of 
the  attachment  and  sale  gave  the  plaintiff  in  error  no  per- 
centage upon  the  indebtedness  to  it  beyond  that  received  by 
other  creditors,  and  thus  no  preference  in  fact,  it  is  sufficient 
to  remark  that  the  alleged  cause  of  action  does  not  rest  upon 
the  provision  relating  to  preferences,  but  upon  the  prohibited 
seizure  and  appropriation  of  property  of  the  estate  vested  in 
the  court  of  bankruptcy  for  administration.  Whether  the 
amount  realized  was  more  or  less  than  the  percentage  which 
might  otherwise  have  been  awarded  the  creditor  cannot  enter 
into  consideration.2 


'ijr       "k  ^-    ^I^^S  OF  PROPERTY 


5*^     y^t  In  re  COFFIN 


r  -'\k  152  Fed.  381,  81  C.  C.  A.  507 

,M\,    ««.  J  Circuit  Court  of  Appeals,  Second  Circuit.    February,  26,  1907) 

f'  This  cause  comes  here  upon  petition  to  review  an  order  of 

the  District  Court,  District  of  Connecticut,  enjoining  the  bank- 
rupt from  making  any  conveyances  of  certain  real  estate  in 
western  states,  standing  in  his  name,  and  directing  him  to  turn 
over  certain  drafts  and  cash  to  the  trustee  in  bankruptcy. 

LACOMBE,  Circuit  Judge  (after  stating  the  facts).  In  1890  a 
Nebraska  corporation,  the  Real  Estate  &  Live  Stock  Association, 
of  which  the  bankrupt  and  his  wife  were  stockholders,  being  fi- 
nancially embarrassed,  sought  a  loan  from  its  stockholders.  The 
stockholders  advanced  $50,000  ($18.75  per  share  of  their  re- 
spective holdings),  and  took  as  security  a  mortgage  upon  nu- 
merous parcels  of  real  estate  in  Nebraska  and  Wyoming.  The 
mortgagee  named  in  the  instrument  was  one  Alonzo  Clark  as 
trustee.  The  money  not  being  paid,  Clark  brought  suit  in  fore- 
closure, and  under  proper  decree  the  real  estate  in  Nebraska 
was  sold  and  bought  in  by  him  and  conveyance  thereof  made  to 

2 — That  part  of  the  opinion  deal-  the  judgment  was  reversed  and  new 

ing    with    the    second    question    is  trial  directed. 

omitted.     Because    of    the    damages  See  Hiscock  v.  Varick  Bank,  206 

having    been    measured    improperly  U.  S.  28,  51  L.  ed.  945. 


KINDS  OP  PROPERTY  493 

him  by  the  ''master  commissioner  under  foreclosure  proceed- 
ings. ' '  The  real  estate  in  Wyoming  was  bought  in  by  Coffin.  In 
November,  1900,  Clark  conveyed  all  the  real  estate  to  Coffin, 
who  thereupon  undertook  to  sell  and  dispose  of  the  same  and 
to  distribute  the  proceeds  ratably  to  the  beneficiaries,  for  whom 
he  was  acting  as  trustee.  Upon  the  sale  of  one  parcel  in  Ne- 
braska, the  prospective  purchasers  questioned  Coffin's  title  to 
the  lands.  Thereupon  each  of  the  parties  interested  and  the 
association  executed  quitclaim  deeds  to  Coffin  of  their  respective 
interests  in  all  said  lands  both  in  Nebraska  and  Wyoming. 
Moreover,  a  friendly  suit  was  brought  in  Nebraska  by  Coffin 
against  the  association  and  all  the  other  parties  in  interest  to 
quiet  the  title,  and  decree  was  entered  therein  June  2,  1902, 
declaring  that  the  title  of  Coffin  in  and  to  said  lands  was  abso- 
lute as  against  any  of  the  parties  defendant.  On  or  prior  to 
that  date  the  quitclaim  deeds  were  all  filed. 

Subsequent  to  June  2,  1902,  Coffin  sold  and  conveyed  from 
time  to  time  portions  of  said  real  estate  in  both  states,  and  re- 
ceived in  payment  therefor  certain  amounts  of  cash,  which  were 
deposited  with  his  personal  account  in  a  bank  in  Middletown, 
and  certain  notes  and  mortgages  which  were  taken  in  his  in- 
dividual name  for  part  payment  of  such  sales.  From  the 
amounts  so  received  he  paid  between  July  30  and  October  30, 

1902,  to  the  parties  who  had  advanced  the  funds  to  the  associa- 
tion 30  per  cent  of  the  amount  so  loaned  or  advanced  by  them, 
together  with  8  per  cent  interest  thereon.  Part  of  these  pay- 
ments were  made  in  cash  and  part  by  the  transfer  to  them  of 
notes  secured  by  mortgages  received  in  part  pajrment  for  the 
lands  so  sold.  Subsequently  to  these  payments  there  had  accu- 
mulated a  large  sum  over  and  above  disbursements  from  sales 
of  the  land  in  question,  which  had  been  deposited  in  his  bank 
account.  On  November  14,  1903,  he  drew  his  entire  deposit 
($4,800)  from  the  bank,  took  $1,000  in  cash  which  he  kept  in  a 
drawer  at  his  office,  and  added  to  it  a  draft  of  $1,915.86  which 
he  had  received  from  his  agent  in  the  West  as  proceeds  of  the 
sale  of  part  of  said  lands,  and  bought  a  draft  on  New  York  to 
the  order  of  himself  as  trustee  of  $7,715.86,  This  draft  and 
some  others  sent  from  the  West  by  said  agent  have  come  into 
the  possession  of  the  trustee  in  bankruptcy.     On  December  2, 

1903,  Coffin  was  adjudicated  a  bankrupt  on  his  own  petition. 
Various  technical  matters  have  been  eliminated   during  the 


494  ADMINISTRATION 

argument,  and  the  single  question  is  presented  whether  the  sev- 
eral parcels  of  real  estate  yet  unsold  prior  to  December  2,  1903, 
were  held  by  Coffin  in  trust  for  the  beneficiaries,  and  therefore 
did  not  pass  to  his  trustee  in  bankruptcy,  or  whether  they  were 
a  part  of  his  individual  estate  to  be  disposed  of  by  the  trustee 
for  the  benefit  of  his  creditors.  That  question  may  appropriately 
be  answered  by  this  court.  The  bankrupt  and  the  trustee  (rep- 
resenting all  the  creditors)  duly  appeared.  The  record  would 
seem  to  indicate  that  there  was  no  appearance  for  the  so-called 
"beneficiaries,"  who  claim  interest  in  the  western  lands,  but  it 
was  asserted  upon  the  argument  that  the  record  is  defective  in 
that  respect,  and,  with  the  consent  and  concurrence  of  all  parties, 
the  beneficiaries  formally  entered  their  appearance  in  this  court. 
It  appears  from  the  referee's  findings  of  fact  that  credit  was 
not  given  or  extended  by  any  creditors  upon  the  strength  of 
Coffin  being  the  owner  of  the  lands  and  property  in  question. 
This  simplifies  the  situation,  because  under  such  circumstances 
the  trustee  in  bankruptcy  stands  in  no  better  position  than  that 
in  which  the  bankrupt  stood  on  the  day  the  petition  was  filed, 
and  it  will  be  necessary  only^o  deiermme  whether,  if  there  had 
been  no  bankruptcy,  the  beneficiaries  could  in  a  court  of  equity 
have  established  their  right  to  have  him  dispose  of  these  lands 
for  their  benefit  and  distribute  the  proceeds  ratably  among 
them. 

The  express  trust  created  by  the  deeds  to  Clark  as  trustee  and 
from  Clark  to  Coffin,  and  resultant  upon  the  furnishing  of  the 
money  by  the  beneficiaries,  was  terminated  by  the  delivery  of 
the  quitclaim  deeds  and  by  the  entry  of  the  decree  of  the  Ne- 
braska court  on  June  2,  1902.  Coffin  already  held  the  legal 
title,  and  each  quitclaim  deed  conveyed  to  him  every  right,  title, 
and  interest,  legal  and  equitable,  which  the  beneficiary  execut- 
ing it  had  to  convey.  At  the  close  of  this  transaction  Coffin  was 
the  absolute  owner  with  no  outstanding  interest  in  and  no  re- 
sultant trust  to  any  one.  But,  since  the  property  was  his  abso- 
lutely, he  was  entirely  free  to  do  what  he  pleased  with  it.  He 
could  convey  it  to  one,  or  more,  or  all  of  his  fellow  stockholders, 
or  to  a  stranger.  He  could  convey  it  to  any  one  he  chose  in 
trust  to  make  any  disposition  of  it  he  might  prescribe  so  long  as 
such  trust  did  not  violate  the  law  or  the  statutes  of  the  state. 
He  could  make  a  declaration  of  trust  which  would  constitute 


KINDS  OF  PROPERTY  495 

himself  the  trustee  for  any  such  purpose.  What  did  he  do  after 
he  became  the  absolute  owner  on  June  2,  1902  ?  Were  his  acts 
such  that  as  between  himself  and  the  other  stockholders — to 
whom  undoubtedly  he  owed  a,  moral  obligation  to  distribute  a 
proportionate  part  of  the  proceeds — a  court  of  equity  would 
hold  that  he  had  created  a  new  trust  in  their  favor?  It  seems 
to  us  that,  upon  this  record,  such  question  must  be  answered  in 
the  affirmative. 

In  the  first  place  we  have  the  sworn  statement  of  Coffin  him- 
self made  June  15,  1904,  that  although  he  held  the  apparent 
legal  title  to  the  several  parcels  of  land,  the  same  was  really  in 
trust  for  the  benefit  of  the  several  individuals  whom  he  enumer- 
ated and  called  beneficiaries.  This  statement  was  made  after 
bankruptcy,  and  no  act  of  his  at  that  time,  no  position  which 
he  might  take,  could  alter  the  status  established  by  the  bank- 
ruptcy. But  it  is  not  as  an  act  of  the  bankrupt  that  this  state-  j 
ment  of  June  15,  1904,  is  important.  It  is  an  historical  narjia- 
tive  of  a_transaction  lon^  prior  t.^  t-hp  hankrnptpy^  anrl  with  such 
a  sworn  "declaration  against  interest"  in  the  case,  it  is  difficult 
to  see  how  a  court  of  equity  could  refuse  such  relief  as  would 
give  the  applicants  the  benefit  of  the  trust  which  he  thus  de- 
clared he  had  created.  Nor  is  this  declaration  a  mere  after- 
thought. Coffin's  whole  course  of  conduct  shows  that  he  con- 
sidered himself  a  trustee  for  his  f eUow  stockholders.  The  referee 
has  found  that  between  July  30  and  October  30,  1902,  he  col- 
lected from  the  sale  of  these  lands  and  distributed  to  them  30 
per  cent  of  the  amounts  originally  advanced  by  them.  Nor  were 
his  declarations  merely  oral.    The  referee  finds  that : 

**In  and  about  October,  1903,  he  wrote  to  some  and  made 
statements  to  others  of  the  parties  named  in  the  petition,  and 
therein  called  beneficiaries,  that  he  soon  hoped  and  intended  to 
pay  another  dividend  of  from  30  to  40  per  cent  to  claimants 
who  had  advanced  funds  to  the  Nebraska  Real  Estate  &  Live 
Stock  Association,  part  of  which  was  to  be  paid  in  cash  and 
part  with  notes  secured  by  mortgages  on  the  land  in  question. 
See  Exhibits  73  to  131." 

Examination  of  the  exhibits  referred  to  shows  that  the  dec- 
larations of  Coffim  as  to  the  equities  of  the  beneficiaries  were 
much  more  explicit  than  the  above  quotation  would  indicate. 
Thus  on  August  2,  1902,  he  writes  to  one  of  the  beneficiaries  to 


496  ADMINISTRATION 

whom  he  had  sent  three  notes  received  as  part  payment  for  a 
parcel  of  land  just  sold: 
j,     "A  party  in  Nebraska  has  made  me  an  offer  of  $950  for  each 

f  $1,000  note,  but  I  have  replied  that  the  notes  are  not  mine.  If 
you  should  wish  to  accept  the  offer,  please  so  advise  when  re- 
turning the  receipt. ' ' 

No  one  can  peruse  these  exhibits  without  being  convinced  that 
subsequent  to  June  2,  1902,  Coffin  undertook  to  manage  these 
lands,  to  sell  them,  and  to  distribute  the  proceeds  in  the  interest 
of  all  who  had  originally  invested  in  the  enterprise.  No  doubt 
the  fact  that  there  was  such  a  trust  was  kept  secret,  so  that  no 
other  prospective  purchaser  might  question  the  title  to  any 
property  he  sold,  but  it  was  communicated  to  the  others  over 
Coffin's  signature  repeatedly,  and,  since  the  rights  of  no  one 
else  had  supervened  during  this  period  of  secrecy,  a  court  of 
chancery  would  have  enforced  their  equities  had  application 
been  made  to  do  so  just  before  the  petition  in  bankruptcy  was 
filed.  As  the  district  judge  expresses  it,  * '  the  acts  of  Mr.  Coffin 
after  the  decree  [of  June,  1902]  undoubtedly  put  the  stock- 
holders in  a  position  where  they  could,  if  there  had  been  time, 
have  established  such  a  relation;"  i,  e.,  a  trust  relationship. 
That  being  so,  the  trustee  in  bankruptcy,  who  is  not  the  grantee 
of  the  bankrupt  for  a  valuable  consideration,  but  a  transferee 
by  act  of  the  law,  who  takes  his  property  subject  to  all  existing 
equities,  cannot  successfully  dispute  their  right  to  establish  such 
relationship  in  an  appropriate  tribunal.  And,  since  all  parties 
are  here,  this  court  may  properly  dispose  of  the  controversy. 

As  to  the  various  drafts  referred  to  supra,  the  evidence  is 
not  sufficiently  clear  to  enable  us  to  determine  how  much  of 
them  represents  proceeds  of  sales  of  land  and  how  much  repre- 
sents general  funds  of  the  bankrupt.  Upon  remand  of  the  cause 
the  District  Court  will  be  able  to  determine  those  questions. 

The  order  is  reversed,  and  cause  remanded,  with  instructions 
to  the  District  Court  to  vacate  the  injunction  which  now  pre- 
vents Coffin  as  trustee  for  the  "beneficiaries"  from  continuing 
to  sell  this  western  land  and  to  distribute  the  proceeds  between 
them.  As  to  the  drafts  and  cash,  disposition  can  be  made  of 
them  in  conformity  with  the  views  expressed  in  this  opinion.^ 

3 — See  Carpenter  v.  Marnell,  3  129.  Cf.  In  re  Packing  Co.,  138  Fed. 
B.  &  P.  40;  In  re  Davis,  112  Fed.       625. 


KINDS  OF  PEOPERTY       ^  497 

CHICAGO,  BURLINGTON,  &  QUINCY  RAILROAD  COM- 
PANY V.  HALL  ^''^^•r* 

229  U.  S.  511,  57  L.  ed.  1306,  33  Sup.  Ct.  885     '^.  C  ?  S. 

(United  States  Supreme  Court.    June  9,  1913)   *  -^^     9    //• 


loyed/^ 


H^l,  a  resident  of  Douglas  county,  Nebraska,  was  employed  /  ■   yw 
by  the  railroad  as  switchman  in  its  yards  in  Omaha.    His  wages  ^t  --i   ^ 
were  exempt  from  garnishment  by  the  laws  of  Nebraska.     In  _^-  v* 
July,  1907,  he  was  insolvent,  and  in  that  month,  while  tern-    ^^  ^ 
porarily  in  the  state  of  Iowa,  two  proceedings  were  instituted    M.  /, 
against  him,  in  which  he  was  personally  served,  and  the  rail-         ^< 
road,  which  owed  him  ^132  as  wages,  was  garnisheed.     In  one 
of  these  cases  Rawles  sued  on  an  open  account  for  $54.20,  the 
railroad  being  required  to  answer  on  August  10th.    In  the  other, 
Torrey,  holding  a  judgment  for  $22,40,  rendered  in  1894,  served 
a  summons  of  garnishment  on  the  railroad,  requiring  it  to  an- 
swer on  August  27,  1907. 

"While  these  proceedings  were  pending  in  the  Iowa  courts, 
Hall  returned  to  Nebraska,  and,  on^  August  7,  1907,  he  was,  on 
his  own  application,  adjudged  a.  bankrupt,  his  wages  being 
claimed  as  exempt,  and  the  two  Iowa  plaintiffs  included  in  his 
list  of  creditors.  Notice  of  the  bankruptcy  proceeding  was  given 
to  them  and  to  the  railroad. 

Thereafter,  on  August  10th,  the  railroad  answered  in  the 
Rawles  suit,  admitting  that  it  owed  Hall  $122,  and  a  judgment 
was  accordingly  entered  against  the  railroad  as  garnishee  for 
$61.60.  On  August  27,  it  answered  in  the  Torrey  suit,  and  the 
court  entered  judgment  against  it  as  garnishee  for  $56.91.  Hall, 
in  the  bankruptcy  proceedings,  had  asked  that,  as  allowed  by 
the  laws  of  Nebraska,  his  wages  be  set  apart  as  exempt,  and  filed 
a  petition  praying  that  the  railroad  should  be  summarily  ordered 
to  pay  him  the  amount  due  for  work  done  in  June  and  July, 
1907.  The  application  was  resisted  by  the  railroad  and  was 
denied  by  the  court,  which  held,  on  the  authority  of  Ingram  v. 
Wilson,  60  C.  C.  A.  618,  125  Fed.  913,  that  the  bankruptcy  court 
could  determine  that  the  property  was  exempt,  but  had  no  juris- 
diction to  compel  its  payment. 

In  view  of  that  ruling,  Hall  made  a  further  application  to 
have  the  $122  set  off  to  him  as  exempt.    An  order  to  that  effect 
was  passed  by  the  referee.    Hall  was  discharged  as  a  bankrupt^  1 
in  April,  1908,  and  then  sued  the  railroad  and  recovered  a  judg- / 

H.  &  A.  Bankruptcy — 32 


498  ADMINISTRATION 

ment,  which  was  afifirmed  by  the  Supreme  Court  (88  Neb.  20, 
128  N,  W.  645),  and  the  case  was  brought  here. 

Mr.  Justice  LAMAR,  after  making  the  foregoing  statement 
of  facts,  delivered  the  opinion  of  the  court: 

Hall,  a  married  man,  head  of  a  family,  and  insolvent,  worked 
as  a  switchman  for  the  railroad  company  in  Nebraska,  his  wages 
being  exempt  from  garnishment  by  the  laws  of  that  state.  While 
temporarily  absent  in  Iowa,  two  suits  were  there  brought  against 
him,  summons  of  garnishment  being  served  upon  the  railroad's 
agent  in  Iowa,  where  it  had  been  held  that  the  Nebraska  exemp- 
tion statute  had  no  extra-territorial  effect. 

While  these  two  suits  were  pending  in  Iowa,  Hall  returned  to 
Nebraska,  was  adjudged  a  bankrupt,  and  claimed  his  wages  as 
exempt.  No  defense  was  made  to  the  Iowa  suits,  and  in  both 
cases  judgment  was  entered  against  the  railroad  as  garnishee. 
For  this  reason  it  refused  to  pay  Hall  when  he  demanded  the 
money,  which  had  been  set  apart  to  him  as  exempt  by  the  referee. 
He  then  sued  the  company  and  recovered  a  judgment,  which 
was  affirmed  by  the  Supreme  Court  of  Nebraska.  The  railroad 
sued  out  a  writ  of  error  to  test  its  liability  in  this  class  of  cases, 
which  it  insists  are  constantly  arising,  because  of  the  employ- 
ment  of  many  persons  on  lis  linies,  extending  into  different  states, 
with  varying  garnishment  laws.  It  contends  that  the  laws  of 
Iowa  do  not  recognize  the  Nebraska  exemption  of  wages  from 
garnishment ;  that  Hall  was  personally  served  in  the  Iowa  suits, 
and  that  the  judgments  therein  entered  against  the  railroad  as 
garnishee  are  unreversed  and  binding;  that  to  compel  it  to  pay 
Hall  and  these  Iowa  plaintiffs  also  is  to  impose  upon  it  a  double 
liability,  and  to  deny  to  the  judgments  of  the  Iowa  courts  the 
full  faith  and  credit  to  which  they  are  entitled  under  the  Fed- 
eral Constitution. 

But  if  they  were  nullified  by  §^67/  of  the  bankruptcy  act,  they 
are  entitled  to  no  faith  and  no  credit.  That  they  were  so  nulli- 
fied is  Hall's  contention;  for  he  insists  that  if  there  was  a  lien 
against  his  wages,  it  was  obtained  by  garnishment  served  within 
four  months  of  his  bankruptcy,  and  discharged  by  virtue  of  the 
provisions  of  §  67/,  which  declares  that  "all  *  *  *  liens  ob- 
tained through  legal  proceedings  against  a  person  who  is  in- 
solvent, at  any  time  within  four  months  prior  to  the  filing  of  a 
petition  in  bankruptcy  against  him,  shall  be  deemed  null  and 
void  in  case  he  is  adjudged  a  bankrupt,  and  the  property  af- 


KINDS  OP  PROPERTY  499 

fected  by  the  levy,  judgment,  attachment,  or  other  lien  shall 
be  deemed  wholly  discharged  and  released  from  the  same,  and 
shall  pass  to  the  trustee  as  a  part  of  the  estate  of  the  bankrupt. ' ' 

The  railroad,  on  the  other  hand,  contends  that  under_§J70  the  ' 
trustee  acquires  no  title  "to  property  which  is  exempt,"  and  ' 
that  liens  thereon  are  not  discharged  by  §.67/,  since  that  section 
has  reference  only  to  liens  on  property  which  can  "pass  to  the  j 
trustee  as  a  part  of  the  estate  of  the  bankrupt, ' '  / 

On  this  question  there  is  a  difference  of  opinion,  some  state 
and  Federal  courts  holding  that  the  bankruptcy  act  was  intended 
to  protect  the  creditor's  trust  fund,  and  not  the  bankrupt's  own 
property,  and  that  therefore  liens  against  the  exempt  property 
were  not  annulled  even  though  obtained  by  legal  proceedings 
within  four  months  of  filing  the  petition.    Re  Driggs,  171  Fed.  > 
897 ;  Re  Durham,  104  Fed.  231.     On  the  other  hand.  Re  Tune, 
115  Fed.  906 ;  Re  Forbes,  108  C.  C.  A.  191,  186  Fed.  79,  hold~j 
that  §  67/  annuls  all  such  liens,  both  as  against  the  property  | 
wEieh  the  trustee  takes  and  that  which  may  be  set  aside  to  the  | 
bankrupt  as  exempt.  ~* 

This  view,  we  think,  is  supported  both  by  the  language  of  the 
sectioA  and  the  general  policy  of  the  act,  which  was  intended 
not  only  to  secure  equality  among  creditors,  but  for  the  benefit 
of  the  debtor  in  discharging  him  from  his  liabilities  and  en- 
abling him  to  start  afresh  with  the  property  set  apart  to  him 
as  exempt.  Both  of  these  objects  would  be  defeated  if  judgi, 
ments  like  the  present  were  not  annulled,  for  otherwise  thp 
t^ojowa  plaintiffs  would  not  only  obtain  a  preference  oyer 
other  creditors,  but  would  take  property  which  it  was  the  pur- 
pose of  the  bankruptcy  act  to  secure  to  the  debtor.  f 

Barring  exceptional  cases,  which  are  specially  provided  for, 
the  policy  of  the  act  is  to  fix  a  four  months'  period  in  which  a 
creditor  cannot  obtain  an  advantage  over  other  creditors  nor  a 
lien  against  the  debtor's  property.  "All  liens  obtained  by  legal 
proceedings"  within  that  period  are  declared  to  be  null  and 
void.  That  universal  language  is  not  restricted  by  the  later 
provision  that  "the  property  affected  by  the  *  *  *  lien 
shall  be  released  from  the  same,  and  pass  to  the  trustee  as  a  part 
of  the  estate  of  the  bankrupt."  It  is  true  that  title  to  exempt 
property  does  not  vest  in  the  trustee,  and  cannot  be  adminis- 
tered by  him  for  the  benefit  of  the  creditors.  But  it  can  "pass/" 
to  th£.  trustee  as  a  part  of  the  estate  of  the  bankrupt, ' '  for  the! 
purposes  named  elsewhere  in  the  statute,  included  in  which  isl 


500  ADMINISTRATION 

the  duty  to  segregate,  identify,  and  appraise  what  is  claimed 
to  be  exempt.    He  must  make  a  report  "of  the  articles  set  off 
to  the  bankrupt,  with  the  estimated  value  of  each  article,"  and 
creditors  have  twenty  days  in  which  to  except  to  the  trustee's 
report.     §47   (11)   and  general  orders  in  bankruptcy  17.     In 
other  words,  the  property  is  not  automatically  exempted,  but 
must  "pass  to  the  trustee  as  a  part  of  the  estate," — not  to  be 
administered  for  the  benefit  of  creditors,  but  to  enable  him  to 
perform  the  duties  incident  to  setting  apart  to  the  bankrupt 
what,  after  a  hearing,  may  be  found  to  be  exempt.    Custody  and 
possession  may  be  necessary  to  carry  out  these  duties,  and  all 
S  levies,  seizures,  and  liens  obtained  by  legal  proceedings  within 
\  the  four  months,  that  may  or  do  interfere  with  that  possession, 
are  annulled,  not  only  for  the  purpose  of  preventing  the  prop- 
erty passing  to  the  trustee  as  a  part  of  the  estate,  but  for  all 
purposes,   including  that  of  preventing  their  subsequent  use 
against  property  that  may  ultimately  be  set  aside  to  the  bank- 
rupt.    This  property  is  withdrawn  from  the  possession  of  the 
trustee,  not  for  the  purpose  of  being  subjected  to  such  liens, 
but  on  the  supposition  that  it  needed  no  protection,  inasmuch 
as  they  had  been  nullified. 

The  liens  rendered  void  by  §  67/  are  those  obtained  by  legal 
proceedings  within  four  months.  The  section  does  not,  however, 
defeat  rights  in  the  exempt  property  acquired  by  contract  or  by 
waiver  of  the  exemption.  These  may  be  enforced  or  foreclosed 
by  judgments  obtained  even  after  the  petition  in  bankruptcy  was 
filed,  under  the  principle  declared  in  Lockwood  v.  Exchange 
Bank,  190  U.  S.  294,  47  L.  ed.  1061,  23  Sup.  Ct.  Rep.  751.  But 
Hall  did  not  waive  his  exemption  in  favor  of  the  Iowa  plaintiffs, 
and  they  had  no  right  against  his  wages  except  that  which  was 
obtained  by  a  legal  proceeding  within  four  months  of  the  bank- 
ruptcy. Those  liens,  having  been  annulled  by  §  67/  of  the  bank- 
ruptcy act,  furnished  no  defense  to  the  railroad  when  sued  by 
Hall  for  his  wages,  earned  in  Nebraska,  exempt  by  the  laws  of 
that  state,  and  duly  set  apart  to  him  by  the  referee  in  bank- 
ruptcy. The  judgment  of  the  Supreme  Court  of  Nebraska  is 
affirmed.* 

4 — Southern  Pac.  Co.  v.  I.  X.  L, 
Furniture,  etc.,  House  (Utah,  1914), 
140  Pac.  665,  ace. 


y^     )       \^ 


V^ 


KINDS  OF  PROPERTY  501 

LOCKWOOD  v.  EXffiANGE  BANK      ^^^"^^^f"*^    ^, 

190  U.  S.  294,  47  L.  ed.  1061,  23  Sup.  Ct.  751    ^     .  /^  T  \/ 

(United  States  Supreme  Court.    June  1,  1903)  a4.vck*^T».*jk    #  j 

In  this  proceeding,  upon  certain  questions  being  certified  by 
the  United  States  Circuit  Court  of  Appeals  for  the  fifth  circuit 
for  decision  by  this  court,  a  writ  of  certiorari  was  allowed,  and 
the  entire  record  has  been  brought  up  for  consideration. 

The  controversy  is  fully  set  forth  in  the  following  "state- 
ment of  case,"  embodied  in  the  certificate  of  the  Circuit  Court 
of  Appeals : 

"On  the  23d  day  of  November,  1900,  said  Joel  W.  Loekwood 
was,  on  his  application,  duly  adjudged  a  bankrupt  by  the  District 
Court  of  the  United  States  for  the  southern  district  of  Georgia. 
On  December  6,  1900,  F.  T.  Rape  was  duly  appointed  trustee  for 
said  bankrupt ;  on  the  16th  day  of  December,  1900,  the  said  F.  T. 
Rape,  trustee,  set  aside  and  designated  as  an  exemption  all  of 
the  property  returned  by  the  5»i.iH  bari]5ri]pt  rnFiis  sc,h^iiTft_of 
assets.  On  the  1st  day  of  January,  1901,  the  Exchange  Bank  of 
^^o?rif alley,  a  creditor  who  had  duly  proven  its  debt  as  an  unse- 
cured claim,  filed  exceptionsjo  the  trustee's  assignment  of  home- 
stegii_au4„exeinptiQe,  upon  the  following  grounds :  " : 

"  '  (a)  That  said  creditor  held  a  contract  against  the  bankrupt 
in  which  said  bankrupt  specially  waived  and  renounced  all  right 
to  the  homestead  exemption  allowed  by  the  laws  of  Georgia  or  the 
United  States.  Said  waiver  is  contained  in  a  note  constituting 
contract  of  indebtedness,  and  was  made  in  accordance  with  the 
provisions  of  the  Constitution  and  laws  of  said  state,  authorizing 
and  empowering  the  debtor  to  waive  and  renounce  in  writing  his 
right  to  the  benefit  of  the  exemption  provided  for  by  the  Con- 
stitution and  laws  of  said  state. 

"  '(6)  That  creditor's  debt  was  unsecured,  save  and  except 
so  far  2&  a  waiver  of  homestead  and  exemption  may  be  construed 
as  a  security. 

"  '(c)  That  the  trustee  has  set  apart  all  the  property  of  said 
bankrupt  returned  by  him  in  bankruptcy. 

"  *  (d)  Under  the  laws  of  Georgia,  the  debtor's  exemption  can- 
not be  subjected  to  the  payment  of  a  debt  containing  a  waiver 
of  homestead  except  by  putting  said  debt  in  judgment,  and  after- 
wards causing  execution  to  issue  thereon  to  be  levied  on  the 


502  ADMINISTRATION 

exempt  property,  in  accordance  with  the  provisions  of  §  §  2850 
et  seq.  of  the  Code  of  Georgia.  If  bankrupt  court  should  ap- 
prove trustee 's  assignment  in  this  case,  without  reserving  to  peti- 
tioner the  right  to  sue  his  claim  and  put  same  in  judgment,  and 
without  itself  giving  judgment  for  said  debt,  creditor  would  be 
left  without  means  of  enforcing  his  rights  created  and  arising 
out  of  the  aforesaid  waiver,  and  would  be  without  remedy. 

"  *  (e)  Creditor  therefore  prays  equitable  relief  and  such  de- 
cree as  will  protect  his  rights;  that  the  homestead  be  set  aside 
and  trustee  be  required  to  take  charge  of  and  administer  the 
property  of  said  bankrupt  so  set  apart,  except  so  much  as  cannot 
be  waived,  for  the  benefit  of  creditors  holding  waiver  contracts. ' 

' '  To  these  exceptions  of  the  creditor  the  bankrupt  duly  filed  a 
demurrer  on  the  following  grounds : 

'*  *  (a)  That  said  exceptions  are  wholly  insufficient  in  law  to 
defeat  the  report  of  the  trustee. 

"  '(b)  That  the  exceptions  made  are  not  such  as,  under  the 
laws  of  Georgia,  will  defeat  the  setting  apart  of  the  exemption, 
and  furnish  no  reason  why  the  trustee  should  not  assign  the 
exemption. 

"  '  (c)  That  the  bankrupt  court  has  no  jurisdiction  over  ex- 
empted property,  and  no  authority  to  administer  the  same. 

"  '  (d)  That  there  is  no  authority  of  law  for  the  exceptions 
made,  nor  for  the  relief  sought. ' 

"The  referee,  Honorable  Shelby  Myrick,  overruled  the  afore- 
said demurrer,  and  directed  the  trustee  to  carve  out  of  the  said 
exemption  of  property  a  portion  of  the  same,  amounting  to 
$300.00,  which  was  to  be  free  from  the  claims  of  all  creditors. 
JThe  residue  of  the  exempted  property  was  to  be  sold,  and  the 
/proceeds  held  by  the  trustee  for  the  benefit  of  creditors  holding 
(waiver  notes.  The  bankrupt  was  ordered  to  yield  possession  to 
the  trustee  for  the  purpose  of  carrying  out  this  order.  The  ref- 
eree, at  the  request  of  bankrupt,  certified  the  record  in  said  case, 
together  with  his  decision  thereon,  to  the  Honorable  Emory 
Speer,  judge  of  the  District  Court  of  said  district,  for  final 
determination.  On  the  30th  March,  1901,  said  case  came  on  regu- 
larly to  be  tried  before  said  district  judge,  and,  after  hearing 
argument  of  counsel,  his  honor  Judge  Emory  Speer  held  and 
decided  and  adjudged  the  aforesaid  exceptions  to  the  determina- 
tions and  report  of  the  trustee  be  sustained,  and  that  the  exemp- 
tions set  apart  by  the  trustee  in  his  said  report  be  denied  and 
refused  to  the  said  bankrupt,  save  and  except  the  item  of  house- 


KINDS  OP  PROPERTY  503 

hold  furniture  and  wearing  apparel,  and  that  the  said  bankrupt 
was  not  entitled  to  an  exemption  as  claimed  by  him,  by  reason  of 
having  waived  and  renounced  in  writing  his  rights  thereto,  in 
accordance  with  the  Constitution  and  laws  of  the  state  of 
Georgia." 

This  judgment  of  the  District  Court  is  the  one  complained  of, 
and  which  was  sought  to  be  revised  in  the  Circuit  Court  of 
Appeals. 

Mr.  Justice  WHITE,  after  making  the  foregoing  statement, 
delivered  the  opinion  of  the  court: 

The  general  exemption  of  property  from  levy  or  sale,  author- 
ized by  article  9,  §  1,  Tj  1,  of  the  present  Constitution  of  the  state 
of  Georgia  (that  of  1877),  is  ''realty  or  personalty,  or  both,  to 
the  value  in  the  aggregate  of  $1,600."  By  article  9,  §  3,  ^  1,  of 
the  same  Constitution,  a  debtor  is  vested  with  power  to  waive  or 
renounce  in  writing  this  right  of  exemption,  ' '  except  as  to  wear- 
ing apparel,  and  not  exceeding  $300  worth  of  household  andi 
kitchen  furniture  and  provisions, ' '  The  mode  of  enforcement  of 
a. waiver  of  exemption  is  provided  for  in  §  2850  of  the  Code  of 
1895,  reading  as  follows : 

"In  all  cases  when  any  defendant  in  execution  has  applied 
for  and  had  set  apart  a  homestead  of  realty  and  personalty,  or 
either,  or  where  the  same  has  been  applied  for  and  set  apart  out 
of  his  property,  as  provided  for  by  the  Constitution  and  laws  of 
this  state,  and  the  plaintiff  in  execution  is  seeking  to  proceed 
with  the  same,  and  there  is  no  property  except  the  homestead,  on 
which  to  levy  upon  the  ground  that  his  debt  falls  within  some  one 
of  the  classes  for  which  the  homestead  is  bound  under  the  Con- 
stitution, it  shall  and  may  be  lawful  for  such  plaintiff,  his  agent, 
or  attorney,  to  make  affidavit  before  any  officer  authorized  to 
administer  oaths  that,  to  the  best  of  his  knowledge  and  belief, 
the  debt  upon  which  such  execution  is  founded  is  one  from  which 
the  homestead  is  not  exempt,  and  it  shall  be  the  duty  of  the  officer 
in  whose  hands  the  execution  and  affidavit  are  placed  to  proceed 
at  once  to  levy  and  seU,  as  though  the  property  had  never  been 
set  apart.  The  defendant  in  such  execution  may,  if  he  desires  to 
do  so,  deny  the  truth  of  the  plaintiff's  affidavit  by  filing  with 
the  levying  officer  a  counter  affidavit." 

The  question  presented  on  the  record  before  us  may  be  stated 
in  similar  language  to  thatVhich  was  used  by  the  district  judge 
— ^the  correctness  of  whose  decision  in  the  case  at  bar  is  now  for 


504 


ADMINISTRATION 


review — in  the  course  of  his  opinion  In  re  Woodruff,  96  Fed.  317, 
as  follows  (p.  318)  : 

"Has  the  bankruptcy  court  jurisdiction  to  protect  or  enforce 
against  the  bankrupt's  exemption  the  rights  of  creditors  not  hav- 
ing a  judgment  or  other  lien,  whose  promissory  notes  or  other 
like  obligations  to  pay  contain  a  written  waiver  of  the  homestead 
and  exemption  authorized  and  prescribed  by  the  Constitution  of 
the  state,  or  are  such  creditors  to  be  remitted  to  the  state  courts 
for  such  relief  as  may  be  there  obtained  ? ' ' 

The  provisions  of  the  bankruptcy  act  of  1898  [30  Stat,  at  L. 
544,  c.  541  (U.  S.  Comp.  Stat.  1901,  p.  3418),]  which  control  the 
consideration  of  the  question  just  propounded  are  as  foUows: 
By  clause  11  of  §  2  courts  of  bankruptcy  are  vested  with  juris- 
diction to  "determine  all  claims  of  bankrupts  to  their  exemp- 
tions."   I^G^rovides  as  follows:        '>  'sUj^nir^B  'iff  lu 

"§  6.  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  domicil  for  the  six  months  or  the  greater  portion 
thereof  immediately  preceding  the  filing  of  the  petition." 

By  clause  8  of  §  7  the  bankrupt  is  required  to  schedule  all  his 
property,  and  to  make  "a  claim  for  such  exemptions  as  he  may 
be  entitled  to. ' '  By  clause^ll.pf  .i 47  it  is  made  the  duty  of  the 
trustees  to  ''set  apart  the  bankrupt's  exemptions  and  report 
the  items  and  estimated  value  thereof  to  the  court  as  soon  as 
practicable  after  their  appointment. ' '  By  §  67  it  is  provided, 
among  other  things,  that  the  property  of  the  debtor  fraudulently 
conveyed,  etc.,  "shall,  if  he  be  adjudged  a  bankrupt,  and  the 
same  is  not  exempt  from  execution  and  liability  for  debts  by  the 
law  of  his  domicil,  be  and  remain  a  part  of  the  assets  and  estate 
of  the  bankrupt, ' '  etc.  In  §  70  is  enumerated  the  property  of 
the  bankrupt  which  is  to  vest  in  the  trustee  as  of  the  date  of 
the  adjudication  in  bankruptcy,  "except  in  so  far  as  it  is  to 
property  which  is  exempt." 

Under  the  bankruptcy  act  of  1867  [14  Stat,  at  L.  522,  c.  176] 
it  was  held  that  property  generally  exempted  by  the  state  law 
from  the  claims  of  creditors  was  not  part  of  the  assets  of  the 
bankrupt,  and  did  not  pass  to  the  assignee,  but  that  such  prop- 
erty must  be  pursued  by  those  having  special  claims  against  it, 
in  the  proper  state  tribunals.  Thus,  speaking  of  the  act  of  1867, 
Mr.  Justice  Bradley  (Re  Bass,  3  Woods,  382,  384,  Fed.  Cas. 
No.  1,091)  said: 


KINDS  OF  PROPERTY  505 

' '  Not  only  is  all  property  exempted  by  state  laws,  as  those  laws 
stood  in  1871,  expressly  excepted  from  the  operation  of  the  con- 
veyance to  the  assignee,  but  it  is  added  in  the  section  referred  to, 
as  if  ex  industria,  that  '  these  exceptions  shall  operate  as  a  limi- 
tation upon  the  conveyance  of  the  property  of  the  bankrupt  to 
his  assignee,  and  in  no  case  shall  the  property  hereby  excepted 
pass  to  the  assignee,  or  the  title  of  the  bankrupt  thereto  be  im- 
paired or  affected  by  any  of  the  provisions  of  this  title. ' 

"In  other  words,  it  is  made  as  clear  as  anything  can  be  thatj  ^ 
such  exempted  property  constitutes  no  part  of  the  assets  in/  , 
bankruptcy.  The  agreement  of  the  bankrupt  in  any  particular 
case  to  waive  the  right  to  the  exemption  makes  no  difference.  He 
may  owe  other  debts  in  regard  to  which  no  such  agreement  has 
been  made.  But  whether  so  or  not,  it  is  not  for  the  bankrupt 
court  to  inquire.  Tlie_exemption  is  created  by  the  state  law,  and 
the  assignee  acquires  no  title  to  the  exempt  property.  If  the 
"creditor  has  a  claim  against  it,  he  must  prosecute  that  claim  in 
a  court  which  has  jurisdiction  over  the  property,  which  the  bank- 
rupt court  has  not. ' ' 

We  think  that  the  terms  of  the  bankruptcy  act  of  1898,  above  , 
set  out,  as  clearly  evidence  the  intention  of  Congress  that  the  ) 
title  to  t]^e-^.pi»p^'ty  of  a  bankrupt,  generally  exempted  by  state 
laws,  should  remain  in  the  bankrupt,  and  not  pass  to  his  repre- 
sentative in  bankruptc}'.  as  did  the  provisions  of  the  act  of  1867, 
considered  In  re  Bass.  The  fact  that  the  act  of  1898  confefsS 
upon  the  court  of  bankruptcy  authority  to  control  exempt  prop- 
erty in  order  to  set  it  aside,  and  thus  exclude  it  from  the  assets 
of  the  bankrupt  estate  to  be  administered,  affords  no  just  ground 
for  holding  that  the  court  of  bankruptcy  must  administer  and 
distribute,  as  included  in  the  assets  of  the  estate,  the  very  prop- 
erty which  the  act,  in  unambiguous  language,  declares  shall  not 
pass  from  the  bankrupt,  or  become  part  of  the  bankruptcy  assets. 
The  two  provisions  of  the  statute  must  be  construed  together, 
and  both  be  given  effect.  Moreover,  the  want  of  power  in  the 
court  of  bankruptcy  to  administer  exempt  property  is,  besides, 
shown  by  the  context  of  the  act ;  since,  throughout  its  text,  ex- 
empt property  is  contrasted  with  property  not  exempt,  the  lat- 
ter alone  constituting  assets  of  the  bankrupt  estate  subject  to 
administration.  The  act  of  1898,  instead  of  manifesting  the  pur- 
pose of  Congress  to  adopt  a  different  rule  from  that  which  was 
applied,  as  we  have  seen,  with  reference  to  the  act  of  1867,  on 
the  contrary,  exhibits  the  intention  to  perpetuate  the  rule,  since 


506 


ADMINISTRATION 


the  provision  of  the  statute  to  which  we  have  referred  in  reason 
is  consonant  only  with  that  hypothesis. 

Though  it  be  conceded  that  some  inconvenience  may  arise  from 
the  construction  which  the  text  of  the  statute  requires,  the  fact 
of  such  inconvenience  would  not  justify  us  in  disregarding  both 
its  letter  and  spirit.  Besides,  if  mere  arguments  of  incon- 
venience were  to  have  weight,  the  fact  cannot  be  overlooked  that 
the  contrary  construction  would  produce  a  greater  inconvenience. 
The  difference,  however,  between  the  two  is  this:  That  in  the 
latter  case — that  is,  causing  the  exempt  property  to  form  a  part 
of  the  bankruptcy  assets — the  inconvenience  would  be  irremedi- 
able, since  it  would  compel  the  administration  of  the  exempt 
property  as  part  of  the  estate  in  bankruptcy ;  whilst  in  the  other, 
the  rights  of  creditors  having  no  lien,  as  in  the  case  at  bar,  but 
having  a  remedy  under  the  state  law  against  the  exempt  prop- 
erty, may  be  protected  by  the  court  of  bankruptcy,  since,  cer- 
tainly, there  would  exist  in  favor  of  a  creditor  holding  a  waiver 
note,  like  that  possessed  by  the  petitioning  creditor  in  the  case  at 
bar,  an  equity  entitling  him  to  a  reasonable  postponement  of 
the  discharge  of  the  bankrupt,  in  order  to  allow  the  institution 
in  the  State  Court  of  such  proceedings  as  might  be  necessary 
to  make  effective  the  rights  possessed  by  the  creditor. 

As,  in  the  case  at  bar,  the  entire  property  which  the  bank- 
rupt owned  is  within  the  exemption  of  the  state  law,  it  becomes 
unnecessary  to  consider  what,  if  any,  remedy  might  be  available 
in  the  court  of  bankruptcy  for  the  benefit  of  general  creditors, 
in  order  to  prevent  the  creditor  holding  the  waiver  as  to  exempt 
property  from  taking  a  dividend  on  his  whole  claim  from  the 
general  assets,  and  thereafter  availing  himself  of  the  right  result- 
ing from  the  waiver  to  proceed  against  exempt  property. 
r"Yhe  judgment  of  the  District  Court  is  reversed,  and  the  pro- 
jceeding  is  remanded  to  that  court  with  directions  to  overrule 
the  exceptions  to  the  trustee's  assignment  of  homestead  and 
exemption,  and  to  withhold  the  discharge  of  the  bankrupt,  if 
he  be  otherwise  entitled  thereto,  until  a  reasonable  time  has 
elapsed  for  the  excepting  creditor  to  assert,  in  a  state  tribunal, 
his  alleged  right  to  subject  the  exempt  property  to  the  satis- 
faction of  his  claim.    And  it  is  so  ordered. 


li< 


KINDS  OF  PROPERTY  €07 

In  re  GHAZAL 

174  Fed.  809,  98  C.  C.  A.  517 

(Circuit  Court  of  Appeals,  Second  Circuit.    December  7,  1909) 

LACOMBE,  Circuit  Judge.  The  sum  in  question  was  awarded 
to  Ghazal  by  the  Treasury  Department  on  May  6,  1908,  as  a 
reward  for  information  given  by  him  against  smugglers,  which 
information  resulted  in  the  discovery  and  confiscation  by  the 
United  States  government  of  certain  smuggled  property.  The 
award  was  made  under  authority  of  Act  June  22,  1874,  c.  391, 
§  4,  18  Stat.  186  (U.  S.  Comp.  St.  1901,  p.  2019),  which  provides: 

"That  whenever  any  ofl&cer  of  the  customs  or  other  person 
shall  detect  and  seize  goods,  wares,  or  merchandise,  in  the  act 
of  being  smuggled,  or  which  have  been  smuggled,  he  shall  be 
entitled  to  such  compensation  therefor  as  the  Secretary  of  the 
Treasury  shall  award  not  exceeding  in  amount  one-half  of  the 
net  proceeds,  if  any,  resulting  from  such  seizure,  after  deduct- 
ing all  duties,  costs,  and  charges  connected  therewith :  provided, 
that  for  the  purpose  of  this  act  smuggling  shall  be  construed  to 
mean  the  act,  with  intent  to  defraud,  of  bringing  into  the  United 
States,  or  with  like  intent,  attempting  to  bring  into  the  United 
States,  dutiable  articles  without  passing  the  same,  or  the  pack- 
age containing  the  same,  through  the  custom  house,  or  submitting 
them  to  the  officers  of  the  revenue  for  examination.  And  when- 
ever any  person  not  an  officer  of  the  United  States  shall  furnish 
to  a  district  attorney,  or  to  any  chief,  officer  of  the  customs, 
original  information  concerning  any  fraud  upon  the  customs- 
revenue,  perpetuated  or  contemplated,  which  shall  lead  to  the 
recovery  of  any  duties  withheld,  or  of  any  fine,  penalty,  or  for- 
feiture incurred,  whether  by  importers  or  their  agents,  or  by 
any  officer  or  person  employed  in  the  customs  service,  such  com- 
pensation may,  on  such  recovery,  be  paid  to  such  person  so  fur- 
nishing information  as  shall  be  just  and  reasonable,  not  exceeding 
in  any  case  the  sum  of  five  thousand  dollars;  which  compensa- 
tion shall  be  paid,  under  the  direction  of  the  Secretary  of  the 
Treasury  out  of  any  money  appropriated  for  that  purpose. ' ' 

It  is  clear  that  the  statute  makes  the  Secretary  of  the  Treasury  i^ 
the  sole  judge  as  to  whether  there  is  an  informer  who  is  entitled/ 
to  a  share  under  this  section.     Until  he  acts  the  informer  haaj 
merely  an  expectation  of  reward.    Ramsey  v.  U.  S.,  14  Ct.  C1.I 


508  ADMINISTRATION 

367.  The  trustee  does  not  question  the  accuracy  of  this  proposi- 
tion. 

§3477,  Rev.  St.  U.  S.  (U.  S.  Comp.  St.  1901,  p.  2320), 
provides : 

"All  transfers  and  assignments  made  of  any  claim  upon  the 
United  States  or  any  part  or  share  thereof,  or  interest  therein, 
whether  absolute  or  conditional,  and  whatever  may  be  the  con- 
sideration therefor,  and  all  powers  of  attorney,  orders,  or  other 
authorities  for  receiving  payment  of  any  such  claim,  or  any  part 
or  share  thereof,  shall  be  absolutely  null  and  void,  unless  they 
are  freely  made  and  executed  in  the  presence  of  at  least  two 
attesting  witnesses,  after  the  allowance  of  such  a  claim,  the  ascer- 
tainment of  the  amount  due,  and  the  issuing  of  a  warrant  for  the 
payment  thereof,  such  transfers,  assignment,  and  powers  of  at- 
torney, must  recite  the  warrant  for  payment,  and  must  be 
acknowledged  by  the  person  making  them,  before  an  officer  hav- 
ing authority  to  take  acknowledgments  of  deeds,  and  shall  be 
certified  by  the  officer ;  and  it  must  appear  by  the  certificate  that 
the  officer  at  the  time  of  the  acknowledgment,  read  and  fully 
explained  the  transfer,  assignment  or  warrant  of  attorney  to  the 
person  acknowledging  the  same. ' ' 

It  is  therefore  apparent  that,  before  the  allowance  to  him  of 
the  $428.93,  Ghazal  could  not  have  transferred  the  same,  be- 
cause any  such  attempted  transfer  would  be  null  and  void,  and 
certainly  a  hoped-for  award,  not  yet  made,  could  not  have  been 
levied  upon  and  sold  in  judicial  process  against  him. 

The  relevant  provision  of  the  bankrupt  act  (Act  July  1,  1898, 
c.  541,  30  Stat.  565  [U.  S.  Comp.  St.  1901,  p.  3451])  is: 

"§70.  That  the  trustee  *  *  *  shall  *  *  *  be  vested 
by  operation  of  law  with  the  title  of  the  bankrupt  as  of  the  date 
he  was  adjudged  a  bankrupt  *  *  *  to  all  *  *  *  prop- 
erty which  prior  to  the  filing  of  the  petition  he  could  by  any 
means  have  transferred  or  which  might  have  been  levied  upon 
and  sold  under  judicial  process  against  him. ' ' 

The  petition  in  bankruptcy  was  filed  on  April  29,  1908,  but 
the  award  was  not  made  by  the  Secretary  of  the  Treasury  until 
May  6,  1909.  Under  the  provisions  of  statute  above  cited,  there- 
fore the  trustee  did  not  take  title  to  this  sum  of  $428.93. 

It  is  contended,  and  the  District  Judge  reached  the  conclusion, 
that  the  bankrupt  was  estopped  from  insisting  that  title  to  this 
sum  never  passed  to  the  trustee.  Before  petition  was  filed  Ghazal 
had  made  assignments  to  some  of  his  creditors  of  certain  sums. 


KINDS  OF  PROPERTY  509 

out  of  moneys  to  be  paid  him.  by  the  government,  all  of  which 
assignments  were  of  course  "null  and  void."  It  was  on  the 
theory  that  these  were  preferential  that  proceedings  in  involun- 
tary bankruptcy  were  instituted.  Ghazal  at  first  disputed  the 
allegation  of  the  petition,  but  subsequently  withdrew  his  answer 
and  consented  to  an  adjudication.  The  proposition  contended 
for  is  that : 

"When  the  bankrupt  voluntarily  receded  from  his  position 
and  endeavored  to  accept  what  now  appears  to  be  the  benefits  of 
the  bankruptcy  statute  in  this  case,  in  the  way  of  applying  for 
a  discharge  from  his  debts,  and  at  the  same  time  to  keep  out  of 
the  estate  in  bankruptcy  the  only  property  about  which  the  cred- 
itors could  have  attempted  to  maintain  their  position  *  *  * 
the  bankrupt  is  estopped  from  insisting  that  upon  the  29th  of 
April  he  could  not  have  transferred  his  claim  against  the  United 
States." 

We  do  not  find,  in  the  circumstance  that  he  has  not  chosen  to 
oppose  adjudication,  sufficient  ground  for  holding  him  to  be 
estopped  from  insisting  that  after-acquired  property  shall  not 
go  to  the  trustee.  No  injury  has  resulted  therefrom,  and  no 
one  has  been  misled  thereby.  Nor  can  we  see  that  the  circum- 
stance that  he  had  no  property  at  the  time  of  adjudication  is 
any  reason  why  he  should  be  required  to  give  up  after-acquired 
property,  which  the  bankrupt  act  did  not  transfer  to  his  trustee. 


1/ 


The  order  is  reversed.^  -+    ^    «w  c^''^'^*^ 

187  U.  S.  596,  47  L.  ed.  318,  23  Sup.  Ct.  200   <^^^  J 


PAGE  V.  EDMUNDS        ^.^.-L^W       •  1 

Si- 


(United  States  Supreme  Court.    January  5,  1903) 

The  appellant  is  a  resident  of  Philadelphia,  Pennsylvania,  and 
has  been  a  member  of  the  Philadelphia  Stock  Exchange  in  good 
standing  since  the  year  1880.  On  the  16th  of  November,  1899, 
he  was  adjudged  a  voluntary  bankrupt  in  the  District  Court  for 
the  eastern  district  of  Pennsylvania,  and  the  cause  was  referred 
to  Alfred  Driver,  Esq.,  referee  in  bankruptcy.  In  the  schedules 
attached  to  his  petition  the  appellant  did  not  include  as  an  asset 
of  hisestate  his  membership  in  the  stock  exchange.  His  trustee 
in  bankruptcy  caused  the  membership  to  be  appraised,  and  peti- 

5—Cf.  Taft  V.  Maisely,  120  N.  Y.  Williams  v.  Heard,  140  U.  S.  529 
474;  Brooks  v.  Ahrens,  68  Md.  212;  (reversing  Heard  v.  Sturgis,  146 
Kingsbury  v.  Mattocks,  81  Me.  310;       Mass.  545). 


510  ADMINISTRATION 

tioned  the  referee  for  an  order  to  sell  the  same.  The  petition 
was  heard  before  the  referee,  who,  after  hearing,  filed  his  report 
containing  a  summary  as  follows: 

''The  said  Page  was  adjudicated  a  bankrupt  upon  his  own 
petition  on  November  16,  1899.  Upon  his  examination  he  stated 
that  he  is  a  member  of  the  Philadelphia  Stock  Exchange;  that 
he  bought  his  seat  in  1880,  paying  for  it  at  that  time  about 
$5,500;  that  when  a  member  wishes  to  dispose  of  his  seat  he 
hunts  up  somebody  who  wants  to  buy  and  sells  it  to  him ;  that 
seats  are  always  salable;  that  the  last  price  paid  of  which  he 
heard  was  $8,500 ;  that  he  could  sell  his  seat  at  any  time  to  any- 
one who  wanted  to  buy  it ;  that  the  buyer  takes  it  with  the  under- 
standing that  he  will  be  elected  a  member;  otherwise  it  is  no 
sale;  that  he  could  sell  his  seat  without  the  approval  and  con- 
currence of  the  other  members;  that  he  did  not  include  the  seat 
as  an  asset  in  his  schedules  because  from  his  understanding  of 
the  matter  he  did  not  consider  it  an  asset ;  that  in  the  event  of 
his  death  there  would  be  paid  to  his  wife  $5,000  out  of  the 
gratuity  fund,  and  that  she  would  get  said  sum  and  the  seat ;  that 
if  he  should  sell  the  seat  the  gratuity  or  insurance  would  go  with 
the  seat.  '  •"  '- 

"The  trustee  upon  this  evidence  of  the  bankrupt  caused  the 
seat  in  the  stock  exchange  to  be  appraised,  and  the  appraisers 
have  reported  its  value  to  be  $8,000. 

"The  secretary  of  the  stock  exchange  testified  that  the  bank- 
rupt had  no  unsettled  contracts  with  or  claims  against  him  by 
any  member  of  the  exchange.  The  Philadelphia  Stock  Exchange 
is  an  unincorporated  association.    The  constitution  and  by-laws 

were  offered  in  evidence. 

*     *     « 

"The  by-laws  contain  no  provision  relating  to  membership  or 
transfer  of  membership." 

As  a  conclusion  from  these  facts  and  from  the  bankrupt  law, 
the  referee  on  March  7,  1900,  "ordered  that  the  trustee  sell  at 
public  auction  the  seat  or  membership  of  Edward  D,  Page,  the 
bankrupt,  and  all  his  right  and  interest  therein,  subject  to  the 
constitution  and  by-laws  of  the  Philadelphia  Stock  Exchange 
regulating  membership  therein." 

The  appellant  petitioned  for  a  review  of  the  referee 's  order  by 
the  District  Court,  averring  error  in  the  order  in  that  the  peti- 
tioner was  advised  and  believed  that  his  membership  in  the  Phila- 
delphia Stock  Exchange  was  not  property  within  the  meaning 


KINDS  OF  PROPERTY  511 

of  the  bankrupt  act  of  July  1,  1898  (U.  S.  Comp.  St.  1901,  p. 
3418),  nor  was  it  an  asset  of  his  estate  which  could  be  sold  by  his 
trustee  in  bankruptcy. 

On  June  19,  1900,  the  District  Court  approved  the  order  of 
sale  made  by  the  referee,  and  directed  it  to  be  executed.  The 
matter  was  then  taken  for  review  to  the  Circuit  Court  of  Appeals, 
which  court  confirmed  the  order  of  the  District  Court.  This 
appeal  was  thereupon  taken. 

Mr,  Justice  McKIENNA  delivered  the  opinion  of  the  court: 

The  case  presented  by  the  record  is  a  simple  one,  and  does  not 
call  for  elaborate  discussion.  Indeed,  it  has  been  virtually  ruled 
by  this  court.  Hyde  v.  Woods,  94  U.  S.  525,  24  L.  ed.  265 ;  Spar- 
hawk  V.  Yerkes,  142  U.  S.  1,  35  L.  ed.  915,  12  Sup.  Ct.  Rep.  104. 

§  70  of  the  bankrupt  act  of  1898  provides  that  the  trustee  shall 
be  vested  with : 

"The  title  of  the  bankrupt  as  of  the  date  he  was  adjudged  a 
bankrupt,  except  in  so  far  as  it  is  property  which  is  exempt,  to 
all    *    *    * 

"(3)  Powers  which  he  might  have  exercised  for  his  own 
benefit.     *    *     * 

"  (5)  Property  which  prior  to  the  filing  of  the  petition  he  coula] 

by  any  means  have  transferred,  or  which  might  have  been  levied/ 

upon  and  sold  under  judicial  process. ' ' 
*     «     * 

1.  Was  the  seat  in  the  stock  exchange  property  which  could 
have  been  by  any  means  transferred,  or  which  might  have  been 
levied  upon  and  sold  under  judicial  process?  If  the  seat  was 
subject  to  either  manner  of  disposition,  it  passed  to  the  trustee 
of  the  appellant's  estate. 

We  think  it  could  have  been  transferred  within  the  meaning 
of  the  statute.  The  appellant  could  have  sold  his  membership, 
the  purchaser  taking  it  subject  to  election  by  the  exchange,  and 
some  other  conditions.  It  had  decided  value.  The  appellant  paid 
for  it  in  1880,  $5,500,  and  he  testified  that  the  last  price  he  had 
heard  paid  for  a  seat  was  $8,500.  One  or  the  other  of  these  sums, 
«r  at  any  rate,  some  sum,  was  the  value  of  the  seat.  It  was  prop- 
erty and  substantial  property  to  the  extent  of  some  amount,  nott 
withstanding  thec(Witingeneies  to  which  it  was  subject.  In  othey 
words,  the  buyer  took  therisk  of  the  contingen^cieS:  And  they 
seem  to  be  capable  of  estimation.  The  appellant  once  estimated 
them  and  paid  $5,500  for  the  seat  in  controversy ;  another  buyer 


512  ADMINISTRATION 

estimated  them  and  paid  $8,500  for  a  seat.  A  thing  having  such 
vendible  value  must  be  regarded  as  property,  and  as  it  could  have 
been  transferred  by  some  means  by  appellant  (one  of  the  condi- 
tions expressed  in  §  70)  it  passed  to  and  vested  in  his  trustee. 
Whether  it  was  subject  to  levy  and  sale  by  judicial  process  we 
need  not  consider  except  incidentally  in   discussing  the  next 

contention. 

•     *     * 

Judgment  affirmed.^ 

r  EARLB  v.  MAXWELL 

/^  '  86  S.  C.  1,  67  S.  E.  962 

(Supreme  Court  of  South  Carolina.    April  29,  1910) 

WOODS,  J.  This  appeal  is  from  a  decree  overruling  a  de- 
murrer to  a  complaint,  the  material  allegations  of  which  may 
thus  be  stated :  On  the  24th  of  February,  1908,  the  defendant 
F.  B.  MaxweU  made  an  assignment  of  all  his  property  for  the 
benefit  of  his  creditors  to  J.  M.  Paget.  Thereafter,  on  the  18th 
day  of  March,  1908,  Maxwell  was  adjudged  a  bankrupt  by  the 
District  Court  of  the  United  States,  and  Martin  &  Earle,  a  part- 
nership composed  by  B.  F.  Martin  and  C.  B.  Earle,  became 
trustee  for  the  bankrupt  estate.  This  action  was  originally 
brought  in  the  name  of  the  partnership  as  trustee,  but  afterwards 
the  referee  in  bankruptcy,  with  the  consent  of  a  majority  of  the 
creditors  in  numbers  and  amount,  substituted  C,  B.  Earle  as 
trustee,  and  the  complaint  was  amended  to  conform  to  the  change. 
F.  B.  Maxwell,  the  bankrupt,  is  the  grandson  of  F.  C.  Borstell 
and  the  son  of  Mrs.  Alice  Maxwell.  By  his  will,  Borstell  made 
the  following  devise:  "I  will  and  bequeath  to  my  daughter, 
Alice  Maxwell,  my  lot  on  Brick  Range  with  the  storeroom,  offices 
and  all  buildings  connected  therewith,  and  in  view  of  the  mis- 
fortunes of  life  which  are  incident  to  aU  persons  however  prudent 
and  cautious  they  may  be,  and  not  from  any  distrust  of  my  said 
daughter  or  her  husband,  I  have  concluded  to  make  this  a  trust 
property,  and  therefore  vest  the  fee  simple  of  said  lot  and  build- 

6 — See  In  re  Becker,  98  Fed.  407 ;  of  Commerce)  ;  In  re  Spitzel  &  Co., 
In  re  Comer  &  Co.,  171  Fed.  261;  168  Fed.  156  (license  to  sell  pat- 
In  re  Miller,  171  Fed.  263;  In  re  ented  article).  But  see  In  re  Dann, 
Weisel,  173  Fed.  718  (all  cases  of  129  Fed.  495  (inventor's  rights  he- 
liquor  licenses)  ;  In  re  Niemann,  124  fore  patent  issued). 
Fed.  738    (Membership  in  Chamber 


KINDS  OF  PROPERTY  513 

ings  in  D.  S.  Maxwell,  as  trustee  for  her,  to  have  and  to  hold  all 
and  singular  the  said  premises  to  him  and  his  heirs  and  assigns. 
In  trust  nevertheless  for  the  following  uses  and  purposes :  That 
my  said  daughter  shall  have  the  right  to  use,  occupy  and  possess 
the  said  property,  to  receive  the  issues,  rents  and  profits  of  the 
same,  for  and  during  the  term  of  her  natural  life,  and  at  her 
death,  the  same  to  be  sold  and  the  proceeds  to  be  divided  among 
her  children,  share  and  share  alike,  the  share  of  any  deceased 
child,  or  remote  descendant  to  take  the  share  to  which  the 
parent  would  be  entitled  if  living  as  under  the  statute  of  dis- 
tributions. And  should  the  said  trustee  die  or  by  any  means  a 
change  should  be  necessary,  my  said  daughter  shall  have  the  right 
to  appoint  a  new  trustee  in  writing  without  application  to  any 
court,  who  shall  have  all  the  rights  conferred  on  the  said  D.  S. 
JNIaxweU,  and  so  continue  to  appoint  new  trustees  as  often  as  a 
contingency  may  arise."  Mrs,  Maxwell,  the  life  beneficiary  of 
the  trust,  is  still  living,  and  it  is  therefore  uncertain  whether 
at  her  death  the  bankrupt  will  take,  or  his  children,  or  their  chil- 
dren or  descendants.  Some  years  before  Maxwell  was  adjudged 
a  bankrupt,  he  undertook  to  assign  his  interest  under  the  will  to 
his  aunt.  Miss  Von  Borstell,  now  Mrs.  Coleman ;  but  this  assign- 
ment is  alleged  to  be  invalid  for  lack  of  record  or  other  notice  to 
subsequent  creditors.  The  trustee,  believing  Maxwell's  interest 
in  the  trust  estate  to  be  salable,  advertised  it  for  sale,  and  there- 
upon received  notice  from  the  bankrupt  that  his  contingent  in- 
terest was  not  the  subject  of  sale,  and  that  "said  sale  would  be 
contested. ' '  The  allegation  is  made :  ' '  That  by  reason  of  such 
notification  and  claim  on  the  part  of  F.  B.  Maxwell  and  on 
the  part  of  others  on  his  behalf,  a  cloud  has  been  and  is  now 
being  cast  upon  the  title  of  the  interest  of  the  plaintiff  as  trustee, 
and  that  on  account  of  the  resultant  probability  of  the  bidding 
for  the  said  interest  being  chilled  by  virtue  of  such  claim  and 
cloud  upon  the  title  as  aforesaid,  the  plaintiff  withdrew  said  in- 
terest from  sale  and  now  desires  the  question  of  title  and  sala- 
bility  of  the  said  interest  to  be  determined  and  declared  by  the 
court,  and  the  cloud  from  said  title  removed. ' '  The  relief  asked 
is  that  the  cloud  on  the  title  be  removed,  that  the  court  deter- 
mine and  declare  the  salability  of  the  interest  of  the  bankrupt, 
and  order  the  plaintiff  as  trustee  to  sell  and  convey  it. 

In  the  decree  of  the  Circuit  Court  this  statement  appears: 
"By  consent  of  counsel,  the  demurrer  to  the  original  complaint 
is  to  be  considered  as  made  to  the  amended  complaint."     The 

H.  &  A.  Bankruptcy — 33 


514  ADMINISTRATION 

first  ground  of  demurrer  to  the  original  complaint  was:  "Be- 
cause it  appears  from  the  face  of  the  complaint  that  the  plain- 
tiffs have  not  legal  capacity  to  sue  for  the  following  reason, 
to  wit:  §§44  and  45  of  the  act  of  Congress  entitled  *An  act  to 
establish  a  uniform  system  of  bankruptcy  throughout  the  United 
States'  provide  that  the  creditors  of  a  bankrupt  estate  shall 
appoint  one  or  three  trustees  of  the  estate,  who  shall  be  indi- 
viduals or  corporations ;  whereas,  it  appears  from  the  complaint 
that  Martin  &  Earle,  a  partnership  composed  of  B.  F.  Martin 
and  C.  B.  Earle,  and  engaged  in  the  practice  of  law,  was  ap- 
pointed trustee  of  said  estate  by  the  creditors  of  the  bankrupt 
estate."  Act  July  1,  1898,  c.  541,  30  Stat.  557  (U.  S.  Comp.  St. 
1901,  p.  3438).  This  was  the  only  objection  made  to  the  capacity 
of  the  plaintiff  to  sue,  and  it  was  removed  by  the  amendment 
alleging  C.  B.  Earle  to  be  the  sole  trustee  and  substituting  his 
name  as  plaintiff  for  the  firm  name  of  Martin  &  Earle.  Therefore 
the  point  made  in  argument  that  C.  B.  Earle  was  not  properly 
appointed  trustee  of  the  bankrupt  estate  was  not  before  the  Cir- 
cuit Court  and  cannot  be  considered  by  this  court. 

By  the  demurrer  the  bankrupt,  Maxwell,  submits  that  the  com- 
plaint does  not  state  a  cause  of  action :  First,  because  his  interest 
under  the  will  is  contingent,  and  is  therefore  not  the  subject  of 
sale ;  and,  second,  because  the  will  provides  that  the  land  shall  be 
sold  on  the  death  of  his  mother  and  the  proceeds  divided,  and 
therefore  his  interest  is  personalty,  with  respect  to  which  an 
action  to  remove  a  cloud  on  title  cannot  be  maintained.  §  70a 
of  the  bankruptcy  statute  provides  that  the  trustee  of  the  estate 
of  the  bankrupt  shall  be  vested  by  operation  of  law  with  the  title 
of  the  bankrupt  as  of  the  date  he  was  adjudged  a  bankrupt, 
except  in  so  far  as  it  is  to  property  which  is  exempt,  to  "all 
property  which  prior  to  the  filing  of  the  petition  he  could  by 
any  means  have  transferred  or  which  might  have  been  levied 
upon  and  sold  by  judicial  process  against  him. ' '  The  bankruptcy 
statute  further  provides  for  the  sale  of  the  property  of  the  bank- 
rupt subject  to  the  approval  of  the  bankrupt  court. 

Since  under  the  will  the  trustee  therein  named  was  to  sell  the 
land  and  divide  the  proceeds  of  the  sale  after  the  death  of  the 
life  beneficiary,  the  interest  of  F.  B.  Maxwell  and  the  other  chil- 
dren of  Mrs.  Maxwell  is  a  contingent  interest,  not  in  the  land, 
but  in  the  proceeds  of  the  land,  which  is  personalty.  Wood  v. 
Reeves,  23  S.  C.  382 ;  Walker  v.  Killian,  62  S.  C.  482,  40  S.  E. 
887.    The  court  held,  in  Pickens  v.  Pickens,  13  Rich.  Eq.  Ill, 


KINDS  OF  PROPERTY  515 

that,  while  a  contingent  interest  in  land  passes  to  the  assignee 
of  an  insolvent,  the  sale  must  be  postponed  until  the  contingent 
interest  should  become  vested.  It  has  been  often  decided  in  this 
state  that  an  assignment  or  mortgage  of  a  contingent  remainder 
in  land  is  good,  at  least  in  equity.  Allston  v.  Bank  of  the  State, 
2  Hill,  Eq.  235 ;  Rountree  v.  Rountree,  26  S.  C.  450,  2  S.  E.  474; 
Bank  v.  Garlington,  54  S.  C.  413,  32  S.  E.  513.  Under  the 
bankrupt  statute,  providing  that  all  property  which  the  bank- 
rupt could  by  any  means  have  transferred  passes  to  the  assignee, 
there  can  be  no  doubt  that  a  contingent  remainder  in  land  would 
pass  and  would  be  subject  to  sale  by  the  trustee. 

The  interest  of  the  bankrupt  in  this  case  not  being  an  interest 
in  the  land,  but  in  personal  property — the  money  to  be  realized 
from  the  sale  of  the  land — it  might  have  been  doubtful,  under 
the  authority  of  Wood  v.  Reeves,  supra,  whether  it  could  be 
assigned  or  mortgaged;  for  in  that  case  the  view  is  indicated 
that  such  possible  future  interest  in  personal  property  could 
not  be  mortgaged.  But  in  the  later  case  of  Walker  v.  Killian, 
supra,  it  is  expressly  held  that,  while  a  paper  in  the  form  of  a 
mortgage  of  such  a  possible  future  interest  in  personal  prop- 
erty cannot  operate  as  a  mortgage,  it  is  good  in  equity  as  an 
assignment. 

In  three  cases  in  the  District  Court  of  the  United  States  and 
in  one  case  in  the  Circuit  Court  of  Appeals,  it  has  been  held 
that  such  a  contingent  interest  in  either  real  or  personal  prop- 
erty as  is  here  involved  does  not  pass  to  the  trustee  in  bank- 
ruptcy, because  it  is  not  property  which  could  have  been  trans- 
ferred by  the  bankrupt.  In  re  Hoadley  (D.  C.)  101  Fed.  233; 
In  re  Gardner  (D.  C.)  106  Fed.  670;  In  re  Twaddell  (D.  C.) 
110  Fed.  145 ;  In  re  Wetmore,  108  Fed.  520,  47  C.  C.  A.  477."^ 
But  these  cases  arose  under  the  laws  of  New  York  and  Penn- 
sylvania. Under  our  law  there  can  be  no  doubt  that  a  bankrupt 
could  transfer  such  an  interest  before  his  bankruptcy;  and, 
that  being  so,  the  conclusion  is  inevitable  that  it  passes  to  the 
trustee  under  a  bankrupt  act  which  provides  that  all  "prop- 
erty ' '  shall  pass  which  the  bankrupt  * '  could  by  any  means  have 
transferred."  It  is  true,  as  has  been  often  said,  that  a  con- 
tingent remainder  is  not  technically  an  estate,  but  a  mere  pos- 
sibility of  an  estate  in  the  future;  but  that  is  very  far  from 

7 — See  In  re  McCrea,  161  Fed. 
246;  Clowe  v.  Seavey,  208  N.  Y. 
496,  47  L.  E.  A.  (N.  S.)  284.  v^iv>?: .; 


516  ADMINISTRATION 

saying  that  it  is  not  property.  The  term  "property,"  used  in 
the  bankruptcy  act,  is  of  the  broadest  possible  signification, 
embracing  everything  that  has  exchangeable  value,  or  goes  to 
make  up  a  man's  wealth — every  interest  or  estate  which  the  law 
regards  of  sufficient  value  for  judicial  recognition.  Chas.  &  W. 
C.  By.  Co.  V.  Reynolds,  69  S.  C.  481,  48  S.  E.  476;  South  Bound 
Ry.  Co.  V.  Burton,  67  S.  C.  515,  46  S.  E.  340;  Delassus  v. 
United  States,  34  U.  S.  117,  9  L.  ed.  71 ;  Knight  v.  United  Land 
Association,  142  U.  S.  161,  12  Sup.  Ct.  258,  35  L.  ed.  974.  It 
follows  that  under  our  decisions  the  interest  of  the  bankrupt 
under  the  will  was  ' '  property ' '  which  he  could  have  transferred, 
and  that,  therefore,  it  passed  to  his  trustee  in  bankruptcy  to  be 

sold  by  him. 

*     «     • 

It  might  have  been  more  appropriate  to  have  the  right  de- 
termined by  application  to  the  Federal  Court  having  control  of 
the  bankrupt  proceedings;  but  that  point  was  not  made  by  the 
demurrer,  and  is  not  before  us. 

The  judgment  of  this  court  is  that  the  judgment  of  the  Cir- 
cuit Court  be  aflSrmed. 


:>j 


In  re  MEYER'S  ESTATE 

Appeal  of  WEISS 

232  Pa.  St.  89,  81  Atl.  145 

(Supreme  Court  of  Pennsylvania.    May  23,  1911) 

From  the  record  it  appeared  that  testator  died  December  19, 
1902,  leaving  a  will  by  which  he  gave  his  residuary  estate  to 
his  daughter,  Clara  L.  Beihl,  and  her  husband,  Ernest  H. 
Beihl,  ''absolutely  and  forever,  as  tenants  by  entireties."  On 
July  2,  1909,  Ernest  H.  Beihl  was  adjudicated  a  bankrupt  by 
the  United  States  District  Court,  and  Charles  J.  Weiss  was  ap- 
pointed his  trustee  in  bankruptcy.  The  trustee  in  bankruptcy 
claimed  that  one-half  of  the  fund  before  the  court  should  be 
awarded  to  him  as  the  property  of  the  bankrupt.  The  auditing 
judge  disallowed  the  claim. 

STEWART,  J.  The  appeal  is  by  the  trustee  in  bankruptcy 
of  the  estate  of  Ernest  H.  Beihl  from  a  decree  of  the  Orphans' 
Court  in  the  adjudication  of  the  account  of  the  trustees  under 
the  last  will  of  C.  A.  Adolph  Meyer,  deceased,  awarding  the 


KINDS  OF  PROPERTY  517 

fund  before  the  court  to  Ernest  H.  Beihl  and  Clara,  his  wife. 
The  appellant  claims  the  fund  in  virtue  of  his  office  in  bank- 
ruptcy, the  appellees  on  the  ground  that  the  estate  vested  in 
them  as  husband  and  wife.  It  is  not  questioned  that  under  the 
will  through  which  this  estate  was  derived  husband  and  wife 
took  by  entireties,  if  indeed  such  estate  may  still  be  created. 
The  contention  of  appellant  is  that  this  venerable  and  unique 
common-law  estate  has  been  abolished  in  Pennsylvania  by  the 
act  of  June  8,  1893  (P.  L.  344),  not  in  express  terms,  but  by 
unavoidable  implication.  [After  concluding  that  the  estate  by 
the  entirety  may  still  be  created  in  Pennsylvania,  the  court  con- 
tinues:] 

It  is  further  complained  of  as  error  that  the  court  refused  to 
order  proper  security  to  be  given  for  the  payment  to  the  trustee 
of  one-half  the  income  arising  during  the  life  of  the  wife  from 
the  fund  for  distribution.  Whatever  the  rights  of  the  trustee 
may  be  with  respect  to  the  fund  in  the  event  of  the  husband 
surviving  his  wife,  it  is  too  plain  for  discussion  that,  except  as 
estates  by  entirety  no  longer  exist,  he  can  have  no  present  right 
of  enjoyment.  We  have  just  held  that  they  do  still  exist.  In 
estates  of  this  kind  husband  and  wife  are  not  joint  tenants  or 
tenants  in  common,  but  both  are  seised  of  the  entirety,  per  tout 
et  non  per  my.  As  a  consequence  neither  can  dispose  of  any 
part  without  the  consent  of  the  other,  but  the  whole  must  remain 
to  the  other.  It  follows  that  the  interest  of  the  appellant  in 
the  fund  in  dispute,  under  all  our  authorities  defining  this  kind 
of  estate,  and  its  characteristics,  is  at  most  a  contingent  one. 
He  is  not  presently  substituted  for  the  husband,  and  cannot  be. 
His  right  to  the  use  and  enjoyment  of  any  part  of  the  fund  must 
await  the  happening  of  the  contingency  of  the  husband  surviv- 
ing the  wife.  Until  that  happens,  the  wife 's  right  to  the  enjoy- 
ment of  the  whole  may  not  be  disputed  by  any  one  claiming 
under  the  husband.  The  very  enlightening  discussion  of  the 
subject  in  the  able  opinion  of  Judge  Thayer,  approved  and 
adopted  by  this  court  in  McCurdy  v.  Canning,  64  Pa.  39,  and 
which  has  consistently  been  followed,  makes  further  citation 
of  authority  for  the  views  here  expressed  unnecessary. 

This  assignment  of  error  is  likewise  overruled,  and  the  appeal 
is  dismissed.^ 

8— See   Ann.   Cas.    1912    C,   1242, 
where  the  case  is  annotated. 


51%>*^    /^>^C    ADMINISTRATION 


^^^^y^^_  ^  '^'      ''^  GAZLAY  V.  WILLIAMS 


i^^"  ^^}^^      210  U.  S.  41,  52  L.  ed.  950,  28  Sup.  Ct  687 
(United  States  Supreme  Court.    May  18,  1908) 

June  16,  1902,  W.  A.  Gazlay,  Hanna  F.  Gazlay,  Hulda  G. 
Miller,  Emma  G.  Donaldson,  Julia  G.  Stewart,  and  Clara  G. 
Kuhn  entered  into  a  written  agreement  as  lessors  with  one  J.  D. 
Kueny,  whereby,  in  consideration  of  the  rents  to  be  paid  and 
the  covenants  to  be  performed  by  said  lessee,  his  heirs  and 
assigns,  they  leased  to  said  Kueny  certain  premises  situated  on 
the  east  side  of  Vine  street,  south  of  Sixth  street,  Cincinnati, 
Ohio,  for  a  period  of  ten  years,  with  the  privilege  of  ten  years 
additional. 

The  lease  contained  the  following  condition : 

"Provided,  however,  that  if  said  lessee  shall  assign  this  lease 
or  underlet  said  premises,  or  any  part  thereof,  or  if  said  lessee 's 
interest  therein  shall  be  sold  under  execution  or  other  legal 
process,  without  the  written  consent  of  said  lessors,  their  heirs 
or  assigns,  is  first  had,  or  if  said  lessee  or  assigns  shall  fail  to 
keep  any  of  the  other  covenants  of  this  lease  by  said  lessee  to  be 
kept,  it  shall  be  lawful  for  said  lessors,  their  heirs  or  assigns, 
into  said  premises  to  re-enter  and  the  same  to  have  again,  re- 
possess, and  enjoy  as  in  their  first  and  former  estate,  and  there- 
upon this  lease  and  everything  therein  contained  on  the  said 
lessors'  behalf  to  be  done  and  performed  shall  cease,  determine, 
and  be  utterly  void." 

On  the  9th  of  April.Jthe.Jlessors  filed  a  petition  in  the  Superior 
Court  of  Cincinnati,  Ohio,  against  J.  D.  Kueny  for  the  recovery 
of  rent  due  under  the  lease.  In  their  petition  the  lessors  asked 
that  a  receiver  be  appointed  to  take  charge  of  all  the  property 
of  said  J.  D.  Kueny,  including  said  leasehold  estate,  and  that 
said  leasehold  premises  and  the  unexpired  term  be  sold,  "sub- 
ject, however,  to  all  the  terms,  covenants,  and  conditions  con- 
tained in  the  lease  from  said  plaintiffs  to  said  J.  D.  Kueny." 
The  court  thereupon  appointed  receivers  to  take  charge  of  and 
manage  said  property,  and  later  made  an  order  directing  said 
receivers  to  sell  all  of  the  personal  property  of  said  J.  D.  Kueny, 
including  the  leasehold  estate,  and  under  said  order  all  of  said 
property,  including  said  leasehold  estate,  was  sold  to  H.  D. 
Brown,  who  took  possession  of  the  same,  made  extensive  im- 
provements thereon,  and  paid  to  the  lessors  the  rent  reserved 


KINDS  OF  PROPERTY  S19 

under  said  lease,  from  the  time  he  took  possession,  July,  1905, 
to  January,  1906,  when  proceedings  were  begun  against  him  in 
the  District  Court  of  the  United  States  for  the  Southern  District 
of  Ohio,  western  division,  to  have  him  adjudged  a  bankrupt. 

Pending  the  adjudication,  a  receiver  was  appointed,  who  took 
charge  of  all  of  Brown's  property,  including  said  leasehold 
estate,  and  who,  as  such  receiver,  paid  to  said  lessors  the  rent 
reserved  in  said  lease  for  the  month  of  January,  1906. 

In  February,  1906,  the  appellee  herein,  Fletcher  R.  Williams, 
was  elected  as  trustee  in  bankruptcy  of  the  estate  and  effects  of 
said  Brown,  and  on  March  1,  1906,  he  filed  in  the  bankruptcy 
proceeding  an  application  for  the  sale  of  said  leasehold  estate, 
making  the  lessors  parties  thereto,  and  asking  that  they  be  re- 
quired to  set  up  any  claim  they  might  have  upon  the  same. 
Process  was  issued  and  served  upon  all  but  one  of  the  lessors  on 
March  5,  1906,  and  on  that  one  on  March  9,  1906. 

On  March  6,  1906,  said  trustee  paid  to  W.  A.  Gazlay  rent  for 
the  month  of  February,  1906,  the  amount  paid  being  the  monthly 
sum  named  in  the  said  lease.  Thereupon  said  lessors,  coming  in 
for  the  purposes  of  the  motion  only,  filed  a  motion  to  be  dis- 
missed from  the  proceedings  on  the  ground  that  the  court  had 
no  jurisdiction  over  their  persons,  which  motion  was  overruled 
by  the  referee  in  bankruptcy.  Thereupon  the  lessors  filed  an 
answer,  "and,  without  intending  to  enter  their  appearance 
herein,  but  acting  under  protest  and  the  direction  of  the  court, ' ' 
alleged  that  the  lease  contained  the  condition,  among  others, 
"that  if  said  lessee  should  assign  the  lease  or  underlet  said 
leased  premises  or  any  other  part  thereof,  or  if  said  lessee's 
interest  therein  should  be  sold  uijder  execution  or  other  legal 
process  without  the  written  consent  of  said  lessors,  their  heirs 
or  assigns  first  had;  or  if  said  lessee  or  assign  should  fail  to 
keep  any  of  the  other  covenants  of  the  lease  by  lessee  to  be  kept, 
it  should  be  lawful  for  said  lessors,  their  assigns  or  heirs,  into 
said  premises  to  re-enter  and  the  same  to  have  again,  repossess, 
and  enjoy,  as  in  the  first  and  former  estate ;  and  thereupon  this 
lease  and  everything  therein  contained  on  said  lessor's  behalf 
to  be  done  and  performed,  should  cease,  determine,  and  be 
utterly  void.  They  further  say  that  said  lease  and  the  premises^ 
thereby  leased  passed  into  the  possession  of  Harry  D.  Brown, 
the  bankrupt  herein,  without  the  written  consent  of  said  lessors,  I 
but  with  their  acquiescence  only,  and  that  said  condition  in  said-/ 
lease  is  still  in  full  force  and  effect  as  against  said  Harry  D. 


520  ADMINISTRATION 

Brown  and  his  trustee  in  bankruptcy  herein.  That  at  the  time 
of  filing  of  the  application  herein,  so  far  as  they  know  or  are 
informed,  the  said  lessors  had  no  claim  in  said  leasehold  premises 
adverse  to  said  trustee  in  bankruptcy." 

The  case  was  submitted  to  the  referee  upon  these  pleadings, 
an  agreed  statement  of  facts,  and  the  arguments  and  briefs  of 
counsel. 

The  referee  found  that  the  trustee  being  in  lawful  possession 
of  said  leasehold  estate,  the  court  had  jurisdiction  of  the  persons 
and  subject-matter  of  the  suit;  that  the  claim  of  the  lessors, 
assuming  that  they  had  one  and  that  it  would  be  enforceable 
only  after  a  sale,  nevertheless  was  in  the  nature  of  a  cloud  upon 
the  title  of  the  trustee  to  said  leasehold  estate,  and,  as  such, 
could  be  determined  in  this  proceeding  in  advance  of  its  happen- 
ing; and  he  thereupon  held  that  the  lessors  had  no  right,  as 
against  the  trustee  in  bankruptcy  herein,  to  forfeit  the  lease  in 
the  event  of  a  sale  by  him  under  the  court's  order,  and  ordered 
the  trustee  to  sell  the  same  free  from  any  claim  or  right  on  the 
part  of  the  lessors  to  forfeit  the  same.  To  these  findings  and 
this  judgment  of  the  referee  the  lessors  took  exception  and  filed 
a  petition  for  a  review  of  the  same  in  the  District  Court  in  bank- 
ruptcy. The  referee  certified  his  proceedings  to  the  District 
Court,  where,  upon  a  hearing  on  the  pleadings  and  facts,  the 
findings  and  judgment  of  the  referee  were  affirmed  and  the 
petition  dismissed. 

From  this  judgment  the  lessors  took  an  appeal  to  the  United 
States  Circuit  Court  of  Appeals  for  the  Sixth  Circuit.  There 
the  cause  was  again  submitted  upon  the  same  pleadings  and 
facts  as  in  the  District  Court,  and  that  court  affirmed  the  judg- 
ment of  the  District  Court,  and  held  that  the  clause  in  said  lease 
providing  for  its  forfeiture  in  case  of  a  sale  of  the  same  under 
execution  or  other  legal  process,  without  the  lessors'  written 
consent  thereto,  had  no  application  to  a  sale  by  the  trustee  in 
bankruptcy,  and  that  therefore  the  lessors  could  not  forfeit  the 
lease  in  case  the  trustees  herein  should  sell  the  same.  77  C.  C. 
A.  662,  147  Fed.  678. 

From  this  judgment  the  present  appeal  was  taken. 

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

The  passage  of  the  lessee's  estate  from  Brown,  the  bankrupt, 

to  Williams,  the  trustee,  as  of  the  date  of  the  adjudication,  was 

by  operation  of  law,  and  not  by  the  act  of  the  bankrupt,  nor 


KINDS  OF  PROPERTY  $21 

was  it  by  sale.  The  condition  imposed  forfeiture  if  the  lessee 
assigned  the  lease  or  the  lessee's  interest  should  be  sold  under 
execution  or  other  legal  process  without  lessors'  written  consent. 

A  sale  by  the  trustee  for  the  benefit  of  Brown 's  creditors  was 
not  forbidden  by  the  condition  and  would  not  be  in  breach 
thereof.  It  would  not  be  a  voluntary  assignment  by  the  lessee, 
nor  a  sale  of  the  lessee's  interest,  but  of  the  trustee's  interest, 
held  under  the  bankruptcy  proceedings,  for  the  benefit  of  cred- 
itors. Jones,  in  his  work  on  Landlord  and  Tenant,  lays  it  down 
(§  466)  that  "an  ordinary  covenant  against  subletting  and  as- 
signment is  not  broken  by  a  transfer  of  the  leased  premises  by 
operation  of  law,  but  the  covenant  may  be  so  drawn  as  to  ex- 
pressly prohibit  such  a  transfer,  and  in  that  case  the  lease  would 
be  forfeited  by  an  assignment  by  operation  of  law. ' '  The  cove- 
nant here  is  not  of  that  character. 

The  doctrine  of  Dumpor's  Case,  4  Coke,  119,  1  Smith,  Lead. 
Cas.  *85,  is  that  a  condition  not  to  alien  without  license  is  de- 
termined by  the  first  license  granted ;  and  District  Judge  Thomp- 
son expressed  the  opinion  that  it  was  applicable  here,  and  that 
the  sale  to  Brown,  under  the  order  of  the  Superior  Court  of 
Cincinnati,  entered  on  the  petition  of  these  lessors  for  the 
recovery  of  rent,  set  the  leasehold  free  from  the  forfeiture 
clauses,  especially  as  that  court  did  not  direct  that  the  sale  be 
subject  to  the  terms,  covenants,  and  conditions  of  the  lease,  as 
prayed  for  in  the  petition.  Moreover,  the  lessors,  in  their  an- 
swer in  these  proceedings,  stated  that  "said  lease  and  the 
premises  thereby  leased  passed  into  the  possession  of  Harry  D 
Brown,  the  bankrupt  herein,  without  the  written  consent  of  said 
lessors,  but  wi^ .their  aeqjiiescence  only;  and  that  the  said  con 
dition  in  said  lease  is  still  in  full  force  and  effect  as  against  said 
Harry  D.  Brown  and  his  trustee  in  bankruptcy  herein." 

In  respect  of  the  lessors,  Bro\jii_jQaay  be^treated,  theii,.^as_if 
he  were  the  ,QrigiBal4essee ;  and  the  sale  by  his  assignee  in  bank- 
ruptcy, under  order  of  the  bankruptcy  court,  was  not  a  breach 
of  the  condition  in  question.  The  language  of  Bayley,  J.,  in 
Doe  ex  dem.  Goodbehere  v.  Bevan,  3  Maule  &  S.  353,  cited  by 
the  Court  of  Appeals,  is  applicable. 

The  premises  in  question  in  this  case,  being  a  public  house, 
were  demised  by  Goodbehere  to  one  Shaw  for  a  term  of  years, 
and  Shaw  covenanted  that  he,  his  executors,  etc.,  should  not  nor 
would,  during  the  term,  assign  the  indenture,  or  his  or  their 
interest  therein,  or  assign,  set,  or  underlet  the  messuage  and 


522  ADMINISTRATION 

premises,  or  any  part  thereof,  to  any  person  or  persons  whatso- 
ever, without  the  consent  in  writing  of  the  lessor,  his  executors, 
etc.  Proviso,  that  in  case  Shaw,  his  executors,  etc.,  should  part 
with  his  or  their  interest  in  the  premises,  or  any  part  thereof, 
contrary  to  his  covenant,  that  the  lessor  might  re-enter.  After- 
wards Shaw  deposited  this  lease  with  Whitbread  &  Company 
as  a  security  for  the  repayment  of  money  borrowed  of  them; 
and,  becoming  bankrupt,  and  his  estate  and  effects  being  as- 
signed by  the  commissioners  to  his  assignees,  the  lease  was,  upon 
the  petition  of  Whitbread  &  Company,  directed  by  the  Lord 
Chancellor  to  be  sold  in  discharge  of  their  debt,  and  was,  accord- 
ingly, sold  to  the  defendant,  and,  without  the  consent  of  Good- 
behere,  assigned  to  the  defendant  by  the  assignees,  and  he  en- 
tered, etc.  The  trial  judge  ruled  that  this  was  not  a  breach  of 
^e  proviso  not  to  assign  without  consent,  etc.,  inasmuch  as  the 
covenant  did  not  extend  to  Shaw's  assignees,  they  being  as- 
signees in  law;  wherefore  he  directed  a  nonsuit.  The  rule  to 
Sfet  aside  the  nonsuit  was  discharged  on  argument  before  Lord 
Ellenborough,  Ch.  J. ;  LeBlanc,  J. ;  Bayley,  J.,  and  Dampier,  J. 
(delivering  concurring  opinions)  ;  and  Bayley,  J.,  said: 

*  *  It  has  never  been  considered  that  the  leasee 's  becoming  bank- 
rupt was  an  avoiding  of  the  lease  within  this  proviso;  and  if  it 
be  not,  what  act  has  the  lessee  done  to  avoid  it?  All  that  has 
followed  upon  his  bankruptcy  is  not  by  his  act,  but  by  the 
operation  of  law,  transferring  his  property  to  his  assignees. 
Then  shall  the  assignees  have  capacity  to  take  it,  and  yet  not  to 
dispose  of  it?  Shall  they  take  it  only  for  their  own  benefit,  or 
be  obliged  to  retain  it  in  their  hands,  to  the  prejudice  of  the 
creditors,  for  whose  benefit  the  law  originally  cast  it  upon  them  ? 
Undoubtedly  that  can  never  be." 

Decree  affirmed.® 

1^        ^^ r^       BURLINGHAM  v.  GROUSE 

^       M*^tr^     228  U.  S.  459,  57  L.  ed.  920,  33  Sup.  Ct.  564 

}^      ^V^vJp     (United  States  Supreme  Court.    April  28,  1913) 

^  -'        Mr.  Justice  DAY  delivered  the  opinion  of  the  court: 

The  action  was  brought  in  the  United  States  District  Court  for 
the  Southern  District  of  New  York  by  the  trustees  of  the  firm 

9_See  In  re  Montello  Brick  Frazin,  183  Fed.  28;  Wilson  v.  Wal- 
Works,  163  Fed.  624;  Plaut  v,  Gor-  lani,  5  Ex.  Div.  155  (reviewing  the 
ham  Mfg.  Co.,  174  Fed.  872;  In  re      English  statutes). 


tJ" 


KINDS  OF  PROPERTY  523 

of  T.  A.  Mclntyre  &  Company,  and  of  the  individual  members 
of  that  firm,  bankrupts,  against  Charles  M.  Crouse  and  the 
Equitable  Life  Assurance  Society  of  the  United  States,  to  re- 
cover the  sum  of  $90,698.32,  the  net  proceeds  of  certain  policies 
of  insurance  issued  by  the  Equitable  Life  Assurance  Society 
upon  the  life  of  Thomas  A,  Mclntyre,  one  of  the  bankrupts,  de- 
ceased. The  proceeds  of  the  policies  were  paid  into  court  by 
the  society.  The  judgment  of  the  District  Court  in  favor  of 
Crouse  was  afiirmed  by  the  Circuit  Court  of  Appeals  (104  C.  C. 
A.  227,  181  Fed.  479),  and  the  case  has  been  appealed  to  this 
court. 

It  appears  that  on  the  10th  of  April,  1902,  Thomas  A.  Mc- 
lntyre obtained  two  policies  of  life  insurance  in  the  Equitable 
Society.  They  were  known  as  "guaranteed  cash-value,  limited 
payment,  life  policies,"  each  providing  that  upon  the  death  of 
the  insured  the  company  would  pay  to  his  executors,  adminis- 
trators, or  assigns  the  sum  of  $100,000  in  fifty  annual  instal- 
ments, or  the  sum  of  $53,000  in  cash,  a  total  of  $106,000  for  the 
two  policies.  On  April  14,  1906,  the  policies  were_assigned  abso- 
lutely to  the  firm  of  T.  A.  Mclntyre  &  Company,  and  on  April 
24,  1907,  they  were  by  that  firm  assigned  to  the  Equitable 
Society  as  collateral  security  for  a  loan  of  $15,370.  On  Febru- 
ary 25,  1908,  two  months  prior  to  the  filing  of  the  petition  in 
bankruptcy,  the  policies  were  assigned  by  Mclntyre  &  Company 
to  the  defendant,  Charles  M.  Crouse,  subject,  however,  to  the 
prior  assignment  to  the  Equitable  Society.  A  petition  in  in- 
voluntary bankruptcy  was  filed  against  Mclntyre  &  Company 
and  its  individual  members  on  April  25,  1908,  and  on  May  9, 
1908,  the  defendant  Crouse  paid  the  premiums  on  the  policies, 
in  the  sum  of  $6,078.38.  Mclntyre  &  Company  and  the  in- 
dividual members  thereof  were  adjudged  involuntary  bankrupts 
on  May  21,  1908,  and  the  trustees  were  elected  on  the  24th  of 
July,  1908.  On  the  29th  of  July,  1908,  Thomas  A.  Mclntyre 
died,  and  the  policies  became  payable. 

It  appears  that  the  policies  had  a  cash  surrender  value,  which, 
at  the  time  when  the  troistees  qualified,  was  $15,370,  or  the 
amount  of  the  loan  of  the  Equitable  Society  upon  the  policies. 
It  is  therefore  apparent  that  on  the  day  when  the  petition  was 
filed,  as  well  as  the  day  of  the  adjudication  in  bankruptcy,  thel 
cash  surrender  value  would  not  have  exceeded  the  loan  and  lieii 
of  the  society  upon  the  policies.  The  Circuit  Court  of  Appeals 
for  the  Second  Circuit  held  that,  under  the  circumstances,  the 


524  ADMINISTRATION 

policies  did  not  pass  to  the  trustees  as  assets,  and  therefore  the 
action  which  had  been  begun  to  set  aside  the  transfer  to  Grouse, 
as  a  preference  within  the  bankruptcy  act,  could  not  be 
maintained. 

The  correctness  of  this  decision  depends  primarily  upon  the 
construction  of  §  70a  of  the  bankruptcy  act,  which  reads : 

"The  trustee  of  the  estate  of  a  bankrupt,  upon  his  appoint- 
ment and  qualification,  and  his  successor  or  successors  if  he 
shall  have  one  or  more,  upon  his  or  their  appointment  and 
qualification,  shall  in  turn  be  vested  by  operation  of  law  with 
the  title  of  the  bankrupt,  as  of  the  date  he  was  adjudged  a 
bankrupt,  except  in  so  far  as  it  is  to  property  which  is  exempt, 
to  all  (1)  documents  relating  to  his  property;  (2)  interests  in 
patents,  patent  rights,  copyrights,  and  trademarks;  (3)  powers 
which  he  might  have  exercised  for  his  own  benefit,  but  not  those 
which  he  might  have  exercised  for  some  other  person;  (4)  prop- 
erty transferred  by  him  in  fraud  of  his  creditors;  {5)  property 
which,  prior  to  the  filing  of  the  petition,  he  could  by  any  means 
have  transferred,  or  which  might  have  been  levied  upon  and 

Isold  under  judicial  process  against  him:    Provided,  that  when 
any  bankrupt  shall  have  any  insurance  policy,  which  has  a  cash 
surrender  value  payable  to  himself,  his  estate,  or  personal  repre- 
sentatives, he  may,  within  thirty  days  after  the  cash  surrender 
I  Talue  has  been  ascertained  and  stated  to  the  trustee  by  the  com- 
/  pany  issuing  the  same,  pay  or  secure  to  the  trustee  the  sum  so 
'  ascertained  and  stated,  and  continue  to  hold,  own,  and  carry 
such  policy  free  from  the  claims  of  the  creditors  participating 
in  the  distribution  of  his  estate  under  the  bankruptcy  proceed- 
(  ings ;  otherwise  the  policy  shall  pass  to  the  trustee  as  assets ;  and 
{6)  rights  of  action  arising  upon  contracts  or  from  the  unlawful 
taking  or  detention  of,  or  injury  to,  his  property. ' ' 

The  part  of  the  section  particularly  to  be  considered  is  subdiv. 

^_aii4  its  proviso.    Subdivision  5  undertakes  to  vest  in  the  trustee 

property  which,  prior  to  the  filing  of  the  petition,  the  bankrupt 

could  by  any  means  have  transferred,  or  which  might  have  been 

levied  upon  or  sold  under  judicial  process  against  him.     Then 

^^ follows  the  proviso  with  reference  to  insurance  policies  which 

^    have  a  cash  surrender  value,  permitting  a  bankrupt,  when  the 

1  cash  surrender  value  has  been  ascertained  and  stated,  to  pay  or 

secure  such  sum  to  the  trustee,  and  to  continue  to  hold,  own,  and 

carry  the  policies  free  from  the  claims  of  creditors;  otherwise 

the  policies  to  pass  to  the  trustee  as  assets. 


KINDS  OF  PROPERTY  525 

Twq^constructions^ayeJ)eeii--giv^  this  section,  and  the  ques- 
tion, as  presented  in  this  ease,  has  not  been  the  subject  of  direct  \ 
determination  in  this  court.    The  one  favors  the  view  that  only  i 
policies  having  a  cash  surrender  value  are  intended  to  pass  to  i 
the  trustee  for  the  benefit  of  creditors.  ^^     The  other,  conceding 
that  the  proviso  deals  with  this  class  of  policies,  maintains  that 
policies  of  life  insurance  which  have  no  surrender  value  pass  to 
the  trustee  under  the  language  of  §  70a  immediately  preceding 
the  proviso,  which  reads:    "Property  which,  prior  to  the  filing 
of  the  petition,  he  could  by  any  means  have  transferred,  or  which 
might  have  been  levied  upon  and  sold  under  judicial  process 
against  him. '  *  ^^ 

To  determine  the  congressional  intent  in  this  respect  requires 
a  brief  consideration  of  the  nature  of  the  rights  dealt  with. 
Life  insurance  may  be  given  in  a  contract  providing  simply  for 
payment  of  premiums  on  a  calculated  basis  which  accumulates 
no  surplus  for  the  holder.  Such  insurance  has  no  surrender 
value.  Policies,  whether  payable  at  the  end  of  a  term  of  years 
or  at  death,  may  be  issued  upon  a  basis  of  calculation  which 
accumulates  a  net  reserve  in  favor  of  the  policy  holder,  and 
which  forms  a  consequent  basis  for  the  surrender  of  the  policy 
by  the  insured,  with  advantage  to  the  company  upon  the  pay- 
ment of  a  part  of  this  accumulated  reserve.  This  feature  of 
surrender  value  was  discussed  by  Judge  Brown  of  the  Southern 
District  of  New  York,  In  re  McKinney,  15  Fed.  535,  537 : 

'  *  The  first  of  these  elements,  the  surrender  value  of  the  policy,  i 
arises  from  the  fact  that  the  fixed  annual  premium  is  much  inj 
excess  of  the  annual  risk  during  the  earlier  years  of  the  policy, — 
an  excess  made  necessary  in  order  to  balance  the  deficiency  of 
the  same  premium  to  meet  the  annual  risk  during  the  latter 
years  of  the  policy.  This  excess  in  the  premium  paid  over  the 
annual  cost  of  insurance,  with  accumulations  of  interest,  con- 
stitutes the  surrender  value.  Though  this  excess  of  premiums 
paid  is  legally  the  sole  property  of  the  company,  still  in  practi- 
cal effect,  though  not  in  law,  it  is  moneys  of  the  assured,  de- 
posited with  the  company  in  advance,  to  make  up  the  deficiency 

10— In   re   Buelow,    98    Fed.    86;  In  re  Slingluff,  106  Fed.  154;  In  re 

In    re    Josephson,    121    Fed.    142;  Welling,  51  C.  C.  A.  151,  113  Fed. 

Gould  V,  New  York  L.  Ins.  Co.,  132  189;  In  re  Coleman,  69  C.  C.  A,  496, 

Fed.  927;  Morris  v.  Dodd,  110  Ga.  136  Fed.  818;  In  re  Hettling,  99  C. 

606,  50  L.  K.  A.  33,  78  Am.  St,  Eep.  C.  A.  87,  175  Fed.  65;  In  re  Orear, 

129,  36  S.  E.  83.  30  L.  E.  A.  (N.  S.)  990,  102  C.  C. 

11— In  re  Becker,   106   Fed,   54;  A,  78,  178  Fed,  632. 


526  ADMINISTRATION 

in  later  premiums  to  cover  the  annual  cost  of  insurance,  instead 
of  being  retained  by  the  assured,  and  paid  by  him  to  the  com- 
pany in  the  shape  of  greatly-increased  premiums,  when  the  risk 
is  greatest.  It  is  the  'net  reserve'  required  by  law  to  be  kept 
by  the  company  for  the  benefit  of  the  assured,  and  to  be  main- 
tained to  the  credit  of  the  policy.  So  long  as  the  policy  remains 
in  force,  the  company  has  not  practically  any  beneficial  interest 
in  it,  except  as  its  custodian,  with  the  obligation  to  maintain  it 
unimpaired  and  suitably  invested  for  the  benefit  of  the  insured. 
This  is  the  practical,  though  not  the  legal,  relation  of  the  com- 
pany to  this  fund. 

"Upon  the  surrender  of  the  policy  before  the  death  of  the 
assured,  the  company,  to  be  relieved  from  all  responsibility  for 
the  increased  risk,  which  is  represented  by  this  accumulating 
reserve,  could  well  afford  to  surrender  a  considerable  part  of  it 
to  the  assured,  or  his  representative.  A  return  of  a  part  in 
some  form  or  other  is  now  usually  made.     *     *     *  " 

This  case  has  been  cited  with  approval  in  this  court.  Holden 
V.  Stratton,  198  U.  S.  202,  49  L.  ed.  1018,  25  Sup.  Ct.  Rep.  656; 
Hiscock  V.  Mertens,  205  U.  S.  202,  51  L.  ed.  771,  27  Sup.  Ct. 
Rep.  488. 

Under  the  bankruptcy  act  of  1867  [14  Stat,  at  L.  522,  c.  176, 
§  14]  no  special  provision  was  made  for  insurance  policies.  The 
section  providing  for  the  passing  of  the  assets  of  the  bankrupt 
to  the  trustee  contained  the  broad  language  of  "all  the  estate, 
real  and  personal."  Under  this  statute  it  was  held  In  re 
McKinney,  supra,  that  the  insurance  upon  the  life  of  the  bank- 
rupt vested  in  the  bankrupt  estate  only  to  the  extent  of  its  cash 
surrender  value  at  the  time  of  the  filing  of  the  petition. 

In  Holden  v.  Stratton,  supra,  this  court  held  that  the  law  of 
the  state  of  Washington,  exempting  the  proceeds  of  life  insur- 
ance policies,  was  applicable,  and  under  the  bankruptcy  act  of 
1898,  §  6,  the  bankrupt  might  retain  such  policies.  The  Circuit 
Court  of  Appeals  for  the  Ninth  Circuit,  from  which  Holden  v. 
Stratton  came  by  certiorari  to  this  court,  had  held  that  §  70a 
was  not  controlled  by  the  exemptions  provided  in  §  6  of  the 
bankruptcy  act,  and  had  adhered  to  its  former  decision  In  re 
Scheld,  52  L.  R.  A.  188,  44  C.  C.  A.  233,  104  Fed.  870,  in  which 
§  70a  had  been  construed  to  pass  insurance  policies  having  a 
cash  surrender  value  to  the  trustee,  unless  the  bankrupt  paid 
or  secured  the  surrender  value,  as  pointed  out  in  the  section. 
While  this  court  held  that  the  exemption  under  the  state  law 


KINDS  OF  PROPERTY  527 

applied  under  the  bankruptcy  act  to  the  policy  in  question, 
coming  to  deal  with  the  construction  of  §  70a,  this  court  said 
(198  U.  S.,  p.  213) : 

"As  §  70a  deals  only  with  property  which,  not  being  exempt, 
passes  to  the  trustee,  the  mission  of  the  proviso  was,  in  the  in- 
terest of  the  perpetuation  of  policies  of  life  insurance,  to  pro- 
vide a  rule  by  which,  where  such  policies  passed  to  the  trustee 
because  they  were  not  exempt,  if  they  had  a  surrender  value 
their  future  operation  could  be  preserved  by  vesting  the  bank- 
rupt with  the  privilege  of  paying  such  surrender  value,  whereby 
the  policy  would  be  withdrawn  out  of  the  category  of  an  asset 
of  the  estate.  That  is  to  say,  the  purpose  of  the  proviso  was  to 
confer  a  benefit  upon  the  insured  bankrupt  by  limiting  the  char- 
acter of  the  interest  in  a  nonexempt  life  insurance  policy  which 
should  pass  to  the  trustee,  and  not  to  cause  such  a  policy  when 
exempt  to  become  an  asset  of  the  estate.  "When  the  purpose  of 
the  proviso  is  thus  ascertained  it  becomes  apparent  that  to  main- 
tain the  construction  which  the  argument  seeks  to  affix  to  the 
proviso  would  cause  it  to  produce  a  result  diametrically  opposed 
to  its  spirit  and  to  the  purpose  it  was  intended  to  subserve. ' ' 

The  section  came  again  before  this  court  in  Hisco(?k  v.  Mer- 
tens,  supra,  and  it  was  held  that  the  insured  was  entitled  to 
retain  the  policies  upon  the  payment  to  the  trustee  of  a  sum 
equivalent  to  the  amount  the  company  was  willing  to  pay  accord- 
ing to  its  custom,  although  there  was  no  stipulation  in  the  poli- 
cies as  to  a  cash  surrender  value,  and  upon  this  subject  the  court 
said  (p.  212)  : 

"What  possible  difference  could  it  make  whether  the  surren- 
der value  was  stipulated  in  a  policy  or  universally  recognized 
by  the  companies?  In  either  case  the  purpose  of  the  statute 
would  be  subserved,  which  was  to  secure  to  the  trustee  the  sum 
of  such  value  and  to  enable  the  bankrupt  to  'continue  to  hold, 
own,  and  carry  such  policy  free  from  the  claims  of  the  creditors 
participating  in  the  distribution  of  the  estate  under  the  bank- 
ruptcy proceedings.  *  "  12 

And  in  that  case  it  appeared  that  this  sum  was  less  than 
$6,000,  whereas  in  a  short  time,  some  six  months  later,  the  ma- 
turity of  one  of  the  policies  would  give  it  a  value  of  over  $11,000. 
But  this  court  held  that  this  circumstance  made  no  difference 

12 — See  In  re  Coleman,  136  Fed. 
818,  where  the  policy  had  a  loan 
value  only.  •\ 


528  ADMINISTRATION 

in  the  right  of  the  insured  to  pay  the  surrender  value  and  hold 
the  policy. 

/'"True  it  is  that  life  insurance  policies  are  a  species  of  property 
'  and  might  be  held  to  pass  under  the  general  terms  of  subdiv.  5, 
/  §  70a,  but  a  proviso  dealing  with  a  class  of  this  property  was 
(    inserted  and  must  be  given  its  due  weight  in  construing  the 
\statute.     It  is  also  true  that  a  proviso  may  sometimes  mean 
simply  additional  legislation,  and  not  be  intended  to  have  the 
usual  and  primary  office  of  a  proviso,  which  is  to  limit  general- 
ities and  exclude  from  the  scope  of  the  statute  that  which  would 
otherwise  be  within  its  terms. 

This  proviso  deals  with  explicitness  with  the  subject  of  life 
insurance  held  by  the  bankrupt  which  has  a  surrender  value. 
Originally  life  insurance  policies  were  contracts  in  considera- 
tion of  annual  sums  paid  as  premiums  for  the  payment  of  a  fixed 
sum  on  the  death  of  the  insured.  It  is  true  that  such  contracts 
have  been  much  varied  in  form  since,  and  poUcies  payable  in  a 
period  of  years,  so  as  to  become  investments  and  means  of  money 
saving,  are  in  common  use.  But  most  of  these  policies  will  be 
found  to  have  either  a  stipulated  surrender  value  or  an  estab- 
lished value,  the  amount  of  which  the  companies  are  willing  to 
pay,  and  which  brings  the  policy  within  the  terms  of  the  proviso 
(Hiscock  V.  Martens,  supra),  and  makes  its  present  value  avail- 
^able  to  the  bankrupt  estate.  While  life  insurance  is  property, 
lit  is  peculiar  property.  Legislatures  of  some  of  the  states  have 
/provided  that  policies  of  insurance  shall  be  exempt  from  lia- 
/  bility  for  debt,  and  in  many  states  provision  is  made  for  the 
(  protection  from  such  liability  of  policies  in  favor  of  those  de- 
pendent upon  the  insured.  See  Holden  v.  Stratton,  supra. 
—  Congress  undoubtedly  had  the  nature  of  insurance  contracts 
in  mind  in  passing  §  70a  with  its  proviso.  Ordinarily  the  keep- 
ing up  of  insurance  of  either  class  would  require  the  payment 
of  premiums  perhaps  for  a  number  of  years.  For  this  purpose 
the  estate  might  or  might  not  have  funds,  or  the  payments  might 
be  so  deferred  as  to  unduly  embarrass  the  settlement  of  the 
estate.  Congress  recognized  also  that  many  policies  at  the  time 
of  bankruptcy  might  have  a  very  considerable  present  value 
which  a  bankrupt  could  realize  by  surrendering  his  policy  to 
the  company.  We  think  it  was  this  latter  sum  that  the  act 
intended  to  secure  to  creditors  by  requiring  its  payment  to  the 
trustee  as  a  condition  of  keeping  the  policy  alive.  In  passing 
this  statute  Congress  intended,  while  exacting  this  much,  that 


KINDS  OF  PROPERTY 


529 


when  that  sum  was  realized  to  the  estate,  the  bankrupt  should 
be  permitted  to  retain  the  insurance  which,  because  of  advanc- 
ing years  or  declining  health,  it  might  be  impossible  for  him  to 
replace.  It  is  the  twofold  purpose  of  the  bankruptcy  act  to 
convert  the  estate  of  the  bankrupt  into  cash  and  distribute  it 
among  creditors,  and  then  to  give  the  bankrupt  a  fresh  start 
with  such  exemptions  and  rights  as  the  statute  left  untouched. 
In  the  light  of  this  policy  the  act  must  be  construed.  "We  think 
it  was  the  purpose  of  Congress  to  pass  to  the  trustee  that  sura 
which  was  available  to  the  bankrupt  at  the  time  of  bankruptcy 
as  a  cash  asset;  otherwise  to  leave  to  the  insured  the  benefit  of 
his  life  insurance. 

It  should  be  observed,  in  this  connection,  that  in  the  present 
case  the  company  had  advanced  upon  the  policies  their  full  sur- 
render value,  as  stipulated  in  the  policies,  and  that  the  only 
interest  that  could  have  passed  to  the  trustees  would  have  been 
the  speculative  right  to  the  net  proceeds  of  the  policies,  con- 
tingent upon  the  death  of  the  bankrupt,  and  possibly  dependent 
upon  the  payment  of  large  annual  premiums  for  thirteen  years. 

It  is  urged,  however,  that  under  §  70a,  the  cash  surrender 
value  was  to  be  paid  by  the  bankrupt  when  ascertained,  and  the 
policies  kept  alive  for  his  benefit;  and  as  these  policies  had  been 
assigned  by  the  beneficiary  to  Mclntyre  &  Company,  not  as 
collateral,  but  absolutely,  th^  would  not  come  within  the  terms 
ofjthe_proviso,  and  therefore  the  procee<3s  of  the  policies  vested 
in  the  bankrupt  estate ;  but  we  find  nothing  in  the  act  by  which 
the  right  of  the  assignee  of  a  policy  to  the  benefits  which  would 
have  accrued  to  the  bankrupt  is  limited.  As  we  have  construed 
the  statute,  its  purpose  was  to  vest  the  surrender  value  in  the 
trustee  for  the  benefit  of  the  creditors,  and  not  otherwise  to 
limit  the  bankrupt  in  dealing  with  his  policy. 

•    •    • 

It  results  that  the  judgment  of  the  Circuit  Court  of  Appeals 
must  be  aflfirmed.^^ 


13 — See  Foxhever  v.  Order  of  Eed 

Gross,  2  O.  C.  C.    (N.  S.)   394;   In 

re  PfaflSnger,  161  Fed.  526;   In  re 

Whelpley,    169    Fed.    1019;    In!    re 

H.  &  A.  Bankruptcy — 34 


Hettling,  175  Fed.  65;  In  re  Orear, 
178  Fed.  632.  See  also  Hewlett  v. 
Home  for  Incurables,   74  Md.   350. 


/ 


i"(1<J 


530  ADMINISTRATION 

EVERETT  V.  JUDSON 

■■-.</  '^ 

228  U.  S.  474,  57  L.  ed.  927,  33  Sup.  Ct  568 

(United  States  Supreme  Court.    April  28,  1913) 

Mr.  Justice  DAY  delivered  the  opinion  of  the  court: 

This  case  involves  the  title  to  the  proceeds  of  certain  insurance 
policies  upon  the  life  of  Alfred  M.  Judson,  bankrupt,  deceased, 
collected  by  the  trustee  in  bankruptcy.  The  executor  of  Jud- 
son 's  estate  brought  suit  against  the  trustee  in  the  United  States 
District  Court  for  the  Southern  District  of  New  York,  assert- 
ing title  to  such  funds.  The  District  Court  ordered  that  the 
proceeds  of  the  policies,  less  their  cash  surrender  value,  be  paid 
to  the  executor  (188  Fed.  702) ;  the  Circuit  Court  of  Appeals 
for  the  second  circuit,  upon  petition  to  revise,  affirmed  that 
order  (113  C.  C.  A.  158,  192  Fed.  834),  and  the  case  comes  here 
on  certiorari. 

A  petition  in  involuntary  bankruptcy  was  filed  against  the 
firm  of  Judson  &  Judson  and  its  members,  Alfred  IM.  Judson 
being  one,  on  December  17,  1910,  and  on  December  23,  1910, 
Judson  entered  a  notice  of  his  appearance  in  the  proceedings. 
On  January  9,  1911,  the  firm  and  its  members  were  adjudged 
bankrupts,  and  on  February  9,  1911,  Everett  qualified  as  trus- 
tee, Judson  owned  certain  life  insurance  policies  at  the  time 
of  the  institution  of  the  bankrupt  proceedings,  and  thereafter 
and  until  his  death,  payable  to  his  executors,  administrators,  or 
assigns.  So  far  as  this  case  is  concerned,  at  the  time  of  the  filing 
of  the  petition  in  bankruptcy,  these  policies,  with  cash  surrender 
values  and  subject  to  loans,  were  as  follows:  One  policy  for 
$5,000,  having  a  cash  surrender  value  of  $2,291.49,  and  subject 
to  a  loan  of  $2,238 ;  another  for  $1,000,  having  a  cash  surrender 
value  of  $332.31,  and  subject  to  a  loan  of  $322 ;  and  another  for 
$10,000,  having  a  cash  surrender  value  of  $5,030,  and  subject 
to  a  loan  of  $5,240,  It  therefore  appears  that  the  cash  surrender 
value  of  the  policies  on  December  17,  1910,  was  $63.80. 

On  January  4,  1911,  Judson  committed  suicide.  Notice  was 
served  on  the  trustee  that  the  executor  claimed  the  right,  under 
§  70a  of  the  bankruptcy  act,  to  pay  to  the  trustee  the  cash  sur- 
render value  of  the  policies  when  ascertained,  but  the  trustee 
denied  such  right  and  also  the  right  of  the  executor  to  the  bal- 
ance of  the  proceeds  of  the  policies.  Under  agreement,  the 
insurance  companies  paid  to  the  trustee  $8,675.14  upon  the 


KINDS  OF  PROPERTY  531 

policies.  The  executor  asserted  title  to  the  difference  between 
the  sum  realized  on  the  policies  and  the  cash  surrender  value; 
namely,  $8,611.34.  The  District  Court,  upon  the  authority  of 
Burlingham  v.  Grouse,  104  C.  C.  A.  227,  181  Fed.  479,  held  that 
the  proceeds  of  the  policies,  over  and  above  the  cash  surrender 
value  as  of  the  date  of  the  filing  of  the  petition,  passed  to  the 
executor.  The  Circuit  Court  of  Appeals  affirmed  the  order  of 
the  District  Court,  holding  that  the  time  when  the  interest  of 
the  bankrupt  estate  in  the  policies  passed  to  the  trustee  was  the 
date  of  the  filing  of  the  petition,  and  further,  also  upon  the 
authority  of  Burlingham  v.  Crouse,  supra,  that  the  interest  of 
the  trustee  in  the  policies  extended  only  to  their  cash  surrender 
value. 

The  present  case  was  argued  at  the  same  time  as  the  case  of 
Burlingham  v.  Crouse  [228  U.  S.  459,  57  L.  ed.  — ,  33  Sup.  Ct. 
Rep.  564],  and  in  so  far  as  it  is  like  that  case  the  principles 
therein  laid  down  are  controlling.  The  present  case  has,  how- 
ever, a  feature  not  directly  involved  in  the  case  of  Burlingham 
V.  Crouse,  because  Judson,  the  insured,  committed  suicide  before 
the  adjudication  in  bankruptcy,  although  after  the  filing  of  the 
petition,  and  it  is  the  contention  of  the  petitioner  that  the  bank- 
ruptcy act  vested  the  title  to  the  property  in  the  trustee  as  of 
the  time  of  the  adjudication,  and  that  the  death  of  the  bankrupt 
between  the  filing  of  the  petition  and  the  date  of  the  adjudica- 
tion made  the  proceeds  of  the  policies  assets  in  the  hands  of 
the  trustee. 

While  it  is  true  that  §  70a  provides  that  the  trustee,  upon  his 
appointment  and  qualification,  becomes  vested  by  operation  of 
law  with  the  title  of  the  bankrupt  as  of  the  date  he  was  adjudged 
a  bankrupt,  there  are  other  provisions  of  the  statute  which,  we 
think,  evidence  the  intention  to  vest  in  the  trustee  the  title  to 
such  proi)€rty  as  it  was  at  the  time  of  the  filing  of  the  petition. 
This  subject  was  considered  in  Acme  Harvester  Co.  v.  Beekman 
Lumber  Co.,  222  U.  S.  300,  56  L.  ed.  208,  32  Sup.  Ct.  Rep.  96, 
wherein  it  was  held  that,  pending  the  bankrupt  proceedings,  and 
after  the  filing  of  the  petition,  no  creditor  could  obtain  by  at- 
tachment a  lien  upon  the  property  which  would  defeat  the  gen- 
eral purpose  of  the  law  to  dedicate  the  property  to  all  creditors 
alike.  §  70a  vests  all  the  property  in  the  trustee,  which,  prior  to 
the  filing  of  the  petition,  the  bankrupt  could  by  any  means  have 
transferred,  or  which  might  have  been  levied  upon  and  sold  un- 
der judicial  process  against  him.    The  bankrupt's  discharge  is 


532  ADMINISTRATION 

from  all  provable  debts  and  claims  which  existed  on  the  day  on 
which  the  petition  for  adjudication  was  filed.  Zavelo  v.  Reeves, 
227  U.  S.  625,  630,  631,  57  L.  ed.  676,  33  Sup.  Ct.  Rep.  365.  The 
schedule  that  the  bankrupt  is  required  to  file,  showing  the  loca- 
tion and  value  of  his  property,  must  be  filed  with  his  petition. 

We  think  that  the  purpose  of  the  law  was  to  fix  the  line  of 
cleavage  with  reference  to  the  condition  of  the  bankrupt  estate 
as  of  the  time  at  which  the  petition  was  filed,  and  that  the  prop- 
erty which  vests  in  the  trustee  at  the  time  of  adjudication  is 
that  which  the  bankrupt  owned  at  the  time  of  the  filing  of  the 
petition.  And  it  is  as  of  that  date  that  the  surrender  value  of 
the  insurance  policies  mentioned  in  §  70a  should  be  ascertained. 
The  subsequent  suicide  of  the  bankrupt  before  the  adjudication 
was  an  unlooked-for  circumstance  which  does  not  change  the 
result  in  the  light  of  the  construction  which  we  give  the  statute. 

It  follows  that  the  judgment  should  be  afiirmed. 

GIBSON  et  al.  v.  CARRUTHERS 

8  Meeson  &  Welsby,  321 
(Court  of  Exchequer.    May  3,  1841) 

ROLFE,  B.  The  plaintiffs  in  this  cause  are  the  assignees  of 
Thomas  Harris,  a  bankrupt. 

The  declaration  states,  that  Harris,  before  his  bankruptcy, 
agreed  to  buy  from  the  defendant  about  2,000  quarters  of  lin- 
seed, free  on  board  at  Odessa,  at  30s.  lOd.  per  quarter,  the  ship- 
ment to  be  made  on  board  the  buyer's  vessel  on  arrival  at  Odessa, 
which  vessel  was  to  be  forthwith  chartered  for  thence,  and  the 
amount  of  the  invoice  was  to  be  paid  on  handing  over  the  same 
and  the  bills  of  lading  to  the  buyers  in  London. 

The  declaration  then  states  mutual  promises  by  Harris  and 
the  defendant,  according  to  the  terms  of  that  agreement,  and 
goes  on  to  aver  that  Harris,  in  part  performance,  &c.,  dispatched 
a  vessel  to  Odessa,  which  arrived  there  in  a  reasonable  time,  and 
was  ready  to  receive  the  linseed  on  board ;  that  before  its  arrival 
Harris  had  become  bankrupt;  but  the  master  of  the  ship  was 
ready  and  offered  to  receive  the  linseed  on  board,  and  to  give 
bills  of  lading  pursuant  to  the  agreement;  that  the  defendant 
refused  to  deliver  the  linseed  on  board,  or  any  part  thereof,  by 
reason  whereof  the  plaintiffs,  as  assignees  of  Harris,  have  suf- 
fered damage,  etc.    The  declaration,  then  goes,  on  to  state  that 


KINDS  OF  PROPERTY  533 

the  plaintiffs  afterwards,  within  a  reasonable  time  after  the 
arrival  of  the  vessel  at  Odessa,  gave  notice  to  the  defendant  of 
their  being  ready  and  willing  to  pay  for  the  linseed  on  delivery 
in  London  according  to  the  agreement;  yet  the  defendant  re- 
fused to  deliver,  etc. 

To  this  declaration  the  defendant  has  pleaded,  that  the  plain- 
tiffs did  not,  within  a  reasonable  time  after  the  arrival  of  the 
vessel  at  Odessa,  give  notice  to  the  defendant  of  their  intention 
to  adopt  the  contract. 

The  plaintiffs  have  demurred  to  this  plea,  and  have  assigned 
several  causes  of  demurrer,  all  founded  on  the  principle  that  the 
plea  attempts  to  raise  an  immaterial  issue. 

On  the  argument  of  this  case  in  last  Michaelmas  Term  it  was 
contended  on  the  part  of  the  defendant,  first,  that  the  declara- 
tion does  not  state  a  case  which  gives  a  right  of  action  to  the 
assignees;  and  secondly,  that  if  it  does,  then  the  plea  discloses 
a  good  defense. 

I  am  of  opinion  that  neither  of  these  propositions  can  be 
supported. 

As  to  the  first  point,  the  validity  of  the  declaration:  it  is 
clear  that  assignees  of  a  bankrupt  are  entitled  to  the  benefit  of 
all  contracts  entered  into  by  the  bankrupt,  and  which  are  in 
fieri  at  the  time  of  the  bankruptcy.  They  may  elect  to  adopt  or 
reject  such  contracts,  according  as  they  are  likely  to  be  bene- 
ficial or  onerous  to  the  estate.  In  no  case  can  the  party  who 
contracted  with  the  bankrupt  set  up  the  bankruptcy  against  the 
assignees,  as  a  reason  for  not  doing  what  he  has  agreed  to  do. 
Where,  indeed,  the  payment  of  money  or  performance  of  any 
other  duty  by  the  bankrupt  forms  a  condition  precedent  to  the 
doing  of  the  act  which  the  contracting  party  has  agreed  to  do, 
there,  unless  the  money  is  paid  or  duty  performed,  either  by 
the  bankrupt  or  his  assignees,  it  is  plain,  on  principles  alto- 
gether independent  of  any  questions  arising  from  bankruptcy 
or  insolvency,  that  no  obligation  exists  on  the  other  party  to 
perform  his  part  of  the  engagement.  But  no  objection  of  this 
sort  can  be  set  up,  except  in  the  case  of  a  mere  contract  for  the 
sale  and  delivery  of  goods,  until  the  time  has  arrived  when  the 
party  seeking  the  benefit  of  the  contract  fails  to  do  something 
which  according  to  its  provisions  he  ought  to  do.  Until  default, 
no  such  objection  arises,  even  where  the  whole  matter  rests  iu 
fieri ;  but  much  less  can  such  a  course  be  pursued  where,  as  in 
the  present  case,  the  declaration  shows  that  a  part,  and  probably 


534  ADMINISTRATION 

no  inconsiderable  part,  of  the  contract  has  actually  been  already 
performed  by  the  plaintiffs,  or  rather  by  the  bankrupt  whom 
the  plaintiffs  represent.  For  it  will  be  observed,  that  in  this 
case  the  first  act  to  be  performed  under  the  contract  was  the 
sending  of  a  ship  to  Odessa.  This  was  actually  done  at  the  cost 
and  risk  of  the  bankrupt.  If  the  argument  of  the  defendant  be 
well  founded,  the  bankrupt  or  his  estate  must  sustain  the  loss 
occasioned  by  his  having  thus  far  fulfilled  his  part  of  the  contract. 
It  was  endeavored  to  liken  this  to  a  case  of  stoppage  in 
transitu,  to  which  it  was  supposed  to  bear  a  strong  analogy. 
But  it  does  not  appear  to  me  that  any  such  analogy  exists. 
Where  a  vendor  of  goods  has  put  them  into  the  hands  of  a 
carrier,  in  order  to  their  being  by  him  forwarded  and  delivered 
to  the  vendee,  then,  if  the  vendee  before  actual  delivery  to  him 
becomes  insolvent,  the  vendor  has  a  right  to  resume  the  pos- 
session with  which  he  had  previously  parted.  It  may  be  con- 
ceded, that  the  same  circumstances  which  would  justify  a  seller 
in  stopping  the  goods  in  transitu,  will  also  warrant  his  retaining 
them  before  the  transitus  has  commenced,  where  nothing  remains 
to  be  done  but  to  deliver  the  goods  to  the  purchaser.  But  here 
the  proposed  transit  of  the  linseed  from  Odessa  to  London  was 
not,  as  it  seems  to  me,  a  transitus  within  the  meaning  of  the 
doctrine  relative  to  stoppage  in  transitu.  I  consider  it  to  be 
of  the  very  essence  of  that  doctrine,  that  during  the  transitus 
the  goods  should  be  in  the  custody  of  some  third  person,  inter- 
mediate between  the  seller  who  has  parted  with,  and  the  buyer 
who  has  not  yet  acquired,  actual  possession.  In  this  case  the 
linseed  was  to  be  brought  to  London,  not  in  the  ordinary  course 
of  delivery  by  a  seller  to  a  buyer,  but  under  the  terms  of  a 
special  contract,  which  reserved  to  the  defendant,  the  seller,  the 
exclusive  control  over  it  by  means  of  the  bills  of  lading.  It  was 
one  of  the  terms  of  the  contract,  that  the  defendant  should  in  a 
certain  stipulated  mode  cause  the  linseed  to  be  transported  to 
London,  in  order  that  it  might  there  be  by  him  delivered  at  a 
price  agreed  upon  to  the  bankrupt.  This  the  defendant  was 
bound  to  do,  in  the  same  way  as  if  he  had  agreed  to  do  any  other 
act;  as  for  instance,  to  bull  J  a  ship,  to  manufacture  goods,  or 
the  like;  and  he  had  no  right  to  anticipate  that  when  he  had 
performed  his  part  of  the  contract,  the  bankrupt,  with  whom  he 
had  contracted,  would  not  by  himself  or  his  assignees  perform 
what  he  had  agreed  to  do.  If  the  contract  was  beneficial  to  the 
bankrupt,  the  assignees  would  of  course  adopt  it;  if  it  was 


KINDS  OF  PROPERTY  535 

onerous,  then  the  defendant  would  have  to  look  to  the  bankrupt 
himself,  the  sole  party  with  whom  he  contracted,  and  whose 
liability  would  continue  notwithstanding  the  bankruptcy,  as 
was  established  by  the  case  of  Boorman  v.  Nash,  9  B.  &  C.  145. 
On  these  grounds  I  think  the  declaration  discloses  a  state  of 
facts  which  gives  the  plaintiffs  a  right  of  action. 

Supposing  this  to  be  so,  then  the  only  other  question  is, 
whether  the  plea  states  matter  which  destroys  the  right  of 
action  appearing  on  the  declaration:  I  think  it  does  not.  All 
beneficial  interests  in  the  bankrupt  are  by  operation  of  law 
transferred  to  the  assignees,  including  such  a  right  of  action  as 
exists  in  the  present  case.  The  assignees  have  the  right  of  adopt- 
ing or  repudiating  the  contracts  of  the  bankrupt,  according  as 
they  may  think  them  likely  to  prove  beneficial  or  the  contrary. 
The  proposition  implied  and  asserted  by  this  plea  is,  that  the 
assignees  are  not  entitled  to  the  benefit  of  the  bankrupt's  con- 
tracts, unless,  within  a  reasonable  time,  they  give  notice  of  their 
intention  to  adopt  them.  But  for  this  proposition  I  find  no 
warrant  either  in  the  statutes  or  the  decided  cases.  All  that 
the  assignees  are  bound  to  do,  is,  to  fulfill  the  bankrupt's  part 
of  the  engagement  when  the  proper  time  arrives.  If  they  ex- 
pressly waive  the  contract,  or  without  any  express  waiver,  if 
at  the  proper  time  they  omit  to  do  what,  by  the  terms  of  the 
contract,  they  are  bound  to  do,  in  the  first  case  they  certainly 
will,  and  in  the  second  they  probably  may,  absolve  the  other 
party  from  all  obligation  towards  the  assignees.  But  in  such  a 
case  the  proper  course  for  the  defendants  would  be  to  plead, 
not  that  the  assignees  had  not  given  notice  of  adopting  the  con- 
tract, but  that  they  had  repudiated  it,  of  which  the  express 
waiver  certainly  would,  and  the  implied  waiver,  by  omitting  to 
do  what  they  ought  to  do,  might,  under  the  circumstances,  afford 
sufficient  evidence.  In  this  case  it  is  not  alleged  by  the  plea  that 
there  was  any  express  waiver,  or  any  implied  waiver,  by  omit- 
ting to  perform  any  part  of  the  contract,  which,  as  representing 
the  bankrupt,  they  were  bound  to  perform ;  and  on  the  contrary, 
it  is  clear,  from  the  pleadings,  that  they  were  always  ready  to 
do  all  which  the  bankrupt  would  have  been  bound  to  do ;  and  I 
therefore  think  that  nothing  is  stated  in  the  plea  defeating  the 
plaintiffs'  right  of  action  as  disclosed  in  the  declaration,  and 
consequently  that  judgment  ought  to  be  for  the  plaintiffs.^* 

14 — The  opinions  of  Gubney,  B.,  But  see  In  re  Chalmers,  L.  B.  8 

Parke,  B.,  and  Lord  Abingeb,  C.  B.,  Ch.  App.  289.  See  also  In  re  Glick, 
are  omitted.  104  Fed.  967;  In  re  Stem,  116  Fed. 


/  iJ636  y if^'^'!^    .y' ADMINISTRATION       jT 

/  >^    JVT^    "V  BECKHAM  V.  DRAKE 

y  %/'    ^  V^  r  2  H.  L.  Cas.  579 


""^  ^  ^^  J^"^  (House  of  Lords.     1847,  1849) 

^    |L.r  ^''  This  was  a  writ  of  error  upon  a  judgment  of  the  Court  of 
KiT       ^  X.    Exchequer   Chamber  reversing   a  judgment   of  the   Court   of 
Al^     f/^    Exchequer  of  Pleas,  in  an  action  on  promises.     Beckham  had 
y   Ji^       jfentered  the  employment  of  the  defendants  under  a  contract  for 
nrjr  [seven  years'  service  at  a  stated  compensation.     It  was  agreed 

»  that  in  case  either  of  the  parties  should  not  well  and  truly  ob- 

serve, etc.,  the  covenants,  etc.,  the  party  in  default  should  pay 
(to  the  other  five  hundred  pounds  as  ' '  specific  damages. ' '  After 
being  dismissed  Beckham  was  declared  bankrupt.  Later  he 
brought  this  action.  The  defendants  pleaded,  first,  "non- 
assumpsit  ; ' '  and  secondly,  that  Beckham  became  bankrupt  after 
the  accruing  of  the  cause  of  action  and  before  the  commence- 
ment of  the  suit.  Beckham  joined  issue  upon  the  plea  of  "non- 
assumpsit,"  and  demurred  to  the  plea  of  bankruptcy.  The 
issue  in  fact  was  tried  and  a  verdict  given  for  the  plaintiff, 
damages  £500  (9  M.  &  W.  79). 

The  demurrer  was  argued  before  the  judges  of  the  Court  of 
Exchequer,  who  gave  judgment  for  the  plaintiff  upon  the  de- 
murrer (8  M.  &  "W.  846).  The  defendants  brought  a  writ  of 
error  in  the  Exchequer  Chamber,  and,  after  argument,  the  judg- 
ment of  the  Court  of  Exchequer  was  reversed  (11  M.  &  W. 
315). 15 

BARON  PARKE.  The  question  proposed  by  your  Lordships 
is,  whether  the  plaintiff  or  the  defendant  in  error  is  entitled  to 
judgment. 

It  was  my  duty  to  deliver  the  judgment  of  the  Court  of 
Exchequer,  consisting  of  my  brothers  Alderson,  Rolfe,  my  late 
brother  Gurney,  and  myself,  when  this  case  was  decided  by  that 
court  (8  M.  &  W.  846),  and  to  assign  the  reasons  which  induced 
me  to  form  the  opinion  then  expressed.  The  discussion  of  the 
case  on  the  writ  of  error  at  your  Lordships'  Bar,  and  the  sub- 
sequent consideration  of  it,  and  of  the  judgment  of  the  Ex- 
chequer Chamber,  have  induced  me  to  think  that  the  reasons  so 
assigned  by  me  are  insufficient. 

604;  In  re  Nat.  Wire  Corp.,  166  Fed.  15 — This    statement    of    facts    is 

631.  substituted  for  that  in  the  report. 


KINDS  OF  PROPERTY  537 

One  of  the  causes  that  has  led  me  to  doubt  the  propriety  of 
that  decision  is,  that  a  penalty  is  given  for  the  non-performance 
of  this  agreement :  for  it  is  clear,  that,  according  to  the  cases  of 
Kemble  v.  Farren  (31  R.  R.  366  [6  Bing.  141])  and  others, 
though  the  sum  of  £500  is  said  to  be  for  "specific  damages,"  it 
is  to  be  construed  as  a  penalty ;  and  whether  that  penalty  would 
vest  in  the  assignees  under  the  circumstances  of  this  case,  is  a 
question  which  I  propose  afterwards  to  consider.  But  I  assume 
for  the  present,  that  the  case  is  in  the  same  position  as  if  there 
was  no  penalty;  on  which  footing  it  has  been  argued  at  your 
Lordships'  Bar  and  in  the  court  below.  I  would  premise  that 
it  is  not  necessary  to  say  anything  upon  a  question  discussed  in 
the  court  below,  whether  all  the  defendants  are  liable  upon  a 
contract,  though  in  writing,  made  by  one  in  reality  on  his  own 
behalf,  and  as  agent  for  the  others.  There  is  now  no  doubt  upon 
this  point;  both  the  courts  below  concur  in  this  respect;  nor 
was  it  disputed  in  the  argument  here.  The  principal  question  in" 
the  case  on  the  above  mentioned  assumption  is,  whether  the  right 
of  action  for  a  breach  before  bankruptcy  of  such  a  contract  as 
this,  for  the  personal  services  of  the  bankrupt,  passes  to  the  j 
assignees.  — - 

The  general  question  turns  on  the  6  Geo.  IV,  c.  16,  §  63, 
which  must  be  construed  with  the  aid  of  the  twelfth  section, 
and  with  tfiat  of  former  decisions  upon  the  repealed  statutes 
relative  to  bankrupts.  By  that  section,  "all^the  present  and 
futur£_personal  estate  of  the  bankrupt,  wheresoever  found  or 
known,  and  all  property  which  he  may  purchase,  or  which  may 
revert,  descend,  be  devised  or  bequeathed  to,  or  come  to  him 
before  he  shall  have  obtained  his  certificate,  and  all  debts  due 
or  to  be  due  to  him,  wheresoever  the  same  shall  be  found  or 
known,  are  assigned,  and  such  assignment  is  to  vest  the  property, 
right,  and  interest  in  such  debts,  as  fully  as  if  the  assurance 
whereby  they  are  secured  had  been  made  to  the  assignees,  and 
they  have  the  same  remedy  to  recover  as  the  bankrupt  would 
have  had." 

A  former  section  (12)  enabled  the  Lord  Chancellor  to  ap- 
point commissioners,  with  full  power  and  authority  to  make 
such  order  and  direction  as  to  the  lands,  moneys,  fees,  offices, 
annuities,  goods,  chattels,  wares,  merchandises  and  debts,  where- 
soever they  may  be  found  or  known.  The  two  sections  are  to 
be  read  together.  s^ii 

It  is  not  disputed  that  the  rights  of  the  assignee  under  the 


i.,.*^^^ 


538  ADMINISTRATION 

statute  law  are  not  identical  with,  nor  are  they  so  extensive  as 
those  of  an  executor,  who  stands  in  the  place  of  his  testator, 
and  represents  him  as  to  all  his  personal  contracts,  and  is  by- 
law his  assignee  (Wentw.  Off.  Exor.  100),  and  therefore  may 
maintain  any  action  in  his  right  which  he  himself  might.  (Bac. 
Abr.  Exors.  N.)  That  must  be  understood  to  mean  any  action 
on  a  contract,  for  an  executor  never  could  sue  for  wrongs  to 
his  testator;  ''actio  personalis  moritur  cum  persona."  And 
with  respect  to  contracts,  some  exceptions  have  been  introduced 
by  modern  decisions:  Chamberlain  v.  Williamson  (15  R.  R. 
295  [2  M.  &  S.  408] ),  Kingdon  v.  Nottle  (14  R.  R.  462  [1  M.  & 
S.  355])  and  16  R.  R.  379  [4  M.  &  S.  53]),  as  explained  by 
Lord  Abinger  in  the  case  of  Raymond  v.  Fitch  (41  R.  R.  797 
[2  Cr.  M.  &  R.  588,  599]),  and  the  executor  cannot  sue  upon 
[contracts  the  breach  of  which  is  a  mere  personal  wrong.  The 
execjitpr  takes  all  the  other  personal  rights  of  a  testator,  as  a 
^nsequence  of  his '  representative  character,  whether  they  are 
available  for  the  payment  of  debts  or  not,  for  his  liability  to 
pay  debts  is  the  consequence,  not  the  object,  of  the  appoint- 
ment. The  assignee  is  created  by  statute,  for  the  purpose  of 
recovering  and  receiving  the  estate,  and  paying  the  debts  of  the 
bankrupt,  and  takes  only  what  the  statute  gives  for  that  pur- 
pose. What  then  does  it  give?  It  clearly  gives  in  the  section 
above  mentioned,  not  merely  all  personal  chattels,  securities  for 
money,  and  debts  properly  so  called,  but  all  unexecuted  con- 
tracts which  the  assignee  could  perform,  the  performance  of 
which  would  be  beneficial  to  the  bankrupt's  estate.  These  are 
"personal  estate."  The  assignee  takes,  in  the  language  of  Lord 
Tenterden  in  Wright  v.  Fairfield  (2  B.  &  Ad.  727),  all  "the 
beneficial  matters"  belonging  to  the  bankrupt;  or,  as  Mr.  Jus- 
tice BuUer  said,  "anything  belonging  to  the  bankrupt  that  can 
be  turned  to  profit;"  Smith  v.  Coffin  (3  R.  R.  435  [2  11.  Bl. 
444]). 

/    This  contract,  if  unexecuted,  would  clearly  not  have  passed 
/to  the  assignees.    But  the  question  is,  not  whether  the  contract, 
/  but  whether  the  right  of  action  for  the  breach  of  it  before  the 
I  bankruptcy,  passed.    The  words  "personal  estate"  clearly  com- 
prise all  chattels,  chattel  interests,  and  all  the  subjects  men- 
tioned in  the  twelfth  section ;  and  they  also  comprise  some  rights 
of  action  which  are  not  properly  debts,  and  would  not  pass 
under  the  word  "debts,"  but  do  pass  under  the  description  of 
"personal  estate." 


KINDS  OF  PROPERTY  539 

For  instance,  some  actions  for  torts  do  pass.  Actions  for 
injuries  to  personal  chattels,  whereby  they  are  directly  affected, 
and  are  prevented  from  coming  to  the  hands  of  the  assignee,  or 
come  diminished  in  value,  undoubtedly  pass.  The  action  of 
trover  for  a  conversion  before  the  bankruptcy  is  a  familiar 
instance  of  this. 

On  the  other  hand,  rights  of  action  for  injuries  to  the  person, 
or  reputation,  or  the  possession  of  real  estate,  do  not  pass. 
Actions  of  assault,  for  example,  and  for  defamation,  actions  on 
the  case  for  misfeasance,  doing  damage  to  the  person,  for  tres- 
pass quare  clausum  f regit  (Rogers  v.  Spence,  67  R.  R.  736  [13 
M.  &  W.  571]  ;  affirmed  in  this  house,  69  R.  R.  169  [12  CI.  & 
Fin.  700] ) ,  actions  for  criminal  conversation  with  the  wife,  for 
seduction  of  the  servant  or  daughter  of  the  bankrupt,  are  not 
transferred  to  the  assignee,  even  though  some  of  these  causes 
of  action  may  be  followed  by  a  consequential  diminution  of  the 
personal  estate,  as  where  by  reason  of  a  personal  injury  a  man 
has  been  put  to  expense,  or  has  been  prevented  from  earning 
wages  or  subsistence ;  or  where  by  the  seduction  the  plaintiff  has 
been  put  to  expense:  Howard  v.  Crowther(58  R.  R.  823  [8  M. 
&  W.  601]).  But  with  respect  to  contracts;  rights  of  action 
for  the  breach  of  such  as  directly  affect  the  personal  estate, 
whereby  the  assignee  is  prevented  from  receiving  part  of  it,  or 
its  value  is  diminished,  are  certainly  transferred;  as  for  ex- 
ample, rights  of  action  on  a  beneficial  contract,  whereby  one 
engaged  to  sell  and  deliver  goods  to  the  bankrupt,  and  which,  it 
performed,  would  have  put  him  in  the  possession  of  the  goods, 
or  a  contract  with  another  to  carry  or  take  care  of  the  goods 
of  the  bankrupt  which  are  lost,  or  injured,  and  thereby  dimin- 
ished in  value. 

On  the  other  hand,  actions  for  the  breach  of  contracts  pef^ 
sonal  to  the  bankrupt,  unaccompanied  by  an  injury  to  the  per- 
sonal estate,  as  a  contract  to  carry  him  in  safety,  to  cure  his 
person  of  a  wound  or  disease,  or  a  contract  with  a  person,  who 
subsequently  becomes  bankrupt,  to  marry,  4Te_  certainly  not 
assigned.  This  is  conceded;  but  it  is  questioned  on  the  part  of 
the  defendant  in  error,  I  think  without  sufficient  ground, 
whether  the  assignee  would  not  be  entitled  to  sue  in  any  of 
these  cases,  if  the  personal  estate  was  consequently  damaged, 
as  where  the  bankrupt  was  put  to  expense  by  the  breach  of 
contract,  or  lost  the  power  of  earning  money. 

What  then  is  the  proper  construction  of  this  section  of  the 


540  ADMINISTRATION 

act,  according  to  its  words  and  the  several  cases  decided  upon 
it  V  The  proper  and  reasonable  construction  appears  to  me  to 
be,  that  the  statute  transfers  not  all  rights  of  action  which  would 
pass  to  executors  (for  rights  incapable  of  being  converted  into 
money,  such  as  the  next  presentation  to  a  void  benefice,  pass  to 
them),  but  all  such  as  would  be  assets  in  their  hands  for  the 
payment  of  debts,  and  no  others — all  which  could  be  turned  to 
profit,  for  such  rights  of  action  are  personal  estate.  Of  such  the 
executor  is  assignee  in  law ;  and  the  nature  of  the  office  and  duty 
of  a  bankrupt's  assignee  requires  that  he  should  have  them 
also.  But  rights  of  action  for  torts  which  would  die  with  the 
testator,  according  to  the  rule,  ''actio  persoTUilis  moritur  cum 
persona,"  and  all  actions  of  contract  affecting  the  person  only, 
would  not  pass.  Of  such  the  executor  is  not  assignee  in  law; 
and  whatever  may  be  the  reason  of  the  law  which  prohibits  him 
from  being  so,  seems  equally  to  apply  to  a  bankrupt's  assignee. 
According  to  this  rule,  the  description  of  contracts  upon  which 
the  right  of  action  is  transferred,  would  include,  but  would  not 
be  restricted  to,  such  as  directly  affect  some  chattel  or  subject 
of  property  which  would  pass  to  the  assignees,  or  to  such  as 
would,  if  they  had  been  performed,  have  produced  such  prop- 
erty, which  alone,  it  was  argued  at  your  Lordships'  Bar,  would 
be  transferred  by  the  statute;  and  this  was  in  accordance  with 
r^e  view  I  took  in  the  court  below.  J  think^  upon  subsequent 
\  reflection,  that  this  is  too  narrow  a  construction  of  the  statute, 
and  that  it  applies  to  all  contracts  for  the  breach  of  which  an 
executor  could  sue,  which  could  be  turned  to  profit  for  the 
payment  of  creditors.  And  if  this  be  the  true  construction  of 
the  statute,  if  all  the  damages  for  this  breach  of  contract  could 
.have  been  recovered  by  an  executor,  the  assignee  could  recover 
(them,  and  the  plea  would  be  a  good  plea  in  bar. 

But  if  part  was  recoverable  for  the  personal  inconvenience 
of  the  bankrupt,  a  different  question  presents  itself.  I  think 
this  contract  cannot  be  said  not  to  relate  in  any  part  to  the 
person  of  the  bankrupt,  but  that  his  personal  inconvenience  and 
trouble  in  looking  out  for  a  new  employment  would  be  part  of 
the  damages  recovered.  If  so,  that  part  could  not  be  transferred 
to  the  assignees,  and  ought  not  to  be  lost;  the  right  to  those 
damages,  which  would  be  lost  in  the  case  of  a  testator's  death 
altogether,  continues  in  the  bankrupt.  It  is  upon  this  point  that 
the  case  appears  to  me  to  turn.  Who  then  are  to  sue  for  the 
^breach  of  contract  where  part  belongs  to  the  assignee,  part  to 


KINDS  OF  PROPERTY  541 

the  bankrupt?  Who  would  have  to  sue  if  the  contract  was  to 
cure  the  bankrupt  of  a  disease,  and  give  him  a  sum  of  money, 
and  there  had  been  a  breach  of  both  parts,  which  appears  to  me 
to  be  a  similar  question  ?  It  is  extremely  difficult  to  say  in  whom 
the  right  of  action  would  be. 

Either  the  right  of  action  on  the  contract  must  be  divided, 
and  each  sue,  or  the  right  of  action  altogether  must  remain  in 
the  bankrupt,  or  altogether  be  transferred  to  the  assignees,  or 
both  must  join,  the  contract  being  entire,  to  sue  for  the  damages. 
In  the  first  two  cases  the  plea  would  be  good,  in  the  last  two 
bad ;  for  in  the  first  it  would  be  no  answer  to  the  entire  cause  of 
action;  in  the  second,  it  would  be  no  answer  to  any  part.  I 
should  feel  considerable  difficulty  in  deciding  the  question,  but 
this  case  does  not  depend  upon  it,  for  I  have  now  to  consider 
what  the  effect  of  the  penalty  is.  ,,,)""|'''.-|JT~T"~"-r ,  ,  ,.  ^^^■"^^^■■ 
"  Thfs  subject  was  not  discussed  at  your  Lordships'  Bar,  and 
was  little  adverted  to  in  the  court  below. 

At  common  Jaw.  the  penalty  would  have  been  forfeited,  and,/ 
being  a  sum  certain,  would  have  passed  to  the  assignees ;  for,  at  i 
the    time    of  the    bankruptcy   it   would   have   been  uncertain  j 
whether  the  defendant  would  ever  have  filed  a  bill  for  relief,'' 
supposing  he  could  have  done  so;  and  a  sum  certain,  defeasible i 
on  an  uncertain  event,  would  have  been,  until  defeated,  personal 
estate,  and  would  certainly  vest  in  the  assignees.    But  the  ques- 
tion is,  whether  the  statute  8  &  9  Will.  Ill,  c.  11,  has  not  made 
an  alteration.    That  statute  in  effect  makes  the  bond  a  security 
only  for  the   damages  really  sustained.     If  all  the  damages 
would  be  recoverable  by  the  assignees,  the  penalty  would  pass; 
if  none,  the  penalty  could  not  be  levied,  and  therefore  could  not 
be  available  for  the  payment  of  creditors,  and  probably  would 
not  pass  to  the  assignees.    If  part  of  the  damages  could  be  re-/ 
^covered  by  the  assignees,  and  part  not,  the  question  is  different. 
The  penalty  would  then  be  a  security  for  damages  partly  be- 
longing to  the  assignees,  partly  to  the  bankrupt.     It  would  be 
like  the  case  of  a  bond  to  the  bankrupt  conditioned  not  to  assault 
him,  and  to  pay  him  a  sum  of  money,  forfeited  in  both  respects 
before  the  bankruptcy ;  and  I  have  had  some  difficulty  in  saying 
whether  the  right  of  action  on  such  a  bond  would  or  would  not 
pass  to  the  assignees. 

But  it  seems  to  me  to  be  clear  that  the  penalty,  which  is  an-^ 
entire  thing,  could  not  be  divided,  so  that  each  could  sue  for  a  I 
pa.rt;  and  it  could  not  be  predicated  what  part  would  pass  to/ 


542  KINDS  OF  PROPERTY 

each.  It  follows,  therefore,  that  either  the  right  to  the  entire 
penalty  must  remain  in  the  bankrupt,  or  that  either  both  the 
bankrupt  and  the  assignee  must  join,  as  being  both  interested, 
or  that  the  right  to  sue  goes  to  the  assignees,  in  order  to  secure 
such  part  of  the  damages  as  is  the  personal  estate  of  the  bank- 
rupt vested  in  them.  I  cannot  help  thinking  that  both  ought  to 
sue,  as  they  would  do  if  the  bankrupt  before  his  bankruptcy  had 
assigned  a  part  of  an  entire  debt  as  a  security  to  a  creditor,  and 
consequently  was  a  trustee  for  him  for  that  part.  But,  at  all 
events,  I  do  not  think  the  right  to  the  penalty  would  remain  in 
the  bankrupt;  and  therefore  the  plea  is  a  good  plea,  as  it 
shows  that  the  bankrupt  could  not  sue  alone. 

Therefore,  in  either  view  of  the  case,  I  now  think  the  judg- 
ment of  the  Court  of  Exchequer  should  be  reversed,  and  the 
judgment  of  the  Exchequer  Chamber  affirmed.  If  the  whole  of 
the  damages  are  part  of  the  personal  estate  which  passed  to  the 
assignees,  the  plaintiff  was  barred ;  if  some  were,  and  some  were 
not,  still  for  the  reasons  before-mentioned  the  plea  appears  to 
me  to  be  good,  and  my  opinion  which  I  expressed  in  the  court 
below  was  wrong. 

My  opinion  now,  therefore,  is,  that  the  plea  of  the  plaintiff's 
bankruptcy  is  a  good  bar,  and  that  the  judgment  of  the  Ex- 
chequer Chamber  ought  to  be  affirmed.  ^^ 


a'^^^^ 


^^iA  SIBLEY  V.  NASON  et  al. 


^^^   jJ^  196  Mass.  125,  81  N.  E.  887 

.     -v^  (Supreme  Judicial  Court  of  Massachusetts.    June  20,  1907) 

On  July  12,  1902,  plaintiff  was  [injured  through  the  alleged 
negligence  of  defendant.  It]  appeared  that  plaintiff  was  ad- 
judged a  bankrupt  in  March,  1904,  after  having  brought  suit  for 
his  injuries  on  August  9>  1902,  whereupon  defendant  requested 
the  court  to  rule,  i7iter  alia,  (4)  that  plaintiff,  having  been  ad- 
judged a  bankrupt  subsequent  to  the  commencement  of  the  ac- 
tion, could  not  prosecute  the  same,  and  was  therefore  not  entitled 
to  recover;  (7)  that,  if  plaintiff  was  entitled  to  recover,  he  could 
not  recover  for  debts  incurred  for  physicians'  services,  which  had 
never  been  paid,  but  had  been  proved  against  his  estate  in  bank- 
ruptcy or  included  in  his  bankruptcy  schedules;   (8)   that,  if 

16 — See  Streeter  v.  Sumner,  31  N. 
H.  542. 


KINDS  OF  PROPERTY  543 

plaintiff  was  entitled  to  recover,  the  market  value  in  the  kind  of 
business  in  which  he  was  engaged,  if  any,  of  his  services  from  the  /! 

time  of  the  accident  to  the  time  of  his  adjudication  in  bankruptcy,  "     ^^ 

could  not  be  taken  into  consideration  in  determining  the  amount 
of  damages,  if  any;  and  (9)  that,  if  plaintiff  was  entitled  to  re-  <  / 

cover,  the  fair  value  of  the  time  lost  as  a  result  of  the  in  jury '^^^f****^^ 
from  the  date  thereof  to  the  day  of  the  adjudication  of  bank- 
ruptcy could  not  be  considered  as  an  element  of  damage — ^which 
requests  the  court  refused  to  charge. 

RUGG,  J.    Four  contentions  have  been  argued  in  behalf  of  the 

defendant.    His  other  exceptions  are  treated  as  waived. 
•     •     • 

4.  Several  questions  are  raised  respecting  the  effect  upon  the 
plaintiff's  right  to  maintain  his  action  and  the  damages  he  may 
recover,  growing  out  of  the  fact  that  in  March,  1904,  he  was  duly 
adjudged  a  bankrupt  and  the  ordinary  proceedings  were  had; 
the  accident  having  occurred  on  the  11th  day  of  July,  1902,  and 
this  action  having  been  begun  on  the  9th  of  August,  1902.  It  is 
first  urged  that  the  plaintiff  is  debarred  from  the  right  to  main- 
tain his  action  by  reason  of  the  bankruptcy.  The  bankruptcy 
act  (Act  July  1,  1898,  c.  541,  30  Stat.  565,  566  [U.  S.  Comp. 
St.  1901,  p.  3451] )  provides  in  §  70a  that  "the  trustee  *  »  * 
shall  *  *  *  be  vested  by  operation  of  law  with  the  title  of 
the  bankrupt  as  of  the  date  he  was  adjudged  bankrupt,  *  *  • 
to  all  (5)  property  which  prior  to  the  filing  of  the  petition  he 
could  by  any  means  have  transferred,  or  which  might  have  been 
levied  upon  and  sold  under  judicial  process  against  him ;  *  *  • 
(6)  rights  of  action  arising  upon  contracts  or  from  the  unlawful 
taking  or  detention  of,  or  injury  to  his  property. ' '  This  action, 
having  been  brought  for  damages  to  the  person  of  the  plaintiff, 
could  not  by  any  means  have  been  transferred  by  him.  Rice  v. 
Stone,  1  Allen,  566 ;  Robinson  v.  Wiley,  188  Mass.  533,  74  N.  E. 
923 ;  Flynn  v.  Butler,  189  Mass.  377-389,  75  N.  E.  730.  It  was 
not  property  nor  a  right  of  property  until  it  was  reduced  to  a 
judgment.  Stone  v.  Boston  &  Maine  Railroad,  7  Gray,  539.  It 
could  not  be  reached  by  trustee  process.  Thayer  v.  Southwick, 
8  Gray,  229;  Wilde  v.  Mahaney,  183  Mass.  455,  67  N.  E.  337, 
62  L.  R.  A.  813.  Nor  could  it  be  reached  in  equity  by  a  cred- 
itors' bill.  Bennett  v.  Sweet,  171  Mass.  600,  51  N.  E.  183 ;  BiU- 
ings  V.  Marsh,  153  Mass.  311,  26  N.  E.  1000,  10  L.  R.  A.  764,  25 
Am.  St.  Rep.  635.    The  liability  being  disputed,  the  claim  was  not 


544  ADMINISTRATION 

subject  to  taxation  and  therefore  could  not  be  levied  upon  or 
reached  by  the  assessor  or  tax  collector,  Deane  v.  Hathaway,  136 
Mass.  129,  Thus  it  appears  that  the  claim  which  the  plaintiff  was 
i  prosecuting  against  the  defendant  is  not  properly  described  by 
\any  of  the  phraseology  in  subsection  5,  Subsection  6  is  limited' 
to  rights  of  action  arising  upon  contract  or  respecting  property 
and  does  not  include  an  action  of  tort  for  personal  injuries.  It 
is  not,  and  never  has  been,  the  policy  of  the  law  to  coin  into 
money  for  the  profit  of  his  creditors  the  bodily  pain,  mental 
anguish  or  outraged  feelings  of  a  bankrupt.  None  of  the  federal 
or  English  bankruptcy  acts,  nor  our  own  insolvency  statutes,  have 
gone  to  that  length.  It  has  been  held  that  the  following  actions 
do  not  pass  to  the  trustee  or  assignee :  Malicious  prosecution  (In 
re  Haensell  [D.  C]  91  Fed,  357;  Noonan  v.  Orton,  34  Wis.  259, 
17  Am.  Rep.  441 ;  Francis  v,  Burnett,  84  Ky,  223)  ;  slander  (Dil- 
lard  V.  Collins,  25  Grat.  [Va.]  343) ;  seduction  of  servant  (How- 
ard V.  Crowther,  8  M,  &  W,  601)  ;  malicious  attachment  (Brewer 
V,  Dew,  11  M.  &  W,  625) ;  deceit  (In  re  Crocket,  Fed.  Cas.  No. 
3^402) ;  malicious  trespass  (Rogers  v.  Spence,  12  CI.  &  Fin.  700) ; 
trespass  to  ship  (Bird  v.  Hempsted,  3  Day  [Conn.]  272,  3  Am. 
Dec.  269)  ;  trespass  accompanied  by  personal  annoyance  (Rose 
V.  Buckett  [1901]  2  K.  B.  449 ;  negligence  of  an  attorney  (Weth- 
ereU  v.  Julius,  10  C.  B.  267).  See  Tinker  v.  Colwell,  193  U.  S. 
473. 

It  is  also  urged  that  the  plaintiff  is  not  entitled  to  recover,  as 
an  element  of  damage,  for  the  wages  which  he  would  have  earned 
between  the  date  of  his  accident  and  his  aldjudication  in  bank- 
ruptcy. If  the  defendant's  requests  for  instructions  be  construed 
narrowly,  they  were  properly  refused,  for  the  reason  that  under 
the  bankruptcy  act  property  acquired  between  the  date  of  the 
filing  of  the  petition  and  the  date  of  the  adjudication  in  bank- 
ruptcy does  not  pass.  But,  looking  at  the  question  broadly,  the 
contention  cannot  be  sustained.  The  cause  of  action  for  which 
.  the  plaintiff  was  entitled  to  recover  damages  on  account  of  the 
cpain  and  suffering  which  he  had  endured  and  was  likely  to 
\endure,  as  well  as  his  loss  of  time,  was  indivisible.  Doran  v. 
"Cohen,  147  Mass.  342,  17  N.  E.  647.  Moreover,  the  wages  which 
the  plaintiff  might  have  earned,  if  not  injured,  are  not  strictly 
recoverable.  The  value  of  his  time,  while  prevented  from  work- 
ing by  reason  of  the  negligence  of  the  defendant,  is  a  proper 
element  to  be  considered  in  fixing  the  damages.  Braithwaite  v. 
Hall,  168  Mass,  38,  46  N.  B.  398 ;  Whipple  v.  Rich,  180  Mass. 


KINDS  OF  PROPERTY  545 

477,  63  N.  E.  5.  The  personal  injury  is  the  gist  of  the  action. 
The  other  elements  of  damage  are  incidents  only  of  this  main 
cause  of  action.    Prayers  8  and  9  were  therefore  properly  refused. 

The  final  question  argued  was  that  the  plaintiff  was  not  entitled 
to  recover  for  debts  incurred  for  physicians '  services,  never  paid 
by  the  plaintiff,  but  proved  against  his  estate  in  bankruptcy  or 
included  in  his  schedules.  A  plaintiff  in  an  action  for  personal/ 
injury  is  entitled  to  recover  for  reasonable  expenditures  fori 
nursing  and  physicians'  care  rendered  necessary  by  the  wrong-' 
ful  act  of  the  defendant.  Turner  v.  B.  &  M.  R.  R.,  158  Mass. 
261,  33  N.  E.  520 ;  McGarrahan  v.  N.  Y.,  N.  H.  &  H.  R.  R.,  171 
Mass.  211,  50  N.  E.  610 ;  Atwood  v,  Boston  Forwarding  &  Trans- 
fer Co.,  185  Mass.  557,  71  N.  E.  72 ;  ScuUane  v.  Kellogg,  169 
Mass.  544,  48  N.  E.  622.  It  may  be  assumed  that  the  bills  in- 
curred by  the  present  plaintiff  for  physicians'  services  would 
be  barred  by  his  discharge  in  bankruptcy.  This  fact,  however, 
does  not  prevent  the  plaintiff  from  treating  such  obligations  as 
debts  of  honor.  It  is  through  no  virtue  of  the  defendant  that 
the  plaintiff  will  be  enabled  to  interpose  any  defense  to  the  pay- 
ment of  a  reasonable  charge  for  these  services  for  the  ameliora- 
tion of  his  suffering,  but  rather  the  clemency  of  the  law  to  his 
financial  distress.  Under  these  circumstances,  the  law  ought  not 
to  prevent  or  discourage  the  exercise  of  a  debtor's  conscience 
respecting  his  past  indebtedness.  See  Klein  v.  Thompson,  19 
Ohio  St.  569 ;  Denver,  etc.,  Co.  v.  Lorentzen,  79  Fed.  291,  24  C. 
C.  A.  592. 

Exceptions  overruled. 

In  re  GAY  et  al.      ^-^^^^^ 

182  Fed.  260 

(District  Court,  D.  Massachusetts.    July  16,  1910) 

DODGE,  District  Judge.  At  the  time  of  the  bankruptcy  an 
action  of  tort  was  pending  in  the  Massachusetts  Superior  Court, 
which  the  bankrupts  had  brought  against  the  firm  of  Tucker, 
Anthony  &  Co.  The  declaration  alleged  that  the  bankrupts,  who 
were  dealers  in  stocks  and  bonds,  had  been  induced  to  buy  cer- 
tain bonds  from  the  defendants,  who  were  in  the  same  business, 
at  prices  greater  than  their  value,  by  false  and  fraudulent  rep- 
resentations made  by  the  defendants  regarding  facts  materially 

affecting  the  value  of  the  bonds.    Damages  were  claimed  for  al- 
ii. &  A.  Bankruptcy — 35 


546  ADMINISTRATION 

leged  losses  to  the  plaintiff  resulting  from  the  purchase.  The 
question,  to  be  decided  is:  Were  the  bankrupts'  rights  of  action 
asserted  in  this  suit  ''rights  of  action  arising  *  *  *  from 
*  *  *  injury  to  [the  bankrupts']  property,"  so  as  to  pass  to 
the  trustee  under  §  70a  (6)  of  the  bankruptcy  act  (Act  July  1, 
1898,  c.  541,  30  Stat.  565  [U.  S.  Comp.  St.  1901,  p.  3451]). 

Assuming  that  the  bankrupts  were  in  fact  induced,  as  their 
declaration  alleged,  to  pay  $239,594.44  for  bonds  having  no  such 
real  value,  by  means  of  false  and  fraudulent  representations  such 
as  the  declaration  set  forth,  I  think  it  may  be  said,  as  a  matter 
of  fair  and  reasonable  construction,  that  their  right  of  action 
arose  from  injury  to  their  property.  If  those  were  the  facts, 
they  lost  by  the  deceit  practiced  upon  them  money  then  belong- 
ing to  them  which  might  otherwise  have  been  available  to  meet 
their  obligations.  This  construction  of  clause  6  has  the  support 
of  a  recent  decision  by  the  District  Court  for  the  Northern  Dis- 
trict of  New  York.  In  re  Harper,  175  Fed,  412.  A  trustee  in 
bankruptcy  was  there  allowed  to  set  off  against  a  claim  for 
goods  sold  and  delivered  a  counterclaim  for  damages  to  the 
bankrupt,  caused  by  the  creditor's  deceit  in  connection  with  the 
sale.  The  bankrupt's  claim  for  damages  by  the  deceit  was  held 
to  have  passed  to  the  trustee,  because,  if  deceived  as  the  bank- 
rupt alleged,  his  money  had  thereby  been  lost  and  his  estate 
diminished.  It. was  held  (p.  421)  that  the  trustee  might  there- 
fore establish  the  claim  for  damages  as  a  counterclaim  before 
the  referee,  unless  some  other  mode  of  establishing  and  liquidat- 
ing it  should  be  directed. 

It  is  urged  on  the  bankrupt's  behalf  that  the  court  does  not  ap- 
pear in  Re  Harper  to  have  held  the  right  of  action  for  the  deceit 
a  right  which  may  be  properly  described  as  a  right  arising  from 
injury  to  the  bankrupt's  property,  but  to  have  held  only  that  it 
passed  to  the  trustee  because  made  assignable  by  the  New  York 
Code.  Such  a  right  of  action,  it  is  said,  is  not  assignable  under 
the  law  of  Massachusetts,  and  the  decision  is,  therefore,  of  no 
authority  here.  But  if  the  right  of  action  dealt  with  in  Re 
Harper  belonged  to  the  trustee  only  because  assignable  in  New 
York,  and  not  because  a  right  arising  from  injury  to  the  bank- 
rupt 's  property,  it  belonged  to  him,  not  by  virtue  of  subdivision 
6  of  §  70a  but  by  virtue  of  subdivision  5,  or,  in  other  words,  be- 
cause it  was  property  transferable  by  the  bankrupt,  or  which 
might  have  been  sold  under  judicial  process  against  him.     See 


KINDS  OF  PROPERTY  547 

Remington,  Bankruptcy,  §  1019,  p.  569.  And  the  court  expressly 
says  in  Re  Harper,  at  p.  418  of  175  Fed. : 

"It  is  self-evident,  I  think,  that  rights  of  action  for  unliqui- 
dated  damages  for  false  and  fraudulent  representations,  *  *  * 
whether  assignable  or  not,  are  not  regarded  as  property  under 
subdivision  5." 

The  decision,  as  I  understand  it,  holds  the  trustee  entitled  to 
the  right  of  action  only  because  subdivision  6  gives  it  to  him. 
The  definition  of  "injury  to  property"  in  the  New  York  Code  is 
discussed,  because  a  definition  of  words  used  in  subdivision  6, 
and  the  New  York  decisions  bearing  upon  the  Code  definition 
are  quoted  only  as  interpreting  and  illustrating  that  definition. 
The  Code  can  hardly  have  been  supposed  capable  of  making  ' '  in- 
jury to  property ' '  in  subdivision  6  mean  something  in  New  York 
which  it  does  not  mean  elsewhere.  I  am  unable  to  see  in  this 
contention  any  reason  for  declining  to  follow  In  re  Harper. 

No  other  decision  has  been  found  which  deals  with  this  que^ 
tion  as  presented  under  the  present  bankruptcy  act.  Under  the 
bankruptcy  act  of  1867  the  rights  of  action  belonging  to  a  bank- 
rupt which  were  to  pass  to  his  assignee  were  those  ' '  arising  from 
an  unlawful  taking  or  detention  or  injury  to  his  property." 
Rev.  St.  §  5046.  The  language  used  may  be  regarded  as  substan- 
tially identical,  for  the  purposes  of  the  question  under  consid- 
eration, with  that  of  clause  6.  Two  decisions  under  that  act  are 
relied  on  by  the  bankrupts.  They  are  In  re  Crockett,  2  Ben. 
514,  Fed.  Cas.  No.  3,402,  and  In  re  Brick,  4  Fed.  804.  In  the 
first  of  these  cases  the  question  was  whether  there  w^ere  any 
assets  in  existence  belonging  to  a  partnership  which  had  been 
dissolved.  A  suit  which  the  partnership  had  brought  to  recover 
damages  for  fraudulently  and  deceitfully  recommending  a  per- 
son, to  whom  it  had  sold  goods,  as  worthy  of  trust  and  confidence, 
was  held  to  be  not  within  the  description  of  the  assets  which 
pass  to  the  assignee  in  bankruptcy.     The  court  said : 

"It  is  not  a  debt,  or  a  security  for  a  debt,  or  a  right  in  equity, 
or  a  chose  in  action,  or  a  right  of  action  for  property.  Nor  is 
it  a  right  of  action  or  a  cause  of  action  arising  from  contract.  It 
is  an  action  of  tort  for  the  fraud  and  deceit,  and  not  an  action 
on  a  contract." 

The  question  was  not  further  discussed.  In  the  second  case 
it  was  held,  largely  on  the  authority  of  the  first,  that  a  pending 
suit  by  the  bankrupt  for  false  and  fraudulent  representations 
as  to  its  solvency,  made  by  an  officer  of  a  company  to  which  a 


548  ADMINISTRATION 

firm,  whereof  the  bankrupt  was  a  member,  had  sold  iron,  taking  a 
promissory  note  of  the  company  in  payment,  was  not  a  partner- 
ship asset,  so  that  failure  to  include  it  in  his  schedules  would  va- 
cate his  discharge.  The  court  said  that  the  language  of  §  5046 
did  not  include  causes  of  action  arising  ex  delicto,  a  statement 
which,  as  will  appear,  I  must  regard  as  too  broad. 

Another  decision  under  the  act  of  1867  (Act  March  2,  1867, 
c.  176,  14  Stat.  517),  also  relied  on  by  the  bankrupts,  is  Tufts  v. 
Matthews,  10  Fed.  609,  decided  by  the  Circuit  Court  in  this  dis- 
trict. In  that  case  the  purchaser  of  a  right  of  action  originally 
belonging  to  a  bankrupt,  from  his  assignee,  sold  it  to  another  who 
brought  suit  in  his  own  name.  The  right  of  action  was  for  de- 
ceit, and  the  deceit  consisted  in  false  representations  inducing 
the  surrender  of  certain  bonds,  deposited  as  security  for  the 
defendant's  notes.  The  defendant's  demurrer  was  sustained, 
partly  on  the  ground  that  the  plaintiff  could  not  sue  in  his  own 
name,  and  partly  because  of  the  doubt  whether  the  claim  was 
transferable  by  the  assignee  in  bankruptcy,  or  by  the  purchaser 
from  him,  even  if  it  ever  passed  to  the  assignee  under  the  stat- 
ute. But  the  court  also  undoubtedly  held  that  an  action  for  per- 
sonal tort,  "such  as  a  fraudulent  and  deceitful  recommendation 
of  a  person  as  worthy  of  credit  whereby  goods  were  obtained," 
was  not  a  right  of  action  which  passed  to  the  assignee  under  the 
statute.    10  Fed.  611. 

The  case  last  referred  to  did  not,  as  has  been  stated,  turn 
wholly  upon  the  question  whether  or  not  the  bankrupt 's  right  of 
action  passed  to  his  assignee,  nor  do  I  think  that  I  am  required 
by  what  was  said  or  decided  in  either  case  to  hold  that  this  right 
of  action  did  not  pass.  That  such  a  right  was  not  assignable  at 
common  law  does  not  seem  to  me  to  settle  the  question.  In  some 
states  such  rights  of  action  have  been  made  assignable  by  statute 
(as  in  the  case  of  New  York,  above  referred  to) ;  in  other  states, 
not.  But  the  bankruptcy  act,  in  providing  among  the  rights  of 
action  for  torts  which  shall  and  which  shall  not  pass  to  the 
trustee,  has  adopted  its  own  line  of  division,  and  this  does  not 
necessarily  follow  any  of  the  distinctions  observed  elsewhere  or 
for  other  purposes.  It  is  recognized  as  a  general  principle  in 
bankruptcy  that  the  right  of  redress  for  wrongs  to  the  bank- 
rupt's person,  feelings,  or  reputation  does  not  belong  to  his  cred- 
itors. A"  reason  given  is  that  the  discretion  as  to  whether  such 
redress  should  be  sought  ought  not  to  be  intrusted  to  any  one  but 
the  very  person  who  has  received  the  injury   (Lowell,  Bank- 


KINDS  OF  PROPERTY  549 

ruptcy,  §  325)  ;  a  reason  which  has  no  application  where  the  re- 
dress sought  is  the  recovery  of  money  out  of  which  the  bankrupt 
has  been  cheated  in  a  transaction  entered  into  in  the  ordinary 
course  of  his  business.  In  such  a  case  his  money  loss  is  properly 
described  as  resulting  directly  from  the  deceit,  instead  of  being 
a  result  merely  incidental,  remote,  or  indirect.  The  damage  is  to 
be  classed  with  damage  to  property,  rather  than  with  damage  to 
the  feelings  or  person,  and  the  right  to  recover  it,  therefore,  on 
broad  grounds,  with  actions  which  pass  to  the  assignee,  rather 
than  with  those  which  do  not  pass.  Lowell,  Bankruptcy,  §  305. 
In  England  an  action  for  false  representations  ''or  other  deceit 
sounding  in  damages"  passes  to  the  assignee,  like  actions  for 
damage  to  property,  real  or  personal.  Lowell,  Bankruptcy,  §  307. 
And  see,  also,  more  recent  statements  of  the  English  law  in 
Robson,  Bankruptcy  (7th  ed.)  423,  and  Williams,  Bankruptcy 
(8th  ed.)  211,  212. 

As  among  actions  of  tort  there  are  some  which  pass  to  the  as- 
signee in  bankruptcy  and  some  which  do  not,  it  would  seem  to 
be  entirely  possible  that  among  actions  for  deceit  there  may  be 
some  which  will  pass  and  others  which  will  not.  As  in  Cutter 
V.  Hamlen,  147  Mass.  471, 18  N.  E.  397,  1  L.  R.  A.  429,  an  action 
for  deceit  against  a  lessor  for  false  representations,  inducing  the 
plaintiff  to  hire  from  him  an  infected  house  whereby  the  plaintiff 
was  made  sick,  the  action  was  said  to  be  "  not  for  the  deceit  alone, 
the  naked  injuria,  but  for  the  damage  caused  by  the  deceit, ' '  and 
to  be  properly  classed  as  an  action  for  "damage  to  the  person" 
within  the  meaning  of  Pub.  St.  Mass.  1882,  c.  165,  §  1,  because 
* '  the  nature  of  the  damage  sued  for,  not  the  nature  of  its  cause, 
determines  whether  an  action  survives,"  so  in  this  case,  if  the 
nature  of  the  damage  sued  for  be  considered,  rather  than  the 
mere  deceit  which  was  its  cause,  it  may  properly  be  described  as 
arising  from  injury  to  property  within  the  meaning  of  clause  6. 

The  bankrupts  contend  that  an  action  cannot  properly  be  so 
described  unless  it  claims  damage  to  some  specific  property,  real 
or  personal.  This  is  based  on  the  Massachusetts  decisions  con- 
struing the  state  statutes  regulating  the  survival  of  actions.  In 
those  cases  the  question  was  whether  the  action  could  be  called 
an  action  for  '  *  damage  done  to  real  or  personal  estate ' ' — words 
which  may  well  require  a  narrower  construction  than  the  lan- 
guage of  clause  6.  And,  of  course,  the  test  here  is  not  whether 
the  action  is  one  which  survives  under  the  Massachusetts  law. 

Lastly,  it  is  urged  on  the  bankrupts'  behalf  that  they  have 


550  ADMINISTRATION 

resold  the  bonds,  or  some  of  them,  to  customers  of  their  own, 
under  representations  made  by  them,  on  their  own  account,  to 
the  same  effect  as  the  representations  of  which  they  complain  in 
the  suit  referred  to,  and  that  any  recovery  in  that  suit  ought  in 
justice  to  belong  to  them,  rather  than  to  the  trustee,  because  they 
are  not  discharged  in  bankruptcy  from  such  claims  as  the  pur- 
chasers of  the  bonds  from  them  assert  against  them.  If  all  this 
is  properly  before  the  court,  it  is,  of  course,  a  sufficient  answer 
that  no  such  claims  can  be  maintained  against  them,  save  for 
their  own  independent  deceit  or  negligence  in  repeating  the  rep- 
resentations of  which  they  complain. 

The  order  of  the  referee  is  approved  and  affirmed.^'^ 

V'ii   r.  !|^->^    In  re  COLUMBUS  BUGGY  CO. 
r.^   >'"     V V^  143  Fed.  859,  74  C.  C.  A.  611 

'^    }K      (Circuit  Court  of  Appeals,  Eighth  Circuit.    March  2,  1906) 


r  O 


'j  '  P  y'  SANBORN,  Circuit  Judge.    By  a  statute  of  Oklahoma  Terri- 
%/^  ^  tory  an  instrument  in  writing  which  evidences  the  conditional 
V  tJ"   •     ®^^^  ^^  personal  property  and  the  retention  of  title  in  the  vendor 


c^      '     until  the  purchase  price  is  paid  is  rendered  voidable  at  the  in- 
^  '  ^^^\      stance  of  innocent  purchasers  or  creditors  of  the  vendee  unless  it 
^y^^^^       is  deposited  in  the  office  of  the  proper  register.    2  Wilson 's  Rev. 
^ '        &  Ann.  St.  Okl.  1903,  p.  966,  §  162.     On  August  4,  1903,  the 
Washburn-Lytle  Implement  Company  was  adjudged  a  bankrupt 
J        upon  an  involuntary  petition  by  the  District  Court  of  the  United 
States  for  the  Third  District  of  Oklahoma  Territory.    The  trustee 
in  bankruptcy  took  from  the  possession  of  the  bankrupt  goods  of 
the  value  of  about  $5,400,  which  were  situated  in  Oklahoma  and 
were  held  by  the  Washburn  company  under  a  contract  with  the 
Columbus  Buggy  Company,  which  had  not  been  deposited  with 
the  proper  register  of  deeds.    The  material  terms  of  this  contract 
were  that  the  goods  should  be  selected  from  those  of  the  Colum- 
bus company  by  the  Washburn  company  and  should  be  shipped 
and  billed  to  it  as  agent  by  the  Columbus  company  at  the  latter 's 
wholesale  prices,  that  the  Washburn  company  might  sell  the 
goods  at  such  prices  as  it  saw  fit  and  that  it  would  pay  to  the 

17 — See  Eose  v.  Buekett    [1901],  Fed.   828;    Fellebrown  v.  Haywood, 

2  K.  B.  449;   Cleland  v.  Anderson,  190  Mass.  472;  Epstein  v.  Handver- 

75   Neb.    273;    Hansen    v.    Wyman,  ker,  29  Okla.  337;  First  Nat'l  Bank 

105  Minn.  491;  In  re  Burnstine,  131  v.  Lasater,  196  U.  S.  115. 


KINDS  OF  PROPERTY  S51 

Columbus  company  the  wholesale  prices  less  5  per  cent,  discount 
for  the  goods  if  sold  in  each  month  by  the  tenth  day  of  the  suc- 
ceeding month,  that  it  would  keep  the  property  insured  for  the 
benefit  of  the  Columbus  company  and  would  bear  all  expenses  of 
freight,  storage  and  hauling,  that  the  contract  should  continue  in 
force  one  year  and  that,  unless  it  was  renewed,  the  Washburn 
company  would  at  its  expiration  return  that  portion  of  the  mer- 
chandise unsold  and  the  Columbus  company  would  repay  the 
freight  which  had  been  paid  upon  this  portion  and  that  all  the 
goods  should  be  on  consignment  and  the  title  should  remain  in 
the  Columbus  company  and  subject  to  its  order  until  they  were 
sold  and  paid  for  in  cash.  The  Columbus  company  properly  pre- 
sented to  the  District  Court  its  claim  for  that  part  of  the  mer- 
chandise which  the  Washburn  Company  held  unsold  under  this 
contract  and  which  the  trustee  had  taken  at  the  time  of  the  ad- 
judication, and  that  court  denied  its  petition  upon  the  ground 
that  the  contract  evidenced  a  conditional  sale  and  was  therefore 
voidable  under  the  statute  of  Oklahoma.  The  case  is  presented 
to  this  court  by  a  petition  to  revise  this  ruling. 

A  conditional  sale  is  one  in  which  the  vesting  of  the  title  in  f 
the  purchaser  is  subject  to  a  condition  precedent,  or  in  which  its  / 
revesting  in  the  seller  is  subject  to  a  failure  of  the  buyer  to  com- 
ply with  a  condition  subsequent. 

An  agreed  price,  a  vendor,  a  vendee,  an  agreement  of  the 
former  to  sell  for  the  agreed  price  and  an  agreement  of  the  lat- 
ter to  buy  for  and  to  pay  the  agreed  price  are  essential  elements 
of  a  contract  of  sale.  The  contract  involved  in  this  case  has  none 
of  these  characteristics.  The  power  to  require  the  restoration  of 
the  subject  of  the  agreement  is  an  indelible  incident  of  a  contract 
of  bailment.  South  Australian  Ins.  Co.  v.  Randell,  L.  R.  3  P.  C. 
101,  108;  2  Kent's  Com.  *589;  Powder  Co.  v.  Burkhardt,  97 
U.  S.  116,  24  L.  ed.  973 ;  Sturm  v.  Boker,  150  U.  S.  312,  14  Sup. 
Ct.  99,  37  L.  ed.  1093.  This  contract  contains  a  plain  stipulation 
that  the  goods  are  at  all  times  subject  to  the  order  of  the  Colum- 
bus company  until  they  are  sold  and  that  at  the  expiration  of  the 
term  of  the  contract  the  Washburn  company  wiU  return  the  goods 
which  remain  unsold.  It  was  therefore  a  contract  of  bailment  for 
sale  and  it  was  not  subject  to  the  statute  of  Oklahoma  regarding 
conditional  sales.  One  of  the  most  striking  and  familiar  illus- 
trations of  its  character  is  given  by  Chief  Justice  Gibson  in 
McCullough  V.  Porter,  4  Watts  &  S.  (Pa.)  177,  39  Am.  Dee.  68, 
where  he  says: 


552  ADMINISTRATION 

"Were  I  to  put  my  horse  in  the  custody  of  a  friend,  to  be  sold 
for  a  designated  sum,  with  permission  to  retain  whatever  could 
be  got  beyond  it,  it  would  not  be  suspected  that  I  had  ceased  to 
own  him  in  the  meantime,  or  that  my  friend  would  not  be  bound 
to  return  him,  even  without  a  stipulation,  should  he  have  failed 
to  obtain  the  prescribed  price. ' ' 

A  contract  between  a  furnisher  of  goods  and  the  receiver  that 
the  latter  may  sell  them  at  such  prices  as  he  chooses,  that  he  will 
account  and  pay  for  the  goods  sold  at  agreed  prices,  that  he  will 
bear  the  expense  of  insurance,  freight,  storage  and  handling  and 
that  he  will  hold  the  unsold  merchandise  subject  to  the  order  of 
the  furnisher  discloses  a  bailment  for  sale  and  does  not  evidence 
a  conditional  sale.  It  contains  no  agreement  of  the  receiver  to 
pay  any  agreed  price  for  the  goods.  It  is  not,  therefore,  affected 
by  a  statute  which  renders  unrecorded  contracts  for  conditional 
sales  voidable  by  creditors  and  purchasers.  The  fact  that  such 
a  contract  provides  that  the  receiver  of  the  goods  may  fix  the 
selling  prices  and  may  retain  the  difference  between  the  agreed 
prices  of  the  accounting  and  the  selling  prices  to  recompense 
him  for  insurance,  storage,  commission  and  expenses  does  not 
constitute  the  contract  an  agreement  of  sale.  It  still  lacks  the 
obligation  of  the  receiver  to  pay  a  purchase  price  for  the  goods 
and  the  obligation  of  the  furnisher  to  transfer  the  title  to  him 
for  that  price.  Sturm  v.  Boker,  150  U.  S.  312,  14  Sup.  Ct.  99,  37 
L.  ed.  1093;  John  Deere  Plow  Co.  v.  McDavid  (C.  C.  A.)  137 
Fed.  802 ;  Metropolitan  Nat.  Bank  v.  Benedict  Co.,  20  C.  C.  A. 
377,  380,  74  Fed.  182,  185 ;  In  re  Gait,  56  C.  C.  A.  470,  473,  120 
Fed.  64,  67 ;  Union  Stock- Yards,  etc.,  Co.  v.  Western  Land,  etc., 
Co.,  7  C.  C.  A.  660,  664,  59  Fed.  49,  53 ;  Keystone  Watch-Case  Co. 
V.  Fourth  National  Bank,  194  Pa.  535,  45  Atl.  328;  In  re 
Flanders,  67  C.  C.  A.  484,  134  Fed.  560;  Martin  v.  Stratton- 
White  Co.,  1  Ind.  T.  394,  37  S.  W.  833 ;  National  Bank  v.  Good- 
year, 90  Ga.  711,  726,  16  S.  E.  962 ;  Barnes  Safe  &  Lock  Co.  v. 
Bloch  Bros.  Tobacco  Co.,  38  W.  Va.  158,  164,  18  S.  E.  482,  22 
L.  R.  A.  850,  45  Am.  St.  Rep.  846 ;  National  Cordage  Co.  v.  Sims, 
44  Neb.  148,  153,  62  N.  W.  514;  Rosencranz  &  Weber  Co.  v. 
Hanchett,  30  111.  App.  283,  286 ;  Harris  v.  Coe,  71  Conn.  157,  41 
Atl.  552,  554;  W.  0.  Dean  Co.  v.  Lombard,  61  111.  App.  94,  97; 
Norton  &  Co.  v.  Melick,  97  Iowa,  564,  566,  66  N.  W.  780 ;  Len2  v. 
Harrison,  148  111.  598,  36  N.  E.  567,  569. 

The  order  of  the  referee  which  denied  the  application  of  the 
Columbus  Buggy  Company  and  the  order  of  the  District  Court 


KINDS  OP  PROPERTY  553 

which  confirmed  that  order  must  be  vacated,  and  the  case  must 
be  remanded  to  the  court  below  with  directions  to  grant  the  peti- 
tion of  the  Columbus  Buggy  Company  for  the  delivery  to  it  of 
all  the  goods  remaining  in  the  hands  of  the  trustee  which  were 
received  by  him  from  the  bankrupt,  and  which  had  been  obtained 
by  the  latter  from  the  Columbus  company  under  the  contract 
between  them,  and  that  the  trustee  also  pay  over  to  the  Colum- 
bus company  the  proceeds  of  all  goods  of  this  character  which 
he  received,  from  the  bankrupt  and  has  since  sold,  and  it  is  so 
ordered.^® 

In  re  ALLEN 

183  Fed.  172 

(District  Court,  E.  D.  Arkansas,  W.  D.    November  23,  1910) 

The  Heim  Brewery  Company  filed  its  intervention  for  a  num- 
ber of  casks  and  cases  containing  empty  beer  bottles  in  the  pos- 
session of  the  trustee  of  the  estate  of  the  bankrupt,  claiming  to 
be  the  owner  thereof  and  entitled  to  the  immediate  possession. 
The  claim  is  based  upon  the  following  contract: 

*  *  Contract. 

"Little  Rock,  Ark.,  April  22,  1910. 
"This  contract  is  entered  into  on  this  date  between  the  Heim 
Brewery  of  Kansas  City,  Mo.,  and  Allen  &  Kirkland,  liquor 
dealers.  Little  Rock,  Ark.  Allen  &  Kirkland  agree  to  purchase 
bottled  beer  in  carload  lots,  f.  o.  b.  Kansas  City,  Mo.,  at  the 
following  prices :  Kyffhauser  beer,  4  doz.  small  bottles  in  cases, 
$3.10.  Kyffhauser  beer,  2  doz.  large  bottles  in  cases,  $3.10.' 
Heim  Brewery  agrees  to  allow  a  rebate  of  $1.50  for  each  case 
of  empty  bottles  returned  to  the  Heim  Brewery,  containing 
either  4  dozen  small,  or  2  dozen  large  bottles,  and  pay  return 
freight  charges  on  aU  empty  bottles  to  the  Brewery  in  carload 
lots.  It  is  mutually  agreed  that  Allen  &  Kirkland  are  to  pay 
the  net  price  only  on  the  bottled  beer,  but  it  is  distinctly  under- 
stood and  agreed  to  by  Allen  &  Kirkland  that  they  pay  cash 
for  all  cases  or  bottles  not  returned  to  the  Heim  Brewery,  at 
the  rate  of  $1.50  per  case  for  either  large  or  small  bottles.  It 
is  further  agreed  that  the  dating  on  the  first  car  of  beer  shipped 

18 — See  Ludvigh  v.  Am.  Woolen 
Co.,  231  U.  S.  522;  Thomas  v.  Field- 
Brundage  Co.,  215  Fed.  891. 


554  ADMINISTRATION 

to  Allen  &  Kirkland  is  for  sixty  (60)  days'  credit,  and  every 
car  thereafter  is  to  be  paid  for  in  thirty  days  from  date  of  the 
arrival  of  the  beer  in  Little  Rock.  Heim  Brewery  agrees  to 
give  Allen  &  Kirkland  five  cases  of  pints  free  in  each  car  to 
aid  in  drayage  and  advertising  same,  and  also  a  two  per  cent, 
discount  on  all  cars  of  beer  they  pay  for  in  thirty  days  from 
the  arrival  of  said  beer  in  Little  Rock,  which  includes  the  first 
car  shipped. 

"[Signed]  John  Q.  .Allen. 

"D.  0.  Kirkland." 

The  trustee  denied  that  under  the  contract  the  intervener  was 
the  owner  of  the  property,  but  insists  that  the  property  claimed 
belongs  to  the  bankrupt's  estate. 

The  cause  was  submitted  upon  an  agreed  statement  of  facts, 
which  shows  that  under  that  contract  the  bankrupt  bought 
large  quantities  of  beer  from  the  intervener;  that  the  beer  was 
delivered  in  cases  containing  bottles  and  in  casks  containing 
bottles  bearing  the  individual  brand  and  registered  copyright 
of  the  intervener;  that  a  part  of  said  casks,  cases,  and  bottles 
have  been  returned ;  but  that  the  trustee  is  now  in  possession  of 
a  number  claimed  by  the  intervener.  Upon  a  hearing  before 
the  referee,  he  found  in  favor  of  the  intervener.  The  cause  now 
comes  before  the  court  on  petition  for  review  by  the  trustee. 

TRIEBER,  D.  J.  (after  stating  the  facts  as  above).  On 
behalf  of  the  intervener,  it  is  claimed  that,  until  the  articles 
claimed  are  paid  for  by  the  vendee,  it  is  merely  a  bailment,  and 
he  is  entitled  to  a  return  of  them,  or,  at  most,  that  it  was  an 
option  to  purchase.  On  the  other  hand,  it  is  claimed  on  the 
part  of  the  trustee  that  it  was  a  contract  of  ' '  sale  and  return. ' ' 

A  "bailment"  is  properly  defined  as  being  a  delivery  of 
goods  in  trust  upon  a  contract,  express  or  implied,  that  the 
trust  shall  be  duly  executed  and  the  goods  restored  by  the  bailee 
as  soon  as  the  purpose  of  .the  bailment  shall  be  served.  2  Kent, 
Com.  558. 

On  the  other  hand,  a  "contract  of  sale"  is  when  there  is  an 
agreed  price,  a  vendor,  a  vendee,  an  agreement  of  the  former 
to  sell  for  the  agreed  price,  and  an  agreement  of  the  latter  to 
buy  and  pay  the  agreed  price.  An  "option  to  purchase"  is 
merely  an  agreement  whereby  the  vendee  may,  upon  compliance 
with  certain  terms  and  conditions,  become  the  owner  of  the 
property;  the  vendor  giving  him  that  option. 


KINDS  OF  PROPERTY  555 

The  leading  case  upon  which  the  intervener  relies  is  Westcott 
V.  Thompson,  18  N.  Y.  363.  In  that  case  the  contract  was  for 
the  sale  of  beer  and  provided  for  the  sale  of  the  beer  to  the 
vendee  at  a  certain  price.  The  beer  was  to  be  shipped  in  barrels 
and  the  barrels  to  be  returned  to  the  plaintiff  when  emptied  of 
the  beer,  and  if  not  returned  the  vendee  was  to  pay  for  every 
barrel  not  returned  the  sum  of  $2,  and  thereupon  become  the 
owner  thereof.  On  the  other  hand,  in  the  case  at  bar,  the  con- 
tract provides  that  the  vendee  is  to  be  charged  and  pay  for  the 
cases  and  bottles,  but  in  case  he  wishes  to  return  any  of  the  cases 
and  empty  bottles  he  is  to  be  allowed  a  rebate  on  his  bill  of  $1.50 
for  each  case  of  empty  bottles  returned  to  the  intervener. 

Is  this  an  option  to  purchase  or  a  contract  of  sale  and  return  ? 
The  distinction  between  these  two  forms  of  agreement  has  been 
aptly  pointed  out  in  Hunt  v,  Wyman,  100  Mass.  198,  as  follows : 

"An  option  to  purchase  if  he  liked  is  essentially  different 
from  an  option  to  return  a  purchase  if  he  should  not  like.  In 
one  case  the  title  would  not  pass  until  the  option  is  determined ; 
on  the  other  hand,  the  property  passes  at  once,  subject  to  the 
right  to  rescind  and  return." 

See,  also,  Guss  v.  Nelson,  200  U.  S.  298,  26  Sup.  Ct.  260,  50 
L.  ed.  489;  In  re  Schindler  (D.  C),  158  Fed.  458;  Hotchkiss 
V.  Higgins,  52  Conn.  205,  52  Am.  Rep.  582;  Martin  v.  Adams, 
104  Mass.  262. 

Applying  this  rule  to  the  contract  between  the  intervener  and 
the  bankrupt,  it  clearly  appears  that  it  was  not  an  option  to 
purchase,  but  a  contract  of  sale  and  return,  while,  on  the  other 
hand,  the  contract  in  Westcott  v.  Thompson  was  merely  an 
option  to  purchase.  In  the  latter  case  it  was  optionary  with  the 
vendee  to  keep  the  empty  barrels  and  pay  the  sum  of  $2  for 
each  barrel  kept  by  him  or  to  return  them.  In  the  case  at  bar 
the  bankrupt  was  charged  and  promised  to  pay  for  the  cases 
and  bottles  unless  he  desired  to  return  the  same,  and  if  he  did 
he  was  to  be  paid  or  given  credit  on  his  account  therefor  the 
sum  of  $1.50  for  each  ease  and  bottles  therein. 

Great  stress  is  laid  upon  the  fact  that  under  the  contract  the 
bankrupt  was  to  pay  the  net  price  only  on  the  bottled  beer,  still 
the  charge  was  made  against  him,  and  until  he  returned  them  he 
was  liable  to  the  intervener  who  had  a  cause  of  action  against 
him.  In  Herryford  v.  Davis,  102  U.  S.  235,  26  L.  ed.  160,  the 
contract  between  the  parties  spoke  of  the  cars  sold  as  being 
leased  until  paid  for,  but  notes  were  executed  by  the  vendee  for 


556  ADMINISTRATION 

the  full  purchase  money.  The  ears,  before  they  were  paid  for, 
having  been  seized  under  execution,  the  vendor  claimed  them 
as  his  property,  but  the  court  held  that  calling  it  a  lease  did 
not  make  it  so,  nor  was  it  a  conditional  sale,  but  merely  an 
attempt  to  retain  a  lien  for  the  purchase  money,  and,  the  same 
not  having  been  recorded  as  required  by  the  laws  of  the  state 
of  Missouri,  it  was  void  as  against  creditors. 

In  re  Rahilly  v.  Wilson,  3  Dill.  420,  Fed.  Cas.  No.  11,532, 
grain  was  stored  in  a  warehouse  with  the  understanding  that  it 
should  be  sold  by  the  warehouseman,  and  when  the  depositor 
would  surrender  the  receipt  therefor  the  warehouseman  had  the 
right  to  return  an  equal  amount  of  grain  of  equal  quality  or 
pay  the  then  market  price  of  the  grain.  Upon  these  facts  it 
was  held  by  Judge  Dillon  that  it  was  a  sale  and  not  a  bailment. 
The  distinction  between  bailments  and  sales  is  clearly  shown 
by  the  opinion  of  that  eminent  jurist,  who  carefully  reviews 
the  authorities  on  that  subject. 

In  Sturm  v.  Boker,  150  U.  S.  312,  14  Sup.  Ct.  99,  37  L.  ed. 
1093,  the  court  held  that  "a  transaction  is  a  'sale,'  as  distin- 
guished from  a  *  bailment, '  when  there  is  no  obligation  to  return 
the  specified  article."  In  this  case  there  was  no  obligation  on 
the  part  of  the  bankrupt  to  return  the  property  claimed  by  the 
intervener ;  but,  if  he  saw  proper,  he  had  the  right  to  do  so  and 
receive  a  credit  for  the  amount  specified  in  the  agreement.  If 
the  property  had  been  destroyed  by  fire  or  by  any  other  cause, 
even  if  without  any  fault  or  negligence  on  the  part  of  the  bank- 
rupt, the  loss  or  destruction  would  still  have  fallen  on  him. 
This  is  the  rule  applicable  to  contracts  of  sale  and  return. 
Moss  V.  Sweet,  16  Q.  B.  493 ;  Martineau  v.  Kitching,  L.  R.  7  Q. 
B.  436 ;  Schlesinger  v.  Stratton,  9  R.  I.  578. 

As  this  was  a  contract  of  sale  and  return  and  not  a  mere 
option  to  purchase,  nor  a  bailment  in  any  sense,  the  title  passed 
to  the  bankrupt,  and  the  trustee  is  entitled  to  the  possession  of 
the  property. 

The  finding  of  the  referee  will  be  set  aside,  and  judgment 
entered  dismissing  the  intervention,  with  costs. 


KINDS  OF  PROPERTY  557 

In  re  GOLD       "^        '^   iL.    ^--'^'"" 

210  Fed.  410,  127  C.  C.  A.  142 

(Circuit  Court  of  Appeals,  Seventh  Circuit.    October  7,  1913) 

The  bankrupt,  who  was  a  furrier  doing  a  retail  business  in 
the  city  of  Chicago,  on  or  about  August  10,  1910,  approached 
appellants,  who  were  wholesale,  furriers  in  the  city  of  New  York, 
with  a  view  to  securing  a  line  of  credit  in  the  purchase  of  furs. 
She  represented  that  she  was  worth  between  $5,000  and  $6,000 
above  all  her  debts,  which,  she  stated  to  appellants,  did  not 
exceed  $1,000.  Relying  upon  her  representations,  appellants 
sold  and  delivered  to  her  at  two  different  dates  furs  amounting 
in  value  to  the  sum  of  $926.25.  After  receiving  said  furs,  she 
proceeded  to  conceal  the  same  and,  with  intent  to  defraud  ap- 
pellants, shipped  a  large  part  of  the  same  out  of  Chicago. 
Within  two  months  thereafter  she  was  adjudged  an  involuntary 
bankrupt.  Then,  for  the  first  time^  appellants  learned  of  the 
fraud  through  which  she  had  obtained  the  goods.  In  the  mean- 
time, the  trustee  took  steps  to  recover  the  furs  so  concealed  and 
shipped  out  of  the  city,  and  did  recover  a  portion  of  appellants' 
said  furs,  of  the  value  of  $425.  On  learning  of  said  fraudulent 
conduct  and  said  bankruptcy  proceedings,  appellants  rescinded 
said  sales  and  at  once  petitioned  the  court  for  the  return  of  said 
recovered  furs  or  the  proceeds  thereof  to  them,  the  same  having 
been  sold  by  the  trustee  pending  such  proceedings,  all  of  which 
steps  they  took  after  the  fui*s  had  come  into  the  possession  of 
the  trustee.  The  matter  was  heard  before  the  referee,  who 
found  that  the  trustee's  title  to  said  goods,  under  §  47a  (2)  of 
the  bankruptcy  act  as  amended  June  25,  1910,  was  superior  to 
that  of  appellants',  and  dismissed  appellants'  petition  for  want 
of  equity.  Thereupon  the  referee  filed  with  the  District  Court 
a  certificate  for  review,  wherein  he  stated  that  under  the  undis- 
puted evidence  adduced  on  the  hearing  of  appellants'  petition, 
"said  petitioners  [the  appellants]  were  entitled  to  reclaim  said 
goods  and  were  entitled  to  the  proceeds  of  the  sale  thereof,  if, 
under  the  bankruptcy  law  as  amended  by  the  act  of  June  25, 
1910,  a  vendor  of  goods  who  has  been  induced  to  sell  such  goods, 
by  false  and  fraudulent  representations,  can,  under  any  cireum-S 
stances  appearing  in  evidence,  reclaim  such  goods  from  the) 
trustee  in  bankruptcy  of  the  vendee."  Upon  the  hearing  upon 
said  petition  for  review  and  the  said  referee's  certificate,  the 


558  ADMINISTRATION 

District  Court  affirmed  the  action  of  the  referee  in  dismissing 
said  petition.  The  cause  is  before  us  on  appeal  from  that  order. 
The  errors  assigned,  in  substance,  resolve  themselves  into  the 
one  proposition,  viz.,  the  court  erred  in  holding  that  the  rights 
of  the  appellants  were  inferior,  under  the  facts  of  the  case,  to 
i  those  of  the  trustee. 

KOHLS AAT,  Circuit  Judge  (after  stating  the  facts  as  above). 
§  47a  (2)  of  the  Bankruptcy  Act  as  the  same  was  amended  by 
the  act  of  June  25,  1910,  reads  as  follows,  viz. : 

"And  such  trustee,  as  to  all  property  in  the  custody  or  com- 
ing into  the  custody  of  the  Bankruptcy  Court,  shall  be  deemed 
vested  with  all  the  rights,  remedies,  and  powers  of  a  creditor 
holding  a  lien  by  legal  or  equitable  proceedings  thereon;  and 
also,  as  to  all  property  not  in  the  custody  of  the  bankruptcy 
court,  shall  be  deemed  vested  with  all  the  rights,  remedies,  and 
powers  of  a  judgment  creditor  holding  an  execution  duly  re- 
turned unsatisfied." 

By  the  order  of  the  court  affirming  the  referee's  action  upon 
the  petition  for  review,  the  court  in  effect  held  that  under  the 
statute  as  amended,  and  under  the  laws  of  Illinois  as  construed 
by  the  courts  of  that  state,  the  rights  of  a  defrauded  vendor 
were  inferior  to  those  of  "a  creditor  holding  a  lien  by  legal  or 
equitable  proceedings,"  and  that  the  latter  has  the  rights  of 
a  bona  fide  purchaser  for  value  without  notice  of  the  fraud. 
The  question  is  one  of  Illinois  law.  In  support  of  this  proposi- 
tion, the  trustee  cites  a  number  of  cases  from  Illinois,  the  doc- 
trine of  which  is  fully  summed  up  in  Van  Duzor  v.  Allen,  90 
111.  499.  In  that  case  it  appears  that  one  Gaston  bought  of  Van 
Duzor  a  threshing  machine.  Van  Duzor  claimed  that  Gaston 
was  to  have  given  his  notes  with  sureties.  Gaston  insisted  his 
notes  were  to  be  secured  by  chattel  mortgage  on  the  thresher. 
Gaston  was  given  possession  without  the  delivery  of  security, 
and  proceeded  to  thresh  for  thase  desiring  his  services,  for  more 
than  two  months,  said  question  of  the  nature  of  the  security  to 
be  given  still  remaining  unsettled,  when  judgments  against  him 
were  obtained  in  favor  of  persons  who  had  rendered  services  to 
him  in  threshing,  upon  which  judgment  executions  were  sworn 
out  and  placed  in  the  hands  of  a  constable,  who  levied  upon  the 
thresher.  Van  Duzor  replevied  the  latter.  On  the  trial  of  the 
replevin  suit.  Van  Duzor  was  defeated.  On  appeal  the  Supreme 
Court  affirmed  the  judgment.    In  its  opinion  the  court  said : 


KINDS  OF  PROPERTY  559 

'"A  bona  fide  creditor,  who,  under  a  judgment  and  execution, 
acquires  a  lien  on  property  thus  situated,  occupies  the  same  posi- 
tion in  all  respects  as  does  a,  bona  fide  purchaser.  Where  the 
apparent  owner  of  property  thus  acquired  has  the  indicia  of 
ownership  and  may  sell  and  pass  a  good  title  to  a  purchaser, 
without  notice,  a  bona  fide  creditor  may  seize  the  property  on 
execution  and  sell  it  thereunder  and  pass  the  title,  not  only 
against  the  apparent,  but  also  the  real  owner." 

This  decision  must  be  construed  with  reference  to  the  facts  of 
the  case.  The  question  of  the  rights  of  a  defrauded  vendor  were 
not  under  consideration.  Whatever  lien,  if  any,  Van  Duzor 
possessed  as  against  Allen,  was  a  secret  lien  and  was  not  made 
a  condition  of  the  passing  of  the  title.  Allen  actually  had  title. 
This  case  states  the  law  of  Illinois  as  it  stands  today.  Further 
cases  cited  by  the  trustee  yi  support  of  this  doctrine  are  Union 
Stockyards  &  Transit  Co.  et  al.  v.  Mallory,  157  111.  565-566,  41 
N.  E.  888,  48  Am.  St.  Rep.  341;  Brundage  v.  Camp,  21  111.  330; 
Fawcett  v.  Osborn,  32  lU.  411,  83  Am.  Dec.  278 ;  Chicago  Dock 
Co.  V.  Foster,  48  111.  507 ;  Doane  v.  Lockwood,  115  111.  490,  4 
N.  E.  500 ;  Butters  v.  Haughwout,  42  111.  18,  89  Am.  Dec.  401 ; 
Farwell  v.  Hanchett,  120  111.  577,  11  N.  E.  875. 

None  of  these,  however,  apply  to  the  facts  of  the  case  at  bar. 
This  clearly  appears  from  the  decisions  of  the  Illinois  courts. 
The  leading  case  is  that  of  Schweizer  v.  Tracy,  76  111.  345,  the    ^y      ^ 
facts  of  which  are  very  similar  to  those  of  the  case  at  bar.    There 
the  purchaser  had  obtained  the  goods  through  fraudulent  repre-    ^ff^^ 
sentations  as  to  his  financial  circumstances.     After  possession    l^_,i,..^^j^ 
taken,  the  goods  were  levied  upon  under  a  writ  of  attachment 
issued  against  the  fraudulent  vendee.     The  defrauded  vendors 
instituted  a  suit  in  replevin  in  which  they  were  defeated  and 
the  return  of  the   property  to  the  sheriff  awarded.     Having 
failed  to  return  the  goods,  suit  was  instituted  upon  the  replevin 
bond,  in  which  suit  Schweizer  was  impleaded  with  the  defrauded 
vendors.    In  the  lower  court  judgment  went  for  the  plaintiff  in 
that  suit.    On  appeal  the  judgment  was  reversed.    In  the  course 
of  its  opinion  the  court  said : 

*  *  Coming,  then,  to  the  conclusion  which  we  do,  that  had  Mack, 
Stadler  &  Co.  discovered  the  fraud  practiced  upon  them  whilst/ 
the  goods  remained  in  the  hands  of  the  fraudulent  vendee,  and! 
replevied  them,  they  could  have  successfully  maintained  their 
action,  the  question  is  presented,  whether  the  attaching  cred-  i 
iters  here,  or  the  sheriff,  by  virtue  of  his  writ  of  attachment, 


560  ADMINISTRATION 

acquired  any  other  or  greater  title  than  the  fraudulent  vendee 
possessed.  Had  the  vendee,  before  the  reclaiming  of  the  goods 
I  by  Mack,  Stadler  &  Co.,  sold  them  to  an  innocent  purchaser  for 
'value,  no  doubt,  under  the  decisions  of  this  court,  the  purchaser 
\would  have  acquired  a  valid  title  to  the  goods" — citing  Jennings 
V.  Gage  et  al.,  13  lU.  610,  56  Am.  Dec.  476 ;  M.  C.  R.  R.  Co.  v. 
Phillips  et  al.,  60  111.  190;  Young  et  al.  v.  Bradley  et  al.,  68 
111.  553. 

The  court  thereupon  proceeded  to  explain  the  language  in 
Burnell  v.  Robertson,  5  Gilman  (111.)  282,  and  said: 

"That  case  was  a  case  where  a  debtor  had  title  to  the  prop- 
erty, and  the  controversy  was  between  a  prior  purchaser  from 
the  debtor,  who  had  not  obtained  possession  of  the  property, 
and  a  subsequent  attaching  creditor;  and  in  reference  to  such 
a  state  of  facts,  the  court  says:  'lii  case  of  two  sales  of  per- 
sonal property,  both  equally  valid,  his  is  the  better  right  who 
first  gets  possession  of  the  property,  and  the  attaching  creditor 
stands  in  the  light  of  a  purchaser  and  is  to  be  protected  as  such. ' 
That  is,  the  attaching  creditor  stands  in  the  light  of  a  purchaser, 
not  necessarily  as  against  the  world,  but  as  against  another  pur- 
chaser, the  creditor  having,  by  virtue  of  his  attachment,  first 
obtained  possession  of  the  property;  thus  acknowledging  the 
common  doctrine  respecting  the  sale  of  personal  property,  that 
a  sale  without  the  delivery  of  possession,  is  void  as  against  sub- 
sequent purchasers  and  creditors.  This  is  the  full  import  of 
that  decision.  But  in  the  case  at  bar,  the  only  title  of  the  debtor 
is  one  acquired  by  fraud  and  false  representations,  and  voidable 
at  the  option  of  his  vendors.  The  general  expression  used  in 
the  case  cited  is  to  be  understood  with  reference  to  the  facts  of 
that  case,  and  is  not  authority  in  support  of  the  view,  that  an 
attaching  creditor,  under  the  circumstances  of  such  a  case  as 
the  present,  as  against  the  vendor,  stands  in  the  same  position  as 
an  innocent  purchaser  for  value." 

The  court  further  in  said  opinion  said  there  was  no  difference 
as  to  priority  of  lien  between  an  attachment  lienor  and  an  exe- 
cution lien,  citing  Tousley  v.  Tousley,  5  Ohio  St.  78;  that  the 
attachment  creditor  took  no  better  title  than  the  fraudulent 
vendee  possessed,  and  proceeded  to  hold  that  the  right  of  pos- 
session was  in  the  defrauded  vendor  and  that  there  was  no 
liability  upon  the  replevin  bond.  This  case  was  decided  prior 
to  Van  Duzor  v.  Allen,  supra,  but  has  been  approved  in  a  num- 
ber of  subsequent  cases.    In  Walsh  v.  First  National  Bank,  228 


KINDS  OF  PROPERTY  561 

111.  446,  81  N.  E.  1067,  the  court  held  that  the  transferee  of  a 
bill  of  lading  prevailed  over  an  attaching  creditor,  and  says : 

*  *  In  such  a  case  an  attachment  creditor  only  obtains  the  rights 
which  the  debtor  has  in  the  property  at  the  time  of  the  levy  of 
the  writ.  One  claiming  to  be  a  creditor  of  another  and  levying 
a  writ  of  attachment  is  not  a  hona  fide  purchaser  for  a  valuable 
consideration" — citing,  among  other  authorities,  Schweizer  v. 
Tracy,  supra. 

The  latter  case  is  cited  approvingly  in  Hacker  v.  Munroe  & 
Son,  176  111.  394,  52  N.  E.  12;  King  &  Co.  v.  Brown,  24  lU. 
App.  579-582;  Gould  v.  Howell,  32  111.  App.  349-350;  O'Neil  v. 
Patterson  &  Co.,  52  111.  App.  27-33 ;  Nonotuck  Silk  Co.  v.  Levy, 
75  lU.  App.  55-58 ;  La  Salle  Pressed  Brick  Co.  v.  Coe,  65  lU. 
App.  619-622 ;  Link  v.  Gibson,  93  111.  App.  433-435 ;  Magerstadt 
v.  Schaefer,  110  lU.  App.  171,  and  other  cases.  The  same  rule 
of  law  is  laid  down  in  Doane  v.  Lockwood,  supra;  Staver  & 
Abbott  Mfg.  Co.  V.  Coe,  49  111.  App.  426-431. 

From  the  foregoing  it  appears  that  the  rule  laid  down  in 
Schweizer  v.  Tracy,  supra,  is  here  controlling.  The  vendors 
having  at  the  earliest  opportunity  rescinded  the  sale,  the  title  to 
the  furs  in  question  never  passed  to  the  bankrupt,,  by  reason  of 
her  fraudulent  representations  to  the  vendors,  therefore  the 
trustee  took  no  title  thereto  inasmuch  as,  under  the  laws  of 
Illinois,  as  construed  by  the  courts  of  the  state,  the  rights  of 
the  defrauded  vendor  prevailed  over  the  claims  "of  a  creditor 

holding  a  lien  by  legal  or  equitable  proceedings  thereon." 

•  •     •  ,,^,-^ 

The  judgment  of  the  District  Court  is  reversed,  with  direction 
to  vacate  its  decree  herein  and  grant  the  prayer  of  the  petition 
to  the  amount  of  $425. 


SHERMAN  V.  LUCKHARDT 

67  Kans.  682,  74  Pac.  277 

(Supreme  Court  of  Kansas.    Nov.  7,  1903) 

POLLOCK,  J.  This  case  is  before  us  upon  rehearing.  It 
has  been  fully  rebriefed  and  reargued.  The  facts  will  be  found 
stated  in  the  former  opinion  of  this  court.  65  Kan.  610,  70  Pac. 
702.  The  law  there  declared  reads:  "A  preferential  payment 
by  a  debtor  to  one  of  his  creditors  within  four  months  prior  to 
the  former's  bankruptcy  is  not  void  under  clause  'b,'  §  60,  and 

H.  &  A.  Bankruptcy — 36 


562  ADMINISTRATION 

clause  'e,'  §  67,  Bankr.  Act  July  1,  1898,  e.  541,  30  Stat.  562, 
564  [U.  S.  Comp.  St.  1901,  pp.  3445,  3449],  though  made  with 
a  fraudulent  intent  on  the  debtor 's  part,  if  it  be  accepted  by  the 
creditor  without  knowledge  of  such  intent,  and  without  knowl- 
edge that  a  preference  was  intended."  The  question  is,  shall 
that  decision  now  be  upheld  or  overruled?  Prior  to  the  pas- 
sage of  the  national  bankrupt  act  of  July  1,  1898  (c.  541,  30 
Stat.  544  [U.  S.  Comp.  St.  1901,  p.  3418]),  in  this  and  other 
jurisdictions  the  estate  of  an  insolvent  debtor  was  often  swept 
away  in  an  unequal  division  among  his  creditors,  leaving  un- 
satisfied demands  to  harrass  and  annoy  the  debtor.  The  intent 
of  the  lawmaking  power  in  the  passage  of  this  act  was  twofold : 
First,  the  protection  and  discharge  from  liability  of  the  bank- 
rupt; second,  the  equal  distribution  of  his  nonexempt  property 
among  his  creditors  in  proportion  to  their  provable  demands. 
Swarts  V.  Fourth  National  Bank,  117  Fed.  3,  54  C.  C.  A.  387 ; 
In  re  GutwilUg,  92  Fed.  337,  34  C.  C.  A.  379.  One  of  the 
methods  employed  by  the  insolvent  debtor  to  effect  an  unequal 
distribution  of  his  estate  among  his  creditors  before  the  passage 
of  this  act  was,  without  any  fraudulent  intent  on  his  part,  to 
prefer  one  or  more  of  his  creditors  over  others.  Another  method 
was  to  transfer  a  portion  or  all  of  his  property  to  one  or  more 
of  his  creditors  to  ^he  exclusion  of  all  others,  with  the  intent  on 
his  part  to  hinder,  delay,  and  defraud  his  other  creditors.  In 
the  case  first  mentioned  the  transfer  was  without  fraud,  and 
therefore  valid.  In  the  second  case,  the  transfer  having  been 
made  without  any  guilty  knowledge  on  the  part  of,  or  participa- 
tion in  the  fraudulent  act  of  the  debtor  by,  the  creditor,  the 
transfer  was  upheld  as  valid.  To  remedy  this,  among  other  ex- 
isting evils,  the  act  was  passed. 

In  the  case  at  bar  it  is  found  by  the  court,  from  the  evidence, 
as  follows :  "  (8)  That  the  said  William  Luckhardt,  in  causing  the 
above-described  real  estate  to  be  conveyed  to  this  defendant,  in- 
tended thereby  to  prefer  this  defendant  over  his  other  creditors. 
(9)  That  the  said  William  Luckhardt,  in  causing  the  above-de- 
scribed real  estate  to  be  deeded  to  this  defendant,  intended  thereby 
to  hinder,  delay,  and  defraud  his  other  creditors.  (10)  That  the 
said  defendant  was  not  a  purchaser  of  said  real  estate  in  good 
faith  and  for  a  present  fair  consideration."  "(12)  That  upon 
the  trial  of  this  action  the  counsel  for  plaintiff  admitted  that 
the  said  William  Luckhardt,  at  the  time  he  caused  to  be  con- 
veyed to  the  defendant  the  real  estate  hereinabove  described, 


KINDS  OF  PROPERTY  563 

was  indebted  to  the  said  defendant  in  the  sum  of  $1,500,  and 
that  it  was  further  admitted  that  the  said  defendant,  M.  M. 
Luekhardt,  at  the  time  she  received  and  accepted  the  convey- 
ance of  said  premises  to  herself,  had  no  knowledge  of  the  in- 
solvency of  her  husband,  William  Luekhardt,  nor  of  his  inten- 
tion or  purpose  to  defraud,  hinder,  or  delay  his  creditors  in  the 
collection  of  their  debts  by  means  of  said  conveyance  to  her  of 
said  real  estate ;  that  the  defendant  had  no  knowledge  of  the 
plaintiff's  intention  to  make  her  a  preferred  creditor;  and  that 
the  reasonable  value  of  the  real  estate  conveyed  to  her  w^as 
$1,500." 

The  contention  of  the  parties  to  this  controversy  is  this :  On 
the  one  hand,  the  trustee  claims  the  conveyance,  under  finding 
10  of  the  court,  is  condemned  by,  and  may  be  avoided  under 
the  provisions  of,  clause  "e"  of  §  67  of  the  act,  which  provides 
"that  all  conveyances,  transfers,  assignments  or  encumbrances 
of  his  property,  or  any  part  thereof,  made  or  given  by  a  person 
adjudged  a  bankrupt  under  the  provisions  of  this  act,  subse- 
quent to  the  passage  of  this  act  and  \vithin  four  months  prior  to 
the  filing  of  this  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  as  to  purchasers  in  good  faith  and  for  a  present  fair 
consideration;  and  all  property  of  the  debtor  conveyed,  trans- 
ferred, assigned  or  encumbered  as  aforesaid  shall,  if  he  be 
adjudged  a  bankrupt,  and  the  same  is  not  exempt  from  execu- 
tion and  liability  for  debts  by  the  law  of  his  domicile,  be  and 
remain  a  part  of  the  assets  and  estate  of  the  bankrupt  and  shall 
pass  to  his  said  trustee,  whose  duty  it  shall  be  to  recover  and 
reclaim  the  same  by  legal  proceedings  or  otherwise  for  the  bene- 
fit of  the  creditors." 

The  defendant  contends,  under  findings  9  and  12,  above 
quoted,  the  conveyance  was  a  preference,  and  having  been  re- 
ceived by  the  creditor  without  knowledge  on  her  part  of  the 
insolvency  of  the  debtor,  or  his  intent  to  hinder,  delay,  and  de- 
fraud his  other  creditoi*s,  or  to  prefer  her  over  other  creditors, 
it  must  be  upheld.  Clause  "b"  of  §  60  of  the  act  reads:  "If 
a  bankrupt  shall  have  given  a  preference  within  four  months 
before  the  filing  of  a  petition,  or  after  the  filing  of  the  petition 
and  before  the  adjudication,  and  the  person  receiving  it,  or  to 
be  benefited  thereby,  or  his  agent  acting  therein,  shall  have  had 
reasonable  cause  to  believe  that  it  was  intended  thereby  to  give 


564  ADMINISTRATION 

a  preference,  it  shall  be  voidable  by  the  trustee,  and  he  may 
recover  the  property  or  its  value  from  such  person."  Clause 
"g"  of  §  57  reads:  "The  claims  of  creditors  who  have  received 
preferences  shall  not  be  allowed  unless  such  creditors  shall  sur- 
render their  preferences."  30  Stat.  560  [U.  S.  Comp.  St.  1901, 
p.  3443].  Under  these  provisions  of  the  act,  upon  the  findings 
made  by  the  court,  and  viewed  alone  in  the  light  of  a  preference 
only,  we  are  of  the  opinion  the  contention  of  defendant  would 
prevail,  but  the  condemnation  of  the  act  does  not  end  here.  The 
clauses  quoted  from  §  57  and  §  60  treat  only  the  subject  of 
preferences.  No  mention  is  there  made  of  fraud.  The  law- 
making power  dealt  with  the  subject  of  fraud  in  clause  "e" 
of  §  67  of  the  act,  and,  in  language  so  plain,  concise,  exact,  and 
unequivocal  as  to  leave  no  room  for  doubt  or  construction, 
there  inhibited  all  transfers  of  the  property  of  an  insolvent 
debtor  made  within  four  months  prior  to  the  institution  of 
bankruptcy  proceedings  under  the  act  wherein  the  debtor,  with 
the  intent  on  his  part  of  hindering,  delaying,  or  defrauding  his 
creditors,  parted  with  his  property  regardless  of  the  knowledge 
of  or  participation  in  such  fraud  by  the  creditor.  This  is  a 
case  of  first  instance  in  this  state  in  construing  the  above  pro- 
visions of  the  act.  In  other  jurisdictions  a  like  view  of  the  act 
has  been  reached.  Friedman  v.  Verchofsky,  105  111.  App.  414; 
Unmack  v.  Douglsiss  (75  Conn.  633),  55  Atl.  12.  There  are  cases 
holding  a  contrary  view,  Congleton  v.  Schreihofer  et  al.  (N.  J. 
Ch.)  54  Atl.  144;  Gamble  v.  Elkin  et  al.  (205  Pa.  St.  226),  54  Atl. 
782.  However,  the  reasoning  employed  in  these  cases,  contrary  to 
the  view  expressed  in  this  opinion,  does  not  commend  itself  to  our 
judgment  or  meet  our  approval.  Such  a  construction  of  the  act 
would  nullify  one  of  its  most  important  and  beneficial  pro- 
visions, and,  in  so  far  as  the  act  deals  with  fraudulent  trans- 
fers of  the  property  of  an  insolvent  debtor,  the  law  would  remain 
the  same  as  before  the  passage  of  the  act ;  and  this  notwithstand- 
ing the  act  prohibits  all  conveyances,  transfers,  assignments,  or 
incumbrances  of  the  property  of  the  insolvent  debtor  within 
four  months  prior  to  the  filing  of  the  petition  in  bankruptcy 
with  the  intent  and  purpose  on  his  part  to  hinder,  delay,  or 
defraud  his  creditors,  or  any  of  them,  ''except  as  to  purchasers 
in  good  faith  and  for  a  present  fair  consideration,"  in  which 
case  the  estate  of  the  bankrupt  to  be  distributed  is  not  dimin- 
ished, and  also  notwithstanding  the  fact  that  the  act  itself  avoids 
all  transfers  which  might  be  avoided  under  existing  state  laws. 


KINDS  OF  PROPERTY  565 

It  follows,  upon  the  findings  made  by  the  trial  court,  the 
trustee  is  entitled  to  judgment  in  his  favor  setting  aside  the 
conveyance  made.  Therefore  the  former  opinion  of  this  court 
(65  Kan.  610,  70  Pac.  702)  must  be  overruled,  the  judgment 
below  reversed,  and  cause  rem^anded,  with  direction  to  enter 
judgment  in  favor  of  the  trustee. 

CUNNINGHAM,  BURGH,  and  MASON,  JJ.,  concur.i^ 

JOHNSTON,  C.  J.,  and  SMITH  and  GREENE,  JJ.,  dissent 
from  the  reasoning  and  conclusions  of  this  opinion  for  the  rea- 
sons stated  in  the  majority  opinion  on  the  original  hearing. 

BEASLEY  V.  COGGINS  et  ux.    /      (_      ,^_^ 

48  Fla.  215,  37  So.  213  '^^.^^^  ^  ^ 

(Supreme  Court  of  Florida,  Division  A.    July  13,  1904)^7    f'^^f 

'  The  appellant,  D.  P.  Beasley,  filed  his  bill  in  the  Circuit  Court  JUa^^ia.^'-'^ 
of  Madison  county  as  trustee  in  bankruptcy  of  P.  S.  Coggins, 
alleging  that  the  said  Coggins  was  adjudged  a  bankrupt  by  the  jf^jwr^*-^ 
United  States  District  Court  on  July  8,  1902;  that  he  (Beasley) 
was  duly  selected  and  appointed  as  trustee  in  bankruptcy  of 
and  for  all  the  estate  of  said  Coggins,  and  was  then  such  trus- 
tee, as  shown  by  exhibits  attached. 

The  bill  alleges  substantially  that  P.  S.  Coggins,  prior  to  being 
adjudged  a  bankrupt,  was  engaged  in  the  mercantile  business 
at  the  city  of  Madison,  in  Madison  county,  and  had  been  so 
engaged  for  several  years  prior  thereto,  and  had  then  contracted 
a  large  amount  of  indebtedness  with  various  creditors,  of  about 
$12,000. 

The  bill  sets  forth  an  indebtedness  to  several  persons,  includ- 
ing the  Bank  of  Madison,  on  several  notes,  all  due  on  March  8, 
1901,  and  other  debts  contracted  subsequent  to  March  8,  1901, 
and  all  unpaid  and  due  when  the  bill  was  filed;  that  Coggins, 
being  so  indebted  on  March  8,  1901,  in  a  large  sum  of  money, 
intended  a  continuance  for  an  indefinite  period  of  his  said  mer- 
cantile business,  contemplated  the  creation  of  further  indebted- 

19 — See  Jacobs  v.  Van  Sickle,  127  App.   320;    Schilling  v.   Curran,   30 
Fed.    62;    Wright   v.    Sampter,    152  Mont.  370;  Lehrenkrauss  v.  Bonnell, 
Fed.   196;   Underleak  v.   Scott,   117  122  N.  Y.  Supp.  866;  Clowe  v.  Sea- 
Minn.  136;  Coder  v.  Arts,  213  U.  S.  vey,  208  N.  Y.  496. 
223;  Sherman  v.  Luckhardt,  96  Mo. 


566  ADMINISTRATION 

ness,  and  was  then,  on  said  March  8, 1901,  insolvent ;  that  on  said 
March  8,  1901,  said  Coggins  and  his  wife,  Lilla  F.,  executed  a 
deed  of  certain  landed  property  to  W.  F.  Parramore  upon  an 
alleged  and  fictitious  consideration  of  $50,  and  that  Parramore 
on  the  same  day  conveyed  said  property  to  Lilla  F.  Coggins 
for  an  alleged  and  fictitious  consideration  of  $50 ;  that  said  deeds 
were  properly  recorded  on  March  9,  1901 ;  that  the  lots  so  con- 
veyed, upon  information  and  belief,  are  worth  $3,500 ;  that  said 
lots  of  land  were  on  March  8,  1901,  the  property  of  P.  S.  Cog- 
gins;  that  it  was  the  purpose  of  Coggins,  by  the  recited  deeds, 
to  make  a  gift  of  said  lots  of  land  to  his  wife,  Lilla  F,  Coggins, 
without  any  valuable  consideration;  that  said  deeds  were  made, 
contrived,  and  executed  of  covin  and  collusion  by  the  parties,  to 
the  end,  purpose,  and  intent  that  the  creditors  of  Coggins,  both 
prior  and  subsequent,  should  be  delayed,  defrauded,  and  defeated 
in  the  collection  of  their  lawful  and  just  debts  and  demands 
against  Coggins;  and  that  said  deeds  are  fraudulent  and  utterly 
void,  as  against  the  claims  and  demands  of  the  creditors  of 
Coggins. 

I  The  bill,  among  other  things,  prays  a  decree  declaring  said 
'deeds  to  be  fraudulent  and  void  against  the  claims  and  demands 
of  creditors;  that  the  real  estate  thereby  attempted  to  be  con- 
veyed be  sold,  and  the  proceeds  paid  to  the  trustee  in  bank- 
ruptcy, to  be  disposed  of  in  the  regular  administration  of  the 
estate  of  the  bankrupt.  Copies  of  the  deeds  are  made  exhibits 
to  the  bill,  and  also  a  copy  of  the  order  appointing  the  com- 
plainant as  trustee  in  bankruptcy. 

The  defendants  demurred  to  this  bill  on  the  following  grounds, 
in  substance,  viz.:  (1)  That  the  bill  does  not  make  out  a  case 
entitling  complainant  to  discovery  or  relief. 

(2)  That  it  does  not  show  any  judgment  or  lien  upon  the 
property. 

(3  and  4)  That  it  does  not  show  that  complainant  has  ex- 
hausted his  legal  remedies,  and  that  he  has  a  full  and  adequate 
remedy  at  law. 

(5)  That  the  clauses  alleging  the  several  deeds  were  made 
to  hinder  and  delay  creditors,  etc.,  are  demurred  to  because: 
First.     The  same  are  impertinent. 

Second.  That  all  persons  who  became  creditors  after  March 
8,  1901,  had  notice  of  them,  and  that  the  trustee  cannot  claim 
said  deeds  void  as  to  such  creditors. 


KINDS  OF  PROPERTY  567 

Third.  That  said  deeds  can  only  he  avoided,  if  at  all,  by 
creditors  whose  claims  existed  at  the  date  of  said  conveyances. 

Upon  a  hearing  this  demurrer  was  sustained,  and  from  this 
order  an  appeal  was  taken. 

The  assignments  of  error  are,  first,  that  the  court  erred  in 
making  the  order  sustaining  the  demurrer  to  the  bill;  and,  sec- 
ond, that  the  court  erred  in  holding  that  complainant  must  allege 
and  prove  a  judgment  at  law  before  the  bill  of  complaint  could 
be  maintained. 

HOOKER,  J.  (after  stating  the  facts).  It  does  not  appear 
upon  what  ground  the  court  below  sustained  the  demurrer  to 
the  bill,  but  presumably  all  the  grounds  were  sustained. 

The  general  rule  is  that,  before  a  creditor  can  maintain  a  bill 
in  equity  to  set  aside  a  conveyance  by  his  debtor  of  his  real 
estate  on  the  ground  of  fraud,  the  creditor  must  reduce  his  claim 
to  judgment,  or  its  equivalent,  a  decree  for  a  balance  remaining 
after  a  foreclosure  sale  of  mortgaged  property,  creating  a  lien 
on  such  real  estate;  and,  when  personal  property  or  equitable 
assets  are  pursued,  he  must  have  an  execution  issued  and  re- 
turned nulla  'bona.  Robinson  v.  Springfield  Company,  21  Fla. 
203.  But  does  this  rule  apply  to  such  a  suit  by  a  trustee  in  bank-j 
ruptcy  ?  ' 

§  70  of  the  act  of  Congress  to  establish  a  uniform  system  of 
bankruptcy,  passed  July  1,  1898  (Act  July  1,  1898,  c.  541,  30 
Stat.  565  [U.  S.  Comp.  St.  1901,  p.  3451]),  provides:  "The 
trustee  of  the  estate  of  a  bankrupt,  upon  his  appointment  and 
qualification,  and  his  successors,  if  he  shall  have  one  or  more, 
upon  his  or  their  appointment  and  qualification,  shall  in  turn  be 
vested  by  operation  of  law  with  the  title  of  the  bankrupt,  as  of 
the  date  he  was  adjudged  a  bankrupt,  except  in  so  far  as  it  is 
to  property  which  is  exempt,  to  all  *  *  *  (4)  property 
transferred  by  him  in  fraud  of  his  creditors. ' '  In  addition  to  the 
foregoing,  paragraph  "e,"  §  70-  (30  Stat.  566  [U.  S.  Comp.  St. 
1901,  p.  3452] ),  provides:  ''The  trustee  may  avoid  any  transfer 
by  the  bankrupt  of  his  property  which  any  creditor  of  such  bank- 
rupt might  have  avoided,  and  may  recover  the  property  so  trans- 
ferred or  its  value  from  the  person  to  whom  it  was  transferred, 
unless  he  was  a  honu  fide  holder  for  value  prior  to  the  date  of  the 
adjudication,"  etc.  §  67e  (30  Stat.  564  [U.  S.  Comp.  St.  1901, 
p.  3449] )  treats  of  conveyances,  transfers,  etc.,  made  by  a  bank- 


568 


ADMINISTRATION 


ll^ 


nipt  within  four  months  prior  to  filing  the  petition,  with  intent 
to  hinder,  delay,  or  defraud  creditors. 

Some  of  the  Federal  Courts  have  found  difficulty  in  reconciling 
these  sections  of  the  bankrupt  act,  but  it  seems  to  us  that  the 
^,^iews  expressed  in  In  re  Mullen  (D.  C.)  101  Fed.  413,  text,  416, 
I  are  substantially  correct.    It  is  there  said  that  §  70e,  30  Stat.  566 
[U.  S.  Comp.  St.  1901,  p.  3452],  was  intended  to  provide  simply 
that  the  trustee  in  bankruptcy  should  have  the  same  right  to 
avoid  conveyances  as  was  possessed  by  creditors,  or  any  of  them, 
and  this  with  especial  reference  to  the  statute  of  13  Elizabeth. 
Under  the  bankruptcy  act,  when  one  is  thereunder  adjudged  a 
I    bankrupt,  creditors  are  not  permitted  to  attack  fraudulent  con- 
I   veyances  of  their  debtor,  made  more  than  four  months  of  the  ad- 
J    judication  of  bankruptcy;  and,  if  the  trustee  could  not  do  so, 
^,(t-j    then  the  act  would  constitute  "a  device  to  permit  fraudulent 
J        I    conveyances  to  take  effect  with  impunity  in  case  they  are  success- 
"-V^  J-fA  fully  concealed  for  the  specified  four  months."    Lewis  v.  Bishop, 
\  47  App.  Div.  554,  text,  558,  62  N.  Y.  Supp.  618.    It  is  only  by 
rnolding  that  the  trustee  is  subrogated  to  the  rights  of  creditors 
[against  a  fraudulent  conveyance  that  full  effect  and  operation 
'can  be  given  to  the  statute  of  13  Elizabeth  against  fraudulent 
conveyances,  from  which  our  statute  (§  1991,  Rev.  St.  1892)  is 
substantially  taken.    In  Wall  v.  Cox,  101  Fed.  403,  41  C.  C.  A. 
408,  the  second  headnote  is  as  follows :    * '  A  trustee  in  bankruptcy 
seeking  to  set  aside  and  annul  a  bill  of  sale  and  transfer  of  prop- 
erty previously  made  by  the  bankrupt,  and  alleged  to  have  been 
fraudulent  under  the  bankruptcy  law,  and  as  against  creditors, 
may  appropriately  proceed  by  bill  in  equity,  and  will  not  be 
required  to  seek  his  remedy  at  law. "    It  is  true  that  the  trans- 
fer there  sought  to  be  set  aside  was  made  three  days  before  the 
petition  of  involuntary  bankruptcy  was  filed,  and  involved  a 
transfer  rendered  void,  if  made  to  hinder  and  delay  creditors  un- 
der §  67e  of  the  bankruptcy  act.    30  Stat.  564  [U.  S.  Comp.  St. 
1901,  p.  3449].    But  no  reason  is  apparent  why  the  same  rule 
should  not  apply  to  fraudulent  transfers  covered  by  the  cited 
provisions  of  §  70,  30  Stat.  566  [U.  S.  Comp.  St.  1901,  p.  3452]. 
The  case  of  Piatt,  Assignee,  v.  Matthews  (D.  C.)  10  Fed.  280, 
arose  under  the  bankrupt  law  previous  to  that  of  1898.    A  bill 
was  filed  by  the  assignee  to  reach  property  alleged  to  have  been 
fraudulently  transferred  by  the  bankrupt.    It  was  contended  on 
demurrer  that,  as  no  creditor  had  a  judgment  and  execution 
against  the  bankrupt,  such  a  bill  would  not  lie.    The  court  held 


KINDS  OF  PROPERTY  569 

that,  inasmuch  as  the  bankruptcy  act  vested  the  assignee  with  the 
title  of  all  property  conveyed  by  the  bankrupt  in  fraud  of  cred- 
itors, the  assignee  acquired  his  rights  through  the  act,  and  not 
through  what  had  been  done  by  the  creditors.  The  court  over- 
ruled the  demurrer. 

In  Bump  on  Fraudulent  Conveyances,  §  553,  it  is  stated  that, 
in  order  for  an  assignee  in  bankruptcy  to  maintain  a  bill  to  set 
aside  a  fraudulent  conveyance,  it  is  not  necessary  that  he  shall 
have  a  lien  on  the  property,  and  obtain  a  return  of  nulla  hona. 
In  Cady  v.  Whaling,  7  Biss.  430,  Fed.  Cas.  No.  2,285,  an  assignee 
in  bankruptcy  filed  a  bill  to  set  aside  a  fraudulent  conveyance 
made  before  the  bankrupt  act  was  passed.  It  was  contended  that 
such  a  bill  could  not  be  maintained  on  behalf  of  general  creditors 
who  had  no  specific  lien.  The  contention  was  overruled.  The 
question  is  very  thoroughly  discussed  in  Mueller,  Trustee,  v. 
Bruss,  112  Wis.  406,  88  N.  W.  229,  where  it  is  held  that  the  bill 
might  be  maintained,  though  no  judgment  at  law  had  been  recov- 
ered. The.  deeds  sought  to  be  set  aside  in  the  case  at  bar  were  x 
made  about  14  months  before  P.  S.  Coggins  was  adjudged  a  bank-  ^ 
rupt.  At  the  time  they  were  made  he  is  alleged  to  have  been 
insolvent,  and  the  bill  shows  that  some  of  the  debts  he  owed 
at  the  time  of  the  deed  were  unpaid  and  owing  when  he  was 
adjudicated  a  bankrupt.  The  bill  further  alleges  that  the  deeds  | 
of  March  8,  1901,  from  P.  S.  Coggins  to  Parramore,  and  from  ! 
Parramore  to  Mrs,  Coggins,  were  made  without  valuable  consid- 
eration and  were  voluntary. 

In  the  case  of  McKeown  v.  AUen,  37  Fla.  490,  20  South.  556, 
this  court  held  that  "a  voluntary  conveyance  by  one  who  is 
indebted  is  presumptively  fraudulent,  when  attacked  by  a  judg- 
ment creditor  upon  a  debt  existing  at  the  time  of  its  execution. ' ' 
As,  in  our  opinion,  a  trustee  in  bankruptcy  occupies  a  relation 
similar  to  that  of  a  judgment  creditor,  we  think  that  the  first 
four  grounds  of  the  demurrer  should  have  been  overruled. 

The  remaining  grounds  of  the  demurrer  are  directed  to  the 
allegations  upon  which  is  founded  the  prayer  of  the  bill  requir- 
ing the  defendants  to  answer  whether  P.  S.  Coggins  on  the  8th 
day  of  March,  1901,  contemplated  the  creation  of  other  and  fur- 
ther indebtedness  during  the  conduct  of  his  mercantile  business, 
and  whether  the  conveyances  from  Coggins  to  Parramore,  and 
from  Parramore  to  Lilla  F.  Coggins,  were  executed  and  contrived 
by  the  defendants  and  Parramore  of  covin  and  collusion,  to  the 
end,  purpose,  and  intent  that  such  persons  as  should  afterwards 


? 


570  ADMINISTRATION 

become  the  creditors  of  P.  S.  Coggins,  in  pursuance  of  his  said 
intentions  to  create  further  indebtedness,  should  be  delayed,  hin- 
dered, and  defrauded  of  their  just  and  lawful  debts  and  demands. 
It  is  contended,  first,  that  these  allegations  are  impertinent.  We 
ape  not  aware  of  any  recognized  practice  in  equity  authorizing 
a  defendant  to  raise  the  question  of  impertinence  in  a  bill  by 
demurrer.  The  recognized  practice,  as  we  understand  it,  is  to 
bring  the  matter  of  impertinence  to  the  notice  of  the  court  by 
motion  for  a  reference  or  by  exceptions.  19  Ency.  PI.  &  Pr.  200, 
207,  208,  214;  Story's  Eq.  PI.  (10th  ed.)  §  266  et  seq.;  Eastham 
V.  Liddell,  12  Vesey,  Jr.,  201.  But  assuming  the  court  might,  on 
its  own  motion,  refer  a  bill  for  impertinence,  if  the  matter  was 
called  to  its  attention,  we,  in  view  of  our  conclusions,  do  not 
regard  these  allegations  of  the  bill,  or  the  prayer  of  the  bill  in 
relation  thereto,  as  impertinent. 

Under  the  two  last  grounds  of  demurrer  it  is  contended  that 
creditors  who  became  such  after  the  deeds  from  P.  S.  Coggins 
to  Parramore,  and  from  Parramore  to  Lilla  F.  Coggins,  the  wife 
of  P.  S.  Coggins,  were  recorded,  to  wit,  after  the  9th  day  of 
March,  1901,  had  constructive  notice  of  said  deeds,  and  therefore 
such  creditors  could  not  attack  said  deeds  as  being  voluntary, 
and  that  the  trustee  in  bankruptcy  occupies  no  more  advan- 
tageous ground  than  such  subsequent  creditors. 

In  the  case  of  Alston  v.  Rowles,  13  Fla.  118,  the  rights  and 
status  of  subsequent  creditors  were  referred  to  on  p.  136.  Justice 
Westcott  there  says :  ' '  The  doctrine  of  the  Supreme  Court  of  the 
United  States,  as  announced  in  the  leading  case  of  Sexton  v. 

j  Wheaton,  8  Wheat.  229,  5  L,  ed.  603,  and  as  understood  by  Judge 
Jd^    1  Story,  is  that  a  voluntary  conveyance  made  by  a  person  not  in- 
'^  debted  at  the  time,  in  favor  of  his  wife,  cannot  be  impeached  by 

i.al'jUAA     subsequent  creditors  upon  the  mere  ground  of  its  being  volun- 
tary.   It  must  be  shown  to  be  fraudulent  in  fact,  or  to  be  made 

jwith  a  view  to  future  debts. ' '  The  opinion  in  this  case  ( Sexton 
V.  Wheaton)  was  written  by  Chief  Justice  Marshall,  and 
learnedly  discusses  the  proper  construction  and  effect  to  be  given 
the  statute  of  13  Eliz.,  dealing  with  fraudulent  conveyances  as 
regards  creditors,  and  the  statute  of  27  Eliz.,  dealing  with  fraud- 
ulent conveyances  as  regards  purchasers.  These  two  statutes  are 
substantially  embraced  in  §§  1991, 1992,  Rev.  St.  1892.  This  case 
and  the  kindred  one  of  Salmon  v.  Bennett,  1  Conn.  525,  7  Am. 
Dec.  237,  are  selected  in  1  Am.  Lead.  Cas.  17,  as  the  basis  for  very 
elaborate   discussion  and  annotation.     On  p.   *  40  it  is  said : 


KINDS  OF  PROPERTY  571 

"Against  eubsequent  creditors,  as  is  .decided  in  Sexton  v. 
Wlieatoii,  a  conveyance  is  not  void  unless  actually  fraudulent. 
But  there  is  a  little  obscurity  as  to  what  are  the  frauds  of  which 
they  might  take  advantage.  If  the  fraud  be  directed  specifically 
against  subsequent  creditors — that  is,  if  a  voluntary  settlement 
be  made  with  a  view  to  becoming  subsequently  indebted,  Avhich 
may  be  inferred  from  the  fact  of  debts  being  contracted  immedi- 
ately after — there  is  no  doubt  that  the  settlement  may  be  avoided 
by  subsequent  creditors.  But  that  is  not  the  only  sort  of  fraud 
that  may  be  taken  advantage  of  by  subsequent  creditors,  for  it  is 
clear  that  if  a  conveyance  be  made  colorably,  with  actual  intent 
to  defraud  any  existing  creditor  or  creditors,  it  may  be  avoided 
by  subsequent  creditors ;  in  other  words,  that  evidence  of  collu- 
sion against  existing  creditors  is  sufficient  evidence  of  fraud 
against  subsequent  creditors.  Otherwise  it  would  be  easy  to 
evade  the  statute.  The  party  might  pay  off  those  to  whom  he 
is  indebted  at  the  time  he  is  making  the  settlement,  by  borrow- 
ing of  others,  and  then  say  to  these  last,  'I  did  not  make  the 
settlement  to  defraud  you,  but  to  defraud  the  other  persons  who 
were  my  creditors. '  "  It  is  stated  that  the  foregoing  doctrine  is 
probably  limited  to  voluntary  conveyances  which  are  accompa- 
nied, in  law,  by  the  presumption  of  a  secret  trust  for  the  grantor. 
It  is  further  said  on  p.  *  41 :  "  An  intent  actually  to  defraud 
creditors  is  to  be  legally  inferred  from  the  grantor's  being  in- 
solvent at  the  time,  or  greatly  embarrassed,  or  so  largely  indebted 
that  his  conveyance  necessarily  has  the  effect  to  hinder  and  de- 
fraud creditors,  *  *  *  and  a  voluntary  conveyance  made 
under  such  circumstances  may  be  set  aside  by  a  subsequent  cred- 
itor." In  some  of  the  cases  referred  to  in  note  1,  p.  41,  we  find 
that  the  registration  laws  have  been  regarded  as  settling  the  law 
to  the  extent  that  a  subsequent  creditor  cannot  complain  of  a 
voluntary  deed  of  w^hich  he  has  constructive  notice,  except  on 
the  ground  of  actual  fraud.  Cooke 's  Lessee  v.  Kell,  13  Md.  469 ; 
Kane  v.  Roberts,  40  Md.  590.  In  the  last  case  the  headnote  states 
the  lav/  as  follows :  "A  deed  fraudulent  and  void  as  against  the 
grantor's  antecedent  creditors  is  valid,  if  recorded,  as  against 
subsequent  creditors,  when  there  is  nothing  in  the  deed  itself, 
and  no  evidence,  to  show  any  intent  or  design  to  defraud  such 
creditors."  In  the  case  of  Walker,  Evans  and  Cogswell  v.  BoU- 
mann,  22  S.  C.  512,  the  court  held  that  a  subsequent  creditor 
could  not  attack  a  prior  voluntary  deed,  of  which  he  had  notice, 
on  the  ground  that  it  was  voluntary,  but  that  he  could  do  so  on 


572  ADMINISTRATION 

the  ground  that  it  was  made  with  reference  to  future  indebted- 
ness, or  other  circumstances  of  fraud  other  than  its  being  vol- 
untary. Also,  see  Moore  v.  Blonheim,  19  Md.  172 ;  Brundage  v. 
Cheneworth,  101  Iowa,  256,  70  N.  W.  211,  63  Am.  St.  Rep.  382 ; 
Jackson  v.  Plyler,  38  S.  C.  496, 17  S.  E.  255,  37  Am.  St.  Rep.  782. 
See,  also,  the  following  annotated  eases :  Jenkins  v.  Clement,  14 
Am.  Dec.  706;  Hagermaun  v.  Buchanan,  14  Am.  St.  Rep.  751, 
752  et  seq.;  Rudy  v.  Austin,  35  Am.  St.  Rep.  85  et  seq.  On 
p.  752,  14  Am.  St.  Rep.,  supra,  the  annotator,  discussing  the 
effect  of  a  conveyance  as  against  subsequent  creditors,  says: 
"We  apprehend  that  no  general  rule  can  be  formulated  equally 
applicable  to  all  cases,  and  that  such  judicial  declarations  as 
have  been  made  upon  the  subject  must  be  interpreted  with  ref- 
erence to  the  particular  facts  of  the  case  in  which  they  were 
made.  If  the  subsequent  debts  were  contracted  long  after  the 
voluntary  transfer  was  made,  the  presumption  that  it  might 
have  been  made  with  a  view  of  contracting  them  and  of  defraud- 
ing the  subsequent  creditors  certainly  becomes  exceedingly  weak, 
and  may  reasonably  be  treated  as  entirely  destroyed,  unless 
other  circumstances  appear  to  give  it  renewed  vitality.  The  evi- 
dence may,  on  the  other  hand,  disclose  that  the  subsequent  debts 
have  merely  taken  the  place  of  prior  ones,  or  that  the  debtor  has 
continued  or  embarked  in  a  business  in  which  his  becoming  in- 
debted was  inevitable,  or  there  may  be  other  circumstances  of 
the  like  persuasive  character,  creating  or  strengthening  the  pre- 
sumption that,  as  the  transfer  was  in  fraud  of  prior,  it  was  also 
in  fraud  of  subsequent,  creditors."  Bump  on  Fraudulent  Con- 
veyances (4th  ed.)  §§  293-296.  After  a  careful  examination  of 
many  cases,  this  doctrine  seems  reasonable.  "We  are  unable  to 
^^  ,  /  discover  how  constructive  or  even  actual  notice  of  the  execution 
k  fjus'-^^l&Ta  voluntary  deed  by  a  debtor  could  of  itself  inform  a  subse- 
quent creditor  of  the  secret  purposes  of  the  debtor  in  making  the 
deed,  of  his  insolvency,  of  his  intention  to  contract  large  debts, 
or  of  his  intention  to  engage  in  a  hazardous  enterprise,  the  risks 
of  which  he  was  seeking  to  avoid,  or  of  other  fraudulent  and 
covinous  purposes  he  might  entertain,  so  as  to  shut  off  the  subse- 
quent creditor  from  attacking  the  voluntary  deed  for  such  or 
other  sufficient  causes.  See  Diggs  v.  McCullough,  69  Md.  592,  16 
Atl.  453 ;  Scott  V.  Keane,  87  Md.  709,  40  Atl.  1070,  42  L.  R.  A. 
359 ;  Baltimore  High  Grade  Brick  Co.  v.  Amos,  95  Md.  571,  52 
Atl.  582,  53  Atl.  148.  Our  opinion  is  that,  in  so  far  as  the  instant 
ease  is  concerned,  where  the  bill  is  filed  by  a  trustee  in  bank- 


KINDS  OF  PROPERTY  573 

ruptcy  representing  all  classes  of  creditors,  and  where  the  facts 
are  such  as  are  here  alleged,  the  bill  is  not  obnoxious  to  the 
demurrer  which  was  interposed. 

It  is  therefore  adjudged,  ordered,  and  decreed  that  the  order 
sustaining  the  demurrer  be,  and  the  same  is  hereby,  reversed,  and 
the  cause  remanded  for  further  proceedings  in  accordance  with 
law. 

TAYLOR,  C.  J.,  and  COCKRELL,  J.,  concur. 

CARTER,  SHACKLEFORD,  and  WHITFIELD,  JJ.,  concur 
in  the  opinion.2o  ^^^^j^  ^^  ^'^  ^-fS 

/  ^.,<.  ^T^  ^^  ^^^-^-^^ 

KNAPP  V.  MILWAUKEE  TRUST  COMPANY^.^*^  ^    -^^ 

216  U.  S.  545,  54  L.  ed.  610,  30  Sup.  Ct.  ^\2.X^^^^  ^ 

(United  States  Supreme  Court.    March  7,  19i(>y^^'"^''4?_^ 

Mr.  Justice  DAY  delivered  the  opinion  of  the  court :         _^  ^,    "^t/-*-^" 
The  Standard  Telephone  &  Electric  Company,  a  Wisconsin  ^^/    ^ 
corporation,  was  adjudicated  a  bankrupt  in  the  District  Court '  ^^^' 
of  the  United  States  for  the  eastern  district  of  Wisconsin.    Un-/^  ^-L^^o 
der  its  articles  of  association  it  was  authorized  to  carry  on  the  ^      -^  ^ 
business  of  selling  appliances  for  telephone  purposes  and  operat-   A*^*' 
ing  telephone  exchanges.     It  had  established  and  was  operating  i^/dUO^ 
a  telephone  exchange  at  the  village  of  Sheridan,  Wisconsin,  and  ..  *      y_. 
was  carrying  on  the  business  of  manufacturing  and  selling  tele- 
phone apparatus  in  the  city  of  Milwaukee,  Wisconsin,  where  it/itt^^^"^ 
had  a  stock  in  trade  and  trade  fixtures.     T,he^trastee  in  banS  ^^^  Ji 
ruptcy  filed  a  petition  to  sell  all  the  property  of  the  bankrupt.) 
Appellant  Knapp,  as  trustee  of  certain  mortgages  given  by  the- 
telephone  company,  intervened,  and  asked  to  have  the  lien  of 
the  mortgage  established  as  the  firat  lien  on  the  property  andl 
satisfied  out  of  the  proceeds  of  the  sale.    The  property  was  sold/ 
and  the  question  is  as  to  the  lien  of  these  mortgages  upon  the 
fund. 

The  trustee  in  bankruptcy  answered  the  petition  of  Knapp, 
trustee  under  the  mortgage,  averring  that  it  was  a  chattel  mort- 
gage, and  fraudulent  and  void  as  to  creditors,  because  of  certain 
agreements  contained  therein,  because  it  was  on  after-acquired 

20— See  Warren  v.  Moody,  122  U. 
S.  132. 


574  ADMINISTRATION 

property,  and  because  of  the  failure  to  jfile  an  affidavit  of  renewal, 
as  required  by  the  Wisconsin  statutes.  The  referee  in  bank- 
ruptcy  found  the  facts,  and  held  the  mortgage  void.  Upon  hear- 
ing, the  district  judge  reached  a  like  conclusion.    157  Fed.  106. 

The  Circuit  Court  of  Appeals  of  the  seventh  circuit,  upon 
a.ppeal,  affirmed  the  decree  of  the  District  Court,  holding  the 
mortgage  void  for  the  reasons  set  forth  at  large  in  the  opinion 
of  the  district  judge.    89  C.  C.  A.  467,  162  Fed.  675.     *     *     * 

The  mortgages  in  question,  which  were  upon  all  the  property 
and  estate  of  the  mortgagor,  acquired  or  to  be  acquired,  in  con- 
nection with  or  in  relation  to  the  business  of  the  mortgagor,  con- 
tain, among  others,  the  following  provisions: 

"Nothing  herein  contained  shall  be  construed  to  prevent  said 
first  party  from  carrying  on,  in  the  due  and  regular  course,  its 
said  business,  and  collecting  the  indebtedness  and  moneys  due 
or  to  become  due  therein,  and  applying  the  same  to  its  own  use, 
except  as  hereinafter  provided." 

The  mortgage  makes  provision  for  a  sinking  fund  of  $2,000 
annually,  $500  quarterly,  out  of  the  proceeds  of  the  business,  or, 
if  necessary,  from  the  general  resources;  and  the  mortgage -con- 
tains this  further  provision : 

' '  Said  first  party  further  agrees  that  no  dividend  shall  be  de- 
clared or  paid  on  its  capital  stock  at  any  time  when  any  portion 
of  said  sinking  fund  or  the  interest  on  said  bonds  shall  not  have 
been  duly  provided  for,  according  to  the  terms  of  this  indenture. 

"Provided,  however,  That  said  trustee  be  and  he  is  hereby 
empowered  and  authorized  in  his  discretion,  and  in  case  he  does 
not  procure  for  the  sinking  fund  any  of  said  bonds  at  par  and 
accrued  interest,  upon  application  in  writing  by  said  first  party 
to  waive  the  making  by  said  party  of  full  or  any  payment  into 
or  provision  for  said  sinking  fund  for  any  quarter  year,  and  in 
the  event  of  said  trustee  electing  not  to  require  said  first  party 
to  make  such  payment  into  or  provision  for  such  sinking  fund, 
the  moneys  which  would  otherwise  have  been  placed  therein  for 
the  purchase  of  said  bonds  as  aforesaid  shall  remain  at  the  dis- 
position of  said  first  party,  to  be  divided  as  dividends,  or  to  en- 
large, extend,  improve,  repair,  renew,  or  rehabilitate  its  said 
described  business  and  property." 

It  will  be  seen  that  under  these  provisions  the  mortgagor  is 
allowed  to  remain  in  possession  of  the  property,  applying  the 
proceeds  thereof  to  his  own  use,  except  that  no  dividends  shall 
be  declared  or  paid  without  first  making  provision  for  the  sink- 


KINDS  OF  PROPERTY  575 

ing  fund  and  the  interest  on  the  bonds,  and  with  this  important 
proviso, — ^that  the  trustee  under  the  mortgage  may,  in  his  dis- 
cretion, in  case  he  does  not  procure  for  the  sinking  fund  bonds 
at  par  and  accrued  interest,  upon  the  application  of  the  mort- 
gagor, waive  the  payment  into  or  provision  for  the  sinking  fund 
for  any  quarter  year,  and,  in  such  case,  the  moneys  which  would 
otherwise  go  into  the  sinking  fund  for  the  purchase  of  bonds 
shall  remain  at  the  disposition  of  the  mortgagor,  to  be  distributed 
as  dividends,  or  to  be  used  for  the  benefit  of  the  business  and 
property  in  the  manner  described.     *     *     * 

While  there  was  a  finding  that  no  intentional  bad  faith  was 
shown,  still  we  agree  with  the  Court  of  Appeals  and  the  district 
judge  that,  under  the  law  of  Wisconsin,  as  construed  by  her  high- 
est court,  such  conditions  as  were  contained  in  these  mortgages 
rendered  them  fraudulent  in  law  and  void  as  to  creditors.    Mer- 
chants' &  M.  Sav.  Bank  v.  Love  joy,  84  Wis.  601,  55  N.  W.  108 
Bank  of  Kaukauna  v.  Joannes,  98  Wis.  321,  73  N.  W.  997 
Charles  Baumbach  Co.  v.  Hobkirk,  104  Wis.  488,  80  N.  W.  740 
Franzke  v.  Hitchon,  105  Wis.  11,  80  N.  W.  931 ;  Durr  v.  Wildish, 
108  Wis.  401,  84  N.  W.  437. 

In  this  case  the  stipulations  of  the  mortgages  practically  per- 
mitted the  mortgagor  to  dispose  of  the  property  for  his  own  bene- 
fit, except  that  it  must  make  certain  provisions  for  a  sinking 
fund  and  interest  on  the  bonds;  and,  with  the  consent  of  the 
trustee,  no  provision  need  be  made  for  the  sinking  fund  or  inter- 
est, and  the  moneys  which  otherwise  would  have  been  placed 
therein  for  the  purchase  of  bonds  might  be  applied  for  the  bene- 
fit of  the  mortgagor,  whether  as  dividends  or  for  the  benefit  of 
its  business  and  property.  Such  provisions  are  clearly  within 
the  Wisconsin  decisions,  for  they  permit  the  mortgagor  to  have 
the  benefit  of  the  property,  to  keep  it  in  his  possession,  and  to 
appropriate  the  proceeds  to  his  own  use.  The  Wisconsin  deci-| 
sions  render  such  mortgages  invalid  as  to  creditors,  because  the 
effect  of  such  provisions  is  to  give  the  beneficial  use  of  the  mort-  \ 
gaged  property  to  the  mortgagor  in  possession,  and  to  make  pos-  ^ 
sible  the  use  of  the  mortgage  as  a  protection  against  creditors 
of  the  mortgagor  when  they  shall  undertake  to  assert  their 
rights. 

Bjitjt^s  said  the  trustee  in  bankruptcy  may  not  defend  against       n   / 
these  mortgages^  It  js  contended  that  they  are  good  as  between   "^N  "^s^^ 
the  parties,  and  that,  as  to  them,  the  trustee  in  bankruptcy  occu-  ^^-a^yj   ^ 
pies  no  better  position  than  the  bankrupt.     This  question  was^v      .    ^ 


576  ADMINISTRATION 

raised  and  decided  in  Security  Warehousing  Co.  v.  Hand,  206 
U.  S.  415,  51  L.  ed.  1117,  27  Sup.  Ct.  Rep.  720,  11  A.  &  E.  Ann. 
Cas.  789.  That  case  arose  in  Wisconsin,  and  it  was  therein  held 
that,  under  the  Wisconsin  law,  an  attempted  pledge  of  property, 
without  change  of  possession,  was  void  under  the  laws  of  that 
state.  In  that  case,  as  in  this  one,  the  question  was  raised  as  to 
whether  the  trustee  in  bankruptcy  could  question  the  transaction, 
and  it  was  contended  that,  being  valid  as  between  the  partieSj  ,the_ 
trustee  took  only  the  right  and  title  of  the  bankrupt.  The  ques- 
tion was  fully  considered  therein,  and  the  previous  cases  in  this 
f-^urt  were  reviewed.  The  principle  was  recognized  that  the  trus- 
)  tee  in  bankruptcy  stands  in  the  shoes  of  the  bankrupt,  and  that 
/  the  property  in  his  hands  is  subject  to  the  equities  impressed 
(  upon  it  while  in  the  hands  of  the  bankrupt. 
^ —  But  it  was  held  that  the  attempt  to  create  a  lien  upon  the  prop- 
erty of  the  bankrupt  was  void  as  to  general  creditors  under  the 
laws  of  Wisconsin.  Applying  §  70a  of  the  bankruptcy  act,  it  was 
held  that  the  trustee  in  bankruptcy  was  vested  by  operation  of 
the  bankrupt  law  with  the  title  of  the  property  transferred  by 
the  bankrupt  in  fraud  of  creditors,  and  also  that  the  trustee  took 
the  property  which,  prior  to  the  filing  of  the  petition,  might  have 
been  levied  upon  and  sold  by  judicial  process  against  the  bank- 
rupt. It  was  therefore  held  that,  as  there  had  been  no  valid 
pledge  of  the  property,  for  want  of  change  of  possession,  it  could 
have  been  levied  upon  and  sold  under  judicial  process  against 
the  bankrupt  at  the  time  of  the  adjudication  in  bankruptcy,  and 
passed  to  the  trustee  in  bankruptcy. 

The  principles  announced  in  Security  Warehousing  Co.  v. 
Hand,  supra,  when  applied  to  the  present  case,  are  decisive  of 

[the  question  here  presented.  Under  the  Wisconsin  statutes  and 
decisions  of  the  highest  court  of  that  state  the  conditions  con- 
tained upon  the  face  of  this  mortgage  were  such  as  to  render  it 
fraudulent  in  law  and  void  as  to  creditors,  and  prior  to  the  filing 
of  the  petition  in  bankruptcy  the  property  might  have  been 
levied  upon  and  sold  by  judicial  process  against  the  bankrupt. 

It  is  true  that  in  Security  Warehousing  Co.  v.  Hand  the  court 
said  that  the  attempted  pledge  was  a  ' '  mere  pretense,  a  sham ; ' ' 
but  the  courts  of  Wisconsin  have  held  that  such  provisions  as 
are  in  these  mortgages,  giving  the  bankrupt  the  right  to  dispose 
of  the  mortgaged  property  for  its  own  benefit,  rendered  the  con- 
veyance fraudulent  in  law,  and  therefore  void  as  to  creditors. 
This  brings  the  conveyance  within  the  terms  of  the  bankrupt  act. 


KINDS  OF  PROPERTY  577 

as  one  which  the  trostee  may  attaidc^  as  conclusively  as  it  would 
if  fraudulent  intent  in  fact  were  shown  to  exist. 

In  Mueller  v.  Bruss,  112  Wis.  406,  88  N.  W.  229,  it  was  held 
that  a  trustee  in  bankruptcy  could  maintain  an  action  to  set 
aside  a  fraudulent  conveyance,  but  that  the  complaint  must  aver 
and  the  trustee  must  show  that  the  estate  had  not  sufficient  assets 
in  the  trustee's  hands  to  satisfy  the  claims  filed  against  the 
debtor.  And  it  is  insisted  that  a  showing  of  this  character  is 
lacking  in  the  present  case.  Without  deciding  that  under  the 
bankruptcy  act  the  answer  of  the  trustee  in  bankruptcy  was 
required  to  make  this  averment,  accompanied  by  proof,  if  neces- 
sary, it  is  sufficient  upon  this  point  to  say  that  the  intervening 
petition  of  the  trustee  of  the  mortgage  sought  to  assert  a  lien, 
upon  all  the  property  of  the  bankrupt  in  the  trustee's  hands. 
The  suggestion  in  appellant's  brief,  that  the  trustee  in  bank- 
ruptcy may  possibly  recover  against  directors  and  officers  of  the 
corporation  for  dereliction  of  duty,  and  against  stockholders  for 
unpaid  subscriptions  and  additional  liability  on  their  part,  pre- 
sents no  reason  why  he  may  not  resist  an  attempt  to  take  all  the 
available  property  in  his  hands  to  apply  on  a  mortgage  void 
as  to  creditors  at  the  time  of  the  adjudication.  

We  are  of  opinion,  for  the  reasons  stated,  that  the  mortgages 
in  question  are  void,  and  that,  under  the  bankruptcy  law,  the 
trustee  can  assert  their  invalidity. 

Judgment  affirmed. 

THOMPSON  V.  FAIRBANKS 

196  U.  S.  516,  49  L.  ed.  577,  25  Sup.  Ct.  306 

[See  this  case  given  on  page  282,  ante]  ^i 

21 — "The  question  is  simply  such  as  to  prevent  the  York  Mfg. 
whether  the  York  Mfg.  Co.  has  a  Co.  from  asserting  its  right  to  re- 
right  under  its  conditional  sale  of  move  the  machinery  by  virtue  of 
the  machinery  to  the  bankrupt  cor-  reservation  of  the  title  contained  in 
poration  to  take  the  machinery  out  its  contract.  *  *  * 
of  the  premises  where  it  was  placed  "We  come,  then,  to  the  question 
as  against  all  except  judgment,  or  whether  an  adjudication  in  bank- 
other  creditors,  by  some  specific  lien.  ruptcy  was  equivalent  to  a  judg- 
There  are  no  judgment  creditors  in  ment,  attachment,  or  other  specific 
the  case,  and  no  attachment  has  been  lien  upon  the  machinery.  *  *  » 
levied,  and  the  question  is  simply  We  are  of  opinion  that  it  did  not 
whether  the  adjudication  in  bank-  operate  as  a  lien  upon  the  ma.chinerjr, 
ruptcy  is  equivalent  to  a  judgment  as  against  the  York  Mfg.  Co.,  the 
or  an  attachment  on  the  property,  vendor  thereof.  Under  the  proTl- 
H.  &  A.  Bankruptcy — 37 


578  1  ADMINISTRATION 

'   3.    DISSOLUTION  OF  LIENS     / 

HENDERSON  v.  MAYER 
225  U.  S.  631,  56  L.  ed.  1233,  32  Sup.  Ct.  699 
(United  States  Supreme  Court,  June  7,  1912) 

Samuel  Mayer  owned  a  plantation  in  Dooley  county,  Geoi^a, 
which  he  rented  to  Joseph  Burns  for  one  year.  The  rent  not 
having  been  paid  at  maturity,  Mayer,  on  November  13,  1908, 
made  an  affidavit  in  conformity  with  the  statute,  and  a  justice 
of  the  peace  thereupon  issued  a  distress  warrant,  which,  on  the 
same  day,  was  levied  upon  the  cotton,  corn,  and  other  products 
of  the  place.  The  crops  found  on  the  premises  being,  appar- 
ently, insufficient  to  pay  what  was  due,  the  sheriff,  at  the  same 
time,  levied  upon  other  property  by  virtue  of  §  2795  of  the  Code 
of  Georgia,  which  declares  that  "landlords  shall  have  a  special 
lien  for  rent  on  crops  made  on  land  rented  from  them,  superior 
to  all  other  liens  except  liens  for  taxes,  *  *  *  and  shall  also 
have  a  general  lien  on  the  property  of  the  debtor  liable  to  levy 
and  sale,  and  such  general  lien  shall  date  from  the  time  of 
the  levy  of  a  distress  warrant  to  enforce  the  same. ' ' 

Three  days  after  the  levy  a  petition  in  bankruptcy  was  filed 
against  Bums,  the  tenant,  who  was  subsequently  adjudged  a 
bankrupt.  The  trustee,  when  elected,  obtained  possession  of  all 
the  property  seized  by  the  sheriff,  and  subsequently  sold  it  in 
the  due  administration  of  the  estate.  The  proceeds  of  the  cotton 
and  corn  were  paid  over  to  Mayer,  it  being  conceded  that  the 

sions  of  the  bankrupt  act,  the  trus-  coming  into  the  custody  of  the  bank- 
tee  in  bankruptcy  is  vested  with  no  ruptey  court,  shall  be  deemed  vested 
better  right  or  title  to  the  bank-  with  all  the  rights,  remedies,  and 
rupt's  property  than  belongs  to  the  powers  of  a  creditor  holding  a  lien 
bankrupt  at  the  time  when  the  trus-  by  legal  or  equitable  proceedings 
tee's  title  accrued."  York  Manu-  thereon;  and  also,  as  to  all  prop- 
facturing  Co.  v.  Cassel,  201  U.  S.  erty  not  in  the  custody  of  the  bank- 
344,  350.  See  7  Mich.  L.  Kev.  474,  ruptey  court,  shall  be  deemed  vested 
where  it  is  suggested  that  the  mat-  with  all  the  rights,  remedies,  and 
ter  considered  in  the  case  quoted  powers  of  a  judgment  creditor  hold- 
above  should  be  considered  by  Con-  ing  an  execution  duly  returned  un- 
gress.  satisfied."  See  24  Harv.  L.  Rev. 
In  1910,  §47a  (2)  of  the  bank-  620;  In  re  White's  Express  Co.,  215 
ruptey  act  was  Amended  by  adding  Fed.  894 ;  Holt  v.  Henley,  232  U.  S, 
the  following:  "and  such  trustees,  637. 
as  to  all  property  in  the  custody  or 


DISSOLUTION  OF  LIENS  579 

landlord's  special  lien  on  the  crops  had  not  been  affected  by  the  i 
bankruptcy  proceedings. 

]\I^yeralso_claimed  that,  by  virtue  of  his  general  lien,  he  was 
entitled  to  have  the  balance  of  the  rent  paid  out  of  the  proceeds 
arising  from  the  sale  of  the  other  property  levied  on,  and  filed 
his  intervention  to  secure  such  an  order.  The  trustee's  objection 
was  sustained  by  the  referee  on  the  ground  that  the  landlord's 
general  lien  was  discharged  because  it  had  been  "obtained  by 
legal  proceedings"  or  levy  made  three  days  before  the  filing  of 
the  petition  in  bankruptcy.  His  ruling  was  reversed  by  the  Dis- 
trict Court  (175  Fed.  633).  That  judgment  was  affirmed  by  the 
Circuit  Court  of  Appeals  without  opinion.  The  case  was  then 
brought  here  by  writ  of  certiorari,  granted  at  the  instance  of  the 
trustee,  who  claims  that  under  the  Georgia  Code  the  landlord  had 
no  lien  on  tile  property  prior  to  the  levy  of  the  distress  war- 
rant, and  that  whatever  right  had  been  acquired  by  that  seizure 
was  discharged  by  |67/,  which  declares  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  monthsjprior  to  the  filing  of  a  petition  in  bankruptcy  against 
him  shall  be  null  and  void  in  case  he  is  adjudged  a  bankrupt." 

Mr.  Justice  LAMAR,  after  making  the  foregoing  statement, 
delivered  the  opinion  of  the  court : 

The  provisions  of  the  bankruptcy  act,  preventing  an  insolvent 
from  giving  or  the  creditor  from  securing  preferences  for  pre- 
existing debts,  apply  not  only  to  mortgages  and  transfers  volun- 
tarily made  by  the  debtor,  but  also  to  those  preferences  which,  are 
obtained  through  legal  proceedings,  whether  the  lien  dates  from 
the  entry  of  the  judgment,  from  the  attachment  before  judg- 
ment, or,  as  in  some  states,  from  the  levy  of  execution  after 
judgment.  But  the  statute  was  not  intended  to  lessen  rights 
which  already  existed,  nor  to  defeat  those  inchoate  liens  given 
by  statute,  of  which  all  creditors  were  bound  to  take  notice,  and] 
subject  to  which  they  are  presumed  to  have  contracted  when  the^ 
dealt  with  the  insolvent. 

Liens  in  favor  of  laborers,  mechanics,  and  contractors  are  of 
this  character ;  and  although  they  may  be  perfected  by  record  or 
foreclosure  within  four  months  of  the  bankruptcy,  they  are  not 
created  by  judgments,  nor  are  they  treated  as  having  been  ' '  ob- 
tained through  legal  proceedings,"  even  when  it  is  necessary  to 
enforce  then  by  some  form  of  legal  proceeding.    The  statutes  of 


580  ADMINISTRATION 

the  various  states  differ  as  to  the  time  when  such  liens  attach, 
and  also  as  to  the  property  they  cover.     They  may  bind  only 
what  the  plaintiff  has  improved  or  constructed;  or  they  may 
extend  to  all  the  chattels  of  the  debtor,  or  *'all  the  property  in- 
volved in  the  business."    Re  Bennett,  82  C.  C.  A.  531,  153  Fed. 
673. 
/      In  some  cases  the  lien  dates  from  commencement  of  the  work, 
/  or  from  the  completion  of  the  contract.    In  others,  prior  to  levy 
^  they  are  referred  to  as  being  dormant  or  inchoate  liens,  or  as  "  a 
)   right  to  a  lien."    Re  Bennett,  82  C.  C.  A.  531,  153  Fed.  677; 
Re  Laird,  48  C.  C.  A.  538,  109  Fed.  554.22    But  the  courts,  deal- 
ing specially  with  bankruptcy  matters,  have  almost  uniformly 
held  that  1;hese_staiutoiy.4U!efe.rences  are  not  obtained  through 
legal  proceedings,  and  therefore  are  not  defeated  by  §  67/,  even 

1  where  the  registration,  foreclosure,  or  levy  necessary  to  their  com- 
pletion or  enforcement  was  within  four  months  of  the  filing  of 
the  petition  in  bankruptcy. 

Similar  rulings  have  been  made  where  the  landlord  has  only 
a  common  law  right  of  distress.  Re  West  Side  Paper  Co.,  89  C. 
C' A.  110,  162  Fed.  110,  15  Ann.  Cas.  384.  This  is  often  referred 
to  as  a  lien,  but  it  is  "  only  in  the  nature  of  security. "  3  Bl.  Com. 
18.  The  pledge,  or  quasi  pledge,  which  the  landlord  is  said  to 
have,  is,  at  most,  only  a  power  to  seize  chattels  found  on  the 
rented  premises.  These  he  could  take  into  possession  and  hold 
until  the  rent  was  paid.  Doe  ex  dem.  Gladney  v.  Deavors,  11  Ga. 
84.  But  before  the  distraint  the  landlord  at  common  law  has 
"no  lien  on  any  particular  portion  of  the  goods,  and  is  only  an 
ordinary  creditor,  except  that  he  has  the  right  of  distress  by  rea- 
son of  which  he  may  place  himself  in  a  better  position. ' '  Sutton 
V.  Rees,  9  Jur.  N.  S.  456,  1  New  Reports,  464,  8  L.  T.  N.  S.  343, 
11  Week.  Rep.  413.  A  right  fully  as  great  is  created  by  the 
Georgia  statute  here  in  question.  For  while  giving  the  owners 
of  agricultural  lands  a  special  lien  on  the  crops,  there  was  no 
intention  to  deprive  the  proprietor  of  urban  and  other  real  estate 
f  the^lien  for  rent  which  there,  as  in  other  states,  isj^reated  as 
,n  incident  growing  out  of  the  relation  of  landlord  and  tenant!^ 

The  Code  (§2787)  expressly  ''establishes  liens  in  favor  of 
landlords."    It  (§  3124)  gives  them  "power  to  distrain  for  rent 

22 — For  example  see  In  re  Eoeber,  liens  for  material  and  labor  under 

121  Fed.  449;  Kane  Co.  v.  Kinney,  New    York    law.     Cf.    Eyeraon     & 

174  N.  Y.   69;    In  re  Grissler,   136  Son  v.  Smith,  152  lU.  641. 
Fed.    754,    all    with    reference    to 


DISSOLUTION  OF  LIENS  581 

as  soon  as  the  same  is  due. ' '  It  declares  ( §  2795}  jtlmt  landlords, 
"shall  have  a  general  lien  on  the  property  of  the  tenant,  liable 
to  levy"  and,  sal©  *  *  *  which  dates  from  the  levy  of  the 
distress  waSrant  to  enforce  the  same."  It  is  true  that  prior  to 
levy  it  covers  no  specific  property,  and  attaches  only  to  what  is 
seized  under  the  distress  warrant  issued  to  enforce  the  lien  given 
by  statute.  But  in  this  respect  it  is  the  full  equivalent  of  a  com- 
mon-law distress — the  lien  of  which  is  held  not  t&  be  discharged 
by  §  67/.  Re  West  Side  Paper  Co.,  supra;  Austin  v.  O'Reilly, 
2  Woods,  670,  Fed.  Gas.  No.  665. 

The  fact  that  the  warrant  could  be  levied  upon  property  which 
had  never  been  on  the  rented  premises  does  not  change  the 
nature  of  the  landlord's  right,  though  it  may  increase  the  extent 
of  his  security.  The  statutory  restrictions  as  to  date,  rank,  and 
priority  may  be  important  in  a  controversy  with  other  lienhold- 
ers,  but  was  whoUy  immaterial  in  this  contest  between  the  land- 
lord and  trustee,  where  the  latter  was  only  representing  general 
creditors.  As  against  them  the  landlord  had,  from  the  beginning 
of  the  tenancy,  the  right  to  a  statutory  lien,  which  had  com- 
pletely ripened  and  attached  before  the  filing  of  the  petition  in 
bankruptcy.  The  priority  arising  from  the  levy  of  the  distress 
warrant  was  not  secured  because  Mayer  had  been  first  in  a  race 
of  diligence,  but  was  given  by  law  because  of  the  nature  of  th 
claim  and  the  relation  between  himself  as  landlord  and  Burns 
as  tenant.  In  issuing  the  distress  warrant  the  justice  acted  min- 
isterially. Savage  v.  Oliver,  110  Ga.  638,  36  S.  E.  54.  The  sheriff 
was  not  required  to  return  it  to  any  court,  and  no  judicial  hear- 
ing or  action  was  necessary  to  authorize  him  to  sell  for  the  pur- 
pose of  realizing  funds  with  which  to  pay  the  rent.  Such  a  lien 
was  not  created  by  a  judgment  nor  "obtained  through  legaT 

procee^ngs."  " 

.  Decisions  to  the  same  effect  were  made  under  the  bankruptcy 
act  of  1867  (14  Stat,  at  L.  522,  §  14,  c.  176),  which  dissolved 
attachments  or  mesne  process  within  four  months  prior  to  the 
filing  of  the  petition.  In  Austin  v.  O'Reilly,  supra,  decided  in 
1875,  it  appeared  that  in  Mississippi  the  landlord  had  no  lien, 
but,  as  in  Georgia,  was  authorized  to  seize  (but  by  attachment) 
the  tenant's  goods  wherever  found.  Justice  Bradley,  presiding 
at  circuit,  said  that  the  landlord's  right  to  a  distress  at  common 
law  was  not  a  strict  lien,  but '  *  being  commonly  called  a  lien,  and 
being  a  peculiar  right  in  the  nature  of  a  lien,  *  *  *  the  Su- 
preme Court  of  the  United  States,  and  most  of  the  District  and 


582  ADMINISTRATION 

vCircuit  Courts,  have  regarded  it  as  fairly  to  be  classed  as  a  lien, 
Kvithin  the  true  intent  and  meaning  of  the  bankrupt  act,"  and 
Ihat  the  statutory  attachment  being  in  the  nature  of  a  common- 
law  distress  was  not  nullified  or  discharged  by  the  bankruptcy 
proceedings. 

There  is  nothing  in  the  act  of  1898  opposed  to  this  conclu- 
sion. On  the  contrary,  its  general  provisions  indicate  a  purpose 
to.  continue  the  same  policy,  and  an  intent,  as  against  general 
creditors,  to  preserve  rights  like  those  given  by  the  Georgia  stat- 
ute to  landlords,  even  though  the  lien  was  enforced  and  attached 
by  levy  of  a  distress  warrant  within  four  months  of  the  filing  of 
the  petition  in  bankruptcy .^3 

Affirmed.     ,      "'^^ 

h^        J^       j}^Q?'S^  V.  TITLE  GUARANTY  &  SURETY  CO. 

i^C  ^     ,  ^^"-^  %    152  Wis.  611,  140  N.  W.  348 

^*^-^»^    *    ^'^"C  Supreme  Court  of  Wisconsin.    March  19,  1913) 

Y  py  BARNES,  J.     On  July  8,  1911,  the  plaintiff  commenced  an 

51^       >      action  against  the  National  Boat  &  Engine  Company  and  attached 
24  its  property.     On  July  14th  the  attachment  was  released  on  a 

^         bond  conditioned  to  pay  on  demand  the  amount  of  any  judg- 
jfju^     j^     ment  which  the  plaintiff  might  recover.     This  bond  was  signed 
.A>^    AVyfls  surety  by  the  Title  Guaranty  &  Surety  Company,  the  defend- 
V^    "t"      ant  in  the  present  action.    Judgment  by  default  was  taken  in  the 
^/•^'"'^•^c     original  action  on  August  3,  1911.     On  September  5,  1911,  the 
t  defendant  therein  was  adjudged  a  bankrupt.     This  action  is 

brought  against  the  surety  to  recover  the  amount  of  the  judg- 
ment secured  by  plaintiff  against  the  bankrupt. 

The  substantial  question  in  the  case  is  whether  the  adjudica- 
tion  in  bankruptcy  destroyed  the  judgment  and  releasecMthe 
sure^  from  liability.  The  answer  to  this  question  depends  upon 
t^e  construction  that  should  be  placed  on  §67,  subd.  '% ' '  of  the 
bankruptcy  act  (Act  July  1, 1898,  c.  541,  30Stat.  564,~5B5"  [U.  S. 
Comp.  St.  1901,  p.  3449] ;  1  Fed.  Stat.  Ann.  693).  This  section 
reads  as  follows:  "That  all  levies,  judgments,  attachments,  or 
other  liens,  obtained  through  legal  proceedings  against  a  person 
who  is  insolvent,  at  any  time  within  four  months  prior  to  the 

23_See  Hulbutt  v.  Brown,  72  N.  642;  Metcalf  v.  Barker,  187  U.  S. 
H.  235;  Doe  v.  Childress,  21  WaU.       165. 


DISSOLUTION  OF  LIENS  583 

filing  of  a  petition  in  bankruptcy  against  him,2*  shall  be  deemed 
uuU  and  void  in  case  he  is  adjudged  a  bankrupt,  and  the  prop- 
erty affected  by  the  levy,  judgment,  attachment,  or  other  lien 
shall  be  deemed  wholly  discharged  and  released  from  the  same, 
and  shall  pass  to  the  trustee  as  a  part  of  the  estate  of  the  bank- 
rupt, unless  the  court  shall,  on  due  notice,  order  that  the  right 
under  such  levy,  judgment,  attachment,  or  other  Uen  shall  be 
preserved  for  the  benefit  of  the  estate;  and  thereupon  the  same 
may  pass  to  and  shall  be  preserved  by  the  trustee  for  the  benefit 
of  the  estate  as  aforesaid. ' ' 

If  this  statute  is  to  be  read  literally,  and  it  is  held  that  the"^ 
judgment  has  been  wiped  out  of  existence  by  the  proceedings  in 
bankruptcy,  then  we  think  it  would  have  to  be  conceded  that  the   1 } 
bondsman  is  absolved  from  liability.    Its  undertaking  is  to  pay  I 
a  valid  judgment,  not  one  that  is  void  and  does  not  in  fact  exist.  I 
If  the  statute  only  destroys  any  lien  created  by  the  judgment,  and  I 
simply  aims  to  prevent  the  judgment  creditor  from  obtaining  any  /  ^ 
preference  or  advantage  over  the  general  creditors  of  the  bank- 1 
rupt  by  virtue  of  his  judgment,  then  the  adjudication  in  bank- 1 
ruptcy  did  not  discharge  the  surety. 

There  are  a  number  of  decisions  wherein  the  courts,  follow- 
ing the  language  of  the  statute,  have  said  that  the  effect  of  an 
adjudication  in  bankruptcy,  within  four  months  after  the  re- 
covery of  a  judgment  against  the  bankrupt,  is  to  render  the 
judgment  void.  In  re  Richards  (D.  C.)  95  Fed.  258,  and  In  re 
Beals  (D.  C.)  116  Fed.  530,  are  typical  of  the  class  of  cases  re- 
ferred to.  In  nearly  all  of  them  the  same  result  would  have  been 
reached  had  the  courts  held  that  it  was  the  liens  created  by  the 
judgments  that  had  been  destroyed,  and  not  the  judgments  them- 
selves. The  point  presently  under  discussion  was  neither  in- 
volved nor  considered  in  the  great  majority  of  these  eases,  which 
are  relied  upon  by  the  appellant,  and  therefore  they  cannot  be 
accorded  any  great  weight  in  deciding  the  question  before  us. 

Congress  gets  its  power  to  legislate  on  the  subject  of  bank- 
ruptcy from  §  8  of  article  1  of  the  Constitution,  which  empowers 
it  to  pass  ' '  uniform  laws  on  the  subject  of  bankruptcies  through- 
out the  United  States."  It  has  been  held,  correctly,  we  think, 
that  the  '' subject  of  bankruptcies  includes  the  distribution  of 
the  property  of  the  fraudulent  or  insolvent  debtor  among  his 

24 — This  language  does  not  apply      De  Lue,  91  Fed.  510,  to  the  contrary, 
to  involuntary  bankruptcy  alone.  In       is  declared  to  be  erroneous, 
re  Blair,  108  Fed.  529,  where  In  re 


584  ADMINISTRATION 

creditors,  and  the  discharge  of  the  debtor  from  his  contracts  and 
legal  liabilities,  as  well  as  all  the  intermediate  and  incidental 
matters  tending  to  the  accomplishment  or  promotion  of  these  two 
principal  ends."  Silverman's  Case,  2  Abb.  U.  S.  243,  245,  Fed. 
Cas.  No.  12,855. 

The  present  bankruptcy  act  aims  to  secure  an  equal  and  equi- 
table distribution  of  the  debtor's  property  among  his  creditors, 
and  to  promote  that  end  has  in  effect  provided  that  no  preference 
jor  advantage  may  be  obtained  by  one  creditor  over  another  by 
virtue  of  any  attachment,  garnishment,  or  levy  made  within  four 
months  of  the  adjudication  in  bankruptcy.    This  is  as  far  as  it 
was  necessary  for  Congress  to  go  to  attain  the  ends  aimed  at. 
It  may  well  be  doubted  whether  Congress  could  go  to  the  extent 
claimed.    A  creditor  has  a  right  to  sue  his  debtor.    State  Courts 
have  jurisdiction  of  the  persons  of  the  parties,  if  they  live  therein, 
and  of  the  subject-matter  of  an  action  on  contract  brought  to 
collect  a  debt.     A  judgment  in  such  an  action  is  valid  when 
rendered.    Congress  can  say  to  the  creditor,  "You  may  not  ob- 
tain any  special  advantage  by  virtue  of  the  judgment  over  other 
creditors  in  the  distribution  of  the  bankrupt's  estate,"  and  fur- 
ther that  the  creditor  may  be  discharged  from  his  debts,  and 
that  the  judgment  cannot  be  enforced  against  him.    But  can  it 
say,   for  instance,  that  the  judgment  is  not  evidence  of  the 
amount  of  the  indebtedness  due  from  the  bankrupt  to  the  judg- 
ment creditor?     Or  that  the  judgment  is  unenforceable  if  the 
jbankrupt  is  not  entitled  to  a  discharge  under  the  law?    Or  that 
/the  judgment  creditor  may  not  proceed  against  a  surety  whose 
/liability  depends  on  the  validity  of  the  judgment,  where  such 
action  in  no  way  affects  the  other  creditors  of  the  bankrupt? 
Whatever  may  be  the  correct  answers  to  these  questions,  they 
pointedly  suggest  the  improbability  of  congressional  intent  to 
legislate  to  the  extent  claimed,  and  to  the  extent  to  which  a  lit- 
eral reading  of  the  statute  would  lead.    It  was  whoUy  unneces- 
sary to  do  so.    The  judgment  of  the  Wisconsin  court  was  valid 
when  it  was  rendered,  and  the  liability  of  the  surety  became 
fixed  at  such  time.    I|_the  creditor  had  any  real  estate  to  which, 
the  lien  of  the  judgment  attached,  such  lien  was  destroyed  by  the 
adjudication  in  bankruptcy,  because  such  destruction  was  neces- 
sary to  preserve  the  property  for  all  of  the  creditors.    The  same 
would  be  true  of  the  attachment  lien  if  that  had  continued.    If 
the  bankrupt  was  discharged,  the  judgment  could  not  be  enforced 
against  him,  because  Congress  had  the  right  to  absolve  the  bank- 


DISSOLUTION  OF  LIENS  585 

rupt  from  his  debts  after  his  property  or  the  proceeds  of  it  were 
distributed  among  the  creditors.  It  was  wholly  unnecessary  to 
discharge  the  surety  from  the  payment  of  its  obligation  in  orders 
to  protect  either  the  debtor  or  the  creditors. 

Aside  from  what  has  been  said,  there  are  a  number  of  consid- 
erations which  warrant  the  conclusion  that  the  statute  aimed  at 
the  lien  created  by  a  judgment  rather  than  the  judgment  itself. 

The  words  "all  judgments,"  found  in  §  67/  heretofore  quoted, 
are  found  in  the  act  under  the  subtitle  "liens,"  and  are  found 
in  connection  with  the  words  "levies,  attachments,  and  other 
liens, ' '  indicating  that  it  was  the  lien,  rather  than  the  judgment 
itself,  that  Congress  intended  to  reach. 

§_63a  of  the  bankruptcy  act  provides  that  judgments  are  prov- 
able as  claims  against  the  estate  of  the  bankrupt,  without  regard 
to  the  time  of  their  rendition.  Congress  certainly  did  not  intend 
that  a  void  judgment  could  be  proved  as  a  claim  in  the  bank- 
ruptcy proceeding. 

Subsection  5  of  §  63a  provides  that  judgments  rendered  after 
the  filing  of  the  petition  in  bankruptcy,  and  before  the  consid- 
eration of  the  application  for  the  discharge,  may  be  proved 
against  the  estate  of  the  bankrupt,  less  costs  incurred  and  inter- 
est accrued  after  the  time  of  filing  the  petition. 

Under  §  17,  judgments  in  actions  for  frauds  or  obtaining 
property  under  false  pretenses  or  for  willful  and  malicious  in- 
jury to  the  person  or  property  of  another  are  not  affected  at 
all  by  a  discharge  in  bankruptcy.  Such  a  judgment  is  perfectly 
valid  if  entered  the  day  before  filing  the  petition  in  bankruptcy. 
If  §  67  is  to  receive  a  literal  construction,  it  is  obviously  incon- 
sistent with  §  17,  because  the  words  "all  judgments"  would  in- 
clude one  rendered  in  any  of  the  classes  of  cases  provided  for 
in  said  §  17. 

§  905,  Eev.  St.  (U.  S.  Comp.  St.  1901,  p.  677),  provides  that 
the  records  and  judicial  proceedings  of  the  courts  of  any  state 
or  territory,  when  duly  authenticated  as  therein  specified,  shall 
have  such  faith  and  credit  given  them  in  every  court  in  the 
United  States  as  they  have  by  law  or  usage  in  the  courts  of  the 
state  from  which  they  are  taken.  This  statute,  in  substantially 
its  present  form,  was  enacted  in  1790 ;  and  it  is  hardly  suppos- 
able  that  Congress  intended  to  amend  or  partially  repeal  it  by 
§  67/  of  the  bankruptcy  act. 

Again,  if  the  words  "all  judgments"  are  to  be  literally  con- 
strued, they  must  be  held  to  include  judgments  rendered  in 


586  ADMINISTRATION 

courts  of  foreign  countries,  regardless  of  treaty  stipulations,  and 
perhaps  even  judgments  in  the  court  in  which  the  bankruptcy- 
proceedings  are  being  carried  on.  We  hold  that  the  words  ' '  all 
judgments"  are  qualified  and  defined  by  their  context,  and  that 
it  is  the  lien  or  preference  created  by  the  judgment  that  is  void. 
This  conclusion  is  not  without  support  in  the  authorities.  Doyle 
V.  Heath,  22  R.  I.  213,  47  Atl.  213,  is  a  well-considered  ca«e 
directly  in  point.  The  case  of  In  re  Richards,  heretofore  cited, 
was  appealed,  and  the  Circuit  Court  of  Appeals,  in  affirming  the 
judgment,  was  careful  to  say  that  it  was  the  lien  of  the  judg- 
ment that  §  67/  declared  to  be  void.  96  Fed.  935,  37  C.  C.  A. 
634.  In  re  Pease,  4  Am.  Bankr.  Rep.  547,  is  likewise  in  point. 
In  this  case  it  is  said  that  §  67/  was  incorporated  in  the  bank- 
ruptcy act  by  the  conference  committee;  and  the  following  quo- 
tation is  made  from  the  report  of  the  House  conferees  as  found 
in  the  Congressional  Record,  Second  Session,  Thirty-fifth  Con- 
gress, p.  7205:  "By  an  addition  to  §  67,  which  relates  to  liens, 
the  bill  has  been  materially  strengthened.  *  *  *  in  effect, 
liens  of  any  description  obtained  upon  the  property  of  a  bank- 
rupt within  four  months  of  the  adjudication  are  made  null  and 
void,  except  where  given  for  a  new  and  fair  consideration  to  a 
person  who  has  no  notice  of  the  insolvency  or  reasonable  cause 
for  inquiry."  This  quotation  would  indicate  that  the  authors 
of  the  section  had  in  mind  the  matter  of  declaring  liens  void, 
rather  than  judgments.  Other  cases  holding  that  judgments 
recovered  within  four  months  of  the  adjudication  in  bankruptcy 
are  not  void  are  In  re  Kavanaugh  (D.  C),  99  Fed.  928;  In  re 
Beaver  Coal  Co.  (D.  C),  110  Fed.  630;  In  re  Blair  (D.  C),  108 
Fed.  529.  Moreover,  the  federal  Supreme  Court  has  held  that 
§  67/  should  not  receive  a  literal  construction,  and  in  substance 
and  effect  has  said  that  it  is  the  lien  of  the  judgment,  and  not 
the  judgment  itself,  that  is  destroyed.  Metcalf  v.  Barker,  187 
U.  S.  165,  174,  23  Sup.  Ct.  67,  47  L.  ed.  122.  Our  own  court 
held  in  Bank  of  Commerce  v.  Elliott,  109  Wis.  648,  85  N.  W. 
417,  that  filing  a  petition  in  bankruptcy  does  not  prevent  a  party 
from  maintaining  and  prosecuting  an  action  against  the  bank- 
rupt in  the  state  courts,  and  that  the  creditor  can  only  defeat 
such  an  action  if  meritorious  by  pleading  his  discharge  in  the 
bankruptcy  proceedings. 

Holding,  as  we  do,  that  the  judgment  was  not  void,  we  see  no 
good  reason  why  the  surety  should  escape  liability.  The  contin- 
gency has  arisen  under  which  it  agreed  to  respond  in  damages. 


DISSOLUTION  OF  LIENS  587 

The  mere  fact  that  plaintiff,  by  reason  of  the  bankruptcy  pro- 
ceedings, cannot  enforce  his  judgment  against  the  bankrupt  does 
not  extend  immunity  to  the  surety.  It  agreed  to  pay  when 
judgment  was  rendered  against  its  principal.  That  event  having 
taken  place,  the  surety  should  respond.  Wolf  v.  Stix,  99  U.  S. 
1,  8,  25  L.  ed.  309.  Indeedi  many  of  the  cases  recognize  the 
right  of  the  creditor  to  take  a  judgment,  coupled  with  a  per- 
petual stay  of  execution,  in  order  that  the  event  may  take  place 
on  which  the  liability  of  the  surety  is  made  to  depend ;  and  this 
court  recognized  the  existence  and  the  propriety  of  such  a  rule 
in  Whereatt  v.  EUis,  103  Wis.  352,  79  N.  W.  416,  74  Am.  St. 
Rep.  865.  The  decision  in  that  case  is  conclusive  as  to  the  lia- 
bility of  the  surety  here.  There  is  no  difference  in  principle 
between  the  two  cases. 

Some  cases  are  cited  which  deal  with  the  effect  of  a  discharge 
in  the  banlnniptcy  proceedings.  No  such  question  is  in  the  case. 
No  discharge  was  either  pleaded  or  proved ;  and  we  infer  from 
the  record  that  the  bankruptcy  proceedings  had  not  been  wound 
up  when  this  case  was  tried.  ^^^.^    ^'^--jU    >r^  -A^> 

Judgment  affirmed.  At,  ->_<.,.^,,^  WL  ^ 

CLARKE  V.  LARREMORE  ^"^^    ..A,      / 

3^  "^-^    ^  "^ 

On  January  23,  1899,  the  petitioner,  the  owner  of  certain  notes 
of  Raymond  W.  Kenney,  commenced  an  action  thereon  in  the   'T'^-^^uj^ 
Supreme  Court  of  the  state  of  New  York.    On  March  6,  1899,  he  J^^ 
recovered  judgment  for  the  sum  of  $20,906.66.     An  execution, 
issued  thereon,  was  by  the  sheriff  of  the  county  of  New  York        - .' 
levied  upon  a  stock  of  goods  and  fixtures  belonging  to  Kenney--  lf-~-rr^ 
A  sheriff's  sale  thereof,  had  on  March  15,  1899,  realized  $12,-         ^ 
451.09.     Shortly  after  the  levy  of  the  execution  Leon  Abbett; 
sued  out  in  the  same  court  a  writ  of  attachment  against  thef 
property  of  Kenney,  and  caused  it  to  be  levied  upon  the  same 
stock  and  fixtures.     Immediately  thereafter,  claiming  that  the 
debt  in  judgment  was  a  fraudulent  one,  he  commenced  in  aid  of 
his  attachment  an  injunction  suit  to  prevent  the  further  en- 
forcement of  the  judgment,  and  obtained  a  temporary  order 
restraining  the  sheriff  from  paying  petitioner  the  money  received 
upon  the  execution  sale.    Upon  a  hearing  the  Supreme  Court 


188  U.  S.  486,  47  L.  ed.  555,  23  Sup.  Ct.  363    —^^     -f'  -^ 
(United  States  Supreme  Court.    February  23,  1903)  ^^ul*      t^ 


^^ 


.1-: 


588  .       ADMINISTRATION 

decided  that  the  debt  was  just  and  honest,  and  on  April  13, 1899, 
set  aside  the  restraining  order.  On  the  same  day,  and  before 
the  sheriff  had  returned  the  execution  or  paid  the  money  col- 
lected on  it,  a  petition  in  involuntary  bankruptcy  against  Ken- 
ney  was  filed  in  the  United  States  District  Court  for  the  southern 
district  of  New  York,  and  an  order  made  by  the  district  judge 
restraining  the  sheriff  from  paying  the  money  to  Clarke,  the 
execution  creditor.  95  Fed.  427.  Kenney  was  thereafter  ad- 
judged a  bankrupt,  and  on  November  25,  1899,  the  plaintiff 
having  been  appointed  trustee  in  bankruptcy,  the  district  judge 
entered  a  further  order  directing  the  sheriff  to  pay  the  money 
to  the  trustee.  97  Fed.  555.  On  review,  the  United  States  Cir- 
cuit Court  of  Appeals  for  the  second  circuit  affirmed  these  orders 
of  the  district  judge  (45  C.  C.  A.  113,  105  Fed.  897),  and  there- 
upon a  certiorari  was  granted  by  this  court.  180  U.  S.  640,  45 
L.  ed.  711,  21  Sup.  Ct.  Rep.  927. 


Mr.  Justice  BREWER  delivered  the  opinion  of  the  court: 

The  contention  of  the  petitioner  is  that — 

"The  sheriff  having  sold  the  goods  levied  on  before  the  filing 

\  of  the  petition  in  bankruptcy,  the  proceeds  of  the  sale  were  the 

\  property  of  the  plaintiff  in  execution,  and  not  of  the  bankrupt, 

at  the  time  of  the  adjudication,  and  the  trustee,  therefore,  has 

Ino  title  to  the  same. ' ' 

This  contention  cannot  be  sustained.  The  judgment  in  favor 
of  petitioner  against  Kenney  was  not  like  that  in  Metcalf 
Bros.  V.  Barker,  187  U.  S.  165,  23  Sup.  Ct.  Rep.  67,  one 
giving  effect  to  a  lien  theretofore  existing,  but  one  which,  with 
f-the  levy  of  an  execution  issued  thereon,  created  the  lien ;  and  as 
judgment,  execution,  and  levy  were  all  within  four  months  prior 
to  the  filing  of  the  petition  in  bankruptcy,  the  lien  created 
thereby  became  null  and  void  on  the  adjudication  of  bankruptcy. 
This  nuUity  and  invalidity  relate  back  to  the  time  of  the  entry 
of  the  judgment,  and  affect  that  and  all  subsequent  proceedings. 
The  language  of  the  statute  [67/]  is  not  "when"  but  "in  case  he 
is  adjudged  a  bankrupt,"  and  the  lien  obtained  through  these 
legal  proceedings  was  by  the  adjudication  rendered  null  and 
void  from  its  inception.  Further,  the  statute  provides  that 
"the  property  affected  by" — not  the  property  subject  to — the 
lien  is  wholly  discharged  and  released  therefrom.  It  is  true 
that  the  stock  and  fixtures,  the  property  originally  belonging  to 


DISSOLUTION  OP  LIENS  589 

the  bankrupt,  had  been  sold,  but  having,  so  far  as  the  record 
shows,  passed  to  a  ''bona  fide  purchaser  for  value,"  it  remained 
by  virtue  of  the  last  clause  of  the  section  the  property  of  the 
purchaser,  unaffected  by  the  bankruptcy  proceedings.  But  the 
money  received  by  the  sheriff  took  the  place  of  that  property. 

It  is  said  that  that  money  was  not  the  property  of  the  bank-| 
rupt,  but  of  the  creditor  in  the  execution.    Doubtless  as  betweeni 
the  judgment  creditor  and  debtor,  and  while  the  execution  re-l 
mained  in  force,  the  money  could  not  be  considered  the  property! 
of  the  debtor,  and  could  not  be  appropriated  to  the  payment  of  \ 
his  debts  as  against  the  rights  of  the  judgment  creditor,  but, it  | 
had  not  become  the  property  absolutely  of  the  creditor.     The  ' 
writ  of  execution  had  not  been  fully  executed.    Its  command  to 
the  sheriff  was  to  seize  the  property  of  the  judgment  debtor, 
sell  it,  and  pay  the  proceeds  over  to  the  creditor.     The  time 
within  which  that  was  to  be  done  had  not  elapsed,  and  the  execu- 
tion was  still  in  his  hands,  not  fully  executed.     The  rights  of 
the  creditor  were  still  subject  to  interception.    Suppose,  for  in- 
stance, there  being  no  bankruptcy  proceedings,  the  judgment 
had  been  reversed  by  an  appellate  court  and  the  mandate  of 
reversal  filed  in  the  trial  court ;   could  it  for  a  moment  be  i 
claimed  that,  notwithstanding  the  reversal  of  the  judgment,  the 
money  in  the  hands  of  the  sheriff  belonged  to  the  judgment  , 
creditor,  and  could  be  recovered  by  him,  or  that  it  was  the  duty 
of  the  sheriff  to  pay  it  to  him?    The  purchaser  at  the  sheriff's 
sale  might  keep  possession  of  the  property  which  he  had  pur- 
chased, but  the  money  received  as  the  proceeds  of  such  sale  would 
undoubtedly  belong  and  be  paid  over  to  the  judgment  debtor. 
The  bankruptcy  proceedings  operated  in  the  same  way.     They 
took  away  the  foundation  upon  which  the  rights  of  the  creditor, 
obtained  by  judgment,  execution,  levy,  and  sale,  rested.     The 
duty  of  the  sheriff  to  pay  the  money  over  to  the  judgment  cred- 
itor was  gone  and  that  money  became  the  property  of  the  bank- 
rupt, and  was  subject  to  the  control  of  his  representative  in 
bankruptcy. 

It  was  held  in  Turner  v.  Fendall,  1  Cranch,  116,  2  L.  ed.  53, 
that  money  collected  by  a  sheriff  on  an  execution  could  not  be 
levied  upon  under  execution  placed  in  his  hands  against  the 
judgment  creditor,  and  that  the  latter  could  maintain  an  action 
against  the  sheriff  for  a  failure  to  pay  the  money  thus  collected. 
A  similar  ruling  was  made  in  New  York  (Baker  v.  Ken  worthy, 
41  N.  Y.  215),  in  which  it  appeared  that  a  sheriff  had  collected 


590  ADMINISTRATION 

money  on  dn  execution  in  favor  of  one  Brooks;  that  he  returned 
the  execution  without  paying  the  money  to  Brooks,  but,  on  the 
contrary,  levied  upon  it  under  an  execution  against  Brooks, 
and  it  was  held  that  such  levy  did  not  release  him  from  liability 
to  Brooks.    It  was  said  in  the  opinion  (p.  216)  : 

"The  money  paid  into  the  hands  of  the  sheriff  on  the  execu- 
tion in  favor  of  Brooks  did  not  become  the  property  of  Brooks 
until  it  had  been  paid  over  to  him.  Until  that  was  done,  the 
sheriff  could  not  levy  upon  it  by  virtue  of  the  execution  against 
Brooks  then  in  his  hands. ' ' 

The  rule  in  that  state  in  respect  to  a  levy  upon  money  in  the 
hands  of  a  sheriff  may  have  been  changed, — at  least,  so  far  as 
an  attachment  is  concerned.  See  Wehle  v.  Conner,  83  N.  Y.  231. 
In  Nelson  v.  Kerr,  59  N.  Y.  224,  it  is  said:  ''The  money  col- 
lected by  the  sheriff  belongs  to  the  plaintiff. ' '  But  in  that  case 
the  execution  had  been  returned,  and  yet  the  officer  had  not  paid 
the  money  to  the  execution  creditor.  See  also  Kingston  Bank  v. 
Eltinge,  40  N.  Y.  391,  100  Am.  Dec.  516. 

In  none  of  those  cases  had  anything  been  done  to  affect  the 
validity  or  force  of  the  writ  of  execution.    Whatever  was  done 
was  done  under  a  writ  whose  validity  and  potency  were  un- 
challenged and  undisturbed ;  while  here,  before  the  writ  of  exe- 
^cution  had  been  fully  executed,  its  power  was  taken  away.    Its 
\command  had  ceased  to  be  obligatory  upon  the  sheriff,  and  the 
execution  creditor  had  no  right  to  insist  that  the  sheriff  should 
further  execute  its  commands. 

/■<A  different  question  might.  My e  arisen  if  the  writ  had  been 

/ fully  executed  by  payment  to  the  execution  creditor.    Whether 

^Ijo*^^'^  \the  bankruptcy  proceedings  would  then  so  far  affect  the  judg- 

|Sment  and  execution,  and  that  which  was  done  under  them,  as  to 

^**^ justify  a  recovery  by  the  trustee  in  bankruptcy  from  the  execu- 

j  tion  creditor,  is  a  question  not  before  us,  and  may  depend  on 

many  other  considerations.    It  is  enough  now  to  hold  that  the 

1>ankruptcy  proceedings  seized  upon  the  writ  of  execution  while 

it  was  still  unexecuted  and  released  the  property  which  was 

held  under  it  from  the  claim  of  the  execution  creditor. 

The  judgment  of  the  Court  of  Appeals  is  affirmed. 

Mr.  Justice  WHITE  and  Mr.  Justice  PECKHAM  dissented. 


Sc] 


DISSOLUTION  OF  LIENS  591 

In  re  EESNEK 

167  Fed.  574 

(District  Court,  E.  D.  Pennsylvania.     February  9,  1909) 

HOLLAND,  District  Judge.  In  this  case  the  judgment  had 
been  entered  in  the  Court  of  Common  Pleas  of  Northampton 
county,  the  levy  and  sale  made,  and  the  money  paid  over  to 
Albert  H.  Resnek  on  the  9th  day  of  December,  1907,  within 
four  months  of  the  filing  of  the  petition  in  bankruptcy  against 
the  alleged  bankrupts,  which  took  place  on  the  16th  day  of 
March,  1908,  and  the  adjudication  was  entered  April  16,  1908. 
Upon  the  presentation  of  a  petition,  the  referee  summarily  di- 
rected Albert  H,  Resnek  to  pay  over  to  the  trustee  in  bank- 
ruptcy the  net  proceeds  received  from  the  sheriff  on  the  execu- 
tion, to  which  order  Resnek  excepted,  and  the  question  is  certi- 
fied to  this  court  for  determination  as  to  whether  the  referee, 
under  the  circumstances,  had  jurisdiction  to  make  this  summary 
order. 

Where,  within  four  months  before  the  filing  of  a  petition  in 
bankruptcy  against  £in  insolvent  debtor,  an  execution  has  been 
issued  and  levy  and  sale  made  and  the  proceeds  paid  over  to  the 
judgment  creditor  before  the  filing  of  the  petition,  the  case  does 
not  fall  within  the  provisions  of  §  67/  of  the  bankrupt  act  (Act 
July  1,  1898,  c.  541,  30  Stat.  565  [U.  S.  Comp.  St.  1901,  p. 
3450]),  and  the  lien  created  by  the  judgment  and  levy  is  not 
rendered  void  by  the  adjudication.  The  remedy,  if  any,  the 
trustee  has  against  the  creditor,  is  under  the  provisions  of 
§§  60a  and  60&  of  the  bankrupt  act  in  a  plenary  action,  where 
it  wiU  be  necessary  to  allege  and  show  that  the  creditor  had 
reasonable  cause  to  believe  that  the  bankrupt,  by  suffering  judg- 
ment to  be  taken  against  him,  intended  to  give  a  preference. 
In  re  Blair  (D.  C),  102  Fed.  987;  In  re  Bailey  (D.  C),  144 
Fed.  214.  And  this  is  true,  even  though  the  proceeds  of  the 
execution  are  insufficient  to  satisfy  the  claim  of  the  judgment 
creditor.    In  re  Knickerbocker  (D.  C),  121  Fed.  1004. 

It  follows,  therefore,  that  the  order  of  the  referee  must  be 
reversed.    It  is  so  ordered. 


592     -  >^^^  5^'^^  ^"administration 

..-^     i/^.^'l''  FIRST  NAT.  BANK  v.  STAAKE 

^     't^^  «       '^   f  202  U.  S.  141,  50  L.  ed.  967,  26  Sup.  Ct.  580 

'>^^  fjb^      t^-  (United  States  Supreme  Court.    April  30,  1906) 

^/^^    V    '"  This  writ  of  certiorari  was  allowed  to  review  an  order  of  the 

ly^     Circuit  Court  of  Appeals,  affirming  a  decree  of  the  District 

T^  y  ^r      Court  in  favor  of  Staake,  as  trustee  in  bankruptcy  of  the  estate 

^"^  of  Chester  R.  Baird,  bankrupt,  subrogating  him  to  the  rights  of 

L^    certain  creditors,  and  authorizing  him  to  enforce  their  attach- 

^r     5ir^^>    ment  liens  with  like  force  and  effect  as  the  attaching  creditors — 

^■^i^  \    one  of  which  was  the  First  National  Bank  of  Baltimore — might 

•^      P    ^  have  done  had  not  the  bankruptcy  proceedings  intervened. 

%j^\jr^    The  facts  of  the  case  are  substantially  as  follows:    Chester  R. 

fly.       V.     Baird,  doing  business  under  the  name  of  C.  R.  Baird  &  Com- 

L-    jijS>-        pany,  and  owning  certain  real  estate  in  Virginia  known  as  the 

A.  ,  West  End  Furnace  Company,  sold  the  same,  December  7,  1899, 

«*■'   ±^  to  the  Roanoke  Furnace  Company,  subject  to  certain  encum- 

^     U        brances,  executed  a  contract  in  writing,  and  received  from  the 

Ibti       y  furnace  company  the  entire  consideration,  namely,  $500,000,  in 

./    >     the  capital  stock  of  the  furnace  company.    Under  this  contract 

f      ,/^      of  sale  the  furnace  company  took  immediate  possession,  but  no 

h-'     I      deed  to  the  company  was  made  until  November  5,  1900,  when  a 

t^*^       deed  was  executed  and  recorded. 

Meantime,  however,  and  on  October  26,  1900,  nine  different^ 
attachments,  among  them  one  by  the  petitioning  bank,  were  sued 
out  of  the  hustings  court  for  the  city  of  Roanoke,  amounting  to 
over  $40,000,  against  Baird  as  a  nonresident,  and  were  levied 
upon  the  furnace  property.  Under  the  provisions  of  the  law  of 
/  Virginia  the  attachments,  having  been  levied  before  the  deed  of 
the  furnace  property  had  been  executed  and  recorded,  the  at- 
taching creditors  acquired,  as  against  Baird  and  the  furnace 
company,  a  lien  on  the  properties  attached. 

Within  four  months  after  the  levy  of  the  attachments,  namely, 
December  24,  1900,  Baird  was  adjudicated  a  bankrupt  in  the 
District  Court  for  the  eastern  district  of  Pennsylvania,  and  on 
January  2,  1901,  the  District  Court  for  the  western  district  of 
Virginia  assumed  ancillary  jurisdiction  of  such  property  as 
was  located  in  Virginia.  On  December  29,  1900,  the  Roanoke 
Furnace  Company  was  also  adjudicated  a  bankrupt.  On  March 
26,  1901,  Staake  was  appointed  trustee  of  Baird 's  estate,  and 


y*' 


DISSOLUTION  OF  LIENS  593 

on  June  29,  1901,  John  M.  N.  Shimer  was  appointed  trustee  of 
the  Roanoke  Furnace  Company, 

It  was  further  agreed  that  the  deed  of  November  5, 1900,  froni^ 
Baird  to  the  Roanoke  Furnace  Company,  was  a  valid  convey 
ance  to  a  purchaser  in  good  faith  for  a  then  fair  consideration 
and  was  not  affected  by  the  bankruptcy  proceedings. 

The  proceedings  in  question  here  were  instituted  by  a  peti- 
tion filed  by  Staake,  entitled  both  in  the  cases  of  Chester  R. 
Baird  and  the  Roanoke  Furnace  Company,  averring  that  under 
the  laws  of  Virginia  the  rights  of  the  attaching  creditors  were 
superior  to  those  of  the  furnace  company,  and  that  as  to  them 
the  property  attached  was  the  property  of  Baird;  but  that,  by 
reason  of  his  insolvency  and  of  the  fact  that  these  attachments 
had  been  levied  within  four  months  preceding  the  filing  of  the 
petition  in  bankruptcy,  such  attachments  were  nuU  and  void, 
unless  the  court  should  order  them  preserved  for  the  benefit  of 
the  estate.  He  therefore  prayed  that  they  be  decreed  null  and 
void  as  regards  plaintiffs,  but  that  they  be  preserved  for  the 
benefit  of  petitioner. 

The  bank  demurred  to  this  petition,  and  also  answered,  deny-  P 
ing  that  its  attachment  was  null  and  void,  and  also  denying  the  I 
right  of  the  court  to  enter  an  order  preserving  the  attachment'' 
for  the  benefit  of  the  petitioner;  and  alleging  that  respondent' 
is  entitled  to  the  benefit  of  the  attachment,  said  property  when 
sold  by  an  interlocutory  order  having  realized  enough  to  pay 
said  attachment,  as  weU.  as  all  prior  liens. 

Shimer,  trustee  for  the  Roanoke  Furnace  Company,  also  an-  / 
swered,  praying  that,  if  the  attachment  be  continued  for  the 
trustee  of  Baird,  the  petitioner  should  be  required  to  abate  a 
large  claim  which  he  filed  against  the  estate  of  the  Roanoke 
company,  by  the  amount  of  said  attachments. 

Upon  a  hearing  before  the  District  Court,  that  court  overruled  | 
the  demurrer  to  Staake 's  petition,  and  authorized  him  to  enforce  j 
the  attachment  liens  for  the  benefit  of  the  estate.    126  Fed.  845.  / 
The  Court  of  Appeals  affirmed  this  action  (66  C.  C.  A.  547,  133 
Fed.  717),  and  the  bank  petitioned  this  court  for  a  writ  of 
certiorari,  which  was  granted. 

Mr.  Justice  BROWN,  after  making  the  foregoing  statement, 
delivered  the  opinion  of  the  court : 

At  the  time  these  attachments  were  levied,  the  title  to  the 
property  in  question  stood  in  the  name  of  Baird,  and  the  attach- 

H.  &  A.  Bankruptcy — 38 


594  ADMINISTRATION 

ing  creditors,  by  their  levies,  secured  a  preferential  lien  upon 
the  property,  not  only  as  against  Baird,  but  also  as  against  the 
furnace  company,  which  received  a  deed  to  the  property  Novem- 
ber 5,  1900,  after  the  attachments  had  been  levied.  These  at- 
tachments, however,  were  annulled  by  the  filing  of  a  petition  in 
I  bankruptcy  against  Baird  within  four  months  after  the  attach- 
Wents  were  levied,  and  if  the  case  stood  upon  this  fact  alone 
[there  could  be  no  doubt  that  the  property  would  pass  to  the 
trustee  of  the  furnace  company,  discharged  of  the  lien  of  the 
attachments.  We  are  not  concerned  here  with  any  conflicting 
rights  of  the  two  trustees,  Staake  and  Shimer,  since  they  were 
both  appointed  receivers  of  the  Roanoke  Furnace  Company,  and 
the  only  claim  made  by  Shimer  now  is  that,  if  the  attachments 
be  continued,  the  petitioner  Staake  be  required  to  abate  his 
claim  against  the  estate  of  the  furnace  company  by  the  amount 
of  these  attachments.  It  is  therefore  unnecessary  to  consider 
whether,  if  the  attachments  were  annulled,  the  property  would 
pass  unencumbered  to  the  trustee  of  the  furnace  company,  since, 
as  stated  by  the  district  judge,  the  demurrer  to  the  petition  is 
intended  merely  to  raise  the  question  whether  the  trustee  of 
Baird 's  estate  or  the  attaching  creditors  shall  have  the  benefit 
of  the  attachments. 

This  depends  upon  the  peculiar  terms  of  §  67  of  the  bankrupt 
act,  which  provides  as  follows: 

' '  §  67/.  That  all  levies,  judgments,  attachments,  or  other  liens 
obtained  through  legal  proceedings  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  case  he  is  adjudged  a  bankrupt,  and  the  property  affected 
by  the  levy,  judgment,  attachment,  or  other  lien  shall  be  deemed 
wholly  discharged  and  released  from  the  same,  and  shall  pass 
to  the  trustee  as  a  part  of  the  estate  of  the  bankrupt,  uidess  the 
court  shall,  on  due  notice,  order  that  the  right  under  such  levy, 
judgment,  attachment,  or  other  lien  shall  be  preserved  for  the 
benefit  of  the  estate;  and  thereupon  the  same  may  pass  to  and 
shall  be  preserved  by  the  trustee  for  the  benefit  of  the  estate  as 
aforesaid.  And  the  court  may  order  such  conveyance  as  shall 
be  necessary  to  carry  the  purposes  of  this  section  into  effect : 
Provided,  That  nothing  herein  contained  shall  have  the  effect 
to  destroy  or  impair  the  title  obtained  by  such  levy,  judgment, 
attachment,  or  other  lien,  of  a  bona  fide  purchaser  for  value 


DISSOLUTION  OF  LIENS  595 

who  shall  have  acquired  the  same  without  notice  or  reasonable 
cause  for  inquiry." 

§  67c,  which  also  treats  of  liens  created  by  attachments  on 
mesne  process,  and  provides  for  their  dissolution,  in  the  last 
clause  declares  that — "if  the  dissolution  of  such  lien  would 
militate  against  the  best  interests  of  the  estate  of  such  person, 
the  same  shall  not  be  dissolved,  but  the  trustee  of  the  estate  of 
such  person,  for  the  benefit  of  the  estate,  shall  be  subrogated  toj 
the  rights  of  the  holder  of  such  lien,  and  empowered  to  perfect 
and  enforce  the  same  in  his  name  as  trustee,  with  like  force  and 
effect  as  such  holder  might  have  done  had  not  bankruptcy  pro- 
ceedings intervened." 

Thjs  section  (67/)  makes  two  distinct  provisions  for  the  dis- 
position ijl.JLhe_  property  of  an  insolvent  attached  within  four 
months  prior  to  the  filing  of  a  petition  in  bankruptcy  against 
him.  First,  such  attachments  shall  be  declared  null  and  void, 
and  the  property  affected  shall  be  deemed  released,  and  shall 
pass  to  the  trustee  of  the  estate  of  the  bankrupt ;  or  second,  the 
court  may  order  that  the  right  acquired  by  the  attachment  shall 
be  preserved  for  the  benefit  of  the  estate.  In  the  first  case  the 
whole  property  passes  free  from  the  attachment.  In  the  second, 
so  much  of  the  value  of  the  property  attached  as  is  represented 
by  the  attachments  passes  to  the  trustee  for  the  benefit  of  the 
entire  body  of  creditors ;  that  is,  * '  for  the  benefit  of  the  estate, ' ' 
— in  other  words,  the  statute  recognizes  the  lien  of  the  attach- 
ment, but  distributes  the  lien  among  the  whole  body  of  creditors. 

The  first  provision  contemplates  the  attachment  of  property 
to  which  the  bankrupt  has  the  complete,  legal,  and  equitable 
title,  which,  as  soon  as  the  attachment  is  dissolved,  passes  at 
once  to  the  bankrupt's  trustee  as  part  of  his  estate.  The  second 
provision  evidently  does  not  apply  to  this,  as  there  is  no  object 
in  preserving  the  lien  of  the  attachment  for  the  benefit  of  the 
estate,  since,  under  the  first  clause,  the  entire  value  of  the  prop- 
erty attached  passes  to  the  trustee,  free  from  the  attachment. 
The  second  clause  contemplates  property  in  which  the  bankrupt 
has  an  interest  which  has  been  secured  to  attaching  creditors 
by  the  levy  of  the  writ,  but  which  might  have  passed  to  another^ 
person,  as,  for  instance,  a  purchaser  under  an  unrecorded  deed, 
but  for  the  fact  that  the  attaching  creditors  had  acquired  a  prior 
lien  thereon.  In  such  case  the  statute  recognizes  the  validity 
of  the  lien,  but  preserves  it  for  the  benefit  of  the  entire  body  of 
creditors,  by  reason  of  the  fact  that  the  attachment  was  dis- 


596  ADMINISTRATION 

solved  as  a  preferential  lien  in  favor  of  the  attaching  creditors, 
by  the  institution  of  proceedings  in  bankruptcy. 

In  the  present  case  Baird  had  contracted  to  convey  the  prop- 
erty to  the  Roanoke  Furnace  Company,  possession  had  been 
taken,  and  the  consideration  paid,  but  the  deed  was  not  actually 
executed  and  recorded  until  after  the  attachment  had  been 
levied.  Hence,  under  the  Virginia  statute,  the  validity  of  which 
is  not  questioned,  the  lien  of  the  attachment  took  precedence  of 
the  deed,  and  would  have  remained  a  prior  lien,  had  it  not  been 
1  for  the  institution  of  the  bankruptcy  proceedings  within  four 
I  months.  This  dissolved  the  attachment,  and,  had  the  case  rested 
here,  the  property  would  have  apparently  passed  to  the  furnace 
company,  or  to  its  trustee  in  bankruptcy,  Shimer;  but  at  this 
point  the  court,  under  the  second  proviso  of  §  67/,  interposed 
and  recognized  the  lien  of  the  attachment;  not,  however  solely 
for  the  benefit  of  the  attaching  creditors,  but  for  the  benefit  of 
Baird 's  estate.  Shimer  made  no  objection,  and  the  court  de- 
clined to  express  an  opinion  as  to  his  rights. 

This  is  one  of  the  very  contingencies  provided  for  by  the  sec- 
ond clause  of  the  section,  which  apparently  vests  in  the  court 
a  certain  discretion  with  regard  to  the  preservation  of  the  right 
acquired  under  the  attachment  or  other  lien.  In  this  case  the 
court  recognized  the  validity  of  the  lien,  the  trustee  of  the  fur- 
nace company  making  no  objection  to  this;  but  the  attaching 
creditors  insist  that,  as  the  lien  was  acquired  for  their  own 
benefit,  they  should  not  be  required  to  share  with  the  general 
creditors  of  Baird 's  estate. 

Their  argument  is  based  upbn  the  theory  that  the  second  clause 

was  not  intended  to  apply  to  liens  acquired  upon  the  estate  of 

third  parties,   but  to   property  which  would  have  passed  to 

Baird 's  trustee  had  the  attachment  not  been  levied.     In  other 

words,  that  the  bankruptcy  court  has  nothing  to  do  with  the 

property,  since  it  really  did  not  belong  to  the  bankrupt,  and 

would  have  passed  to  his  vendee  if  the  attachments  had  not  been 

levied  upon  it.     Indeed,  the  opinion  especially  finds  that  "had 

valid  attachments  not  been  levied,  the  property  would  have 

,  passed  to  the  trustee  of  the  Roanoke  Furnace  Company." 

,      To  what  extent  liens  obtained  by  prior  judicial  proceedings 

/  shall  be  recognized  is  a  matter  wholly  within  the  discretion  of 

Congress,     It  might  have  validated  all  such  liens,  even  though 

*  obtained  the  day  before  proceedings  were  instituted.     It  might 

probably  have  invalidated  all  such  liens  whenever  obtained.    It 


DISSOLUTION  OF  LIENS  597 

took  a  middle  course,  and  invalidated  all  liens  obtained  through 
legal  proceedings  within  four  months  prior  to  the  filing  of  the 
petition,  but  at  the  same  time  preserved  to  the  general  body  of 
creditors,  as  against  third  parties  (such  as  purchasers  under  an 
unrecorded  deed),  such  liens  as  attaching  creditors  had  secured 
upon  property  which  would  have  passed  to  the  subsequent  pur- 
chaser in  case  the  attachment  had  not  been  levied.  It  is  true 
that  the  attaching  creditors  are  thereby  deprived  of  the  fruits) 
of  their  diligence,  but  the  same  thing  would  have  happened  had 
the  attachment  been  levied  upon  property  to  which  the  bankrupt 
had  the  whole  and  undisputed  title,  or  of  which  he  had  made  a 
fraudulent  conveyance.  As  remarked  by  the  district  judge,* 
"In  cases  where  the  bankrupt  makes  a  valid  conveyance,  or 
where  his  fraudulent  vendee  makes  a  valid  conveyance,  the  pur- 
pose of  the  law  is  worked  out  by  preserving  and  enforcing  the  \ 
liens  of  the  attaching  creditors  for  the  pro  rata  benefit  of  aU/ 
the  creditors."     [126  Fed.  847.]  ' 

§  67/  is  merely  carrying  out  the  general  purposes  of  the  act, 
of  securing  to  the  creditors  the  entire  property  of  the  bankrupt, 
reckoning  as  part  of  such  property  liens  obtained  by  attaching 
creditors  against  real  estate  which  had  been  transferred  to  an- 
other, though  no  deed  had  been  actually  executed  and  recorded. 

The  argument  that  §  67/  in  question  here  refers  only  to  liens 
upon  property  which,  if  such  liens  were  annulled,  would  pass 
to  the  trustee  of  the  bankrupt,  we  think  is  unsound,  since  that 
contingency  is  amply  provided  for  by  the  prior  clause  of  the 
section  annuling  all  such  liens  and  providing  that  property  af- 
fected thereby  shall  pass  to  the  trustee  as  a  part  of  the  estate. 
Under  the  argument  of  the  attaching  creditors  in  this  case,  the 
subsequent  clause  would  be  entirely  unnecessary.  This  clause 
evidently  contemplates  that  attaching  creditors  may  acquire 
liens  upon  property  which  would  not  pass  to  the  bankrupt  if 
the  liens  were  absolutely  annulled,  and  therefore  recognizes 
such  liens,  but  extends  their  operation  to  the  general  creditors. 
Had  no  proceedings  in  bankruptcy  been  taken,  doubtless  thisi 
property  would  have  been  sold  for  the  benefit  of  the  attaching! 
creditors. 

The  general  rule  relied  upon  by  the  bank  in  this  case,  that 
the  words  "property  of  the  bankrupt"  mean  only  the  property 
to  which  the  bankrupt  is  beneficially  entitled,  and  do  not  include 
property  to  which  he  has  only  a  bare  legal  title,  is  perhaps  justi- 
fied by  our  decision  in  Hewit  v.  Berlin  Mach.  Works,  194  U.  S. 


598 


ADMINISTRATION 


296,  48  L.  ed.  986,  24  Sup.  Ct.  Rep.  690.  But  the  extent  to 
which  the  bankruptcy  court  shall  recognize  the  rights  obtained 
by  creditors  upon  property  attached  as  the  property  of  the 
bankrupt,  though  in  fact  such  property  had  been  conveyed  by 
an  unrecorded  contract,  is  a  matter  solely  within  the  discretion 
of  Congress.  The  liens  acquired  in  this  case  were  liens  upon 
property  which,  as  to  attaching  creditors,  was  the  property  of 
the  bankrupt,  and  Congress  may  lawfully  insist  that  it  shall  be 
reckoned  as  a  part  of  his  estate,  and  pass  to  the  trustee.  As 
remarked  by  the  Court  of  Appeals :  ' '  The  rule  that  the  trustee 
takes  the  estate  of  the  bankrupt  in  the  same  plight  as  the  bank- 
rupt held  it  is  not  applicable  to  liens  which,  although  valid  as 
to  the  bankrupt,  are  invalid  as  to  creditors."  [66  C.  C.  A.  550, 
133  Fed.  720.] 

If  the  interest  of  Baird  in  this  property  were  sold  solely  for 
the  benefit  of  the  attaching  creditors,  it  would  obviously  result 
in  a  preference  to  those  creditors  over  the  general  creditors  of 
his  estate,  and  in  fraud  of  the  bankruptcy  act,  which  is  designed 
to  secure  equality  among  all  creditors. 

The  judgment  of  the  Court  of  Appeals  is  affirmed.^^ 


25 — Mr.  Justice  Harlan,  Mr.  Jus- 
tice White,  and  Mr.  Justice  Peck- 
ham  dissented. 

— Construction  of  67c  and  67f. 
— ' '  §  67c  declares  that  all  liens 
obtained  by  suit  in  law  or  in 
equity,  including  an  attachment  upon 
mesne  process  or  a  judgment  by  con- 
fession begun  within  four  months  be- 
fore the  filing  of  the  petition  in 
bankruptcy,  shall  be  dissolved  by 
the  adjudication  if  it  appear  that 
said  lien  was  obtained  or  permitted 
while  the  debtor  was  insolvent,  and 
that  its  existence  and  enforcement 
will  work  a  preference.  This  clause, 
it  would  seem,  recognizes  a  prefer- 
ence obtainable  through  an  attach- 
ment, acquired  upon  mesne  process 
pursuant  to  a  suit  or  proceeding  at 
law  or  in  equity,  the  condition  being 
that  the  attachment  shall  have  been 
made  while  the  debtor  was  insolvent, 
and  its  existence  and  enforcement 
will  so  operate;  that  is,  as  a  prefer- 
ence. 


' '  §  67f  provides  that  all  levies, 
judgments,  attachments,  or  other 
liens  obtained  through  legal  proceed- 
ings against  a  person  who  is  insol- 
vent at  any  time  within  four  months 
prior  to  the  filing  of  the  petition  in 
bankruptcy,  shall  be  null  and  void 
in  case  he  is  adjudged  a  bankrupt, 
and  that  the  property  affected  there- 
by shall  be  wholly  discharged  and 
released  from  the  same.  It  has  been 
held  and  determined  that  subdivi- 
sion 'c'  is  repugnant  to  the  provi- 
sions of  subdivision  'f, '  on  the  same 
subject,  and  that  the  latter  provi- 
sions are  controlling.  In  re  Kichards, 
96  Fed.  933,  935,  37  C.  C.  A.  634; 
Bear  v.  Chase,  99  Fed.  920,  40  C.  C. 
A.  182.  We  quote  from  the  opinion 
in  the  former  case: 

"  'These  two  subdivisions,  "c"  and  / 
"f,"    in   our   judgment,   are   plainly! 
antagonistic  and  irreconcilable.  The^ 
former  saves  a  lien  obtained  through 
legal  proceedings  begun  within  four 
months  unless  it  was  obtained  and 


9u 

MUTUAL  DEBTS  AND  CREDITS 

4.    MUTUAL  DEBTS  AND  CREDITS     ,  C^XA^'ciL 


fv<t. 


MUTUAL  DEBTS  AND  CREDITS 

LIBBY  V. 


104  U.  S 
(United  States  Supreme  Court 


HOPKINS     ^TS^    T^t..^^    ^ 
303,  26  L.  ed.  769  ^T^       fP  ^d^^  ^ 


ed.  769 

October  term,  1881) 


r 

Error  to  the  Supreme  Court  of  the  state  of  Ohio,  t^'^^^'^'^^^^^^ru^^^l^  -^ 
The  suit  was  brought  in  the  Superior  Court  of  Cincinnati,  bj-  \  ^^  ^ 
A.  T.  Stewart  &  Co.,  of  which  firm  the  plaintiffs  in  error  are  /  y^j*^**^ 
the  survivors,  against  Lewis  C.  Hopkins  and  wife,  and  Isaac 
M.  Jordan,  trustee  in  bankruptcy  of  Hopkins. 

It  appears  from  the  record  that  A,  T.  Stewart  &  Co.,  mer- 
chants, of  the  city  of  New  York,  loaned,  June  6,  1866,  Hopkins, 
a  merchant  of  Cincinnati,  Ohio,  $iQ!?AOO,  and  took  his  promis- 
sory note  of  that  date  therefor,  payable  on  demand  with  interest 
from  date,  to  secure  the  payment  of  which  he  executed  and 
delivered  to  them  several  mortgages  on  real  estate  in  Cincinnati  ?^vmjl. 
and  its  vicinity.    Both  before  and  after  that  date  he  bought  of 

ah,  194  Fed.  785,  114  C.  C.  A.—,  No. 
2,013,  just  decided. 


permitted  while  the  debtor  was  in- 
solvent, or  the  creditor  had  reason- 
able cause  to  believe  such  insolvency, 
or  the  lien  was  sought  and  permitted 
in  fraud  of  the  provisions  of  the  act. 
The  question  of  the  pecuniary  condi- 
tion  of    the   debtor   and   knowledge 
upon  the  part  of  the  creditor  are  in- 
fluential in  determining  the  validity 
of  the  lien  so   obtained.     But  sub-       reading    of    all 
division  "f "  is  broader  in  its  scopp,      enacted  in   -pari 
and  avoids  all  liens  obtained  through 
legal    proceedings    within    the    time 
stated  against  a  person   who  is   in- 
solvent, within  the  meaning  of  the 
subdivision,    irrespective    of    knowl- 
edge on  the  part  of  the  creditor  of 
the  fact  of  insolvency,  and  irrespect 
ive  of  the  question  whether  the  ob- 
taining of  the  lien  was  in  any  way 
suffered  and  permitted  by  the  deb- 
tor.    It    avoids    all    liens    obtained   I 
through  legal  proceedings  against  a    ' 
person  who  is  insolvent  within  four 
months  before  the  filing  of  the  peti- 
tion.' •  ^ 
' '  See,   also,  Cook  v.  Bobinson   et 


' '  Notwithstanding  the  repugnancy 
of  subdivision  'c'  to  subdivision  'f, ' 
and  that  the  provisions  of  the  latter 
are  controlling,  those  of  the  former 
still  remain  for  the  purpose  of  in- 
terpretation, as  the  intendment  of 
the  act  must  be  gathered  from  a 
its  pi^visions  as 
materia.  So  read- 
ing the  provisions  as  they  relate  to 
a  preference,  we  find  that  a  prefer- 
ence may  not  only  consist  in  the 
bankrupt's  procuring  or  suffering  a 
judgment  to  be  entered  against  him 
or  making  a  transfer  of  his  prop- 
erty within  four  months  of  the  filing 
of  the  petition  in  bankruptcy,  but 
also  in  the  creation  of  a  lien  by  way 
of  attachment,  or  the  confession  of 
a  judgment  within  four  months  of 
the  filing  of  the  petition,  the  exist- 
ence and  enforcement  of  which  will 
work  a  preference. ' '  Folger  v. 
Putnam,  194  Fed.  793, 


600  ADMINISTRATION 

them  large  quantities  of  goods,  and  as  a  matter  of  convenience 
kept  with  them  two  accounts, — one  a  cash  and  the  other  a 
merchandise  account.  Theywere  his  bankers.  All  his  remit- 
tances were  sent  to  them  and  credited  to  him  in  the  cash  account. 
By  drafts  thereon  he  paid  his  debts  for  merchandise  to  them 
and  other  New  York  merchants,  and  in  order  to  replenish  it  he 
borrowed  the  $100,000  above  mentioned,  and  it  was  carried  to 
his  credit  in  that  account.  On  May  4,  1867,  he  paid  on  his  note 
$25,000.  On  Nov.  12,  1867,  he  remitted  to  Stewart  &  Co., 
$10,000,  on  Dec.  27,  1867,  $17,000,  on  the  28th  of  the  same 
month,  $10,000,  and  on  the  30th,  $48,025.  He  directed  these 
remittances  to  be  applied  to  the  payment  of  his  note  and  to  be 
credited  thereon.  It  is  now  no  longer  disputed  that  the  first 
three  of  these  remittances  were  so  applied.  The  last  two,  with 
the  interest  thereon,  constitute  the  sum  now  in  controversy. 

On  Jan.  1,  1868,  Hopkins  suspended  business,  insolvent.  At 
that  time  he  owed  A.  T.  Stewart  &  Co.,  $231,515  on  account, 
and  unsecured.  His  liabilities  to  others  amounted  to  more  than 
$500,000.  A  petition  in  bankruptcy  was  filed  against  him  Feb- 
ruary 29.  He  was  adjudicated  a  bankrupt  March  30.  On  April 
30  Jordan  was  appointed  trustee. 

As  to  the  foregoing  facts  there  is  no  dispute. 

In  August,  1868,  on  what  day  the  recof3  does  not  show, 
Stewart  &  Co.  commenced  this  suit  for  the  foreclosure  of  the 
mortgages,  claiming  as  due  the  full  amount  of  the  note,  less  the 
payment  of  $25,000. 

'^  The  answer,  besides  other  defenses  not  pertinent  to  any  con- 
tention now  raised,  averred  that  Hopkins  had  paid  on  the  note, 
not  only  the  said  sum  of  $25,000,  but  also  the  remittances  above 
mentioned,  making  the  total  amount  paid  thereon  $110,025; 
and,  after  alleging  that  said  payments  were  made  in  fraud  of 
the  bankrupt  act,  demanded,  by  way  of  counterclaim,  a  judg- 
ement against  Stewart  &  Co.  therefor. 

The  reply  admitted  that  Hopkins  requested  Stewart  &  Co.  to 
credit  the  remittances  on  his  mortgage  debt,  and  averred  that 
they  were  held  subject  to  his  order,  and  continued  to  be  so  held, 
up  to  the  time  when  the  rights  of  Jordan,  trustee,  attached, 
subject  to  such  law  of  set-off  as  is  provided  in  the  bankrupt  act. 
It  nowhere  appeared  in  the  pleadings  that  Hopkins  was  in- 
debted to  the  plaintiffs  on  any  unsecured  claim,  or  in  any  other 
way,  except  upon  the  note  for  $100,000.  No  unsecured  debt  of 
Hopkins  was  pleaded  as  a  set-off  or  otherwise. 


MUTUAL  DEBTS  AND  CREDITS  601 

The  Superior  Court  found  that  the  mortgages  were  valid,  and 
the  first  lien  on  the  premises  therein  described,  and  that  there 
was  due  thereon,  including  interest,  the  sum  of  $75,957.06.  It 
rendered  a  final  decree  that  unless  that  sum  with  interest  be 
paid  within  one  hundred  and  eighty  days  therefrom  to  Stewart 
&  Co.,  the  mortgaged  premises  should  be  sold. 

The  court  further  found  that  when  Hopkins  made  the  last 
two  remittances,  of_$10,000  and  $48,025,  respectively,  it  was 
with  the  intent  and  the  express  instruction  in  writing  to  Stewart 
&  Co.  to  apply  them  in  discharging  the  mortgage  claim;  that 
Stewart  &  Co,  refused  to  do  so,  but  assumed,  without  his  au- 
tEioHty  or  consent,  to  apply  and  did  apply  them  to  his  credit 
on  the  general  account  against  him  for  merchandise;  and  that 
Stewart  &  Co.  had  no  right  to  make  such  application;  and  that 
the  remittances  remained  in  their  hands  as  his  moneys  from 
the  several  days  of  their  payment  until  Feb.  29,  1868,  when  the 
title  of  Jordan  as  trustee  attached  thereto.  It  also  found  that  the 
said  two  several  sums  were  not  subject  to  any  claim  of  set-off 
or  cross-demand,  or  of  mutual  debts  or  credits,  on  the  part  of 
Stewart  &  Co.,  under  §  20  of  the  Bankrupt  Act,  or  otherwise. 

The  court,  therefore,  rendered  a  decree  in  favor  of  Jordan, 
trustee,  against  Stewart  &  Co.,  for  $58,025,  the  aggregate  of 
the  last  two  remittances,  with  interest,  amounting  in  all  to 
$75,981.36. 

The  case  was  carried,  by  the  i)etition  in  error  of  Stewart  & 
Co.,  and  the  cross-petition  in  error  of  Jordan,  trustee,  to  the 
Supreme  Court  of  Ohio,  by  which  the  decree  of  the  Superior 
Court  was  afiirmed. 

Stewart  &  Co.  thereupon  brought  the  case  here  by  writ  of 
error.  Some  of  the  members  of  the  firm  have  died,  and  Libby 
and  another  are  its  surviving  members. 

Mr.  Justice  WOODS,  after  stating  the  facts,  delivered  the 
opinion  of  the  court. 

The  only  question  to  which  our  attention  is  directed  by  the\ 
plaintiffs  is  that  of  set-off  under  the  twentieth  section  of  the  act  j 
of  March  2,  1867,  c.  176  (14  Stat.  517),  which  is  as  follows: 
f"In  all  cases  of  mutual  debts  or  mutual  credits  between  the 
parties,  the  account  between  them  shall  be  stated,  and  one  debt 
set  off  against  the  other,  and  the  balance  only  shall  be  allowed 
or  paid,  but  no  set-off  shall  be  allowed  of  a  claim  in  its  nature 
not  provable  against  the  estate;  Provided,  that  no  set-off  shall 


602  ADMINISTRATION 

be  allowed  in  favor  of  any  debtor  to  the  bankrupt  of  a  claim 
purchased  by  or  transferred  to  him  after  the  filing  of  the  peti- 
tion." This  provision  was  in  force  at  the  time  of  the  trial,  and 
is  now  substantially  incorporated  in  §  5073  of  the  Revised 
Statutes. 

The  contention  of  the  plaintiffs  is  that  they  were  entitled  un- 
der this  section  to  set  off  an  unsecured  account  due  them  from 
Hopkins  against  the  $58,025  remitted  to  them  by  him  with  direc- 
tions to  credit  it  on  his  mortgage  debt,  and  which  they  refused 
so  to  apply. 

Waiving  the  difficulty  that  they  have  not  pleaded  that  account 

as  a  set-off,  we  shall  consider  the  question  made  by  them.    That 

account  is  a  claim  provable  against  the  bankrupt  estate,  and  it 

was  not  purchased  by  or  transferred  to  them  after  the  filing 

of  the  petition  in  bankruptcy.     The  controversy  is,  therefore, 

r^edueed  to  this  issue :    Were  that  account  and  the  money  trans- 

l  mitted  by  Hopkins  to  them,  and  held  and  not  applied  by  them 

\to  the  mortgage  debt,  mutual  credits,  or  mutual  debts  which 

I  could  be  set  off  against  each  other  under  the  twentieth  section 

I  of  the  Bankrupt  Act? 

The  plaintiffs  insist  that  the  term  "mutual  credits"  is  more 
comprehensive  than  the  term  "mutual  debts"  in  the  statutes 
relating  to  set-off ;  that  credit  is  synonymous  with  trust,  and  the 
trust  or  credit  need  not  be  money  on  both  sides ;  that  where  there 
is  a  deposit  of  property  on  one  side  without  authority  to  turn 
it  into  money,  no  debt  can  arise  out  of  it;  but  where  there  are 
directions  to  turn  it  into  money  it  may  become  a  debt,  the  reason 
being  that  when  .turned  into  money  it  becomes  like  any  other 
mutual  debt.  They  say  that  the  first  of  the  two  remittances 
under  consideration  is  not  proved  to  have  been  other  than  money, 
but  as  it  was  only  $10,000  its  application  to  the  note  could  not 
be  required.  The  larger  remittance  was  in  drafts,  and  their  ap- 
plication could  not  be  required.  But  there  was  authority  to  turn 
them  into  money,  and  that  to  get  the  money  on  them  it  was 
necessary  that  the  drafts  should  be  indorsed  by  the  plaintiffs, 
and  that  the  indorsement  to  and  collection  by  them  put  the 
money  received  in  the  same  plight  as  if  the  drafts  had  been  sent 
to  them  for  collection.  We  cannot  assent  to  these  views,  and 
they  receive  but  little  supjyort  from  the  adjudged  cases. 

Ex  parte  Deeze  (1  Atk.  228)  arose  under  the  twenty-eighth 
section  of  the  statute  5  Geo.  II,  c.  30,  which  provides  that"  when 
it  shall  appear  to  the  said  commissioners  [in  bankruptcy]   or 


MUTUAL  DEBTS  AND  CREDITS  603 

the  major  part  of  them,  that  there  hath  been  mutual  credit 
given  by  the  bankrupt  and  any  other  person,  or  mutual  debts 
between  the  bankrupt  and  any  other  person,  at  any  time  before 
such  person  became  bankrupt,  the  said  commissioners,  or  the 
major  part  of  them  or  the  assignees  of  such  bankrupt's  estate, 
shall  state  the  account  between  them,  and  one  debt  shall  be  set 
against  another,  and  what  shall  appear  to  be  due  on  either  side 
on  the  balance  of  said  account,  and  on  setting  such  debts  against 
one  another,  and  no  more  shall  be  claimed  on  either  side  re- 
spectively." In  that  case,  a  packer  claimed  to  retain  goods  not 
only  for  the  price  of  packing  them,  but  for  a  sum  of  £500  lent 
to  the  bankrupt  on  his  note.  Lord  Hardwicke  determined  that 
he  had  such  right  on  the  ground  of  mutual  credits,  holding  that 
the  words  "mutual  credits"  have  a  larger  effect  than  "mutual 
debts,"  and  that  under  them  many  cross-claims  might  be  al- 
lowed in  cases  of  bankruptcy,  which  in  common  cases  would  be 
rejected. 

But  this  ruling  was  subsequently  made  narrower  by  Lord 
Hardwicke  himself,  in  Ex  parte  Ockenden  (id.  235),  and  was 
in  effect  overruled  in  Rose  v.  Hart,  8  Taunt.  499.  In  that  case 
trover  was  brought  for  cloths  deposited  by  the  bankrupt  pre- 
viously to  his  bankruptcy,  with  the  defendant,  a  fuller,  for  the 
purpose  of  being  dressed.  It  was  held  that  the  defendant  was 
not  entitled  to  detain  them  for  his  general  balance  for  such 
work  done  by  him  for  the  bankrupt  previously  to  his  bankruptcy, 
for  there  was  no  mutual  credit  within  that  section.  And  the 
court  declared  that  the  term  "mutual  credits"  in  the  act  meant 
only  such  as  must  in  their  nature  terminate  in  debts. 

The  rule  established  in  this  ease,  as  to  the  nature  of  the  cred- 
its which  can  be  the  subject  of  set-off,  has  been  declared  in  other 
cases.  Smith  v.  Hodson,  4  T.  R.  211 ;  Easum  v.  Cato,  5  Barn.  & 
Aid.  861.  The  effect  of  the  authorities  is,  that  the  term  "mutual 
credits"  includes  only  such,  where  a  debt  may  have  been  within 
the  contemplation  of  the  parties. 

These  authorities  make  it  clear  that,  even  under  the  Bank- 
rupt Act  of  5  Geo.  II,  the  plaintiffs  would  have  no  right  to  the 
set-off  claimed  by  them.  And  they  lose  sight  of  the  controlling 
fact  that  the  money  and  the  drafts  which  they  turned  into 
money  were  remitted,  with  express  directions  to  apply  them  on 
a  specific  debt.  Without  the  consent  of  Hopkins  they  could 
never-  be  changed  into  a  debt  due  to  him  from  the  plaintiffs, 
and  that  consent  has  never  been  given. 


604  ADMINISTRATION 

Whether  or  not  he  had  the  right  to  direct  the  application  is 
immaterial.     There  was  no  legal  obstacle  to  the  application  as 

/K  directed.     The  fact  that  he  gave  the  direction  imposed  on  the 

/    plaintiffs  the  obligation  to  apply  the  money  as  directed,  or  to 

{    return  it  to  him. 

^^  They  had  no  better  right  to  refuse  to  make  the  application  and 

/  to  retain  the  money  and  set  off  against  it  the  debt  due  to  them 
^from  Hopkins,  than  if  they  had  been  directed  to  pay  the  money 
on  a  debt  due  from  him  to  another  of  his  creditors,  or  than  they 

\   had  to  apply  to  the  payment  of  his  debt  to  them  money  which 

\  he  left  with  them  as  a  special  deposit. 

^  Hopkins  sent  them  the  money  and  drafts,  upon  the  faith  and 
trust  that  they  would  be  applied  according  to  his  instructions. 
The  refusal  so  to  apply  them  did  not  change  the  relations  of  the 
parties  to  this  fund,  nor  make  that  a  debt  which  before  such  re- 
fusal was  a  trust.  To  so  hold  would  be  to  permit  a  trustee  to 
better  his  condition  by  a  refusal  to  execute  a  trust  which  he  had 
assumed.  Winslow  v.  Bliss  (3  Lans.  (N.  Y.)  220)  and  Scam- 
mon  V.  KimbaU  (92  U.  S.  362),  cited  by  the  plaintiffs  to  sup- 
port their  contention,  are  cases  where  a  bank  or  banker  was 
allowed  to  set  off  the  money  of  a  depositor  against  a  debt  due 
from  him  to  the  bank.  The  answer  to  these  authorities  is  that 
the  relation  between  a  bank  and  its  general  depositor  is  that  of 
debtor  and  creditor.  When  he  deposits  moneys  with  the  bank, 
it  becomes  his  debtor  to  the  amount  of  them.  Foley  v.  Hill, 
2  H.  L.  Cas.  28 ;  Bank  of  the  RepubUc  v.  MiUard,  10  Wall.  152 ; 
BuUard  v.  Randall,  1  Gray  (Mass.),  605.  When,  therefore,  he 
becomes  indebted  to  the  bank,  it  is  a  case  of  mutual  debt  and 
mutual  credit,  which  may  well  be  set  off  against  each  other. 

But  in  this  case  there  was  no  deposit.    The  relation  of  banker 

and  depositor  did  not  arise,  consequently  there  was  no  debt. 

WTien  A.  sends  money  to  B.,  with  directions  to  apply  it  to  a 

debt  due  from  him  to  B.,  it  cannot  be  construed  as  a  deposit, 

ipeven  though  B.  may  be  a  banker.    The  reason  is  plain.    The  con- 

\  sent  of  A.  that  it  shall  be  considered  a  deposit,  and  not  a  pay- 

/ment,  is  necessary  and  is  wanting. 

Another  answer  to  the  contention  of  the  plaintiffs  is  found 
in  the  language  of  the  twentieth  section  of  the  Bankrupt  Act 
of  March  2,  1867,  c.  176,  which  differs  materially  from  that  *of 
the  twenty-eighth  section  of  5  Geo.  II,  c.  30.  In  our  act  the 
terms  "credits"  and  "debts"  are  used  as  correlative.  What  is 
a  debt  on  one  side  is  a  credit  on  the  other,  so  that  the  term 


MUTUAL  DEBTS  AND  CREDITS  605 

' '  credits ' '  can  have  no  broader  meaning  than  the  term  ' '  debts. ' ' 
"We  j5nd  no  warrant  in  the  language  of  the  section  or  its  context 
for  extending  the  term  "credits"  so  as  to  include  trusts.  Gen^ 
erally  we  know  that  ''credit"  and.  "trust"  are  not  synonymous, 
{grais.  They  have  distinct  and  well-settled  meanings,  and  we  see 
no  reason  why  they  should  be  confounded  in  interpreting  the  j 
twentieth  section  of  the  Bankrupt  Act. 

T.o  authorize  a  set-off  there  must  be  mutual  credits  or  mutual., 
debts.  The  remitting  of  certain  money  assets  by  Hopkins  to  the 
plaintiffs,  to  be  applied  by  them  according  to  his  instructions, 
did  not  make  them  his  debtors,  but  his  trustees.  So  that  there 
were  in  the  case  no  mutual  credits  or  debts.  The  indebtedness 
was  all  on  the  side  of  Hopkins.  The  plaintiffs  owed  him  noth- 
ing. They  held  his  money  in  trust  to  apply  it  as  directed  by 
him. 

They  refused  to  make  the  application  as  he  directed.  They 
held  it,  therefore,  subject  to  his  order.  They  continued  so  to 
hold  it  until  the  rights  of  the  trustee  in  bankruptcy  attached, 
and  until  he  sought  to  recover  it  by  his  counter-claim  filed  in 
this  case. 

The  only  contention  of  the  plaintiffs  set  up  in  this  court  is 
that  the  Supreme  Court  of  Ohio  approved  of  the  action  of  the 
Superior  Court  of  Cincinnati,  in  refusing  to  allow  the  plain- 
tiffs to  set  off  the  unsecured  debt  due  to  them  by  Hopkins  against 
funds  intrusted  to  them  by  him  for  an  entirely  different  pur- 
pose. We  are  of  opinion  that  the  decision  of  the  Superior  Court 
was  correct.  The  judgment  of  the  Supreme  Court  of  Ohio  must, 
therefore,  be  affirmed.^^*  ^  ^^  ti^.ji^j   U/^^-*-^ 

Ex  parte  WHITING— Ee  DOW  et  al.  ^^^^^--^^  >*^    

2  Low.  472  C  «*-«•--' 


— Ee  DOW  et  al.;*^*^ 

472  zo^^j 

(District  Court,  Massachusetts.    March,  1876)  <'-»a 


LOWELL,  J.    The  facts,  as  I  understand  them,  are,  that  in<i»'**^    ' ' 
1874  the  firm  of  Dow^Hunt  &  Co.,  the  bankrupts,  of  which  firm  -f    ^  f,^ 
A.  C.  Cushing  was  a  partner,  borrowed  $3,000  of  a  savings  bank, 
for  which  they,  as  a  firm,  and  Cushing  and  the  petitioner,  Whit-  'oU-*-*-^^'^ 
ing,  individually,  gave  their  joint  and  several  promissory  note,  vf.^ 
This jQote  the  petitioner  paid  to  the  bank  in  full,  after  the  failure  >/ 

of  Dow,  Hunt  &  Co.,  but  before  their  bankruptcy.    The  parties 
diflerlh  their  mode  of  looking  at  this  note.    The  petition  repre- 

2ca  See  Morris  v.  Windsor  Trust 
Co.,  213  N.  Y.  — ,  106  N.  E.  753. 


606  ADMINISTRATION 

sents  it  as  signed  by  Dow,  Hunt  &  Co.,  and  Gushing,  as  prin- 
cipals, and  by  the  petitioner  as  surety,  while  the  answer  repre- 
sents  it  to  be  the  note  of  Dow,  Hunt  &  Co.  as  principals,  and 
Oushing  and  the  petitioner  as  co-sureties,  and  alleges  that  the 
money  went  to  the  firm  exclusively.  Upon  the  face  of  the  note 
11  should  suppose  that  the  answer  puts  the  contract  correctly, 
/  and  I  shall  so  consider  the  case  for  the  purposes  of  the  present 
\  decision,  though  it  is  a  point  upon  which  evidence  outside  of 
\the  note  is  of  course  admissible.  In  1875,  the  petitioner  lent 
$1,396  to  the  firm  of  Dow,  Hunt  &  Co.,  and  Cushing  transferred 
to  him  eight  shares  of  the  capital  stock  of  the  Hingham  Steam- 
boat Company  as  collateral  security,  which  Whiting  promised  to 
return  on  payment  of  the  $1,396  with  interest.  This  debt  was 
overdue  and  unpaid  at  the  time  of  the  bankruptcy.  This  stock 
is  worth  more  than  $1,396  and  interest,  and  the  assignee  has 
offered  to  pay  the  amount  of  that  debt  upon  a  reconveyance  of 
the  stock.  The  question  is,  whether  Mr.  Whiting  can  hold  the 
surplus  proceeds  of  the  shares  by  way  of  set-off  against  Cush- 
ing's  other  debt  to  him,  for  contribution  as  co-surety  of  the  note 
above  mentioned. 

I  have  had  occasion  more  than  once  to  look  carefully  at  the 
cases  on  the  subject  of  mutual  credit  in  bankruptcy;  and  while 
the  decisions  in  this  country  agree  entirely,  as  far  as  they  go, 
with  those  made  in  England,  the  subject  has  been  more  fully 
considered  in  that  country,  as  is  natural,  the  bankrupt  law  hav- 
ing been  in  force  there  for  a  much  greater  length  of  time.  The 
leading  eases  on  the  subject  are  Rose  v.  Hart,  8  Taunt.  499; 
Young  V.  Bank  of  Bengal,  1  Moore,  P.  C.  150,  much  more  fully 
reported  1  Deacon,  622;  Naoroji  v.  Chartered  Bank  of  India, 
L.  R.  3  C.  P.  444;  Astley  v.  Gumey,  L.  R.  4  C.  P.  (Ex.  Ch.) 
714.  All  those  cases  should  be  studied.  The  result  of  theiajs, 
that  a  creditor  who  at  tHe  time  of  the  bankruptcy,_Jias  Jn Jhis 
hands  goods  or  chattels  of  the  bankrupt  with  a  power  of  sale, 
or  choses  in  action  with  a  power  of  collection,  may  sell  those 
goods  or  collect  those  claims,  and  set  them  off  against  the  debt 
the  bankrupt  owes  him ;  and  this,  although  the  power  to  sell  or 
to  collect  were  revocable  by  the  bankrupt  before  his  bankruptcy ; 
or,  in  other  words,  the  occurrence  of  bankruptcy  in  such  cases 
gives  a  sort  of  lien  which  did  not  exist  before.  This  has  been 
the  law  ever  since  Rose  v.  Hart,  8  Taunt.  499.  Before  that  de- 
cision, it  was  admitted  even  in  cases  where  there  was  no  power 
of  sale.    Young  v.  Bank  of  Bengal,  itbi  supra,  adds  this  limita- 


MUTUAL  DEBTS  AND  CREDITS  607 

tion,  and  this  only,  that  if  the  right  to  sell  the  pledge  does  not 
arise  until  after  the  bankruptcy,  then  there  is  no  set-off  for 
the  surplus;  for  the  reason  that  the  assignee  might  redeem  in- 
stantly, before  any  such  power  existed,  and  the  creditors  shall 
not  be  prejudiced  by  any  failure  or  neglect  to  redeem;  or,  to 
put  it  in  another  way,  that  the  rights  of  the  parties  are  fixed 
at  the  date  of  the  bankruptcy. 

I  have  not  overlooked  the  fact  that  in  Young  v.  Bank  of 
Bengal  a  good  deal  is  said  about  the  agreement  to  return  the 
surplus.  In  this  case  there  is  an  agreement  to  return  the  shares 
when  the  debt  is  paid.  I  do  not  consider  the  case  cited  to  stand 
on  this  ground,  but  on  that  already  mentioned,  that  the  credit 
did  not  exist  at  the  date  of  the  bankruptcy.  See  that  case  ex- 
plained by  Parke,  B.,  one  of  the  judges  who  decided  it,  in  Alsager 
V.  Currie,  12  M.  &  W.  751,  and  by  the  judges  in  the  late  cases 
above  cited.  I  apprehend  that,  when  shares  are  conveyed  in  this 
way  as  collateral  security,  the  law  implies  a  promise  to  return 
them  on  the  payment  of  the  debt,  and  its  expression  cannot  prop- 
erly affect  the  case.  In  all  the  cases  there  has  been  either  an 
express  or  an  implied  promise  by  the  agent  or  other  person  hav- 
ing the  property,  that  he  would  faithfully  account  for  it  and 
pay  over  its  proceeds;  but  this  does  not  prevent  a  set-off  in 
bankruptcy.  And  the  weight  of  authority  is  that  a  promise  of 
this  sort  does  not  bar  a  set-off,  either  under  the  ordinary  stat- 
utes or  under  the  bankrupt  act,  unless  the  property  has  been 
intrusted  to  the  agent  for  a  particular  purpose  inconsistent  with 
such  an  application  of  the  surplus,  so  that  this  would  be  a  fraud 
or  breach  of  trust :  see  Key  v.  Flint,  8  Taunt.  21 ;  Buchanan 
V.  Findlay,  9  P.  &  C.  738,  for  cases  of  this  sort;  and,  for  the 
general  rule,  Comfroth  v.  Rivett,  2  M.  &  S.  510 ;  Eland  v.  Carr, 
1  East,  375;  Atkinson  v.  Elliott,  7  T.  R.  378. 

In  this  case,  the  debt  of  $1,396  was  overdue  and  unpaid,  and 
by  a  statute  of  Massachusetts  Mr.  Whiting  had  a  right  to  sell 
the  shares  after  giving  a  certain  notice.  This  law  enters  into 
the  contract  of  the  parties ;  and  though  there  is  no  evidence  of  a 
power  of  sale  conferred  by  Mr.  Gushing  (the  form  of  the  trans- 
fer was  not  put  in  evidence),  yet  they  will  be  taken  to  have 
understood  that  there  would  be  a  power  of  sale  in  accordance 
with  the  statute.  On  the  day  of  the  bankruptcy.  Gushing  was 
indebted  to  the  petitioner  for  one-half  the  note  of  the  firm  actu- 
ally paid  by  his  co-surety,  the  petitioner,  two  weeks  or  more  be- 
fore that  time.    This  makes  out  a  case  of  mutual  credit  upon  the 


608  ADMINISTRATION 

authorities  cited  and  the  others  which  have  followed  them:  a 
debt  due  from  Gushing  to  the  petitioner,  and  choses  in  action 
of  Gushing 's,  with  a  present  power  of  sale  in  the  petitioner's 
hands. 


Petition  granted.  ^ 

y 

In  re  HARPER 


^1f 


175  Fed.  412 

(District  Court,  N.  D.  New  York.    January  4,  1910) 

RAY,  District  Judge.  On  the  26th  day  of  February,  1908,  an 
involuntary  petition  in  bankruptcy  was  filed  against  the  above- 
named  bankrupt,  Howard  E.  Harper,  by  Peninsular  Paint  & 
Varnish  Gompany,  and  this  petition  alleged  that  such  company 
was  a  creditor  of  said  Howard  E.  Harper.  March  12,  1908,  said 
Harper  filed  a  voluntary  petition  in  bankruptcy,  and  filed  sched- 
ules in  which  he  states  that  said  Peninsular  Paint  &  Varnish 
Gompany  is  a  creditor  to  the  amount  of  about  $3,500,  but  also 
sets  forth  that  the  said  company  is  indebted  to  him  in  the  sum 
of  $6,500.  The  nature  of  this  last-mentioned  alleged  indebted- 
ness will  be  referred  to  later.  On  his  voluntary  petition  Harper 
was  adjudicated  a  bankrupt  on  the  16th  day  of  March,  1908,  and 
thereafter,  and  on  the  27th  day  of  March,  1908,  the  two  proceed- 
ings were  consolidated,  and  Harper  was  adjudicated  a  bankrupt 
under  the  involuntary  petition,  also  without  answer  or  objec- 
tion. No  issue  was  raised  as  to  the  validity  of  the  claim  of  the 
Peninsular  Paint  &  Varnish  Gompany  by  Harper  or  any  of  his 
creditors.  After  adjudication  and  consolidation  such  proceed- 
ings were  had  that  a  trustee  was  duly  appointed.  He  qualified 
and  entered  on  the  discharge  of  his  duties.  Thereafter  the  said 
company,  hereafter  called  the  "Peninsular  Gompany,"  filed  its 
duly  itemized  and  verified  claim  with  the  referee.  It  is  in  due 
form,  and  is  a  valid  proof  of  claim  on  its  face.  Gertain  cred- 
itors, at  the  first  meeting  of  creditors,  filed  objections  thereto; 
but,  for  the  purpose  of  electing  a  trustee,  it  was  temporarily 
allowed,  with  the  understanding  that  later  the  trustee  should 
file  objections,  so  as  to  test  the  validity  of  the  claim.  On  the 
29th  day  of  July,  1908,  the  trustee  filed  his  petition  for  the  re- 
examination of  such  claim  of  the  Peninsular  Gompany.  Sep- 
tember 23,  1908,  said  company  moved  for  an  order  quashing  the 


MUTUAL  DEBTS  AND  CREDITS  609 

objection  filed  by  such  creditors  and  dismissing  the  said  petition 
of  the  trustee.  The  motion  was  based  upon  the  petitions  and 
proceedings  for  adjudication,  the  schedules  of  the  bankrupt,  the 
proof  of  claim  of  the  Peninsular  Company,  the  objections  thereto, 
the  said  petition  of  the  trustee,  certain  testimony  given  by  the 
bankrupt  on  his  examination  in  the  proceedings,  and  on  the 
petition  filed  by  the  trustee  for  a  settlement  of  the  estate  of 
such  bankrupt.  The  referee  denied  the  motion  to  quash  the 
objections  and  dismiss  the  petition  of  the  trustee  to  re-examine 
the  claim  of  said  Peninsular  Company,  and  this  proceeding  for 
a  review  of  that  decision  follows: 

The  claim  of  the  Peninsular  Company,  amounting  to  ,$3,391.17, 
after  deducting  payments  and  credits  for  discount,  shortage, 
and  merchandise  returned  between  October  10, 1906,  and  October 
23,  1907,  is  for  goods,  wares,  and  merchandise  sold  and,  delivered 
to  said  Harper  between  October  13,  1906,  and  July  18,  1907, 
"of  the  reasonable  value  and  stipulated  price  of  $6,272.87,  no 
part  of  which  has  been  paid,  except  the  sum  of  $2,881.70,  leaving 
a  balance  due,  owing,  and  unpaid  of  $3,391.17,  a  statement  of 
which  account  is  hereto  annexed  and  made  a  part  of  this  proof ; 
that  said  debt  exists  upon  an  open  account  and  became  due  on 
the  5th  day  of  June,  1907,  that  day  being  the  average  due  date 
of  the  items  of  said  account. "     *     *     * 

A  statement  of  items  is  annexed  as  referred  to  in  the  claim. 

The  objections  filed  by  the  creditors  contain  no  denial  of  any  ' 
allegation  of  the  claim,  but  set  up  counterclaims  alleged  to  exist 
in  favor  of  Harper  against  said  Peninsular  Company  connected 
with  and  growing  out  of  the  same  transaction  or  transactions  set  ^ 
forth  in  the  claim.     *     *     * 

The  affidavit  of  Harper,  referred  to  in  such  objection  and  an- 
nexed thereto,  so  far  as  material,  reads  as  follows: 
' '  Rensselaer  County,  City  of  Troy — ss. : 

"Howard  E.  Harper,  being  duly  sworn,  says  that  he  is  the 
bankrupt  above  named,  and  that  the  claim  existing  in  his  favor 
against  the  Peninsular  Paint  &  Varnish  Company,  which  claim    cp- 
is  scheduled  as  an  asset  of  the  bankrupt  estate  herein,  consists        ^^ 
in  substance  of  the  following  items:  '-,,  / 

"First.     Damages  sustained  by  deponent  by  reason  of  the  , 
false  and  fraudulent  representations  made  by  said  Peninsular  \ 
Paint  &  Varnish  Company  to  deponent,  by  which  deponent  was  } 
induced  to  engaged  in  business  in  the  city  of  Troy,  N.  Y.,  in  or 
about  the  month  of  August,  1906,  as  the  local  representative  of 

H.  &  A.  Bankruptcy — S9 


*x 


610  ADMINISTRATION 

said  Peninsular  Paint  &  Varnish  Company  in  the  sale  of  the 
goods  manufactured  by  said  company.  Said  representations 
were  in  substance  to  the  effect  that  said  company  had  business 
in  this  locality  amounting  to  $20,000  per  year.  Said  representa- 
Ition  was  false,  and  was  known  to  be  false  by  said  company  when 
it  was  made,  and  deponent  relied  upon  such  representation  in 
making  the  contract,  which  was  then  made  for  the  purchase  by 
deponent  of  goods  made  by  said  Company.  Deponent  paid  to 
said  company  about  $2,300  for  the  first  car  load  of  paint  men- 
tioned in  said  contract.  The  purchase  price  of  the  second  car 
load  of  paint  mentioned  in  said  contract  amounted  to  about 
$1,900,  and  that  amount  has  not  been  paid  by  deponent,  but  is 
included  as  a  part  of  the  claim  of  said  company  herein.  By  rea- 
son of  the  false  representations  made  by  said  company  to  depo- 
nent, deponent  has  lost  the  $2,300  which  he  paid  to  said  com- 
pany, besides  about  18  months'  time  and  labor,  which  is  worth 
to  deponent  not  less  than  $3,000.  That  the  business  of  said 
company  in  this  locality  did  not  amount  to  more  than  $5,000  a 
year.  That  the  gross  profits  of  said  business,  if  it  had  amounted 
to  $20,000  per  year,  would  have  been  $4,000  per  year,  and  the 
net  profits  to  deponent  would  have  been  at  least  $2,000  per  year. 
Said  business  amounted  in  fact  to  only  $5,000  per  year,  and  the 
gross  profits  thereof  being  but  $1,000,  there  were  not  net  profits 
to  deponent,  but  an  actual  loss,  not  only  of  said  net  profits,  but 
of  money  which  deponent  was  obliged  to  borrow  in  order  to  carry 
on  said  business.  Said  amount  of  borrowed  money  amounts  to 
at  least  $1,300,  making  the  total  losses  sustained  by  reason  of 
said  false  and  fraudulent  representations  of  the  said  Peninsular 
Paint  &  Varnish  Company  at  least  the  sum  of  $6,600. 

"Second.  In  and  by  the  contract  entered  into  between  depo- 
nent and  said  Peninsular  Paint  &  Varnish  Company,  in  or  about 
August,  1906,  said  company  agreed  to  furnish  to  deponent  the 
services  of  a  capable  salesman  to  assist  deponent  in  disposing 
of  the  goods  manufactured  by  said  company  in  this  locality  for 
,  certain  periods  of  the  year,  specified  in  said  contract.  Said  com- 
I  pany  failed  and  neglected  to  furnish  such  salesman  at  the  period 
specified  in  said  contract,  and  when  a  salesman  was  eventually 
furnished  to  deponent  for  a  short  time  by  said  company  said 
salesman  was  incapable  and  inexperienced,  and  was  of  no  assist- 
ance whatever  to  deponent.  That  by  reason  of  the  failure  of  said 
company  to  carry  out  its  contract  with  deponent  in  respect 


MUTUAL  DEBTS  AND  CREDITS  611 

herein  referred  to  deponent  has  suffered  damages  in  the  sum  of 
at  least  $1,000. 

"Howard  E.  Harper. 
"Sworn  to  before  me  this  31st  day  of  March,  1908. 

"James  W.  Wright,  Notary  Public,  Reus.  Co." 
«     *     * 

It  will  be  noted  that  the  affidavit  of  Harper  does  not  deny  the 
sale  and  delivery  and  agreed  price  of  the  goods,  wares,  and 
merchandise,  or  the  account  stated,  but  sets  up  two  counterclaims. 
The  petition  of  the  trustee  admits  the  sale,  etc.,  denies  the  ac- 
count stated,  and  sets  up,  in  substance,  the  same  counterclaims. 

The 'claim  of  the  Peninsular  Company  is  not  based  upon  an 
account  stated.  That  allegation  may  be  wholly  disregarded,  and 
we  have  a  complete  and  valid  proof  of  claim,  which,  in  the 
absence  of  objection,  should  and  must  be  allowed  as  a  valid 
claim  to  the  amount  stated.  The  trustee  does  not  deny  the  sale 
and  delivery  of  the  goods  to  the  bankrupt,  the  agreed  price,  the 
value,  the  payments,  or  the  balance  due.  He  simply  denies  that 
there  was  an  account  stated  between  the  parties,  which  included 
this  account. 

This  reduces  the  questions  involved  here  to  the  propositions:  \,^ 
(1)  Whether  or  not  valid  actionable  counterclaims  or  offsets  are 
alleged;  and  (2)  if  so,  can  they  or  either  of  them  be  used  to 
reduce  or  extinguish  the  otherwise  valid,  provable,  and  proved 

claim  of  the  Peninsular  Company? 

*     *     * 

But  this  question  is  not  very  important  here,  as  the  undis- 
puted facts  show  that  the  Peninsular  Company  is  a  creditor  to 
the  amount  stated,  and  the  question  is,  really,  whether  the  trus- 
tee may  prove  and  have  liquidated  an  unliquidated  claim  for 
damages,  or  claims  for  damages,  of  the  nature  stated,  and  if 
such  claims,  or  either  of  them,  are  sustained,  use  the  recovery  to 
reduce  or  "wipe  out"  the  claim  of  the  Peninsular  Company.  If 
the  trustee  had  come  into  possession  of  a  valid  promissory  note 
of  $3,000  made  by  the  Peninsular  Company,  overdue,  and  be- 
longing to  the  bankrupt  and  his  estate  after  adjudication,  is 
there  any  question  that  he  could  set  it  up  as  a  counterclaim  or 
offset  to  the  claim  of  the  Peninsular  Company,  and  to  that  ex- 
tent reduce  its  claim  ?  I  think  not.  Any  debt,  liquidated  or } 
unliquidated,  owing  to  the  bankrupt  from  a  creditor  of  his,  I 
whether  for  damages  or  on  contract,  express  or  implied,  which 
passes  to  the  trustee,  may,  of  course,  be  used  by  him  to  reduce 


612  ADMINISTRATION 

the  claim  of  such  creditor  when  presented,  or  to  extiu^ish  it 
altogether.     §  68  of  the  bankruptcy  act,  as  amended,  provides: 

"Set-Offs  and  Counterclaims. — (a)  In  all  cases  of  mutual  debts 
or  mutual  credits  between  the  estate  of  a  bankrupt  and  a  cred- 
itor the  account  shall  be  stated  and  one  debt  shall  be  set  off 
against  the  other,  and  the  balance  only  shall  be  allowed  or  paid. ' ' 

By  §  70  of  the  act  it  is  provided,  in  substance,  that  upon 
his  appointment  and  qualification  the  trustee  shall  be — 
"vested  by  operation  of  law  with  the  title  of  the  bankrupt,  as 
of  the  day  he  was  adjudged  a  bankrupt,  except  in  so  far  as  it  is 
,to  property  which  is  exempt,  to  all     *     *     *     (5)    property 
which  prior  to  the  filing  of  the  petition  he  could  by  any  means 
have  transferred,  or  which  might  have  been  levied  upon  and  sold 
,  under  judicial  process  against  him ;     *     *     *     (6)  rights  of  ac- 
tion arising  upon  contracts  or  from  the  unlawful  taking  or 
detention  of,  or  injury  to  his  property. ' ' 
f,    ^  It  is  self-evident,  I  think,  that  rights  of  action  for  ujilic[uidated 
f  Ay'-^^ldamages  for  false  and  fraudulent  representations,  or  for  a  breach 
I  of  contract,  whether  assignable  or  not,  are  not  regarded  as  prop- 
)  *"  lerty  under  subdivision  5. 

Do  the  objecting  creditors  set  up,  or  does  the  trustee  in  his 
petition  set  up  or  allege,  "a  right  of  action,"  existing  in  favor 
of  Harper,  prior  to  his  bankruptcy,  "arising  upon  contract"? 
Clearly  neither  of  them  set  up  a  right  of  action  arising  from 
the  unlawful  taking  or  detention  of  his  property.  Do  the  cred- 
itors or  trustee  set  up  a  right  of  action  arising  from  injury  to 
the  bankrupt's  property?  The  first  counterclaim  is  to  recover 
damages  for  false  and  fraudulent  representations  whereby  the 
bankrupt  was  induced  to  enter  into  a  contract  to  purchase  paints 
and  to  enter  on  the  business  of  selling  or  dealing  in  paints, 
whereby  it  is  alleged  he  lost  the  sum  of  $6,500.  The  second 
counterclaim  is  to  recover  damages  for  a  breach  of  contract  in 
not  furnishing  a  capable  salesman  to  assist  Harper  in  the  dis- 
posal of  goods  manufactured  by  the  Peninsular  Company.  Dam- 
f  ages  in  the  sum  of  $1,000  are  alleged.  In  the  first  counterclaim 
{ no  breach  of  contract  is  alleged.  It  is  a  cause  of  action  (if  one  is 
sufficiently  stated)  to  recover  damages  for  false  and  fraudulent 
representations  made  by  the  company,  whereby,  relying  thereon, 
the  bankrupt,  prior  to  bankruptcy,  was  induced  to  enter  into  a 
certain  contract  to  engage  in  a  certain  business,  and  in  such 
business  purchase  his  stock  of  the  Peninsular  Company,  all  of 
which  he  did,  and  because  of  the  false  and  fraudulent  representa- 


MUTUAL  DEBTS  AND  CREDITS  613 

tions  inducing  such  contract  he  lost  $6,500.  This  is  not  a  right 
of  action  arising  upon  contract.  Is  it  one  arising  from  injury 
to  Harper's  property?  Code  Civ.  Proc.  N.  Y.  §  3343,  subd.  10, 
provides : 

**An  injury  to  property  is  an  actionable  act  whereby  the  / 
estate  of  another  is  lessened,  other  than  a  personal  injury,  or  I 
the  breach  of  a  contract."  ' 

Was  the  making  of  these  false  and  fraudulent  statements  an 
"actionable  act,"  within  the  meaning  of  this  provision  of  the 
law?  No  physical  act  is  alleged  which  lessened  the  estate  of 
Harper,  unless  it  be  that  the  making  of  false  and  fraudulent 
statements  is  a  physical  act,  within  the  definition  stated.  The 
representations  did  not  lessen  or  diminish  the  estate  of  Harper 
directly;  but,  the  claim  is,  they  induced  Harper  to  enter  into 
a  contract  which  otherwise  he  would  not  have  made,  and  that 
in  the  execution  or  attempted  execution  of  same,  without  fault 
OkU  his  part  and  solely  because  of  the  fact  that  business  conditions 
and  surroundings  were  not  as  represented,  he  lost  $6,500,  and 
that  thereby  his  estate  was  lessened  to  that  extent.  In  other 
words,  the  false  and  fraudulent  representations  made  to  Harper 
by  the  Peninsular  Company  induced  an  act  by  Harper  in  the 
execution  of  which  he  lost  $6,500.  The  gravamen  of  the  cause"] 
of  action  is  the  false  and  fraudulent  representations,  the  acts 
of  making  them;  the  result  is  damage  by  the  loss  of  money  be- 
longing to  Harper's  estate,  whereby  such  estate  is  diminished 
or  lessened. 

[After  discussing  certain  New  York  cases,  the  court  continued :] 

This  would  seem  to  be  a  plain  holding  that  material  false  and 
fraudulent  representations  which  induce  another  to  part  with 
his  property  constitute  an  actionable  act  causing  injury  to 
property.  If  so,  is  it  not  a  "right  of  action  arising  from  an 
injury  to  his  property ' '  ?  However,  Harper  was  not  induced  by 
the  false  and  fraudulent  representations  to  part  with  any  prop- 
erty, or  to  stop  any  work  on  his  property,  or  to  pay  men  for  time 
idle,  and  he  lost  no  rental  of  property.  He  was  induced  by 
such  representations  to  enter  into  a  certain  contract  with  the 
one  making  them,  to  purchase  and  engage  in  an  attempt  to  sell 
certain  property — risk  that  property  in  business — and  in  and 
by  so  doing,  for  the  reason  such  representations  were  false,  he 
lost  his  money  or  property.  His  estate  was  lessened.  In  this 
ease  the  Peninsular  Company  not  only  made  the  representations, 
but  was  the  party  to  be  benefited  by  the  contract.    Harper  was 


614  ADMINISTRATION 

to  purchase  of  it  his  stock  of  goods,  risk  same  in  the  business, 
and  pay  therefor  to  the  company.  He  did  under  that  contract 
purchase  these  goods  mentioned  in  the  claim  of  the  Peninsular 
Company  presented  as  a  claim  to  the  trustee  of  Harper's  estate 
in  bankruptcy.  If  Harper  had  not  been  adjudicated  a  bankrupt, 
and  had  been  sued  by  the  Peninsular  Company  for  the  price  or 
value  of  the  goods,  he  could  have  set  up  and  pleaded  this  coun- 
terclaim. §§  500  and  501,  Code  of  Civil  Procedure.  §  500  per- 
mits the  setting  up  of  a  counterclaim,  and  §  501  says : 

* '  The  counterclaim,  specified  in  the  last  section,  must  tend,  in 
some  way,  to  diminish  or  defeat  the  plaintiff's  recovery,  and 
must  be  one  of  the  following  causes  of  action  against  the  plain- 
tiff, or,  in  a  proper  ease,  against  the  person  whom  he  repre- 
sents, and  in  favor  of  the  defendant,  or  of  one  or  more  defend- 
ants, between  whom  and  the  plaintiff  a  separate  judgment  may 
be  had  in  the  action : 

"1.  A  cause  of  action,  arising  out  of  the  contract  or  transac- 
tion, set  forth  in  the  complaint  as  the  foundation  of  the  plain- 
tiff's claim,  or  connected  with  the  subject  of  the  action. 

"2.  In  an  action  on  contract,  any  other  cause  of  action  on 
contract,  existing  at  the  commencement  of  the  action." 

This  counterclaim,  the  one  asserted  by  the  trustee,  does  not 
arise  on  contract,  and  is  not  for  damages  for  a  breach  of  the 
contract  on  which  the  Peninsular  Company  relies;  but  it  is  a 
claim  to  recover  damages  resulting  from  the  false  and  fraudu- 
lent representations  of  the  party  who,  in  eft'ect,  sues  on  the  con- 
tract, who  was  a  party  thereto,  and  who  induced  the  making 
thereof;  and  the  contention  of  Harper's  trustee  is  that,  having 
been  induced  to  enter  into  it  by  such  false  representations,  and 
under  and  pursuant  to  it  to  purchase  the  goods  in  question  and 
engage  in  the  business  of  selling  them,  by  reason  of  the  falsity  of 
such  statements,  he  (Harper)  lost  his  money  or  property. 

This  cause  of  action  for  the  damages  sustained  is  one  con- 
nected with  the  subject  of  the  action — that  is,  the  claim  of  the 
Peninsular  Company  here — even  if  it  is  not  one  arising  out  of 
the  contract  or  transaction  on  which  that  company  bases  its  claim 
as  presented  to  the  trustee.  It  is  a  cause  of  action  to  recover 
damages  sustained  by  reason  of  or  as  a  consequence  of  the  fraud 
perpetrated  in  inducing  the  making  of  the  very  contract  the 
Peninsular  Company  relies  upon  as  the  basis  of  its  claim,  and 
which  damages  were  sustained  in  executing  or  performing  that 
very  contract,  so  induced,  for  the  benefit  of  the  said  company. 


MUTUAL  DEBTS  AND  CREDITS  615 

All  this  is  settled  by  the  decision  of  the  Court  of  Appeals  of  the 
state  of  New  York.  Carpenter  v.  Manhattan  Life  Insurance 
Company,  93  N.  Y.  552,  556 ;  Thomson  v.  Sanders,  118  N.  Y.  252, 
258,  259,  23  N.  E.  374.  The  words  "subject  of  the  action" 
mean  "the  facts  constituting  plaintiff's  cause  of  action."  Leh- 
maier  v.  Griswold,  40  N.  Y.  Super.  Ct.  100,  cited  and  approved 
Rothschild  v.  Whitman  et  al.,  132  N.  Y.  472,  476,  30  N.  E.  858. 
The  facts  constituting  the  Peninsular  Company's  claim  are  the 
contract  to  sell  goods,  and  the  sale  and  delivery  of  said  goods 
pursuant  thereto,  and  a  breach  thereof  by  nonpayment.  The 
counterclaim  is  that  such  contract  was  entered  into  because  of 
false  and  fraudulent  representations  made  by  the  company  and 
relied  on  by  the  vendee  or  purchaser  under  the  contract,  result- 
ing in  great  loss,  because  there  was  no  market  for  the  goods  as 
represented.  True,  the  representations  preceded  the  contract, 
and  the  ordering  and  delivery  of  goods  under  it,  and  the  loss; 
but  they  were  all  connected  and  followed  in  regular  sequence. 
The  case  is  not  like  Rothschild  v.  Whitman  et  al.,  132  N.  Y.  472, 
30N.  E.  858. 

I  am  therefore  of  the  opinion,  and  hold,  that  the  claim  for\    • 
damages  passed  to  the  trustee,  if  he  has  one,  and  that,  as  the   \^J^ 
Peninsular  Company  has  presented  its  claim  to  the  trustee,  the     I      ^ 
trustee  may  establish  such  counterclaim  before  the  referee,  unless     I 
some  other  mode  of  establishing  and  liquidating  same  is  directed^^ 

My  attention  is  called  to  In  re  Becker  Bros.,  15  Am.  Bankr. 
R.  228,  139  Fed.  366,  In  that  case  the  bankrupt  had  leased  cer- 
tain premises  and  was  in  possession.  The  landlord  negligently 
allowed  water  to  come  in  upon  the  leased  premises,  whereby  the 
property  of  the  bankrupt  was  injured.  The  landlord  duly  proved 
his  claim  for  rent  in  the  bankruptcy  proceedings,  and  the  trustee 
sought  to  counterclaim  the  alleged  cause  of  action  for  such  dam- 
ages against  the  claims  of  the  landlord  for  such  rent.  If  under 
the  laws  of  Pennsylvania  the  negligence  of  the  landlord  in  al- 
lowing water  to  come  in  on  the  premises  leased  to  the  bankrupt, 
to  the  injury  of  his  property  constituted  and  created  "a  right 
of  action  in  favor  of  such  bankrupt,  prior  to  his  adjudication, 
arising  from  injury  to  his  property, ' '  such  right  of  action  passed 
by  operation  of  law  to  the  trustee  in  bankruptcy,  and  it  became 
his  duty  to  enforce  it  and  collect  the  damages  for  the  benefit  of 
the  estate.  It  would  be  ridiculous  to  say  that  a  right  of  action 
for  damages  which  passes  to  a  trustee  is  not  to  be  enforced  and 
collected  by  him  for  the  benefit  of  the  estate.    If,  then,  the  one 


616  ADMINISTRATION 

liable  to  the  estate  in  an  action  for  damages  has  and  presents  a 
claim  against  snch  estate,  no  matter  what  its  character  or  how 
it  arises,  provided  it  be  one  properly  provable  and  allowable 
against  the  estate  in  bankruptcy,  are  the  trustee  and  referee  to 
allow  it,  and  pay  a  dividend  or  dividends,  and  proceed  by  action 
to  enforce  the  claim  for  damages;  or  may  the  trustee  establish 
the  claim  for  damages  and  use  it  to  reduce  or  wipe  out  such  cred- 
itor's  claim?    The  bankruptcy  act  itself  says: 

"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. ' '     §  68a. 

Subdivision  "b"  of  the  same  section  adds  the  limitation  or 
qualification,  however,  that : 
.       "A  set-off  or  counterclaim  shall  not  be  allowed  in  favor  of 
(  any  debtor  of  a  bankrupt  which  is  not  provable  against  the 
\estate." 

This  is  not  a  limitation  or  restriction  on  the  right  of  the 
trustee  to  set  up,  prove,  and  use  any  claim  he  has  and  which 
he  may  enforce  against  a  creditor  of  the  bankrupt  presenting  a 
claim  against  the  estate  he  represents,  provided  it  be  a  "debt" 
owing  by  such  creditor  to  the  bankrupt  estate  within  the  mean- 
ing of  1^  68a.  The  plainly  disclosed  policy  of  the  act  is  that 
where  a  person  is  indebted  to  the  bankrupt  estate,  and  the  trus- 
tee seeks  to  enforce  the  indebtedness,  the  debtor  to  the  estate 
may  set  up  as  an  offset  or  counterclaim  only  such  just  demands 
as  he  has  against  the  estate  which  are  provable  in  bankruptcy  as 
a  claim  against  the  estate,  unless  it  be  one  purchased  or  trans- 
ferred to  him  after  the  filing  of  the  petition  in  bankruptcy,  or 
within  four  months  before  such  filing,  with  a  view  to  such  use, 
and  with  notice  or  knowledge  that  such  bankrupt  was  insolvent 
or  had  committed  an  act  of  bankruptcy.  The_debtor  is  limited 
to  claims  provable  in  bankruptcy.  There  is  no  provision  or  sug- 
gestion in  the  act  that  a  claim  against  a  creditor  of  the  bankrupt 
in  the  hands  of  the  trustee,  and  which  came  to  him  by  opera- 
tion of  law  on  his  appointment,  cannot  be  used  as  an  offset  to 
or  counterclaim  against  the  claim  of  such  creditor  of  the  bank- 
rupt estate,  unless  such  claim  in  the  hands  of  the  trustee  be  one 
of  a  character  provable  in  bankruptcy  in  case  the  one  liable 
thereon  had  been  adjudicated  a  bankrupt. 

Confess  had  a  perfect  right  to  provide  that  a  debtor  to  the 
estate  shall  not  be  allowed  to  offset  or  counterclaim  demands  or 


MUTUAL  DEBTS  AND  CREDITS  617 

claims  against  the  bankrupt,  unless  they  be  of  the  class  and 
character  provable  in  bankruptcy,  and  also  to  provide  what 
claims  and  demands  and  causes  of  action,  existing  in  favor  of  the 
bankrupt  at  the  time  the  petition  was  filed,  shall  pass  to  the 
trustee  in  bankruptcy  and  be  enforced  by  him,  and  also  to  pro- 
vide the  mode  of  enforcement.  Is  a  claim  for  damages  for  false 
and  fraudulent  representations  a  *'debt,"  within  the  meaning 
and  intent  of  §  68a.  of  the  act?  If  so,  there  is  no  doubt  of  the 
right  of  the  trustee  to  offset  or  counterclaim  same.  |Laubd. 
11,  of  the  act  provides : 

"^'^'Debt'  shall  include  any  debt,  demand,  or  claim  provable 
in  bankruptcy." 

It  will  be  noted  that  some  of  these  definitions  in  §  1  read  ' '  shall 
mean,"  while  others  read  "shall  include."  It  was  not  intended 
that  definitions  of  words  used  in  the  act  which  read  "shall  in- 
clude ' '  should  exclude  other  meanings  or  definitions  of  the  word, 
or  limit  the  ordinary  and  well-understood  meanings.  It  was  in- 
tended, as  the  words  used  plainly  indicate,  to  make  sure  that 
they  would  be  held  to  include  what  is  expressed.  If  a  statute 
should  be  written  prohibiting  the  sale  of  all  intoxicating  bev- 
erages, and  a  section  should  be  added  saying,  the  words  ' '  intoxi- 
cating beverages"  as  used  herein  shall  include  hard  cider,  would 
an  intelligent  court  be  justified  in  holding  that  the  words  "in- 
toxicating beverages, ' '  used  in  the  act,  had  been  defined  to  mean 
hard  cider,  and  nothing  else,  and  that  whisky,  rum,  brandy,  and 
other  intoxicants  were  excluded,  or  not  included  ?  Yet  cases  may 
be  found  where  this  very  interpretation  has  been  put  upon  §  1 
of  the  bankruptcy  act. 

It  is  quite  true  that  the  word  "debt,"  given  its  common-law \ 
meaning,  does  not  include  a  claim  for  unliquidated  damages  for  I 
false  and  fraudulent  representations.  Jackson  v.  Bell,  31  N,  Jr 
Eq.  554,  558;  Duncan  v.  Lyon,  3  Johns.  Ch.  351,  8  Am.  Dec. 
513 ;  Berson  v.  Ewing,  84  Cal.  89,  23  Pac.  1112.  However,  the 
word  "debt"  may  include  claims  for  unliquidated  damages.  In 
re  Brouillard,  20  R.  I.  617,  40  Atl.  762.  There  Gen.  Laws  1896, 
c.  274,  §  50,  provided  that  a  discharge  in  insolvency  should  re- 
lease the  insolvent  from  ' '  all  his  provable  debts. ' '  The  same  act 
provided  that  claims  for  trover  and  torts  might  be  proved.  It 
was  held  that  the  word  "debts"  was  used  in  its  generic  and  not 
its  strict  legal  sense,  and  that  claims  for  damages  for  torts  were 
released.  In  Rosenbaum  v.  United  States  C.  S.,  61  N.  J.  Law, 
543,  40  Atl.  591,  593,  it  was  held  that  the  statute  providing  for 


618  ADMINISTRATION 

sale  and  the  division  of  proceeds  amongst  the  creditors  of  an  in- 
solvent corporation  in  proportion  to  their  debts  included  claims 
for  unliquidated  damages,  and  the  word  ''debts"  is  used  in  its 
broad  and  no  restricted  sense.  Damages  for  taking  land  is  a 
debt  due,  when  fixed  and  payable.  Lowell  v.  Boston,  etc.,  106 
Mass.  540. 

In  Berson  v.  Ewing,  supra,  the  Civil  Code  provides  that  the 
liquidating  partner  may  collect,  compromise,  or  release  any  debts 
due  the  partnership,  and  pay  or  compromise  any  claims  against 
it;  and  it  was  held  that  ''debts"  included  claims — that  the 
words  were  used  synonymously.  In  New  York  the  word  "debts" 
includes  every  claim  and  demand  upon  which  a  judgment  for 
a  sum  of  money,  or  directing  the  payment  of  money,  could  be 
recovered  in  an  action.     Code  Civ.  Proc.  §  2514. 

A  Wisconsin  statute,  providing  that  the  homestead  should  not 
be  liable  to  a  forced  sale  ' '  for  any  debt, ' '  means  debts  arising  on 
contract  and  judgments  for  torts.  Smith  v.  Omans,  17  Wis.  395, 
397. 

The  words  "debts  contracted,"  as  used  in  the  Constitution 
of  Michigan,  are  words  of  large  import,  and  include  all  kinds 
of  claims  arising  not  only  on  contract,  but  in  tort.  Mertz  v. 
Berry,  101  Mich.  32,  59  N.  W.  445,  446,  24  L.  R.  A.  789,  45  Am. 
St.  Rep.  379.  See,  also,  Losee  v.  BuUard,  79  N.  Y.  404 ;  Munson 
V.  Genesee,  etc.,  37  App.  Div.  207,  56  N.  Y.  Supp.  139. 

The  bankruptcy  act  has  provided  that  such  a  claim  as  is  set  up 
7  by  this  trustee  shall  pass  to  the  trustee  in  bankruptcy  as  we  have 
\  seen.  It  contemplates  that  he  will  do  his  duty,  and  establish  and 
S  liquidate  it  in  some  court  of  competent  jurisdiction.  When  so 
S  liquidated,  it  is  a  debt  owing  by  the  one  against  whom  it  is  as- 
)serted  beyond  all  question.  Thayer  v.  Southwick,  8  Gray  (Mass.) 
•  229;  Crouch  v.  Gridley,  6  Hill  (N.  Y.)  250;  Johnson  v.  Butler, 
2  Iowa,  535,  545 ;  In  re  Book,  3  Fed.  Cas.  867,  868.  When  that 
is  done,  the  right  of  offset  or  counterclaim  is  perfect  and  com- 
plete. Claims  of  creditors  are  proved  before  the  referee  or  court. 
§  57.  §  63  states  what  debts  may  be  proved ;  §  64  states  what 
debts  have  priority ;  §  65  provides  for  the  declaration  and  pay- 
ment of  dividends ;  §  66  takes  care  of  unclaimed  dividends ;  and 
§  67  takes  care  of  liens.  Then  comes  §  68,  relating  to  "Set-Offs 
and  Counterclaims,"  which  is  a  limitation  on  the  preceding  sec- 
tions relating  to  the  allowance  of  claims  and  the  declaration  and 
payment  of  dividends. 


MUTUAL  DEBTS  AND  CREDITS  619 

I  do  not  doubt  that  the  claims  set  up  by  the  trustee  herg~" 
and  sought  to  be  offset  or  counterelaimed  passed  to  the  trustee 
in  bankruptcy.     If  he  would  enforce  them,  must  he  bring  suit 
thereon  for  the  benefit  of  all  the  creditors,  collect  the  entire 
judgment  for  damages,  if  one  is  recovered,  and  apply  the  pro- 
ceeds generally  in  marshaling  the  assets,  or  are  they  to  be  treated  . 
as  debts  owing  by  the  creditor,  and  as  subject  to  be  offset  when  I 
liquidated  or  established,  and  the  amount  due,  if  anything,  ascer-  / 
tained  ?    The  latter  is  the  construction  the  more  favorable  to  the  / 
one  liable  in  damages.     He  is  not  compelled  to  pay  the  entire 
recovery,  and  perhaps  no  part  of  it,  depending  on  the  amount 
of  his  claim  against  the  bankrupt  estate.    On  the  other  hand,  if 
such  a  claim  for  damages  is  not  regarded  as  the  subject  of  off- 
set within  the  meaning  of  §  68a,  the  trustee  here  must  go  to  a 
foreign  state  and  bring  suit,  and  take  his  chances  of  making  col- 
lection in  case  of  recovery.     §§  23&,  60&,  67e.     The  Peninsular 
Company  having  come  into  this  court  with  its  claim,  it  has  either 
made  itself  a  party  to  the  bankruptcy  proceeding  here,  or  has 
instituted    a   proceeding   in   bankruptcy,   probably  the   latter. 
Coder  v.  Arts,  213  U.  S.  223,  234,  235,  29  Sup.  Ct.  436,  441, 
53  L,  ed.  772,  where  it  is  said : 

' '  Arts  appeared  in  the  bankruptcy  court,  recognizing  the  title 
and  possession  of  the  trustee  in  bankruptcy,  asserted  his  claim 
upon  the  notes,  and  his  right  to  have  the  assets  so  administered 
and  paid  as  to  recognize  the  validity  of  the  lien  for  the  security 
for  his  claim.  We  are  of  opinion  that  he  thus  instituted  a  pro- 
ceeding in  bankruptcy,  as  distinguished  from  a  controversy  aris- 
ing in  the  course  of  bankruptcy  proceedings. ' '  ^ 

In  either  case  that  claimant  company  is  in  this  court  seeking 
a  dividend  from  the  estate,  and  it  seems  clear  to  me  that  under 
the  general  policy  and  to  answer  the  true  purpose  of  the  law  the 
claim  of  the  trustee  is  to  be  regarded  and  treated  as  an  alleged 
debt  of  that  company  to  the  estate  in  bankruptcy,  and,  if  estab- 
lished, offset  or  counterelaimed.  There  is  no  legal  ^r_ec|uitable^ 
principle  upon  which  it  can  be  held  that  the  creditor  shall  pay 
such  claims  for  damages  in  full,  if  established,  for  the  benefit  of 
the  estate,  taking  his  percentage  thereof  by  way  of  dividend  on 
his  claim  when,  if  such  claim  for  damages  had  been  reduced  to 
judgment  against  him  prior  to  bankruptcy,  he  would  be  entitled 
to  wipe  it  out  in  whole  or  in  part  by  offsetting  his  claims  against 
th^ba£kru£tjinder^^^  The  cases  all  agree  that  a  claim  for 
damages  arising  from  f rauH  or  false  and  fraudulent  representa- 


620  ADMINISTRATION 

tions  becomes  a  "debt"  when  reduced  to  judgment.  The  bank- 
ruptcy act  so  treats  such  judgments.  §  63a.  In  short,  if  the 
bankrupt  and  the  estate  after  adjudication  owes  A.  $1,000  for 
money  loaned,  and  A.  owes  the  bankrupt  (and  the  estate  after 
adjudication)  $1,000  on  a  judgment  obtained  for  damages  sus- 
tained by  reason  of  false  and  fraudulent  representations,  both 
are  debts,  and  must  be  offset  under  §  68<j.  Under  the  conten- 
tion of  the  Peninsular  Company  here,  in  case  such  a  cause  of  ac- 
tion exists  in  favor  of  the  estate,  and  recovery  of  judgment  is  had 
by  the  trustee  after  bankruptcy,  the  creditor  is  not  entitled  to 
/  the  offset  or  counterclaim.    I  cannot  assent  that  this  is  the  mean- 

f   ing  and  effect  of  the  bankruptcy  act. 
«     *     * 

The  order  under  review  is  affirme^, 

tAj^AX  A.     -<^  ^  c*^«(U^     KISKADDEN  v.  STEINLE 

^^tJ^t^^^  /  /^*^*-^*^-^03  Fed.  375,  121  C.  C.  A.  559 

""1^*-*-^      (Circuit  Court  of  Appeals,  Sixth  Circuit.     February  4,  1913) 

J.    tL.^       '^^^  trustee  sought  to  have  a  claim  of  Steinle  re-examined  and 

'^  •  ""  diminished,  which  had  been  allowed  December  4,  1909.     The 

Jl^<.        claim  was  for  $16,549,  with  interest  from  October  23,  1909.    The 

^   /  claim  was  based  upon  five  promissory  notes,  two  for  $6,500  each 

^*''*'  and  three  for  $1,000  each,  bearing  date  March  2j6^X9Q9,  and 

^^(fJLA^       falling  due  on  different  dates  between  that  time  and  October 

^^_f(i  ,  26th  following,  with  6  per  cent,  interest.     The  notes  were  exe- 

*r^      ^     cuted  by  the  C.  C.  Anderson  Manufacturing  Company   (whose 

tT  name  was  changed  to  the  Fostoria  Undermuslin  Company)   to 

^^^''*     the  order  of  A.  V.  Bauman,  and  were  indorsed  by  Bauman, 

Henry  Hughes,  and  C.  O.  Frick.    Bauman  discounted  the  paper 

and  turned  the  money  over  to  the  Fostoria  Company.     When 

the  notes  matured,  the  company  was  unable  to  pay  them,  and 

they  were  taken  up  by  Bauman  and  held  by  him  until  November 

2,  1909,  when  they  were  assigned  to  Steinle.    The  facts  alleged 

in  support  of  the  right  to  have  the  claim  diminished  were,  in 

substance,  that  Bauman  subscribed  for  300  shares,  of  the  par 

value  of  $100  each,  of  the  capital  stock  of  the  company,  but  did 

not  fully  pay  for  the  shares,  and  so  is  indebted  to  the  company 

for  the  balance  remaining  due  upon  his  subscription ;  that  Baji;- 

man  was  the  real  owner  of  the  notes  and  the  claim,  but  that,  if 

it  should  be  found  that  they  were  in  fact  owned  by  Steinle,  since 


t 


MUTUAL  DEBTS  AND  CREDITS  621 

he  obtained  the  notes  after  maturity,  the  claim  in  his  hands  was 
subject  to  a  set-off  to  the  extent  of  such  balance. 

In  June,  1904,  C.  C.  Anderson  and  Bauman  formed  a  copart- 
nership for  the  purpose  of  manufacturing  muslin  underwear, 
acquiring  a  factory,  with  goods  and  stock,  and  conducting  the 
business  at  Fostoria,  Ohio.  They  also  purchased  and  removed 
to  this  factory  certain  equipment  and  goods  of  a  company  in 
Saginaw,  Mich.  In  October,  1904,  they  incorporated  a  company 
under  the  laws  of  Ohio,  with  an  authorized  capital  stock  of  $100,- 
000;  Anderson  and  Bauman  each  subscribing  for  44  shares,  J. 
J.  Anderson  for  10  shares,  and  Anna  Rose  G.  Bauman  and  Helen 
May  Anderson  for  1  share  each,  these  five  persons  being  also 
the  incorporators  and  directors.  The  company,  through  these 
directors,  thereupon  purchased  the  partnership  property,  busi- 
ness, and  good  will  of  Anderson  and  Bauman,  and  assumed  the 
firm's  obligations  for  the  consideration  of  602  shares  ($60,200 
par  value)  of  what  was  characterized  as  "the  fully  paid  and  non- 
assessable stock"  of  the  newly  incorporated  company.  This  was 
to  include  the  shares  subscribed,  ' '  and  the  issue  of  which  was  in 
full  satisfaction  of  the  obligations  assumed  by  them  and  each  of 
them  by  said  subscription. ' '  In  the  summary  of  the  evidence  it 
appears  that  the  real  estate  turned  over  to  the  corporation  was 
purchased  by  Anderson  and  Bauman  for  $5,000;  that  the  pur- 
chase of  the  articles  at  Saginaw  was  from  a  company  that  had 
gone  into  liquidation,  which,  after  disposing  of  part  of  its  prop- 
erty to  others,  sold  the  remainder  to  Anderson  and  Bauman  for 
$7,500.  The  referee  found  that  the  property  and  articles  of 
every  kind  turned  over  by  the  copartnership  to  the  company  in 
payment  of  the  602  shares  of  stock  cost  the  firm  from  $27,500 
to  $32,500.  The  company  sold  200  shares  of  its  so-called  treasury 
stock  to  Henry  Hughes,  one  of  the  indorsers  of  the  notes  in  dis- 
pute, at  $67.50  per  share.  This  price  was  made  and  accepted 
on  the  representation  of  Anderson  and  Bauman  that  they  had 
invested  $40,000  in  the  property  turned  over  to  the  company, 
and  the  declared  purpose  was  to  sell  the  stock  to  Hughes  at  a 
price  ' '  that  would  let  him  in  on  the  same  basis  as  Anderson  and 
Bauman,"  because  "Hughes  had  originally  intended  to  join  the 
partnership."  The  referee  found  that  the  fair  and  reasonable 
value  of  all  of  the  property,  which  Anderson  and  Bauman  sold 
to  the  company,  "did  not  exceed  the  sum  of  forty  thousand  ($40,- 
000)  dollars,"  and  that  the  overvaluation  of  the  property  "was 
not  due  to  error  of  judgment  on  the  part  of  C.  C.  Anderson  and 


J 


u 


622  ADMINISTRATION 

A.  V.  Bauman  and  other  directors  of  the  corporation  at  the  time 
of  the  transaction.     *     *     *" 

Of  the  602  shares  of  stock  received  for  the  sale  of  the  property, 
Bauman  received  300  shares  ($30,000  par  value),  and  is  still  the 
owner  of  the  stock.  The  finding  of  the  referee  respecting  these 
shares  is  as  follows:  "That  at  the  time  of  the  issue  to  him  of 
the  said  three  hundred  shares  of  stock"  of  the  company  "Bau- 
man was  aware  of  the  overvaluation  of  the  property  of  Ander- 
son and  Bauman,  and  that  his  half  interest  in  the  partnership, 
for  which  he  received  the  three  hundred  shares  of  stock  of  the 
par  value  of  one  hundred  ($100)  dollars  each,  was  worth  not 
'^j^^'^  to  exceed  twenty  thousand  ($20,000)  dollars." 
^^^'  ,  The  referee  ordered  Steinle's  claim  of  $16,549  to  be  reduced 
*'  in  the  sum  of  $10,000,  letting  it  stand  as  "allowed  against  the 

bankrupt"  for  $6,549,  with  interest.  The  court  below  reversed 
the  referee's  order,  denied  the  petition  of  the  trustee  to  dis- 
allow the  claim,  and  dismissed  the  petition  with  costs.  The  ease 
was  brought  to  this  court  upon  appeal  prayed  and  allowed  within 
10  days  of  the  date  of  the  order  made  by  the  court  below. 

WARRINGTON,  Circuit  Judge   (after  stating  the  facts  as 

above).    We  shall  consider  the  case  under  the  objections  urged 

on  behalf  of  appellee:     (a)  the  case  is  not  appealable;  (b)  no 

stock  liability  exists  against  Bauman;  (c)  such  liability  cannot 

be  set  off  against  the  claim  of  Steinle.^" 
#     *     * 

Alleged  Stack  Liability.  No  opinion  was  handed  down  in  the 
court  below,  and  we  have  no  means  of  ascertaining  the  views 
of  the  learned  trial  judge,  except  as  they  were  stated  in  the 
arguments  of  counsel,  and  as  they  appear  in  their  briefs.  The 
claims  that  no  liability  of  Bauman  exists  in  respect  of  the  300 
shares  of  stock  received  by  him,  and  that,  if  there  be  any  such 
liability,  it  cannot  be  set  off  against  the  claim  of  Steinle,  present 
questions  of  some  difficulty.    However,  since  the  promissory  notes 

'  were  past  due  when  obtained  by  Steinle,  it  is  not  disputed  that 
they  were  received  by  him  subject  to  any  defense  of  the  com- 
pany to  which  they  would  have  been  open  in  the  hands  of  Bau- 

*  man.  If  the  facts  are  accepted,  as  in  substance  found  by  the 
referee,  that  the  overvaluation  of  the  partnership  property  was 
not  due  to  error  in  judgment  of  Anderson  and  Bauman  and  the 

26 — The  opinion  on  the  first  point 
is  omitted. 


MUTUAL  DEBTS  AND  CREDITS  623 

other  directors  of  the  corporation  at  the  time  of  the  transaction, 
and  that  Bauman  then  knew  that  the  portion  of  the  property- 
he  was  transferring  to  the  eompajiy  was  $10,000  less  in  value 
than  the  par  value  of  the  stock  he. was  receiving,  we  are  met 
with  the  question  whether  proof  of  the  claim  must  be  allowed 
and  payments  made  upon  it  out  of  the  bankrupt's  assets  ratably 
with  the  claims  of  the  general  creditors,  who  confessedly  are  not 
indebted  to  the  estate,  without  regard  to  the  unpaid  portion  of 
the  Bauman  stock.  Could  Bauman  have  retained  the  notes  and 
maintained  this  position?  As  pointed  out  in  the  statement, 
the  corporation  was  organized  under  the  laws  of  Ohio.  Whether 
Bauman  is  liable  for  the  unpaid  portion  of  the  stock  he  received 
is  a  local  question,  and  is  governed  by  the  pertinent  rule  of  de- 
cision of  the  Supreme  Court  of  Ohio.  Black  v.  Zacharie  &  Co., 
3  How.  482,  511,  11  L.  ed.  690;  Thompson  v.  Fairbanks,  196  U. 
S.  516,  523,  25  Sup.  Ct.  306,  49  L.  ed.  577 ;  Detroit  Trust  Co.  v. 
Pontiac  Savings  Bank,  196  Fed.  29,  33,  115  C.  C.  A.  663  (C.  C. 
A.  6th  Cir.)  ;  In  re  Jassoy  Co.,  178  Fed.  515,  516,  101  C.  C.  A. 
641  (C.  C.  A.  2d  Cir.)  ;  Shaw  v.  Goebel  Brewing  Co.,  202  Fed. 
408  (C.  C.  A.  6th  Cir.)  ;  Mishawaka  Woolen  Mfg.  Co.  v.  West- 
veer,  191  Fed.  465,  466,  112  C.  C.  A.  109  (C.  C.  A.  6th  Cir.). 
[The  court  concluded  that  under  Ohio  law  Bauman  was  indebted 
to  the  corporation  in  the  sum  of  $10,000,  which  the  trustee  could 
recover;  and  continued  as  follows:] 

TJie  Right  of  Set-Off.    Can  Bauman 's  liability  be  enforced  by 
the  trustee  through  the  exercise  of  the  right  of  set-off  in  a  case 
like  this?     At  first  blush  it  would  seem  that  the  language  of 
§  68a^f  the  Bankruptcy  Act,  in  connection  with  the  rule  in  the 
Gates  Case,  would  admit  of  the  set-off  claimed  here ;  for  §  68a 
extends  to  ' '  all  cases  of  mutual  debts  or  mutual  credits  between 
the  estate  of  a  bankrupt  and  a  creditor,"  and,  as  stated,  the 
Ohio  rule  treats  such  liability  as  a  debt  due  to  the  corporation. 
However,  we  think  the  true  interpretation  of  §  68,  els.  "a"  andj 
"b",  and  of  such  rule  is  that,  after  the  corporation  becomes  in-, 
solvent,  any  sum  due  upon  a  stock  subscription  is  impressed  with  ^'***' 
the  character  of  a  trust  in  favor  of  all  the  creditors  alike,  except       ,   .^ 
only  such  as  may  have  given  credit  to  the  company  with  knowl-      * 
edge  of  the  scheme  of  stock  issue.    Hence  to  apply  such  an  un- 1  /    ^ 
paid  subscription  as  a  set-off  to  an  ordinary  claim  held  by  the  f 
subscriber  against  the  corporation  would  be  to  appropriate  the}  .a-    A 
rights  of  the  other  creditors  in  the  subscription  debt  to  the  ex- 
clusive benefit  of  the  person  owing  it ;  or,  on  the  other  hand,  it 


•J 


624  ADMINISTRATION 

might,  as  respects  his  costoekholders,  subject  him  to  the  payment 

of  more  than  his  ratable  share  of  the  bankrupt's  debts.    It  can- 

I  not  be  said,  then,  that  the  debts  in  question  are  in  their  nature 

I  both  mutual  and  in  the  same  right ;  nor  that  after  the  bankruptcy 

[  there  was  any  reason  for  enforcing  stockholders '  liability  or 

Bauman's  ratable  share  thereof  except  for  the  equal  benefit  of 

all  the  creditors. 

In  Sawyer  v.  Hoag,  supra,  17  Wall,  at  p.  622,  21  L.  ed.  731, 
when  passing  upon  a  provision  of  the  Bankruptcy  Act  of  1867 
(14  Stat.  p.  526,  §  20),  similar  to  §  68  of  the  present  act,  Justice 
•Miller  said: 

* '  This  section  was  not  intended  to  enlarge  the  doctrine  of  set- 
off, or  to  enable  a  party  to  make  a  set-off  in  cases  where  the 
principles  of  legal  or  equitable  set-off  did  not  previously  author- 
ize it.     The  debts  must  be  mutual ;  must  be  in  the  same  right. 
The  case  before  us  is  not  of  that  character.    The  debt  which  the 
appellant  owed  for  his  stock  was  a  trust  fund  devoted  to  the  pay- 
.raent  of  all  the  creditors  of  the  company.    As  soon  as  the  com- 
ipany   became   insolvent,   and  this   fact   became   known  to   the 
1  appellant,  the  right  of  set-off  for  an  ordinary  debt  to  its  full 
\amount  ceased.    It  became  a  fund  belonging  equally  in  equity  to 
all  the  creditors,  and  could  not  be  appropriated  by  the  debtor 
to  the  exclusive  payment  of  his  own  claim." 

To  the  same  effect  are  Scammon  v.  Kimball,  Assignee,  92  U.  S. 
366,  367,  23  L.  ed.  483 ;  Scovill  v.  Thayer,  supra,  105  U.  S.  153, 
26  L.  ed.  968;  Babbitt  v.  Read  (C.  C.)  173  Fed.  712,  715; 
In  re  Howe  Mfg.  Co.  (D.  C.)  193  Fed.  524,  527;  1  Love- 
land  on  Bankr.  (4th  ed.)  p.  661,  and  note  4;  Collier  on 
Bankr.  (8th  ed.)  p.  796,  and  notes.  And  the  rule  that  "unpaid 
subscriptions  to  the  stock  of  a  corporation  constitute  a  trust 
fund  for  the  benefit  of  its  creditors"  is  stated  in  Fogg  v.  Blair, 
139  U.  S.  at  p.  125,  11  Sup.  Ct.  476,  35  L.  ed.  i04,  to  be  ''the 
settled  doctrine  of  this  court ' ' ;  and,  further,  in  Scovill  v.  Thayer, 
105  U.  S.  156,  26  L.  ed.  968,  it  was  held: 

"Upon  the  bankruptcy  of  the  company  his  obligation  was  to 

,  pay  to  the  assignees,  upon  demand,  such  an  amount  upon  his 

i  unpaid  stock  as  would  be  sufficient,  with  the  other  assets  of  the 

\  company,  to  pay  its  debts.    He  was  under  no  obligation  to  pay 

any  more,  and  he  was  under  no  obligation  to  pay  anything  until 

the  amount  necessary  for  him  to  pay  was  at  least  approximately 

ascertained.     Until  then  his  obligation  to  pay  did  not  become 

complete. ' ' 


MUTUAL  DEBTS  AND  CREDITS  625 

We  have  still  to  consider  an  important  ease  recently  decided 
by  the  Supreme  Court  of  Ohio.  It  is  Niles,  Assignee,  v,  Olszak 
(87  Ohio  St.  229,  100  N.  E.  820,  decided  December  17,  1912), 
which  holds: 

"A  stockholder  in  a  savings  and  loan  association  organized 
under  the  laws  of  this  state  is  entitled,  when  the  association 
becomes  insolvent,  to  set  off,  as  against  its  assignee  for  the  bene- 
fit of  creditors,  a  claim  for  money  which  he  has  on  deposit  with 
the  association  against  his  liability  for  the  unpaid  part  of  his 
stock  subscription." 

That  case  is  the  nearest  approach  to  this  one  of  any  other 
decided  by  the  Supreme  Court  of  Ohio,  and  so  dispenses  with  the 
need  of  referring  to  other  decisions  of  the  court.  "We  think  the; 
learned  judge  announcing  the  opinion  pointed  out  facts  whichi 
render  the  decision  inapplicable  here,  when  he  said  : 

'  *  The  stock  was  not  issued  under  the  pretense  of  being  or  pur- 
porting to  be  fully  paid,  when  in  fact  it  was  not  paid  for. 
There  was  no  contrivance  to  release  the  debt  for  the  stock,  and 
substitute  a  loan  therefor.  It  is  not  a  case  in  which  a  corpora- 
tion had  held  itself  out  to  the  public  as  having  a  larger  paid-up 
capital  than  it  actually  had.  *  *  *  The  statute  prescribes 
*  *  *  that  no  such  association  shall  commence  business  until 
at  least  one-half  of  each  subscription  ha^  been  fuUy  paid  up. 
There  is  no  claim  that  this  was  not  done,  and  the  presumption 
is  that  it  was  done.  The  finding  of  facts  shows  that  the  associa- 
tion was  duly  organized  under  the  statute.  There  is  no  claim 
that  it  ever  pretended  that  any  more  than  50  per  cent,  of  each 
subscription  had  been  paid  in,  or  that  any  one  ever  gave  credit 
on  the  faith  that  all  of  its  stock  had  been  paid  in  full.  *  *  * 
It  is  common  knowledge  that  many  of  the  subscribers  to  the  stock 
of  such  savings  associations  make  their  deposits  therein  with 
the  intention  and  understanding  that  such  deposits  shall  be 
made  and  used  for  the  purpose  of  paying  for  the  stock.    *    *    *  " 

Thus  it  may  be  fairly  inferred  that  all  creditors  of  the  sav- 
ings bank  were  chargeable  with  knowledge  that  only  50  per 
cent,  of  its  capital  stock  had  been  paid  in,  and  that  it  was  un- 
derstood that  the  deposits  should  be  applied  to  the  payment  of 
the  balance  due  on  the  subscriptions.  This  in  principle  agrees 
with  what  we  have  already  pointed  out  as  recognized  by  the  same 
court  in  the  Gates  Case,  and  by  this  court  in  Rickerson  Roller 
Mill  Co,  V.  Farrell  Foundry  &  Machine  Co.,  respecting  the  rights 
of  persons  who  extend  credit  to  a  corporation  with  knowledge 

H.  &  A.  Bankruptcy — 40 


626  ADMINISTRATION 

of  the  arrangement  under  which  its  stock  subscriptions  have  been 
made.  It  may  well  be  that  as  to  all  such  persons  the  unpaid 
subscriptions  do  not  constitute  a  trust  fund,  in  the  sense  that 
it  is  not  open  to  set-off. 

Furthermore,  any  suit  rightly  to  enforce  payment  of  unpaid 
stock  subscriptions  would  have  to  be  of  a  plenary  character  (In 
re  Haley,  158  Fed.  74,  85  C.  C.  A.  404  [C.  C.  A.  6th  Cir.]  ;  In  re 
Remington  Automobile  &  Motor  Co.,  153  Fed.  345,  347,  82  C.  C. 
A.  421  [C.  C.  A.  2d  Cir.] )  ;  and  it  does  not  appear  that  Bauman 
is  a  party  to  the  present  suit,  although  he  appeared  as  a  witness 
and  so  had  notice  of  it.  We  are  thus  led  to  believe  that  the  set- 
off was  not  permissible. 

What,  then,  should  be  done  with  the  claim  of  Steinle  ?  We 
have  felt  bound  under  the  present  record  to  assume  that  Bau- 
man is  solvent.  If  the  claim  be  allowed  and  permitted  now  to 
share  in  the  assets,  according  to  the  undisputed  statement  of 
counsel  for  appellee,  Steinle  would  receive  a  sum  nearly  equal 
to  the  amount  found  by  the  referee  to  be  due  from  Bauman  upon 
his  subscription.  Still,  if  Bauman  could  meet  his  unpaid  bal- 
ance, not  to  speak  of  the  liability  of  any  of  his  costockholders,  no 
ultimate  loss  to  the  other  creditors  would  ensue.  If,  on  the 
other  hand,  Bauman  should  not  be  able  to  pay  anything  re- 
maining due  on  his  subscription,  Steinle  (who  stands  no  better 
than  Bauman)  would  profit  at  the  expense  of  the  other  cred- 
itors. In  the  latter  event,  however,  the  reasons  for  denying  the 
^  set-off  (or  at  least  its  equivalent  in  the  nature  of  an  equitable 
defense)  against  the  Steinle  claim  would  cease ;  for  nothing  would 
be  gained  by  suit  upon  the  subscription,  and  so  nothing  could 
be  lost  by  the  general  creditors  by  applying  whatever  sum  is 
really  due  from  Bauman  toward  payment  of  the  Steinle  claim. 
Rolling  Mill  Co.  v.  Ore  &  Steel  Co.,  152  U.  S.  615,  616,  14  Sup. 
Ct.  710,  38  L.  ed.  565. 

Since  it  would  be  obviously  inequitable  to  permit  the  Steinle 
claim  to  share  ratably  in  the  assets  before  properly  disposing 
of  the  question  of  Bauman 's  obligation  and  his  ability  to  pay 
it  (In  re  Wiener  &  Goodman  Shoe  Co.  (C.  C.)  96  Fed.  949,  950, 
and  In  re  Duryea  Power  Co.  (D.  C.)  159  Fed.  783,  784,  the 
underlying  principles  of  which  we  regard  as  applicable),  we  are 
constrained  to  hold  that  the  order  of  the  court  below  allowing 
the  claim  should  be  reversed,  with  costs;  that  all  proceedings 
upon  the  Steinle  claim  be  stayed,  and  all  dividends  that  would 
accrue  on  such  claim,  if  allowed,  be  withheld  and  preserved, 


MUTUAL  DEBTS  AND  CREDITS  627 

until  the  Bauman  debt  and  its  availability  be  finally  settled. 
If  such  debt  be  collected  by  the  trustee,  Steinle's  claim  shall  be 
allowed  in  full;  if  by  reason  of  his  insolvency  Bauman 's  debt 
is  not  collectible  in  whole  or  in  part,  Steinle's  claim  shall  be 
accordingly  reduced  and  the  remainder  allowed.  An  order  will 
be  entered  reversing  the  cause,  and  remanding  it  for  further 
proceedings,  not  inconsistent  withyfciiis  opinion. 

NORFOLK  &  W.  RY.  CO.  v.  GRAHAM  ^^^^^   ^^^^  J^ 
145  Fed,  809,  76  C.  C.  A.  385 
(Circuit  Court  of  Appeals,  Fourth  Circuit.    May  1,  1906) 

McDowell,  District  Judge.  The  following  is  an  excerpt 
from  the  opinion  of  the  trial  court : 

"This  was  a  suit  in  assumpsit  instituted  by  John _T.  Graham^ 
trustee  of  the  estate  of  0.  M.  Page,  a  bankrupt,  against  the  Nor-    ^     ^ 
folk  &  Western  Railway  Company,  for  the  recovery  of  certain    ^^M^ 
moneys  alleged  to  be  due  to  said  estate  under  a  contract  entered 
into  between  said  Page  and  said  railway  company  for  the  con-, 
struction  of  a  certain  portion  of  its  roadbed  in  West  Virginia. 
The  defendant  pleaded  nonassumpsit  and  also  filed  a  notice  of 
recoupment  under  the  West  Virginia  statute,  under  which  it 
sought  to  prove  damages  growing  out  of  the  contract  or  trans- 
action upon  which  the  suit  was  brought,  to  an  amount  equal  to 
the  demand  against  it. 

' '  The  parties  by  mutual  consent  waived  a  jury  and  submitted 
all  matters  of  law  and  fact  to  the  judgment  of  the  court  upon 
an  agreed  statement  of  all  facts,  from  which  statement  it  appears 
that  O.  M.  Page  entered  into  a  written  contract  on  the  11th  day 
of  August,  1902,  with  the  defendant,  by  which  he  agreed  to  con- 
struct for  it,  at  certain  prices  therein  named,  §§21  to  25 
inclusive,  of  the  Naugatuck  Branch  of  the  Ohio  extension  of  its 
railroad.  That,  by  the  terms  of  the  said  contract,  on  or  about 
the  15th  day  of  each  calendar  month  estimates  of  the  work  done 
by  Page  during  the  preceding  month  were  to  be  made,  and  an 
advance  payment  of  eighty-five  per  cent.  (85%)  thereof  made 
to  him,  the  remaining  fifteen  per  cent.  (15%)  to  be  retained  by 
the  railway  company  as  a  compensation  for  or  on  account  of 
any  damages  which  might  be  certified  by  its  engineer  to  have 
been  sustained  from  any  failure  of  the  said  Page  to  perform 
said  contract.    That  Page  performed  work  and  furnished  mate- 


628  ADMINISTRATION 

rials  under  said  contract  until  the  latter  part  of  August,  1903, 
during  the  whole  of  which  time  his  total  work  amounted,  ac- 
cording to  the  terms  of  the  contract,  to  thirty  thousand  seven 
hundred  and  fifty  dollars  and  eleven  cents  ($30,750.11),  all  of 
which  was  paid  him,  excepting  $4,612.52  of  retained  percent- 
ages, and  $3,428.25  worth  of  work  estimated  to  have  been  done 
in  the  month  of  August,  making  a  total  still  in  the  hands  of  the 
railway  company,  retained  percentages  and  August  estimate, 
amounting  to  $8,040.77.  That  the  retained  percentages  for  the 
month  of  May,  1903,  amounted  to  $1,070.53 ;  for  the  month  of 
June,  $570.66 ;  for  the  month  of  July,  $651.13,  and  for  the  month 
of  August,  $604.99;  all  of  which  percentages  are  embraced  in 
the  sum  total  retained  percentages  of  $4,612.52  above  named, 
and  are  separated  into  months  only  for  the  purpose  of  showing 
what  these  percentages  amounted  to  for  the  four  months  next 
preceding  the  adjudication  of  Page  as  a  bankrupt.  That  Page 
broke  his  contract  and  abandoned  his  work  on  or  about  the  28th 
or  29th  day  of  August,  1903,  and  the  railway  company,  through 
its  engineer  construction  work,  branch  lines,  and  in  accordance 
with  the  terms  of  said  contract,  immediately  declared  in  writing 
the  same  to  be  terminated  and  forfeited,  which  writing  was  filed 
with  the  railway  company,  a  copy  thereof  mailed  to  Page's  last 
known  address,  and  another  copy,  as  provided  in  the  contract, 
posted  at  the  front  door  of  his  office  upon  his  work,  on  Septem- 
ber 1,  1903.  Tha,t  a  petition  in  bankruptcy  was  filed  against^ 
Page  on  the  1st  day  of  September,  1903,  and  he  duly  adjudged 
a  bankrupt  on  the  10th  day  of  said  month.  John  T.  Graham 
was  chosen  as  trustee  in  bankruptcy  by  the  creditors,  and,  by 
an  order  of  the  bankrupt  court,  was  authorized  and  directed  to 
institute  this  suit. 

"It  was  further  agreed  that  Page  was  insolvent  at  the  time 
of  his  adjudication  as  a  bankrupt,  and  that  he  was  at  that  time 
indebted  to  laborers  who  had  performed  work  for  him  upon  the 
sections  agreed  to  be  constructed  by  him  during  the  three  months 
next  preceding  such  adjudication,  in  amounts  aggregating  five 
thousand  dollars  ($5,000.00),  but  exceeding  in  no  individual 
case  the  sum  of  three  hundred  dollars  ($300.00),  all  of  whose 
claims  were  proven  in  the  bankrupt  court,  in  accordance  with 
the  provisions  of  the  act  of  Congress.  It  was  further  agreed 
that,  after  Page  had  abandoned  his  work  and  the  railway  com- 
pany had  declared  his  contract  forfeited  and  at  an  end,  it  im- 
mediately advertised  for  bids  in  the  customary  way  for  the  com- 


MUTUAL  DEBTS  AND  CREDITS  629 

pletion  of  the  work  that  had  been  left  unfinished  by  him.  Many 
contractors  made  bids  thereon,  but  after  the  exercise  of  due  care 
and  diligence  in  the  premises  upon  the  part  of  the  railway  com- 
pany, one  John  T.  McKinney  was  declared  to  be  the  lowest  and 
best  bidder,  and  the  contract  for  the  completion  of  the  aban- 
doned work  of  0.  M.  Page  was  given  to  the  said  McKinney. 
The  new  contractor  entered  upon  his  work  and  prosecuted  the 
same  with  diligence,  and  under  the  reasonable  supervision  of 
the  railway  company,  to  completion;  but,  in  consequence  [as  it 
was  agreed]  of  the  condition  in  which  Page  left  the  work  that 
had  been  abandoned  by  him,  the  railway  company  was  com- 
pelled to  pay  unto  McKinney  $11,112.80  more  than  it  would 
have  been  required  to  pay  to  Page  upon  the  completion  of  said 
work  had  he  performed  the  same  at  the  prices  and  in  accordance 
with  the  terms  agreed  upon  by  him. 

' '  The  def ec^es.  .of  the  railway  company  were  two :  ( 1 )  That, 
under  the  plea  of  non-assumpsit,  and  by  the  very  terms  of  the 
contract  itself,  it  did  not  owe  Page  anything;  because  it  had  a 
right  to  keep  not  only  the  retained  percentages  of  $4,612.52,  but 
the  August  estimate  of  $3,428.25,  as  well ;  the  title  thereto  never 
having  vested  in  Page,  in  consequence  of  his  agreement  that  no 
money  was  to  become  due  or  payable  to  him  or  demandable  by 
him  until  after  the  whole  work  had  been  completed  in  a  satis- 
factory manner  and  certified  by  the  engineer  of  the  railway 
company,  which  had  not  been  done.  (2)  That,  even  if  said  re- 
tained percentages  and  August  estimate  should  be  held  to  be  a 
debt  due  from  the  railway  company  to  Page,  still  nothing  would 
be  recoverable  against  the  railway  company  in  consequence  of 
its  right  to  recoup,  to  the  extent  thereof,  or  offset  against  the 
same,  the  damages  occasioned  to  it  by  the  very  breach  by  Page 
of  the  contract  sued  upon." 

The  declaration  consisted  of  the  common  counts  in  assumpsit 
and  several  special  counts  founded  on  the  contract.  It  does  not 
appear  whether  or  not  the  railway  company  knew  of  the  bank- 
ruptcy proceedings  prior  to  the  institution  of  this  action.  The 
trial  court  ruled  in  favor  of  the  railway  as  to  the  fifteen  per 
cent,  retained  from  the  various  monthly  estimates.  But,  being 
of  opinion  that  defense  as  to  the  85  per  cent,  of  the  August  esti- 
mate could  only  be  made  by  way  of  counterclaim,  and  that 
§.57w,  30  Stat.  561  [U.  S.  Comp.  St.  1901,  p.  3444],  barred 
such  counterclaim,  the  judgment  below  was  as  to  this  item  ad- 


630  ADMINISTRATION 

verse  to  the  railway  company.  The  opinion  as  to  the  effect  of 
the  bankrupt  act  reads  as  follows: 

"The  only  other  feature  necessary  to  be  considered  is  as  to 
the  applicability  of  the  notice  of  recoupment  filed  with  the  plea 
of  nonassumpsit.  As  the  estate  of  Page,  here  represented  by 
the  trustee,  is  that  of  a  bankrupt,  the  question  as  to  the  avail- 
ability of  this  notice  is  solvable  only  under  the  provisions  of  the 
bankruptcy  act,  and  under  those  provisions  I  must  hold  that  it  is 
ineffectual.  It  is  provided  by  Act  July  1,  1898,  c.  541,  §  68&,  30 
Stat.  565  [U.  S.  Comp.  St.  1901,  p.  3450],  that  a  set-off  or  counter 
claim  shall  not  be  allowed  in  favor  of  any  debtor  of  the  bankrupt 
which  is  not  made  provable  against  the  estate.  This  account  for 
damages  for  failure  to  complete  the  bankrupt's  contract  is  not 
so  provable,  because  of  lapse  of  time,  and  therefore  cannot  now 
be  set  off.  It  is  not  the  character  of  the  demand  which  precludes 
the  right  to  set  it  off,  but  the  failure  to  prove  it  in  the  proceed- 
ing in  bankruptcy.  Thus  unliquidated  claims  may  be  set  off 
against  liquidated  claims,  provided  they  are  provable  in  bank- 
ruptcy, and  this,  as  I  apprehend,  requires  that  they  be  presented 
and  proved  before  the  referee.  See  §  636,  30  Stat.  563  [U.  S. 
Comp.  St.  1901,  p.  3447]  and  the  discussion  thereof  in  Collier  on 
Bankruptcy  (5th  ed.)  p.  488;  Brandenburg  on  Bank  (3d  ed.) 
§  1005;  Loveland  on  Bank  (2d  ed.)  p.  282. 

''Had  the  railway  company  chosen  to  liquidate  and  prove  its 
claim  it  would  seem  that  it  would  have  been  entitled  to  set  it  off 
against  the  debt  due  to  the  estate;  but,  not  having  proved  its 
claim  within  the  time  limited,  or  taken  steps  to  have  it  allowed 
in  the  bankruptcy  proceedings,  it  cannot  now  be  pleaded  as  a 
virtual  set-off  in  this  proceeding. 

"Let  judgment  be  entered  for  $3,428.25,  with  interest  thereon 
from  September  15,  1903." 

As  the  railway  company  alone  has  filed  assignments  and  sued 
out  writ  of  error,  we  shall  deal  only  with  the  propositions  de- 
cided adversely  to  it.  In  view  of  the  conclusion  we  have  reached 
it  is  unnecessary  that  we  set  out  the  reasons  which  lead  us  to 
think  unsound  the  contention  made  in  behalf  of  the  railway 
company  to  the  effect  that  the  contract  gave  the  company  the 
right  to  retain  the  85  per  cent,  of  the  August,  1903,  estimate  as 
liquidated  damages.  We  agree  with  the  trial  court  that  the  right 
of  the  company  to  defeat  the  claim  of  the  trustee  could  only  be 
asserted  by  way  of  counterclaim.  We  must  therefore  now  con- 
sider the  question  raised  under  the  bankrupt  act. 


MUTUAL  DEBTS  AND  CREDITS  631 

J  57n,  3ia..atat._561  [U.  S.  Comp.  St.  1901,  p.  3444],  is  a  new 
provision,  appearing  for  the  first  time  in  the  act  of  1898.  The 
argument  relied  on  by  defendant  in  error  may  be  briefly  ex- 
pressed as  follows:  The  counterclaim  of  the  railway  company, 
while  provable  in  its  nature,  was  not  proved  in  the  bankruptcy 
proceeding  within  the  time  allowed  by  §  57n,  and  it  was  there- 
fore when  asserted  in  the  court  below  not  a  provable  counter- 
claim such  as  can  be  set  off.  So  far  as  we  have  been  able  to  dis- 
cover there  is  no  reported  case  which  can  be  relied  upon  as  a 
precedent  for  the  view  taken  by  the  court  below,  and  none  that 
has  more  than  a  tendency  to  support  the  opposite  view.  As  the 
trial  court  read  §  57n,  it  is  a  statute  of  limitations  applicable 
to  the  counterclaim  of  a  debtor  sued  in  an  independent  plenary 
action  brought  by  the  trustee  in  bankruptcy.  We  cannot  so  con- 
strue this  provision.  §  57  as  a  whole  relates  merely  to  the  proof 
and  allowance  of  .claims  against  the  bankrupt  in  the  bankruptcy 
proceeding.  The  purpose  of  57ti  is  to  speed  the  conclusion  of 
that  proceeding.  One  who  is  the  debtor  and  the  creditor  of  the 
bankrupt,  whose  claim  against  exceeds  his  debt  to  the  bankrupt, 
must  prove  his  claim  in  the  bankruptcy  proceeding  within  the 
time  limit  fixed  by  57w,  in  order  to  share  in  the  distribution  of 
the  estate.  In  re  Muskoka  Co.  (D.  C.)  127  Fed.  886.  But  we 
find  no  warrant  for  holding  that  his  failure  to  thus  prove  it  is 
a  bar  to  the  use  of  such  claim  in  diminution  of  or  to  defeat  the 
claim  of  the  trustee  when  asserted  in  an  independent  action.  If 
this  clause  of  the  act  has  the  effect  given  it  by  the  trial  court, 
it  is  as  effective  when  relied  on  against  the  counterclaim  of  one 
who  has  never  heard  of  the  bankruptcy  proceeding,  as  it  is  when 
relied  on  against  the  counterclaim  of  one  who  has  had  full  knowl- 
edge of  such  proceeding.  And  it  is  as  effective  in  ease  the  trustee 
brings  his  action  after  the  expiration  of  the  time  limit  fixed  by 
§  57n,  as  in  case  he  brings  such  action  while  there  is  yet  time  for 
the  defendant  to  prove  his  counterclaim  in  the  bankruptcy 
proceeding. 

If  in  the  case  at  bar  the  railway  company  had  no  knowledge 
of  the  bankruptcy  proceeding  until  this  action  was  brought,  i 
§  57n,  as  construed  by  the  trial  court,  has  the  effect  of  depriv- 
ing the  company  of  a  valuable  right  without  an  opportunity  to^. 
be  heard.    The  fact  that  no  exception  is  made  in  behalf  of  one[ 
who  first  leams  of  the  institution  of  the  bankruptcy  proceeding 
after  the  time  fixed  by  this  clause  seems  to  us  sufficient  of  itself 
for  denying  the  clause  effect  in  an  independent  action.    But  let 


632  ADMINISTRATION 

it  be  assumed  that  in  the  case  at  bar  the  company  knew  of  the 
bankruptcy  proceeding  in  ample  time,  and  failed  to  prove  its 
claim  for  the  excess  of  its  damages  over  the  value  of  the  unpaid 
for  work,  simply  because  it  regarded  the  claim  as  worthless. 
Under  this  assumption,  the  discharge  in  bankruptcy,  when 
granted,  wiU  bar  the  claim  for  the  excess  as  a  liability  against 
Page  (In  re  Hilton  [D.  C]  104  Fed.  981)  ;  and  the  faUure  of 
the  railway  company  to  prove  its  claim  deprives  it  of  any  pos- 
sible right  to  share  as  a  creditor  in  the  distribution  of  the  bank- 
rupt estate  (In  re  Shaffer  [D.  C]  104  Fed.  982).  But  we  think 
it  cannot  be  true  that  such  failure  to  prove  the  claim  to  the 
excess  in  the  bankruptcy  proceeding  leaves  the  company  in  the 
position  of  a  mere  debtor.  Statutes  of  limitation  are  strictly 
construed.  But  even  if  the  rule  of  construction  were  otherwise, 
the  language  of  the  clause  in  question  and  its  context  seem  to 
us  to  plainly  limit  its  effect  to  proceedings  iij  bankruptcy.  In 
enacting  the  bankrupt  act  Congress  could  have  had  no  reason 
for  requiring  a  debtor  creditor,  whose  claim  against  exceeds  his 
debt  to  the  bankrupt,  to  prove  the  excess  and  insist  upon  his 
rights  as  a  creditor  of  the  estate.  And  hence  there  was  no  rea- 
son for  penalizing  such  failure  by  imposing  a  limitation  upon 
the  right  of  a  person  thus  situated  who  does  not  wish  to  prove 
/^nd  claim  the  excess.  The  full  purpose  of  §  57 n  seems  to  us  to 
/  be  subserved  when  it  is  held  that  the  limitation  applies  merely 
I  to  claims  sought  to  be  asserted  in  the  bankruptcy  proceeding. 
We  think  the  tme  solution  of  the  question  before  us  is  that 


tiajesomtK 
whicE^maAi 


the  counterclaim  whichmay  be  set  off  in  an  independent  action 
brought  by  the  trustee  is  (subject  to  the  restrictions  of  §  686, 
30  Stat.  565  [U.  S.  Comp.  St.  1901,  p.  3450] )  one  that  is  prov- 
able in  its  nature,  and  need  not  necessarily  be  one  that  has  been, 
or  may  yet  be,  proved  in  the  bankruptcy  proceeding.  §  20  of 
the  bankrupt  act  of  1867  provided:  •'- — 

"That  in  all  cases  of  mutual  debts  or  mutual  credits  between 
the  parties  the  account  shall  be  stated,  and  one  debt  set  off 
a^gainst  the  other,  and  the  balance  only  shall  be  allowed  or  paid ; 
but  no  set-off  shall  be  allowed  of  a  claim  in  its  nature  not  prov- 
able against  the  estate.     *     *     *  " 

§  68  of  the  present  act  reads,  so  far  as  now  material : 

"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.     A  set-off  or  counterclaim  shall 


MUTUAL  DEBTS  AND  CREDITS  633 

not  be  allowed  in  favor  of  any  debtor  of  the  bankrupt  which  is 
not  provable  against  the  estate." 

In  Morgan  v.  Wordell,  178  Mass.  350,  59  N.  E.  1037,  55  L. 
R.  A.  33-41,  Mr.  Justice  Holmes,  said: 

''The  present  statute  leaves  out  the  words  *in  its  nature,'  but 
we  can  have  no  doubt  that  it  was  intended  to  convey  the  same 
idea  as  the  longer  phrase  in  the  last  preceding  act,  from  which 
in  all  probability  its  words  were  derived.  'Provable'  means 
provable  in  its  nature  at  the  time  when  the  set-off  is  claimed, 
not  provable  in  the  pending  bankruptcy  proceedings." 

It  may  be  true  that  Page's  liability  to  the  company  was  at 
the  time  of  the  filing  of  the  petition  and  at  the  date  of  the  ad- 
judication contingent.  But  before  this  liability  was  asserted  as 
a  counterclaim  it  had  become  fixed  and  certain  in  amount.  It 
was  certainly  provable  in  nature  when  it  was  asserted  in  the 
court  below.  The  contention  of  defendant  in  error  based  on  the 
theory  that  the  railway  company  is  securing  a  preference  seems 
to  us  without  merit.  If  a  counterclaim  is  provable  in  its  nature, 
and  if  it  was  not  acquired  as  forbidden  by  §  686,  we  find  noth- 
ing in  the  bankrupt  act  to  prevent  its  use  under  the  circum- 
stances existing  here. 

*     •     • 

We  are  of  the  opinion  that  the  learned  trial  court  erred  in  / 
rendering  judgment  against  the  railway  company,  and  the  judg-  / 
ment  below  must  be  reversed,  and  the  cause  remanded. 

Reversed. 

WAGNER  V.  BURNHAM 

224  Pa.  St.  586,  73  Atl.  990 

(Supreme  Court  of  Pennsylvania.    May  10,  1909) 

Assumpsit  to  recover  balance  due  on  a  building  contract  by 
Louis  Wagner,  as  trustee  in  bankruptcy  of  Charles  Gilpin, 
against  George  Burnham  and  others.  From  an  order  discharg- 
ing a  rule  for  judgment  for  want  of  a  sufficient  affidavit  of  de- 
fense, plaintiff  appeals. 

MESTREZAT,  J.  We  think  the  learned  court  below  was 
right  in  discharging  the  rule  for  judgment  for  want  of  a  suffi- 
cient affidavit  of  defense.  Charles  Gilpin  entered  into  a  contract 
with  the  defendants  to  tear  down  an  old  building  and  erect  a 


634  ADMINISTRATION 

new  building  in  the  city  of  Philadelphia.  After  performing 
part  of  the  work,  he  filed  a  voluntary  petition  in  bankruptcy, 
and  was  duly  adjudicated  a  bankrupt.  The  plaintiff  is  his  trus- 
tee in  bankruptcy.  At  the  date  of  the  bankruptcy,  Gilpin  was 
indebted  to  certain  subcontractors  for  work  done  and  materials 
furnished  who  subsequently  to  that  date  entered  mechanics' 
liens  against  the  property  of  the  defendants  to  enforce  their 
claims.  The  defendants  were  compelled  to  pay  these  claims. 
This  suit  was  brought  by  the  trustee  to  collect  the  amount  due 
Gilpin  on  the  contract,  and  the  defendants  claim  as  a  defense 
a  set-off  for  the  amount  which  they  were  compelled  to  pay  the 
subcontractors  on  the  mechanics'  liens  filed  against  their  prop- 
erty. The  right  to  interpose  this  set-off  as  a  defense  in  this 
action  and  thereby  defeat  the  plaintiff's  recovery  is  the  only 
question  in  the  case. 

The  right  to  the  set-off  depends  upon  the  provisions  of  the 
bankruptcy  act  (Act  July  1,  1898,  c.  541,  §  1,  30  Stat.  544  [U.  S. 
Comp.  St.  1901,  p.  3418]),  relative  thereto.  The  part  of  the  act 
controlling  the  question  is  §  68,  which  provides,  inter  alia,  as 
follows:  "In  all  cases  of  mutual  debts  or  mutual  credits  be- 
tween the  estate  of  a  bankrupt  and  a  creditor  the  account  shaU 
be  stated  and  one  debt  shall  be  set  off  against  the  other,  and  the 
balance  only  shall  be  allowed  or  paid.  A  set-off  or  counterclaim 
shall  not  be  allowed  in  favor  of  any  debtor  of  a  bankrupt  which 
is  not  provable  against  the  estate. ' '  Is  the  counterclaim  or  set- 
off of  the  defendants  in  this  action  allowable  under  this  provi- 
sion of  the  bankruptcy  act  ?  It  is  strenuously  contended  by  the 
plaintiff  that  the  defendants'  claim  was  contingent,  uncertain, 
was  not  provable  against  the  bankrupt  at  the  date  of  the  adjudi- 
cation in  bankruptcy,  and  therefore  cannot  be  allowed  as  a  set- 
off. This  view,  however,  we  think  entirely  overlooks  the  nature 
and  character  of  the  defendants'  claim  as  well  before  as  at  the 
time  it  was  interposed  as  a  set-off.  At  the  date  of  the  adjudica- 
tion the  bankrupt  was  indebted  to  the  subcontractors  on  the 
claims  which  were  subsequently  paid  by  the  defendants.  The 
primary  liability  for  payment  of  these  claims  rested  upon  the 
bankrupt,  and  the  claims  could  have  been  enforced  against  him 
to  the  extent  of  his  liability  to  pay.  By  the  law  of  this  state, 
however,  the  subcontractors  had  a  lien  against  the  property  of 
the  defendants  for  the  work  done  and  the  materials  furnished 
by  them.  This  property  was  made  subject  to  a  statutory  lien  to 
secure  the  payment  of  the  debts  of  the  subcontractors,  and  by  a 


MUTUAL  DEBTS  AND  CREDITS  635 

subsequeut  section  of  the  statute  the  lien  of  the  claim  took  effect 
* '  as  of  the  date  of  the  visible  coniraencement  upon  the  ground  of 
the  work  of  building  the  structure  or  other  improvement. ' '  The 
lien  of  the  subcontractor's  claim,  therefore,  began  with  the  com- 
mencement of  the  work  on  the  defendants'  premises,  and  was,  of 
course,  in  full  force  and  effect  at  the  date  of  the  adjudication  in 
bankruptcy.  It  was  inchoate  from  the  beginning,  it  is  true,  but 
it  was  an  existing  claim  or  demand  for  which  the  defendants' 
property  was  liable  on  failure  of  the  contractor  to  pa,y.  During 
the  time  for  filing  the  lien  the  subcontractors  had  a  preferential 
statutory  claim  in  the  nature  of  a  nonperfected  equitable  lien 
which  was  perfected  by  filing  the  lien  after  the  adjudication  in 
bankruptcy,  but  within  the  statutory  period.  In  re  Grissler, 
136  Fed.  754,  69  C.  C.  A.  406.  The  statute  provides  the  method 
for  perfecting  and  enforcing  the  lien,  and  the  bankruptcy  of 
the  contractor  does  not  prevent  its  enforcement.  §  20  of  the 
mechanics'  lien  law  of  June  4,  1901  (P.  L.  431,  3  Purdon's  Dig. 
[13th  ed.]  2487),  makes  specific  provision  for  the  enforcement 
of  the  claim  after  the  insolvency  or  bankruptcy  of  the  contractor 
as  follows:  "When  any  such  contract  has  been  suspended  or 
ended,  the  right  to  file  a  claim  or  to  sue  under  the  contract  shall 
remain,  and  may  be  exercised  with  the  same  effect  as  if  further 
proceedings  under  such  contract  had  been  determined  by  con- 
sent of  all  parties. ' '  The  work  was  done  and  the  materials  were 
furnished  prior  to  the  adjudication  in  bankruptcy.  The  subcon- 
tractors, therefore,  had  the  right  to  file  a  lien  and  enforce  it 
under  the  terms  and  within  the  statutory  period  provided  in  the 
act  of  1901.  The  lien,  however,  of  the  subcontractors  did  not 
arise  or  was  not  created  by  the  filing  of  the  claim  in  the  common 
pleas  for  the  purpose  of  its  enforcement,  but  came  into  existence 
at  the  commencement  of  the  improvement  of  the  defendants' 
property  by  the  contractor.  The  claim,  therefore,  of  the  sub- 
contractors, now  held  by  the  defendants  and  proposed  to  be  set 
off  by  them  against  the  plaintiff's  demand,  existed  in  its  inchoate 
form  at  the  date  of  the  adjudication  in  bankruptcy,  and  was 
subsequently  perfected  by  filing  a  lien  in  conformity  with  the 
provisions  of  the  act  of  1901.  "While  the  primary  debtor  of  the 
subcontractors  was  the  contractor  whose  duty  it  was  to  pay  the 
claim,  the  property  of  the  defendants,  and  hence  the  defendants 
themselves,  were  the  statutory  sureties  for  the  payment  of  the 
debt  of  the  bankrupt  to  the  subcontractors.  Bassett  &  Brown  v. 
Baird,  85  Pa.  384.     A  surety  paying  the  debt  of  his  principal 


636  ADMINISTRATION 

after  bankruptcy  may  under  the  bankrupt  act  of  1898  set  off 
the  amount  so  paid  against  his  debt  to  the  bankrupt.  In  re  Dil- 
lon (D.  C.)  100  Fed.  627.  It  is  clear,  we  think,  that  the  claim 
of  the  defendants  sought  to  be  set  off  in  this  action  is  for  money 
expended  by  them  as  quasi  surety  for  the  bankrupt,  and  is  there- 
fore a  ''mutual  credit"  within  contemplation  of  §68  of  the 
bankrupt  act.  It  should  not  be  overlooked  that  the  right  of  the 
debtor  to  a  set-off  in  an  action  brought  against  him  by  the  trus- 
tee is  not  based  upon  the  rules  of  equitable  set-off  administered 
in  the  state  courts,  but  upon  those  rules  which  prevail  in  the 
federal  courts  which  are  generally  broader  and  more  liberal  in 
permitting  the  set-off.  These  rules  must  be  observed  by  the 
state  courts  in  construing  the  bankrupt  act. 

Is  the  proposed  set-off  "provable  against  the  estate"  of  the 
bankrupt  within  the  meaning  of  §  68  of  the  act?  This  question 
must  receive  an  affirmative  answer  unless  we  interpret  the  sec- 
tion differently  from  the  decisions  of  two  courts  of  the  highest 
respectability,  one  of  which  is  a  federal  court  whose  construction 
of  an  act  of  Congress  we  must  accept.  After  a  very  careful  con- 
sideration of  the  bankruptcy  act,  we  are  satisfied  that  the  con- 
clusion of  those  courts  is  correct,  and  that  a  counterclaim  '  *  prov- 
able against  the  estate"  of  the  bankrupt  by  his  debtor  in  an 
action  brought  by  the  trustee  is  such  claim  as  is  provable  in  its 
nature  at  the  time  the  set-off  is  sought  to  be  enforced.  The 
status  of  the  claim  at  that  date  determines  its  provability  in  con- 
templation of  the  act  of  Congress.  This  is  conclusively  shown  by 
Holmes,  C.  J.,  now  a  justice  of  the  Supreme  Court  of  the  United 
States,  in  the  opinion  in  Morgan  v.  Wordell,  178  Mass.  350,  59 
N.  E.  1037,  55  L.  K  A.  33.  This  was  an  action  by  a  trustee  of 
a  bankrupt,  and  the  defense  was  set-off,  the  defendant  claiming 
that  he  occupied  the  position  of  a  quasi  surety  who  had  paid 
and  therefore  was  subrogated  to  the  claim  of  a  joint  creditor  of 
himself  and  the  debtor.  The  right  to  a  set-off  under  §  68  of  the 
bankrupt  act  was  the  question  at  issue,  and  in  delivering  the 
opinion  the  chief  justice  said,  inter  alia:  "The  defendant  also 
claims  a  set-off  by  virtue  of  his  covenant.  "We  assume  that  it  has 
been  adjudicated  between  the  parties  in  the  District  Court  that 
the  defendant  has  not  a  claim  which  he  could  prove  in  his  own 
name,  and  that  this  decision  carries  with  it  the  corollary  that 
he  could  not  prove  his  claim  on  the  covenant  against  the  estate. 
If,  therefore,  the  prohibition  of  a  set-off  of  a  claim  'which  is  not 
provable  against  the  estate '  is  to  be  taken  with  simple  literalness 


MUTUAL  DEBTS  AND  CREDITS  637 

as  applying  to  any  claim  that  could  not  be  proved  in  the  existing 
bankruptcy  proceedings,  the  defendant's  set-off  cannot  be  main- 
tained. But  we  are  of  opinion  that  the  seemingly  simple  words 
which  we  have  quoted  must  be  read  in  the  light  of  their  history 
and  in  connection  with  the  general  provision  at  the  beginning 
of  §  68  for  a  set-off  of  mutual  debts  '  or  mutual  credits, '  and 
that  so  read  they  interpose  no  obstacle  to  the  defendant's  claim. 
The  provision  for  the  set-off  of  mutual  credits  is  old.  But,  while 
the  provision  as  to  mutual  credits  was  thought  to  be  more  exten- 
sive than  that  as  to  mutual  debts,  it  was  held  that  even  the 
broader  phrase  did  not  extend  to  claims  which,  when  the  moment 
of  set-off  arrived,  still  were  wholly  contingent  and  uncertain, 
such,  for  instance,  as  the  claim  upon  this  covenant  would  have 
been  if  the  defendant  had  not  yet  been  called  upon  to  pay  any- 
thing upon  the  original  partnership  debt.  But  the  moment  when 
the  set-off  was  claimed  was  the  material  moment.  The  defend- 
ant's  claim  might  have  been  contingent  at  the  adjudication  of 
bankruptcy,  and  so  not  provable  in  the  absence  of  special  pro- 
visions such  as  are  to  be  found  in  the  later  bankrupt  acts  in 
England  and  in  the  United  States  act  of  March  2,  1867  (14 
Stat.  517,  c.  176),  although  not  in  the  present  law,  and  yet  if  it 
had  been  liquidated,  as  here,  by  payment,  before  the  defendant 
was  sued,  he  was  allowed  without  question  to  set  it  off  (citing 
authorities).  The  limitations  worked  out  by  these  decisions 
were  expressed  in  the  section  of  the  act  of  1867  cited  above,  in 
the  words,  '  but  no  set-off  shall  be  allowed  of  a  claim  in  its  nature 
not  provable  against  the  estate. '  These  words,  as  it  seems  to  us, 
following  the  eases,  refer  yet  to  the  nature  of  the  claim  at  the 
moment  when  it  was  sought  to  set  it  off,  not  to  its  nature  at  the 
beginning  of  the  pending  bankruptcy  proceedings,  and  did  not 
prevent  a  set-off  of  a  claim  which  was  liquidated  at  the  later 
moment  merely  because,  when  the  bankruptcy  proceedings 
began,  for  some  reason  it  did  not  admit  of  proof.  *  *  * 
'Provable'  means  provable  in  its  nature  at  the  time  when  the 
set-off  is  claimed,  not  provable  in  the  pending  bankruptcy  pro- 
ceedings." This  case  is  followed  and  approved  by  the  United 
States  Circuit  Court  of  Appeals  in  Norfolk  &  W.  Ry.  Co.  v. 
Graham,  145  Fed.  809,  813,  76  C.  C.  A.  385,  389.  In  that  case  it 
is  said,  inter  alia :  ' '  "We  think  that  the  true  solution  of  the  ques- 
tion before  us  is  that  the  counterclaim  which  may  be  set  off  in 
an  independent  action  brought  by  the  trustee  is  *  *  *  one 
that  is  provable  in  its  nature,  and  need  not  necessarily  be  one 


638  ADMINISTRATION 

that  has  been,  or  may  yet  be,  proved  in  the  bankruptcy  proceed- 
ing. *  *  *  It  may  be  true  that  Page's  liability  to  the  com- 
pany was  at  the  time  of  the  filing  of  the  petition  and  at  the 
date  of  the  adjudication  contingent.  But,  before  this  liability 
was  asserted  as  a  counterclaim,  it  had  become  fixed  and  certain 
in  amount.  It  was  certainly  provable  in  its  nature  when  it  was 
asserted  in  the  court  below." 

It  follows  from  what  has  been  said  that  the  judgment  of  the 
common  pleas  should  be  affirmed. 

The  assignments  of  error  are  overruled,  and  the  judgment  is 
affirmed.^ 

NEW  YORK  COUNTY  NAT.  BANK  v.  MASSEY 
^  192  U.  S.  138,  48  L.  Ed.  380,  24  Sup.  Ct.  199 

"iir^  •  tt    \y,        [See  this  case  given  on  page  275,  (mte\      jT^ 

^ft^  /    ■ 

^  '  c^-^     GERMANIA  SAVINGS  BANK  &  TRUST  CO.  v.  LOEB 


r. 


^  ^-  188  Fed.  285,  110  C.  C.  A.  263 

(Circuit  Court  of  Appeals,  Sixth  Circuit.    May  2,  1911) 

This  is  an  appeal  from  an  order  of  the  District  Court  disal- 
lowing the  claim  of  appellant  against  the  bankrupt's  estate  in 
default  of  the  performance  of  certain  conditions  hereafter  stated. 
The  proof  of  claim  alleged  ag. indebtedness  of  the  bankrupt. to 
the  bank  of  $10,387.39.  The  proof  was  construed  as  claim- 
ing that  amount  as  a  balance  remaining  of  $20,000  loaned  by 
the  bank,  less  $9,612.61  deposited  by  the  bankrupt  in  the  bank 
and  applied  by  the  latter  as  an  offset  against  the  original  indebt- 
edness. It  is  alleged  in  such  proof,  with  reference  to  the  origin 
of  the  debt,  that  on  or  about  January  30,  1908,  the  bankrupt 
secured  from  claimant  $20,000,  upon  representations  that  the 
,  company  had  a  paid-in  capital  stock  of  $80,000;  that  it  was  a 
1  successful  corporation,  and  had  made  profits  in  excess  of  $30,- 
000 ;  that  on  February  13th  claimant  first  learned  of  the  falsity 
of  said  representations,  and  thereupon  demanded  back  its  money. 
The  trustee  excepted  to  the  claim  upon  the  grounds,  first,  that 
the  bank  had  received  a  preference  of  a  large  amount  within 
four  months  before  the  bankruptcy,  while  the  Mercantile  Com- 
pany was  insolvent;  and,  second,  that  a  large  amount  of  the 
bank  deposits  were  made  under  an  agreement,  between  the  rep- 


MUTUAL  DEBTS  AND  CREDITS  639 

resentatives  of  the  bankrupt  and  the  bank  respectively,  that  they 
should  be  held  as  a  special  deposit,  and  that  no  right  of  offset 
existed  as  to  such  amount. 

The  referee  reported,  in  substance  sufficient  for  this  opinion, 
the  fact  of  the  making  of  the  loan  of  $20,000  about  January,  28, 
1908:  that  about  February  1st  following  it  became  known  to 
the  officers  of  the  Mercantile  Company  that  one  of  its  officers 
was  short  in  his  accounts  about  $4,000,  and  had  forged  $6,000 
of  the  stock  of  the  company ;  that  at  least  one  of  the  officers  of 
the  Mercantile  Company  knew  that  as  much  as  $35,000  of  the 
capital  stock  of  the  company  had  not  been  paid  for;  that  part 
of  this  forged  stock  had  been  hypothecated  with  appellant;  that 
in  order  to  avoid  trouble  with  one  of  the  stockholders,  who  had 
become  dissatisfied,  the  president  of  the  Mercantile  Company 
had  bought  his  stock,  giving  in  part  payment  therefore  the  check 
of  the  Mercantile  Company  upon  the  appellant  bank;  that,  for 
the  purpose  of  ascertaining  the  exact  condition  of  the  company, 
its  attorney  had  ordered  an  inventory  taken;  that  on  February 
5,  1908,  the  officers  and  agents  of  the  appellant  bank  knew  of 
certain  of  the  irregularities  before  stated,  were  advised  of  the 
order  for  taking  an  inventory,  and  that  the  books  of  the  Mer- 
cantile Company  were  being  audited,  and  had  sufficient  infor- 
mation to  put  them  upon  inquiry  respecting  the  insolvency  of 
the  Mercantile  Company ;  that  the  latter  was  at  the  time  actually 
insolvent,  and  that  its  officers  knew  it;  that  on  February  5th  a 
conference  was  had  between  the  respective  attorneys  of  the  bank 
and  the  bankrupt — the  former  having  sent  for  the  president  of 
the  Mercantile  Company,  and  the  attorney  appearing  in  his 
stead,  on  account  of  the  alleged  illness  of  the  president;  that 
both  attorneys  realized  that  the  Mercantile  Company  was  in  a 
critical  condition ;  that  the  bank 's  attorney  desired  to  protect  its 
interests,  and  that  the  attorney  of  the  bankrupt ' '  realized  that  it 
would  be  dangerous  at  that  time  for  any  action  to  be  started 
against  the  company,  and  was  willing  to  do  anything  reasonable 
to  prevent  litigation;"  that  the  bankrupt  had  at  the  time  on 
deposit  in  the  bank  $5,970.23;  that  the  bankrupt's  attorney 
thought  that,  unless  the  bank  could  at  once  be  satisfied,  it  would 
refuse  to  cash  checks  for  the  money  then  on  deposit;  that  the 
bankrupt's  attorney  did  not  then  know  that  his  client  was 
insolvent,  and  stated  that  he  was  informed  and  believed  that  it 
was  solvent,  that  it  owed  not  more  than  $65,000  and  had  $100,- 
000  of  assets,  but  that  the  exact  condition  could  not  be  known 


640  ADMINISTRATION 

until  the  examination  of  the  books  and  taking  of  inventory  were 
completed,  and  stated  that  if  the  bank  were  to  take  steps  at  that 
time  to  protect  its  interests  the  collapse  of  the  bankrupt's  business 
would  result,  and  asked  that  no  action  be  taken  by  the  bank,  but 
that  matters  ''remain  as  they  are,"  under  an  arrangement  that 
the  Mercantile  Company  should  draw  out  no  more  than  it  should 
subsequently  deposit — thus  always  leaving  a  balance  equal  to 
the  existing  balance,  and  thus  the  bank  be  not  prejudiced  in 
case  the  Mercantile  Company  should  prove  insolvent;  but  that, 
while  the  evidence  did  not  show  whether  the  bank's  attorney 
replied  to  this  proposition,  no  objection  was  made  to  it,  and  that, 
the  bank  having  accepted  subsequent  deposits,  the  Mercantile 
Company's  attorney  understanding  the  proposition  was  satis- 
factory, the  former  was  bound  by  the  transaction. 

It  appeared  that  on  February  11th  the  accounting  of  the  Mer- 
cantile Company's  affaii*s  was  completed,  showing  that  it  owed 
upwards  of  $138,000,  instead  of  not  more  than  $65,000,  as  be- 
lieved by  its  attorney  at  the  time  of  the  conference  of  February 
5th ;  that  but  $28,000  of  the  $80,000  capital  stock  subscribed  had 
actually  been  paid  for ;  and  that  the  inventoried  assets  amounted, 
at  the  valuation  placed  upon  them,  to  but  slightly  more  than  the 
amount  of  the  debts.     The  bank,  upon  learning  this  situation, 
j  on  February  11th  or  12th,  refused  to  honor  further  checks  of 
I  the  Mercantile  Company,  and  its  checks  to  the  amount  of  more 
than  $6,000  drawn,  and  in  part  issued,  for  current  expenses  or 
current  debts,  were  accordingly  either  dishonored  by  the  bank 
or  withheld  from  delivery,  by  reason  of  such  notification  from 
i,,  the  bank.     On  February  13th  the  latter  demanded  from  the 

(Mercantile  Company  the  return  of  the  $20,000  borrowed,  to- 
gether with  check  for  the  balance  of  the  latter 's  bank  deposit, 
with  notice  that  the  bank  had  already  applied  the  same  upon 
said  indebtedness.  The  creditors'  petition  for  bankruptcy  was 
filed  the  next  day. 

The  referee  held  that  the  arrangement  by  which  the  money 
then  on  deposit  should  not  be  checked  against  did  not  constitute 
a  preference  under  the  circumstances  of  the  case,  including  the 
fact  that  the  bankrupt's  attorney  knew  that  if  any  of  the  rep- 
resentations made  to  the  bank,  on  which  the  $20,000  was  bor- 
rowed, were  untrue,  the  latter  could  repossess  itself  of  the  money 
then  on  deposit,  and  that  he  also  must  have  known  that  in  case 
of  insolvency  proceedings  the  bank  would  have  the  right  to  off- 
set the  money  then  on  deposit,  and  accordingly  held  that  the 


MUTUAL  DEBTS  AND  CREDITS  641 

bank  was  entitled  to  offset  the  balance  on  deposit  February  5, 
1908,  against  the  bankrupt's  indebtedness.  The  amounts  de- 
posited in  the  bank  after  February  5th  and  until  February  13th, 
less  the  amount  of  the  cheeks  cashed  between  those  dates,  was 
$4,514.08.  The  referee  held  that  the  Mercantile  Company  had 
the  right  to  control  its  deposits  made  after  February  5th,  and 
that  in  view  of  the  talk  between  the  attorneys  "the  bank  must 
receive  the  deposits  as  suggested,  or  decline  them ; ' '  that  it  was 
the  intention  of  the  attorney  and  other  officers  of  the  Mercantile 
Company  that  the  rights  of  both  parties  should  be  fixed  on  Feb- 
ruary 5th;  and  that  the  subsequent  deposits  were  made  by  the 
agents  of  the  Mercantile  Company  "with  the  understanding 
that  they  were  not  to  be  molested  by  the  bank  and  that  they 
would  have  the  right  to  withdraw  them  as  they  saw  fit;"  and 
that  as  the  Mercantile  Company's  affairs  were  being  conducted 
by  subordinate  agents,  who  were  striving  to  preserve  the  assets 
and  protect  the  interests  of  all  creditors  alike  until  the  exact 
condition  of  the  business  could  be  ascertained,  the  deposits  made 
aft^r  February  5th  were  not  made  in  the  ordinary  business  way, 
but  in  such  way  as  to  create  a  trust  relation,  and  thus  to  pre- 
clude a  right  on  the  part  of  the  bank  to  offset  them  against  the 
Mercantile  Company's  debt.  It  was  accordingly  ordered  that 
upon  the  payment  of  the  latter  balance  ($4,514.08),  deposited 
after  February  5th,  the  bank  might  prove  its  claim  for  what 
remained  after  making  the  offset  of  the  balance  previous  to  that 
date,  together  with  its  claim  for  the  $4,514.08  so  to  be  paid  in, 
and  that  in  default  of  such  payment  the  entire  claim  should  be 
disallowed. 

The  referee's  order  was  reviewed  by  the  District  Judge,  upon 
petitions  therefor  by  both  the  bank  and  the  trustee.  The  judge 
agreed  with  the  referee  as  to  the  facts  relating  to  the  deposit 
balance  of  February  5th,  but  was  of  opinion  that  the  agreement 
and  understanding  that  the  bank  should  withhold  the  taking  of 
legal  proceedings  against  the  bankrupt  until  invoices  should  be 
taken  and  the  exact  condition  of  the  Mercantile  Company  ascer- 
tained, and  that  the  latter  should  not  check  against  this  balance, 
in  connection  with  the  arrangement  for  further  deposits  to  be 
checked  against,  amounted  to  the  giving  of  a  preference  to  the 
bank,  under  §  60  (5fthe  act,  and  accordingly  held  that  the  bank 
had  no  right  to  offset  the  balance  of  February  5th  against  the 
bankrupt's  debt.  As  to  the  balance  of  deposits  made  after  Feb- 
ruary 5th,  the  judge  approved  the  action  of  the  referee  in  hold- 

H.  &  A.  Bankruptcy — 41 


642  ADMINISTRATION 

ing  that  such  balance  was  a  trust  fund,  and,  while  not  in  formal 
terms  confirming  the  referee's  conclusions  of  fact,  in  effect  did 
80,  holding  that  the  bank's  refusal  to  honor  checks  that  were 
drawn  by  the  bankrupt  against  this  subsequent  balance,  and  its 
attempt  to  apply  the  same  to  the  indebtedness  which  the  bank- 
rupt owed  the  bank,  amounted  to  a  conversion.  An  order  was 
accordingly  entered  denying  the  offset  of  $5,970.23,  but  provid- 
ing that  upon  the  payment  of  that  sum  to  the  trustee  the  bank 
might  prove  its  claim  for  the  entire  amount  of  the  debt,  and  that 
in  default  of  such  payment  the  entire  claim  be  disallowed,  but 
adjudging  that  the  bank  is  a  debtor  to  the  estate  of  the  bank- 
rupt in  the  amount  of  $4,514.08,  and  rendering  judgment  in 
favor  of  the  trustee  accordingly,  with  interest  from  February  5, 
1908,  with  provision  for  the  withholding  of  dividends  upon  the 
bank's  claim  until  the  last-named  sum,  with  interest,  be  paid,  as 
well  as  for  issue  of  execution  against  the  bank  for  any  balance 
thereof  in  case  the  item  of  $5,970.23,  with  interest,  should  not 
be  paid,  or  in  case  the  dividends  did  not  amount  to  $4,514.08, 
with  interest.  The  costs  of  the  proceedings  for  review  were  ad- 
judged against  the  bank.  It  is  conceded  by  appellee  that  the 
proper  balance  on  deposit  February  5,  1908,  was  $5,098.53,  in- 
stead of  $5,970.23,  as  found  by  the  referee. 

KNAPPEN,  Circuit  Judge  (after  stating  the  facts  as  above). 
The  first  question  presented  is  whether  the  agreement  of  Feb- 
ruary 5th  between  the  Mercantile  Company  and  the  bank 
created,  as  to  the  then  existing  deposit  balance  of  $5,098.53,  a 
preferential  transfer  within  the  meaning  of  the  bankruptcy  act. 
§  60a  of  the  act  provides  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  *  *  *  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  per- 
centage of  his  debt  than  any  other  of  such  creditors  of  the  same 
class." 

§  68a  provides  that : 

"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. ' ' 


MUTUAL  DEBTS  AND  CREDITS  643 

It  has  been  authoritatively  decided  by  the  Supreme  Court, 
in  considering  these  two  sections,  that  the  balance  of  a  regular 
bank  account  at  the  time  of  filing  the  petition  is  a  debt  due  to 
the  bankrupt  from  the  bank,  and  in  the  absence  of  fraud  or 
collusion  between  the  bank  and  the  bankrupt,  with  the  view  of 
creating  a  preferential  transfer,  the  bank  need  not  surrender 
such  balance,  but  may  set  it  off  against  notes  of  the  bankrupt 
held  by  it,  and  may  prove  its  claim  for  the  amount  remaining 
due  on  the  notes.  N.  Y.  County  National  Bank  v.  Massey,  192 
U.  S.  138,  24  Sup.  Ct.  199,  48  L.  ed.  380. 

The  Massey  Case  is  decisive  of  the  question  we  are  considering,"" 
unless  the  case  before  us  is  distinguishable  either  by  the  fact 
that  the  notes  here  in  question  were  not  due  at  the  time  of  the 
bankruptcy,  or  because  of  the  existence  of  fraud  or  collusion 
between  the  bank  and  the  Mercantile  Company,  with  the  view  of 
creating  a  preferential  transfer. 

As  to  the  nonmaturity  of  the  notes : 

The  word  *  *  debt, ' '  as  used  in  §  68a  includes  any  debt  provable 
in  bankruptcy.  Bankr.  Act  1898,  §  1,  cl.  11 ;  Loveland  on  Bank- 
ruptcy (3d  ed.)  p.  369.  And  a  debt  is  provable,  whether  due  or 
not  at  the  time  of  bankruptcy.  Bankr.  Act  1898,  §  63a  (1).  It 
is  thus  immaterial  to  the  application  of  §  68a.  whether  or  not  the 
notes  were  due.  Collier  on  Bankruptcy  (8th  ed.)  p.  793;  Love- 
land  on  Bankruptcy  (3d  ed.)  p.  372;  Moch  v.  Market  St.  Na- 
tional Bank  (3d  Circuit),  107  Fed.  897,  47  C.  C.  A.  49;  In  re 
Semmer  Glass  Co.  (2d  Circuit),  135  Fed.  77,  67  C.  C.  A.  551. 

A  careful  consideration  of  the  record  constrains  us  to  the 
opinion  that  there  was  no  fraud  or  collusion  between  the  bank 
and  the  bankrupt_for_the  purpose  of  creating  a  preferential 
transfer  with  respect  to  the  depositbalance^jQ~question.  TTls 
ncft^^aSdroauld  notlBe,  contended  that  thefe~was  auy^  collusion 
in  respect  to  creating  this  balance.  If  collusion  existed,  it  must 
be  found  in  the  agreement  between  the  bank  and  the  Mercantile 
Company  that  the  deposit  should  remain  in  the  bank  during  the 
investigation  of  the  solvency  of  the  Mercantile  Company,  and  for 
the  purpose  of  permitting  the  bank  to  apply  this  balance  upon 
its  notes  in  case  the  Mercantile  Company  should  turn  out  to  be 
insolvent.  This  question  must  be  answered  in  the  light  of  exist- 
ing conditions.  The  suggestion  that  the  balance  be  not  drawn 
upon  came  from  the  Mercantile  Company's  attorney,  because  he 
thought  such  arrangement  only  fair  to  the  bank  as  preventing 
prejudice  to  it,  through  its  failure  to  take  action  to  protect  its 


644  ADMINISTRATION 

interests,  including  the  possible  repudiation  of  the  credit  as  ob- 
tained by  misrepresentation.  The  Mercantile  Company  was  at 
the  time  actually  insolvent.  The  bank  had  the  power  (as  dis- 
tinguished from  the  right)  to  refuse  checks  upon  its  deposit  bal- 
ance. If  the  Mercantile  Company  proved  insolvent,  or  the  credit 
turned  out  to  have  been  obtained  by  fraudulent  misrepresenta- 
tions, the  bank  had  the  right  to  so  refuse.  Such  refusal  would 
naturally  have  tended  to  precipitate  hostile  action  by  the  cred- 
itors of  the  Mercantile  Company,  and  when  the  condition  of  the 
company  was  actually  learned  would  naturally  have  brought 
rabout  bankruptcy  proceedings.  It  was,  to  our  minds,  entirely 
,  proper  that  the  Mercantile  Company  should,  in  these  circum- 
stances, arrange  for  a  continuance  of  the  existing  status,  which, 
should  the  Mercantile  Company  prove  solvent,  would  be  of  bene- 
fit to  it,  and,  should  it  prove  insolvent,  would  merely  give  the 
bank  the  same  rights  as  it  would  have  if  then  existing  insolvency 
k  were  recognized.  The  transaction  in  no  sense  amounted  tg_  a, 
hypothecation  of  this  balance,  as  suggested  by  appellee 's  coun- 
sel. The  fact  that  the  bank  had  reason  to  believe  the  Mercantile 
Company  was  insolvent  did  not  affect  its  right  to  set-off.  In  the 
Massey  Case  a  portion  of  the  deposits  held  applicable  by  way  of 
set-off  were  made  after  the  bank  had  knowledge  of  the  debtor's 
insolvency.  The  testimony  of  the  attorney  of  the  Mercantile 
Company,  in  our  opinion,  distinctly  repels  the  inference  of  an 
intent  to  give  the  bank  a  preference.  "We  think  the  bank  should 
have  been  allowed  to  offset  the  deposit  balance  of  February  5th 
upon  the  bank's  notes. 

As  to,  the  balance_of  depositsjnade  after  February  5th : 
It-tbe-bank  held  these  deposits  as  trustee  for  the  Slercantile 
Company,  the  right  toset  off.the  same  against  the  latter 's  notes 
did  not  exist.  Under  the  authority  of  Western  Tie  &  Timber 
Co.  v.  Brown,  196  U.  S.  502,  25  Sup.  Ct.  339,  49  L.  ed.  571,  the 
bank  was  entitled  to  prove  its  debt  vdth  the  set-off  in  question 
eliminated,  but  remained  a  debtor  to  the  bankrupt  for  the  amount 
of  the  deposits;  and  if  such  trust  relation  existed,  the  action 
taken  by  the  court  in  protection  of  the  bankrupt's  estate,  with 
respect  to  dividends  on  the  bank's  claim,  in  case  of  the  latter 's 
failure  to  make  payment  of  the  trust  fund,  was  proper,  unless 
as  regards  the  award  of  execution  for  balance  not  covered  by 
dividends,  as  to  which  question  we  do  not  find  it  necessary  to 
express  an  opinion. 

The  alleged  trust  relation,  including  the  conversion  recognized 


MUTUAL  DEBTS  AND  CREDITS  645 

by  the  District  Judge,  rests  upon  the  existence  of  an  under- 
standing between  the  bank  and  the  Mercantile  Company  that 
the  latter  should  be  at  liberty  to  withdraw  the  entire  amount 
of  its  deposits  made  after  February  5th,  and  that  the  bank  should 
not  be  at  liberty  to  set  off  against  the  Mercantile  Company's 
notes  any  balance  that  should  not  be  so  drawn  out,  and  that  such 
deposits  were  not  made  in  the  ordinary  course  of  business,  ^ut 
becameinfact  a  special  deposit.  Upon  a  careful  examination  oi 
t.hftrftcoTJ^jwg^rftjgo^  to  hold  that  the  evidence^does  ngt. 

warrant  such  conclusion.  The  referee  has  not  found  as  a  fact 
that  there  was  any  agreement  to  that  effect  between  the  parties, 
or  even  an  understanding  to  that  effect  on  the  part  of  the  bank. 
As  we  read  the  record,  there  is  no  direct  testimony  of  any  ex- 
press agreement  or  mutual  understanding  to  that  effect.  There 
is  nothing  in  the  testimony  of  the  bank's  attorney  which,  in  our 
opinion,  warrants  such  inference.  On  the  other  hand,  the  attor- 
ney for  the  Mercantile  Company,  while  testifying  to  the  state- 
ment to  the  bank's  attorney  that  he  would  see  that  the  Mercantile 
Company  should  not  make  withdrawals  in  excess  of  the  new 
deposits,  does  not  state  that  the  bank  was  even  asked  to  agree 
that  all  the  new  deposits  might  be  checked  against.  The  sub- 
stance of  the  testimony  of  the  Mercantile  Company's  attorney 
on  this  point  is  that  he  was  anxious  to  have  the  banking  rela- 
tions continued  without  hostile  steps  upon  the  part  of  the  bank, 
and  that  in  order  to  induce  the  latter  to  continue  such  relations 
he  agreed  that  the  bank's  status  should  not  be  impaired  by 
an  attempt  on  the  part  of  the  Mercantile  Company  to  with- 
draw more  than  it  should  deposit.  It  is  true  that  the  Mercantile 
Company 's  attorney  testified  that  his  ' '  idea  was  that  the  propo- 
sition was  that  the  Block  Mercantile  Company  should  be  abso- 
lutey  free  to  withdraw  every  cent  that  it  deposited  after  that 
date,"  and  that  **if  there  had  been  any  scheme  on  the  part  of 
the  bank,  or  anything  that  would  have  kept  us  from  using  the 
money  during  this  investigation,  I  would  have  had  to  make  some 
other  arrangement  and  found  another  place  to  deposit,"  and 
that  if  he  had  understood  in  his  own  mind  that  his  clients  could 
not  withdraw  against  subsequent  deposits  he  would  not  have  ad- 
vised them  to  make  their  deposits  in  the  same  bank.  To  the 
definite  question  as  to  the  bank's  acceptance  or  rejection  of 
the  suggestion  he  replied : 

"I  want  to  say  this:  That  Mr.  Hirsh  [the  bank's  attorney] 
was  pressing  me  for  information  which  I  did  not  have,  and  I  was 


646  ADMINISTRATION 

holding  him  up  until  I  could  get  it,  so  it  looked  to  me  like  a 
fair  proposition.  Now,  as  to  whether  that  was  accepted  or  re- 
jected, in  this  way  it  must  have  been  that  I  thought  it  was  going 
to  go  through.  I  mean  by  that  certainly  I  would  be  permitted 
to  withdraw  against  deposits,  or  I  never  would  have  done  it. ' ' 
And  again: 

' '  I  have  stated  repeatedly  in  this  examination  that  I  could  not 
remember  what  answer  that  Mr.  Hirsh  made  to  my  suggestion, 
as  to  continuing  present  deposits  intact  and  the  subsequent  de- 
posits to  be  withdrawn." 

-'^his  testimony,  in  our  opinion,  falls  short  of  evidencing  a  con- 
tract or  understanding  whereby  the  Mercantile  Company  should, 
under  any  and  all  circumstances,  have  the  right  to  draw  out  all 
the  new  deposits,  or  whereby  the  new  deposits  should  be  held 
/in  any  way  as  a  special  deposit  differing  from  the  ordinary  bank 
Ijdeposit.  The  attorney  of  the  Mercantile  Company  seems  not 
unnaturally  to  have  assumed  that  so  long  as  the  Mercantile 
Company  was  continuing  to  do  business  in  the  usual  way,  and  in 
advance  of  a  development  of  its  insolvency,  checks  on  the  bank 
account  would  be  honored.  But  we  find  no  agreement  or  mutual 
understanding  to  that  effect.  Such  course  was  in  fact  taken ;  for 
it  was  not  until  after  the  accounting  of  the  Mercantile  Company 's 
affairs  was  completed,  showing  that  its  financial  condition  was 
much  worse  than  believed  by  its  attorney  on  February  5th,  and 
suggesting  probable  insolvency,  and  indicating  that  a  portion 
at  least  of  the  credit  extended  to  the  Mercantile  Company  was 
procured  by  false  representations,  that  the  bank  refused  to  honor 
further  checks.  In  our  opinion  there  was,  to  say  the  least,  no 
room  for  finding  an  understanding  between  the  bank  and  the 
bankrupt  that  the  bank  waived  its  right  of  set  off  on  account  of 
any  balance  that  might  remain  after  such  situation  was  found 
to  exist.  Nor  do  we  think  that  the  fact  that  the  bankrupt's  busi- 
ness was  during  the  examination  of  its  affairs  being  managed  by 
subordinates,  rather  than  by  its  usual  officers,  changed  the  nature 
of  the  deposits  from  the  ordinary  relation.     *     •     * 

It  follows,  from  the  views  we  have  expressed,  that  the  order  of 
the  District  Court  should  be  reversed,  with  directions  to  allow 
the  balance  claimed  in  full  after  the  application  thereon,  by  way 
of  set-off,  of  the  entire  amount  of  bankrupt's  deposit  balance  in 
the  bank.  "27 

27 — See   Heyman   v.    Third   Nat. 
Bank,  216  Fed.  685. 


EXEMPTIONS  647 

SECTION  IV 

EXEMPTIONS 

CHICAGO,  B.  &  Q.  B.  CO.  v.  HALL 

229  U.  S.  511,  57  L.  ed.  1306,  33  Sup.  Ct.  885 

[See  this  case  given  on  page  ^91^ante.]  JU-r^A 

InreCOHN  ^^^.,..,^ . 

171  Fed.  568  J^^  ^ 

(District  Court,  D.  North  Dakota,  S.  E.  D.    July  28,  1909) 

AMIDON,  District  Judge.  The  above  bankrupt  filed  his  vol- 
untary petition  in  bankruptcy  on  the  5th  day  of  December,  1908. 
About  the  1st  of  July,  1908,  he  made  final  proof  upon  a  govern- 
ment homestead,  and  received  his  final  receipt  entitling  him  to 
a  patent  therefor.  All_debts  scheduled  by_the_  bankrupt  were, 
incurred  prior  to  the ^ate-oliii&making  such_final  proof.  In  his 
schedules  he  claimed  the  homestead  as  exempt  both  under  the 
laws  of  North  Dakota  and  under  §  2296  of  the  Revised  Statutes 
of  the  United  States  (U.  S.  Comp.  St.  1901,  p.  1398).  The  trus- 
tee set  the  land  off  to  him  as  his  homestead,  under  the  state 
laws.  One  of  his  creditors  filed  exceptions  before  the  referee 
to  this  action  of  the  trustee,  and  asked  that  an  order  be  entered 
denying  the  bankrupt's  right  to  the  land  as  a  homestead,  and 
directing  the  trustee  to  take  possession  of  the  same  and  apply  it 
to  the  satisfaction  of  the  bankrupt's  debts.  This  question  was 
fully  presented  before  the  referee,  by  counsel  for  the  respective 
parties,  upon  voluminous  testimony.  As  the  result  of  such  hear- 
ing, the  referee  found  that  the  bankrupt  prior  to  the  time  ^fjhe^ 
filing  of  his  petition  in  bankru^cy  had  removed  from  the  state 
of  North  Dakota,  in  wMch^the  homestead  is  situated,  and  taken 
up  his  residence  in  the  city  Qf_Hinneapoiis,  in  the  state  of  Min-  j, 
nesota,  and  that  he  had  thereby  abandoned  his  homestead  as  an 
exemption  under  the  laws  of  the  state  of  North  Dakota,  and  lost 
all  right  to  claim  the  same  as  exempt  under  those  laws ;  but  the 
referee  further  held  that  the  homestead  was  exempt  from  the 
claims  of  all  creditors  whose  indebtedness  was  incurred  prior  to 
the  date  of  the  making  of  final  proof,  and  entered  an  order  so 


648  ADMINISTRATION 

declaring,  and  directing  that  the  homestead  be  applied  only  to 
the  payment  of  those  debts,  properly  proven,  which  had  arisen 
since  the  bank^ugt^  madej&nal^jproof^for  his  homestead.  A  cred- 
itor whose  claim  accrued  prior  to  the  making  of  such  final  proof 
excepted  to  this  order  of  the  referee,  and  at  his  request  the  order 
has  been  certified  to  the  court  for  review. 

The  bankrupt  has  filed  no  exceptions  to  the  order  of  the  ref- 
eree, and  cannot  therefore  be  heard  to  object  to  any  of  its  pro- 
visions. If  this  were  not  the  case,  it  is  quite  likely  that  he  would 
have  just  cause  to  complain  of  the  order  because  it  limits  his 
exemption  from  debts  to  those  which  accrued  prior  to  the  mak- 
ing of  his  final  proof ;  whereas,  §  2296  of  the  Revised  Statutes 
declares  that  the  homestead  shall  not '  *  in  any  event  become  liable 
[to  the  satisfaction  of  any  debt  contr^Mgd^ prior  to  thp  issniTig  of 
the  patent  therefore ' '  There  is  no  evidence  presented  here  show- 
ing that  any  patent  has  ever  been  issued.  It  is  the  issuance  of 
the  patent  which  fixes  the  time  when  the  property  shall  become 
liable  to  subsequent  debts  of  the  homesteader.  Barnard  v.  Boiler, 
105  Cal.  214,  38  Pac.  728 ;  Wallowa  National  Bank  v.  Riley,  29 
Or.  289,  45  Pac.  766,  54  Am.  St.  Rep.  794. 

Counsel  for  the  objecting  creditor  contends  that  §  2296  of  the 
Revised  Statutes  is  repealed  by  §§  6  and  70,  subd.  5,  of  the 
bankruptcy  act  (Act  July  1,  1898,  c.  541,  30  Stat.  548,  565  [U. 
S.  Comp  St.  1901,  pp.  3424,  3451]).  §  6  simply  provides  that 
the  bankruptcy  act  shall  not  affect  the  allowance  to  bankrupts  of 
the  exemptions  which  are  prescribed  by  state  laws.  Plainly  this 
section  deals  solely  with  state  laws.  It  is  declaratory  in  its 
character.  Its  purpose  is  to  save  exemptions  allowed  by  state 
laws,  not  to  abolish  those  allowed  by  federal  law.  Its  language  is 
affirmative,  and  ought  not  to  be  given  a  negative  effect,  in  the 
absence  of  a  clear  manifestation  of  such  a  legislative  purpose. 
Potter's  Dwarris,  69.  §  70  declares  that  the  trustee  shall  be 
vested  with  the  title  of  the  bankrupt  (except  property  which  is 
exempt),  to  all  "(5)  property  which  prior  to  the  filing  of  the 
petition  he  could  by  any  means  have  transferred,  or  which 
might  have  been  levied  upon  and  sold  under  judicial  process 
against  him."  The  land  in  question  does  not  come  within  the 
provisions  of  either  branch  of  this  section.  Down  to  the  time 
of  final  proof,  the  entryman  could  not  transfer  his  homestead. 
§§2288  and  2291,  Rev.  St.  (U.  S.  Comp.  St.  1901,  pp.  1385, 
1390).  Nor  could  any  of  the  creditors  whose  claims  have  been 
proven  have  levied  upon  or  sold  the  homestead  for  the  collec- 


EXEMPTIONS  649 

tion  of  their  debts.  Such  action  is  clearly  forbidden  by  §  2296 
of  the  Kevised  Statutes.  Seymour  v.  Sanders,  Fed.  Cas.  No. 
12,690;  Baldwin  v.  Boyd,  18  Neb.  444,  25  N.  W.  580;  Shoemaker 
V.  Stimson,  16  Wash.  1,  47  Pac.  218 ;  Jean  v.  Dee,  5  Wash.  580, 
32  Pac.  460;  Brown  v.  Kennedy,  12  Colo.  235,  20  Pac.  696.  There 
is  certainly  no  such  inconsistency  between  the  bankruptcy  act 
and  §  2296  of  the  Revised  Stg,tutes  as  would  sustain  a  repeal  of 
§  2296  by  implication.  Great  Northern  Railway  Co.  y.  United 
States,  155  Fed.  945,  961,  84  C.  C.  A.  93,  and  cases  there  cited. 

In  some  of  the  cases  there  are  general  remarks  to  the  effect 
that  the  state  law  establishes  the  rule  of  exemption  under  the 
bankruptcy  act,  and  that  only  such  exemptions  in  value  and 
kind  as  those  laws  permit  can  be  claimed  by  the  bankrupt.  Steele 
V.  Buel,  104  Fed.  968,  44  C.  C.  A.  287;  In  re  Manning  (D.  C.) 
112  Fed.  948 ;  In  re  Wunder  (D.  C.)  133  Fed.  821.  Thej^uestion 
before  the  court  in  these  cases,  however,  was  whether  a  specific 
piece  of  property  came  rightfully  within  the  terms  of  the  state 
law  granting  exemptions.  In  none  of  them  was  the  question 
raised  whether  a  bankrupt  was  entitled  to  the  protection  of  the 
few  federal  laws  granting  to  him  special  rights  as  against  his 
creditors.  The  question  here  presented  therefore  must  be  de-l 
termined,  not  upon  such  generaTobservations  as  are  found  in  J 
these  cases,  but  upon  the_provisions^fjthe  statutes  themselves. 
For  example.  Rev.  St.  U.  S.  §1628  (U.  S.  Comp.  St.  1901,  p. 
1122),  declares  that  military  uniforms,  arms,  and  equipments 
shall  be  exempt  from  all  judicial  process  These  articles  are 
not  exempt  under  many  of  the  state  laws.  Could  it  be  reason- 
ably contended  that  such  articles  pass  to  the  trustee  in  bank- 
ruptcy because  they  are  not  covered  by  state  exemption  laws? 
I  think  not.  The  cardinal  principle  of  the  bankruptcy  act  is  to 
grant  to  creditors  only  those  rights  which  would  have  been  theirs 
if  bankruptcy  had  not  supervened,  and  to  save  to  the  bankrupt 
and  his  family  every  right  and  exemption  which  would  have  been 
theirs  as  against  creditors  enforcing  their  claims  by  ordinary 
judicial  process.  Thomas  v.  Woods,  170  Fed.  .  This  prin- 
ciple should  not  be  departed  from  except  in  obedience  to  a  com- 
mand of  the  statute  which  is  altogether  clear.  Such  feeble  in- 
consistencies as  are  here  brought  to  the  notice  of  the  court  would 
afford  no  justification  for  such  action. 

The  decision  of  the_  referee  must  be  affinned,  and_it  is  so__ 
ordered. 


650        f  J,  cM^    ADMINISTRATION 
^^^Jctj^"^       TU  Yin  re  baker 

l^iy..^    "TJIS^^-       182  Fed.  392,  104  C.  C.  A.  602 
u^r  ^  (Circuit  Court  of  Appeals,  Sixth  Circuit.    May  3,  1910) 

WARRINGTON,  Circuit  Judge.  This  is  a  proceeding  to  re- 
vise in  matter  of  law  a  judgment  denying  to  the  petitioner  a 
homestead  exemption  in  certain  real  estate.  The  petitioner  was 
adjudged  a  bankrupt  under  voluntary  proceedings  begun  July 
31, 1908.  He  presented  with  his  petition  and  schedules  his  claim 
to  the  exemption  under  §1702,  Ky.  St.  (Russell's  St.  §4661). 
His  real  estate  consisted  of  an  undivided  one-fifth  interest  in 
three  parcels  of  land,  which  descended  to  him  upon  the  death 
of  his  brother  in  June,  1908.  The  lands  were  neither  improved 
nor  susceptible  of  partition ;  and  the  trustee  in  bankruptcy,  un- 
der order  of  the  referee  made  in  November,  1908,  sold  the  in- 
terest of  the  bankrupt  in  the  lands  for  $926,  and  set  apart  the 
whole  of  the  proceeds  of^sale  to  the,  bankrupt  as  exempt  in  lieu 
of  his  claim  to  a  homestead.,.  Prior  to  the  bankrupfcy^roceed- 
ings  some  of  the  petitioner's  creditors,  whose  claims  antedated 
the  inheritance,  commenced  suits  in  attachment  and  otherwise 
/to  subject  the  land  to  the  payment  of  these  debts.  These  cred- 
itors objected  to  any  allowance  of  a  homestead,  and  the  order 
/  of  the  referee  was  set  aside  by  the  court  below. 

In  view  of  Bankr.  Act  July  1,  1898,  c.  541,  §  6,  30  Stat.  548 
(U.  S.  Comp.  St.  1901,  p.  3424),  the  validity  of  the  action  of 
the  trustee  in  setting  apart  the  bankrupt's  exemption  and  the 
rights  of  the  bankrupt  in  that  behalf  aje^to  bejested  by  the  law 
gf  K-entucky.  The  federal  courts  are  accustomed  in  such  cases 
to  follow  the  decisions  of  the  court  of  last  resort  of  the  state 
whose  laws  are  so  drawn  in  question.  In  speaking  of  the  Consti- 
tution and  statutes  of  Texas  respecting  homestead  exemptions  in 
a  proceeding  like  the  present  one  in  Duncan  v.  Ferguson-Mc- 
Kinney  Dry  Goods  Co.,  150  Fed.  269,  271,  80  C.  C.  A.  157,  159, 
Circuit  Judge  Shelby  said : 

**It  has  been  the  policy  of  the  state  of  Texas  in  its  Constitu- 
tion and  legislation,  as  construed  by  the  decisions  of  its  Su- 
preme Court,  to  favor  by  liberal  interpretations  the  exemptions 
in  favor  of  debtors.  These  decisions,  construing  the  state  Con- 
stitution and  statutes,  are  as  binding  on  this  court  as  the  Con- 
stitution and  statutes  themselves." 

See,  also,  McCarty  v.  Coffin,  150  Fed.  307,  310,  80  C.  C.  A. 


EXEMPTIONS  651 

195;  In  re  Wood  (D.  C.)  147  Fed.  877,  878;  Huenergardt  v. 
Brittain  Dry  Goods  Co.,  116  Fed.  31,  33,  53  C.  C.  A.  505 ;  In  re 
Irvin,  120  Fed.  733,  734,  57  C.  C.  A.  147 ;  In  re  Meriwether 
(D.  C.)  107  Fed.  102;  In  re  Pope  (D.  C.)  98  Fed.  722;  Loveland 
on  Bankruptcy  (3d  ed.)  §  177,  p.  514. 

Since  the  federal  courts  cannot  administer  or  distribute  ex- 
empted property  as  an  asset  of  the  bankrupt's  estate,  or  do  more 
than  to  set  it  apart  to  the  bankrupt  (Lockwood  v.  Exchange 
Bank,  190  U.  S.  294,  23  Sup.  Ct.  751,  47  L.  ed.  1061),  this  prac- 
tice of  the  courts  would  seem  to  be  in  accord  with  the  course 
pursued  by  Mr.  Justice  Gray  respecting  a  dower  right  under 
the  bankruptcy  act  of  1867  (Act  March  2,  1867,  c.  176,  14  Stat. 
517)  in  Porter  v.  Lazear,  109  U.  S.  84,  3  Sup.  Ct.  58,  27  L.  ed. 
865.  See,  also,  In  re  Petition  of  Carrie  E.  Hays  (decided  by  this 
court  March  8,  1910)  181  Fed.  674. 

The  court  below  in  terms  recognized  the  binding  effect  in  such 
matters  of  decisions  of  courts  of  last  resort  of  the  states  in  which 
the  questions  arise ;  but,  as  we  understand  his  opinion  the  learned, 
judge  did  not  think  any  rule  of  decision  on  the  present  issue 
was  settled  in  Kentucky,    He  said : 

"At  the  outset  I  would  emphasize  that  the  homestead  ex- 
emption is  purely  statutory.  It  is  created  by  statute,  and  it 
exists  only  as  it  is  so  created.  The  courts  cannot  adjudge  that 
to  be  such  an  exemption  which  is  not  such  by  the  terms  of  the 
statute  according  to  their  intent  and  meaning.  They  are  con- 
cerned solely  with  determining  what  that  true  intent  and  mean- 
ing is.  This  court,  however,  is  not  entirely  free  to  do  this.  It 
is  limited  by  any  construction  of  the  statute  put  forth  by  the 
Kentucky  Court  of  Appeals,  at  least  if  it  clearly  appears  that 
such  is  its  construction,  and  there  is  no  reason  to  think  that  in 
any  future  case  it  will  not  adhere  thereto.  I  recognize  fully 
this  restriction  upon  me,  and  have  no  disposition  to  go  beyond 
it.  But  the  proper  standpoint  from  which  to  view  any  particu- 
lar construction  of  the  statute  by  that  court,  and  to  determine 
accurately  just  what  it  is,  is  one's  own  construction.  I  will  there- 
fore at  the  first  undertake  for  myself  to  ascertain  the  statute's 
true  intent  and  meaning." 

We  of  course  agree  that  where  the  decisions  of  the  State 
Court  are  in  conflict,  and  point  to  no  definite  rule  touching  the 
construction  of  a  statute  of  the  state,  the  federal  courts  are 
quite  as  much  at  liberty  to  place  their  own  construction  upon 
the  statute  as  they  would  be  if  the  State  Court  had  not  con- 


652  ADMINISTRATION 

jstrued  it  at  all.  But  if  there  be  a  rule  of  decision  which  is 
reasonably  clear  with  respect  to  a  given  statute,  we  think  the 
federal  courts  are  bound  in  a  case  like  this  to  follow  the  rule, 
rather  than  to  undertake  to  determine  upon  their  own  interpre- 
tation whether  the  State  Court  may  not  change  the  rule  in  the 
future.  The  statute  in  question  provides  that : 
"*  *  *  there  shall,  on  all  debts  or  liabilities  *  *  *  be 
exempt  from  sale  under  execution,  attachment  or  judgment,  ex- 
cept to  foreclose  a  mortgage  given  by  the  owner  of  a  homestead, 
or  for  purchase  money  due  therefor,  so  much  land  including  the 
dwelling  house  and  the  appurtenances  owned  by  debtors,  who  are 
actual  hona  fide  housekeepers  with  a  family,  resident  in  this 
commonwealth,  as  shall  not  exceed  in  value  one  thousand  dol- 
lars ;  but  this  exemption  shall  not  apply  to  sales  under  execution, 
attachment  or  judgment,  if  the  debt  or  liability  existed  prior  to 
the  purchase  of  the  land,  or  of  the  erection  of  the  improvements 
thereon." 

It  is  further  provided  in  substance  by  §  1705  that  where  real 
estate — 

''in  the  opinion  of  the  appraisers,  is  of  greater  value  than  one 
thousand  dollars,  and  not  divisible  without  great  diminution  of 
its  value,  then  the  same  shall  be  sold,  *  *  *  and  one  thou- 
sand dollars  of  the  money  *  *  *  shall  be  paid  to  the  defend- 
ant to  enable  him  to  purchase  another  homestead. ' ' 

•     «     * 

We  do  not  feel  called  upon  to  comment  on  all  the  distinctions 
urged  by  learned  counsel  to  exist  between  a  number  of  the  deci- 
sions cited  in  this  opinion,  and  between  some  of  them  and  others 
cited  in  their  brief.  Enough  has  been  adduced  to  show  what 
we  conceive  to  be  the  plain  trend  of  decision  of  the  Court  of 
Appeals,  and  also  why  we  regard  those  decisions  as  controlling 
in  the  present  case. 

The  judgment  of  the  court  below  is  reversed,  with  direction 
that  the  order  of  the  referee  be  affirmed,  with  costs. 


tiT^ 


CHAPTER  IV      \^  9'^^^'^^'^^^ 
COMPOSITIONS      \  /^<^1r1; 
ZAVELO  V.  REEVES^ 
227  U.  S.  625,  57  L.  ed.  676,  33  Sup.  Ct.  365 
[See  this  case  given  on  page  391,  ante.] 

InreHOXIEetal.         r^    ^/^ 

180  Fed.  508         ^^JjJC^i  ^        .j^"" 
(District  Court,  D.  Maine.    July  2,  1910)/^-^  t'-rl^ 

II ALE,  District  Judge.  The  bankrupts  were  duly  adjudicated 
on  the  15th  day  of  March,  1910,  upon  an  involuntary  petition 
filed  February  26,  1910,  At  the  first  meeting  of  creditors,  claims 
of  44  creditors,  amounting  to  $9,146.59,  were  filed.  Claims  of 
certain  other  creditors,  duly  scheduled,  have  not  yet  been  pre- 
sented for  allowance.  Appraisers  have  been  appointed,  and  have 
filed  their  report,  showing  the  value  of  the  assets  of  the  bankrupts 
to  be :  Real  estate,  $5,300,  which  is  under  mortgage  for  more 
than  that  amount ;  personal  property,  $4,481.95.  The  appraisers 
report  that  the  basis  of  their  valuation  is  partly  at  cost  price  and 
partly  at  possible  selling  value.  After  the  bankrupts  filed  their 
schedule  and  were  examined  they  offered  a  composition  at  the 
rate  of  15  per  cent.  A  majority  in  number  of  all  the  creditors 
whose  claims  have  been  allowed,  namely,  29  creditors,  represent- 
ing $5,362.06,  have  accepted  in  writing  the  offer  of  composition. 
The  referee  reports  the  above  facts.  He,  recommends  that  the 
composition  will  be  for  the  best  interests  of  the  creditors ;  that  it 
is  made  in  good  faith,  and  not  procured  by  any  means,  promises, 
or  acts  prohibited  by  the  bankrupt  law ;  and  that  the  bankrupts 
have  not  been  guilty  of  any  act,  or  of  any  failure  in  duty,  whichl 
would  be  a  bar  to  their  discharge.  He  also  assigns  certain  rea- 
sons which  have  influenced  him  in  coming  to  his  conclusion. 

It  is  provided  by  §  12^  of  the  bankruptcy  act  of  1898  (Act 
July  1, 1898,  c.  541,  30  Stat.  550  [U.  S.  Comp.  St.  1901,  p.  3427] ) 
that  the  judge  shall  confirm  a  composition  if  satisfied  (1)  that 

653 


654  COMPOSITIONS 

it  is  for  the  best  interests  of  the  creditors.  There  being  no 
question  of  the  bankrupts  having  been  guilty  of  any  act  or  of 
any  failure  in  duty  which  would  be  a  bar  to  their  discharge,  and 
the  offer  and  acceptance  having  been  in  good  faith,  the  single 
question  before  the  court  is  whether  or  not  the  confirmation  of 
the  composition  is  for  the  best  interests  of  all  the  creditors. 

The  English  rule  appears  to  be  that  the  approval  of  the  major- 
ity of  the  creditors  to  the  offer  is  final.  Under  our  statute  such 
approval  is  evidence,  prima  facie,  that  the  composition  is  for  the 
best  interests  of  the  creditors ;  and  the  burden  is  upon  those  who 
attack  the  composition.  The  same  rule  prevailed  under  the  bank- 
ruptcy act  of  1867  (Act  March  2,  1867,  c.  176,  14  Stat.  517).  In 
Ex  parte  Jewett,  2  Low.  393,  Fed.  Gas.  No.  7,303,  Judge  Lowell 
said: 

"Sl-tJie  absence  of  fraud  and  concealment,  the  question  for 
the  court  seems  to  be,  not  whether  the  debtor  might  have  offered 
morepbut  whether  his  estate  would  pay  more  in  bankruptcy. ' ' 

Substantially  the  same  issue  is  before  the  court  under  the  pres- 
ent act.  Adler  v.  Jones,  109  Fed.  967,  48  C.  C.  A.  761 ;  Adler  v. 
Hammond,  104  Fed.  862,  44  C.  C.  A.  229;  In  re  Waynesboro 
Drug  Co.  (D.  C.)  157  Fed.  101. 

Certain  creditors  object  to  the  confirmation  of  the  composi- 
tion, and  file  specifications  of  objections.  The  examination  of  the 
bankrupts,  and  all  papers  relating  to  the  estate,  are  before  me. 
It  is  for  the  court  to  determine  whether  the  nonassenting  cred- 
itors have  met  the  burden  of  showing  that  the  offer  of  composi- 
tion is  inadequate,  and  that  a  substantially  larger  sum  may  rea- 
sonably be  expected  to  result  from  the  administration  of  the  as- 
sets under  the  regular  course  of  bankruptcy  proceedings.  A  sum 
less  than  $1,500  is  required  to  carry  out  the  offer  of  composition. 
The  appraisal  shows  assets  amounting  to  about  $4,500.  The 
learned  counsel  for  the  bankrupts  urge  that  the  evidence  shows 
the  appraisal  to  be  largely  in  excess  of  the  available  value  of  the 
property.  It  is  not  necessary  to  discuss  in  detail  the  different 
views  taken  by  counsel  touching  this  matter,  or  the  testimony 
to  it.  It  is  in  evidence  that  since  the  adji;idication  the  business 
of  the  bankrupt  firm  continues  to  be  carried  on,  and  that  many 
of  the  creditors  who  have  accepted  the  offer  continue  to  supply 
the  bankrupts  with  goods,  and  to  do  business  with  them.  It 
is  urged  that  they  are  willing  to  accept  the  offer  for  the  reason 
that  their  profits  in  future  from  the  conduct  of  the  business  will 
fully  repay  them  for  their  losses  in  bankruptcy.    I  do  not  esteem 


COMPOSITIONS  655 

it  to  be  my  duty  to  discuss  the  evidence  in  detail,  or  to  decide 
what  induced  the  assenting  creditors  to  assent.  The  bankruptcy 
law  does  not  make  their  decision  conclusive,  but  only  prima  facie. 
Their  assent  does  not  relieve  the  court  from  passing  on  the  ques- 
tion whether  the  composition  is  for  the  best  interests  of  all 
the  creditors.  This  question  is. addressed  to  the  judicial  discre- 
tion of  the  court,  and  from  its  conclusion  either  party  may 
appeal.    Adler  v.  Hammond,  supra. 

Upon  a  careful  review  of  the  examination  of  the  bankrupts, 
the  schedules,  and  all  the  evidence  before  me,  t_  cannot  avoid 
the  conclusion  that  the  nonassenting  creditors  have  met  the  bur- 
den of  showing  that  the  acceptance  of  the  composition  will  not 
be  for  the  best  interests  of  all  the  creditors.  The  whole  testimony 
leads  me  to  the  conclusion  that  the  assets  should  produce  nearly 
double  the  offer  of  15  per  cent.  It  is  with  hesitation  that  I 
come  to  a  conclusion  opposed  to  that  of  the  painstaking  and  com- 
petent referee,  who  assigns  some  very  good  reasons  for  coming 
to  his  conclusions.  Some  of  the  reasons  which  he  assigns,  how- 
ever, are  not  tenable,  and  would  enlarge  the  inquiry  beyond  its 
legitimate  scope. 

The  offer  of  composition  is  not  confirmed. 

In  re  MESSENGILL        <i^>i-*^4    .^^j^  V-<^ 
113  Fed.  366  ^  ':^*'-  ^'    X'  l^ 

(District  Court,  E.  D.  North  Carolina.    January  27,  1902)    "- 

PURNELL,  District  Judge.  The  referee  for  the  Fourth  di- 
vision of  the  district  certifies  the  following  as  having  arisen  in 
the  course  of  the  proceedings  to  consider  a  proposition  of  com- 
position pertinent  to  the  proceedings.  The  facts  are  certified 
that  the  creditor  purchased  several  claims  after  the  debts  had 
been  allowed!  No  pleadings  or  evidence  accompany  the  referee 's 
certificate.    The  question  for  consideration  is  thus  stated: 

**In  determining  whether  or  not  a  majority  of  the  creditors, 
whose  claims  represent  a  majority  of  the  indebtedness  of  this 
estate  in  bankruptcy,  have  signified  their  agreement  in  writing 
to  accept  30%  offer  of  composition,  should  E.  F.  Young,  to  whom 
a  large  number  of  creditors  have  sold  their  claims,  be  counted 
as  one  creditor,  or  as  the  number  who  have  assigned  claims  to 
him?  The  referee  holds  that  he  should  be  counted  as  one  cred- 
itor, and~the  bankrupt  excepted  and  appealed  to  the  district 


-*  -»*** 


656  COMPOSITIONS 

judge.    And  the  said  question  is  certified  to  the  judge  for  his 
opinion  thereon, ' ' 

The  foregoing  decision  of  the  referee  is  affirmed.  §  12,  Bank- 
ruptcy Act,  should  be  strictly  construed.  In  re  Rider,  96  Fed. 
808,  3  Am.  Bankr.  R.  178.  Where  a  claim  has  been  assigned 
after  proof,  the  real  owner  alone  can  vote.  In  re  Frank,  Fed. 
Gas.  No.  5,050 ;  Loveland,  Bankr.  §  105.  He  is  one  creditor, 
holding  several  claims.       _^ 

^Jl^  c#^|<i'  ^         (M^  r     In  re  RIDER  ^ 

^  (District  Court,  N.  D.  New  York.    October  6,  1899) 

At  the  argument  it  was  conceded  that  the  accepting  creditors 
did  not  represent  a  majority  in  number  and  amount  of  all  the 
creditors  whose  claims  have  been  allowed,  but  only  such  a  ma- 
jority of  those  whose  claims  were  allowed  at  the  first  meeting  of 
creditors.  At  the  date  of  the  argument,  September  19th,  not  less 
than  30  creditors  had  proved  their  debts  aggregating  $8,554,  and 
but  12  or  13  creditors  representing  $4,210  had  signed  the  com- 
position agreement.  The  claims  of  Holmes  Rider,  the  father  of 
the  bankrupt,  for  $2,600,  and  of  his  mother-in-law  for  $446,  are 
included  in  the  above  amount  of  $4,210.  The  referee,  who  has 
made  a  most  careful  and  exhaustive  return  upon  the  law  and 
facts,  reports  as  follows:  "At  that  session  of  April  15th  the 
bankrupt  was  examined  by  his  creditors.  *  *  *  After  such 
examination  and  partly  during  the  session  of  the  meeting,  but 
not  as  a  part  of  the  proceedings  thereof,  the  bankrupt  presented 
the  proposed  written  composition  herein  to  11  of  the  15  creditors 
in  attendance,  whose  claims  aggregated  $3,745.44  of  the  $4,089.02 
proved  and  allowed  at  that  time,  all  of  whom  accepted  the  com- 
position in  writing  at  that  time  and  place  by  instrument  dated 
that  day."  It  does  not  appear  that  the  paper  was  presented  to 
the  remaining  four  creditors  who  had  proved  their  debts.  It  was 
not  presented  to  the  general  creditors  at  all  and  they  had  no 
formal  information  that  a  composition  was  on  foot,  except  the 
notice  that  it  would  be  presented  to  the  court  for  confirmation. 
The  composition  proposed  was  to  pay  30  per  cent.,  one-third  in 
cash,  one- third  in  four  months  and  one-third  in  six  months.  The 
deferred  payments  were  to  be  evidenced  by  the  notes  of  the  bank- 
rupt indorsed  by  his  father.  There  is  a  marked  dispute  as  to 
the  value  of  the  bankrupt's  estate,  the  contesting  creditors  in- 


COMPOSITIONS  657 

sisting  that  it  will  pay  much  more  than  30  per  cent.  The  referee 
recognizes  the  possibility  that  this  contention  is  well  founded, 
but  is  of  the  opinion  "that  if  the  composition  could  be  paid 
wholly  in  cash  and  without  any  part  thereof  being  deferred,  the 
creditors  will  realize  more  from  a  confirmation  thereof  than  they 
will  to  have  the  estate  administered  in  bankruptcy. ' '  Owing  to 
the  long  delay  occasioned  by  the  contest  the  notes  originally 
deposited  are  not  now  available  as  some  of  them  have  already 
become  due.  The  amount  deposited  by  the  bankrupt  for  costs 
is  also  inadequate.  The  financial  responsibility  of  Holmes  Rider 
is  assailed,  but  the  referee  finds  that  he  is  worth  from  $7,000  to 
$8,000  over  and  above  his  present  liabilities. 

COXE,  District  Judge  (after  stating  the  facts  as  above).  The 
effect  of  a  composition  is  to  supersede  the  bankruptcy  proceed- 
ings and  reinvest  the  bankrupt  with  all  his  property  free  from 
the  claims  of  creditors.  As  an  abstract  proposition,  considered 
for  a  moment  apart  from  the  provisions  of  the  statute,  it  is  en- 
tirely clear  that  a  condition  so  plainly  in  derogation  of  common- 
law  rights  should  not  be  permitted,  unless  it  is  reasonably  certain 
that  the  creditors  approve  and  that  they  will  fare  at  least  as  well 
as  they  would  were  the  estate  administered  in  the  usual  course. 
It  would  be  manifestly  unfair  and  opposed  to  the  basic  principle 
of  our  institutions  to  permit  a  minority  to  dictate  terms  to  a 
majority  and  compel  them,  in  invitum,  to  take  what  the  bank- 
rupt chooses  to  offer,  or  nothing.  Indeed,  it  has  been  considered 
a  somewhat  dangerous  exercise  of  legislative  power  to  compel 
even  a  minority  to  surrender  all  claim  upon  the  debtor's  estate  at 
the  dictation  of  the  majority.  Certainly  no  previous  law  has 
permitted  a  minority  to  force  a  compromise.  Always  the  safe- 
guard of  a  majority  against  favoritism  and  fraud  has  been  pre- 
served. The  amendment  of  1874  to  the  law  of  1867  provides 
that  ' '  such  resolution  shall,  to  be  operative,  have  been  passed  by 
a  majority  in  number  and  three-fourths  in  value  of  the  creditors 
of  the  debtor  assembled  at  such  meeting,  and  shall  be  confirmed 
by  the  signatures  thereto  of  the  debtor  and  two-thirds  in  num- 
ber and  one-half  in  value  of  all  the  creditors  of  the  debtor."  18 
Stat.  183,  c.  390,  §  17.  A  law  which  compels  a  creditor,  against 
his  will,  to  accept  in  discharge  of  his  debt  just  what  the  debtor 
sees  fit  to  offer,  should  be  strictly  construed.  Loveland,  Bankr. 
p.  549 ;  In  re  Shields,  Fed.  Cas.  No.  12,784. 

The  present  law  should  be  construed  in  the  light  of  similar 

H.  &  A.  Bankruptcy — 42 


658  COMPOSITIONS 

Cprior  enactments  and  any  doubt  should  be  resolved  against  those 
\  who  seek  to  deprive  creditors  of  the  ri^ht  to  have  the  debtor's 
(property  applied  to  the  payment  of  his  debts.  Nothing  short  of 
an  absolutely  plain  and  unambiguous  provision  will  convince  the 
court  that  congress  intended  for  the  first  time,  it  is  thought,  in 
the  history  of  bankruptcy  legislation  to  vest  such  unusual  and 
dictatorial  powers  with  a  minority  of  the  creditors.  It  may  be 
assumed  that  the  language  of  §  12  is  not  as  perspicuous  as  could 

Ibe  desired,  but,  read  as  a  whole,  the  intention  of  congress  seems 
plain  to  permit  a  compromise  only  when  sanctioned  by  a  ma- 
jority in  number  and  amount  of  the  creditors  whose  claims  have 
been  allowed,  after  due  notice  to  them  of  the  bankrupt's  proposi- 
tion. If  the  construction  contended  for  by  the  bankrupt  be  ac- 
cepted it  will  lead  to  most  inequitable  results.  Take,  for  illus- 
tration, a  case  where  there  are  thirty  creditors  and  only  three 
have  proved  their  debts,  for  equal  amounts,  at  the  time  the  com- 
position is  offered.  If  the  bankrupt  obtains  the  consent  of  two 
of  them  the  composition  must  be  confirmed,  although  the  remain- 
ing twenty-eight  creditors  may  be  in  open  opposition. 

§  12  is  easily  capable  of  a  construction  compatible  with  the  in- 
tent and  purpose  which  has  always  ruled  proceedings  of  this 
kind.  After  the  bankrupt  has  been  examined  and  filed  a  list 
of  his  creditors  he  * '  may  offer  terms  of  composition  to  his  cred- 
itors." This  plainly  implies  that  the  offer  should  be  made  to 
all  his  creditors  whether  they  have  proved  their  debts  or  not.  It 
is  not  essential  that  proofs  shall  be  made  before,  or  at,  the  first 
meeting.  They  may  be  made  at  any  time  within  a  year  after  the 
adjudication  and  it  is  not  necessary  that  they  shall  be  filed,  in 
the  first  instance,  with  the  referee.     §  57,  c.  n. 

After  the  terms  are  thus  made  known  to  all  the  creditors  they 
have  a  reasonable  time  to  decide  whether  they  will  accept  the 
offer  or  not.  But  in  order  to  qualify  themselves  to  vote  upon 
the  proposition  they  are  required  to  prove  their  claims.  The 
reason  for  this  is  obvious;  it  excludes  from  the  voting  all  but 
hona  fide  creditors ;  it  excludes  all  those  who  are  too  indifferent 
to  present  their  claims  and  all  whose  claims  are  unliquidated, 
fictitious  or  exorbitant;  it  gives  all  creditors  notice  no  matter 
what  may  be  the  nature  of  their  claims  and  permits  them  to 
qualify,  if  they  desire  to  do  so,  and  assent  to  the  compromise  or 
oppose  it,  or,  if  they  so  elect,  they  may  simply  withhold  their 
assent.  After  a  fair  opportunity  has  been  given  to  all  and  the 
requisite  majority  of  those  whose  claims  have  been  allowed  have 


COMPOSITIONS  659 

accepted  it  in  writing  an  application  to  confirm  the  composition 
may  be  filed.  Even  then  the  composition  may  be  rejected  if  the 
judge  be  convinced  that  it  is  not  for  the  best  interests  of  the 
creditors. 

A  construction  which  permits  the  bankrupt  to  select  a  time 
when  but  few  creditors  have  proved  and  then  to  present  his 
terms  only  to  such  creditors  as  he  believes  to  be  friendly  to  his 
interests,  keeping  the  general  creditors  in  the  dark  until  he  has 
obtained  a  majority  of  the  few  who  have  proved,  is  contrary  to 
the  intent  and  spirit  of  the  law.  It  would  enable  a  few  active 
and  friendly  creditors  on  the  spot  so  to  manipulate  the  proceed- 
ings that  the  necessary  majority  could  be  secured  while  distant 
creditors  were  wholly  ignorant  of  the  proposed  settlement.  That 
the  Supreme  Court  entertain  views  similar  to  the  foregoing  may 
be  inferred  from  form  No.  60  (18  Sup.  Ct.  xlvi.),  adopted  pur- 
suant  to  general  order  38  (Id.  x.).  ^ 

"Without  pursuing  the  subject  further  the  court  is  constrained 
to  deny jthe  application  to  confirm  this  composition.    The  reasons    \ 
for  this  conclusion  may  be  briefly  stated  as  follows: 

First.  It  is  not  approved  by  a  majority  in  number  and  amount 
of  creditors  whose  claims  have  been  allowed. 

Second.  No  notice  was  given  to  the  general  creditors  of  the 
bankrupt. 

Third,  The  composition  was  not  presented  to  all  the  cred- 
itors whose  claims  were  allowed. 

Fourth.  At  the  present  time  the  consideration  deposited  is 
not  in  form  to  be  distributed. 

Fifth.    The  amount  deposited  as  costs  is  inadequate. 

Motion  denied. 

In  re  LEVY 

110  Fed.  744 

(District  Court,  W.  D.  Pennsylvania.    July,  1901) 

A  majority  in  number  and  amount  of  bankrupt's  creditors 
signed  an  acceptance  of  the  offer  of  composition,  whereby  it  was 
agreed  to  pay  25  cents  on  the  dollar.  Subsequently  a  number 
of  the  creditors  who  had  agreed  to  accept  such  composition  came 
into  court,  and  desired  to  file  a  paper,  asking  leave  to  withdraw 
their  acceptance,  and  that  the  application  for  the  composition 
be  dismissed ;  stating  that  when  they  signed  the  acceptance  they 
were  not  aware  of  all  the  facts  in  the  case. 


660  COMPOSITIONS 

BUFFINGTON,  District  Judge  (orally).  These  creditors 
voluntarily  came  into  court,  accepted  the  proposed  composition, 
and  asked  the  court  to  act  in  the  matter,  and  confirm  the  com- 
position. They  procured  the  court  to  act,  and  they  are  now 
estopped  from  interfering  with  the  further  conduct  of  the  case  in 
the  matter  of  this  composition.  Had  they  alleged  fraud  or  mis- 
representation in  the  procuring  of  their  signatures  to  the  accept- 
ance, the  case  would  be  different.  They  are  presumed  to  have 
had  the  same  knowledge  when  they  signed  as  they  have  now.  The 
application  for  their  withdrawal  will  be  refused,  and  the  court 
will  proceed  to  pass  upon  the  merits  of  the  proposed  composition. 
If  it  is  not  for  the  best  interests  of  the  creditors,  it  can  be  shown 
on  the  hearing  before  the  referee. 

Mccormick  v.  solinsey 

152  Fed.  984,  82  C.  C.  A.  134 
(Circuit  Court  of  Appeals,  Fifth  Circuit.    April  15, 1907) 

PER  CURIAM.  On  the  case  made,  the  contract  by  the  Cit- 
izens' National  Bank  of  Beaumont,  under  which  it  advanced  the 
money  to  pay  the  compositon  to  creditors  in  the  bankruptcy  of 
E.  N.  Brown,  was  illegal,  because  a  part  of  the  consideration 
thereof  was  that  the  bank's  debt  against  the  bankrupt  should  be 
paid  in  full,  notwithstanding  the  composition. 

Solinsky  was  a  party  to  the  illegal  contract,  and  therein 
agreed  as  a  part  of  the  inducement  that  he  would  return  to  the 
bank  the  amounts  received  by  him  under  the  composition  as  one 
of  the  creditors  of  the  bankrupt,  Brown.  The  present  suit,  be- 
ing one  to  recover  from  Solinsky  the  amounts  received  by  him 
under  the  composition,  is  clearly  a  suit  to  recover  moneys  know- 
ingly advanced  under  an  illegal  contract. 

The  judgment  of  the  Circuit  Court  is  therefore  affirmed. 


.^^>;  .  r.^.^^r..  V 


iP^  ^^'^S!^  ^^  ^^  GRIFFIN 


"^        f^-"       jJ^  ^^^   ^^^'    '^^^ 

^    mH      y  (District  Court,  N.  D.  Georgia.    May  27,  1910) 

^P^  NEWMAN,   District  Judge.     The   above   bankrupt,  M.   M. 

y\  Griffin,  has  applied  to  the  court  for  the  confirmation  of  a  com- 

position, which  he  has  offered  to  his  creditors  and  which  haa 
been  accepted  by  a  majority  in  number  and  amount.    Objection 


COMPOSITIONS  661 

is  made  to  the  confirmation  of  the  composition  by  the  Silvey- 
Smith  Hat  Company  for  the  following  reason: 

"Because  said  bankrupt  obtained  the  property  on  credit  from 
them  upon  a  materially  false  statement  in  writing,  made  to  them 
for  the  purpose  of  obtaining  such  property  on  credit ;  such  state- 
ment being  made  on  June  28,  1909,  and  being,  as  therein  shown, 
made  'for  the  purpose  of  obtaining  credit,'  and  standing  'good 
as  to  each  purchase  now  and  hereafter,  unless  there  should  be  a 
material  change,  in  which  case  [I  or  we]  will  notify  them  before 
making  purchases  from  them. '  Copy  of  said  statement  is  hereto 
attached  and  made  a  part  hereof,  marked  '  Exhibit  A. '  On  such 
statement  these  objectors  sold  said  bankrupt  goods  from  time  to 
time,  and  at  the  time  the  petition  in  bankruptcy  was  filed  said 
bankrupt  was  and  is  indebted  to  these  objectors  on  account  of 
such  purchases,  as  shown  by  statement  of  account  hereto  at- 
tached and  made  a  part  hereof,  marked  'Exhibit  B,'  to  which 
reference  is  prayed  as  often  as  may  be  necessary.  Said  state- 
ment was  materially  false,  in  that  said  bankrupt  represented 
therein  one  house  and  lot  located  in  Manchester,  Georgia,  of  the 
value  of  $1,000,  as  among  his  assets.  Said  house  and  lot  was 
at  the  time  the  property  of  said  bankrupt's  wife,  and  is  still  her 
property. ' ' 

It  appears,  from  the  written  statement  of  the  bankrupt  made 
to  the  objectors,  which  is  in  evidence,  that  among  other  assets 
shown  by  the  statement,  which  amounted  in  all  to  $3,450,  he 
claimed  to  have  a  house  and  lot  located  in  Manchester,  Ga.,  where 
he  was  doiug  business,  of  the  value  of  $1,000.  He  now  acknowl- 
edges that  he  did  not  own  this  house  and  lot,  but  that  it  belonged 
to  his  wife.  That  this  was  a  material  statement  is  clear,  and  that 
it  was  untrue  is  now  equally  clear. 

§  14  of  the  bankrupt  act  of  July  1,  1898  (30  Stat.  550,  c.  541 
[U.  S.  Comp.  St.  1901,  p.  3427]),  as  amended  in  1903  (Act  Feb. 
5,  1903,  c.  487,  §  4,  32  Stat.  797  [U.  S.  Comp.  St.  Supp.  1909, 
p.  1310] ),  makes  one  of  the  grounds  of  objection  to  discharge: 

"(3)  Obtained  property  on  credit  from  any  person  upon  a 
material  false  statement,  in  writing,  made  to  such  person  for  the 
purpose  of  obtaining  such  property  on  credit. ' ' 

§  12  of  the  act  provides : 

"The  judge  shall  confirm  the  composition  if  satisfied  that 
*  *  *  (2)  the  bankrupt  has  not  been  guilty  of  any  of  the 
acts,  or  failed  to  perform  any  of  the  duties,  which  would  be  a 
bar  to  his  discharge." 


662  COMPOSITIONS 

It  may  be  that  to  sustain  the  objection  will  prevent  the 
creditors  from  getting  as  much  as  they  would  if  the  composition 
was  accepted,  but  this  cannot  be  considered  in  passing  upon  this 
objection.  As  Judge  J.  B.  McPherson,  in  the  District  Court 
for  the  Eastern  District  of  Pennsylvania,  in  a  case  very  much 
like  this  (In  re  Godwin,  122  Fed.  Ill),  said: 

*  *  It  is  very  likely  that  the  creditors  may  lose  by  the'  defeat  of 
the  proposed  composition;  but  this  consideration  cannot  be  al- 
lowed to  influence  the  court  in  deciding  whether  the  bankrupt 
has  been  'guilty  of  any  of  the  acts,  or  failed  to  perform  any  of 
the  duties,  which  would  be  a  bar  to  his  discharge. '  Bankr.  Act 
July  1,  1898,  c.  541,  §  12,  cl.  *d'  (U.  S.  Comp.  St.  1901,  p.  3427). 
I  agree  with  the  learned  referee  that  the  testimony  establishes 
the  fact  satisfactorily  that  the  bankrupt  has  committed  one  of 
the  offenses  specified  in  §  14,  cl.  '  b. '  He  has  *  with  fraudulent 
intent  to  conceal  his  true  financial  condition  and  in  contempla- 
tion of  bankruptcy  destroyed,  concealed  or  failed  to  keep  books 
of  account  or  records  from  which  his  true  condition  might  be 
ascertained. '  This  being  so,  I  think  the  act  requires  me  to  refuse 
approval  of  the  composition,  without  regard  to  the  question 
whether  the  creditors  would  be  benefited  thereby;  and  the  fact 
that  only  one  creditor  is  actively  objecting,  while  a  large  ma- 
jority is  in  favor  of  taking  what  the  bankrupt  offers,  is  of  no 
importance  in  the  present  inquiry." 

The  objection  must  be  sustained,  and  the  confirmation  of  the 
composition  refused. 


CHAPTER  V 

DISCHARGE 

In  re  CHANDLER 

138  Fed.  637,  71  C.  C.  A.  87 

(Circuit  Court  of  Appeals,  Seventh  Circuit.     April  11,  1905) 

On  October  27,  1902,  the  bankrupt  was  discharged  from  his 
debts  by  the  court  below.  On  October  23,  1903,  a  petition  was 
filed  by  William  H.  Rhodes,  John  Gray,  and  Edward  G.  Pauling 
to  revoke  the  discharge  upon  certain  grounds  therein  stated. 
The  only  allegation  in  the  petition  with  respect  to  the  character 
of  the  petitioners  is  * '  that  they  are  creditors  of  Frank  R.  Chan- 
dler, who  has  heretofore  been  adjudicated  a  bankrupt. ' '  To  the 
petition  a  demurrer  was  interposed,  and  sustained  by  the  Dis- 
trict Court,  and  the  petition  dismissed.  The  proceeding  here  is 
to  review  and  revise  that  ruling  of  the  District  Court. 

HUMPHREY,  District  Judge.  §  14&  of  the  bankruptcy  act 
of  July  1,  1898,  c.  541,  30  Stat.  550,  as  amended  by  Act  Feb.  5, 
1903,  c.  487,  32  Stat.  797  [U.  S.  Comp.  St.  Supp.  1903,  p.  411], 
provides  that  objections  to  discharge  of  bankrupts  may  be  made 
by  "parties  in  interest."  The  averment  in  the  petition  that  the 
objectors  are  creditors  is  not  such  a  statement  as  shows  to  the 
court  that  the  petitioners  are  "parties  in  interest,"  within  the 
meaning  of  the  law.  The  petition  does  not  make  such  a  show- 
ing that  the  court  can  say  that  the  rights  of  the  petitioners  were 
affected  by  the  discharge.  No  facts  are  averred  which  would 
justify  the  legal  conclusion  that  the  petitioners  are  "parties  in 
interest."  It  is  not  averred  that  they  were  creditors  at  the  time 
of  the  bankruptcy.  The  character  of  their  debt  is  not  shown.  It 
is  not  averred  that  their  debt  was  provable  in  bankruptcy  or  was 
proved  in  the  proceedings.  The  debt  or  debts  they  represent, 
from  all  that  appears  from  the  petition,  may  have  been  created 
since  the  discharge,  or  they  may  have  become  purchasers  of  the 
debts  which  were  discharged,  without  right  to  attack  the  dis- 

663 


664  DISCHARGE 

charge.  We  are  of  opinion  that  the  petition  should  have  shown 
that  the  petitioners  had  at  the  time  provable  debts  against  the 
bankrupt,  which  were  affected  by  the  discharge  of  the  bankrupt. 
Otherwise  they  are  not ' '  parties  in  interest, ' '  within  the  meaning 

of  the  statute. 

*     *     • 

The  decree  is  aflfirmed.^  y 

^J^^U^  ^  .     GILPIN  V.  MERCHANTS'  NAT.  BANK 

y^     -t-^  ^^^   ^^^    g^^    ^^   ^     ^    ^    ^^^ 

J^      (Circuit  Court  of  Appeals,  Third  Circuit.    November  21,  1908) 

GRAY,  Circuit  Judge.  This  is  a  petition  by  a  bankrupt,  to 
revise  for  error  of  law  the  decree  of  the  United  States  District 
Court  for  the  Eastern  District  of  Pennsylvania,  reversing  the 
referee's  report  and  sustaining  one  of  the  creditor-appellee's  ex- 
ceptions to  his  application  for  discharge.  The  sole  exception  thus 
sustained,  was  to  the  effect  that  the  referee  had  erroneously  held 
that  the  "materially  false  statement"  in  writing,  mentioned  in 
clause  (3)  of  §  14&  of  the  bankruptcy  act  (Act  July  1,  1898,  c. 
541,  30  Stat.  550  [U.  S.  Comp.  St.  1901,  p.  3427],  amended  by 
Act  Feb.  5,  1903,  c.  487,  §  4,  32  Stat.  797  [U.  S.  Comp.  St. 
Supp.  1907,  p.  1026]),  must,  in  order  to  constitute  a  bar  to 
.  the  discharge  of  the  bankrupt,  be  intentionally  or  knowingly 
untrue.  The  facts  of  the  case  as  summarized  from  the  findings 
made  by  the  referee,  and  elsewhere  disclosed  in  the  record,  are 
as  follows: 

The  bankrupt  was  engaged  in  the  construction  of  buildings, 
at  Baltimore,  in  places  near  New  York  City,  and  Philadelphia. 
His  main  office  was  in  Philadelphia,  where  his  books  were  kept 
by  his  bookkeeper.  The  bankrupt  was  chiefly  engaged  in  the 
actual  supervision  of  the  building  work  he  had  in  hand,  and  paid 
little  or  no  attention  to  his  books.  He  collected  money,  paid 
notes,  and  in  a  general  way  knew  the  condition  and  progress 
of  each  of  his  building  contracts.  He  intrusted  the  keeping  of  his 
books  to  his  bookkeeper,  and  in  September,  1905,  the  posting 
of  his  books  was  some  months  behind.  During  that  month,  the 
bankrupt  went  to  the  Merchants'  National  Bank,  at  Philadel- 

1 — As  to  the  right  of  the  trustee 
to  interpose  objections,  see  In  re 
Hoekman,  205  Fed.  330. 


DISCHARGE  665 

phia,  (the  excepting  creditor  and  appellee)  and  stated  that  he 
wished  to  open  an  account,  and  would  require  accommodations 
not  to  exceed  $10,000.  The  bank  informed  him  that  they  would 
like  to  have  a  statement,  and  gave  him  one  of  their  blank  forms, 
to  be  filled  out  and  signed  by  him.  This  form  the  bankrupt  took 
to  his  office,  and  there  signed  the  same  in  blank,  instructing  his 
bookkeeper  to  fill  it  out  and  send  it  to  the  bank.  He  signed  it  in 
blank  before  it  was  filled  out,  for  the  reason  that  he  was  obliged 
to  return  to  Baltimore  without  delay.  He  says  he  instructed 
the  bookkeeper  to  make  an  exact  statement  for  the  bank,  to  which 
the  bookkeeper  replied  that  he  could  not,  but  that  he  would  make 
an  approximate  statement  and  send  it  to  the  bank.  The  state- 
ment was  made  by  the  bookkeeper,  and  upon  it  was  written  the 
word  "approximate,"  and  it  was  sent  by  the  bookkeeper  to  the 
bank.  Opbn  this  statement,  and  upon  a  note  which  the  bankrupt 
was  to  obtain  from  one  Stokes,  of  Baltimore,  as  collateral,  the 
bank  extended  the  accommodation  desired.  This  note  was  never 
obtained  for  the  bank  from  Stokes.  About  October  3,  1905,  and 
after  the  said  statement  of  September  28th  had  been  filed  by  the 
bank,  the  note  of  the  bankrupt  for  $7,500,  due  30  days  after  date, 
was  discounted.  After  two  renewals  and  a  payment  of  $1,000 
on  account,  and  the  further  discount  of  a  10  days'  note  of  $2,500, 
the  bank,  on  the  9th  day  of  February,  1906,  renewed  the  entire 
amount  then  due,  viz.,  $9,000,  for  30  days,  which  is  still  unpaid. 

The  adjudication  of  bankruptcy  was  entered  February  26, 
1906.  The  approximate  statement  sent  by  the  bookkeeper  to 
the  bank  was  materially  inconsistent  with  the  bankrupt's  books, 
as  they  stood  at  the  time  the  bankruptcy  occurred.  There  is 
nothing  in  the  referee's  report  to  show  how  the  books  actually 
stood  at  the  time  the  statement  was  prepared  by  the  bookkeeper. 
There  is  no  evidence  that  the  bankrupt  ever  saw  this  statement 
after  it  was  filled  out,  that  the  bank  ever  showed  it  to  him,  or 
interrogated  him  in  regard  to  it,  or  that  he  ever  asked  to  see  it. 
This  statement  showed  a  net  worth  of  $43,569.27.  The  bankrupt 
himself  made  up  from  his  books,  during  the  course  of  his  exami- 
nation, a  statement  showing  that  his  net  worth  at  that  time  was 
$45,698.09.  This  statement,  however,  in  all  its  items  fails  to 
coincide  with  the  statement  made  up  by  the  bookeeper  and  de- 
livered to  the  bank. 

The  referee  finds  that,  although  the  falsity  of  the  statement 
sent  to  the  bank  has  been  proved,  the  fact  that  the  bankrupt 


666  DISCHARGE 

knew  it  to  be  false,  or  did  not  know  it  to  be  true,  was  not  proved, 
and  says: 

*  *  There  is  no  evidence  to  support  the  contention  that  the  bank- 
rupt knew  or  had  any  reason  to  believe  that  the  statement  sent 
to  the  bank  by  the  bookkeeper  was  false,  or  that  the  bankrupt 
intended  in  any  way  to  deceive  the  bank." 

The  referee,  therefore,  reported  that  a  decree  of  discharge  of 
the  bankrupt  should  be  entered.  To  the  finding  of  the  referee, 
as  stated,  the  appellee  filed  its  exception,  and  the  court  below, 
after  considering  the  same,  reversed  the  finding  of  the  referee 
and  directed  that  an  order  be  entered,  sustaining  the  said  objec- 
tion to  the  bankrupt's  discharge. 

§  14  of  the  bankrupt  act  prescribed  the  conditions  upon  which 
a  discharge  may  be  granted  to  the  bankrupt  by  the  court  of 
bankruptcy  in  which  the  proceedings  are  depending,  and  pro- 
vides that  the  court  shall  hear  and  investigate  the  merit  of  the 
application  and  discharge  the  bankrupt,  unless  he  has — 
"  (1)  committed  an  offense  punishable  by  imprisonment,  as  herein 
provided;  or  (2)  with  intent  to  conceal  his  financial  condition, 
destroyed,  concealed,  or  failed  to  keep  books  of  account  or  rec- 
ords from  which  such  condition  might  be  ascertained;  or,  (3) 
obtained  property  on  credit  from  any  person  upon  a  materially 
false  statement  in  writing  made  to  such  person  for  the  purpose 
of  obtaining  such  property  on  credit;  or  (4),  at  any  time  sub- 
sequent to  the  first  day  of  the  four  months  immediately  preced- 
ing the  filing  of  the  petition  transferred,  removed,  destroyed,  or 
concealed,  or  permitted  to  be  removed,  destroyed,  or  concealed 
any  of  his  property  with  intent  to  hinder,  delay,  or  defraud  his 
creditors;  or  (5)  in  voluntary  proceedings  been  granted  a  dis- 
charge in  bankruptcy  within  six  years;  or  (6),  in  the  course  of 
the  proceedings  in  bankruptcy  refused  to  obey  any  lawful  order 
of  or  to  answer  any  material  question  approved  by  the  court." 

The  single  question  of  law  presented  for  our  consideration  is 
clearly  defined  in  the  following  extracts  from  the  opinion  of  the 
court  below: 

"I  accept  and  shall  act  upon  the  finding  of  the  referee  that 
the  bankrupt  either  did  not  actually  know  what  the  statement 
contained,  or  did  not  know  that  it  was  materially  false,  and  that 
he  did  not  have  a  conscious  intention  to  deceive  the  bank." 

In  concluding,  the  court  said  as  follows : 

**The  other  matter  that  may  properly  need  a  moment's  con- 
sideration is  the  effect  that  should  be  given  to  the  word  'false' 


DISCHARGE  667 

in  clause  3.  In  my  opinion  the  argument  for  the  bankrupt  must 
rest  wholly  upon  the  conclusion  that  this  word  should  bear.  It 
is  unquestionably  a  flexible  word.  Sometimes  it  means  incorrect, 
or  not  true;  sometimes  it  includes  the  idea  of  wickedness  or 
fraud — as  in  §  29,  where  a  false  oath  is  evidently  a  corruptly 
false  oath,  such  as  would  subject  the  affiant  to  a  prosecution  for 
perjury.  That  'false'  means  no  more  in  clause  3  than  'not  true,' 
I  have  tried  to  establish  in  the  preceding  pages  of  this  opinion, 
and  if  I  have  failed  hitherto  to  give  good  reasons  to  my  belief 
I  am  sure  that  I  shall  not  strengthen  the  argument  by  stating 
them  again  in  somewhat  different  words. 

"The  decision  of  the  referee  is  reversed  and  the  clerk  is  di- 
rected to  enter  an  order  sustaining  the  first  objection  of  the 
Merchants'  National  Bank  to  the  bankrupt's  discharge."  v. 

Addressing  ourselves  to  the  question  thus  distinctly  raised,  it 
is  to  be  remarked  that  of  the  slk  reasons  for  refusing  a  discharge 
to  the  bankrupt,  as  set  forth  in  §  14&  of  the  bankrupt  act,  the 
five  that  relate  to  the  conduct  of  the  bankrupt,  unless  we  exclude 
the  third,  with  which  we  are  here  concerned,  all  imply  a  willful 
and  fraudulent  act  on  the  part  of  the  bankrupt,  or,  as  in  the  case 
of  the  sixth,  a  willful  and  intentional  defiance  of  a  lawful  order 
of  the  court.  And  they  all  imply  conduct  that  is  immoral,  or  at 
least  unworthy  in  one  seeking  the  reward  of  honesty  that  is  in- 
tended to  be  conferred  by  a  discharge.  In  the  recent  case.  In  re 
A.  B.  Carton  &  Co.  (D.  C.)  148  Fed.  63,  66,  Judge  Hough  in  the 
District  Court  for  the  Southern  District  of  New  York,  adopts  as 
a  terse  statement  of  his  views,  the  following  language ; 

'  *  The  policy  of  the  bankruptcy  act  is  founded  on  equal  rights 
and  privileges  to  all  creditors ;  it  is  not  intended  as  a  means  to 
punish  the  bankrupt  at  the  option  of  the  defrauded  creditor  only. 
Dkcharge  f rpm  debts  is  a  matter  of  favor  and  not  a  matter  of 
Qght.  Honesty  on  the  part  of  a  bankrupt  is  rewarded  by  a  dis- 
charge. Fraud  and  dishonesty  are  stamped  with  disapproval 
of  a  discharge.  Contumacy  on  the  witness  stand,  a  previous  dis- 
charge within  six  years,  obtaining  money  upon  false  statements, 
and  the  commission  of  an  offense  punishable  by  imprisonment 
under  the  act,  are  all  valid  objections  to  a  discharge,  and  are  not 
limited  to  the  defrauded  creditors  alone,  but  may  be  urged  by 
any  and  all  creditors.  It  is  the  fraudulent  conduct  that  is 
aimed  at,  and  not  retaliation  for  the  individual  loss." 

"We^fail  to  perceive  any  sufficient  ground  for  denying  to  the 
third  reason  for  refusing  a  discharge  to  the  bankrupt,  the  gen- 


668  DISCHARGE 

leral  characteristic  of  personal  misconduct  that  attaches  to  all 
i  the  others,  as  set  forth  in  the  said  section  of  the  bankrupt  act.  It 
would  indeed  be  a  harsh  construction,  and  at  variance  with  the 
general  policy  of  the  bankruptcy  act,  that  would  make  the  con- 
duct described  in  clause  3  an  exception  in  this  respect  to  the 
whole  category  of  acts  which  may  severally  deprive  the  bankrupt 
of  his  privilege  of  discharge.  It  is  a  construction  which  should 
not  unnecessarily  be  made. 

But  apart  from  the  incongruity  imported  into  this  section  of 
the  bankruptcy  act  by  such  construction,  it  seems  to  us  clear  that 
the  plain  language  of  this  third  clause  of  §  146  requires  that  the 
written  statement  made  by  the  bankrupt,  for  the  purpose  of  ob- 
taining credit,  etc.,  should  be  knowingly  and  intentionally  un- 
true, in  order  to  constitute  a  bar  to  the  discharge  of  the  bank- 
rupt. In  other  words,  "false  statement"  connotes  a  guilty  scien- 
ter on  the  part  of  the  bankrupt.  This  primary  and  ordinary 
meaning  of  the  word  "false"  cannot  be  ignored.  It  is  the  pri- 
mary meaning  given  in  the  ordinary  lexicons  of  the  English 
language.  Webster  gives  as  its  primary  meaning: — "Uttering 
falsehood;  unveracious;  given  to  deceit;  dishonest."  As  an  ad- 
jective, it  is  correlative  with  the  noun  "falsehood."  To  charge 
a  person  with  making  a  false  statement,  is  equivalent  to  charg- 
ing him  with  uttering  a  falsehood,  and  imputes  moral  delin- 
quency to  the  person  so  charged.  It  is  true  that  the  word  may 
have  a  secondary  meaning  in  certain  collocations,  and  be  merely 
equivalent  to  * '  untrue  "  or  "  incorrect. ' '  But  this  is  not  the  or- 
dinary or  usual  signification  attached  to  the  word.  To  charge  a 
person  with  making  false  entries  in  books  of  account,  means 
something  more  than  that  incorrect  or  untrue  entries  have  been 
made,  and  it  has  been  so  held  by  the  courts  in  the  consideration 
of  offenses  of  that  character.  The  last  edition  of  Bouvier's  Law 
Dictionary  says  of  the  word  "false,"  that  when  "applied  to 
the  intentional  act  of  a  responsible  being,  it  implies  a  purpose 
to  deceive. ' '  In  Black 's  Law  Dictionary,  under  the  title  ' '  false, ' ' 
it  is  said :  "  In  law,  this  word  means  something  more  than  un- 
true; it  means  something  designedly  untrue  and  deceitful,  and 
implies  an  intention  to  perpetrate  some  treachery  or  fraud." 
In  a  recent  and  well  accepted  publication  called  "Words  and 
Phrases,"  the  word  "false"  is  thus  defined: — "False  means  that 
which  is  not  true,  coupled  with  a  lying  intent."  Wood  v.  The 
State,  48  Ga.  192,  297,  15  Am.  Rep.  664.     "False  in  juris- 


DISCHARGE  669 

prudence  usually  imports  something  more  than  the  vernacular 
sense  of  'erroneous'  or  'untrue.'  " 

This  and  other  citations  in  the  petitioner's  brief,  establish  a 
jurisprudential  meaning  to  the  word  "false"  at  variance  with 
that  adopted  by  the  learned  judge  of  the  court  below. 

No  good  reason  has  been  suggested  why  Congress  should  have 
made  such  an  exception  to  the  character  of  the  acts  enumerated, 
as  severally  barring  the  discharge  of  the  bankrupt,  by  using  the 
word  *  *  false ' '  in  some  other  than  its  primary  and  obvious  mean- 
ing. 

But  it  is  not  without  significance  to  inquire  why  an  incorrect 
statement,  innocently  made  to  one  creditor,  should  bar  the  dis- 
charge of  the  bankrupt  as  to  all  his  other  debts,  whatever  be  its 
effect  as  to  the  debt  of  that  particular  creditor.  In  re  Carton  & 
Co.,  supra,  the  court  says: 

"It  is  the  act  of  issuing  a  materially  false  statement  and  the 
fraudulent  intent  of  the  man  who  issues  it,  that  the  statute  seeks 
to  punish  by  refusing  a  discharge.  It  should  not  depend  upon 
the  whim  or  good  nature  of  any  particular  creditor  to  whom  the 
false  statement  was  made,  whether  the  offending  bankrupt  should 
be  given  or  refused  his  discharge.  Any  'party  in  interest'  who 
chooses  to  bring  the  wrongful  act  to  the  attention  of  the  court, 
and  proves  that  it  was  wrong  within  the  meaning  of  the  stat- 
ute, is  entitled  so  to  do. "  ,    ; 

We  fully  concur  in  the  meaning  thus  attributed  to  the  clause 
in  question.  The  bankrupt  who  has  made  to  a  creditor,  for  the 
purpose  of  obtaining  credit,  a  false  statement, — that  is,  one  in- 
tentionally and  knowingly  untrue,  is  unworthy  of  the  privilege  of 
a  discharge  under  the  act,  and  the  court  will  act  upon  informa- 
tion brought  to  it  of  such  an  act  by  any  party  in  interest.  It 
will  be  at  once  conceded  on  all  hands,  that  such  a  bankrupt  is 
unworthy,  and  should  not  receive  the  favor  accorded  by  the 
law  to  the  honest  but  unfortunate  debtor.  Some  of  the  cases 
cited  by  the  appellee  conflict  with  the  view  here  stated,  .but  the 
weight  of  authority,  as  of  reason,  supports  it. 

We  think  that  the  court  below  erred  in  finding  that  the  word 
"false"  means  no  more  in  clause  3  than  "not  true,"  and  the 
order  of  the  said  court  is  hereby  revised  in  matter  of  law,  by 
directing  that  the  first  specification  of  grounds  of  opposition  to 
the  discharge  of  the  bankrupt,  filed  by  the  Merchants'  National 
Bank,  be  dismissed,  and  that  the  bankrupt  receive  his  discharge 


670  DISCHARGE 

in  accordance  with  the  recommendation  of  the  referee  in  that 
-     ,behalf.2    ,     .X 

-V;    y^^^  DIMOCK  V.  REVERE  COPPER  CO. 

^\iy\  \^  117  u.  S.  559,  29  L.  ed.  994 


^         (United  States  Supreme  Court.    April  5,  1886) 


■y^  ^j(  ^^^is  case  came  here  by  a  writ  of  error  to  the  Supreme  Court 
^  *-  of  New  York,  having  been  decided  in  the  Court  of  Appeals,  and 
^-  y,  the  record  remitted  to  the  Supreme  Court  that  judgment  might 
W^  be  finally  entered  there. 

The  action  was  brought  in  that  court  on  a  judgment  in  favor 
of  the  Revere  Copper  Company,  plaintiff,  against  Anthony  W. 
Dimock,  rendered  in  the  Superior  Court  of  the  Commonwealth 
of  Massachusetts,  for  the  county  of  Suffolk,  on  the  1st  day  of 
April,  1875. 

The  defendant,  Dimock,  pleaded,  in  bar  in  this  action,  a  dis- 
charge in  bankruptcy,  by  the  District  Court  of  the  United  States 
for  the  District  of  Massachusetts,  rendered  on  the  26th  day  of 
March,  1875,  five  days  before  judgment  in  the  State  Court. 

The  case  being  submitted  to  the  New  York  Supreme  Court  in 
special  term,  without  a  jury,  that  court  found  the  following  facts 
and  conclusions  of  law  thereon: 

"As  Findings  of  Fact. 

"First.  That  the  plaintiff  is,  and  at  the  times  hereinafter  men- 
tioned was,  a  corporation,  duly  organized  and  existing  under  and 
by  virtue  of  the  laws  of  the  Commonwealth  of  Massachusetts. 

"Second.  That  on  or  about  the  13th  day  of  January,  1874, 
the  Revere  Copper  Company  of  Boston,  Massachusetts,  the  plain- 
tiff herein,  commenced  an  action  in  the  Superior  Court  of  the 
Commonwealth  of  Massachusetts,  within  and  for  the  county  of 
Suffolk,  a  court  of  general  jurisdiction,  against  Anthony  W.  Di- 
mock, the  defendant  herein,  by  the  issue  of  a  writ  of  attachment 
against  the  goods,  estate,  and  body  of  the  said  defendant,  and 
which  said  writ  was  duly  served  on  said  defendant,  and  the  sum- 
mons to  appear  in  said  action  was  duly  served  upon  him  per- 
sonally,  and  that  the  said  defendant  thereafter  duly  appeared 
in  said  action  by  attorney ;  that  the  cause  of  action  was  an  in- 
dorsement of  said  Dimock  of  two  promissory  notes  made  in  the 

2 — The  principal  case  is  annotated 
in  20  L.  E.  A.  (N.  S.)  1023. 


DISCHARGE  671 

city  of  New  York  to  the  order  of  plaintiff  by  the  Atlantic  Mail 
Steamship  Company,  and  dated  December  19,  1872. 

'  *  Third.  That  on  or  about  June  23,  1874,  the  said  defendant, 
Anthony  W.  Dimock,  filed  a  petition  in  bankruptcy,  and  was  duly 
adjudicated  a  bankrupt,  in  the  District  Court  of  the  United  \ 
States  for  the  District  of  Massachusetts,  and  that  such  proceed-  \ 
ings  were  thereafter  had  that,  on  or  about  March  26,  1875,  the 
said  Dimock  was  discharged  from  all  debts  and  claims  provable 
against  his  estate,  and  which  existed  on  the  23d  day  of  June, 
1874. 

"Fourth.  That  such  proceedings  were  had  in  the  aforesaid 
action  in  the  Superior  Court  of  the  Commonwealth  of  Massa- 
chusetts that  on  or  about  April  1st,  1875,  the  plaintiff  duly  re- 
covered judgment  in  said  action  against  the  defendant  for  the 
sum  of  three  thousand  five  hundred  and  ninety-five  dollars  and 
fifteen  cents  ($3,595.15),  and  that  said  judgment  was  upon  that 
day  duly  entered. 

"Fifth.  That  no  part  of  said  judgment  has  been  paid,  and 
the  whole  thereof  is  now  due  and  payable  to  the  plaintiff. ' ' 

"As  Conclusions  of  Law. 

"I.  That  the  said  proceedings  in  bankruptcy  are  no  bar  to 
the  present  action,  and  constitute  no  defense  herein. 

"II.  That  the  plaintiff  should  have  judigment  against  the  de- 
fendant for  the  sum  of  three  thousand  five  hundred  and  ninety- 
five  dollars  and  fifteen  cents  ($3,595.15)  with  interest  from  April 
1st,  1875,  amounting  to  one  thousand  one  hundred  and  forty-two 
dollars  and  ninety-six  cents  ($1,142.96),  making  in  all  four  thou- 
sand seven  hundred  and  thirty-eight  dollars  and  eleven  cents 
($4,738.11),  together  with  the  costs  of  this  action,  to  be  taxed, 
and  an  allowance,  in  addition  to  costs,  amounting  to  the  sum  of 
seventy-five  dollars." 

The  judgment  rendered  on  these  findings  was  reversed  by  the 
Supreme  Court  in  general  term,  and  that  judgment  was  in 
turn  reversed  by  the  Court  of  Appeals,  which  restored  the  judg- 
ment of  the  special  term.    90  N.  Y.  33. 

Mr.  Justice  MILLER,  after  stating  the  facts  as  above  reported, 
delivered  the  opinion  of  the  court. 

The  only  question  considered  at  all  these  trials  was  whether\ 
the  discharge  of  the  defendant  in  the  bankruptcy  proceeding  isj 
under  the  facts  found  by  the  court,  a  bar  to  the  present  actionj[^ 


672  DISCHARGE 

and,  as  the  decision  by  the  New  York  court  against  the  plaintiff 
in  error  as  to  the  effect  of  that  order  of  discharge  is  to  refuse  to 
him  a  right  claimed  under  the  laws  of  the  United  States,  this 
court  has  jurisdiction  to  review  the  decision. 

The  Superior  Court  of  Massachusetts  had  jurisdiction  of  the 
suit  of  the  Copper  Company  against  Dimock,  both  as  regards  the 
subject-matter  and  the  parties.  This  jurisdiction  was  rendered 
complete  by  service  of  process  and  by  the  appearance  of  the 
defendant.  All  this  was  before  the  beginning  of  the  bankruptcy 
proceeding.  Nothing  was  done  to  oust  this  jurisdiction,  and  the 
case  accordingly  proceeded  in  due  order  to  the  rendition  of  the 
judgment  which  is  the  foundation  of  this  action.  It  is  not  argued 
that  this  judgment  was  void,  or  that  the  court  was  ousted  of  its 
jurisdiction  by  anything  done  in  the  bankruptcy  court.  No  such 
argument  could  be  sustained  if  it  were  made.  In  the  case  of 
Eyster  v.  Gaff,  91  U.  S.  521,  which  was  very  similar  to  this  on 
the  point  now  before  the  court,  it  was  said :  ' '  The  court  in  that 
case  had  acquired  jurisdiction  of  the  parties  and  of  the  subject- 
matter  of  the  suit.  It  was  competent  to  administer  full  justice, 
and  was  proceeding  according  to  the  law  which  governed  such 
a  suit  to  do  so.  It  could  not  take  judicial  notice  of  the  pro- 
ceedings in  bankruptcy  in  another  court,  however  seriously  they 
might  affect  the  rights  of  parties  to  the  suit  already  pending.  It 
was  the  duty  of  that  court  to  proceed  to  a  decree  between  the 
parties  before  it,  until  by  some  proper  pleadings  in  the  case  it 
was  informed  of  the  changed  relations  of  any  of  the  parties  to 
the  subject-matter  of  the  suit.  Having  such  jurisdiction,  and 
performing  its  duty  as  the  case  stood  in  that  court,  we  are  at  a 
loss  to  see  how  its  decree  can  be  treated  as  void."  The  court 
then  goes  on  to  show,  that,  if  the  assignee  had  brought  his  right, 
acquired  pendente  lite,  to  the  notice  of  the  court,  it  would  have 
been  protected.    Hill  v.  Harding,  107  U.  S.  631. 

So  here,  if  Dimock  had  brought  his  discharge  to  the  attention 
of  the  Superior  Court  at  any  time  before  judgment,  it  would 
have  been  received  as  a  bar  to  the  action,  and,  under  proper 
circumstances,  even  after  judgment,  it  might  be  made  the  foun- 
dation for  setting  it  aside  and  admitting  the  defense.  Ray  v. 
Wight,  119  Mass.  426;  Page  v.  Cole,  123  Mass.  93;  Golden  v. 
Blaskopf,  126  Mass.  523.  Nothing  of  the  kind  was  attempted. 
The  question  before  the  Massachusetts  court  for  decision,  at  the 
moment  it  rendered  its  judgment,  was,  whether  Dimock  was  then 
[indebted  to  the  Copper  Company.    Of  Dimock  and  of  this  ques- 


DISCHARGE  673 

tion  it  had  complete  jurisdiction,  and  it  was  bound  to  decide  it 
on  the  evidence  before  it.  Its  decision  was,  therefore,  conclusive, 
as  much  so  as  any  judgment  where  the  jurisdiction  is  complete. 
It  concluded  Mr.  Dimock  from  ever  denying  that  he  was  so  in- 
debted on  that  day,  wherever  that  judgment  was  produced  as 
evidence  of  the  debt.  If  he  had  the  means  at  that  time  to  prove 
that  the  debt  had  been  paid,  released,  or  otherwise  satisfied,  and 
did  not  show  it  to  the  court,  he  cannot  be  permitted  to  do  it  in 
this  suit;  and  the  fact  that  the  evidence  that  he  did  not  then 
owe  the  debt  was  the  discharge  in  bankruptcy,  made  five  days 
before,  does  not  differ  from  a  payment  and  receipt  in  full  or  a 
release  for  a  valuable  consideration.  Cromwell  v.  Sac  County, 
94  U.  S.  351 ;  also,  Claflin  v.  Houseman,  93  U.  S.  130,  134.  A 
still  stronger  case  of  the  validity  of  judgments  of  a  State  Court, 
in  their  relation  to  bankruptcy  proceedings,  had  pendente  lite,  is 
that  of  Davis  v.  Friedlander,  104  U.  S.  570.  In  the  case  of 
Thatcher  v.  Rockwell,  105  U.  S.  467,  469,  the  Chief  Justice,  after 
alluding  to  these  and  other  cases,  says,  they  "establish  the  doc- 
trine that,  under  the  late  bankrupt  law,  the  validity  of  a  pend- 
ing suit,  or  of  the  judgment  or  decree  thereon,  was  not  affected 
by  the  intervening  bankruptcy  of  one  of  the  parties;  that  the 
assignee  might  or  might  not  be  made  a  party;  and  whether  he 
was  so  or  not  he  was  equally  bound  with  any  other  party  acquir- 
ing an  interest  pendente  lite." 

It  is  said,  however,  that,  though  the  defendant  had  his  dis-^ 
charge  before  the  judgment  in  the  State  Court  was  rendered, 
and  might  have  successfully  pleaded  it  in  bar  of  that  action 
and  did  not  do  so,  the  judgment  now  sued  on  is  the  same  debt, 
and  was  one  of  the  debts  from  which,  by  the  terms  of  the  bank- 
rupt law,  he  was  discharged  under  the  order  of  the  bankruptcy 
court,  and  to  any  attempt  to  enforce  that  judgment  the  discharge 
may  be  shown  as  a  valid  defense.  That  is  to  say,  that  the  failure 
of  the  defendant  to  plead  it  when  it  was  properly  pleadable, 
when,  if  he  ever  intended  to  rely  on  it  as  a  defense,  he  was 
bound  to  set  it  up,  works  him  no  prejudice  because,  though  he 
has  a  dozen  judgments  rendered  against  him  for  this  debt  after 
he  has  received  his  discharge,  he  may  at  any  time  set  it  up  as 
a  defense  when  these  judgments  are  sought  to  be  enforced. 
Upon  the  same  principle,  if  he  had  appeared  in  the  State  Court 
and  pleaded  his  discharge  in  bar,  and  it  had  been  overruled  as 
a  sufficient  bar,  he  could,  nevertheless  in  this  action  on  that 
judgment,  renew  the  defense. 

H.  &  A.  Bankruptcy — 4  3 


674 


DISCHARGE 


^' 


But  in  such  case,  his  remedy  would  not  lie  in  renewing  the 
struggle  in  a  new  suit  on  such  judgment,  but  in  bringing  the 
first  judgment  for  review  before  this  court  where  his  right  under 
the  discharge  would  have  been  enforced  then,  as  he  seeks  to  do  it 
now,  after  submitting  to  that  judgment  without  resistance  and 
without  complaint. 

Ge  are  of  opinion  that,  having  in  his  hands  a  good  defense 
le  time  judgment  was  rendered  against  him,  namely,  the 
, r  of  discharge,  and  having  failed  to  present  it  to  a  court 

;  which  had  jurisdiction  of  his  case  and  of  all  the  defenses  which 
/  he  might  have  made,  including  this,  the  judgment  is  a  valid  judg- 
'  ment,  and  that  the  defense  cannot  be  set  up  here  in  an  action 
\  on  that  judgment.  The  case  of  Steward  v.  Green,  11  Paige,  535, 
sSfems  directly  in  point.  So  also  are  HoUister  v.  Abbott,  11 
Foster,  31  N.  H.  442,  and  Bradford  v.  Rice,  102  Mass.  472. 

It  is  clear  that  until  the  judgment  of  the  Massachusetts  court 
is  set  aside  or  annulled  by  some  direct  proceeding  in  that  court, 
its  effect  cannot  be  defeated  as  a  cause  of  action,  when  sued  in 
another  state,  by  pleading  the  discharge  as  a  bar  which  might 
have  been  pleaded  in  the  original  action. 

The  judgment  of  the  New  York  court  is  affirmed.^ 


3 — "The  execution  was  issued 
after  the  discharge  in  bankruptcy, 
and  appellee  filed  his  motion  to 
quash  on  the  ground  that  the  judg- 
ment was  a  partnership  debt  of  the 
firm  of  Munder  &  Stevenson.  Tes- 
timony was  introduced,  over  the  ob- 
jection of  appellant,  tending  to 
prove  that,  though  the  notes  upon 
which  the  judgment  was  rendered 
were  signed  individually,  they  were 
in  fact  obligations  of  the  firm,  and 
that  the  consideration  therefor  went 
to  the  firm.     •     •     • 

"The  effect  of  the  discharge  in 
bankruptcy  was  to  release  the  mem- 
bers of  the  firm  individually  and  as 
partners  from  all  the  provable  debts 
of  the  firm  save  those  specially  ex- 
cepted by  the  terms  of  the  statute, 
such  as  judgments  in  actions  for 
fraud  or  false  pretense,  etc. 

"The  discharge  is  the  judgment 
of  a  court  of  competent  jurisdiction 
and  cannot  be  collaterally  attacked. 


Collier  on  Bankruptcy,  p.  785;  Black 
on  Bankruptcy,  p.  88;  Loveland  on 
Bankruptcy,  p.  785;  Fuller  v.  Pease, 
144  Mass.  390;  Corey  v.  Eipley,  57 
Me.  69 ;  Bailey  v.  Carruthers,  71  Me. 
172;  Howland  v.  Carson,  28  Ohio 
St.,  625;  Milhous  v.  Aicardi,  51  Ala. 
594;  Stevens  v.  Brown,  49  Miss. 
597;  Brady  v.  Brady,  71  Ga.  71; 
Talbott  v.  Suit,  68  Md.  443. 

"It  is  contended  by  counsel  for 
appellant  that  the  discharge  was  not 
effective  to  release  appellee  from 
liability  individually  from  the  part- 
nership debts  because  he  failed  to 
include  his  individual  assets  in  the 
schedules.  If  it  has  been  shown  to 
the  bankruptcy  court  that  appellee 
owned  property  not  included  in  the 
schedules,  that  would  have  been 
ground  for  refusal  of  the  discharge, 
or  for  revocation  of  the  discharge  by 
that  court  after  it  had  been  granted; 
but  that  question  should  have  been 
litigated   in   the   bankruptcy   court, 


DISCHARGE  675 

CITIZENS'  LOAN  ASS'N  v.  BOSTON  &  M.  R.  R. 

196  Mass.  528,  82  N.  E.  696 

(Supreme  Judicial  Court  of  Massachusetts.    Nov.  27,  1907) 

Plaintiff  and  defendant  are  domestic  corporations.  On  Feb- 
ruary 27,  1905,  and  for  a  long  time  prior  thereto,  Steven  J. 
Wescott  was  in  the  employ  of  defendant  as  a  conductor.  On 
that  day  Wescott,  for  a  valuable  consideration,  and  as  security 
for  the  payment  of  a  note  given  by  him  to  plaintiff,  and  for 
money  loaned,  assigned  to  plaintiff  all  claims  which  he  might 
thereafter  have  against  defendant  for  moneys  becoming  due 
between  that  date  and  January  1,  1908,  for  services. 

RUGrG,  J.  The  single  question  presented  by  this  appeal  is 
whether  an  assignment  of  wages  to  be  earned  in  an  existing  em- 
ployment, given  before  bankruptcy,  without  fraud,  and  upon 
sufficient  consideration,  to  secure  a  valid  subsisting  debt,  and 
duly  recorded,  can  be  enforced,  after  the  discharge  in  bank- 
ruptcy of  the  assignor,  as  to  wages  earned  in  the  course  of  the 
original  employment,  by  the  creditor,  who  has  not  proved  his 
debt  in  bankruptcy.  A  debt  is  not  extinguished  by  a  discharge 
in  bankruptcy.  The  remedy  upon  the  debt,  and  the  legal,  but 
not  the  moral,  obligation  to  pay,  is  at  an  end.^  The  obligation 
itself  is  not  canceled.  Champion  v.  Buckingham,  165  Mass.  76, 
42  N.  E.  498 ;  Heather  v.  Webb,  2  C.  P.  D.  1.  An  assignment 
of  future  earnings,  which  may  accrue  under  an  existing  employ- 
ment, is  a  valid  contract  and  creates  rights,  which  may  be  en- 
forced both  at  law  and  in  equity,  whichever  may  in  a  par- 
ticular case  be  the  appropriate  forum.    Tripp  v.  Brownell,  12 

and  the  judgment  of  that  court  in  provable  claim  against  the  estate  of 
granting  the  discharge  is  conclusive  the  bankrupt  and  was  discharged. 
of  the  right  to  contest  it  on  that  Collier  on  Bankruptcy,  p.  191;  Love- 
ground,  land  on  Bankruptcy,  p.  760;  In  re 
"The  discharge  operates  only  Ehutassel,  96  Fed.  597;  In  re  Mus- 
upon  such  debts  as  were  provable,  sey,  99  Fed.  71 ;  In  re  Wright,  No. 
and  the  question  whether  or  not  a  18065,  Fed.  Cases."  Young  v. 
particular  debt  has  been  released  by  Stevenson,  73  Ark.  480,  482.  See 
it  is  left  to  be  determined  by  the  also  Custard  v.  Wigderson,  130  Wis. 
court  in  which  action  is  brought  to  412. 
enforce    the    debt.     It   was    proper, 

therefore,    for    the    court    to    enter  4 — Cf.     Matthewson  t.   Needham, 

upon  an  inquiry  whether  or  not  the  81  Kans.  340,  26  L.  E.  A.  (N.  S.) 

debt  in  controversy  was  in  fact  a  274. 


676  DISCHARGE 

Cush.  376;  Weed  v.  Jewett,  2  Mete.  608,  37  Am.  Dec.  115; 
Brackett  v.  Blake,  7  Mete.  335,  41  Am.  Dec.  442;  Hartey  v. 
Tapley,  2  Gray,  565 ;  Gardner  v.  Hoeg,  18  Pick.  168 ;  Taylor  v. 
Lynch,  5  Gray,  49 ;  Lannan  v.  Smith,  7  Gray,  150 ;  St.  Johns  v. 
Charles,  105  Mass.  262 ;  Lazarus  v.  Swan,  147  Mass.  330,  333,  17 
N.  E.  665 ;  James  v.  Newton,  142  Mass.  366,  8  N.  E.  122,  56 
Am.  Rep.  692.  These  cases  proceed  upon  the  theory  that  the 
worker  under  contract  for  service,  though  indefinite  as  to  time 
and  compensation  and  terminable  at  will,  has  an  actual  and  real 
interest  in  wages  to  be  earned  in  the  future  by  virtue  of  his  con- 
tract. He  may  recover  for  an  unjustifiable  interference  with 
such  an  employment,  as  for  an  injury  to  any  other  vested  prop- 
erty right.  Morgan  v.  Dunphy,  177  Mass.  485,  59  N.  E.  125, 
52  L.  R.  A.  115,  83  Am.  St.  Rep.  289 ;  Berry  v.  Donovan,  188 
Mass,  353,  74  N.  E.  603,  5  L.  R.  A.  (N.  S.)  899,  108  Am.  St. 
Rep.  499.  It  is  plain  that  one  may  sell  wool  to  be  grown  upon 
his  own  sheep,  or  a  crop  to  be  produced  upon  his  own  land,  but 
not  that  to  be  grown  or  produced  upon  the  sheep  or  land  of  an- 
other. No  more  can  one  assign  wages,  where  there  is  no  con- 
tract for  service.  Jones  v.  Richardson,  10  Mete.  481 ;  Low  v. 
Pew,  108  Mass.  347,  11  Am.  Rep.  357.  But  profitable  employ- 
ment is  a  reality.  Wages  to  be  earned  by  virtue  of  an  existing 
employment  are  no  more  shadowy  or  insubstantial  than  the  fleece 
of  next  spring  or  the  crop  of  the  following  autumn.  Money  to 
accrue  from  such  service  is  not  a  bare  expectancy  or  mere  pos- 
sibility, but  a  substance  capable  of  grasp  and  delivery.  It  con- 
stitutes a  present,  existing,  right  of  property,  which  n\Q,y  be  sold 
or  assigned  as  any  other  property.  Although  not  in  the  manual 
possession  of  the  assignor,  it  is  in  his  potential  possession.  The 
transfer  of  this  potential  possession  creates  the  assignee  a  lienor 
upon  the  property  right.  The  holder  of  such  an  assignment 
stands  upon  a  firmer  plane  than  the  mortgagee  of  future  ac- 
quired property,  who  has  only  the  right  by  contract  to  act  be- 
times in  the  future  for  his  protection.  Wasserman  v.  McDon- 
nell, 190  Mass.  326,  76  N.  E.  959.  The  assignee  of  wages  to  be 
earned  under  an  existing  contract  gets  a  present  right,  perfect 
in  itself,  requiring  no  future  action  on  his  part.  Contracts  for 
personal  service  are  of  such  a  character  that  their  breach  is  in 
appropriate  cases  enjoined.  Lumley  v.  Wagner,  1  De  G.,  M.  & 
G.  604 ;  Duff  V.  Russell,  133  N.  Y.  678,  31  N.  E.  622 ;  Whitwood 
Chemical  Co.  v.  Hardman  [1891]  2  Ch.  416.  See  Phila.  Base 
Ball  Club  V.  Lajoie,  202  Pa.  210,  51  Atl.  973,  58  L.  R.  A.  227, 


DISCHARGE  677 

90  Am.  St.  Rep.  627.  It  may  be  taken  for  granted  that  the  right 
to  future  wages  to  be  earned  under  such  a  contract  does  not  pass 
to  the  trustee  in  bankruptcy.  Nor  are  we  dealing  here  with  a 
contract  as  to  labor  in  terms  or  spirit  contrary  to  public  policy, 
as  in  Parsons  v.  Trask,  7  Gray,  473,  66  Am.  Dec.  502.  But  on 
the  contrary,  assignments  of  wages  are  recognized  as  valid  by 
statute.  Rev.  Laws,  c.  189,  §§  32,  33,  34;  Id.  c.  102,  §§  51,  57 
to  67,  both  inclusive ;  Id.  c.  106,  §  63.  The  present  case  is  not 
affected  by  St.  1905,  p.  224,  c.  308,  or  St.  1906,  p.  366,  c.  390. 
Specific  performance  of  contracts  to  labor  like  that  in  ques- 
tion will  not  be  enforced.  Arthur  v.  Oakes,  63  Fed.  310-318, 
11  C.  C.  A.  209,  25  L.  R.  A.  414;  Robertson  v.  Baldwin,  165 
U.  S.  275,  17  Sup.  Ct.  326,  41  L.  ed.  715.  It  is  only  where  labor 
has  been  voluntarily  performed  that  the  question  now  presented 
can  arise.  It  is  possible  that  an  agreement  to  execute  an  assign- 
ment, falling  short  of  the  creation  of  a  lien,  is,  when  the  wages 
have  been  actually  earned,  enforceable  in  equity,  even  after  a 
subsequent  bankruptcy  or  insolvency.  We  do  not  decide  this, 
however.  Edwards  v.  Peterson,  80  Me.  367,  14  Atl.  936,  6  Am. 
St.  Rep.  207 ;  Stott  v.  Franey,  20  Or.  410,  26  Pac.  271,  23  Am. 
St.  Rep.  132.  At  lowest  the  assignment  in  question  became  "a 
specific  equitable  lien  on  the  fund"  (Triste  v.  Child,  21  Wall. 
441,  22  L.  ed.  623),  or  was  "an  independent  collateral  agree- 
ment given  by  way  of  guaranty  or  other  security ' '  for  the  main 
debt,  and  there  is  no  reason  why  such  an  agreement  should  not 
outlive  the  remedy  upon  the  debt,  to  secure  which  it  was  given 
(Shaw  V.  Silloway,  145  Mass.  503,  507,  14  N.  E.  783).  In  either 
event,  it  was  not  dissolved  by  the  bankruptcy.  We  have  consid- 
ered the  contrary  authorities  of  In  re  West  (D.  C.)  128  Fed.  205, 
In  re  Home  Discount  Co.  (D.  C.)  147  Fed.  538,  and  Leitch  v. 
Northern  Pacific  Ry.  Co.,  95  Minn.  35,  103  N.  W.  704,  with  the 
deference  to  which  they  are  entitled.^  They  proceed  upon  con- 
siderations as  to  the  effect  of  an  assiignment  of  wages  and  the 
rights  vesting  thereunder  in  the  assignee,  as  well  as  public  pol- 
icy pointed  out  in  the  latter  case,  which  are  inconsistent  with 
what  we  conceive  to  be  sound  reasoning,  and  opposed  to  the 
numerous  decisions  of  this  court  above  cited  concerning  rights 
acquired  under  assignments  of  wages.  In  the  absence  of  a  de- 
cision to  the  same  effect  by  the  Supreme  Court  of  the  United 

5— See    also    In    re    Ludeke,    171      E.  A.  (N.  S.)  375,  137  Am.  St.  Rep. 
Fed.  292;  Levi  v.  Loevenhart  &  Co.,      377. 
138  Ky.  133,  127  S.  W.  748,  30  L. 


678  DISCHARGE 

States,  we  cannot  accede  to  them  as  authoritative.  Nor  do  we 
perceive  anything  inconsistent  with  the  conclusion  we  have 
reached,  in  Clark  v.  Clark,  17  How.  315,  15  L.  ed.  77,  East 
Lewisburg  v.  Marsh,  91  Pa.  96,  Christian  &  Craft  Grocery  Co. 
V.  Michael  &  Lyons,  121  Ala.  84-87,  25  South.  571,  77  Am.  St. 
Rep.  30,  Williams  v.  Chambers,  10  Q.  B.  337,  and  Hanover  Nat. 
Bank  v.  Moyses,  186  U.  S.  192,  22  Sup.  Ct.  857,  46  L.  ed.  1113, 
which  are  cited  as  generally  supporting  authorities  In  re  Home 
Discount  Co.,  uhi  supra. 

The  assignment  to  the  plaintiff  is  a  lien  which  was  preserved 
by  §  61  d  of  the  bankruptcy  act  of  July  1,  1898  (30  Stat.  564, 
e.  541  [U.  S.  Comp.  St.  1901,  p.  3450] ),  and  was  not  affected  by 
the  discharge  in  banki'uptcy  of  the  assignor.  This  conclusion 
is  supported  by  MaUin  v.  Wenham,  209  111.  252,  70  N.  E.  564, 
65  L.  R.  A.  602,  101  Am.  St.  Rep.  233. 

Judgment  aiBfirmed.^ 

EVANS  V.  STAALLE 

88  Minn.  253,  92  N.  W.  951 

(Supreme  Court  of  Minnesota.    Jan.  9,  1903) 

START,  C.  J.  Action  in  the  District  Court  of  the  county  of 
Murray  to  enforce  a  resulting  trust  in  favor  of  the  plaintiff  as 
a  creditor  of  the  defendant's  husband,  Christ  Staalle,  hereafter 
designated  as  the  "debtor."  The  facts,  in  brief,  as  established 
by  the  verdict  of  the  jury  and  the  findings  of  the  trial  judge, 
are  substantially  these:  In  the  year  1892  the  debtor  was  in- 
debted to  the  plaintiff  in  the  aggregate  sum  of  $117.25,  and  on 
November  11,  1897,  the  plaintiff  duly  recovered  and  docketed  a 
judgment  against  him  therefor  in  the  sum  of  $224.17,  including 
interest  and  costs.  On  March  19,  1901,  execution  was  duly  is- 
sued on  the  judgment,  and  returned  wholly  unsatisfied.  On 
November  28  and  December  19,  1900,  respectively,  land  aggre- 
gating 160  acres,  being  the  two  tracts  of  80  acres  each  described 
in  the  complaint,  was  conveyed  to  the  defendant  by  the  then 
owners  thereof.  The  debtor  paid  one-third  of  the  consideration 
for  the  conveyance  of  such  tracts  of  land,  and  the  title  was  taken 
in  the  name  of  the  defendant  as  grantee  to  hinder  and  defraud 
the  creditors  of  the  debtor.     This  action  was  commenced  in 

6 — See  note  to  principal  ease  in 
14  L.  K.  A.  (N.  S.)  1025. 


DISCHARGE  679 

April,  1901,  and  the  complaint  alleged,  with  others,  the  facts 
we  have  stated.  The  answer  of  the  defendant  to  the  complaint 
admitted  that  the  tracts  of  land  described  in  the  complaint  were 
conveyed  to  her  at  the  dates  stated  in  the  complaint,  and  denied 
the  other  allegations  thereof.  On  April  6,  1902,  the  defendant 
moved  the  court  for  leave  to  serve  an  amended  and  supplemental 
answer,  setting  up  the  fact  that  on  November  16,  1901,  the 
debtor,  Christ  Staalle,  was  discharged  in  bankruptcy  from  all 
of  his  debts  existing  on  January  19,  1901,  on  which  day  he  filed 
his  petition  for  adjudication  under  the  act  of  congress  relating 
to  bankruptcy.  The  motion  was  denied,  and  the  trial  proceeded 
upon  the  original  pleadings.  The  trial  court,  as  a  conclusion  of 
law,  directed  judgment  in  favor  of  the  plaintiff  to  the  effect  that 
the  defendant  holds  the  title  to  an  undivided  one-third  of  the 
two  tracts  of  land  here  in  question  in  trust  for  the  plaintiff  to 
the  amount  of  his  judgment,  which  is  a  lien  thereon,  and,  fur- 
ther, that  the  plaintiff  is  entitled  to  a  lien  on  a  third  tract  of 
land  to  the  extent  of  $51.92,  as  to  which  it  is  unnecessary  to 
state  the  facts.  Judgment  was  so  entered,  from  which  the  de- 
fendant appealed. 

1.  The  first  assignment  of  error  to  be  considered  is  that  the 
complaint  does  not  allege  facts  constituting  a  cause  of  action, 
because  it  does  not  state  that  the  debtor  was  ever  the  owner  of 
any  interest  in  the  land  in  question,  nor  that  he  was  ever  the 
owner  of  any  of  the  consideration  paid  therefor,  nor  any  facts 
tending  to  show  any  intention  to  defraud  any  of  his  creditors, 
or  that  any  of  them  were  defrauded.  No  one  of  these  objections 
to  the  complaint  is  well  taken.  The  complaint  alleges  that  the 
land  in  question  was  conveyed  to  the  defendant,  and  that  the 
purchase  price  thereof  was  paid  by  the  judgment  debtor,  and 
the  title  thereto  taken  in  the  name  of  the  defendant  to  defraud 
creditors.  Upon  these  facts  there  presumptively  arose  a  trust 
in  favor  of  the  creditors  of  the  debtor  at  the  time  such  convey- 
ance was  made.  It  was  only  necessary  to  allege  such  facts  in 
the  complaint.  Gen.  St.  1894,  §  4281 ;  Rogers  v.  McCauley,  22 
Minn.  384.  It  was  sufficient  to  allege  in  the  complaint  that  the 
debtor  paid  the  purchase  price,  without  also  alleging  that  he 
was  the  owner  thereof.  The  legal  title  to  the  land  was  vested 
in  the  defendant  by  the  conveyance  to  her,  and  no  interest  or  trust 
in  the  land  resulted  in  favor  of  the  debtor  by  reason  of  his  pay- 
ing part  of  the  purchase  price  or  otherwise.  Subject  to  the  trust 
in  favor  of  then  existing  creditors,  the  defendant  became,  by  the 


680  DISCHARGE 

conveyance,  the  absolute  owner  of  the  land.  Gen.  St.  1894, 
§  4281.  Such  being  the  effect  of  the  conveyance  to  the  defendant, 
it  would  have  been  absurdly  untrue  to  have  alleged  in  the  com- 
plaint that  the  debtor  had  some  interest  in  the  land. 

2.  The  order  of  the  court  denying  the  defendant's  motion  to  file 
a  supplemental  answer  pleading  the  debtor's  discharge  in  bank- 
ruptcy is  urged  as  error.  The  trial  court,  in  the  exercise  of  a 
fair  discretion,  might  well  have  denied  the  motion  on  the  ground 
that  it  was  not  made  with  reasonable  promptness.  But,  this 
aside,  the  order  was  right  on  the  merits,  for  the  debtor's  dis- 
charge was  immaterial.  No  title  to  the  land  passed  to  the  trus- 
tee in  bankruptcy.  The  discharge  in  bankruptcy  did  not  pay 
or  extinguish  the  plaintiff's  debt,  nor  relieve  the  defendant's 
land  from  the  trust  with  which  it  was  charged  by  operation  of 
law  for  the  payment  of  the  debt.  The  only  effect  of  the  dis- 
charge was  to  relieve  the  debtor  from  all  legal  obligations  to 
pay  the  debt,  leaving  all  liens  or  trusts  securing  the  debt  unim- 
paired. Lowell,  Bankr.  §§242-244;  Smith  v.  Stanchfield,  84 
Minn.  343,  87  N.  W.  917.  Now,  when  the  land  in  this  case  was 
conveyed  to  the  defendant  upon  a  consideration  paid  by  the 
debtor,  a  trust  in  favor  of  the  plaintiff  as  a  creditor  attached  to 
the  land  to  the  extent  necessary  to  satisfy  his  debt,  which  could 
be  defeated  only  by  disproving  any  fraudulent  intent.  This 
trust  could  be  enforced  after  the  debtor's  discharge,  although 
all  personal  remedies  against  him  to  secure  payment  of  the  debt 
had  been  thereby  extinguished,  precisely  the  same  as  a  mortgagee 
may  foreclose  his  lien  on  the  mortgaged  premises,  and  thereby 
secure  payment  of  his  debt,  although  an  action  to  recover  it 
from  the  mortgagor  be  barred  by  the  statute  of  limitations. 

Slingerland  v.  Sherer,  46  Minn.  422,  49  N.  W.  237. 

«     *     * 

Judgment  affirmed. 

;„  BROWN  &  BROWN  COAL  CO.  v.  ANTEZAK 

164  Mich.  110,  128  N.  W.  774 

(Supreme  Court  of  Michigan.     Dec.  7,  1910) 

This  action  was  commenced  by  attachment  in  the  justices' 
court  of  Detroit,  December  30,  1907.  On  January  2,  1908,  the 
attached  property  was  released  upon  the  giving  of  the  statutory 
bond.     On  February  8,  1908,  judgment  was  rendered  in  favor 


DISCHARGE  681 

of  the  plaintiff  for  $405.94  and  costs.  On  March  2,  1908,  an 
appeal  was  taken  to  the  Circuit  Court  for  the  county  of  Wayne. 
In  perfecting  the  appeal  the  usual  statutory  bond  was  given; 
one  John  Knuth  becoming  surety  thereon.  While  said  appeal 
was  pending  and  13  months  after  it  was  taken,  the  defendant, 
on  April  7,  1909,  filed  a  voluntary  petition  in  bankruptcy  in  the 
United  States  District  Court.  On  July  16,  1909,  the  appeal  not 
having  been  prosecuted  or  determined,  plaintiff  made  a  motion 
to  dismiss.  On  July  26,  1909,  defendant  secured  an  order  stay- 
ing proceedings  in  the  Wayne  Circuit  Court  until  the  final  de- 
termination of  the  bankruptcy  proceedings  in  the  United  States 
District  Court.  In  the  bankruptcy  proceeding  the  judgment 
here  in  question  was  listed  as  a  liability  of  the  bankrupt,  and  a 
final  discharge  was  by  him  obtained  on  September  21,  1909.  On 
October  4,  1909,  defendant  filed  an  amended  plea,  giving  notice 
of  his  discharge,  and  on  December  10,  1909,  the  case  came  on 
for  trial  in  the  Wayne  Circuit  Court.  No  defense  upon  the 
merits  was  interposed  by  defendant,  but  it  was  urged  in  his  be- 
half that  his  discharge  in  the  bankruptcy  proceeding  operated, 
not  only  to  cancel  his  indebtedness  to  plaintiff,  but  likewise  re- 
leased the  surety  upon  the  appeal  bond.  It  was  conceded  upon 
the  trial  that,  unless  the  discharge  of  defendant  released  the 
surety,  plaintiff  was  entitled  to  a  judgment  for  the  amount  of 
the  judgment  in  the  justice  court,  with  interest.  There  being 
no  question  of  fact  involved,  by  consent  of  counsel,  the  case  was 
tried  by  the  court  without  a  jury.  A  verdict  was  directed  for 
defendant,  upon  which  judgment  was  entered.  Plaintiff  has  re- 
moved the  ease  to  this  court  by  writ  of  error. 

BROOKE,  J.  (after  stating  the  facts  as  above).  From  the 
foregoing  statement  of  facts,  it  will  be  seen  that  the  only  ques- 
tion to  be  determined  is  whether  or  not  the  discharge  which 
defendant  obtained  in  the  bankruptcy  proceedings  operates  as 
a  bar  to  the  taking  of  a  judgment  against  his  surety  upon  the 
appeal  bond.  The  obligation  of  the  bond  is  as  follows: 
"Whereas,  judgment  was  rendered  on  the  26th  day  of  February, 
A.  D.  1908,  by  Louis  Ott,  one  of  the  justices  of  the  peace  in  and 
for  the  county  of  Wayne,  in  favor  of  the  above-named  Brown 
&  Brown  Coal  Company,  as  plaintiff,  and  against  the  above- 
bounden  Stanislaus  Antezak,  as  defendant,  for  the  sum  of 
405.94  dollars,  damages,  and  3.00  dollars,  costs  of  suit,  and 
whereas  the  above-bounden  Stanislaus  Antezak,  conceiving  him- 


682  DISCHARGE 

self  aggrieved  by  said  judgment,  has  appealed  therefrom  to  the 
Circuit  Court  for  the  county  of  "Wayne:  Now,  therefore,  the 
condition  of  the  above  obligation  is  such,  that  if  the  above- 
bounden  Stanislaus  Antezak  shall  prosecute  his  said  appeal  with 
all  due  diligence  to  a  decision  in  the  said  Circuit  Court,  and  if 
a  judgment  be  rendered  against  him  in  the  said  Circuit  Court, 
shall  pay  the  amount  of  such  judgment,  including  all  the  costs, 
with  interest  thereon,  and  in  case  the  said  appeal  shall  be  dis- 
continued or  dismissed,  if  the  said  Stanislaus  Antezak  shall  pay 
the  amount  of  said  judgment  rendered  against  him  in  said  jus- 
tice court,  including  all  costs  with  interest  thereon,  then  this 
obligation  to  be  void,  otherwise  in  force.  [Signed]  Stanislaus 
Antezak.     [Seal.]      [Signed]  John  Knuth.     [Seal.]" 

§  16,  National  Bankruptcy  Law  1898,  provides:  "The  liabil- 
ity of  a  person,  who  is  a  co-debtor  with  or  guarantor  or  in  any 
manner,  a  surety  for  a  bankrupt,  shall  not  be  altered  by  the 
discharge  of  such  bankrupt."  Act  July  1,  1898,  c.  541,  30  Stat. 
550  (U.  S.  Comp.  St.  1901,  p.  3428). 

This  identical  question  was  considered  in  the  case  of  Knapp 
V.  Anderson,  15  N.  B.  R.  316.  The  language  of  the  bankrupt 
act  of  1867  is,  in  effect,  the  same  as  that  of  the  act  of  1898 
above  quoted.  Act  March  2,  1867,  c.  176,  §  33,  14  Stat.  533. 
The  court,  after  discussing  the  obligation  of  an  indorser,  said: 
"So  with  the  surety.  He  agrees  to  pay  if  the  event  happens 
which  matures  his  obligation  to  pay.  He  assumes  to  pay,  and 
incurs  the  obligation  to  do  so,  which  may  become  absolute.  The 
design  of  an  undertaking  and  the  effect  of  it  are  proper  matters 
of  consideration  on  the  question.  The  undertaking  stays  all  pro- 
ceedings, and  the  effect  is  to  prevent  the  creditor  from  enforcing 
his  judgment  by  execution,  and  in  that  mode  obtaining  his  debt 
out  of  the  property  of  his  debtor.  The  sureties  in  the  under- 
taking prevent  him  from  availing  himself  of  this  right  and  op- 
portunity, to  which  he  is  entitled  by  the  law  of  the  land  and  by 
his  superior  diligence.  This  right  can  be  destroyed  in  all  cases 
if  the  debtor,  by  appeal,  and  by  subsequent  proceedings  in  bank- 
ruptcy before  a  judgment  of  affirmance,  can  release  himself  and 
his  sureties  as  well.  It  was  doubtless  to  prevent  such  and  kin- 
dred results  that  the  law  declared  the  discharge  should  not  re- 
lease or  affect  any  person  liable  for  the  same  debt  for  or  with 
the  bankrupt,  either  as  partner,  contractor,  indorser,  surety,  or 
otherwise.  It  is  a  personal  relief  given  to  the  applicant,  or 
forced  upon  him,  and  not  to  those  equally  bound  with  him  to 


DISCHARGE  683 

answer  his  creditor.  *  *  *  A  surety  is  rarely  primarily  lia- 
ble. His  obligation  usually  depends  upon  a  contingency,  which 
is  either  an  event  to  occur,  or  the  failure  of  the  principal  to  pay 
or  to  do  the  act  required. ' ' 

In  Holyoke  v.  Adams,  10  N.  B.  R.  270,  it  was  held  that  a  dis- 
charge in  bankruptcy  did  not  release  the  sureties  upon  a  bond 
given  in  attachment  proceedings,  commenced  more  than  four 
months  before  the  bankruptcy  proceedings  were  launched. 

The  case  of  In  re  Wm.  Albrecht,  17  N.  B.  R.  287,  Fed.  Cas. 
No.  145,  arose  in  Michigan,  and  the  opinion  was  written  by 
Judge  Brown,  later  Justice  of  the  United  States  Supreme  Court. 
In  that  case,  the  authorities  are  reviewed,  and  the  conflict  be- 
tween them  is  noted.  The  court  concludes:  "I  deem  it  incon- 
sistent with  the  general  purpose  of  the  act  to  hold  that  the  lien 
of  the  creditor,  lawfully  acquired  by  his  diligence,  shall  be  lost 
by  the  debtor  giving  a  bond  to  satisfy  the  judgment,  an  action 
entirely  beyond  the  control  of  the  creditor,  and  one  which  was 
designed  to  secure,  not  to  defeat,  the  ultimate  payment  of  the 
debt.  *  *  *  But  under  the  construction  given  by  the  Mas- 
sachusetts courts,  the  preference  of  the  attaching  creditor  is  lost, 
if  the  debtor  is  sufficiently  responsible  to  obtain  a  bond,  while 
it  is  preserved,  if  his  situation  is  so  desperate  as  to  make  the 
release  of  the  property  impossible." 

In  Hill  V.  Harding,  107  U.  S.  631,  2  Sup.  Ct.  404,  27  L.  ed. 
493,  Mr.  Justice  Gray,  speaking  for  the  court,  said :  ' '  The  stay 
does  not  operate  as  a  bar  to  the  action,  but  only  as  a  suspension 
of  proceedings  until  the  question  of  the  bankrupt's  discharge 
shall  have  been  determined  in  the  United  States  Court  sitting 
in  bankruptcy.  After  the  determination  of  that  question  in  that 
court,  the  court  in  which  the  suit  is  pending  may  proceed  to 
such  judgment  as  the  circumstances  of  the  case  may  require. 
If  the  discharge  is  refused,  the  plaintiff,  upon  establishing  his 
claim,  may  obtain  a  general  judgment  If  the  discharge  is 
granted,  the  court  in  which  the  suit  is  pending  may  then  deter- 
mine whether  the  plaintiff  is  entitled  to  a  special  judgment  for 
the  purpose  of  enforcing  an  attachment  made  more  than  four 
months  before  the  commencement  of  the  proceedings  in  bank- 
ruptcy, or  for  the  purpose  of  charging  sureties  upon  a  bond 
given  to  dissolve  such  an  attachment."  This  case  was  again 
before  the  United  States  Supreme  Court  (130  U.  S.  699,  9  Sup. 
Ct.  725,  32  L.  ed.  1083),  where  it  said:  "If  the  bond  was 
executed  before   the   commencement   of  proceedings  in   bank- 


684  DISCHARGE 

ruptcy,  the  discharge  of  the  bankrupt  protects  him  from  liability 
to  the  obligees,  so  that,  in  an  action  on  the  bond  against  him  and 
his  sureties,  any  judgment  recovered  by  the  plaintiffs  must  be 
accompanied  with  a  perpetual  stay  of  execution  against  him; 
but  his  discharge  does  not  prevent  that  judgment  from  being 
rendered  generally  against  them" — citing  Wolf  v.  Stix,  99  U,  S. 
1,  25  L.  ed.  309. 

A  very  well  considered  case  involving  the  question  in  dispute 
will  be  found  in  Fisse  v.  Einstein,  5  Mo.  App.  78.  After  dis- 
cussing the  Massachusetts  decisions  and  those  of  some  other 
states  to  the  contrary,  the  court  says :  "To  hold  that  the  surety 
in  this  appeal  is  to  be  released  because  there  can  be  no  formal 
entry  of  judgment  against  his  principal  in  the  Appellate  Court, 
though  there  is  a  solemn  admission  in  that  court  of  the  perfect 
correctness  and  justice  of  the  judgment  from  which  this  appeal 
is  taken,  is  to  denaturalize  the  transaction,  and  to  give  an  inter- 
pretation to  the  appeal  bond  quite  foreign  to  its  scope  and  mean- 
ing. It  is  to  say  that  the  surety,  whilst  engaging  to  pay  the 
judgment  appealed  from  if  the  judgment  debtor  becomes  in- 
solvent, is  to  be  released  merely  because  the  judgment  debtor 
becomes  insolvent.  *  *  *  The  insolvency  of  the  principal  is 
the  very  contingency  against  which  the  appeal  bond  was  in- 
tended to  provide."  See,  also,  Farrell  v.  Finch,  40  Ohio  St. 
337 ;  Cyc.  vol.  5,  p.  401,  and  cases  cited. 

We  do  not  overlook  the  fact  that  several  states,  notably  Mas- 
sachusetts (see  Carpenter  v.  Turrell,  100  Mass.  452,  and  Hamil- 
ton V.  Bryant,  114  Mass.  543),  have  given  a  different  construc- 
tion to  the  statute.  This  is,  however,  a  federal  statute,  and  we 
are  of  opinion  that  the  construction  it  has  received  in  the  fed- 
eral courts  should  control,  if  that  construction  is  not  inconsistent 
with  our  own  decisions  and  is,  as  we  believe  it  to  be,  in  accord- 
ance with  the  principles  of  justice. 

It  is  urged  that  no  federal  question  is  involved.  While  in  one 
sense  that  may  be  true,  yet,  under  the  record  as  it  stands,  the 
only  obstacle  to  the  recovery  of  a  judgment  by  the  plaintiff 
against  both  principal  and  surety  is  the  fact  that  a  federal  law 
says  that  under  a  certain  contingency  (which  has  arisen)  the 
principal  is  relieved  from  the  debt.  That  same  law,  in  terms, 
and  as  construed  by  the  federal  courts,  says  that  the  release  of 
the  principal  shall  not  operate  to  discharge  his  surety.  Nor  is 
this  construction  one  which  is  unduly  harsh  as  to  the  surety.  In 
signing  the  obligation,  he  may  be  presumed  to  have  had  in  mind 


DISCHARGE  685 

the  contingency  that  his  principal  might  become  bankrupt,  thus 
making  the  surety's  liability  upon  the  bond  certain. 

We  have  not  heretofore  discussed  the  conditions  of  the  bond 
itself.  The  first  condition  is:  "That  if  the  above-bounden 
Stanislaus  Antezak  shall  prosecute  his  said  appeal  with  aU  due 
diligence  to  a  decision  in  the  said  Circuit  Court,"  etc.  Now, 
did  the  principal  comply  with  this  condition  of  his  bond?  In- 
stead of  prosecuting  his  appeal,  he  voluntarily  sought  relief 
through  bankruptcy  in  the  Federal  Court,  and  interposed  that 
proceeding  first  for  the  purpose  of  securing  a  stay  of  proceed- 
ings, and  finally  as  an  absolute  bar  to  a  recovery  These  acts 
are  clearly  inconsistent  with  his  obligation  as  expressed  in  the 
bond.  Whether  or  not  they  constitute  such  a  breach  thereof  as 
would  render  the  surety  liable  we  do  not  decide,  for,  in  our 
view  of  the  decisions,  the  liability  of  the  surety  would  remain 
the  same  even  though  the  bankruptcy  were  involuntary. 

Our  attention  is  called  to  the  case  of  Bryant  v.  Kinyon,  127 
Mich.  152,  86  N.  W.  531,  53  L.  R.  A.  801.  We  there  held  that 
a  discharge  in  bankruptcy  released  the  surety  upon  a  capias 
bond.  The  condition  of  that  bond  is  that  the  principal  "shall 
pay  the  costs  and  condemnation  of  the  court  or  render  himself 
into  the  custody  of  the  sheriff,"  etc. 

The  right  of  the  surety  to  surrender  his  principal  extends 
eight  days  from  the  commencement  of  suit  on  the  recognizance, 
after  the  timely  and  regular  issue  and  return  "not  found"  of 
a  body  execution.  If  the  debt  for  which  the  original  suit  was 
brought  is  extinguished  by  the  bankruptcy  proceeding,  no  body 
execution  can  ever  issue,  and  the  contingency  which  fixes  the 
liability  of  the  surety  can  never  arise.  The  case  at  bar  does  not 
present  this  difficulty.  Here,  as  stated  by  the  United  States 
Supreme  Court,  a  judgment  may  issue  against  the  principal  ac- 
companied by  a  perpetual  stay  of  execution,  and  the  surety  may 
be  compelled  to  answer  according  to  the  terms  of  his  obligation. 

The  judgment  is  reversed,  and  a  new  trial  ordered.'^ 

7 — On  motion  to  amend  judgment  will  be  entered  for  the  plaintiff  in 

the   court   amended    the   opinion    to  the  amount  of  the  judgment  in  the 

read  as  follows:  "The  judgment  is  justice's  court,  with  interest."   164 

reversed,  and  the  case  is  remanded  Mich.  116,  130  N".  W.  305. 
to  the  circuit  court,  where  judgment 


686     /^  /  DISCHARGE 

V    v/^   ,/^  BLUTHENTHAL  v.  JONES 

r     JlA^  208  U.  S.  64,  52  L.  ed.  390,  28  Sup.  Ct.  192 

i^  (United  States  Supreme  Court.    January  6,  1908) 

Mr.  Justice  MOODY  delivered  the  opinion  of  the  court: 
This  is  a  writ  of  error  to  the  Supreme  Court  of  the  state  of 
Florida.     The  plaintiffs  in  error  were  judgment  creditors  of 
Miles  C.  Jones,  the  intestate  of  the  defendant  in  error.     The 
•creditors^sought  to  enforce  the  judgment  by  a  levy  of  execution. 
The  question  in  the  case  is  whether  Jones  was  discharged  Irom 
the  debt  by  a  discharge  in  bankruptcy  granted  to  him  on  Novem- 
ber 7,  1903,  by  the  District  Court  for  the  southern  district  of 
Florida,  on  proceedings  which  were  begun  on  August  3,  1903. 
The  debt  was  one  provable  in  the  bankruptcy  proceeding,  and, 
it  is  conceded,  would  be  barred  by  the  discharge,  were  it  not 
that  there  had  been  a  prior  proceeding  in  bankruptcy  in  another 
district  court,  which,  it  is  contended,  had  the  effect  of  exempting 
the  debt  from  the  operation  of  the  discharge.    In  the  year  1900, 
Jones  filed  his  petition  in  bankruptcy  in  the  District  Court  for 
the  southern  district  of  Georgia.     Bluthenthal  &  Bickart,  the 
plaintiffs  in  error,  objected  to  the  discharge  in  that  proceeding, 
and  it  was  refused  on  December  3,  1900.    Bluthenthal  &  Bickart, 
at  the  time  of  the  first  proceeding,  were  creditors  of  Jones  in 
I  respect  of  what  may  be  assumed,  for  the  purposes  of  this  case, 
/to  be  the  same  indebtedness  now  in  question.    The  ground  of  the 
I  refusal  does  not  appear.    It  may  be  assumed  to  have  been,  how- 
^  ever,  one  of  the  two  grounds  specified  in  §  14  of  the  bankruptcy 
act    [30  Stat,  at  L.  550,  c.  541,  U.   S.   Comp.   Stat.  1901,  p. 
3427]   before  it  was  amended  by  the  act  of  February  5,  1903 
[32  Stat,  at  L.   797,  c.  487,  U.   S.   Comp.   Stat.   Supp.   1907, 
p.  1026]  ;  that  is  to  say,  either  that  the  bankrupt  has  committed 
an  offense  punishable  by  imprisonment,  or,  with  fraudulent  in- 
tent and  in  contemplation  of  bankruptcy,  destroyed,  concealed, 
)or  failed  to  keep  books  of  accounts.     Though  Bluthenthal  & 
I  Bickart  were  notified  of  the  proceedings  on  tTie' second  petition 
fqr  bankruptcy  and  their  debt  was  scheduled,  they  did  not  prove 
their  claim  or  participate  in  any  w^y  in  those  proceedings.    They 
now  claim  that  their  debt  was  not  affected  by  the  discharge  on 
account  of  the  adjudication  in  the  previous  proceedings. 

§  1  of  the  bankruptcy  act  defines  a  discharge  as  "the  release 
of  a  bankrupt  from  all  of  his  debts  which  are  provable  in  bank- 


DISCHARGE  687 

ruptcy,  except  such  as  are  excepted  by.  this  act. "  §  14  of  the 
amended  act,  which  was  applicable  to  the  second  proceedings, 
provides  that  after  due  hearing  the  court  shall  discharge  the 
bankrupt,  unless  he  has  committed  one  of  the  six  acts  specified 
in  that  section.  §  17  of  the  amended  act  provides  that  a  dis- 
charge in  bankruptcy  shall  release  a  bankrupt  from  all  of  his 
provable  debts,  with  four  specified  exceptions,  which  do  not 
cover  this  case.  The  discharge  appears  to  have  been  regularly 
granted,  and,  as  the  debt  due  to  Bluthenthal  &  Bickert  is  not 
one  of  the  debts  which,  by  the  terms  of  the  statute,  are  excepted 
from  its  operation,  on  the  face  of  the  statute  the  bankrupt  was 
discharged  from  the  debt  due  to  them.  There  is  no  reason  shown 
in  this  record  why  the  discharge  did  not  have  the  effect  which 
it  purported  to  have.  Undoubtedly,  as  in  all  other  judicial  pro- 
'ceedings,  an  adjudication  refusing  a  discharge  in  bankruptcy, 
"finally  determines,  for  all  time  and  in  all  courts,  as  between 
tEbse  parties  or  privies  to  it,  the  facts  upon  which  the  refusal 
was  based.  But  courts  are  not  bound  to  search  the  records  of 
other  courts  and  give  effect  to  their  judgments.  If  there  has 
been  a  conclusive  adjudication  of  a  subject  in  some  other  court, 
it  is  the  duty  of  him  who  relies  upon  it  to  plead  it  or  in  some 
manner  bring  it  to  the  attention  of  the  court  in  which  it  is 
sought  to  be  enforced.  Plaintiffs  in  error  failed  to  do  this. 
When  an  application  was  made  by  the  bankrupt  in  the  District 
Court  for  the  southern  district  of  Florida,  the  judge  of  that 
court  was,  by  the  terms  of  the  statute,  bound  to  grant  it,  unless 
upon  investigation  it  appeared  that  the  bankrupt  had  committed 
one  of  the  six  offenses  which  are  specified  in  §  14  of  the  bank- 
ruptcy act  as  amended.  An  objecting  creditor  might  have 
proved  upon  that  application  that  the  bankrupt  had  committed 
one  of  the  acts  which  barred  his  discharge,  either  by  the  produc- 
tion of  evidence  or  by  showing  that  in  a  previous  bankruptcy 
proceeding  it  had  been  conclusively  adjudicated,  as  between  him 
and  the  bankrupt,  that  the  bankrupt  had  committed  one  of  such 
offenses.  If  that  adjudication  had  been  proved,  it  would  have 
taken  the  place  of  other  evidence  and  have  been  final  ui>on  the 
parties  to  it.  But  nothing  of  this  kind  took  place.  Bluthenthal] 
&  Bickart  intentionally  remained  away  from  the  court  and/ 
allowed  the  discharge  to  be  granted  without  objection.  -^ 

Since  the  debt  due  to  the  plaintiffs  in  error  was  a  debt  prov- 
able in  the  proceedings  before  the  District  Court  of  Florida, 
and  was  not  one  of  the  debts  exempted  by  the  statute  from  the 


688  DISCHARGE 

operation  of  the  discharge,  it  was  barred  by  that  discharge.  The 
Supreme  Court  of  the  State  of  Florida  so  held,  and  its  judg- 
ment must  be  affirmed. 

HARGADINE-McKITTRICK  DRY  GOODS  CO.  v.  HUDSON 

122  Fed.  232,  58  C.  C.  A.  596 

(Circuit  Court  of  Appeals,  Eighth  Circuit.    March  23,  1903) 

On  the  31st  day  of  December,  1901,  the  Hargadine-McKit- 
trick  Dry  Goods  Company,  plaintiff  in  error,  brought  this  action 
at  law  [in  the  Circuit  Court  of  the  United  States  for  the  eastern 
district  of  Missouri]  against  John  Robert  Hudson,  the  defendant 
in  error,  founded  on  the  record  of  a  judgment  recovered  by  the 
plaintiff  against  the  defendant  in  the  District  Court  of  Burnett 
county,  Tex.,  on  the  10th  day  of  April,  1891,  for  the  sum  of  $10,- 
939.92.  The  defendant  answered,  admitting  the  recovery  of  the 
judgment,  and  setting  up  these  defenses:  (1)  That,  being  a  resi- 
dent and  citizen  of  the  state  of  Colorado,  he  was  on  the  29th  day 
of  January,  1900,  duly  adjudged  a  bankrupt  by  the  United  States 
District  Court  for  the  District  of  Colorado,  and  that  on  the  17th 
day  of  April,  1900,  he  was  duly  discharged  as  a  bankrupt  by 
the  order  of  that  court  from  the  payment  of  all  debts  provable 
against  his  estate  on  the  26th  day  of  January,  1900;  (2)  that 
the  plaintiff,  prior  to  the  11th  day  of  August,  1900,  appeared 
before  the  referee  in  bankruptcy  having  charge  of  the  defend- 
ant's estate  in  bankruptcy,  and  filed  for  allowance  against  the 
defendant's  estate  a  claim  founded  on  the  identical  judgment 
sued  on  in  this  action,  which  claim  was,  upon  due  hearing  and 
consideration,  disallowed  by  the  referee,  and  that  the  plaintiff 
filed  a  petition  for  a  review  of  the  order  and  judgment  of  the 
referee  by  the  United  States  District  Court  for  the  District  of 
Colorado,  whereupon  the  referee,  on  the  petition  of  the  plaintiff, 
duly  certified  the  claim  and  his  ruling  thereon  to  the  District 
Court  for  review,  and  upon  full  hearing  and  consideration  that 
court,  on  the  25th  day  of  February,  1901,  confirmed  the  ruling 
of  the  referee  and  entered  judgment  disallowing  the  plaintiff's 
claim  based  on  the  judgment.  The  plaintiff's  replication  ad- 
mits that  it  filed  for  allowance  against  the  estate  of  the  bank- 
rupt its  claim,  based  on  the  judgment  in  suit,  and  that  the  same 
was  disallowed  by  the  referee,  and  upon  review  was  also  disal- 
lowed by  the  District  Court;  but  it  alleges  the  ruling  of  the 


DISCHARGE  689 

referee  in  the  cause,  and  the  judgment  of  the  District  Court 
affirming  the  referee's  ruling,  proceeded  upon  the  ground  that 
the  plaintiff's  cause  of  action  on  the  judgment  was  barred  by 
the  statute  of  limitations  of  the  state  of  Colorado,  and  avers  that 
it  was  not  barred  by  the  statute  of  limitations  of  the  state  of 
Texas,  wherein  the  judgment  was  rendered,  or  of  the  state  of 
Missouri.  The  replication  further  set  up  that  the  debt  which 
was  the  foundation  of  the  judgment  sued  on  was  created  by 
fraud.  On  motion  of  the  defendant  the  portions  of  the  replica- 
tion which  we  have  epitomized  were  stricken  out;  the  "motion 
to  strike"  seemingly  performing  the  office  of  a  demurrer.  By 
agreement  of  the  parties  a  jury  was  waived,  and  the  cause  tried 
before  the  court,  which  made  a  general  finding  in  favor  of  the 
defendant  and  rendered  judgment  (C.  C. ;  111  Fed.  361),  ac- 
cordingly, and  the  plaintiff  sued  out  this  writ  of  error. 

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

The  plaintiff  having  voluntarily  gone  into  the  bankrupt  court, 
and  submitted  itself  to  the  jurisdiction  of  that  court,  and  filed 
its  claim  against  the  bankrupt's  estate  founded  on  the  judgment 
here  in  suit,  and  that  court  having  disallowed  the  claim  and  en- 
tered judgment  accordingly,  and  that  judgment  remaining  in 
full  force  and  virtue,  constitutes  a  complete  bar  to  this  action. 
It  is  not  material  upon  what  ground  that  court  rested  its  judg- 
ment. It  unquestionably  had  jurisdiction  of  the  parties  and  the 
subject-matter,  and,  if  either  party  conceived  its  judgment  was 
for  any  reason  erroneous,  the  remedy  was  by  appeal,  and  not  by 
a  suit  on  the  same  cause  of  action  in  another  jurisdiction  against 
the  bankrupt. 

But  if,  as  is  claimed  by  the  plaintiff  in  error,  the  United 
States  District  Court  for  the  District  of  Colorado  disallowed  the 
claim  upon  the  ground  that  it  was  barred  by  the  statute  of  lim- 
itations of  that  state,  that  court  committed  no  error  in  so  doing. 
The  bankrupt  was  a  resident  and  citizen  of  the  state  of  Colorado. 
If  he  had  been  sued  on  the  record  of  the  judgment  here  in  suit 
before  he  was  adjudged  a  bankrupt,  either  in  the  state  or  United 
States  Court  in  Colorado,  he  could  have  successfully  interposed 
the  statute  of  limitations  of  that  state  as  a  defense  to  the  action. 
And  when  he  was  adjudged  a  bankrupt,  and  the  plaintiff  filed 
its  claim  before  the  referee,  it  was  open  to  that  officer  in  like 
manner  to  interpose  the  statute  of  limitations  of  the  state  of 

H.  &  A.  Bankruptcy — 44 


690  DISCHARGE 

Colorado  as  a  defense  to  the  claim.  There  is  no  support  in  rea- 
son or  authority  for  the  contention  that  no  debt  barred  by  the 
statute  of  limitations  of  the  state  where  the  bankruptcy  proceed- 
ing is  pending  is  provable  in  bankruptcy,  or  discharged  by  a 
discharge  in  bankruptcy,  if  by  the  laws  of  any  other  state  the 
debt  would  not  be  barred.  For  the  purposes  of  the  administra- 
tion and  settlement  of  the  bankrupt's  estate,  and  determining 
its  liabilities,  the  statute  of  limitations  of  the  state  where  the 
bankrupt  proceedings  are  pending  is  applicable,  and  is  the  stat- 
ute of  limitations  by  which  the  rights  of  creditors  must  be  de- 
termined. 

It  comes  to  this:  Can  the  trustee  in  bankruptcy  plead  the 
statute  of  limitations  to  a  claim  against  the  bankrupt's  estate 
that  was  barred  by  the  law  of  the  state  of  the  bankrupt's  resi- 
dence before  he  was  adjudged  a  bankrupt?  It  is  clear  the  trus- 
tee cannot  plead  the  statute  of  limitations  of  any  other  state, 
and,  if  he  cannot  plead  the  statute  of  the  state  in  which  the 
debtor  resided  and  was  adjudged  a  bankrupt,  then  there  is  no 
bar  to  claims  against  a  bankrupt's  estate.  The  statute  of  lim- 
itations of  the  state  of  the  bankrupt's  residence,  and  in  which 
he  was  adjudged  a  bankrupt,  like  the  exemption  laws  of  the 
state,  governs  and  determines  the  rights  of  creditors  in  the  ad- 
ministration of  the  bankrupt's  estate.  So  far  forth  as  relates  to 
the  statute  of  limitations,  the  rights  of  a  creditor  of  the  bank- 
rupt are  not  in  any  manner  changed  or  abridged  by  allowing 
the  trustee  in  bankruptcy  to  plead  in  bar  of  the  creditor's  claim 
the  very  same  statute  of  limitations  that  the  bankrupt  himself 
could  have  successfully  pleaded,  if  an  action  on  the  claim  had 
been  brought  against  him  before  he  was  adjudged  a  bankrupt. 

The  judgment  of  the  District  Court  against  the  plaintiff  on 
the  plea  of  the  statute  of  limitations  is  as  effectual  for  all  pur- 
poses as  if  it  had  been  rendered  on  a  plea  of  payment.  The 
plaintiff's  claim  was  barred  before  the  adjudication  in  bank- 
ruptcy, and  we  have  no  occasion,  therefore,  to  inquire  whether 
the  statute  would  continue  to  run  after  the  adjudication  and 
the  appointment  of  the  trustee.  Richmond  v.  Irons,  121  U.  S. 
27,  7  Sup.  Ct.  788,  30  L.  ed.  864;  McDonald  v.  State  of  Nebraska, 
41  C.  C.  A.  278,  101  Fed.  171. 

But  it  is  contended  that  the  debts  of  the  bankrupt,  barred  by 
the  statute  of  limitations  of  the  state  in  which  he  was  adjudged 
a  bankrupt,  are  not  provable  debts,  and  are  not,  therefore,  af- 
fected by  the  bankrupt's  discharge.     This  is  rather  a  startling 


DISCHAEGE  691 

proposition.  We  are  not  surprised  that  no  authorities  are  cited 
to  support  it.  If  this  were  the  law,  it  would  result  in  this 
curious  anomaly:  that,  while  all  recent  and  live  dehts  of  the 
bankrupt  would  be  discharged,  no  outlawed  debts  would  be  dis- 
charged, because  they  could  not  have  been  successfully  proved 
if  the  trustee  had  chosen  to  plead  the  statute  of  limitations. 
This  would  be  giving  to  stale  and  outlawed  claims  a  preference 
over  live  debts,  and  would  leave  the  creditors  free  to  sue  and 
recover  on  these  outlawed  claims  in  any  jurisdiction  where  the 
bankrupt  could  not  for  any  reason  successfully  plead  the  statute 
of  limitations,  which  is  precisely  what  the  plaintiff  is  seeking  to 
do  in  this  case. 

Debts  are  not  the  less  provable,  within  the  meaning  of  the 
bankrupt  act,  because  the  statute  of  limitations  may  be  success- 
fully pleaded  against  their  allowance.  As  weU  say  that  a  debt 
was  not  suable  because  the  statute  of  limitations  might  be 
pleaded  to  an  action  upon  it.  The  plaintiff's  judgment  was  a 
provable  debt,  and  the  fact  that  a  recovery  upon  it  might  be 
defeated  by  the  plea  of  payment,  or  a  plea  of  the  statute  of 
limitations,  or  any  other  plea  in  bar,  did  not  take  it  out  of  the 
class  of  provable  debts.  The  term  "provable  debts"  does  not 
mean  only  such  debts  as  are  valid,  and  against  the  allowance  of 
which  no  defense  can  be  successfully  interposed. 

A  discharge  in  bankruptcy,  that  discharges  the  debts  of  the 
bankrupt  in  one  state,  discharges  them  in  all  the  states.  The 
Constitution  of  the  United  States  empowers  Congress  to  estab- 
lish "uniform  laws  on  the  subject  of  bankruptcies  throughout 
the  United  States."  The  very  purpose  of  a  national  bankrupt 
act  is  to  give  force  and  effect  to  the  proceedings  in  bankruptcy, 
including  the  bankrupt's  discharge,  "throughout  the  United 
States. ' '  Its  efficacy  is  not  dependent  on  the  varying  statute  of 
limitations  of  the  several  states. 

The  allegation  in  the  replication  that  the  debt  which  was  the 
foundation  of  the  judgment  sued  on  was  created  by  fraud  is 
unavailing.  Whether,  after  suing  and  recovering  judgment  on 
its  promissory  notes,  and  afterwards  suing  the  bankrupt's  estate 
in  the  bankrupt  court  on  the  record  of  that  judgment,  and  after- 
wards bringing  this  action  on  the  same  record,  it  is  now  open  to 
the  plaintiff  to  say  the  original  debt  was  created  by  fraud,  we 
do  not  stop  to  consider.  The  provision  of  the  present  bankrupt 
law  applicable  to  the  point  now  under  consideration  is  as  fol- 
lows: 


692  DISCHARGE 

' '  §  17a.  A  discharge  in  bankruptcy  shall  release  a  bankrupt 
from  all  of  his  provable  debts  except  *  *  *  (2)  judgments 
in  actions  for  frauds.     *     *     *" 

By  this  provision  it  is  only  "judgments  in  actions  for  frauds" 
that  are  excepted  from  the  operation  of  a  discharge.  The  judg- 
ment here  sued  on  was  rendered  on  promissory  notes,  and  no 
suggestion  of  fraud  was  ever  made  or  heard  of  until  the  filing 
of  the  replication  in  this  case,  more  than  11  years  after  the  giv- 
ing of  the  notes,  and  more  than  10  years  after  the  rendition 
of  the  judgment  thereon. 

Decisions  construing  the  bankrupt  act  of  1867  (Act  March  2, 
1867,  c.  176 ;  14  Stat.  517)  have  no  application  to  the  present 
act  on  this  subject.  The  language  of  that  act  was:  "No  debt 
created  by  fraud.  *  *  *  "  This  act  left  the  question  of 
fraud  in  the  creation  of  the  debt  open  to  inquiry  after  the  bank- 
rupt obtained  his  discharge,  and  proved  to  be  a  fruitful  source 
of  bitter  and  protracted  litigation.  In  the  light  of  that  experi- 
ence Congress  has  limited  the  exception  to  "judgments  in  ac- 
tions for  frauds."  This  language  leaves  no  room  for  construc- 
tion.   It  is  as  plain  as  the  English  language  can  make  it. 

The  judgment  of  the  Circuit  Court  is  affirmed. 

SANTA  ROSA  BANK  v.  WHITE  et  al. 

139  Cal.  703,  73  Pac.  577 

(Supreme  Court  of  California.    Aug.  4,  1903) 

SMITH,  C.  This  is  a  suit  on  a  promissory  note  of  the  appel- 
lant and  the  other  defendants  for  the  sum  of  $3,675.53,  with 
interest,  etc.  The  plaintiff  had  judgment,  from  which,  and  from 
an  order  denying  the  appellant  defendant's  motion  for  a  new 
trial,  the  appeal  is  taken. 

The  defense  is  a  discharge  of  the  defendant  in  bankruptcy, 
under  the  act  of  July  1,  1898,  c.  541,  30  Stat.  544  [U.  S.  Comp. 
St.  1901,  p.  3418].  The  effect  of  this  was  to  "release"  the  de- 
fendant "from  all  of  his  provable  debts,"  with  the  exceptions 
named  in  §  17  of  the  act,  c.  541,  30  Stat.  550,  [U.  S.  Comp.  St. 
1901,  p.  3428 J,  which,  so  far  as  material,  reads  as  follows:  "A  dis- 
charge in  bankruptcy  shall  release  a  bankrupt  from  all  of  his 
provable  debts,  except  such  as  *  *  *  have  not  been  duly 
scheduled  in  time  for  proof  and  allowance,  with  the  name  of 
the  creditor,  if  known  to  the  bankrupt,  unless  such  creditor  had 


DISCHARGE  693 

notice  or  actual  knowledge  of  the  proceedings  in  bankruptcy." 
It  was  held  by  the  court,  in  effect,  that  the  debt  sued  on  comes 
within  the  exception  stated.  The  contrary  is  claimed  by  the  ap- 
pellant, for  the  reason,  among  others,  that  it  appears  from  the 
evidence  that  the  plaintiff's  debt  was  not  known  to  him  when  he 
prepared  his  schedules,  or  until  after  his  discharge,  which  was 
more  than  a  year  after  the  adjudication  of  bankruptcy.  The 
only  evidence  on  this  point  is  the  defendant's  own  testimony. 
But  his  explanation  of  the  matter  is  not  unreasonable,  and,  as 
there  is  no  finding  on  the  point,  it  must  be  assumed  that  the 
court  regarded  the  question  as  immaterial ;  which,  indeed,  is  the 
ground  now  taken  by  respondent's  counsel.  It  will  be  assumed, 
therefore,  that  the  fact  is  as  stated  by  appellant  in  his  testi- 
mony. The  question  involved  is  therefore  purely  one  of  con- 
struction, and  may  be  thus  stated:  Does  the  exception  cited 
include  all  debts  not  scheduled,  whether  known  or  unknown  to 
the  bankrupt,  or  only  such  as  were  known  to  him  ?  The  question 
is  not  without  difficulty,  but  the  grammatical  structure  of  the 
provision  seems  to  require  the  former  construction,  and  we  see 
nothing  in  the  terms  of  the  provision  or  in  the  other  provisions 
of  the  act,  whether  considered  in  themselves  or  in  connection  with 
the  former  law,  to  indicate  a  different  intention,  Sutherland  on 
Stat.  Cons.  §  267 ;  Broom 's  Leg.  Max.  652.  Under  the  former 
law,  the  omission  of  a  debt  from  the  schedule,  whether  intention- 
ally or  otherwise,  did  not  affect  the  validity  of  the  discharge 
(Rev.  St.  §  5119)  ;  and  the  effect  of  the  new  provision  is  simply 
to  establish  a  different  rule.  In  the  only  cases  involving  this  pro- 
vision we  have  been  able  to  find,  the  question  now  presented  was 
not  involved,  nor  do  they  seem  to  throw  any  light  upon  it.  Tyr- 
rel  V.  Hammerstein  (Sup.)  67  N.  Y.  Supp.  717;  Collins  v.  Mc- 
Walters  (Sup.)  72  N.  Y.  Supp.  203;  In  re  Rhutassel  (D.  C.) 
96  Fed.  597. 

The  other  contentions  of  the  appellant  are  more  obviously  un- 
tenable. They  are:  (1)  That  the  provision  in  question  is  to  be 
construed  as  requiring  only  constructive  notice  to  the  creditor 
to  exclude  him  from  the  exception;  (2)  that  the  evidence  did  not 
justify  the  finding  that  plaintiff  did  not  have  actual  notice;  (3) 
that  the  plaintiff  was  at  liberty  to  present  his  claim  for  proof 
and  allowance  when  he  discovered  the  pendency  of  the  bank- 
ruptcy proceedings,  which  was  more  than  a  year  after  the  ad- 
judication of  bankruptcy;  and  (4)  that  the  plaintiff's  claim  as 
to  the  effect  of  the  defendant's  discharge  constituted  a  collateral 


694  DISCHARGE 

attack  on  the  decree,  which  was  inadmissible.  But  as  to  the  first 
contention,  we  think  it  clear  that  in  the  expression  "notice  or 
actual  knowledge"  the  latter  term  is  used  as  explanatory  of  the 
former,  and  that  actual  knowledge  is  required  in  order  to  exclude 
the  creditor  from  the  exception  (Collins  v.  Mc Walters  [Sup.] 
72  N.  Y.  Supp.  205) ;  and  as  to  the  second,  the  evidence,  we 
think,  was  sufficient  to  justify  the  findings.  The  third  contention 
is  disposed  of  by  the  express  provisions  of  §  57,  subd.  2,  of  the 
act  of  July  1,  1898,  c.  541,  30  Stat.  560  [U.  S.  Comp.  St.  1901, 
p.  3443],  and  the  fourth  by  those  of  §  17,  which  expressly  except 
the  debts  specified  from  the  effect  of  the  decree.  In  the  corre- 
sponding provision  of  the  Revised  Statutes  (§5119)  there  was  a 
similar  provision  as  to  the  effect  of  the  discharge,  with  excep- 
tions stated,  and  it  was  held  that  as  to  the  plea  of  discharge  the 
exception  might  be  shown  in  a  collateral  action  (Forsyth  v.  Veh- 
meyer,  177  U.  S.  177,  20  Sup.  Ct.  623,  44  L.  ed.  723)  ;  and  the 
same  has  been  held  with  reference  to  the  existing  act  (Gee  v. 
Gee,  84  Minn.  384,  87  N.  W.  1116,  In  re  Rhutassel  [D.  C]  96 
Fed.  597).  The  numerous  cases  cited  by  appellant's  counsel  re- 
fer to  other  provisions  of  the  former  act  and  to  other  questions. 

We  advise  that  the  judgment  and  order  appealed  from  be 
affirmed. 

We  concur:  GRAY,  C;  CHIPMAN,  C. 

PER  CURIAM.  For  the  reasons  given  in  the  foregoing  opin- 
ion, the  judgment  and  order  appealed  from  are  affirmed.^ 

THOMPSON  V.  JUDY 

169  Fed.  553,  95  C.  C.  A.  51 

(Circuit  Court  of  Appeals,  Sixth  Circuit.    April  19, 1909) 

SEVERENS,  Circuit  Judge.  On  March  30,  1907,  J.  D.  Mc- 
Clintock  obtained  a  judgment  in  the  Circuit  Court  of  Bourbon 
county,  Ky.,  against  Wyatt  A.  Thompson  for  $1,500,  damages  for 
a  false  and  malicious  libel  published  in  a  newspaper  by  the  de- 
fendant and  others  in  April,  1906.  On  June  24,  1907,  Thompson 
filed  his  voluntary  petition  in  bankruptcy  in  the  United  States 
District  Court  for  the  Eastern  District  of  Kentucky,  and  listed 
the  said  claim  of  J.  D.  McClintock  as  one  of  his  liabilities.    Mc- 

8 — See  Birkett  t.  Columbia  Bank, 
195  U.  S.  345. 


DISCHARGE  695 

Clintock  afterwards  proved  his  claim  in  the  ease.  On  October  8, 
1907,  Thompson  received  his  discharge  in  bankruptcy.  On  Oc- 
tober 14, 1907,  a  writ  of  capias  ad  satis fadiendwm  was  issued  from 
the  Bourbon  Circuit  Court,  and  was  executed  on  October  22, 
1907,  by  the  arrest  of  said  Thompson,  who  was  delivered  into 
the  custody  of  George  W.  Judy,  jailer  of  Bourbon  county.  On 
October  23,  1907,  Thompson  filed  his  petition  in  the  United 
States  Circuit  Court  for  the  Eastern  District  of  Kentucky  for 
a  writ  of  habeas  corpus  on  the  ground  that  the  indebtedness 
upon  which  the  capias  was  issued,  namely,  the  judgment  for 
damages  for  libel,  had  been  discharged  in  bankruptcy.  The  writ 
was  issued  against  Judy,  the  jailer  of  Bourbon  county,  and  the 
petitioner  was  admitted  to  bail.  Thereafter  Judy  filed  his  re- 
sponse, setting  forth  the  proceedings  in  the  Circuit  Court  of 
Bourbon  county,  and  on  final  hearing  Judge  Cochran,  who  was 
presiding  in  the  court  below,  held  that  the  judgment  in  question 
was  not  discharged  by  proceedings  in  bankruptcy,  and  ordered 
that  the  petition  for  habeas  corpus  be  dismissed  and  the  peti- 
tioner be  remanded  to  the  state  custody.  From  that  order  this 
appeal  is  taken. 

The  sole  question  in  the  case  is  whether  the  proceedings  in 
bankruptcy  operated  to  discharge  the  liability  of  the  petitioner, 
which  was  the  foundation  of  the  judgment  of  the  Bourbon  Cir- 
cuit Court,  and  the  solution  of  it  depends  upon  the  construction 
of  §  17  of  the  bankruptcy  act  (Act  July  1,  1898,  c.  541,  30  Stat. 
550  [U.  S.  Comp.  St.  1901,  p.  3428] ),  which  is  as  follows: 

*  *  §  17.  A  discharge  in  bankruptcy  shall  release  a  bankrupt 
from  all  of  his  provable  debts,  except  such  as  ( 1 )  are  due  as  a  tax 
levied  by  the  United  States,  the  state,  county,  district,  or  mu- 
nicipality in  which  he  resides;  (2)  are  liabilities  for  obtaining 
property  by  false  pretenses  or  false  representations,  or  for  will- 
ful and  malicious  injuries  to  the  person  or  property  of  another ; 
(or  for  alimony  due  or  to  become  due,  or  for  maintenance  or 
support  of  wife  or  child,  or  for  seduction  of  an  unmarried  fe- 
male, or  for  criminal  conversation)  ;  (3)  have  not  been  duly 
scheduled  in  time  for  proof  and  allowance,  with  the  name  of  the 
creditor  if  known  to  the  bankrupt,  unless  such  creditor  had  notice 
or  actual  knowledge  of  the  proceedings  in  bankruptcy;  or  (4) 
were  created  by  his  fraud,  embezzlement,  misappropriation,  or 
defalcation  while  acting  as  an  officer  or  in  any  fiduciary  ca- 
pacity." 

The  foregoing  is  §  17  of  the  act  as  amended  by  Act  Feb.  5, 


696  DISCHARGE 

1903,  c.  487,  §  5,  32  Stat.  798  (U.  S.  Comp.  St.  Supp.  1907,  p. 
1026).  That  part  of  clause  2  which  excepts  from  the  operation 
of  the  discharge  "liabilities"  for  wiUful  and  malicious  injuries 
to  the  person  or  property  of  another  is  the  provision  here  in- 
volved. That  clause  in  the  original  act  was  the  same,  except 
that  instead  of  the  word  ''liabilities"  the  word  "judgments" 
was  employed.  And  the  matter  in  dispute  is,  What  was  the  con- 
sequence of  the  amendment  which  substituted  "liabilities"  for 
"judgments"? 

Before  the  amendment,  a  liability  for  such  a  cause  was  not 
excepted  unless  it  had  been  reduced  to  judgment.  By  the 
amendment  it  is  excepted  without  being  reduced  to  judgment. 
The  contention  of  the  appellant  is  that  when  a  judgment  has 
been  obtained  the  liability  is  merged  therein,  and  the  claim  no 
longer  adheres  to  the  liability,  but  is  transmuted  into  another 
species  of  right,  which  was  excepted  by  the  original  act,  but, 
since  the  amendment,  is  no  longer  excepted.  But  notwithstand- 
ing the  iuigenuity  of  the  argument  by  which  this  contention  is 
sought  to  be  niaintained,  we  are  of  opinion  that  the  intention  of 
Congress  was  to  declare  that  such  liability  should  be  excepted 
whether  a  judgment  had  been  rendered  upon  it  or  not.  The 
general  doctrine  of  merger  of  the  cause  of  action  by  judgment 
cannot,  of  course,  be  disputed.  No  suit  or  proceeding  can  there- 
after be  brought  upon  the  original  liability,  but  only  for  the  en- 
forcement of  the  judgment.  The  power  of  the  court  cannot  be 
again  invoked  to  adjudicate  the  question  of  liability.  It  is  for 
the  interest  of  the  public  that  litigation  shall  come  to  an  end, 
and  the  inconvenience  of  preserving  the  original  liability  as  a 
continuing  cause  of  action  would  be  great.  The  pursuit  must 
proceed  along  the  line  adopted,  and  the  satisfaction  of  the  claim 
must  be  sought  through  the  judgment.  But  this  rule  of  law 
prevails  only  to  the  extent  that  the  reason  for  it  exists.  It  does 
not  prevent  the  recognition  in  the  judgment  of  the  attributes  of 
the  original  cause  of  action.  For  the  purposes  of  relief,  the  judg- 
ment embodies  those  attributes  and  gives  ground  for  their  en- 
forcement. The  rights  of  the  parties  are  established,  and  are  in 
no  wise  diminished  thereby.  So,  when  the  judgment  is  general 
in  form,  it  is  often  necessary  to  go  behind  it  and  see  upon  what 
liability  it  is  founded,  to  the  end  that  the  characteristics  of  the 
cause  of  action  may  be  impressed  upon  it.  Such  instances  will 
recur  to  the  mind  of  every  lawyer.  Indeed,  Congress  required 
this  in  this  identical  act  when  it  excepted  judgments  for  the  par- 


DISCHARGE  697 

ticular  causes  of  action  mentioned  in  clause  2  of  §  17.  Now,  we 
cannot  resist  the  impression  that  Congress  in  making  this  amend- 
ment was  looking  to  the  substantial  nature  of  the  liability,  and 
regarded  the  question  as  to  whether  a  judgment  had  been  ren- 
dered upon  it  as  immaterial,  that  its  intrinsic  nature  had  not 
been  altered  and  was  in  reality  the  cause  of  action  intended  by 
the  original  exception,  and  that  Congress  meant  to  protect  that 
from  the  discharge.  Apparently  the  requirement  in  the  original 
act  that  the  claim  should  have  been  reduced  to  judgment  was 
intended  to  obviate  the  delay  which  a  proceeding  in  the  bank- 
ruptcy court  for  the  liquidation  of  the  damages  would  involve. 
And,  finally,  it  would  seem  that  in  plain  English  a  judgment  on 
such  a  cause  of  action  is  a  "liability"  therefor. 

But  the  appellant  raises  another  question,  which  is  whether  a 
willful  and  malicious  libel  is  an  injury  ' '  to  the  person  or  prop- 
erty of  another,"  and  argues  that  by  this  language  is  meant  a 
physical  injury  to  his  person,  and  not  merely  an  injury  to  a 
right  which  the  law  attaches  to  the  person.  The  question  is 
therefore  one  of  construction.  It  is  true  that  in  modem  par- 
lance the  words  "personal  injury"  are  often  used  to  designate 
a  physical  injury  to  the  party.  But  usually,  when  there  is  any 
attempt  to  put  the  matter  into  legal  phraseology,  these  and 
equivalent  words  are  understood  to  import  the  meaning  in 
which  they  have  long  been  used  by  recognized  authorities, 
whether  in  legal  text-books  and  commentaries  or  precise  defini- 
tion by  courts,  in  classifying  the  rights  of  individuals.  In  1 
Blackstone's  Com.  129  et  seq.,  the  author  classifies  and  dis- 
tinguishes those  rights  which  are  annexed  to  the  person,  jura 
personarum,  and  acquired  rights  in  external  objects,  jura  rerum; 
and  in  the  former  he  includes  personal  security,  which  consists 
"in  a  person's  legal  and  uninterrupted  enjoyment  of  his  life, 
his  limbs,  his  body,  his  health,  and  his  reputation."  And  he 
makes  the  corresponding  classification  of  remedies.  The  idea 
expressed  is  that  a  man's  reputation  is  a  part  of  himself,  as  his 
body  and  his  limbs  are,  and  that  detraction  of  it  is  an  injury  to 
his  personality,  and  Chancellor  Kent  in  liis  twenty-fourth  lecture 
shows  that  the  same  classification  of  rights  was  expressed  in  our 
colonial  legislation  and  has  always  been  observed,  and  on  p.  *  16 
of  the  second  volume  of  his  Commentaries,  he  says : 

"  As  a  part  of  the  rights  of  personal  security,  the  preservation 
of  every  person's  good  name  from  the  vile  arts  of  detraction  is 
justly  included.    The  laws  of  the  ancients,  no  less  than  those  of 


698  DISCHARGE 

modern  nations,  made  private  reputation  one  of  the  objects  of 
their  protection. ' ' 

The  reasonable  presumption  is  that  Congress,  being  engaged 
in  framing  a  statute  so  much  requiring  precision  of  terms,  ex- 
pected its  language  to  be  interpreted  by  long-settled  usage  in 
legal  nomenclature.  We  shall  not  particularly  refer  to  the  many 
decisions  of  courts  where  this  subject  has  been  considered,  but 
will  limit  our  references  to  cases  where  this  particular  language 
of  the  bankruptcy  act  and  its  construction  were  involved.  Mc- 
Donald V.  Brown,  23  R.  I.  546,  51  Atl.  213,  58  L.  R.  A.  768,  91 
Am.  St.  Rep.  659 ;  Sanderson  v.  Hunt,  116  Ky.  435,  76  S.  W.  179 ; 
McChristal  v.  Clisbee,  190  Mass.  120,  76  N.  E.  511,  3  L.  R.  A. 
(N.  S.)  702. 

We  are  not  aware  of  any  decision  of  the  Federal  Courts  upon 
this  precise  question,  but  there  are  several  which  seem  to  point 
to  the  conclusion  that  the  injuries  contemplated  in  §  17  of  the 
bankrupt  act  are  not  restricted  to  those  which  are  inflicted  upon 
the  physical  x>erson  of  the  party,  but  extend  to  those  inherent 
rights  of  the  person,  which  stand  in  the  same  class  as  his  right 
to  security  from  violence  done  to  his  body.  Tinker  v.  Colwell, 
193  U.  S.  473,  24  Sup.  Ct.  505,  48  L.  ed.  754 ;  In  re  Freche  (D.  C.) 
109  Fed.  620;  In  re  Maples  (D.  C.)  105  Fed.  919.  And  see 
Leicester  v.  Hoadley,  66  Kan.  172,  71  Pac.  318,  65  L.  R.  A.  523. 

The  order  ()i  the  Circuit  Court  must  be  afSrmed,  with  costs.^ 

I/" 
PETERS  V.  UNITED  STATES  ex  rel.  KELLEY 

177  Fed.  885,  101  C.  C.  A.  99 

(Circuit  Court  of  Appeals,  Seventh  Circuit.  January  28,  1910) 

After  relatrix  was  adjudged  a  bankrupt  by  the  court  below, 
and  before  she  was  discharged,  appellant  as  sheriff  took  her  into 
custody  under  an  execution  against  her  body.  The  execution  was 
issued  by  virtue  of  a  judgment  entered  against  her  in  favor  of 
Michael  Burke  by  the  Circuit  Court  of  Champaign  county.  111., 
before  her  voluntary  petition  in  bankruptcy  was  filed.  On  her 
petition  for  a  writ  of  Kaheas  corpus  in  the  District  Court,  she 
was  temporarily  released  from  custody,  pending  her  application 
for  a  discharge  in  bankruptcy.  After  her  discharge  in  bank- 
ruptcy was  granted,  the  District  Court  considered  her  petition 
for  the  writ,  the  sheriff's  return,  and  certain  testimony,  and 

9— See  Friend  t.  Talcott,  228  U. 
S.  27. 


DISCHARGE  699 

thereupon  entered  the  order  appealed  from,  finally  discharging 
relatrix  from  the  custody  of  the  sheriff. 

§  17  of  the  bankruptcy  act  of  July  1,  1898,  c.  541,  30  Stat.  550 
(U.  S.  Comp.  St.  1901,  p.  3428),  as  amended  in  1903  (Act  Feb. 
5,  1903,  c.  487,  §  5,  32  Stat.  798  [U.  S.  Comp.  St.  Supp.  1909, 
p.  1310]),  provides  that  '*A  discharge  in  bankruptcy  shall  re- 
lease a  bankrupt  from  all  of  his  provable  debts,  except  such  as 
•  •  *  (2)  are  liabilities  *  •  *  for  willful  and  malicious 
injuries  to  the  person  or  property  of  another. ' ' 

The  sheriff's  return  exhibited  the  record  of  the  proceedings 
and  judgment  of  the  Champaign  county  Circuit  Court.  On  the 
hearing,  relatrix  admitted  that  the  proceedings  and  judgment 
were  correctly  stated  in  the  return. 

Burke's  declaration  was  in  three  counts.  The  first  was  the 
common-law  count  for  trespass  vi  et  armis.  The  second  stated 
that  Burke  was  11  years  old,  and  was  attending  a  public  school 
in  Champaign  county,  of  which  relatrix  was  the  teacher;  that 
relatrix,  under  pretense  of  inflicting  punishment  upon  him  for 
some  alleged  infraction  of  the  rules,  kept  him  after  school,  and 
then  and  there,  without  any  just  or  sufficient  excuse,  unlawfully, 
willfully,  wantonly,  and  maliciously  struck  and  beat  him  vio- 
lently with  a  certain  stick  or  club ;  that  the  punishment  admin- 
istered as  aforesaid  was  grossly  and  maliciously  excessive; 
whereby  he  was  permanently  injured,  etc.  The  third  also  de- 
tailed a  "wanton  and  malicious"  assault  with  a  stick  and  club. 

Relatrix  pleaded  the  general  issue ;  also  that  the  alleged  assault 
was  only  a  moderate  and  proper  punishment  of  Burke  as  pupil 
by  relatrix  as  teacher;  and,  further,  that  the  alleged  assault 
occurred  while  relatrix  was  making  a  proper  defense  against  an 
assault  by  Burke. 

On  issues  so  tendered,  and  closed  by  Burke's  general  replica- 
tion, the  jury  returned  a  general  verdict  of  guilty  and  assessed 
Burke 's  damages  at  $1,800.  Judgment  in  due  form  was  entered. 
Relatrix  prayed  an  appeal  to  the  Appellate  Court  of  Illinois,  but 
the  appeal  was  never  perfected ;  and  no  bill  of  exceptions,  pre- 
serving the  evidence  and  the  instructions  of  the  court  to  the 
jury,  was  ever  filed. 

At  the  habeas  corpus  hearing  the  District  Court  permitted 
relatrix,  over  appellant's  objection,  to  go  into  her  side  of  the 
merits  of  the  alleged  assault.  Appellant  introduced  no  evidence 
touching  the  original  occurrence  on  which  the  declaration  was 
based. 


700  DISCHARGE 

BAKER,  Circuit  Judge  (after  stating  the  facts  as  above). 
If  the  District  Court  and  this  court  were  at  liberty  to  inquire 
de  novo  into  the  question  whether  relatrix  inflicted  a  willful 
and  malicious  injury  upon  the  person  of  her  11  year  old  pupil, 
a  fair  answer  could  not  be  given  from,  this  record.  Relatrix 
and  her  witnesses  gave  their  present  version  of  her  side  of  the 
story  (some  of  them  admitting  on  cross-examination  that  they 
were  adding  matters  not  testified  to  by  them  in  the  State  Court)  ; 
but  the  boy  and  his  witnesses  did  not  attend  the  hearing  in  the 
District  Court.  We  could  not  properly  pass  upon  the  truth  of 
the  original  charge  de  novo,  without  considering  the  testimony 
in  support  of  the  charge. 

Relatrix 's  direct  adversary  in  the  District  Court  was  not  the 
boy,  but  the  sheriff;  and  he  evidently  thought  he  was  doing 
his  full  duty  as  a  disinterested  officer  of  the  law  when  in  re- 
sponse to  the  demand  that  he  show  cause  why  he  detained  rela- 
trix in  custody  he  produced  the  writ  he  held  and  the  record  of 
the  proceedings  and  judgment  on  which  the  writ  was  issued. 
And  so  he  was;  for  a  writ  of  habeas  corpus  cannot  lawfully  be 
used  as  a  means  of  bringing  the  original  parties  into  court  to 
relitigate  their  original  controversy — it  cannot  even  be  used  law- 
fully to  review  and  revise  alleged  errors  of  law  or  fact  in  the 
original  litigation.  "No  court  may  properly  release  a  prisoner 
under  conviction  and  sentence  of  another  court,  unless  for  want 
of  jurisdiction  of  the  cause  or  person,  or  for  some  other  matter 
rendering  its  proceedings  void.  Where  a  court  had  jurisdiction, 
mere  errors  which  have  been  committed  in  the  course  of  the  pro- 
ceedings cannot  be  corrected  upon  a  writ  of  itabeas  corpus, 
which  may  not  in  this  manner  usurp  the  functions  of  a  writ  of 
error."  Kaizo  v.  Henry,  211  U.  S.  146,  29  Sup.  Ct.  41,  53  L. 
ed.  125,  and  cases  there  cited.  Also  Ex  parte  Watkins,  3  Pet. 
193,  7  L.  ed.  650,  and  In  re  Lennon,  166  U.  S.  548,  17  Sup.  Ct. 
658,  41  L.  ed.  1110.  ^i 

The  character  of  the  "liability,"  as  that  word  is  used  in 
amended  §  17  (2)  of  the  bankruptcy  act,  is  not  changed  by  the 
fact  that  the  liability  was  reduced  to  judgment.  Tinker  v.  Col- 
well,  193  U.  S.  473,  24  Sup.  Ct.  505,  48  L.  ed.  754;  Boynton  v. 
BaU,  121  U.  S.  457,  466,  7  Sup.  Ct.  981,  30  L.  ed.  985 ;  Wiscon- 
sin V.  Pelican  Ins.  Co.,  127  U.  S.  265,  292,  8  Sup.  Ct.  1370,  32  L. 
ed.  239.  The  question,  therefore,  is  whether  the  judgment  of  the 
State  Court  is  conclusive  evidence  of  a  liability  of  relatrix  for 


DISCHARGE  701 

a  willful  and  malicious  injury  to  the  person  of  the  judgment 
plaintiff. 

"Willful  and  malicious  injury,"  in  the  bankruptcy  act  and 
everywhere  in  the  law,  does  not  necessarily  involve  hatred  or 
ill  will  as  a  state  of  mind,  but  arises  from  "a  wrongful  act,  done 
intentionally,  without  just  cause  or  excuse. "  "In  order  to  come 
within  that  meaning  as  a  judgment  for  a  willful  and  malicious 
injury  to  person  or  property,  it  is  not  necessary  that  the  cause 
of  action  be  based  upon  special  malice,  so  that  without  it  the 
action  could  not  be  maintained."  Tinker  v.  Colwell,  193  U.  S. 
473,  485,  24  Sup.  Ct.  505,  508,  48  L.  ed.  754. 

In  the  second  and  third  counts  of  the  declaration  the  charge 
was  explicitly  made  that  relatrix  inflicted  the  injury  willfully 
and  maliciously;  that  she  intentionally  overstepped  her  author- 
ity as  teacher,  and  administered  an  excessive  punishment  with- 
out just  cause  or  excuse.  By  her  pleas  of  denial,  of  authority  as 
teacher,  and  of  self-defense,  she  accepted  the  gage ;  and  the  jury 
found  her  guilty.  What  the  evidence  was,  what  the  instructions 
were,  we  do  not  know;  nor,  if  the  second  and  third  were  the 
only  count-s,  could  we  inquire,  for  unquestionably  a  judgment 
thereon  would  be  conclusive  that  in  fact  and  in  law  the  relatrix 
had  inflicted  a  willful  and  malicious  injury  upon  the  person  of 
the  judgment  plaintiff. 

Relatrix  contends  that  under  the  first  count,  for  trespass 
vi  et  armis,  a  recovery  could  be  had  without  proof  of  a  willful 
and  malicious  injury,  and  thereupon  insists  that  it  was  not  erro- 
neous for  the  District  Court  to  inquire  de  novo  into  the  real  na- 
ture of  the  alleged  assault.  If  the  assumption  as  to  the  charac- 
ter of  the  first  count  were  warranted,  the  predicated  result  would 
not  follow.  The  most  that  would  be  authorized  (if  anj'thing) 
would  be  to  show  that  at  the  trial  in  the  State  Court  no  evidence 
was  introduced  in  support  of  the  second  and  third  counts,  and 
that  the  evidence  which  was  introduced  under  the  first  count 
did  not  tend  to  prove  a  willful  and  malicious  injury.  This, 
not  on  the  theory  of  disputing  the  record  or  questioning  the  ad- 
judication, but  on  the  theory  that  the  record  was  ambiguous,  and 
that  therefore  evidence  dehors  the  record  was  proper  and  nec- 
essary to  disclose  what  in  truth  had  been  adjudicated.  The 
assumption,  however,  is  unwarranted,  for  by  the  law  of  Illinois 
(as  generally  elsewhere)  a  judgment  for  damages  under  a  count 
of  trespass  ri  et  armis  cannot  lawfully  be  rendered  except  upon 
proof  of  a  willful  and  malicious  injury.    Jernberg  v.  Mix,  199 


702  DISCHARGE 

111.  254,  65  N.  E.  242 ;  Gilmore  v.  Fuller,  198  111.  143,  65  N.  E. 
84,  60  L.  R.  A.  286 ;  Forsyth  v.  Vehmeyer,  176  111.  365,  52  N.  E. 
55 ;  In  re  Mullen,  118  111.  551,  9  N.  E.  208 ;  In  re  Murphy,  109 
111.  31;  Paxton  v.  Boyer,  67  111.  133,  16  Am.  Rep.  615;  Razor  v. 
Kinsey,  55  111.  App.  605 ;  Tinker  v.  Colwell,  193  U.  S.  473,  24 
Sup.  Ct.  505,  48  L.  ed.  754;  McChristal  v.  Clisbee,  190  Mass. 
120,  76  N.  E.  511,  3  L.  R.  A.  (N.  S.)  702.  And  the  full  faith 
and  credit  to  which  the  judgment  of  the  State  Court  is  entitled 
would  not  be  rendered  if  a  doubt  were  entertained  that  the 
jury  under  proper  instructions  based  their  verdict  on  sufficient 
evidence. 

The  order  appealed  from  is  reversed,  and  the  cause  is  remanded 
to  the  District  Court  with  the  direction  to  dismiss  the  petition.^^ 

GROSSCUP,  Circuit  Judge  (dissenting).  The  policy  of  the 
Bankruptcy  Law  is  to  discharge  all  honest  debtors  who  have 
fallen  into  insolvency,  that  they  may  have  another  opportunity 
in  the  race  of  life.  The  debtors  excepted  from  this  general  policy 
are  those  who  have  become  such  through  "fraud,"  or  through 
the  obtaining  of  property  ''by  false  pretenses  or  false  repre- 
sentations, ' '  or  through  the  committing  of  *  *  willful  and  malicious 
injuries  to  the  person  or  property  of  another. ' '  Under  the  old 
bankruptcy  law,  the  exception  founded  on  fraud  could  only  be 
made  out  by  the  disclosure  of  "a  fraud  involving  moral  turpi- 
tude or  intentional  wrong, ' '  and  did  not  extend  to  a  mere  fraud 
implied  by  law.  Hennequin  v.  Clews,  111  U.  S.  676,  681,  4  Sup. 
Ct.  576,  28  L.  ed.  565 ;  Forsyth  v.  Vehmeyer,  177  U.  S.  177,  20 
Sup.  Ct.  623,  44  L.  ed.  723  (quotation  from  Tinker  v.  Colwell, 
193  U.  S.  488,  24  Sup.  Ct.  509,  48  L.  ed.  754).  The  Supreme 
Court  does  not  hold  that  "fraud,"  as  the  word  is  employed  in 
the  present  bankruptcy  act,  is  met  by  anything  less  than  the  fore- 
going, for  it  says  (Tinker  v.  Colwell,  193  U.  S.  489,  24  Sup.  Ct. 
509,  48  L.  ed.  754) : 

"Assuming  that  the  same  holding  would  be  made  in  regard  to 
the  fraud  mentioned  in  the  present  act,  it  is  clear  that  the  cases 
are  unlike.  The  implied  fraud  which  the  Court  in  the  above- 
cited  cases  released  was  of  such  a  nature  that  it  did  not  impute 

10 — The    concurring    opinion    of  N.  Y.  175   (wrongful  conversion  of 

Seaman,  Circuit  Judge,  is  omitted.  stocks),  ace.  Cf.  Tompkins  v.  "Wil- 

McChristal  v.  Clisbee,  190  Mass.  120,  liams,  137  App.  Div.  521,  122  N.  Y. 

3  L.  E.  A.  (N.  S.)  702,  5  Ann.  Cas.  Supp.  152. 

769;   Kavanaugh   v.  Mclntyre,  210  ^^^^j   j^^j. 


DISCHARGE  703 

either  bad  faith  or  immorality  to  the  debtor,  while  in  a  judg- 
ment founded  upon  a  cause  of  action,  such  as  the  one  before  us 
[crim.  con.]  the  malice  which  is  implied  is  of  that  very  kind 
which  does  involve  moral  turpitude." 

And,  of  course,  a  debtor  who  has  become  such  through  the  ob- 
taining of  property  by  false  pretenses  or  false  representations 
(the  second  element  of  the  list  of  exceptions),  necessarily  has 
become  such  debtor  by  bad  faith,  or  conscious  wrong.  Up  to  this 
point  then,  so  far  as  the  Supreme  Court  has  construed  the  pres- 
ent bankruptcy  act,  the  exceptions  are  founded  upon  the  ele- 
ment of  bad  faith  or  conscious  wrong  involved  in  the  debts  from 
which  release  is  asked. 

Is  the  third  exception,  **  willful  and  malicious  injuries  to  the 
person  or  property  of  another, ' '  to  receive  a  like  interpretation  ? 
I  am  deeply  impressed  with  the  belief  that  such  will  be  the  inter- 
pretation put  upon  it  by  the  Supreme  Court  when  the  question 
is  squarely  presented  to  that  Court.  This  impression  is  founded, 
first,  upon  the  care  that  the  court  has  taken  in  Tinker  v.  Col- 
well  to  exclude  any  contrary  impression;  for  in  every  sentence 
of  the  court's  opinion,  stress  is  laid  upon  the  element  of  actual 
bad  faith  and  moral  turpitude  involved  in  the  particular  debt 
before  the  court. 

'  *  The  judgment  here  mentioned  comes,  as  we  think, ' '  says  the 
court,  "within  the  language  of  the  statute  reasonably  construed. 
The  injury  for  which  it  was  recovered  is  one  of  the  grossest 
which  can  be  inflicted  upon  the  husband,  and  the  person  who 
perpetrates  it  knows  it  is  an  offense  of  the  most  aggravated  char- 
acter; that  it  is  a  wrong  for  which  no  adequate  compensation 
can  be  made,  and  hence  personal  and  particular  malice  towards 
the  husband  as  an  individual  need  not  be  shown,  for  the  law 
implies  that  there  must  be  malice  in  the  very  act  itself,  and  we 
think  Congress  did  not  intend  to  permit  such  an  injury  to  be  re- 
leased by  a  discharge  in  bankruptcy. ' '    ( The  italics  are  my  own. ) 

I  am  also  impressed  that  it  is  the  interpretation  that,  to 
carry  out  the  intention  of  Congress,  ought  to  be  put  upon  the 
phrase  as  used  in  the  bankruptcy  act.  The  exception  is  in  the  na- 
ture of  a  denial — ^the  denial  of  something  that  all  others  obtain. 
And  it  seems  to  me  that  Congress  meant  that  this  denial  should 
be  interposed,  not  lipon  any  mere  fiction  of  the  law,  or  any 
mere  empty  implication  of  the  law,  but  only  upon  the  disclosure 
of  something,  in  the  transaction  out  of  which  the  debt  arose,  that 
gives  to  it  the  color  of  bad  faith  or  conscious  wrong  doing. 


704  DISCHARGE 

The  case  before  us  is  that  of  a  school  teacher,  who,  in  the 
lawful  exercise  of  her  power  to  inflict  punishment,  has  inflicted 
excessive  punishment.  I  say  this  is  the  case  before  us,  because 
unless  such  be  a  "willful  and  malicious  injury"  within  the 
meaning  of  the  bankruptcy  act,  the  judgment  in  the  trespass  suit 
is  not  conclusive  upon  the  bankruptcy  court;  for,  by  the  law  of 
Illinois  and  most  common  law  jurisdictions,  under  the  issue 
raised  by  the  first  count  (trespass  vi  et  armis  for  simple  assault 
and  battery),  the  pleas  of  moderate  castigavit  and  son  assaiilt 
demesne,  and  the  replication  de  injuria,  a  recovery  could  be  had 
for  an  excess  of  force  employed  by  the  relatrix  beyond  reasonable 
chastisement,  assuming,  of  course,  that  the  evidence  submitted 
warranted  such  recovery.  Ayres  v.  Kelley,  11  111.  17 ;  Fortune 
V.  Jones,  30  111.  App.  116 ;  Hannen  v.  Edes,  15  Mass.  347 ;  Ben- 
nett V.  Appleton,  25  Wend.  371;  Devine  v.  Rand,  38  Vt.  621. 
And,  for  the  purpose  of  this  appeal,  the  scope  of  that  judgment, 
where  doubt  or  ambiguity  exists,  must  be  construed  most  strongly 
against  him  who  invokes  it  as  res  judicata;  from  which  it  fol- 
lows, that  the  verdict  returned,  being  a  general  verdict  (and 
being  as  applicable  to  the  first  count  as  to  the  second  or  third 
counts)  is  as  applicable  to  a  case  of  mere  excess  of  force,  ini- 
tially lawful,  employed  beyond  reasonable  chastisement,  though 
without  any  conscious  or  designed  wrong-doing,  as  it  would  be 
to  a  case  of  assault  originating  in  conscious  wrong-doing. 

No  one  pretends  that  a  school  teacher  chastising  a  pupil,  or  a 
master  of  a  vessel  punishing  some  member  of  his  crew,  or  an 
individual  resisting  an  assault,  may  not,  without  actual  malice, 
go  beyond  the  force  actually  needed  and  therefore  make  them- 
selves liable  to  a  civil  action  for  trespass  vi  et  armis.  In  each  of 
these  cases,  the  malice  imputed  may  be  the  mere  "fiction  of 
malice ' ' — a  fiction  created  to  give  the  complaining  party  a  stand- 
ing for  a  civil  suit  in  the  form  of  action  selected.  There  is  in 
such  conduct,  unless  of  course  actual  malice  is  shown,  no  bad 
faith  or  conscious  wrong — nothing  indeed  that  distinguishes  the 
moral  quality  of  the  act  from  the  moral  quality  of  the  owner 
of  a  factory  who  allows  his  employees  to  come  into  contact  with 
defective  machinery,  or  the  owner  of  a  carriage  who  takes  in  a 
passenger  with  knowledge  that  he  has  a  defective  vehicle,  or, 
as  put  by  Justice  Peckham  in  Tinker  v. "Colwell,  supra,  "one 
who  negligently  drives  through  a  crowded  thoroughfare  and  neg- 
ligently runs  over  an  individual,  would  not,  as  I  suppose,  be 
within  the  exception." 


DISCHARGE  705 

True,  in  In  re  ]\Iurphy,  109  111.  31,  it  was  siiid  that  malice  was 
the  gist  of  an  action  of  trespass  for  assault  and  battery;  but 
it  was  not  ruled  that  mere  malice,  as  a  fiction  of  law,  was  the 
same  thing  as  conscious  wrong-doing.  The  facts  in  In  re  Murphy 
are  not  given.  The  case  relied  on  as  a  precedent  was  First  Na- 
tional Bank  of  Flora  v.  Burkett,  101  111.  392,  40  Am.  Rep.  209, 
in  which  it  was  said: 

"It  (malice)  in  some  cases  implies  a  wrong  inflicted  on  an- 
other, with  an  evil  intent  or  purpose,  and  this  is  the  sense  in 
which  it  is  employed  in  the  statute." 

And  for  anything  appearing  in  In  re  Murphy,  it  was  that 
kind  of  malice  that  was  there  shown.  Indeed,  the  court  says, 
speaking  of  the  facts  before  it  (as  already  said,  the  facts  are 
not  reported)  : 

"Here  there  was  an  Intent  to  do  harm,  and  an  unlawful  exe- 
cution of  that  intent,  resulting  in  the  infliction  of  a  wrong  and 
injury  upon  another.  Under  such  circumstances  was  malice 
the  gist  of  the  action?" 

And  that  this,  in  its  application  to  the  state  insolvent  law, 
is  as  far  as  the  Supreme  Court  of  Illinois  meant  to  go  (consid- 
ering the  case  as  one  of  actual  malice  and  not  mere  malice  by 
fiction  of  law)  is  shown  by  that  court  in  the  subsequent  case  of 
Jemberg  v.  Mix,  199  111.  254,  256,  65  N.  E.  242,  where  it  is  said : 

■'The  term  'malice,'  as  used  in  the  act  in  question  (the  in- 
solvent act)  applies  to  that  class  of  wrongs  which  are  inflicted 
with  an  evil  intent,  design  or  purpose.  It  implies  that  the  guilty 
party  was  actuated  by  improper  or  dishonest  motives,  and  re- 
quires the  intentional  perpetration  of  an  injury  or  a  wrong  on 
another. ' ' 

Let  me  not  be  misunderstood.  As  I  understand  the  Supreme 
Court  of  the  United  States  in  Tinker  v.  Colwell,  and  the  Su- 
preme Court  of  Illinois  in  the  cases  just  spoken  of,  a  distinction 
is  observed,  where  the  bankruptcy  and  insolvent  laws  are  in- 
volved, between  malice  as  a  fiction  of  law  and  malice  arising  from 
bad  faith  or  conscious  wrong-doing.  Indeed,  in  the  suppositi- 
tious case  stated  by  Justice  Peckham,  the  form  of  action  might 
have  been  trespass  vi  et  armis  or  trespass  on  the  case,  that  is  to 
say  might  have  been  an  action  implying  malice  by  fiction  of  law, 
or  an  action  not  implying  malice  at  all,  depending,  on  the  elec- 
tion of  the  plaintiff,  whether  he  counted  upon  the  negligence  or 
upon  the  forcible  invasion  of  his  right  to  security  as  the  basis 
of  recovery,    Percival  v.  Hickey,  18  Johns.  (N.  Y.)  257,  9  Am. 

H.  &  A.  Bankruptcy — 45 


706  DISCHARGE 

Dec.  210.  That  Congress  intended  that  discharge  from  debts, 
under  this  exception  to  the  general  policy  of  the  bankruptcy  law, 
should  be  granted  or  denied,  not  according  to  the  real  inherent 
quality  of  the  transaction  out  of  which  the  debt  arose,  but  wholly 
in  accordance  with  the  accident  whether  recovery  is  sought  in  one 
form  of  action  or  another,  I  cannot  believe;  for  whether,  as  a 
mere  fiction  of  law,  there  be  malice  or  not,  the  moral  character 
of  the  wrong  complained  of  is  the  same,  the  evidence  alone  de- 
termining the  animus  of  the  act.  And  in  the  case  before  us,  the 
evidence  alone  can  determine  whether  or  not  the  excessive  pun- 
ishment was  due  to  an  honest  mistake  of  judgment  or  want  of 
due  care,  or  whether  it  was  due  to  motives  of  ill-will,  hatred  and 
malevolence. 

I  am  giving  expression  to  this  dissent  because,  in  my  judg- 
ment the  majority  opinion  misinterprets  Tinker  v.  Colwell  (and 
in  that  decision  there  were  four  dissenting  justices)  ;  and  be- 
cause this  misinterpretation,  unless  this  clause  of  the  bankruptcy 
act  is  construed  by  the  Supreme  Court,  is  liable  to  be  followed 
by  what  seems  to  me  an  unjust,  if  not  unauthorized,  applica- 
tion of  the  law. 

One  other  phase  of  this  question  has  thus  far  wholly  gone 
unnoticed.  The  phrase,  in  the  bankruptcy  act,  is  ''willful  and 
malicious  injuries."  If  this  means  that  willfulness  and  malice, 
even  though  the  malice  be  merely  a  fictitious  malice,  must  con- 
cur, then  the  case  of  a  school  teacher,  master  of  a  vessel,  or  party 
assaulted,  who  uses  more  force  than  what  is  needed,  but  does  it 
without  consciousness  of  such  excess,  cannot  be  said  to  be  willful, 
for  "willful"  means  conscious  intention.  And  to  put  such  an 
interpretation  upon  the  phrase — ^joining  the  two  words  as  char- 
acterizing the  act — brings  this  third  exception  into  line  with 
the  first  and  second  exceptions,  to-wit,  "fraud"  and  the  obtain- 
ing of  property  by  *  *  false  pretenses  or  false  representations. ' ' 

I  am  not  sure  that  the  order  appealed  from  in  this  case  should 
be  affirmed.  That  might  preclude  the  holder  of  the  judgment 
from  showing,  in  some  appropriate  way,  that  the  injury  was 
actually  malicious.  But  the  judgment  from  which  this  is  a  dis- 
sent, on  the  other  hand,  accepts  the  judgment  in  the  trespass  suit 
as  res  judicata,  and  thereby  forestalls  any  appropriate  inquiry 
as  to  whether  the  injury  was  without  actual  malice,  bad  faith, 
or  conscious  wrong-doing. 


DISCHARGE  707 

DUNBAR  V.  DUNBAR 

190  U.  S.  340,  47  L.  ed.  1084,  23  Sup.  Ct.  757 

[See  this  case  given  on  page  424,  ante.] 

In  re  WARTH 

200  Fed.  408,  118  C.  C.  A.  560 

(Circuit  Court  of  Appeals,  Second  Circuit.    November  11,  1912) 

NOYES,  Circuit  Judge.  The  District  Court  properly  re- 
strained the  petitioner  from  enforcing  her  judgment  in  case, 
but  only  in  case,  it  was  dischargeable.  And  whether  it  were  dis- 
chargeable depends  upon  the  real  nature  of  the  action  in  which 
the  judgment  was  obtained.     Its  form  was  immaterial. 

The  action  was  in  form  for  breach  of  promise  to  marry.  The 
seduction  was  in  form  but  an  aggravation  of  the  damage.  The 
strict  rule  of  the  common  law  that  a  woman  who  consents  can- 
not complain  directly  of  the  greatest  possible  wrong,  had  to  be 
adhered  to.  But  the  action  while  in  form  upon  contract  was  in 
substance  for  the  gross  fraud  which  the  man  perpetrated  in 
taking  advantage  of  the  confidential  relation  established  by  the 
marriage  engagement  to  accomplish  the  woman's  dishonor.  The 
substantial  damages  which  the  petitioner  obtained  were  not  for 
the  deprivation  of  the  matrimonial  alliance,  but  for  the  loss  of 
character  and  the  ever-continuing  shame  and  sorrow. 

It  has  been  the  policy  of  the  Bankruptcy  Act  to  discharge 
honest  debtors  but  not  to  afford  a  shield  to  willful  wrongdoers 
and  to  avoid  the  possibility  that  seducers  might  take  advantage 
of  it,  Congress  in  1903  passed  an  amendment  providing  that  lia- 
bility for  "the  seduction  of  an  unmarried  female"  should  not 
be  discharged.  The  provision  is  broad  and  we  have  no  doubt 
applies  and  was  intended  to  apply  to  every  case  where  there  is 
liability  for  seduction  whether  the  action  to  enforce  such  lia- 
bility be  based,  as  is  permitted  in  some  states,  directly  upon  the 
essential  wrong,  or  by  reason  of  the  limitations  of  the  common 
law,  be  founded  upon  the  incident — the  refusal  to  marry.  To 
say  that  Congress  intended  to  distinguish  between  these  cases 
is  to  say  that  it  intended  to  further  favor  seducers  in  those  juris- 
dictions where  they  are  already  favored  by  adherence  to  an 
artificial  form  of  action  which  often  operates  to  prevent  the  en- 
forcement of  a  morally  just  demand. 


708  DISCHARGE 

The  contention  is  made  that  as  the  action  is  in  form  for 
breach  of  contract  some  portion  of  the  damages  awarded  must 
have  been  for  the  loss  of  the  matrimonial  alliance  and  that  as  the 
judgment  cannot  be  split  up  all  must  be  discharged.  As  already 
pointed  out,  however,  the  real  wrong  for  which  the  plaintiff  re- 
covered was  for  the  seduction,  and  in  the  absence  of  any  showing 
to  the  contrary  it  will  be  presumed  that  the  substantial  dam- 
ages were  awarded  for  that. 

The  order  of  the  District  Court  is  reversed  with  costs.^^ 

GEE  V.  GEE 

84  Minn.  384,  87  N.  W.  1116 

(Supreme  Court  of  Minnesota.    Nov.  22,  1901) 

LOVELY,  J.  Plaintiff  and  defendant  formed  a  partnership 
on  the  30th  of  July,  1896,  for  the  purpose  of  buying  and  selling 
grain  on  commission.  Plaintiff  was  to  give  no  attention  to  the 
business.  Defendant  was  personally  to  conduct  the  same,  and 
receive  $60  per  month  therefor.  Such  connection  continued  un- 
til January  7th  following,  when  it  was  dissolved  by  mutual  con- 
sent. Thereafter  an  action  was  brought  by  plaintiff  against 
his  partner  for  an  accounting,  which  was  submitted  to  a  referee. 
The  referee  heard  the  evidence,  arid  made  findings  on  which 
judgment  was  ordered  against  the  defendant  for  a  substantial 
sum,  which  was  duly  entered  and  docketed.  In  September  of  the 
following  year  defendant  made  application  for  the  benefits  of 
the  federal  bankrupt  act,  in  which  he  properly  scheduled  his 
liabilities,  including  plaintiff's  judgment,  and,  upon  proceedings 
duly  had,  was  legally  discharged.  The  judgment  against  de- 
fendant still  remaining  of  record,  under  the  provisions  of  c.  262, 
Gen.  Laws  1899,  he  moved  the  District  Court  in  which  it  was 
docketed  to  discharge  the  same.  At  the  hearing  of  this  motion 
it  was  claimed  by  plaintiff  that  the  judgment  was  excepted  from 
the  discharge  in  bankruptcy,  and  he  was  given  leave  to  bring 
suit  thereon,  which  he  did.  Defendant  answered,  setting  up  his 
discharge  in  bankruptcy.  Plaintiff,  by  reply,  alleged  that  the 
judgment  referred  to  was  for  defendant's  fraud  and  misap- 
propriation while  acting  in  a  fiduciary  capacity,  which  facts, 
under  his  claim,  excepted  the  judgment  from  the  effect  of  the 

11 — Followed  in  In   re   Grounds, 
215  Fed.  280.  '  -••'-•         -.     -- 


DISCHARGE  709 

bankruptcy  discharge.  The  action  was  tried  to  the  District 
Court  for  St.  Louis  county,  which,  after  having  made  findings 
of  fact  and  law  in  favor  of  defendant,  ordered  judgment  thereon. 
Plaintiff  moved  for  a  new  trial  upon  a  settled  case,  which  was 
denied.    From  this  order,  plaintiff  appeals. 

Under  plaintiff's  contention,  the  disposition  of  this  appeal  is 
within  a  very  narrow  compass,  depending  upon  the  construc- 
tion of  that  portion  of  the  federal  bankrupt  act  of  1898  which 
excepts  from  the  discharge  "judgments  in  actions  for  frauds, 
•  *  •  or  debts  created  by  fraud,  *  *  *  in  any  fiduciary 
capacity. ' '  30  Stat.  550,  §  17,  els.  2,  4.  Plaintiff  insists,  first, 
that  the  action  for  accounting  was  based  upon  the  fraudulent  acts 
of  the  defendant  in  the  misappropriation  of  partnership  funds 
and  property.  His  theory  is  that  the  partnership  was  controlled 
by  an  agreement  under  which  defendant  was  authorized  to  with- 
draw $60  per  month  for  his  services,  and  no  more ;  also  that  it 
was  defendant's  duty  to  render  an  account  from  month  to 
month,  which  he  did  not  do.  Other  than  the  connection  between 
the  partnership  agreement  and  general  allegations  of  deficit 
and  misappropriation  of  funds  by  defendant,  there  was  nothing 
in  the  complaint  in  the  suit  before  the  referee  which  would 
justify  the  claim  that  fraud  was  litigated  therein.  It  was  an 
ordinary  equitable  action  for  an  accounting  between  partners, 
sounding  in  contract  (3  Pom.  Eq.  Jur.  p.  1431),  and  asking  for 
a  money  judgment.  Neither  do  we  think  the  findings  of  the 
referee  justify  the  claim  that  defendant  was  guilty  of  defraud- 
ing plaintiff  in  the  conduct  of  the  partnership  business.  It  was 
found  by  the  referee  that  during  the  period  of  the  partnership 
defendant  "converted"  a  certain  sum  of  money,  which  counsel 
claims  ex  vi  termini  indicates  fraud ;  but  it  is  clear  from  the  re- 
maining findings  that  the  word  ' '  converted ' '  was  used  in  no  such 
sense,  but  to  describe  conduct  not  inconsistent  with  honesty  and 
good  faith.  From  which  it  follows  that  neither  the  findings  nor 
the  judgment  entered  thereon  in  the  suit  before  the  referee  es- 
tablished any  fraud  by  defendant  in  the  management  of  the 
partnership  business.  As  distinguished  from  the  previous  United 
States  bankruptcy  acts,  the  act  of  1898  provides  for  two  sep- 
arate classes  of  exceptions  from  the  discharge  of  the  bankrupt, 
viz.,  one  in  which  the  judgment  must  be  for  fraud,  and  the  other 
in  which  the  debt  must  have  arisen  upon  embezzlement,  misap- 
propriation, or  fraud  in  a  "  fiduciary  capacity. "  It  is  probable, 
as  held  in  Re  Rhutassel  (D.  C.)  96  Fed.  597,  that  it  was  the 


710  DISCHARGE 

purpose  of  the  present  bankruptcy  act  to  provide  that  in  the 
first  class  of  cases  the  fraud  should  be  shown  or  evidenced  by  a 
judgment,  or  at  least  disclosed  in  the  judgment  roll,  while  in 
the  case  of  debts  for  "fraud  in  a  fiduciary  capacity"  proof  of 
the  fiduciary  capacity  would  furnish  the  test  of  the  exception 
which  would  apply  to  cases  of  violation  of  express  trusts.  But 
it  is  not  necessary  in  this  case  to  anticipate  a  decision  of  the 
Supreme  Court  of  the  United  States  in  that  respect,  for  the  trial 
judge,  not  having  before  it  a  judgment  for  fraud,  fully  consid- 
ered the  weight  of  evidence  on  that  question,  and  found  that 
there  was  no  fraud,  upon  testimony  that  amply  supports  his 
conclusions  in  that  respect,  and  forecloses  any  further  inquiry 
upon  that  issue  here,  leaving  for  us  the  simple  duty  of  constru- 
ing the  meaning  of  the  provision  that  excepts  * 'fraud  in  a  fidu- 
ciary capacity"  from  the  operation  of  the  bankruptcy  dis- 
charge. So  that  it  only  remains  to  be  considered  whether,  un- 
der the  partnership  agreement,  a  violation  of  the  obligations  im- 
posed upon  the  defendant  by  its  provisions  for  payment  and 
account  for  moneys  received,  as  well  as  the  defendant's  with- 
drawal of  more  money  than  his  salary,  was  a  breach  of  a  fidu- 
ciary relation,  within  the  purview  of  the  bankruptcy  exception 
referred  to.  In  the  national  acts  of  bankruptcy  for  1841  and 
1867  the  discharge  of  the  bankrupt  excepts  him  from  a  debt  of 
a  similar  nature.  In  both  of  these  acts  the  word  "fiduciary" 
was  employed  as  a  designation  of  the  relation  from  which  a  dis- 
charge would  not  operate,  and  such  term  has  received  authorita- 
tive interpretation  from  the  highest  tribunal  in  the  land,  which 
concededly  has  final  jurisdiction  in  such  matters.  The  term  "fi- 
duciary" in  the  provisions  of  these  acts  has  been  held  by  the 
United  States  Supreme  Court,  as  well  as  other  courts,  to  apply 
to  what  may  be  understood  as  technical  or  express,  rather  than 
implied,  trusts,  and  as  excluding  from  such  interpretation  frauds 
by  commission  men,  brokers,  agents,  etc.  Neal  v.  Clark,  95  U. 
S.  704,  24  L.  ed.  586 ;  Hennequin  v.  Clews,  111  U.  S.  676,  4  Sup. 
Ct.  576,  28  L.  ed.  565 ;  Palmer  v.  Hussey,  87  N.  Y.  303 ;  Id.,  119 
U.  S.  96,  7  Sup.  Ct.  158,  30  L.  ed.  362 ;  Noble  v.  Hammond,  129 
U.  S.  65,  9  Sup.  Ct.  235,  32  L.  ed.  621.  The  implied  trust  rela- 
tion existing  between  partners,  under  which  their  liabilities  to 
each  other  must  be  determined,  does  not  bring  their  affairs 
within  the  definition  of  the  excepted  term,  "fiduciary,"  in  the 
bankruptcy  act,  under  the  construction  given  in  the  above  deci- 
sions.   In  a  leading  case  in  a  court  of  high  authority,  which  had 


DISCHARGE  711 

previously  decided  that  implied  as  well  as  express  trusts  were 
embraced  in  the  exception  of  the  bankruptcy  act  referred  to,  it 
was  held  that  even  under  such  interpretation  the  exception  of 
the  act  would  not  extend  to  an  implied  trust  between  the  mem- 
bers of  a  partnership  (Hill  v.  Shiebley,  68  Ga.  556) ;  and  we 
are  clearly  of  that  opinion.  While  the  collocation  of  language 
in  which  the  term  "fiduciary"  is  used  in  the  former  acts  is  not 
precisely  the  same  as  in  the  act  of  1898,  there  is  no  reason  to 
apprehend  that  a  different  construction  will  be  given  to  that 
word  than  by  the  previous  decisions  in  the  court  of  final  juris- 
diction in  such  matters.  In  re  Basch  (D.  C.)  97  Fed.  761; 
Bracken  v.  Milner  (C.  C.)  104  Fed.  522. 
The  order  appealed  from  is  affirmed. 

ZAVELO  V.  REEVES 

227  U.  S.  625,  57  L.  ed.  676,  33  Sup.  Ct.  365 

[See  this  case  given  on  page  391,  ante.] 

ALLEN  &  CO.  V.  FERGUSON 

18  Wallace,  1,  21  L.  ed.  854 
(United  States  Supreme  Court.    October  Term,  1873) 

P.  H.  Allen  &  Co.  sued  A.  H.  Ferguson  upon  a  promissory 
note,  dated  March  20th,  1867,  payable  one  day  after  date,  with 
interest. 

Ferguson  appeared  and  pleaded  his  discharge  in  bankruptcy 
in  bar  to  the  action. 

The  plaintiffs  replied  a  new  promise  in  writing  made  while  the 
proceedings  in  bankruptcy  were  pending.  This  promise  the 
plaintiffs  averred  that  they  relied  upon,  and  in  consequence  of 
it  made  no  efforts  to  collect  their  debt.  The  alleged  promise 
was  contained  in  the  following  letter,  which  the  plaintiffs  made 
part  of  their  replication,  viz. : 

"Crockett's  Bluff,  Arkansas,  January  7th,  1868. 

"Messrs.  T.  H.  Allen  &  Co. 

"Dear  Sir:  I  avail  myself  of  this  opportunity  to  give  you  a 
fare  statement  of  my  pecuniary  affa'res.  First,  I  failed  to  make 
a  crop ;  secondly,  find  myself  involved  as  security  to  the  amount 
of  five  or  eight  thousand  dollars;  was  sued,  and  judgments  was 


712  DISCHARGE 

render 'd  against  ine  at  the  last  turm  of  our  co'rt  for  about 
$4000,  a  sum  suf 'ie'ent  to  sell  all  the  avai'ble  property  that  I 
am  in  possession  of.  I  lost  about  $3000  by  persons  taking  the 
bankrupt  law.  This  is  my  situation.  I  was,  as  you  can  re'dily 
conclude,  in  a  bad  fix.  To  remain  as  I  was,  at  that  time,  my 
property  would  be  sold  to  pay  security  debts,  and  my  just  cred- 
itors would  not  get  any  part  of  it,  and  that  I  would  be  redused 
to  insolvency  and  still  ju'gments  against  me.  As  a  last  resort 
concluded  to  render  a  skedule  myself  in  order  to  forse  a  pro- 
rater  division  of  my  affects.  The  five  bales  cotton  I  shipt  you 
was  all  my  crop,  to  pay  you  for  the  meat  that  you  had  sent  me, 
to  enable  me  to  make  the  little  crop  that  I  did  make.  The  cash 
that  I  requested  you  to  send  me  was,  for  myself  and  "William 
Ferguson,  to  pay  his  hands  for  labor ;  and  one  hundred  and  fifty 
yards  of  the  bag'ing  was  for  W.  Ferguson,  and  one  barel  of  the 
salt.  I  have  been  absent  from  home  for  the  last  two  weeks ;  got 
home  last  night,  and  has  not  scan  him  yet,  but  suppose  he  has 
shipt  you  some  cotton.  If  he  has  not  done  so,  I  will  see  that  he 
sends  you  cotton  at  once.  Be  satisfied;  all  will  he  right.  I  in- 
tend to  pay  all  my  just  debts,  if  money  can  he  made  out  of 
hired  labor.  Security  debt  I  cannot  pay.  I  shall  have  a  hard 
time,  I  suppose,  this  se'son,  but  will  do  the  best  I  can. 

"Jan.  8. — Since  the  above  was  writ 'en  I  have  seen  "William 
Ferguson.  He  says  he  ship'ed  you  two  bales  cotton,  ten  or 
twelve  days  ago,  and  ship'ed  in  my  name,  as  the  baggin'  was 
order 'd  by  me  for  him.  William  Ferguson  will  be  in  Memphis 
betwixt  this  and  the  first  of  March,  and  will  call  and  see  you  on 
bisness  matters  betwixt  me  and  you 'self.  All  will  be  right  be- 
twixt me  and  my  just  creditors.  Don't  think  hard  of  me.  At- 
tribet  my  poverty  to  the  unprincipel'd  Yankey.  Let  me  heare 
from  you  as  usel. 

''Yours,  very  respectfully, 

"A.  H.  Ferguson." 

To  this  replication  the  defendant  demurred.  The  demurrer 
was  sustained  by  the  Circuit  Court,  and  this  appeal  was  taken 
by  the  plaintiffs. 

Mr.  Justice  HUNT  delivered  the  opinion  of  the  court. 

The  question  is,  does  the  letter  of  the  defendant,  set  forth  in 
the  replication,  contain  a  sufficient  promise  to  pay  the  debt  in 
suit? 


DISCHARGE  713 

All  the  authorities  agree  in  this,  that  the  promise  by  which 
a  discharged  debt  is  revived  must  be  clear,  distinct,  and  un- 
equivocal. It  may  be  an  absolute  or  a  conditional  promise,  but 
in  either  case  it  must  be  unequivocal,  and  the  occurrence  of  the 
condition  must  be  averred  if  the  promise  be  conditional.  The 
rule  is  different  in  regard  to  the  defense  of  the  statute  of  limi- 
tations against  a  debt  barred  by  the  lapse  of  time.  In  that  case, 
acts  or  declarations  recognizing  the  present  existence  of  the 
debt  have  often  been  held  to  take  a  case  out  of  the  statute.  Not 
so  in  the  class  of  cases  we  are  considering.  Nothing  is  sufficient 
to  revive  a  discharged  debt  unless  the  jury  are  authorized  by 
it  to  say  that  there  is  the  expression  by  the  debtor  of  a  clear 
intention  to  bind  himself  to  the  payment  of  the  debt.  Thus, 
partial  payments  do  not  operate  as  a  new  promise  to  pay  the 
residue  of  the  debt.  The  payment  of  interest  will  not  revive  the 
liability  to  pay  the  principal,  nor  is  the  expression  of  an  in- 
tention to  pay  the  debt  sufficient.  The  question  must  be  left  to 
the  jury  with  instructions  that  a  promise  must  be  found  by 
them  before  the  debtor  is  bound.  (Hilliard  on  Bankruptcy,  264 
to  266,  where  the  cases  are  collected.) 

The  plaintiffs  in  error  contend  that  such  promise  is  to  be  found 
in  the  letter  of  the  defendant,  forming  a  part  of  their  replica- 
tion. They  rely  chiefly  on  these  expressions :  "Be  satisfied ;  all 
will  be  right.  I  intend  to  pay  all  my  just  debts,  if  money  can 
be  made  from  hired  labor.  Security  debt  I  cannot  pay,"  and  on 
the  postscript  where  he  adds,  ' '  All  will  be  right  betwixt  me  and 
my  just  creditors." 

There  can  be  no  more  uncertain  rule  of  action  than  that  which 
is  furnished  by  an  intention  to  do  right.  How  or  by  whom  is 
the  right  to  be  ascertained  ?  What  is  right  in  a  particular  case  ? 
Archbishop  Whately  says:  "That  which  is  conformable  to  the 
supreme  will  is  absolutely  right,  and  is  called  right  simply, 
without  reference  to  a  special  end.  The  opposite  to  right  is 
wrong."  This  announces  a  standard  of  right,  but  it  gives  no 
practical  aid.  What  may  be  right  between  the  defendant  and 
his  creditors  is  as  difficult  to  determine  as  if  he  had  no  such 
standard.  It  is  not  absolutely  certain  that  it  is  right  for  a 
creditor,  seizing  hs  debtor,  to  say,  Pay  me  what  thou  owest,  or 
that  it  is  wrong  for  the  debtor  to  resist  such  an  attack.  It  is 
not  unnatural  that  the  creditor  should  think  that  payment  of  the 
debt  was  right,  and  that  it  was  the  only  right  in  the  case.  It  is 
equally  natural  that  the  debtor  should  entertain  a  different  opin- 


714  DISCHARGE 

ion.  The  law  holds  it  to  be  right  that  a  debtor  shall  devote 
his  entire  property  to  the  payment  of  his  debts,  and  when  he  has 
done  this  that  after-acquired  property  shall  be  his  own,  to  be 
held  free  from  the  obligation  of  all  his  debts,  just  debts  as  well 
as  unjust,  principal  debts  as  well  as  security  debts.  Neither 
the  supreme  will,  so  far  as  we  can  ascertain  it,  nor  the  laws  of 
the  land,  require  that  a  debtor  whose  family  is  in  need,  or  who 
is  himself  exhausted  by  a  protracted  struggle  with  poverty  and 
misfortune,  should  prefer  a  creditor  to  his  family ;  that  he  should 
appropriate  his  earnings  to  the  payment  of  a  debt  from  which 
the  judgment  of  the  law  has  released  him,  rather  than  to  the 
support  of  his  family  or  to  his  own  comfort.  What  an  honest 
man  should  or  would  do  under  such  circumstances  it  is  not 
always  easy  to  say.  When,  therefore,  the  debtor  in  this  case 
said  to  the  plaintiff:  "Be  satisfied;  I  intend  to  do  right;  all 
will  be  right  betwixt  my  just  creditors  and  myself,"  he  cannot 
be  understood  as  saying  that  he  would  certainly  pay  his  debt, 
much  less  that  he  would  pay  it  immediately,  as  the  plaintiff 
assumes.  What  is  or  what  may  be  right  depends  upon  many 
circumstances.  The  principle  is  impracticable  as  a  rule  of  ac- 
tion to  be  administered  by  the  courts.  There  is  no  standard 
known  to  us  by  which  we  are  able  to  say  that  it  is  wrong  in  the 
defendant  not  to  pay  the  plaintiff's  debt. 

We  are  of  the  opinion  that  the  letter  produced  does  not  con- 
tain evidence  of  a  promise  to  pay  the  debt  in  suit,  and  that 
the  judgment  appealed  from  must  be  affirmed. ^^ 

12 — See  Matthewson  v.  Needham, 
81  Kans.  340,  26  L.  R.  A.  (N.  S.) 
274. 


APPENDIX 


STATUTES 


STATUTE  OF  13  ELIZABETH 
Ch.  5 

§  1.  For  the  avoiding  and  abolishing  of  feigned,  covinous,  and  fraudu- 
lent feoffments,  gifts,  grants,  alienations,  conveyances,  bonds,  suits,  judg- 
ments, and  executions,  as  well  of  lands  and  tenements  as  of  goods  and 
chattels,  more  commonly  used  and  practised  in  these  days  than  hath  been 
seen  or  heard  of  heretofore:    which  feoffments,  gifts,  grants,  alienations^ 
conveyances,  bonds,  suits,  judgments,   and   executions  have  been  and  are 
devised  and  contrived  of  malice,  fraud,  covin,  collusion,  or  guUe/to  the  end,\ 
purpose,  and  intent  to  delay,  hinder,  or  defraud  creditors  and  others  of] 
tKeir  just  and  lawful  actions,   suits,   debts,   accounts,   damages,   penalties/ 
forfeitures,  heriots,  mortuaries,  and  reliefs,  not  only  to  the  let  or  hinderance 
of  the  due  course  and  execution  of  law  and  justice,  but  also  to  the  over- 
throw of  all  true  and  plain  dealing,  bargaining,  and  chevisanee  bfetween 
man  and  man,  without  the  which  no  commonwealth  or  civil  society  can  be 
maintained  or  continued: 

§  2,  Be  it  therefore  declared,  ordained,  and  enacted  by  the  authority  of 
this  present  Parliament,  that  all  and  every  feoffment,  gift,  grant,  alienation, 
bargain  and  conveyance  of  lands,  tenements,  hereditaments,  goods 
and  chattels,  or  of  any  of  them,  or  of  any  lease,  rent,  common,  or  other 
profit  or  charge  out  of  the  same  lands,  tenements,  hereditaments,  goods,  and 
chattels,  or  any  of  them,  by  writing  or  otherwise,  and  all  and  every  bond, 
suit,  judgment,  and  execution,  at  any  time  had  or  made  sithence  the  be- 
ginning of  the  Queen's  Majesty's  reign  that  now  is,  or  at  any  time  here- 
after to  be  had  or  made,  to  or  for  any  intent  or  purpose  before  declared  and 
expressed,  shall  be  from  henceforth  deemed  and  taken  (only  as  against  that 
person  or  persons,  his  or  their  heirs,  successors,  executors,  administrators 
and  assigns,  and  every  of  them,  whose  actions,  suits,  debts,  accounts,  dam- 
ages, penalties,  forfeitures,  heriots,  mortuaries,  and  reliefs,  by  such  guileful 
covinous,  or  fraudulent  devices  and  practices  as  is  aforesaid,  are,  shall,  or 
might  be  in  any  wise  disturbed,  hindered,  delayed,  or  defrauded),  to  be 
glearly  and  utterly  void,  frustrate,  and  of  none  effect;  any  pretence,  color, 
feigned  consideration,  expressing  of  use,  or  any  other  matter  or  thing  to 
the  contrary,  notwithstanding. 

§  3.  And  be  it  further  enacted  by  the  authority  aforesaid,  that  all  and 
every  the  parties  to  such  feigned,  covinous,  or  fraudulent  feoffment,  gift, 
grant,  alienation,  bargain,  conveyance,  bonds,  suits,  judgments,  executions, 
and  other  things  before  expressed,  and  being  privy  and  knowing  of  the 
same,  or  any  of  them,  which  at  any  time  after  the  tenth  day  of  June  next 
coming  shall  wittingly  and  willingly  put  in  ure,  avow,  maintain,  justify,  or 
defend  the  same,  or  any  of  them,  as  true,  simple,  and  done,  had,  or  made, 
bona  fide  and  upon  good  consideration;  or  shall  alien  or  assign  any  of  the 
lands,  tenements,  goods,  leases,  or  other  things  before  mentioned,  to  him  or 
them  conveyed  as  is  aforesaid,  or  any  part  thereof ;  shall  incur  the  penalty 
and  forfeiture  of  one  year 's  Value  of  the  said  lands,  tenements,  and  heredita- 
ments, leases,  rents,  commons,  or  other  profits  of  or  out  of  the  same;  and  the 
whole  value  of  the  said  goods  and  chattels ;  and  also  so  much  money  as  are  or 

717 


718  STATUTES 

shall  be  contained  in  any  such  covinous  and  feigned  bond,  the  one  moiety 
whereof  to  be  to  the  Queen's  Majesty,  her  heirs  and  successors,  and  the  other 
moiety  to  the  party  or  parties  grieved  by  such  feigned  and  fraudulent  feoff- 
ment, gift,  grant,  alienation,  bargain,  conveyance,  bonds,  suits,  judgments, 
executions,  leases,  rents,  commons,  profits,  charges,  and  other  things  afore- 
said, to  be  recovered  in  any  of  the  Queen's  courts  of  record,  by  action  of 
debt,  bill,  plaint,  or  information,  wherein  no  essoin,  protection,  or  wager  of 
law  shall  be  admitted  for  the  defendant  or  defendants;  and  also  being 
thereof  lawfully  convicted,  shall  suffer  imprisonment  for  one-half  year 
without  bail  or  mainprise. 

§  6.  Provided  also,  and  be  it  enacted  by  the  authority  aforesaid,  that 
this  act,  or  anything  therein  contained,  shall  not  extend  to  any  estate  or 
interest  in  lands,  tenements,  hereditaments,  leases,  rents,  commons,  profits, 
goods,  or  chattels,  had,  made,  conveyed,  or  assured,  or  hereafter  to  be  had, 
made,  conveyed,  or  assured,  which  estate  or  interest  is  or  shall  be  upon  good 
consideration  and  hotia  fide  lawfully  conveyed  or  assured  to  any  person  or 
persons,  or  bodies  politic  or  corporate,  not  having  at  the  time  of  such  convey- 
ance or  assurance  to  them  made  any  manner  of  notice  or  knowledge  of 
Buch  covin,  fraud,  or  collusion  as  is  aforesaid;  anything  before  mentioned 
to  the  contrary  hereof,  notwithstanding. 

NEW  YORK  STATUTE  OF  1829  i 

(New  York  Rev.  Stat.  1829,  Part  II,  Ch.  VII,  Title  III)  '■••• 

§  1.  Every  conveyance  of  assignment,  in  writing  or  otherwise,  of  any 

estate  or  interest  in  lands,  or  in  goods  or  things  in  action,  or  of  any  rents 

or  profits  issuing  therefrom,  and  every  charge  upon  lands,  goods,  or  things 

in  action,  or  upon  the  rents  or  profits  thereof,  made_with  the  intent  to 

(hinder,  delay  or  defraud  creditors  or  other  persons  of  their  lawful  suits, 
damages,  forfeitures,  debts,  or  demands,  and  every  bond  or  other  eividence 
of  debt  given,  suit  commenced,  decree  or  judgment  suffered,  with  the  like  in- 
tent, as  against  the  persons  so  hindered,  delayed,  or  defrauded,  shall  be  void. 

§  3.  Every  conveyance,  charge,  instrument,  or  proceeding  declared  to  be 
void,  by  the  provisions  of  this  chapter,  as  against  creditors*  or  purchasers, 
shall  be  equally  void  against  the  heirs,  successors,  personal  representatives, 
or  assignees  of  such  creditors  or  purchasers. 

§  4.  The  question  of  fraudulent  intent  in  all  cases  arising  under  the 
provisions  of  this  chapter  shall  be  deemed  a  question  of  fact  and  not  of 
law;  nor  shall  any  conveyance  or  charge  be  adjudged  fraudulent  as  against 
creditors  or  purchasers  solely  on  the  ground  that  it  was  not  founded  on  a 
valuable  consideration. 

§  5.  The  provisions  of  this  chapter  shall  not  be  construed  in  any  manner 
to  affect  or  impair  the  title  of  a  purchaser  for  a  valuable  consideration, 
unless  it  shall  appear  that  such  purchaser  had  previous  notice  of  the  fraudu- 
lent intent  of  his  immediate  grantor,  or  of  the  fraud  rendering  void  the 
title  of  such  grantor. 

^  These  provisions,  in  somewhat  altered  phraseology,  are  to  be  found 
in  the  present  Consolidated  Laws,  c.  50  (Real  Property  Law),  §§  263-266; 
c.  45  (Personal  Property  Law),  §§  35,  37.  They  have  furnished  the  pat- 
tern for  the  legislation  of  many  states.  Bigelow,  Fraudulent  Conveyances 
(Knowlton'B  edj,  pp.  H,  25. 


UNITED  STATES  BANKRUPTCY  LAW 

(ACT  OF  JULY  1.  1898.  CH.  541;  30  Stat,  at  L.  544;  1  Fed.  Stat.  Annot.  525) 

AS  AMENDED  BY 

THE  ACT  OF  FEBRUARY  5.  1903,  CH.  487  (32  Stat,  at  L.  197;  10  Fed.  Stat 

Annot.  38);  THE  ACT  OF  JUNE  15,  1906,  CH.  3333  (34  Stat,  at  L. 

267;  1909  Supp.  Fed.  Stat.  Annot.  55);  AND  THE  ACT  OF 

JUNE  25,   1910.   CH.  412   (36  Stat,  at  L-  838: 

1912    Supp.    Fed.    Stat.    Annot.    21) 


AN  ACT 

To  Establish  a   Unifoem   System   of  Bankruptcy   Theoughout   thb 

United  States 

Be  it  enacted  by  the  Senate  and  House  of  Representatives  of  the  United 
States  of  America  in  Congress  assembled, 

CHAPTEE  I 

DEFINITIONS 

1 1.  Meaning  of  Woeds  and  Phrases. — a  The  words  and  phrases  used 
in  this  Act  and  in  proceedings  pursuant  hereto  shall,  unless  the  same  be  in- 
eousi stent  with  the  context,  be  construed  as  follows:  (1)  "A  person 
mgainst  whom  a  petition  has  been  filed"  shall  include  a  person  who  has 
filed  a  voluntary  petition;  (2)  "adjudication"  shall  mean  the  date  of  the 
entry  of  a  decree  that  the  defendant,  in  a  bankruptcy  proceeding,  is  a 
bankrupt,  or  if  such  decree  is  appealed  from,  then  the  date  when  such 
decree  is  finally  confirmed;  (3)  "appellate  courts"  shall  include  the  circuit 
courts  of  appeals  of  the  United  States,  the  supreme  courts  of  the  Terri- 
tories, and  the  Supreme  Court  of  the  United  States;  (4)  "bankrupt"  shall 
include  a  person  against  whom  an  involuntary  petition  or  an  application 
to  set  a  composition  aside  or  to  revoke  a  discharge  has  been  filed,  or  who 
has  filed  a  voluntary  petition,  or  who  has  been  adjudged  a  bankrupt;  (5) 
"clerk"  shall  mean  the  clerk  of  a  court  of  bankruptcy;  (6)  "corpora 
tions"  shall  mean  all  bodies  having  any  of  the  powers  and  privileges  ot 
private  corporations  not  possessed  by  individuals  or  partnerships,  and  shall 
include  limited  or  other  partnership  associations  organized  under  laws  mak- 
ing the  capital  subscribed  alone  responsible  for  the  debts  of  the  associa- 
tion; (7)  "court"  shall  mean  the  court  of  bankruptcy  in  which  the  proceed- 
ings are  pending,  and  may  include  the  referee;  (8)  "courts  of  bankruptcy" 
shall  include  the  district  courts  of  the  United  States  and  of  the  Territories, 
the  supreme  court  of  the  District  of  Columbia,  and  the  United  States  court 
of  the  Indian  Territory,  and  of  Alaska;  (9)  "creditor"  shall  include  any- 
one who  owns  a  demand  or  claim  provable  in  bankruptcy,  and  may  include 
his  duly  authorized  agent,  attorney,  or  proxy;  (10)  "date  of  bankruptcy," 
or  "time  of  bankruptcy,"  or  "commencement  of  proceedings,"  or  "bank- 
ruptcy," with  reference  to  time,  shall  mean  the  date  when  the  petition  waa 
filed;  (11)  "debt"  shall  include  any  debt,  demand,  or  claim  provable  in 
bankruptcy;  (12)  "discharge"  shall  mean  the  release  of  a  bankrupt  from 
all  of  his  debts  which  are  provable  in  bankruptcy,  except  such  as  are  ex- 
cepted by  this  Act;    (13)    "document"  shall  include  any  book,  deed,  or 

1 — ^Thoae     portions      of     the      Act  1903,    1906    and    1910    are    indicated 

which    remain    as    originally    enacted  by    the    use    of    italics;    the    original 

in   1898   are   printed  in   Roman  type ;  form     of     the     amended     sections     is 

changes  made  by  the  amendments  of  given    in    the    footnotes. 
H.  &  A.  Bankruptcy — 46 

721 


722  BANKRUPTCY  ACT  OF  1898 

instrument  in  writing;  (14)  "holiday"  shall  include  Christmas,  the  Fourth 
of  July,  the  Twenty-second  of  February,  and  any  day  appointed  by  the 
President  of  the  United  States  or  the  Congress  of  the  United  States  as  a 
holiday  or  as  a  day  of  public  fasting  or  thanksgiving;  (15)  a  person  shall 
be  deemed  insolvent  within  the  provisions  of  this  Act  whenever  the  aggre- 
gate  of  his  property,  exclusive  of  any  property  which  he  may  have  con- 
veyed, transferred,  concealed,  or  removed,  or  permitted  to  be  concealed  or 
removed,  with  intent  to  defraud,  hinder  or  delay  his  creditors,  shall  not,  at 
a  fair  valuation,  be  sufficient  in  amount  to  pay  his  debts;  (16)  "judge" 
shall  mean  a  judge  of  a  court  of  bankruptcy,  not  including  the  referee; 
(17)  "oath"  shall  include  affirmation;  (18)  "officer"  shall  include  clerk, 
marshal,  receiver,  referee,  and  trustee,  and  the  imposing  of  a  duty  upon  or 
the  forbidding  of  an  act  by  any  officer  shall  include  his  successor  and  any 
person  authorized  by  law  to  perform  the  duties  of  such  officer;  (19) 
"persons"  shall  include  corporations,  except  where  otherwise  specified,  and 
officers,  partnerships,  and  women,  and  when  used  with  reference  to  the 
commission  of  acts  which  are  herein  forbidden  shall  include  persons  who 
are  participants  in  the  forbidden  acts,  and  the  agents,  officers,  and  members 
of  the  board  of  directors  or  trustees,  or  other  similar  controlling  bodies  of 
corporations;  (20)  "petition"  shall  mean  a  paper  filed  in  a  court  of  bank- 
ruptcy or  with  a  clerk  or  deputy  clerk  by  a  debtor  praying  for  the  benefits 
of  this  Act,  or  by  creditors  alleging  the  commission  of  an  act  of  bankruptcy 
by  a  debtor  therein  named;  (21)  "referee"  shall  mean  the  referee  who  has 
jurisdiction  of  the  case  or  to  whom  the  case  has  been  referred,  or  any  one 
acting  in  his  stead;  (22)  "conceal"  shaU  include  secrete,  falsify,  and 
mutilate;  (23)  "secured  creditor"  shall  include  a  creditor  who  has  security 
for  his  debt  upon  the  property  of  the  bankrupt  of  a  nature  to  be  assignable 
under  this  Act,  or  who  owns  such  a  debt  for  which  some  indorser,  surety,  or 
other  persons  secondarily  liable  for  the  bankrupt  has  such  security  upon  the 
bankrupt's  assets;  (24)  "States"  shall  include  the  Territories,  the  Indian 
Territory,  Alaska,  and  the  District  of  Columbia;  (25)  "transfer"  shall  in- 
clude the  sale  and  every  other  and  different  mode  of  disposing  of  or 
parting  with  property,  or  the  possession  of  property,  absolutely  or  condi- 
tionally, as  a  payment,  pledge,  mortgage,  gift,  orsecurity;  (26)  "trustee" 
shall  include  all  of  the  trustees  of  an  estate; /(27)  ' ' wagg;earner ' '  shall 
mean  an  individual  who  works  for  wages,  salary,  or  hire,  at  a  rate  of  com- 
pensation  not  exceeding  ane_^ousand  five  hundred  dollars  per  yea'H^  (28) 
words  importing  the  masculine  gender  may  be  applied  to  and  include  cor- 
porations, partnerships,  and  women;  (29)  words  importing  the  plural  num- 
ber may  be  applied  to  and  mean  only  a  single  person  or  thing;  (30)  words 
importing  the  singular  number  may  be  applied  to  and  mean  several  per- 
sons or  things. 

CHAPTEB  II 

CaUEATION   OF  COURTS   OF  BANKBUPTCY   AND   THEffi  JURISDICTION 

§  2.  That  the  courts  of  bankruptcy  as  hereinbefore  defined,  viz,  the  dis- 
trict courts  of  the  United  States  in  the  several  States,  the  supreme  court 
of  the  District  of  Columbia,  the  district  courts  of  the  several  Territories,  and 
the  United  States  courts  in  the  Indian  Territory  and  the  District  of  Alaska, 
are  hereby  made  courts  of  bankruptcy,  and  are  hereby  invested,  within  their 


BANKRUPTCY  ACT  OF  1898  723 

respective  territorial  limits  as  now  established,  or  as  they  may  be  hereafter 
changed,  with  such  jurisdiction  at  law  and  in  equity  as  will  enable  them 
to  exercise  original  jurisdiction  in  bankruptcy  proceedings,  in  vacation  in 
chambers  and  during  their  respective  terms,  as  they  are  now  or  may  be 
hereafter  held,  to  (1)  adjudge  persons  bankrupt  who  have  hadftheir  prin- 
cipal place  of  business,  resided,  or  had  their  domiciled  within  their  respee- 
tive  territorial  jnriafjjctiona  for  the  preceding  six  months^  or  the^reater  por- 
tioajthfiifiof,  or  who  do  not  have  their  principal  place  of  business,  reside,  or 
have  their  domicile  wi^in  the  United  States,  but  have  property  within  their 
jurisdictions,  or  who  have  been  adjudged  bankriipts  by  courts  of  competent 
jurisdiction  without  the  United  States,  and  have  property  within  their  juris- 
dictions; (2)  allow  claims,  disallow  claims,  reconsider  allowed  or  disallowed 
claims,  and  allow  or  disallow  them  against  bankrupt  estates;  (3)  appoint 
receivers  or  the  marshals,  upon  application  of  parties  in  interest,  in  case  the 
courts  shall  find  it  absolutely  necessary,  for  the  preservation  of  estates,  to 
take  charge  of  the  property  of  bankrupts  after  the  filing  of  the  petition  and 
until  it  is  dismissed  or  the  trustee  is  qualified;  (4)  arraign,  try,  and  punish 
bankrupts,  officers,  and  other  persons,  and  the  agents,  officers,  members  of 
the  board  of  directors  or  trustees,  or  other  similar  controlling  bodies,  of 
corporations  for  violations  of  this  Act,  in  accordance  with  the  laws  of 
procedure  of  the  United  States  now  in  force,  or  such  as  may  be  hereafter 
enacted,  regulating  trials  for  the  alleged  violation  of  laws  of  the  United 
States;  (5)  authorize  the  business  of  bankrupts  to  be  conducted  for  lim- 
ited periods  by  receivers,  the  marshals,  or  trustees,  if  necessary  in  the  best 
interests  of  the  estates;  and  allow  such  officers  additional  compensation  for 
such  services,  as  provided  in  section  forty-eight  of  this  Act;^  (6)  bring  in 
and  substitute  additional  persons  or  parties  in  proceedings  in  bankruptcy 
when  necessary  for  the  complete  determination  of  a  matter  in  controversy; 
(7)  cause  the  estates  of  bankrupts  to  be  collected,  reduced  to  money  and 
distributed,  and  determine  controversies  in  relation  thereto,  except  as  herein 
otherwise  provided;  (8)  close  estates,  whenever  it  appears  that  they  have 
been  fully  administered,  by  approving  the  final  accounts  and  discharging 
the  trustees,  and  reopen  them  whenever  it  appears  they  were  closed  before 
being  fuUy  administered;  (9)  confirm  or  reject  compositions  between 
debtors  and  their  creditors,  and  set  aside  compositions  and  reinstate  the 
cases;  (10)  consider  and  confirm,  modify  or  overrule,  or  return,  with 
.  instructions  for  further  proceedings,  records  and  findings  certified  to  them 
by  referees;  (11)  determine  all  claims  of  bankrupts  to  their  exemptions; 
(12)  discharge  or  refuse  to  discharge  bankrupts  and  set  aside  discharges 
and  reinstate  the  cases;  (13)  enforce  obedience  by  bankrupts,  officers, 
and  other  persons  to  all  lawful  orders,  by  fine  or  imprisonment  or  fine 
and  imprisonment;  (14)  extradite  bankrupts  from  their  respective  districts 
to  other  districts;  (15)  make  such  orders,  issue  such  process,  and  enter 
such  judgments  in  addition  to  those  specifically  provided  for  as  may  be 

2 — §  2  (5)  originally  read  as  fol-  ditlonal  compensation  for  such  serv- 
lows :  "(5)  authorize  the  business  of  lees,  but  not  at  a  greater  rate  than 
bankrupts  to  be  conducted  for  Um-  In  this  Act  allowed  trustees  for 
ited    periods    by    receivers,    the    mar-      similar    services." 

sbals,  or  trustees,  If  necessary  In  the  The  amendment  of  1910  struck  out 

best   interests   of   the   estates."  the  last   clause  added  by   the  amend- 

The  amendment  of  1903   added   thement    of    1903     and    substituted    the 
words :     "and   allow   such   oflScers  ad-  words  between  the  asterisks. 


724  BANKRUPTCY  ACT  OF  1898 

necessary  for  the  enforcement  of  the  provisions  of  this  Act;  (16)  punish 
persons  for  contempts  committed  before  referees;  (17)  pursuant  to  the 
recommendation  of  creditors,  or  when  they  neglect  to  recommend  the  ap- 
pointment of  trustees,  appoint  trustees,  and  upon  complaints  of  creditors, 
remove  trustees  for  cause  upon  hearings  and  after  notices  to  them;  (18) 
tax  costs,  whenever  they  are  allowed  by  law,  and  render  judgments  there- 
for against  the  unsuccessful  party,  or  the  successful  party  for  cause,  or  in 
part  against  each  of  the  parties,  and  against  estates,  in  proceedings  in 
bankruptcy;  (19)  transfer  cases  to  other  courts  of  bankruptcy;  and  (20) 
exercise  ancillary  jurisdiction  over  persons  or  property  within  their  respec- 
tive territorial  limits  in  aid  of  a  receiver  or  trustee  appointed  in  any  bank- 
ruptcy proceedings  pending  in  any  other  court  of  bankruptcy.^ 

Ivlothing  in  this  section  contained  shall  be  construed  to  deprive  a  court 
of  bankruptcy  of  any  power  it  would  possess  were  certain  specific  powers 
not  herein  enumerated. 

CHAPTEK  III 

BANKRUPTS 

§  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)  trans- 
ferred, 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  prefer- 
ence 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  preference;  or  (4)  made  a  general  assignment  for  the 
benefit  of  his  creditors;  or,  being  iiisolvent,  applied  for  a  receiver  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;*  or  (5)  admitted  in  writing  his  inability  to  pay  his 
debts  and  his  willingness  to  be  adjudged  a  bankrupt  on  that  ground. 

b  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.  Such  time  shall  not  expire  until  four  months  after  (1)  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  with  intent 
to  hinder,  delay,  or  defraud  his  creditors  or  for  the  purpose  of  giving  a 
preference  as  hereinbefore  provided,  or  a  general  assignment  for  the  benefit 
of  his  creditors,  if  by  law  such  recording  or  registering  is  required  or  per- 
mitted, or,  if  it  is  not,  from  the  date  when  the  beneficiary  takes  notorious, 
exclusive,  or  continuous  possession  of  the  property  unless  the  petitioning 
creditors  have  received  actual  notice  of  such  transfer  or  assignment. 

c  It  shall  be  a  complete  defense  to  any  proceedings  in  bankruptcy  insti- 
tuted under  the  first  subdivision  of  this  section  to  allege  and  prove  that  the 
party  proceeded  against  was  not  insolvent  as  defined  in  this  Act  at  the  time 

8 — §  2     (20)     was     added    by     the  4 — The  Italicized  words  were  added 

amendment  of   1910.  by  the  amendment  of  1903. 


BANKRUPTCY  ACT  OF  1898  725 

of  the  filing  the  petition  against  him,  and  if  solvency  at  sueh  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. 

d  Whenever  a  person  against  whom  a  petition  has  been  filed  as  herein- 
before provided  under  the  second  and  third  subdivisions  of  this  section  takes 
issue  with  and  denies  the  allegation  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  to  so  attend  and 
submit  to  examination  the  burden  of  proving  his  solvency  shaU  rest  upon 
him. 

e  Whenever  a  petition  is  filed  by  any  person  for  the  purpose  of  having 
another  adjudged  a  bankrupt,  and  an  application  is  made  to  take  charge  of 
and  hold  the  property  of  the  alleged  bankrupt,  or  any  part  of  the  same, 
prior  to  the  adjudication  and  pending  a  hearing  on  the  petition,  the  pe- 
titioner or  applicant  shall  file  in  the  same  court  a  bond  with  at  least  two 
good  and  sufficient  sureties  who  shall  reside  within  the  jurisdiction  of  said 
court,  to  be  approved  by  the  court  or  a  judge  thereof,  in  such  sum  as  the 
court  shall  direct,  conditioned  for  the  payment,  in  case  such  petition  is  dis- 
missed, to  the  respondent,  his  or  her  personal  representatives,  all  costs, 
expenses,  and  damages  occasioned  by  such  seizure,  taking,  and  detention 
of  the  property  of  the  alleged  bankrupt. 

If  such  petition  be  dismissed  by  the  court  or  withdrawn  by  the  petitioner, 
the  respondent  or  respondents  shall  be  allowed  all  costs,  counsel  fees, 
expenses,  and  damages  occasioned  by  such  seizure,  taking,  or  detention  of 
such  property.  Counsel  fees,  costs,  expenses,  and  damages  shall  be  fixed  and 
allowed  by  the  court,  and  paid  by  the  obligors  in  such  bond. 

§  4.  Who  May  Become  Bankrupts. — a  Any  person,  except  a  vmnicipal, 
railroad,  insurance,  or  banking  corporation,  shall  be  entitled  to  the  benefits 
of  this  Act  as  ajvolimtary  bankrupt. 

b  Any  natural  person,  except  a  wage-earner  or  a  pergon  ee^aged  chiefly 
iil_farnung  or  the  tillage  of  the  soil,  any  unincorporated  company,  and  any 
moneyed,  btmii^s^of  c^omrnerctaT  corporation,  except  a  municipal,  railroad, 
insurance,  or  hanking  corporation,  owing  debts  to  the  amount  of  one  thou- 
sand dollars  or  over,  may  be  adjudged  an  involuntary  bankrupt  upon  def aiilt 
or  an  impartial  trial,  and  shall  be  subject  to  the  provisions  and  entitled  to 
the  benefits  of  this  Act. 

The  bankruptcy  of  a  corporation  shall  not  release  its  officers,  directors, 
or  stockholders,  os  sv^ch,  from  any  liability  under  the  laws  of  a  State  or 
Territory  or  of  the  United  States.^ 

5 — §  4    originally,   read   as    follows :  suits,   owing  debts  to   the  amount  of 

"a    Any   person   who'  owes   debts,    ex-*  one  thousand  dollars  or  over,  may  be 

cept   a   corporation,    shall   be   entitled  adjudged     an     involuntary     bankrupt 

to  the  benefits  of  this  Act  as  a  volun-  upon    default    or    an    impartial    trial, 

tary  bankrupt,     b  Any  natural  person,  and  shall  be  subject  to  the  provisions 

except  a  wage-earner  or  a  person  en-  and    entitled    to   the    benefits   of   this 

gaged  chiefly  in  farming  or  the  tillage  Act.      Private    bankers,    but    not    na- 

of   the   soil,    any   unincorporated   com-  tional    banks    or    banks    Incorporated 

pany,    and    any    corporation    engaged  under   State  or  Territorial  laws,  may 

principally  in  manufacturing,  trading,  be  adjudged  involuntary  bankrupts." 
printing,  publishing,  or  mercantile  pur- 


726  BANKRUPTCY  ACT  OF  1898 

§  5.  Partners. — a  A  partnership,  during  the  continuation  of  the  part- 
nership business,  or  after  its  dissolution  and  before  the  final  settlement 
thereof,  may  be  adjudged  a  bankrupt. 

b  The  creditors  of  the  partnership  shall  appoint  the  trustee;  in  other 
respects  so  far  as  possible  the  estate  shall  be  administered  as  herein  provided 
for  other  estates. 

c  The  court  of  bankruptcy  which  has  jurisdiction  of  one  of  the  partners 
may  have  jurisdiction  of  all  the  partners  and  of  the  administration  of  the 
partnership  and  individual  property. 

d  The  trustee  shall  keep  separate  accounts  of  the  partnership  property 
and  of  the  property  belonging  to  the  individual  partners. 

e  The  expenses  shall  be  paid  from  the  partnership  property  and  the 
individual  property  in  such  proportions  as  the  court  shall  determine. 

f  The  net  proceeds  of  the  partnership  property  shall  be  appropriated 
to  the  payment  of  the  partnership  debts,  and  the  net  proceeds  of  the  indi- 
vidual estate  of  each  partner  to  the  payment  of  his  individual  debts.  Should 
any  surplus  remain  of  the  property  of  any  partner  after  paying  his  indi- 
vidual debts,  such  surplus  shall  be  added  to  the  partnership  assets  and  be 
applied  to  the  payment  of  the  partnership  debts.  Should  any  surplus  of 
the  partnership  property  remain  after  paying  the  partnership  debts,  such 
surplus  shall  be  added  to  the  assets  of  the  individual  partners  in  the  pro- 
portion of  their  respective  interests  in  the  partnership. 

g  The  court  may  permit  the  proof  of  the  claim  of  the  partnership  estate 
against  the  individual  estates,  and  vice  versa,  and  may  marshal  the  assets 
of  the  partnership  estate  and  individual  estates  so  as  to  prevent  preferences 
and  secure  the  equitable  distribution  of  the  property  of  the  several  estates. 

h  In  the  event  of  one  or  more  but  not  all  of  the  members  of  a  partner- 
ship being  adjudged  bankrupt,  the  partnership  property  shall  not  be  admin- 
istered in  bankruptcy,  unless  by  consent  of  the  partner  or  partners  not 
adjudged  bankrupt;  but  such  partner  or  partners  not  adjudged  bankrupt 
shall  settle  the  partnership  business  as  expeditiously  as  its  nature  will 
permit,  and  account  for  the  interest  of  the  partner  or  partners  adjudged 
bankrupt. 

§  6.  Exemptions  of  Bankrupts. — a  This  Act  shall  not  affect  the  allow- 
ance 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  domicile  for  the  six  months  or  the  greater  portion  thereof 
immediately  preceding  the  filing  of  the  petition. 

§  7.  Duties  op  Bankrupts. — a  The  bankrupt  shall  (1)  attend  the  first 
meeting  of  his  creditors,  if  directed  by  the  court  or  a  judge  thereof  to  do 
so,  and  the  hearing  upon  his  application  for  a  discharge,  if  filed;  (2) 
comply  with  all  lawful  orders  of  the  court;  (3)  examine  the  correctness  of 
all  proofs  of  claims  filed  against  his, estate;  (4)  execute  and  deliver  such 
papers  as  shall  be  ordered  by  the  court;  (5)  execute  to  his  trustee  transfers 
of  all  his  property  in  foreign  countries;  (6)  immediately  inform  his  trustee 

The  amendment  of  1^03^  ad^edtt^a       tlon   shall  not  release  its  oflacers,  di- 


word   "mininpr"   aft,pr   "ppMiabing'^ln  rectors,  or  stockholders,  as  such,  from 

the'ttrt-TST'ciassesof  corporations  sub-  any  liability  under  the  laws  of  a  State 

Ject  to  involuntary  bankruptcy  under  or  Territory  or  of  the  United  States." 

8  4b,   and  added   the   following   provi-  The    other    changes    were    made   by 

sion :    "The  bankruptcy  of  a  corpora-  the  amendment  of  1910. 


BANKRUPTCY  ACT  OF  1898  727 

of  any  attempt,  by  his  creditors,  or  other  persons,  to  evade  the  provisions  of 
this  Act,  coming  to  his  knowledge;  (7)  in  case  of  any  person  having  to  his 
knowledge  proved  a  false  claim  against  his  estate,  disclose  that  fact  imme- 
diately to  his  trustee;  (8)  prepare,  make  oath  to,  and  file  in  court  within 
ten  days,  unless  further  time  is  granted,  after  the  adjudication,  if  an  invol- 
untary bankrupt,  and  with  the  petition  if  a  voluntary  bankrupt,  a  schedule 
of  his  property,  showing  the  amount  and  kind  of  property,  the  location 
thereof,  its  money  value  in  detail,  and  a  list  of  his  creditors,  showing  their 
residences,  if  known,  if  unknown,  that  fact  to  be  stated,  the  amounts  due 
each  of  them,  the  consideration  thereof,  the  security  held  by  them,  if  any, 
and  a  claim  for  such  exemptions  as  he  may  be  entitled  to,  all  in  triplicate, 
one  copy  of  each  for  the  clerk,  one  for  the  referee,  and  one  for  the  trustee; 
and  (9)  when  present  at  the  first  meeting  of  his  creditors,  and  at  such  other 
times  as  the  court  shall  order,  submit  to  an  examination  concerning  the  con- 
ducting of  his  business,  the  cause  of  his  bankruptcy,  his  dealings  with  his 
creditors  and  other  persons,  the  amount,  kind,  and  whereabouts  of  his 
property,  and,  in  addition,  all  matters  which  may  affect  the  adnjfinistration 
and  settlement  of  his  estate ;  but  no  testimony  given  by  him  shatX  be  offered 
in  evidence  against  him  in  any  criminal  proceeding. 

Provided,  however,  That  he  shall  not  be  required  to  attend  a  meeting  of 
his  creditors,  or  at  or  for  an  examination  at  a  place  more  than  one  hundred 
and  fifty  miles  distant  from  his  home  or  principal  place  of  business,  or  to 
examine  claims  except  when  presented  to  him,  unless  ordered  by  the  court, 
or  a  judge  thereof,  for  cause  shown,  and  the  bankrupt  shall  be  paid  his 
actual  expenses  from  the  estate  when  examined  or  required  to  attend  at  any 
place  other  than  the  city,  town,  or  village  of  his  residence. 

§  8.  Death  or  Insanity  of  Bankrupts. — a  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  chil- 
dren shallbe  entitled  to  all  rights  of  dower  and  allowance  fixed  by  the  laws 
of  the  State  of  the  bankrupt 's  residence. 

§  9.  Protection  and  Detention  op  Bankrupts. — a  A  bankrupt  shall  be 
exempt  from  arrest  upon  civil  process  except  in  the  following  cases:  (1) 
When  issued  from  a  court  of  bankruptcy  for  contempt  or  disobedience  of  its 
lawful  orders;  (2)  when  issued  from  a  State  court  having  jurisdiction,  and 
served  within  such  State,  upon  a  debt  or  claim  from  which  his  discharge  in 
bankruptcy  would  not  be  a  release,  and  in  such  case  he  shall  be  exempt  from 
such  arrest  when  in  attendance  upon  a  court  of  bankruptcy  or  engaged  in 
the  performance  of  a  duty  imposed  by  this  Act. 

b  The  judge  may,  at  any  time  after  the  filing  of  a  petition  by  or  against 
a  person,  and  before  the  expiration  of  one  month  after  the  qualification  of 
the  trustee,  upon  satisfactory  proof  by  the  affidavits  of  at  least  two  persons 
that  such  bankrupt  is  about  to  leave  the  district  in  which  he  resides  or  has 
his  principal  place  of  business  to  avoid  examination,  and  that  his  departure 
will  defeat  the  proceedings  in  bankruptcy,  issue  a  warrant  to  the  marshal, 
directing  him  to  bring  such  bankrupt  forthwith  before  the  court  for  exami- 
nation. If  upon  hearing  the  evidence  of  the  parties  it  shall  appear  to  the 
court  or  a  judge  thereof  that  the  allegations  are  true  and  that  it  is  necessary, 
he  shall  order  such  marshal  to  keep  such  bankrupt  in  custody  not  exceeding 
ten  days,  but  not  imprison  him,  until  he  shall  be  examined  and  released  or 


728  BANKRUPTCY  ACT  OF  1898 

give  bail  conditioned  for  his  appearance  for  examination,  from  time  to  time, 
not  exceeding  in  all  ten  days,  as  required  by  the  court,  and  for  his  obedience 
to  all  lawful  orders  made  in  reference  thereto. 

§  10.  Extradition  of  Bankrupts. — a  Whenever  a  warrant  for  the  appre- 
hension of  a  bankrupt  shall  have  been  issued,  and  he  shall  have  been  found 
within  the  jurisdiction  of  a  court  other  than  the  one  issuing  the  warrant, 
he  may  be  extradited  in  the  same  manner  in  which  persons  under  indictment 
are  now  extradited  from  one  district  within  which  a  district  court  has  juris- 
diction to  another. 

§  11.  Suits  By  and  Against  Bankrupts. — a  A  suit  which  is  founded 
upon  a  claim  from  which  a  discharge  would  be  a  release,  and  which  is  pend- 
ing against  a  person  at  the  time  of  the  filing  of  a  petition  against  him,  shall 
be  stayed  until  after  an  adjudication  or  the  dismissal  of  the  petition ;  if  such 
person  is  adjudged  a  bankrupt,  such  action  may  be  further  stayed  until 
twelve  months  after  the  date  of  such  adjudication,  or,  if  within  that  time 
such  person  applies  for  a  discharge,  then  until  the  question  of  such  discharge 
is  determined. 

b  The  court  may  order  the  trustee  to  enter  his  appearance  and  defend 
any  pending  suit  against  the  bankrupt. 

c  A  trustee  may,  with  the  approval  of  the  court,  be  permitted  to  prosecute 
as  trustee  any  suit  commenced  by  the  bankrupt  prior  to  the  adjudication, 
with  like  force  and  effect  as  though  it  had  been  commenced  by  him, 

d  Suits  shall  not  be  brought  by  or  against  a  trustee  of  a  bankrupt  estate 
subsequent  to  two  years  after  the  estate  has  been  closed. 

§  12.  Compositions,  When  Confirmed. — a  A  bankrupt  may  offer,  either 
before  or  after  adjudication,  terms  of  composition  to  his  creditors  after, 
but  not  before,  he  has  been  examined  in  open  court  or  at  a  meeting  of  his 
creditors,  and  has  filed  in  court  the  schedule  of  his  property,  and  the  list  of 
his  creditors  required  to  be  filed  by  bankrupts.  In  compositions  "before  adju- 
dication the  banlcrupt  shall  file  the  required  schedules,  and  thereupon  the 
court  shall  call  a  meeting  of  creditors  for  the  allowance  of  claims,  examina- 
tion of  the  banlcrupt,  and  preservation  or  conduct  of  estates,  at  which  meet- 
ing the  judge  or  referee  shall  preside;  and  action  upon  the  petition  for 
adjudicatiom  shall  be  delayed  until  it  shall  be  determined  whether  such 
composition  shall  be  confirmed.^ 

b  An  application  for  the  confirmation  of  a  composition  may  be  filed  in 
the  court  of  bankruptcy  after,  but  not  before,  it  has  been  accepted  in  writ- 
ing by  a  majority  in  number  of  all  creditors  whose  claims  have  been  allowed, 
which_mimber  must  represent  a  majority  in  amount  of  such  claims,  and  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  subject  to 
the  order  of  the  judge. 

c  A  date  and  place,  with  reference  to  the  convenience  of  the  parties 
in  interest,  shall  be  fixed  for  the  hearing  upon  each  application  for  the  con- 
firmation of  a  composition,  and  such  objections  as  may  be  made  to  its 
confirmation. 

d  The  judge  shall  confirm  a  composition  if  satisfied  that  (1)  it  is  for  the 

6 — The  words  In  Italics  were  added 
by   the   amendment   of   1910. 


BANKRUPTCY  ACT  OF  1898  729 

best  interests  of  the  creditors;  (2)  the  bankrupt  has  not  been  guilty  of  any 
of  the  acts  or  failed  to  perform  any  of  the  duties  which  would  be  a  bar  to 
his  discharge;  and  (3)  the  offer  and  its  acceptance  are  in  good  faith  and 
have  not  been  made  or  procured  except  as  herein  provided,  or  by  any  means, 
promises,  or  acts  herein  forbidden. 

e  Upon  the  confirmation  of  a  composition,  the  consideration  shall  be 
distributed  as  the  judge  shall  direct,  and  the  case  dismissed.  Whenever  a 
composition  is  not  confirmed,  the  estate  shall  be  administered  in  bankruptcy 
as  herein  pro\aded. 

§  13.  Compositions,  When  Set  Aside. — a  The  judge  may,  upon  the 
appUeation  ^of  parties  in  interest  filed  at  any  time  within  six  months  after 
a  composition  has  been  confirmed,  set  the  same  aside  and  reinstate  the  case 
if  it  shall  be  made  to  appear  upon  a  trial  that  fraud  was  practiced  in  the 
procuring  of  such  composition,  and  that  the  knowledge  thereof  has  come  to 
the  petitioners  since  the  confirmation  of  such  composition. 

§  14.  Discharge,  When  Granted. — a  Any  person  may,  after  the  expira- 
tion of  one  month  and  within  the  next  twelve  months  subsequent  to  being 
adjudged  a  bankrupt,  file  an  application  for  a  discharge  in  the  court  of 
bankruptcy  in  which  the  proceedings  are  pending;  if  it  shall  be  made  to 
appear  to  the  judge  that  the  bankrupt  was  unavoidably  prevented  from  filing 
it  within  such  time,  it  may  be  filed  within  but  not  after  the  expiration  of 
the  next  six  months. 

b  The  judge  shall  hear  the  application  for  a  discharge  and  such  proofs 
and  pleas  as  may  be  made  in  opposition  thereto  by  the  trustee  or  other 
parties  in  interest,  at  such  time  as  will  give  the  trustee  or  parties  in 
interest  a  reasonable  opportunity  to  be  fully  heard,  and  investigate  the 
merits  of  the  application  and  discharge  the  applicant  unless  he  has  (1) 
committed  an  offense  punishable  by  imprisonment  as  herein  provided;  or 
(2)  with  intent  to  conceal  his  financial  condition,  destroyed,  concealed, 
or  failed  to  keep  books  of  account  or  records  from  which  sv,ch  condition 
might  be  ascertained;  or  (3)  obtained  money  or  property  on  credit  upoii  a 
materially  false  statement  in  writing,  made  by  him  to  any  person  or  his  rep- 
resentative for  the  purpose  of  obtaining  credit  from  such  person;  or  (4)  at  any 
time  subsequent  to  the  -first  day  of  the  four  months  immediately  preceding 
the  iiling  of  the  petition  transferred,  removed,  destroyed,  or  concealed,  or 
permitted  to  be  removed,  destroyed,  or  concealed,  any  of  his  property,  with 
intent  to  hinder,  delay,  or  defraud  his  creditors;  or  (5)  in  voluntary  proceed- 
ings been  granted  a  discha/rge  in  bankruptcy  within  six  years;  or  (6)  in  the 
course  of  the  proceedings  im,  bankruptcy  refused  to  obey  any  lawful  order  of, 
or  to  answer  any  material  question  approved  by  the  court:  Provided,  That 
a  trustee  shall  not  interpose  objections  to  a  bankrupt's  discharge  until  he 
shall  be  authorised  so  to  do  at  a  meeting  of  creditors  called  for  that  purposed 

7 — ■§  14b  originally  read  as  follows :  mitted    an    offense    punishable    by    im- 

"b  The  Judge  shall   hear  the  applica-  prisonment    as    herein     provided ;    or 

tlon  for  a  discharge,  and  such  proofs  (2)    with  fraudulent  intent  to  conceal 

and  pleas  as  may  be  made  in  opposi-  his    true    financial    condition    and    in 

tlon  thereto  by  parties  in  interest,  at  contemplation      of      bankruptcy,      de- 

such  time  as  will  give  parties   in   in-  stroyed,    concealed,    or   failed    to    keep 

terest  a  reasonable  opportunity  to  be  books     of    account    or     records     from 

fully  heard,   and  investigate  the  mer-  which    his    true    condition    might    be 

its   of   the    application    and   discharge  ascertained." 

the  applicant  unless  he  has   (1)    com-  The  amendment  of  1903  changed  It 


730  BANKRUPTCY  ACT  OF  1898 

e  The  confirmation  of  a  composition  shall  discharge  the  bankrupt  from 
hia  debts,  other  than  those  agreed  to  be  paid  by  the  terms  of  the  composition 
and  those  not  affected  by  a  discharge. 

§  15.  Discharge,  When  Revoked. — a  The  judge  may,  upon  the  appli- 
cation of  parties  in  interest  who  have  not  been  guilty  of  undue  laches,  filed 
at  any  time  within  one  year  after  a  discharge  shall  have  been  granted,  revoke 
it  upon  a  trial  if  it  shall  be  made  to  appear  that  it  was  obtained  through  the 
fraud  of  the  bankrupt,  and  that  the  knowledge  of  the  fraud  has  come  to  the 
petitioners  since  the  granting  of  the  discharge,  and  that  the  actual  facts 
did  not  warrant  the  discharge. 

§  16.  Co-Debtors  op  Bankrupts. — a  The  liability  of  a  person  who  is  a 
co-debtor  with,  or  guarantor  or  in  any  manner  a  surety  for,  a  bankrupt  shall 
not  be  altered  by  the  discharge  of  such  bankrupt. 

§  17.  Debts  Not  Affected  by  a  Discharge. — a  A  discharge  in  bank- 
ruptcy shall  release  a  bankrupt  from  all  of  his  provable  debts,  except  such 
as  (1)  are  due  as  a  tax  levied  by  the  United  States,  the  State,  county,  dis- 
trict, or  municipality  in  which  he  resides;  (2)  are  liabilities  for  obtaining 
property  by  false  pretenses  or  false  representations,  or  for  willful  and 
malicious  injuries  to  the  person  or  property  of  another,  or  for  alimony  due 
or  to  become  due,  or  for  maintenance  or  support  of  wife  or  child,  or  fo^ 
seduction  of  an  unmarried  femMe,  or  for  criminal  conversation;  (3)  have 
not  been  duly  scheduled  in  time  for  proof  and  allowance,  with  the  name  of 
the  creditor  if  known  to  the  bankrupt,  unless  such  creditor  had  notice  or 
actual  knowledge  of  the  proceedings  in  bankruptcy;  or  (4)  were  created 
by  his  fraud,  embezzlement,  misappropriation,  or  defalcation  while  acting 
as  an  officer  or  in  any  fiducigjy  capaeity.s   ~  ^  ^  ^    /  t  1   fi^^(MxU.   ^ 

t(rread  as  follows:  ^T|)ft  judge  shall  years; 'or    (^)rin    tne/ course   of    the 

hear   the  application   for  a   discharge,  proceedings   in   bankruptcy   refused   to 

and  such  proofs  and  pleas  as  may  be  obey  any  lawful  order  of  or  to  answer 

made  in  opposition  thereto  by  parties  any  material  question  approved  by  the 

in  interest,  at  such  time  as  will  give  court." 

parties  in  interest  a  reasonable  op-  The  other  changes  were  made  by  the 
portunlty  to  be  fully  heard,  and  in-  amendment  of  1910. 
vestlgate  the  merits  of  the  applica-  8 — §  17  originally  read  as  follows : 
tlon  and  discharge  the  applicant  un-  "A  discharge  in  bankruptcy  shall  re- 
less  he  has  (1)  committed  an  of-  lease  a  bankrupt  from  all  of  his  prov- 
fense  punishable  by  imprisonment  as  able  debts,  except  such  as  (1)  are 
herein  provided ;  or  (2)  with  Intent  due  as  a  tax  levied  by  the  United 
to  conceal  his  financial  condition,  de-  States,  the  State,  county,  district, 
stroyed,  concealed,  or  failed  to  keep  or  municipality  in  which  he  resides ; 
books  of  account  or  records  from  which  (2)  are  Judgments  in  actions  for 
such  condition  might  be  ascertained ;  frauds,  or  obtaining  property  by  false 
or  (3)  obtained  property  on  credit  pretenses  or  false  representations,  or 
from  any  person  upon  a  materially  for  willful  and  malicious  injuries  to 
false  statement  in  writing  made  to  the  person  or  property  of  another ; 
such  person  for  the  purpose  of  obtain-  (3)  have  not  been  duly  scheduled  in 
ing  such  property  on  credit ;  or  (4)  at  time  for  proof  and  allowance,  with  the 
any  time  subsequent  to  the  first  day  name  of  the  creditor  if  known  to  the 
of  the  four  months  immediately  pre-  bankrupt,  unless  such  creditor  had  no- 
ceding  the  filing  of  the  petition  trans-  tice  or  actual  knowledge  of  the  pre- 
ferred, removed,  destroyed,  or  con-  ceedlngs  in  bankruptcy;  or  (4)  were 
cealed,  or  permitted  to  be  removed,  created  by  his  fraud,  embezzlement, 
destroyed,  or  concealed  any  of  his  misappropriation,  or  defalcation  while 
property  with  Intent  to  hinder,  delay,  acting  as  an  oflJcer  or  in  any  fiduciary 
or   defraud    his    creditors;    or    (5)    in  capacity." 

voluntary  proceedings  been  granted  a  The    changes    were    made    by    the 

discharge    In    bankruptcy    within    six  amendment  of  1903. 


BANKRUPTCY  ACT  OF  1898  731 

CHAPTER  IV 

COURTS  AND  PEOCEDUBE  THEREIN 

§  18.  Process,  Pleadings,  and  Adjudications. — a  Tlpon  the  filing  of  a 
petition  for  involuntary  bankruptcy,  service  thereof,  with  a  writ  of  sub- 
poena, shall  be  made  upon  the  person  therein  named  as  defendant  in  the 
same  manner  that  service  of  such  process  is  now  had  upon  the  commence- 
ment of  a  suit  in  equity  in  the  courts  of  the  United  States,  except  that  it 
shall  bp  returnable  within  fifteen  days,  unless  the  judge  shall  for  cause  fix 
a  lonjgef  time;  but  in  case  personal  service  can  not  be  made,  then  notice 
shall  be  given  by  publication  in  the  same  manner  and  for  the  same  time  aa 
provided  by  law  for  notice  by  publication  in  suits  to  enforce  a  legal  or  equit- 
able lien  in  coti/rts  of  the  United  States,  except  that,  unless  the  judge  shall 
otherwise  direct,  the  order  shall  be  publisbed  not  more  than  once  a  week 
for  two  consecutive  weelcs,  and  the  return  day  shall  be  ten  days  after  the 
last  publication  unless  the  judge  shall  for  cause  fix  a  longer  iime.^ 

b  The  bankrupt,  or  any  creditor,  may  appear  and  plead  to  the  petition 
withia  five  days  after  the  return  day,  or  within  such  further  time  as  the 
court  may  allow,  lo 

c  AU  pleadings  setting  up  matters  of  fact  shall  be  verified  under  oath. 

d  If  the  bankrupt,  or  any  of  his  creditors,  shall  appear,  within  the  time 
limited,  and  controvert  the  facts  alleged  in  the  petition,  the  judge  shall 
determine,  as  soon  as  may  be,  the  issues  presented  by  the  pleadings,  without 
the  intervention  of  a  jury,  except  in  cases  where  a  jury  trial  is  given  by 
this  Act,  and  makes  the  adjudication  or  dismiss  the  petition. 

e  If  on  the  last  day  within  which  pleadings  may  be  filed  none  are  filed 
by  the  bankrupt  or  any  of  his  creditors,  the  judge  shall  on  the  next  day, 
if  present,  or  as  soon  thereafter  as  practicable,  make  the  adjudication  or 
dismiss  the  petition. 

f  If  the  judge  is  absent  from  the  district,  or  the  division  of  the  district 
in  which  the  petition  is  pending,  on  the  next  day  after  the  last  day  on  which 
pleadings  may  be  filed,  and  none  have  been  filed  by  the  bankrupt  or  any 
of  his  creditors,  the  clerk  shall  forthwith  refer  the  case  to  the  referee. 

g  Upon  the  filing  of  a  voluntary  petition  the  judge  shall  hear  the  peti- 
tion and  make  the  adjudication  or  dismiss  the  petition.  If  the  judge  is 
absent  from  the  district,  or  the  division  of  the  district  in  which  the  petitioa 
is  filed  at  the  time  of  the  filing,  the  clerk  shall  forthwith  refer  the  case  to 
the  referee. 

S  19.  Jury  Trials. — a  A  person  against  whom  an  involuntary  petition 
has  been  filed  shall  be  entitled  to  have  a  trial  by  jury,  in  respect  to  the  ques- 

9 — §  18a  originally  read  as  follows :  time ;  but  In  case  personal  service  can 

"Upon    the    filing    of    a    petition    for  not    be    made,    then    notice    shall    be 

Involuntary  bankruptcy,  service  there-  given  by  publication  in  the  same  man- 

of,  with  a  writ  of  subpoena,  shall  be  ner  and  for  the  same  time  as  provided 

made  upon  the  person  therein  named  by    law   for    notice    by   publication    in 

as  defendant  in  the  same  manner  that  suits  in  equity  in  courts  of  the  United 

service    of    such    process    is    now    had  States." 

upon  the  commencement  of  a  suit  in  The  change  was  made  by  the  amend- 

equity    In    the    courts    of    the    United  ment   of   1903. 

States,  except  that  it  shall  be  return-  10 — Before  the  amendment  of  1903, 

able    within    fifteen    days,    unless    the  the  time  to  plead  was  ten  days  after 

judge    shall    for    cause    fix    a    longer  the  return  day,  instead  of  five. 


732  BANKRUPTCY  ACT  OF  1898 

tion  of  his  insolvency,  except  as  herein  otherwise  provided,  and  any  act  of 
bankruptcy  alleged  in  such  petition  to  have  been  committed,  upon  filing  a 
written  application  therefor  at  or  before  the  time  within  which  an  answer 
may  be  filed.  If  sujch  application  is  not  filed  within  such  time,  a  trial  by 
jury  shall  be  deemed  to  have  been  waived. 

b  If  a  jury  is  not  in  attendance  upon  the  court,  one  may  be  specially 
summoned  for  the  trial,  or  the  case  may  be  postponed,  or,  if  the  case  is 
pending  in  one  of  the  district  courts  within  the  jurisdiction  of  a  circuit 
court  of  the  United  States,  it  may  be  certified  for  trial  to  the  circuit  court 
sitting  at  the  same  place,  or  by  consent  of  parties  when  sitting  at  any  other 
place  in  the  same  district,  if  such  circuit  court  has  or  is  to  have  a  jury 
first  in  attendance. 

c  The  right  to  submit  matters  in  controversy,  or  an  alleged  offense 
under  this  Act,  to  a  jury  shall  be  determined  and  enjoyed,  except  as  provided 
by  this  Act,  according  to  the  United  States  laws  now  in  force  or  such  as 
may  be  hereafter  enacted  in  relation  to  trials  by  jury. 

§  20.  Oaths,  Affirmations. — a  Oaths  required  by  this  Act,  except  upon 
hearings  in  court,  may  be  administered  by  (1)  referees;  (2)  officers  author- 
ized to  administer  oaths  in  proceedings  before  the  courts  of  the  United 
States,  or  under  the  laws  of  the  State  where  the  same  are  to  be  taken;  and 
(3)  diplomatic  or  consular  officers  of  the  United  States  in  any  foreign 
country. 

b  Any  person  conscientiously  opposed  to  taking  an  oath  may,  in  lieu 
thereof,  affirm.  Any  person  who  shall  affirm  falsely  shall  be  punished  as  for 
the  making  of  a  false  oath. 

§  21.  Evidence. — a  A  court  of  bankruptcy  may,  upon  application  of  any 
officer,  bankrupt,  or  creditor,  by  order  require  any  designated  person,  in- 
cluding the  bankrupt  and  his  wife,  to  appear  in  court  or  before  a  referee 
or  the  judge  of  any  State  court,  to  be  examined  concerning  the  acts,  con- 
duct, or  property  of  a  bankrupt  whose  estate  is  in  process  of  administration 
under  this  Act. 

Provided,  That  the  wife  may  he  examined  only  touching  business  tran- 
sacted by  her  or  to  which  she  is  a  party,  and  to  determine  the  fact  whether 
she  has  transacted  or  teen  a  party  to  any  business  of  the  banTcruptA^ 

b  The  right  to  take  depositions  in  proceedings  under  this  Act  shall  be 
determined  and  enjoyed  according  to  the  United  States  laws  now  in  force, 
or  such  as  may  be  hereafter  enacted  relating  to  the  taking  of  depositions, 
except  as  herein  provided. 

c  Notice  of  the  taking  of  depositions  shall  be  filed  with  the  referee  in 
every  case.  When  depositions  are  to  be  taken  in  opposition  to  the  allowance 
of  a  claim  notice  shall  also  be  served  upon  the  claimant,  and  when  in  oppo- 
sition to  a  discharge  notice  shall  also  be  served  upon  the  bankrupt. 

d  Certified  copies  of  proceedings  before  a  referee,  or  of  papers,  when 
issued  by  the  clerk  or  referee,  shall  be  admitted  as  evidence  with  like  force 

11 — §  21a    originally    read    as    fol-  In   court  or   before   a   referee   or   the 

lows :    "A    court    of  bankruptcy    may,  judge   of   any    State    court,    to   be   ex- 

upon  application  of  any  oflBcer,  bank-  amlned    concerning   the   acts,    conduct, 

rupt,    or    creditor,    by    order    require  or  property  of  a  bankrupt  whose  estate 

any   designated   person,    including   the  is  in  process  of  administration  under 

bankrupt,  who  is  a  competent  witness  this  Act." 

under  the  laws  of  the  State  In  which  The  change  was  made  by  the  amend- 

the  proceedings  are  pending,  to  appear  ment  of  1903. 


BANKRUPTCY  ACT  OF  1898  733 

and  effect  as  certified  copies  of  the  records  of  district  courts  of  the  United 
States  are  now  or  may  hereafter  be  admitted  as  evidence. 

6  A  certified  copy  of  the  order  approving  the  bond  of  a  trustee  shall 
constitute  conclusive  evidence  of  the  vesting  in  him  of  the  title  to  the 
property  of  the  bankrupt,  and  if  recorded  shall  impart  the  same  notice  that 
a  deed  from  the  bankrupt  to  the  trustee  if  recorded  would  have  imparted 
had  not  bankruptcy  proceedings  intervened. 

f  A  certified  copy  of  an  order  confirming  or  setting  aside  a  composition, 
or  granting  or  setting  aside  a  discharge,  not  revoked,  shall  be  evidence  of 
the  jurisdiction  of  the  court,  the  regularity  of  the  proceedings,  and  of  the 
fact  that  the  order  was  made. 

g  A  certified  copy  of  an  order  confirming  a  composition  shall  constitute 
evidence  of  the  revesting  of  the  title  of  his  property  in  the  bankrupt,  and 
if  recorded  shall  impart  the  same  notice  that  a  deed  from  the  trustee  to  the 
bankrupt  if  recorded  would  impart. 

§  22.  Referekce  of  Cases  after  Adjudication. — a  After  a  person  has 
been  adjudged  a  bankrupt  the  judge  may  cause  the  trustee  to  proceed  with 
the  administration  of  the  estate,  or  refer  it  (1)  generally  to  the  referee  or 
specially  with  only  limited  authority  to  act  in  the  premises  or  to  consider 
and  report  upon  specified  issues;  or  (2)  to  any  referee  within  the  territorial 
jurisdiction  of  the  court,  if  the  convenience  of  parties  in  interest  will  be 
served  thereby,  or  for  cause,  or  if  the  bankrupt  does  not  do  business,  reside, 
or  have  his  domicile  in  the  district. 

b  The  judge  may,  at  any  time,  for  the  convenience  of  parties  or  for 
cause,  transfer  a  case  from  one  referee  to  another. 

§  23.  Jurisdiction  of  United  States  and  State  Courts. — a  The  United 
States  circuit  courts  shall  have  jurisdiction  of  all  controversies  at  law  and 
in  equity,  as  distinguished  from  proceedings  in  bankruptcy,  between  trustees 
as  such  and  adverse  claimants  concerning  the  property  acquired  or  claimed 
by  the  trustees,  in  the  same  manner  and  to  the  same  extent  only  as  though 
bankruptcy  proceedings  had  not  been  instituted  and  such  controversies  had 
been  between  the  bankrupts  and  such  adverse  claimants. 

b  Suits  by  the  trustee  shall  only  be  brought  or  prosecuted  in  the  eoorts 
where  the  bankrupt,  whose  estate  is  being  administered  by  such  trustee, 
might  have  brought  or  prosecuted  them  if  proceedings  in  bankruptcy  had 
not  been  instituted,  unless  by  consent  of  the  proposed  defendant,  except 
suits  for  the  recovery  of  property  under  section  sixty,  subdivision  t ;  section 
sixty-seven,  subdivision  e ;  and  section  seventy,  subdivision  e.12 

c  The  United  States  circuit  courts  shall  have  concurrent  jurisdiction 
with  the  courts  of  bankruptcy,  within  their  respective  territorial  limits,  of 
the  offenses  enumerated  in  this  Act. 

§  24.  Jurisdiction  of  Appellate  Courts. — a  The  Supreme  Court  of 
the  United  States,  the  circuit  courts  of  appeals  of  the  United  States,  and 

12 — §  23b  originally  read  as  fol-  The  amendment  of  1903  added  the 
lows :  "Suits  by  the  trustee  shall  only  words,  "except  suits  for  the  recovery 
be  brought  or  prosecuted  in  the  courts  of  property  under  section  sixty,  sub- 
where  the  bankrupt,  whose  estate  is  division  b,  and  section  sixty-seven, 
being    administered    by    such    trustee,  subdivision  e." 

might     have     brought     or     prosecuted  The  amendment  of  1910  added  also 

them  If  proceedings  in  bankruptcy  had  the  words   "and  section  seventy,   sab- 

not  been  instituted,  unless  by  consent  division  e." 
of  the  proposed  defendant." 


734  BANKRUPTCY  ACT  OF  1898 

the  supreme  courts  of  the  Territories,  in  Tacation  in  chambers  and  during 
their  respective  terms,  as  now  or  as  they  may  be  hereafter  held,  are  hereby 
invested  with  appellate  jurisdiction  of  controversies  arising  in  bankruptcy 
proceedings  from  the  courts  of  bankruptcy  from  which  they  have  appellate 
jurisdiction  in  other  cases.  The  Supreme  Court  of  the  United  States  shall 
exercise  a  like  jurisdiction  from  the  courts  of  bankruptcy  not  within  any 
organized  circuit  of  the  United  States  and  from  the  supreme  court  of  the  Dis- 
trict of  Columbia. 

b  The  several  circuit  courts  of  appeals  shall  have  jurisdiction  in  equity, 
either  interlocutory  or  final,  to  superintend  and  revise  in  matter  of  law  the 
proceedings  of  the  several  inferior  courts  of  bankruptcy  within  their  juris- 
diction. Such  power  shall  be  exercised  on  due  notice  and  petition  by  any 
party  aggrieved. 

§  25.  Appeals  and  Writs  of  Error. — a  That  appeals,  as  in  equity  cases 
may  be  taken  in  bankruptcy  proceedings  from  the  courts  of  bankruptcy  to 
the  circuit  court  of  appeals  of  the  United  States,  and  to  the  supreme  court 
of  the  Territories,  in  the  following  cases,  to  wit,  (1)  from  a  judgment 
adjudging  or  refusing  to  adjudge  the  defendant  a  bankrupt;  (2)  from  a 
judgment  granting  or  denying  a  discharge;  and  (3)  from  a  judgment  allow- 
ing or  rejecting  a  debt  or  claim  of  five  hundred  dollars  or  over.  Such  appeal 
shall  be  taken  within  ten  days  after  the  judgment  appealed  from  has  been 
rendered,  and  may  be  heard  and  determined  by  the  appellate  court  in  term 
or  vacation,  as  the  case  may  be. 

b  From  any  final  decision  of  a  court  of  appeals,  allowing  or  rejecting  a 
claim  under  this  Act,  an  appeal  may  be  had  under  such  rules  and  within  such 
time  as  may  be  prescribed  by  the  Supreme  Court  of  the  United  States,  in  the 
following  cases  and  no  other : 

1.  Where  the  amount  in  controversy  exceeds  the  sum  of  two  thousand 
dollars,  and  the  question  involved  is  one  which  might  have  been  taken  on 
appeal  or  writ  of  error  from  the  highest  court  of  a  State  to  the  Supreme 
Court  of  the  United  States;  or 

2.  Where  some  Justice  of  the  Supreme  Court  of  the  United  States  shall 
certify  that  in  his  opinion  the  determination  of  the  question  or  questions 
involved  in  the  allowance  or  rejection  of  such  claim  is  essential  to  a  uniform 
construction  of  this  Act  throughout  the  United  States. 

e  Trustees  shall  not  be  required  to  give  bond  when  they  take  appeals  or 
sue  out  writs  of  error. 

d  Controversies  may  be  certified  to  the  Supreme  Court  of  the  United 
States  from  other  courts  of  the  United  States,  and  the  former  court  may 
exercise  jurisdiction  thereof  and  issue  writs  of  certiorari  pursuant  to  the 
provisions  of  the  United  States  laws  now  in  force  or  such  as  may  be  here- 
after enacted. 

§  26.  Arbitration  of  Controversies. — a  The  trustee  may,  pursuant  to 
the  direction  of  the  court,  submit  to  arbitration  any  controversy  arising  in 
the  settlement  of  the  estate. 

b  Three  arbitrators  shall  be  chosen  by  mutual  consent,  or  one  by  the 
trustee,  one  by  the  other  party  to  the  controversy,  and  the  third  by  the  two 
so  chosen,  or  if  they  fail  to  agree  in  five  days  after  their  appointment  the 
court  shall  appoint  the  third  arbitrator. 

c  The  written  finding  of  the  arbitrators,  or  a  majority  of  them,  ai  to 


BANKRUPTCY  ACT  OF  1898  735 

the  issues  presented,  may  be  filed  in  court  and  shall  have  Uke  force  and 
effect  as  the  verdict  of  a  jury. 

§  27.  Compromises. — a  The  trustee  may,  with  the  approval  of  the  court, 
compromise  any  controversy  arising  in  the  administration  of  the  estate  upon 
such  terms  as  he  may  deem  for  the  best  interests  of  the  estate. 

§  28.  Designation  of  Newspapeks. — a  Courts  of  bankruptcy  shall  by 
order  designate  a  newspaper  published  within  their  respective  territorial 
districts,  and  in  the  county  in  which  the  bankrupt  resides  or  the  major  part 
of  his  property  is  situated,  in  which  notices  required  to  be  published  by 
this  Act  and  orders  which  the  court  may  direct  to  be  published  shall  be 
inserted.  Any  court  may  in  a  particular  case,  for  the  convenience  of  parties 
in  interest,  designate  some  additional  newspaper  in  which  notices  and  orders 
in  such  case  shall  be  published. 

§  29.  Offenses. — a  A  person  shall  be  punished,  by  imprisonment  for  a 
period  not  to  exceed  five  years,  upon  conviction  of  the  offense  of  having 
knowingly  and  fraudulently  appropriated  to  his  own  use,  embezzled,  spent, 
or  unlawfully  transferred  any  property  or  secreted  or  destroyed  any  docu- 
ment belonging  to  a  bankrupt  estate  which  came  into  his  charge  as  trustee. 

b  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  (1)  concealed  while  a  bankrupt,  or  after  his  discharge,  from 
his  trustee  any  of  the  property  belonging  to  his  estate  in  bankruptcy;  or 
(2)  made  a  false  oath  or  account  in,  or  in  relation  to  any  proceeding  in 
bankruptcy;  (3)  presented  under  oath  any  false  claim  for  proof  against 
the  estate  of  a  bankrupt,  or  used  any  such  claim  in  composition  personally  or 
by  agent,  proxy,  or  attorney,  or  as  agent,  proxy,  or  attorney;  or  (4)  re- 
ceived any  material  amount  of  property  from  a  bankrupt  after  the  filing  of 
the  petition,  with  intent  to  defeat  this  Act;  or  (5)  extorted  or  attempted  to 
extort  any  money  or  property  from  any  person  as  a  consideration  for  acting 
or  forbearing  to  act  in  bankruptcy  proceedings. 

c  A  person  shall  be  punished  by  fine,  not  to  exceed  five  hundred  dollars, 
and  forfeit  his  office,  and  the  same  shall  thereupon  become  vacant,  upon 
conviction  of  the  offense  of  having  knowingly  (1)  acted  as  a  referee  in  a 
case  in  which  he  is  directly  or  indirectly  interested;  or  (2)  purchased,  while 
a  referee,  directly  or  indirectly,  any  property  of  the  estate  in  bankruptcy 
of  which  he  is  referee;  or  (3)  refused,  while  a  referee  or  trustee,  to  permit 
a  reasonable  opportunity  for  the  inspection  of  the  accounts  relating  to  the 
affairs  of,  and  the  papers  and  records  of,  estates  in  his  charge  by  parties 
in  interest  when  directed  by  the  court  so  to  do. 

d  A  person  shall  not  be  prosecuted  for  any  offense  arising  under  this  Act 
unless  the  indictment  is  found  or  the  information  is  filed  in  court  within  one 
year  after  the  commission  of  the  offense. 

§  30.  Rules,  Forms,  and  Orders. — a  All  necessary  rules,  forms,  and 
orders  as  to  procedure  and  for  carrying  this  Act  into  force  and  effect  shall 
be  prescribed,  and  may  be  amended  from  time  to  time,  by  the  Supreme  Court 
of  the  United  States. 

§  31.  Computation  of  Time. — a  Whenever  time  is  enumerated  by  days  in 
this  Act,  or  in  any  proceeding  in  bankruptcy,  the  number  of  days  shall  be 
computed  by  excluding  the  first  and  including  the  last,  unless  the  last  fall  on 
a  Sunday  or  holiday,  in  which  event  the  day  last  included  shall  be  the  next 
day  thereafter  which  is  not  a  Sunday  or  a  legal  holiday. 


736  BANKRUPTCY  ACT  OF  1898 

§  32.  Transfer  of  Cases. — a  In  the  event  petitions  are  filed  against 
the  same  person,  or  against  different  members  of  a  partnership,  in  different 
courts  of  bankruptcy  each  of  which  has  jurisdiction,  the  cases  shall  be 
transferred,  by  order  of  the  courts,  relinquishing  jurisdiction,  to  and  be 
consolidated  by  the  one  of  such  courts  which  can  proceed  with  the  same  for 
the  greatest  convenience  of  parties  in  interest. 

CHAPTEE  V 

OFFICERS,   THEIR   DUTIES   AND    CX)MPENSATION 

§  33.  Creation  of  Two  Offices. — a  The  offices  of  referee  and  trustee 
are  hereby  created. 

§  34.  Appointment,  Eemoval,  and  Districts  of  Eeperees. — a  Courts 
of  bankruptcy  shall,  within  the  territorial  limits  of  which  they  respectively 
have  jurisdiction,  (1)  appoint  referees,  each  for  a  term  of  two  years,  and  may, 
in  their  discretion,  remove  them  because  their  services  are  not  needed  or 
for  other  cause;  and  (2)  designate,  and  from  time  to  time  change,  the  limits 
of  the  districts  of  referees,  so  that  each  county,  where  the  services  of  a  ref- 
eree are  needed,  may  constitute  at  least  one  district. 

§  35,  QuAijFicATiONs  OF  Eeferees. — a  Individuals  shall  not  be  eligible 
to  appointment  as  referees  unless  they  are  respectively  (1)  competent  to 
perform  the  duties  of  that  office;  (2)  not  holding  any  office  of  profit  or 
emolument  under  the  laws  of  the  United  States  or  of  any  State  other  than 
commissioners  of  deeds,  justices  of  the  peace,  masters  in  chancery,  or  notaries 
public;  (3)  not  related  by  consanguinity  or  affinity,  within  the  third  degree 
as  determined  by  the  common  law,  to  any  of  the  judges  of  the  courts  of 
bankruptcy  or  circuit  courts  of  the  United  States,  or  of  the  justices  or  judges 
of  the  appellate  courts  of  the  districts  wherein  they  may  be  appointed; 
and  (4)  residents  of,  or  have  their  offices  in,  the  territorial  districts  for 
which  they  are  to  be  appointed. 

§  36.  Oaths  of  Office  of  Eeferees. — a  Eeferees  shall  take  the  same 
oath  of  office  as  that  prescribed  for  judges  of  United  States  courts. 

§  37.  Number  of  Eeeerees. — a  Such  number  of  referees  shall  be  ap- 
pointed as  may  be  necessary  to  assist  in  expeditiously  transacting  the  bank- 
ruptcy business  pending  in  the  various  courts  of  bankruptcy. 

§  38.  Jurisdiction  of  Eeferees. — a  Eeferees  respectively  are  hereby 
invested,  subject  always  to  a  review  by  the  judge,  within  the  limits  of  their 
districts  as  established  from  time  to  time,  with  jurisdiction  to  (1)  consider 
all  petitions  referred  to  them  by  the  clerks  and  make  the  adjudications  or 
dismiss  the  petitions;  (2)  exercise  the  powers  vested  in  courts  of  bankruptcy 
for  the  administering  of  oaths  to  and  the  examination  of  persons  as  witnesses 
and  for  requiring  the  production  of  documents  in  proceedings  before  them, 
except  the  power  of  commitment;  (3)  exercise  the  powers  of  the  judge  for 
the  taking  possession  and  releasing  of  the  property  of  the  bankrupt  in  the 
event  of  the  issuance  by  the  clerk  of  a  certificate  showing  the  absence  of  a 
judge  from  the  judicial  district,  or  the  division  of  the  district,  or  his  sick- 
ness, or  inability  to  act;  (4)  perform  such  part  of  the  duties,  except  as  to 
questions  arising  out  of  the  applications  of  bankrupts  for  compositions  or 
discharges,  as  are  by  this  Act  conferred  on  courts  of  bankruptcy  and  as  shall 
be  prescribed  by  rules  or  orders  of  the  courts  of  bankruptcy  of  their  re- 
spective districts,  except  as  herein  otherwise  provided;  and  (5)  upon  the 


BANKRUPTCY  ACT  OF  1898  737 

application  of  the  trustee  during  the  examination  of  the  bankrupts,  or  other 
proceedings,  authorise  the  employment  of  stenographers  at  the  expense  of  the 
estates  at  a  compensation  not  to  exceed  ten  cents  per  folio  for  reporting  and 
transcribing  the  proceedings. 

§39.  Duties  of  Eeferees. — a  Eeferees  shall  (1)  declare  dividends  and 
prepare  and  deliver  to  trustee  dividend  sheets  showing  the  dividends  declared 
and  to  whom  payable;  (2)  examine  all  schedules  of  property  and  lists  of 
creditors  filed  by  bankrupts  and  cause  such  as  are  incomplete  or  defective 
to  be  amended;  (3)  furnish  such  information  concerning  the  estates  in  proc- 
ess of  administration  before  them  as  may  be  requested  by  the  parties  in 
interest;  (4)  give  notice  to  creditors  as  herein  provided;  (5)  make  up  records 
embodying  the  evidence,  or  the  substance  thereof,  as  agreed  upon  by  the  par- 
ties in  all  contested  matters  arising  before  them,  whenever  requested  to 
do  so  by  either  of  the  parties  thereto,  together  with  their  findings  therein, 
and  transmit  them  to  the  judges;  (6)  prepare  and  file  the  schedules  of  prop- 
erty and  lists  of  creditors  required  to  be  filed  by  the  bankrupts,  or  cause 
the  same  to  be  done,  when  the  bankrupts  fail,  refuse,  or  neglect  to  do  so; 
(7)  safely  keep,  perfect,  and  transmit  to  the  clerks  the  records,  herein 
required  to  be  kept  by  them,  when  the  cases  are  concluded;  (8)  transmit 
to  the  clerks  such  papers  as  may  be  on  file  before  them  whenever  the  same 
are  needed  in  any  proceedings  in  courts,  and  in  like  manner  secure  the  return 
of  such  papers  after  they  have  been  used,  or,  if  it  be  impracticable  to  trans- 
mit the  original  papers,  transmit  certified  copies  thereof  by  mail;  (9)  upon 
application  of  any  party  in  interest,  preserve  the  evidence  taken  or  the  sub- 
stance thereof  as  agreed  upon  by  the  parties  before  them  when  a  stenog- 
rapher is  not  in  attendance;  and  (10)  whenever  their  respective  offices  are 
in  the  same  cities  or  towns  where  the  courts  of  bankruptcy  convene,  call  upon 
and  receive  from  the  clerks  all  papers  filed  in  courts  of  bankruptcy  which 
have  been  referred  to  them. 

b  Eeferees  shall  not  (1)  act  in  cases  in  which  they  are  directly  or  in- 
directly interested;  (2)  practice  as  attorneys  and  counselors  at  law  in  any 
bankruptcy  proceedings;  or  (3)  purchase,  directly  or  indirectly,  any  property 
of  an  estate  in  bankruptcy. 

§  40.  Compensation  of  Eeferees. — a  Eeferees  shall  receive  as  full  com- 
pensation for  their  services,  payable  after  they  are  rendered,  a  fee  of  -fifteen 
dollars  deposited  with  the  clerk  at  the  time  the  petition  is  filed  in  each  case, 
except  when  a  fee  is  not  required  from  a  voluntary  bankrupt,  and  twenty- 
five  cents  for  every  proof  of  claim  filed  for  allowance,  to  be  paid  from  the 
estate,  if  any,  as  a  part  of  the  cost  of  administration,  and  from  estates  which 
have  been  administered  before  them  one  per  centum  commission  on  all 
moneys  disbursed  to  creditors  by  the  trustee,  or  one-half  of  one  per  centum 
on  the  amount  to  be  paid  to  creditors  upon  the  confirmation  of  a  compo- 
sition, is 

13 — §  40a     originally    read     as    fol-  before   them    one   per  centum   commis- 

lows :     "Referees   shall   receive  as  full  sions  on  sums  to  be  paid  as  dividends 

compensation   for   their    services,    pay-  and    commissions,   or    one-half    of    one 

able  after  they  are  rendered,  a  fee  of  per  centum  on  the  amount  to  be  paid 

ten  dollars  deposited  with  the  clerk  at  to   creditors  upon  the  confirmation  of 

the  time   the  petition  is  filed   In  each  a    composition." 

case,  except  when  a  fee  is  not  required  The  change  was  made  by  the  amend- 

from  a  voluntary  bankrupt,  and  from  ment    of    1903. 
estates  which   have  been  administered 
H.  &  A.  Bankruptcy — 47 


738  BANKRUPTCY  ACT  OF  1898 

b  Whenever  a  case  is  transferred  from  one  referee  to  another  the  judge 
shall  determine  the  proportion  in  which  the  fee  and  commissions  therefor 
shall  be  divided  between  the  referees, 

c  In  the  event  of  the  reference  of  a  case  being  revoked  before  it  is  con- 
cluded, and  when  the  case  is  especially  referred,  the  judge  shall  determine 
what  part  of  the  fee  and  commissions  shall  be  paid  to  the  referee. 

§  41.  Contempts  before  Eeferees. — a  A  person  shall  not,  in  proceedings 
before  a  referee,  (1)  disobey  or  resist  any  lawful  order,  process,  or  writ; 
(2)  misbehave  during  a  hearing  or  so  near  the  place  thereof  as  to  obstruct 
the  same;  (3)  neglect  to  produce,  after  having  been  ordered  to  do  so,  any 
pertinent  document;  or  (4)  refuse  to  appear  after  having  been  subpoenaed, 
or,  upon  appearing,  refuse  to  take  the  oath  as  a  witness,  or,  after  having 
taken  the  oath,  refuse  to  be  examined  according  to  law :  Provided,  That  no 
person  shall  be  required  to  attend  as  a  witness  before  a  referee  at  a  place 
outside  of  the  State  of  his  residence,  and  more  than  one  hundred  miles  from 
such  place  of  residence,  and  only  in  case  his  lawful  mileage  and  fee  for  one 
day 's  attendance  shall  be  first  paid  or  tendered  to  him. 

b  The  referee  shall  certify  the  facts  to  the  judge,  if  any  person  shall 
do  any  of  the  things  forbidden  in  this  section.  The  judge  shall  thereupon, 
in  a  summary  manner,  hear  the  evidence  as  to  the  acts  complained  of,  and, 
if  it  is  such  as  to  warrant  him  in  so  doing,  punish  such  person  in  the  same 
manner  and  to  the  same  extent  as  for  a  contempt  committed  before  the 
court  of  bankruptcy,  or  commit  such  person  upon  the  same  conditions  as  if 
the  doing  of  the  forbidden  act  had  occurred  with  reference  to  the  process  of, 
or  in  the  presence  of,  the  court. 

§  42.  Records  op  Referees. — a  The  records  of  all  proceedings  in  each 
case  before  a  referee  shall  be  kept  as  nearly  as  may  be  in  the  same  manner 
as  records  are  now  kept  in  equity  cases  in  circuit  courts  of  the  United 
States. 

b  A  record  of  the  proceedings  in  each  case  shall  be  kept  in  a  separate 
book  or  books,  and  shall,  together  with  the  papers  on  file,  constitute  the  rec- 
ords of  the  case. 

c  The  book  or  books  containing  a  record  of  the  proceedings  shall,  when 
the  case  is  concluded  before  the  referee,  be  certified  to  by  him,  and,  together 
with  such  papers  as  are  on  file  before  him,  be  transmitted  to  the  court  of 
bankruptcy  and  shall  there  remain  as  a  part  of  the  records  of  the  court. 

§  43.  Referee  's  Absence  or  Disability. — a  "Whenever  the  office  of  a 
referee  is  vacant,  or  its  occupant  is  absent  or  disqualified  to  act,  the  judge 
may  act,  or  may  appoint  another  referee,  or  another  referee  holding  an 
appointment  under  the  same  court  may,  by  order  of  the  judge,  temporarily 
fill  the  vacancy. 

§  44.  Appointment  of  Trustees. — a  The  creditors  of  a  bankrupt  estate 
shall,  at  their  first  meeting  after  the  adjudication  or  after  a  vacancy  has 
occurred  in  the  office  of  trustee,  or  after  an  estate  has  been  reopened,  or 
after  a  composition  has  been  set  aside  or  a  discharge  revoked,  or  if  there 
is  a  vacancy  in  the  office  of  trustee,  appoint  one  trustee  or  three  trustees 
of  such  estate.  If  the  creditors  do  not  appoint  a  trustee  or  trustees  as 
herein  provided,  the  court  shall  do  so. 

§45.  Qualifications  of  Trustees. — a  Trustees  may  be  (1)  individuals 
who  are  respectively  competent  to  perform  the  duties  of  that  office,  and 
reside  or  have  an  office  in  the  judicial  district  within  which  thef  are  ap- 


BANKRUPTCY  ACT  OF  1898  739 

pointed,  or  (2)  corporations  autliorized  by  their  charters  or  by  law  to  act 
in  such  capacity  and  having  an  office  in  the  judicial  district  within  which 
they  are  appointed. 

§  46.  Death  oe  Eemoval  op  Trustees. — a  The  death  or  removal  of  a 
trustee  shall  not  abate  any  suit  or  proceeding  which  he  is  prosecuting  or 
defending  at  the  time  of  his  death  or  removal,  but  the  same  may  be  pro- 
ceeded with  or  defended  by  his  joint  trustee  or  successor  in  the  same  manner 
as  though  the  same  had  been  commenced  or  was  being  defended  by  such 
joint  trustee  alone  or  by  such  successor. 

§  47.  Duties  of  Trustees. — a  Trustees  shall  respectively  (1)  account  for 
and  pay  over  to  the  estates  under  their  control  aU  interest  received  by  them 
upon  property  of  such  estates;  (2)  collect  and  reduce  to  money  the  property 
of  the  estates  for  which  they  are  trustees,  under  the  direction  of  the  court, 
and  close  up  the  estate  as  expeditiously  as  is  compatible  with  the  best 
interests  of  the  parties  in  interest;  and  such  trustees,  as  to  all  property  in 
the  custody  or  coming  into  the  custody  of  the  bankruptcy  court,  shall  be 
deemed  vested  with  all  the  rights,  remedies,  and  powers  of  a  creditor  holding 
a  lien  by  legal  or  equitable  proceedings  thereon;  and  also,  as  to  all  property 
not  in  the  custody  of  the  bankruptcy  court,  shall  be  deemed  vested  with  all 
the  rights,  remedies,  and  powers  of  a  judgment  creditor  holding  an  execu- 
tion duly  returned  unsatisfied;^'^  (3)  deposit  all  money  received  by  them 
in  one  of  the  designated  depositories;  (4)  disburse  money  only  by  check  or 
draft  on  the  depositories  in  which  it  has  been  deposited;  (5)  furnish  such 
information  concerning  the  estates  of  which  they  are  trustees  and  their 
administration  as  may  be  requested  by  parties  in  interest;  (6)  keep  regular 
accounts  showing  all  amounts  received  and  from  what  sources  and  all 
amounts  expended  and  on  what  accounts;  (7)  lay  before  the  final  meeting 
of  the  creditors  detailed  statements  of  the  administration  of  the  estates; 
(8)  make  final  reports  and  file  final  accounts  with  the  courts  fifteen  days 
before  the  days  fixed  for  the  final  meetings  of  the  creditors;  (9)  pay  divi- 
dends within  ten  days  after  they  are  declared  by  the  referees ;  ( 10 )  report  to 
the  courts,  in  writing,  the  condition  of  the  estates  and  the  amounts  of  money 
on  hand,  and  such  other  details  as  may  be  required  by  the  courts,  within 
the  first  month  after  their  appointment  and  every  two  months  thereafter, 
unless  otherwise  ordered  by  the,  courts;  and  (11)  set  apart  the  bankrupt's 
exemptions  and  report  the  items  and  estimated  value  thereof  to  the  court 
as  soon  as  practicable  after  their  appointment. 

b  Whenever  three  trustees  have  been  appointed  for  an  estate,  the  con- 
currence of  at  least  two  of  them  shall  be  necessary  to  the  validity  of  their 
every  act  concerning  the  administration  of  the  estate. 

c  The  trustee  shall,  within  thirty  days  after  the  adjudication,  file  a 
certified  copy  of  the  decree  of  adjudication  in  the  office  where  conveyances 
of  real  estate  are  recorded  in  every  county  where  the  bankrupt  oums  real 
estate  not  exempt  from  execution,  and  pay  the  fee  for  such  filing,  and  he 
shall  receive  a  compensation  of  fifty  cents  for  each  copy  so  filed,  which, 
together  with  the  filing  fee,  shall  be  paid  out  of  the  estate  of  the  bankrupt 
as  a  part  of  the  costs  and  disbursements  of  the  proceedings.^^ 

14 — The    Italicized    words    in    S  47a  15 — S  47c  was  added  by  the  amend- 

(2)   were  added  by  the  amendment  of       ment  of  1903. 
1910. 


740  BANKRUPTCY  ACT  OF  1898 

§  48.  Compensation  op  Trustees,  ^eceiveks  and  Makshals, — a 
Trustees  shall  receive  for  their  services,  payable  after  they  are  rendered,  a 
fee  of  five  dollars  deposited  with  the  clerk  at  the  time  the  petition  is  filed  in 
each  case,  except  when  a  fee  is  not  required  from  a  voluntary  bankrupt, 
and  stich  commissions  on  all  moneys  disbursed  or  turned  over  to  any  person, 
including  lien  holders,  by  them,  as  may  be  allowed  by  the  courts,  not  to  ex- 
ceed six  per  centum  an  the  first  five  hundred  dolla/rs  or  less,  four  per 
centum  on  moneys  in  excess  of  five  hnindred  dollars  and  less  than  fifteen 
hundred  dollars,  two  per  centum  on  moneys  in  excess  of  fifteen  hundred  dol- 
lars amd  less  than  ten  thousand  dollars,  and  one  per  centum  on  moneys  in 
excess  of  ten  thousand  dollars.  And  in  case  of  the  confirmation  of  a  com- 
position after  the  trustee  has  qualified  the  court  may  allow  him,  as  com- 
pensation, not  to  exceed  one-half  of  one  per  centum  of  the  amownt  to  be  paid 
the  creditors  on  such  composition^^ 

b  In  the  event  of  an  estate  being  administered  by  three  trustees  instead 
of  one  trustee  or  by  successive  trustees,  the  court  shall  apportion  the  fees 
and  commissions  between  them  according  to  the  services  actually  rendered, 
80  that  there  shall  not  be  paid  to  trustees  for  the  administering  of  any 
estate  a  greater  amount  than  one  trustee  would  be  entitled  to. 

c  The  court  may,  in  its  discretion,  withhold  all  compensation  from  any 
trustee  who  has  been  removed  for  cause. 

d  Beceivers  or  marshals  appointed  pursuant  to  section  two,  subdivision 
three,  of  this  Act  shall  receive  for  their  services,  payable  after  they  are 
rendered,  compensation  by  way  of  commissions  upon  the  moneys  disbursed  or 
turned  over  to  any  person,  including  lien  holders,  by  them,  and  also  upon  the 
moneys  turned  over  by  them  or  afterwards  realized  by  the  trustees  from 
property  turned  over  in  kind  by  them  to  the  trustees,  as  the  court  may  allow, 
not  to  exceed  six  per  centum  on  the  first  five  hundred  dollars  or  less,  four 
per  centum  on  moneys  iii  excess  of  five  hundred  dollars  and  less  than  one 
thousand  five  hundred  dollars,  two  per  centum  on  moneys  in  excess  of  one 
thousand  five  hundred  dollars  and  less  than  ten  thousand  dollars,  and  one 

16 — §  48a  originally  read  as  fol-  when  a  fee  is  not  required  from  a 
lows :  "Trustees  shall  receive,  as  full  voluntary  bankrupt,  and  from  estates 
compensation  for  their  services,  pay-  which  they  have  administered  such 
able  after  they  are  rendered,  a  fee  of  commissions  on  all  moneys  disbursed 
Ave  dollars  deposited  with  the  clerk  by  them  as  may  be  allowed  by  the 
at  the  time  the  petition  is  filed  in  each  courts,  not  to  exceed  six  per  centum 
case,  except  when  a  fee  is  not  required  on  the  first  five  hundred  dollars  or 
from  a  voluntary  bankrupt,  and  from  less,  four  per  centum  on  moneys  in  ex- 
estates  which  they  have  administered,  cess  of  five  hundred  dollars  and  less 
such  commissions  on  sums  to  be  paid  than  fifteen  hundred  dollars,  two  per 
as  dividends  and  commissions  as  may  centum  on  moneys  in  excess  of  fifteen 
be  allowed  by  the  courts,  not  to  ex-  hundred  dollars  and  less  than  ten 
ceed  three  per  centum  on  the  first  five  thousand  dollars,  and  one  per  centum 
thousand  dollars  or  less,  two  per  on  moneys  in  excess  of  ten  thousand 
centum  on  the  second  five  thousand  dollars.  And  in  case  of  the  conflrma 
dollars  or  part  thereof,  and  one  per  tion  of  a  composition  after  th«» 
centum  on  such  sums  in  excess  of  ten  trustee  has  qualified  the  court  may 
thousand  dollars."  allow  him,  as  compensation,  not  to 
,The  amendment  of  1903  changed  it  exceed  one-half  of  one  per  centum 
to  read  as  follows :  "Trustees  shall  of  the  amount  to  be  paid  the  creditors 
receive  for  their  services,  payable  after  on  such  composition." 
they  are  rendered,  a  fee  of  five  dollars  The  other  changes  were  made  by  the 
deposited  with  the  clerk  at  the  time  amendment  of  1910. 
the  petition  is  filed  in  each  case,  except 


BANKRUPTCY  ACT  OF  1898  741 

per  centum  on  moneys  in  excess  of  ten  thousand  dollars:  Provided,  That 
in  case  of  the  confirmation  of  a  composition  such  commissions  shall  not  exceed 
one-half  of  one  per  centum  of  the  amount  to  be  paid  creditors  on  such  com- 
positions: Provided  further,  That  when  the  receiver  or  marshal  acts  as  a 
mere  custodian  and  does  not  carry  on  the  business  of  the  bankrupt  as  pro- 
vided in  clause  five  of  section  two  of  this  Act,  he  shall  not  receive  nor  be 
allowed  in  any  form  or  guise  more  than  two  per  centum  on  the  first  thou- 
sand dollars  or  less,  and  one-half  of  one  per  centum  on  all  above  one  thousand 
dollars  on  moneys  disbursed  by  him  or  turned  over  by  him  to  the  trustee 
and  on  moneys  subsequently  realized  from  property  turned  over  by  him  in 
kind  to  the  trustee:  Provided  further,  That  before  the  allowance  of  com- 
pensation notice  of  application  therefor,  specifying  the  amount  asked,  shall 
be  given  to  creditors  in  the  manner  indicated  in  section  fifty-eight  of  this 
ActAt 

e  Where  the  business  is  conducted  by  trustees,  marshals,  or  receivers,  as 
provided  in  clause  five  of  section  two  of  this  Act,  the  court  may  allow  such 
officers  additionM,l  compensation  for  such  services  by  ivay  of  comvussums 
upon  the  moneys  disbursed  or  turned  over  to  any  person,  including  lien 
holders,  by  them,  and,  in  cases  of  receivers  or  marshals,  also  upon  the  moneys 
turned  over  by  them  or  afterwards  realised  by  the  trustees  from  property 
turned  over  in  kiiid  by  them  to  the  trustees;  such  commisskms  not  to  exceed 
six  per  centum  on  the  first  five  hundred  dollars  or  less,  four  per  centum  on 
moneys  in  excess  of  five  hundred  dollars  and  less  than  one  thousand  five 
hundred  dollars,  two  per  centum  on  moneys  in  excess  of  one  thousand  five 
hundred  dollars  and  less  than  ten.  thousand  dollars,  and  one  per  centum  on 
moneys  in  excess  of  ten  thousand  dollars:  Provided,  That  in  case  of  the 
confirmation  of  a  composition  such  commissions  shall  not  exceed  one-half 
of  one  per  centum  of  the  amount  to  be  paid  creditors  on  such  composition: 
Provided  further,  That  before  the  allowance  of  compensation  notice  of 
application  therefor,  specifying  the  amount  asked,  shall  be  given  to  creditors 
in  the  manner  indicated  in  section  fifty-eight  of  this  ActA» 

§  49.  Accounts  and  Papers  of  Trustees. — a  The  accounts  and  papers 
of  trustees  shall  be  open  to  the  inspection  of  officers  and  all  parties  in 
interest. 

§  50.  Bonds  of  Referees  and  Trustees. — a  Referees,  before  assuming 
the  duties  of  their  offices,  and  within  such  time  as  the  district  courts  of  the 
United  States  having  jurisdiction  shall  prescribe,  shall  respectively  qualify 
by  entering  into  bond  to  the  United  States  in  such  sum  as  shall  be  fixed 
by  such  courts,  not  to  exceed  five  thousand  dollars,  with  such  sureties  as 
shall  be  approved  by  such  courts,  conditioned  for  the  faithful  performance 
of  their  official  duties. 

b  Trustees,  before  entering  upon  the  performance  of  their  official  duties, 
and  within  ten  days  after  their  appointment,  or  within  such  further  time, 
not  to  exceed  five  days,  as  the  court  may  permit,  shall  respectively  qualify 
by  entering  into  bond  to  the  United  States,  with  such  sureties  as  shall  be 
approved  by  the  courts,  conditioned  for  the  faithful  performance  of  their 
official  duties. 

c  The  creditors  of  a  bankrupt  estate,  at  their  first  meeting  after  the 

17 — §  48d  was  added  by  the  amend-  18 — §  48e  was  added  by  the  amend- 

ment of  1910.  ment  of  1910. 


742  BANKRUPTCY  ACT  OF  1898 

adjudication,  or  after  a  vacancy  has  occurred  in  the  office  of  trustee,  or 
after  an  estate  has  been  reopened,  or  after  a  composition  has  been  set  aside 
or  a  discharge  revoked,  if  there  is  a  vacancy  in  the  office  of  trustee,  shall  fix 
the  amount  of  the  bond  of  the  trustee;  they  may  at  any  time  increase  the 
amount  of  the  bond.  If  the  creditors  do  not  fix  the  amount  of  the  bond 
of  the  trustee  as  herein  provided  the  court  shall  do  so. 

d  The  court  shall  require  evidence  as  to  the  actual  value  of  the  property 
of  sureties. 

e  There  shall  be  at  least  two  sureties  upon  each  bond. 

f  The  actual  value  of  the  property  of  the  sureties,  over  and  above  their 
liabilities  and  exemptions,  on  each  bond  shall  equal  at  least  the  amount  of 
such  bond. 

g  Corporations  organized  for  the  purpose  of  becoming  sureties  upon 
bonds,  or  authorized  by  law  to  do  so,  may  be  accepted  as  sureties  upon  the 
bonds  of  referees  and  trustees  whenever  the  courts  are  satisfied  that  the 
rights  of  all  parties  in  interest  will  be  thereby  amply  protected. 

h  Bonds  of  referees,  trustees,  and  designated  depositories  shall  be  filed 
of  record  in  the  oflSce  of  the  clerk  of  the  court  and  may  be  sued  upon  in  the 
name  of  the  United  States  for  the  use  of  any  person  injured  by  a  breach 
0^  these  conditions. 

i  Trustees  shall  not  be  liable,  personally  or  on  their  bonds,  to  the  United 
States,  for  any  penalties  or  forfeitures  incurred  by  the  bankrupts  under 
this  act,  of  whose  estates  they  are  respectively  trustees. 

j  Joint  trustees  may  give  joint  or  several  bonds. 

k  If  any  referee  or  trustee  shall  fail  to  give  bond,  as  herein  provided 
and  within  the  time  limited,  he  shall  be  deemed  to  have  declined  his  appoint- 
ment, and  such  failure  shall  create  a  vacancy  in  his  office. 

1  Suits  upon  referees'  bonds  shall  not  be  brought  subsequent  to  two 
years  after  the  alleged  breach  of  the  bond. 

m  Suits  upon  trustees'  bonds  shall  not  be  brought  subsequent  to  two 
years  after  the  estate  has  been  closed. 

§  51.  Duties  of  Clerks. — a  Clerks  shall  respectively  (1)  account  for, 
as  for  other  fees  received  by  them,  the  clerk's  fee  paid  in  each  case  and 
such  other  fees  as  may  be  received  for  certified  copies  of  records  which  may 
be  prepared  for  persons  other  than  officers;  (2)  collect  the  fees  of  the 
clerk,  referee,  and  trustee  in  each  case  instituted  before  filing  the  petition, 
except  the  petition  of  a  proposed  voluntary  bankrupt  which  is  accompanied 
by  an  affidavit  stating  that  the  petitioner  is  without,  and  can  not  obtain, 
the  money  with  which  to  pay  such  fees;  (3)  deliver  to  the  referees  upon 
application  all  papers  which  may  be  referred  to  them,  or,  if  the  offices  of 
such  referees  are  not  in  the  same  cities  or  towns  as  the  offices  of  such  clerks, 
transmit  such  papers  by  mail,  and  in  like  manner  return  papers  which  were 
received  from  such  referees  after  they  have  been  used;  (4)  and  within  ten 
days  after  each  case  has  been  closed  pay  to  the  referee,  if  the  case  was 
referred,  the  fee  collected  for  him,  and  to  the  trustee  the  fee  collected  for 
him  at  the  time  of  filing  the  petition. 

§  52.  Compensation  of  Clerks  and  Marshals. — a  Clerks  shall  respec- 
tively receive  as  full  compensation  for  their  service  to  each  estate,  a  filing 
fee  of  ten  dollars,  except  when  a  fee  is  not  required  from  a  voluntary  bank- 
rupt. 


BANKRUPTCY  ACT  OF  1898  743 

b  Marshals  shall  respectively  receive  from  the  estate  where  an  adjudi- 
cation in  bankruptcy  is  made,  except  as  herein  otherwise  provided,  for  the 
performance  of  their  services  in  proceedings  in  bankruptcy,  the  same  fees, 
and  account  for  them  in  the  same  way,  as  they  are  entitled  to  receive  for 
the  performance  of  the  same  or  similar  services  in  other  cases  in  accordance 
with  laws  now  in  force,  or  such  as  may  be  hereafter  enacted,  fixing  the  com- 
pensation of  marshals. 

§  53.  Duties  of  Attoeney-Genebal. — a  The  Attorney-General  shall 
annually  lay  before  Congress  statistical  tables  showing  for  the  whole  coun- 
try, and  by  States,  the  number  of  cases  during  the  year  of  voluntary  and 
involuntary  bankruptcy;  the  amount  of  the  property  of  the  estates;  the 
dividends  paid  and  the  expenses  of  administering  such  estates;  and  such 
other  like  information  as  he  may  deem  important. 

§  54.  Statistics  op  Bankruptcy  Proceedings. — a  Officers  shall  furnish 
in  writing  and  transmit  by  mail  such  information  as  is  within  their  knowl- 
edge, and  as  may  be  shown  by  the  records  and  papers  in  their  possession, 
to  the  Attorney-General,  for  statistical  purposes,  within  ten  days  after  being 
requested  by  him  to  do  so. 

CHAPTEB  VI 

CREDITORS 

§  55.  Meetings  of  Creditors. — a  The  court  shall  cause  the  first  meeting 
of  the  creditors  of  a  bankrupt  to  be  held,  not  less  than  ten  nor  more  than 
thirty  days  after  the  adjudication,  at  the  county  seat  of  the  county  in 
which  the  bankrupt  has  had  his  principal  place  of  business,  resided,  or  had 
his  domicile;  or  if  that  place  would  be  manifestly  inconvenient  as  a  place 
of  meeting  for  the  parties  in  interest,  or  if  the  bankrupt  is  one  who  does 
not  do  business,  reside,  or  have  his  domicile  within  the  United  States,  the 
court  shall  fix  a  place  for  the  meeting  which  is  the  most  convenient  for  par- 
ties in  interest.  If  such  meeting  should  by  any  mischance  not  be  held  within 
such  time,  the  court  shall  fix  the  date,  as  soon  as  may  be  thereafter,  when 
it  shall  be  held. 

b  At  the  first  meeting  of  creditors  the  judge  or  referee  shall  preside, 
and,  before  proceeding  with  the  other  business,  may  allow  or  disallow  the 
claims  of  creditors  there  presented,  and  may  publicly  examine  the  bankrupt 
or  cause  him  to  be  examined  at  the  instance  of  any  creditor. 

e  The  creditors  shall  at  each  meeting  take  such  steps  as  may  be  pertinent 
and  necessary  for  the  promotion  of  the  best  interests  of  the  estate  and  the 
enforcement  of  this  Act. 

d  A  meeting  of  creditors,  subsequent  to  the  first  one,  may  be  held  at 
any  time  and  place  when  all  of  the  creditors  who  have  secured  the  allowance 
of  their  claims  sign  a  written  consent  to  hold  a  meeting  at  such  time  and 
place. 

e  The  court  shall  call  a  meeting  of  creditors  whenever  one-fourth  or 
more  in  number  of  those  who  have  proven  their  claims  shall  file  a  written 
request  to  that  effect;  if  such  request  is  signed  by  a  majority  of  such  cred- 
itors, which  number  represents  a  majority  in  amount  of  such  claims,  and 
contains  a  request  for  such  meeting  to  be  held  at  a  designated  place,  the 
court  shall  call  such  meeting  at  such  place  within  thirty  days  after  the  date 
of  the  filing  of  the  request. 


744  BANKRUPTCY  ACT  OP  1898 

f  Whenever  the  affairs  of  the  estate  are  ready  to  be  closed  a  final  meet- 
ing of  creditors  shall  be  ordered. 

§  56.  Voters  at  Meetings  of  Creu)ITORS. — a  Creditors  shall  pass  upon 
matters  submitted  to  them  at  their  meetings  by  a  majority  vote  in  number 
and  amount  of  claims  of  all  creditors  whose  claims  have  been  allowed  and 
are  present,  except  as  herein  otherwise  provided. 

b  Creditors  holding  claims  which  are  secured  or  have  priority  shall  not, 
in  respect  to  such  claims,  be  entitled  to  vote  at  creditors'  meetings,  nor 
shall  such  claims  be  counted  in  computing  either  the  number  of  creditors 
or  the  amount  of  their  claims,  unless  the  amounts  of  such  claims  exceed 
the  values  of  such  securities  or  priorities,  and  then  only  for  such  excess. 

§  57.  Proof  and  Allowance  of  Claims. — a  Proof  of  claims  shall  con- 
sist of  a  statement  under  oath,  in  writing,  signed  by  a  creditor  setting 
forth  the  claim,  the  consideration  therefor,  and  whether  any,  and,  if  so 
what,  securities  are  held  therefor,  and  whether  any,  and,  if  so  what,  pay- 
ments have  been  made  thereon,  and  that  the  sum  claimed  is  justly  owing 
from  the  bankrupt  to  the  creditor. 

b  Whenever  a  claim  is  founded  upon  an  instrument  of  writing,  such 
instrument,  unless  lost  or  destroyed,  shall  be  filed  with  the  proof  of  claim. 
If  such  instrument  is  lost  or  destroyed,  a  statement  of  such  fact  and  of  the 
circumstances  of  such  loss  or  destruction  shall  be  filed  under  oath  with  the 
claim.  After  the  claim  is  allowed  or  disallowed,  such  instrument  may  be 
withdrawn  by  permission  of  the  court,  upon  leaving  a  copy  thereof  on 
file  with  the  claim. 

c  Claims  after  being  proved  may,  for  the  purpose  of  allowance,  be  filed 
by  the  claimants  in  the  court  where  the  proceedings  are  pending  or  before 
the  referee  if  the  case  has  been  referred. 

d  Claims  which  have  been  duly  proved  shall  be  allowed,  upon  receipt 
by  or  upon  presentation  to  the  court,  unless  objection  to  their  allowance 
shall  be  made  by  parties  in  interest,  or  their  consideration  be  continued 
for  cause  by  the  court  upon  its  own  motion. 

6  Claims  of  secured  creditors  and  those  who  have  priority  may  be 
allowed  to  enable  such  creditors  to  participate  in  the  proceedings  at  cred- 
itors* meetings  held  prior  to  the  determination  of  the  value  of  their  securi- 
ties or  priorities,  but  shall  be  allowed  for  such  sums  only  as  to  the  courts 
seem  to  be  owing  over  and  above  the  value  of  their  securities  or  priorities. 

f  Objections  to  claims  shall  be  heard  and  determined  as  soon  as  the 
convenience  of  the  court  and  the  best  interests  of  the  estates  and  the 
claimants  will  permit. 

g  The  claims  of  creditors  who  have  received  preferences,  voidable  under 
section  sixty,  subdivision  b,  or  to  whom  conveyances,  transfers,  assignments, 
or  incumbrances,  void  or  voidable  under  section  sixty-seven,  subdivision  e, 
have  been  made  or  given,  shall  not  be  allowed  unless  such  creditors  shall 
surrender  such  preferences,  conveyances,  transfers,  assignments,  or  incu/m- 
hran-cesM 
I  h  The  value  of  securities  held  by  secured  creditors  shall  be  determined 
'  by  converting  the  same  into  money  according  to  the  terms  of  the  agree- 
ment  pursuant  to  which  such  securities  were  delivered  to  such  creditors  or 

19 — The  Italicized  words  in  §  57g 
were  added  by  the  amendment  of 
1003. 


BANKRUPTCY  ACT  OF  1898  746 

by  such  creditors  and  the  trustee,  by  agreement,  arbitration,  compromise, 
or  litigation,  as  the  court  may  direct,  and  the  amount  of  such  value  shall 
be  credited  upon  such  claims,  and  a  dividend  shall  be  paid  only  on  the 
unpaid  balance. 

i  Whenever  a  creditor,  whose  claim  against  a  bankrupt  estate  is  secured 
by  the  individual  undertaking  of  any  person,  fails  to  prove  such  claim,  such 
person  may  do  so  in  the  creditor's  name,  and  if  he  discharge  such  under- 
taking in  whole  or  in  part  he  shall  be  subrogated  to  that  extent  to  the 
rights  of  the  creditor. 

j  Debts  owing  to  the  United  States,  a  State,  a  county,  a  district,  or 
a  municipality  as  a  penalty  or  forfeiture  shall  not  be  allowed,  except  for 
the  amount  of  the  pecuniary  loss  sustained  by  the  act,  transaction,  or  pro- 
ceeding out  of  which  the  penalty  or  forfeiture  arose,  with  reasonable  and 
actual  costs  occasioned  thereby  and  such  interest  as  may  have  accrued 
thereon  according  to  law. 

k  Claims  which  have  been  allowed  may  be  reconsidered  for  cause  and 
reallowed  or  rejected  in  whole  or  in  part,  according  to  the  equities  of  the 
case,  before  but  not  after  the  estate  has  been  closed. 

1  Whenever  a  claim  shall  have  been  reconsidered  and  rejected,  in 
whole  or  in  part,  upon  which  a  dividend  has  been  paid,  the  trustee  may 
recover  from  the  creditor  the  amount  of  the  dividend  received  upon  the 
claim  if  rejected  in  whole,  or  the  proportional  part  thereof  if  rejected  only 
in  part. 

m  The  claim  of  any  estate  which  is  being  administered  in  bankruptcy 
against  any  like  estate  may  be  proved  by  the  trustee  and  allowed  by  the 
court  in  the  same  manner  and  upon  like  terms  as  the  claims  of  other  creditors. 

n  Claims  shall  not  be  proved  against  a  bankrupt  estate  subsequent  to 
one  year  after  the  adjudication;  or  if  they  are  liquidated  by  litigation  and 
the  final  judgment  therein  is  rendered  within  thirty  days  before  or  after 
the  expiration  of  such  time,  then  wdthin  sixty  days  after  the  rendition  of 
such  judgment:  Provided,  That  the  right  of  infants  and  insane  persons 
without  guardians,  without  notice  of  the  proceedings,  may  continue  six 
months  longer. 

§58.  Notices  to  Creditors. — a  Creditors  shall  have  at  least  ten  days' 
notice  by  mail,  to  their  respective  addresses  as  they  appear  in  the  list  of 
creditors  of  the  bankrupt,  or  as  afterwards  filed  with  the  papers  in  the 
case  by  the  creditors,  unless  they  waive  notice  in  writing,  of  (1)  all  exam- 
inations of  the  bankrupt;  (2)  all  hearings  upon  applications  for  the  con- 
firmation of  compositions;  (3)  all  meetings  of  creditors;  (4)  all  proposed 
sales  of  property;  (5)  the  declaration  and  time  of  payment  of  dividends; 
(6)  the  filing  of  the  final  accounts  of  the  trustee,  and  the  time  when  and 
the  place  where  they  will  be  examined  and  passed  upon;  (7)  the  proposed 
compromise  of  any  controversy;  (8)  the  proposed  dismissal  of  the  pro- 
ceedings, and  (0)  there  shall  he  thirty  days'  notice  of  all  applications  for 
the  discharge  of  bankrupts.20 

20 — %  58a     originally    read    as    fol-  In    the   case    by   the    creditors,    unless 

lows:     "Creditors  shall   have  at  least  they   waive   notice  in   writing,   of   (1) 

ten  days'  notice  by  mall,   to  their  re-  all  examinations  of  the  bankrupt ;   (2) 

spective   addresses   as   they   appear   In  all  hearings  upon  applications  for  the 

the  list  of  creditors  of  the  bankrupt,  confirmation    of    compositions    or    the 

or  as  afterwards  filed  with  the  papers  discharge  of  bankrupts;   (3)   all  meet- 


746  BANKRUPTCY  ACT  OF  1898 

b  Notice  to  creditors  of  the  first  meeting  shall  be  published  at  least  once 
and  may  be  published  such  number  of  additional  times  as  the  court  may 
direct;  the  last  publication  shall  be  at  least  one  week  prior  to  the  date  fijced 
for  the  meeting.    Other  notices  may  be  published  as  the  court  shall  direct. 

c  AH  notices  shall  be  given  by  the  referee,  unless  otherwise  ordered  by 
the  judge. 

§  59.  Who  May  File  and  Dismiss  Petitions. — a  Any  qualified  person 
may  file  a  petition  to  be  adjudged  a  voluntary  bankrupt. 

b  Three  or  more  creditors  who  have  provable  claims  against  any  person 
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  bank- 
rupt. 

c  Petitions  shall  be  filed  in  duplicate,  one  copy  for  the  clerk  and  one 
for  service  on  the  bankrupt. 

d  If  it  be  averred  in  the  petition  that  the  creditors  of  the  bankrupt  are 
less  than  twelve  in  number,  and  less  than  three  creditors  have  joined  aa 
petitioners  therein,  and  the  answer  avers  the  existence  of  a  larger  number  of 
creditors,  there  shall  be  filed  with  the  answer  a  list  under  oath  of  all  the 
creditors,  with  their  addresses,  and  thereupon  the  court  shall  cause  all  such  i 
creditors  to  be  notified  of  the  pendency  of  such  petition  and  shall  delay  the 
hearing  upon  such  petition  for  a  reasonable  time,  to  the  end  that  parties  in 
interest  shall  have  an  opportunity  to  be  heard;  if  upon  such  hearing  it  shall 
appear  that  a  sufficient  number  have  joined  in  such  petition,  or  if  prior  to  or 
during  such  hearing  a  sufficient  number  shall  join  therein,  the  case  may  be 
proceeded  with,  but  otherwise  it  shall  be  dismissed. 

e  In  computing  the  number  of  creditors  of  a  bankrupt  for  the  purpose 
of  determining  how  many  creditors  must  join  in  the  petition,  such  creditors 
as  were  employed  by  him  at  the  time  of  the  filing  of  the  petition  or  are 
related  to  him  by  consanguinity  or  affinity  within  the  third  degree,  as  deter- 
mined by  the  common  law,  and  have  not  joined  in  the  petition,  shall  not  be 
counted. 

f  Creditors  other  than  original  petitioners  may  at  any  time  enter  their 
appearance  and  join  in  the  petition,  or  file  an  answer  and  be  heard  in  opposi- 
tion to  the  prayer  of  the  petition. 

g  A  voluntary  or  involuntary  petition  shall  not  be  dismissed  by  the 
petitioner  or  petitioners  or  for  want  of  prosecution  or  by  consent  of  parties 
until  after  notice  to  the  creditors,  and  to  tliat  end  the  court  shall,  before 
entertaining  an  application  for  dismissal,  require  the  bankrupt  to  file  a  list, 
under  oath,  of  all  his  creditors,  with  their  addresses,  omd  shall  cause  notice 
to  be  sent  to  all  such  creditors  of  the  pendency  of  such  application,  and 
shall  delay  the  hearing  thereon  for  a  reasonable  time  to  allow  all  creditors 
and  parties  in  interest  opportunity  to  be  heard.^^ 

ings    of    creditors;     (4)     all    proposed  the  proposed  dismissal  of  the  proceed- 

sales  of  property ;   (5)    the  declaration  ings." 

and  time  of  payment  of  dividends;  (6)  The  lengthening  of  the  time  of  no- 

the  filing  of  the  final  accounts' of  the  tice  of  applications  for  discharge  was 

trustee,   and   the    time    when   and   the  made  by  tbe  amendment  of  1910. 

place  where  they  will  be  examined  and  21 — The    italicized    words    in    |  59g 

passed  upon;    (7)    the  proposed   com-  were  added  by  the  amendment  of  1910. 
promise  of  any  controversy,  and   (8) 


BANKRUPTCY  ACT  OF  1898  747 

§  60.  Pkeferbed  Ckeditoes. — a  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.  Where  the  preference  consists  in  a  transfer,  such 
period  of  four  months  shall  not  expire  until  four  months  after  the  date  of  the 
recording  or  registering  of  the  tramsfer,  if  by  law  such  recording  or  register- 
ing is  reguired.22 

b  If  a  bankrupt  shall  have  procured  or  suffered  a  judgment  to  be  entered 
against  him  in  favor 'of  any  person  or  have  made  a  transfer  of  amy  of  hit 
property,  and  if,  at  the  time  of  the  transfer,  or  of  the  entry  of  the  judg- 
ment, or  of  the  recording  or  registering  of  the  transfer  if  by  law  recording 
or  registering  thereof  is  required,  and  beirtrg  wi^in  four  months  before  the 
filing  of  the  petition  in  bankruptcy  or  aiter  tiie  filing  thereof  and  before  the 
adjudication,  the  bankrupt  be  insolvent  and  the  judgment  or  transfer  then 
operate  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  judgment  or  transfer  would  effect  a  preference,  it 
shall  be  voidable  by  the  trustee  and  he  may  recover  the  property  or  its  value 
from  such  person.  And  for  the  purpose  of  such  recovery  any  court  of  bank- 
ruptcy, as  hereinbefore  defined,  and  any  state  court  which  would  have  had 
jurisdiction  if  bankruptcy  had  not  intervened,  shall  have  concurrent  juris- 
diction.'^^ 

c  If  a  creditor  has  been  preferred,  and  afterwards  in  good  faith  gives 
the  debtor  further  credit  without  security  of  any  kind  for  property  which 
becomes  a  part  of  the  debtor's  estate,  the  amount  of  such  new  credit  remain- 
ing unpaid  at  the  time  of  the  adjudication  in  bankruptcy  may  be  set  off 
against  the  amount  which  would  otherwise  be  recoverable  from  him.  - 

d  If  a  debtor  shall,  directly  or  indirectly,  in  contemplation  of  the  filing 
of  a  petition  by  or  against  him,  pay  money  or  transfer  property  to  an  attor- 
ney and  counselor  at  law,  solicitor  in  equity,  or  proctor  in  admiralty  for 
services  to  be  rendered,  the  transaction  shall  be  reexamined  by  the  court  on 
petition  of  the  trustee  or  any  creditor  and  shall  only  be  held  valid  to  the 

22— The    Italicized    words    in    §  60a  shall  have  given  a  preference,  and  the 

were  added  by  the  amendment  of  1903.  person  receiving  It,  or  to  be  benefited 

23 — §  60b    originally    read    as    fol-  thereby,    or   his  agent   acting  therein, 

lows :    "If  a  bankrupt  shall  have  given  shall  have  had  reasonable  cause  to  be- 

a    preference   within   four   months   be-  lieve  that  it  was  intended  thereby  to 

fore  the  filing  of  a  petition,  or  after  give  a  preference,  it  shall  be  voidable 

the   filing   of  the   petition   and   before  by   the    trustee,    and    he   may    recover 

the   adjudication,   and   the   person   re-  the   property   or   its   value   from   such 

ceiving  it,  or  to  be  benefited  thereby,  person.     And,  for  the  purpose  of  such 

or  his  agent  acting  therein,  shall  have  recovery,  any  court  of  bankruptcy,  as 

had  reasonable  cause  to  believe  that  it  hereinbefore    defined,    and    any    State 

was  intended  thereby  to  give  a  prefer-  court  which  would  have  had  jurisdic- 

ence,  it  shall  be  voidable  by  the  trustee,  tion  if  'bankruptcy  had  not  intervened, 

and  he  may  recover  the  property  or  its  shall   have  concurrent  jurisdiction." 

value  from  such  person."  The  other  changes  were  made  by  the 

The  amendment  of  1903  changed  it  amendment  of  1910. 
to   read   as   follows :    "If  a   bankrupt 


748  BANKRUPTCY  ACT  OF  1898 

extent  of  a  reasonable  amount  to  be  determined  by  the  court,  and  the  excess 
may  be  recovered  by  the  trustee  for  the  benefit  of  the  estate. 

CHAPTER  VII 

ESTATES 

§  61.  Depositories  for  Money. — a  Courts  of  bankruptcy  shall  designate, 
by  order,  banking  institutions  as  depositories  for  the  money  of  bankrupt 
estates,  as  convenient  as  may  be  to  the  residences  of  trustees,  and  shall 
require  bonds  to  the  United  States,  subject  to  their  approval,  to  be  given 
by  such  banking  institutions,  and  may  from  time  to  time  as  occasion  may 
require,  by  like  order  increase  the  number  of  depositories  or  the  amount  of 
any  bond  or  change  such  depositories. 

§  62.  Expenses  of  Administering  Estates. — a  The  actual  and  necessary 
expenses  incurred  by  officers  in  the  administration  of  estates  shall,  except 
where  other  provisions  are  made  for  their  payment,  be  reported  in  detail, 
under  oath,  and  examined  and  approved  or  disapproved  by  the  court.  If 
approved,  they  shall  be  paid  or  allowed  out  of  the  estates  in  which  they  were 
incurred. 
\y  §  63.  Debts  Which  May  Be  Proved. — a  Debts  of  the  bankrupt  which 

may  be  proved  and  allowed  against  his  estate  which  are  (1)  a  fixed  liability, 
as  evidenced  by  a  judgment  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  recoverable  at  that 
date  or  with  a  rebate  of  interest  upon  such  as  were  not  then  payable  and 
did  not  bear  interest;  (2)  due  as  costs  taxable  against  an  involuntary  bank- 
rupt 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  the  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  con- 
sideration of  the  bankrupt's  application  for  a  discharge,  less  costs  incurred 
and  interests  accrued  after  the  filing  of  the  petition  and  up  to  the  time  of  the 
entry  of  such  judgments. 

b  Unliquidated  claims  against  the  bankrupt  may,  pursuant  to  applica- 
tion to  the  court,  be  liquidated  in  such  manner  as  it  shall  direct,  and  may 
thereafter  be  proved  and  allowed  against  his  estate. 

§  64.  Debts  Which  Hate  Priority. — a  The  court  shall  order  the  trustee 
to  pay  all  taxes  legally  due  and  owing  by  the  bankrupt  to  the  United  States, 
State,  county,  district,  or  municipality  in  advance  of  the  payment  of  divi- 
dends to  creditors,  and  upon  filing  the  receipts  of  the  proper  public  officers 
for  such  payment  he  shall  be  credited  with  the  amount  thereof,  and  in  ease 
any  question  arises  as  to  the  amount  or  legality  of  any  such  tax  the  same 
shall  be  heard  and  determined  by  the  court. 

b  The  debts  to  have  priority,  except  as  herein  provided,  and  to  be  paid 
in  full  out  of  bankrupt  estates,  and  the  order  of  payment  shall  be  (1)  the 
actual  and  necessary  cost  of  preserving  the  estate  subsequent  to  filing  the 
petition;    {2)  the  filing  fees  paid  by  creditors  in  involuntary  cases,  and, 


BANKRUPTCY  ACT  OF  1898  749 

where  property  of  the  hcmkrupt,  transferred  or  concealed  by  him  either 
before  or  after  the  filing  of  the  petition,  shall  have  been  recovered  for  the 
benefit  of  the  estate  of  the  bankrupt  by  the  efforts  and  at  the  expense  of  one 
or  more  creditors,  the  reasonable  expenses  of  such  recovery;  24  (3)  the  cost 
of  administration,  including  the  fees  and  mileage  payable  to  witnesses  as 
now  or  hereafter  provided  by  the  laws  of  the  United  States,  and  one  reason- 
able attorney's  fee,  for  the  professional  services  actually  rendered,  irrespec- 
tive of  the  number  of  attorneys  employed,  to  the  petitioning  creditors  in 
involuntary  cases,  to  the  bankrupt  in  involuntary  cases  while  performing 
the  duties  herein  prescribed,  and  to  the  bankrupt  in  voluntary  cases,  as  the 
court  may  allow;  (4)  wages  due  to  workmen,  clerks,  traveling  or  city  sales- 
men,2!i  or  servants  which  have  been  earned  within  three  months  before  the 
date  of  the  commencement  of  proceedings,  not  to  exceed  three  hundred  dollars 
to  each  claimant;  and  (5)  debts  owing  to  any  person  who  by  the  laws  of 
the  States  or  the  United  States  is  entitled  to  priority. 

c  In  the  event  of  the  confirmation  of  a  composition  being  set  aside,  or  a 
discharge  revoked,  the  property  acquired  by  the  bankrupt  in  addition  to 
his  estate  at  the  time  the  composition  was  confirmed  or  the  adjudication  was 
made  shall  be  applied  to  the  payment  in  full  of  the  claims  of  creditors  for 
property  sold  to  him  on  credit,  in  good  faith,  while  such  composition  or 
discharge  was  in  force,  and  the  residue,  if  any,  shall  be  applied  to  the  pay- 
ment of  the  debts  which  were  owing  at  the  time  of  the  adjudication. 

§  65.  Declaration  and  Payment  of  Dividends. — a  Dividends  of  an 
equal  per  centum  shall  be  declared  and  paid  on  all  allowed  claims,  except 
such  as  have  priority  or  are  secured. 

b  The  first  dividend  shall  be  declared  within  thirty  days  after  the  adjudi- 
cation, if  the  money  of  the  estate  in  excess  of  the  amount  necessary  to  pay 
the  debts  which  have  priority  and  such  claims  as  have  not  been,  but  prob- 
ably will  be,  allowed  equals  five  per  centum  or  more  of  such  allowed  claims. 
Dividends  subsequent  to  the  first  shall  be  declared  upon  like  terms  as  the  first 
and  as  often  as  the  amount  shall  equal  ten  per  centum  or  more  and  upon 
closing  the  estate.  Dividends  may  be  declared  oftener  and  in  smaller  propor- 
tions if  the  judge  shall  so  order.  Provided,  That  the  first  dividend  shall 
not  include  mx>re  than  fifty  per  centum  of  the  money  of  the  estate  in  excess 
of  the  amount  necessary  to  pay  the  debts  which  have  priority  and  such  claims 
as  probably  will  be  allowed:  And  provided  further,  That  the  final  dividend 
shall  not  be  declared  within  three  months  after  the  first  dividend  shall  be 
declared.2^ 

c  The  rights  of  creditors  who  have  received  dividends,  or  in  whose  favor 
final  dividends  have  been  declared,  shall  not  be  affected  by  the  proof  and 
allowance  of  claims  subsequent  to  the  date  of  such  payment  or  declarations 
of  dividends;  but  the  creditors  proving  and  securing  the  allowance  of  such 
claims  shall  be  paid  dividends  equal  in  amount  to  those  already  received  by 
the  other  creditors  if  the  estate  equals  so  much  before  such  other  creditors 
are  paid  any  further  dividends. 

d  Whenever  a  person  shall  have  been  adjudged  a  bankrupt  by  a  court 

24 — The    Italicized    words    In    §  64b  (4)   were  added  by  the  amendment  of 

(2)   were  added  by  the  amendment  of  1906. 

1903.  26— The    italicized    words    In    g  65b 

25 — The    italicized    words    in    S  64b  were  added  by  the  amendment  of  1003. 


750  BANKRUPTCY  ACT  OF  1898 

without  the  United  States  and  also  by  a  court  of  bankruptcy,  creditors 
residing  within  the  United  States  shall  first  be  paid  a  dividend  equal  to  that 
received  in  the  court  without  the  United  States  by  other  creditors  before 
creditors  who  have  received  a  dividend  in  such  courts  shall  be  paid  any 
amounts. 

e  A  claimant  shall  not  be  entitled  to  collect  from  a  bankrupt  estate  any 
greater  amount  than  shall  accrue  pursuant  to  the  provisions  of  this  Act. 

§  66.  Unclaimed  Dividends. — a  Dividends  which  remain  unclaimed  for 
six  months  after  the  final  dividend  has  been  declared  shall  be  paid  by  the 
trustee  into  court. 

b  Dividends  remaining  unclaimed  for  one  year  shall,  under  the  direction 
of  the  court,  be  distributed  to  the  creditors  whose  claims  have  been  allowed 
but  tfot  paid  in  full,  and  after  such  claims  have  been  paid  in  full  the  balance 
shall  be  paid  to  the  bankrupt:  Provided,  That  in  case  unclaimed  dividends 
belong  to  minors  such  minors  may  have  one  year  after  arriving  at  majority 
to  claim  such  dividends. 

§  67.  Liens. — a  Claims  which  for  want  of  record  or  for  other  reasons 
would  not  have  been  valid  liens  as  against  the  claims  of  the  creditors  of  the 
bankrupt  shall  not  be  liens  against  his  estate. 

b  Whenever  a  creditor  is  prevented  from  enforcing  his  rights  as  against 
a  lien  created,  or  attempted  to  be  created,  by  his  debtor,  who  afterwards 
becomes  a  bankrupt,  the  trustee  of  the  estate  of  such  bankrupt  shall  be     v 
subrogated  to  and  may  enforce  such  rights  of  such  creditor  for  the  benefit  of 
theestate. 

^^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  judg- 
ment by  confession,  which  was  begun  against  a  person  within  four  months 
before  the  filing  of  a  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  and  that  its  existence  and  enforcement  will  work  a  preference,  or 

(2)  the  party  or  parties  to  be  benefited  thereby  had  reasonable  cause  to 
believe  the  defendant  was  insolvent  and  in  contemplation  of  bankruptcy,  or 

(3)  that  such  lien  was  sought  and  permitted  in  fraud  of  the  provisions  of 
this  Act;  or  if  the  dissolution  of  such  lien  would  militate  against  the  besK 
interests  of  the  estate  of  such  person  the  same  shall  not  be  dissolved,  but  the  \ 
trustee  of  the  estate  of  such  person,  for  the  benefit  of  the  estate,  shall  be  \ 
subrogated  to  the  rights  of  the  holder  of  such  lien  and  empowered  to  perfect  I 
and  enforce  the  same  in  his  name  as  trustee  with  like  force  and  efl;ect  as  J 
such  holder  might  have  done  had  not  bankruptcy  proceedings  intervened.      r 

d  Liens  given  or  accepted  in  good  faith  and  not  in  contemplation  of  or 
in  fraud  upon  this  Act,  and  for  a  present  consideration,  which  have  been 
recorded  according  to  law,  if  record  thereof  was  necessary  in  order  to  impart 
notice,  shall,  to  the  extent  of  such  present  consideration  only,  not  be  aiJfected 
by  this  Act.27 

e  That  all  conveyances,  transfers,  assignments,  or  incumbrances  of  his 
property,  or  any  part  thereof,  made  or  given  by  a  person  adjudged  a  bank- 
rupt under  the  provisions  of  this  Act  subsequent  to  the  passage  of  this  Act 

27 — ^The    italicized    words    in    §  67d 
were  added  by  the  amendment  of  1910. 


BANKRUPTCY  ACT  OF  1898  751 

and  within  four  inontha  pyinr  In  t.hft.filing  nf  t.hfi  pptitinn,  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 
as  to  purchasers  in  good  faith  and  for  a  present  fair  consideration;  and  all 
property  of  the  debtor  conveyed,  transferred,  assigned,  or  encumbered  as 
aforesaid  shall,  if  he  be  adjudged  a  bankrupt,  and  the  same  is  not  exempt 
from  execution  and  liability  for  debts  by  the  law  of  his  domicile,  be  and 
remain  a  part  of  the  assets  and  estate  of  the  bankrupt  and  shall  pass  to  his 
said  trustee,  whose  duty  it  shall  be  to  recover  and  reclaim  the  same  by  legal 
proceedings  or  otherwise  for  the  benefit  of  the  creditors.  And  all  convey- 
ances, transfers,  or  incumbrances  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,  shall  be  deemed  null  and  void  under  this  Act  against  the  creditors 
of  such  debtor  if  he  be  adjudged  a  bankrupt,  and  such  property  shall  pass 
to  the  assignee  and  be  by  him  reclaimed  and  recovered  for  the  benefit  of  the 
creditors  of  the  bankrupt.  For  the  purpose  of  such  recovery  any  court  of 
bankruptcy  as  hereinbefore  defined,  and  any  State  court  which  ux)uld  have 
Iwd  jurisdiction  if  bankruptcy  had  not  intervened,  shall  have  concurrent 
jurijdiction.^fi 

\  ([fjFhat  all  levies,  judgments,  attachments,  or  other  liens,  obtained  through 
legal  proceedings  against  a  person <i^ho  is  insolvent,|^t  any  ti"|fi  ^lil*^^  ^""'' 
months  jprior  to  the  filing  of  a  petition  in  bankruptcy  against  him,  shall  be 
deemed  null  and  void  in  case  he  is  adjudged  a  bankrupt,  and  the  property 
affected  by  the  levy,  judgment,  attachment,  or  other  lien  shall  be  deemed 
wholly  discharged  and  released  from  the  same,  and  shall  pass  to  the  trustee 
as  a  part  of  the  estate  of  the  bankrupt,  unless  the  court  shall,  on  due  notice, 
order  that  the  right  under  such  levy,  judgment,  attachment,  or  other  lien 
shall  be  preserved  for  the  benefit  of  the  estate ;  and  thereupon  the  same  may 
pass  to  and  shall  be  preserved  by  the  trustee  for  the  benefit  of  the  estate  as 
aforesaid.  And  the  court  may  order  such  conveyance  as  shall  be  necessary 
to  carry  the  purposes  of  this  section  into  effect:  Provided,  That  nothing 
herein  contained  shall  have  the  effect  to  destroy  or  impair  the  title  obtained 
by  such  levy,  judgment,  attachment,  or  other  lien,  of  a  bona  fide  purchaser 
for  value  who  shall  have  acquired  the  same  without  notice  or  reasonable 
cause  for  inquiry. 

'-""  ^§68.  Set-Offs  and  Counteeclaims. — 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  bal- 
ance only  shall  be  allowed  or  paid. 

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  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. 

I  69.  Possession  of  Property. — a  A  judge  may,  upon  satisfactory  proof, 

28 — 'The    italicized    words    in    §  67e 
were  added  by  the  amendment  of  1903. 


752  BANKRUPTCY  ACT  OF  1898 

by  affidavit,  that  a  bankrupt  against  whom  an  involuntary  petition  has  been 
filed  and  is  pending  has  committed  an  act  of  bankruptcy,  or  has  neglected  or 
is  neglecting,  or  is  about  to  so  neglect  his  property  that  it  has  thereby 
deteriorated  or  is  thereby  deteriorating  or  is  about  thereby  to  deterio- 
rate in  value,  issue  a  warrant  to  the  marshal  to  seize  and  hold  it 
subject  to  further  orders.  Before  such  warrant  is  issued  the  petitioners 
applying  therefor  shall  enter  into  a  bond  in  such  an  amount  as  the  judge 
shall  fix,  with  such  sureties  as  he  shall  approve,  conditioned  to  indemnify 
such  bankrupt  for  such  damages  as  he  shall  sustain  in  the  event  such  seizure 
shall  prove  to  have  been  wrongfully  obtained.  Such  property  shall  be  re- 
leased, if  such  bankrupt  shall  give  bond  in  a  sum  which  shall  be  fixed  by  the 
judge,  with  such  sureties  as  he  shall  approve,  conditioned  to  turn  over  such 
property,  or  pay  the  value  thereof  in  )noney  to  the  trustee,  in  the  event  he  is 
adjudged  a  bankrupt  pursuant  to  such  petition. 

§  70.  TiTLK  TO  Property. — a  The  trustee  of  the  estate  of  a  bankrupt, 
upon  his  appointment  and  qualification,  and  his  successor  or  successors,  if 
he  shall  have  one  or  more,  upon  his  or  their  appointment  and  qualification, 
shall  in  turn  be  vested  by  operation  of  law  with  the  tjJitPi  "^  ^^f^  ^^ankrnpt.,  afl_ 
of  the  date  lie  was. adjudged  a  bankrupt,  except  in  so  far  as  it  is  to  property 
which  is  exempt,  to  all  (1)  documents  relating  to  his  property;  (2)  interests 
in  patents,  patent  rights,  copyrights,  and  trade-marks;  (3)  powers  which 
he  might  have  exercised  for  his  own  benefit,  but  not  those  which  he  might 
have  exercised  for  some  other  person;  (4)  property  transferred  by  him  in 
fraud  of  his  creditors;  (5)  property  which  prior  to  the  filing  of  the  petition 
he  could  by  any  means  have  transferred  or  which  might  have  been  levied 
upon  and  sold  under  judicial  process  against  him:  Provided,  That  when  any 
bankrupt  shall  have  any  insurance  policy  which  has  a  cash  surrender  value 
payable  to  himself,  his  estate,  or.  personal  representatives,  he  may,  within 
thirty  days  after  the  cash  surrender  value  has  been  ascertained  and  stated 
to  the  trustee  by  the  company  issuing  the  same,  pay  or  secure  to  the  trustee 
the  sum  so  ascertained  and  stated,  and  continue  to  hold,  own,  and  carry 
such  policy  free  from  the  claims  of  the  creditors  participating  in  the  distri- 
bution of  his  estate  under  the  bankruptcy  proceedings,  otherwise  the  policy 
shall  pass  to  the  trustee  as  assets;  and  (6)  rights  of  action  arising  upon 
contracts  or  from  the  unlawful  taking  or  detention  of,  or  injury  to,  his 
property. 

b  All  real  and  personal  property  belonging  to  bankrupt  estates  shall 
be  appraised  by  three  disinterested  appraisers;  they  shall  be  appointed  by, 
and  report  to,  the  court.  Eeal  and  personal  property  shall,  when  practicable, 
be  sold  subject  to  the  approval  of  the  court;  it  shall  not  be  sold  otherwise 
than  subject  to  the  approval  of  the  court  for  less  than  seventy-five  per  centum 
of  its  appraised  value. 

c  The  title  to  property  of  a  bankrupt  estate  which  has  been  sold,  as 
herein  provided,  shall  be  conveyed  to  the  purchaser  by  the  trustee. 

d  Wlienever  a  composition  shall  be  set  aside,  or  discharge  revoked,  the 
trustee  shall,  upon  his  appointment  and  qualification,  be  vested  as  herein 
provided  with  the  title  to  all  of  the  property  of  the  bankrupt  as  of  the  date 
of  the  final  decree  setting  aside  the  composition  or  revoking  the  discharge. 

e  The  trustee  may  avoid  any  transfer  by  the  bankrupt  of  his  property 
which  any  creditor  of  such  bankrupt  might  have  avoided,  and  may  recover 


BANKRUPTCY  ACT  OF  1898  753 

the  property  so  transferred,  or  its  value,  from  the  person  to  whom  it  was 
transferred,  unless  he  was  a  bona  fide  holder  for  value  prior  to  the  date  of 
the  adjudication.  Such  property  may  be  recovered  or  its  value  collected 
from  whoever  may  have  received  it,  except  a  bona  fide  holder  for  value.  For 
the  purpose  of  such  recovery  any  court  of  bankruptcy  as  hereinbefore  defined, 
and  any  State  court  which  would  have  had  jurisdiction  if  bankruptcy  had  not 
intervened,  shall  have  concurrent  jurisdiction.^^ 

f  Upon  the  confirmation  of  a  composition  offered  by  a  bankrupt,  the  title 
to  his  property  shall  thereupon  revest  in  him. 

THE  TIME  WHEN   THIS  ACT  SHALL  GO  INTO  EFFECT 

a  This  Act  shall  go  into  full  force  and  effect  upon  its  passage :  Provided, 
however,  That  no  petition  for  voluntary  bankruptcy  shall  be  filed  within  one 
month  of  the  passage  thereof,  and  no  petition  for  involuntary  bankruptcy 
shall  be  filed  within  four  months  of  the  passage  thereof. 

b  Proceedings  commenced  under  State  insolvency  laws  before  the  pas- 
sage of  this  Act,  shall  not  be  affected  by  it. 

§  71.  That  the  clerks  of  the  several  district  courts  of  the  United  States 
shall  prepare  and  keep  in  their  respective  offices  complete  and  convenient 
indexes  of  all  petitions  and  discharges  in  bank;ruptcy  heretofore  or  here- 
after filed  in  the  said  courts,  and  shall,  when  requested  so  to  do,  issue  cer- 
tificates of  search  certifying  as  to  whether  or  not  any  such  petitions  or  dis- 
charges have  been  filed;  and  said  clerks  shall  be  entitled  to  receive  for  such 
certificates  the  same  fees  as  now  allowed  by  law  for  certificates  as  to  judg- 
ments in  said  courts:  Provided,  That  said  bankruptcy  indexes  and  dockets 
shall  at  all  times  be  open  to  inspection  and  examination  by  all  persons  or 
corporations  without  any  fee  or  charge  therefor.^o 

§  72.  That  neither  the  referee,  receiver,  marshal,  nor  trustee  shall  iii  any 
form  or  guise  receive,  nor  shall  the  court  allow  him,  any  other  or  further 
compensation  for  his  services  than  that  expressly  authorised  and  prescribed 
in  this  Act.s^ 

29 — The    Italicized    words    In    §  70e  effect,  but  such  cases  shall  be  adjudl- 

were  added  by  the  amendment  of  1903.  cated  and  disposed  of  conformably  to 

.30 — §  71   was  added  by  the  amend-  the  provisions  of  the  said  Act  of  July 

ment  of  1903.  first,     eighteen    hundred    and    ninety- 

31 — §  72  was  added  by  the  amend-  eight." 

ment  of  1903  in  the  following  form :  §  14  of  the  amendatory  Act  of  June 

"That    neither    the    referee    nor    the  25,    1910    is    as    follows :     "That    the 

trustee    shall    In    any    form    or    guise  provisions    of     this    amendatory     Act 

receive,    nor    shall    the    court      allow  shall    not    apply    to    bankruptcy   cases 

them,  any  other  or  further  compensa-  pending  when  this  Act  taljes  effect,  but 

tion   for  their  services   than   that   ex-  such    cases    shall    be    adjudicated   and 

pressly    authorized    and   prescribed    in  disposed  of  conformably  to  the  provi- 

this  Act."  sions  of  said  Act  approved  July  first. 

The  receiver   and   marshal   were  In-  eighteen  hundred  and  ninety-eight,  as 

eluded  In  it  by  the  amendment  of  1910.  amended    by    said    Act   approved   Feb- 

§  19  of  the  amendatory  Act  of  Feb-  ruary     fifth,     nineteen     hundred     and 

ruary   5,   1903,   Is   as   follows :     "That  three,  and  as  further  amended  by  said 

the     provisions     of     this     amendatory  Act  approved   June  fifteenth,  nineteen 

Act    shall    not    apply    to    bankruptcy  hundred  and  six." 
cases    pending    when    this    Act    takes 
H.  &  A.  Bankruptcy — 48 


INDEX  TO  BANKRUPTCY  ACT 


PAGE 

ACT,  when  to  take  effect 751 

ACTS  OF  BANKRUPTCY,  of  what  to  consist 72^  f 

ADJUDICATION,    definition   of 719 

A  PERSON  AGAINST  WHOM  A  PETITION  HAS  BEEN  FILED,  con- 
struction   of     719 

APPEALS,   from   decisions   of  bankruptcy   courts,   to   United   States 

Supreme    Court,    etc 732 

APPELLATE    COURTS,    definition    of 719 

APPRAISAL,    of    bankrupt's    property.. 750 

ARBITRATION,  submission  of  controversies  in   settling  estates ....   732 

ARREST,  bankrupt  exempt  from,  on  civil  process,  etc 725 

ASSIGNMENTS,  general,   an   act   of   bankruptcy 722 

subsequent    to    act,    etc.,    to    defraud,    void 748-9 

ATTACHMENTS,   obtained   within    four    months,   etc.,   void 749 

ATTORNEYS,  payments  to,  by  bankrupt  may  be  reexamined,  etc . .   745 

BANKRUPT,  definition  of 719 

acts  of  bankruptcy 722 

petition  to  be  filed  in  four  months 722 

petition  to  be  accompanied  by  bond 723 

who  may   become 723-4 

a  partnership  may  be 724 

exemptions   of 724 

duties   of 724-5 

death    or    insanity    of 725 

protection    and    detention    of 725 

extradition    of 726 

suits  by  and  against -.   726 

compositions    726-7 

discharges,    application    for 727 

codebtors'  liability  not  affected  by  discharge 728 

debts  not  affected  by  discharge 728 

courts  and  procedure  to  declare,  etc 729 

creditors,  meetings,  claims   of,   etc 741 

estates   of 746-50 

BANKRUPTCY,  with  reference  to  time,  what  to  mean 719 

jurisdiction  of  courts 720-22 

acts  of ' 722 

of  corporation  not  to  release  its  officers,  etc 723 

process,   pleading,  and  jurisdiction 729 

creditors     741-45 

estates    746-50 

BOARD  OF  DIRECTORS,  punishment  of,  by  courts  of  bankruptcy. . ,   721 

755 


756  INDEX  TO  BANKRUPTCY  ACT 

PAGE 

BONA  FIDE   PURCHASER,   for  value,,  etc.,   title   obtained  by   lien, 
etc.,   not    affected 749 

BOND,   in   bankruptcy   proceedings 739 

when  petitioner  to  give 723 

trustees   not   to  give,   on  appeals 732 

of   referees 739 

of  trustees 739 

to  be  given  by  depositories  of  money  of  bankrupt  estates 746 

to  indemnify,  to  be  given  on  taking  bankrupt's  property 750 

of  bankrupt,  to  recover  possession  of  property 750 

CIRCUIT  COURTS,  jurisdiction  of  controversies  between  trustee  and 

adverse   claimant 731 

concurrent  with   courts   of   bankruptcy 731 

CIRCUIT  COURTS  OF  APPEALS,  granted  appellate  jurisdiction  over 

courts  of  bankruptcy 731-2 

appeal  to  Supreme  Court  from  decision  of 732 

CLAIMS,  what  are  provable 746 

unliquidated  may  be  liquidated  and  allowed 746 

CLERK,   definition  of 719 

in  bankruptcy  proceedings,  duties  of 740 

CODEBTOR,  liability  of,  not  affected  by  bankrupt's  discharge 728 

COMMENCEMENT  OF  PROCEEDINGS,  definition  of 719 

COMPENSATION,  in  bankruptcy  proceedings,  of  trustees 738-9,751 

of    referees 735,  751 

of  clerks  and  marshals 740-1,  751 

additional,  to  receivers,  marshals,  and  trustees 721 

COMPOSITIONS,  courts  of  bankruptcy  to  confirm  or  reject 721 

when,    may    be    offered 726 

application   for  confirming 726 

may   be    set   aside 727 

confirmation  of,  a  discharge  from  debts 728 

payment  of  claims  accruing  after,  when  discharge  revoked,  etc. .  . .   747 

OOAO'ROMISE,  trustees  may  compromise  controversies,  etc 733 

CONCEAL,    definition    of 719 

CONTEMPT,  in  bankruptcy  proceedings,  before  referee 722,  736 

proceedings   to  punish 736 

CONVEYANCES,  subsequent  to  act,  etc.,  to  defraud,  void 748-9 

void  under  State  laws,  etc 750-1 

CORPORATIONS,    definition    of 719 

punishment  of,  by  courts  of  bankruptcy 721 

bankruptcy  of,  not  to  release  officers,  etc 723 

may  be  sureties  on  bonds  of  trustees  and  referees 740 

COSTS,  judgments  for ;  .•.'.':".':: 722 

allowance  of,  on  dismissing  petition 723 

COUNSEL  FEES,  allowance  of,  on  dismissing  petition 733 

COUNSELOR    AT    LAW,    payments    to,   by    bankrupt,    may    be    re- 
examined       745 

COUNTERCLAIMS,  between  bankrupt  and  creditor 749 


INDEX  TO  BANKRUPTCY  ACT  757 

PAGE 

COURTS   (see  Courts  of  Bankruptcy;  Pleading  and  Practice;  United 
States  Courts). 

to  determine  issues,  where  facts   controverted 729 

decision,    where   pleadings   not   filed 729 

to  hear  and  adjudicate  voluntary  petitions 729 

COURTS  OF  BANKRUPTCY,  definition  of 719 

when  an  appeal  may  be  taken  from  decisions 732 

transfer  of  cases  commenced  in  different 734 

to  appoint  and  remove  referees,  etc 734 

CREDITORS,  definition  of 719 

of  bankrupt,  time  and  place  of  meeting 741 

claims,    proof   and   allowance    of 742-3 

notices  to ;   waiver 743 

who  may  file  a  petition 744 

notice  to,  not  joined  in  petition 744 

computing  number  of 744 

notice    of    dismissal 744 

preferred,  who  deemed 745 

examination  of  payments  to  attorneys,  etc.,  on  application 745 

notices  to,  of  pendency  of  petition 744 

other  than  original,  appearance  of 744 

set-offs  between  bankrupts'   estate  and 749 

CRIMES  AND  OFFENSES,  courts  of  bankruptcy  to  punish  violations 

of  act 721 

in  bankruptcy  proceedings,  making  false  oath  or  affirmation ....  730 

DAMAGES,  allowance  of,  on  dismissing  petition 723 

DATE   OF  BANKRUPTCY,  definition  of 719 

DEATH,  of  bankrupt,  not  to  abate  proceedings 725 

of  trustee,  suits  not  to  abate 737 

DEBTS,  definition  of 719 

confirmation  of  composition,  a  discharge  from 728 

not  affected  by  discharge 728 

allowable   against   estate 746 

having    priority • 746-7 

due  the  United  States,  allowance  of 743 

DEFINITIONS    719-20 

DEPOSITIONS,  in  bankruptcy  cases,  laws  governing 730 

DEPOSITORIES,  for  money  of  bankrupt  estates 746 

DETENTION,  of  bankrupt  for  purposes  of  examination 725 

DISCHARGE,  definition  of 719 

application    for 727 

hearing    of 727 

from  debts,  on  confirmation  of  composition 728 

when    revoked 788     "7 

of  bankrupt,  not  to  affect  codebtor's  liability 728 

debts  not  affected  by 728 

on  revocation,  payment  of  claims  accruing  after  composition ....  747 
DISTRICT  COURTS  (see  United  States  courts). 

made  courts  of  bankruptcy 720 


758  INDEX  TO  BANKRUPTCY  ACT 

PAGE 

DIVIDENDS,  declaration  and  payment  of 747-8 

creditors  receiving,  not  affected  by  proof  of  subsequent  claims,  etc.  747 

preference  to  certain  creditors,  etc 748 

limit  to  right  to  collect 748 

unclaimed    748 

DOCUMENT,  definition  of 719 

DOWER,  death  of  bankrupt,  not  to  aflfect  widow,  etc 725 

ESTATES,  bankrupt,  depositories  for  money 746 

expenses  of  administering 746 

debts  which  may  be  proved 746 

allowance  of  unliquidated  claims 746 

debts  which  have  priority 746-7 

declaration  and  payment  of  dividends 747-8 

unclaimed    748 

liens    748-9 

set-oflFs  and  counterclaims 749 

possession  of 750 

title    to 750 

EVIDENCE,  compulsory  attendance  of  witnesses 730 

depositions,   laws   governing 730 

EXEMPTIONS,  of  bankrupts,  allowed  by  State  laws,  etc 724 

EXTRADITION,  by  courts  of  bankruptcy,  from  one  district  to  another  721 

of   bankrupts i 726 

FINES  (see  Crimes  and  offenses),  in  bankruptcy  matters 733 

FORMS,  in  bankruptcy  matters,  to  be  prescribed  by  Supreme  Court. .   733 

FRAUD,  practice  of,  grounds  for  setting  composition  aside 727 

GUARANTOR,  liability  of,  not  affected  by  bankrupt's  discharge ....   728 

HOLIDAY,  definition  of 720 

INCUMBRANCES,  subsequent  to  act,  etc.,  to  defraud,  void 748-9 

INFANTS,  time  for  proving  claims  against  bankrupt 743 

INSANE,  bankrupt,  time  for  proving  claims 743 

bankrupt  becoming,  not  to  abate  proceedings 725 

INSOLVENT,  definition  of 720 

filing  of  petition  against 722 

from  when  to  date 729 

failure  to  prove,  a  complete  defense 722 

liens  created  while,  to  be  dissolved 748 

INSURANCE  POLICY,  of  bankrupt,  how  may  be  retained 750 

INVOLUNTARY  BANKRUPT,  who  may  become 723 

JUDGE,   definition  of 720 

JUDGMENT,  lien  created  by,  when  dissolved 748 

JURISDICTION,  of  courts  of  bankruptcy 720-3 

of  circuit  court  in  suits  between  trustee  and  adverse  claimant. .  . .   731 
concurrent  between  circuit  courts  and  courts  of  bankruptcy. ...   731 

courts  of  bankruptcy  and  State  courts 749, 751 

of    appellate    courts 731-2 

of   referees 734 

over  one  partner,   sufficient,   etc 724 

JURY,  person  against  whom  petition  filed,  entitled  to  trial  by 729-30 


INDEX  TO  BANKRUPTCY  ACT  759 

PAGK 

LEVIES,  obtained  within  four  months,  etc.,  void 749 

LIENS,  unrecorded  claims  not,  etc 748 

trustees  subrogated  to  rights  of  creditor 748 

created  within  four  months  of  filing  petition  to  be  dissolved 748 

given  in  good  faith,  etc.,  not  affected 748 

conveyances,  etc.,  subsequent  to  act,  to  defraud 748-9 

created  through  legal  proceedings,  void,  etc 749 

purchaser  for  value,  etc.,  not  affected 749 

MARSHALS,  courts  of  bankruptcy,  to  appoint 721 

compensation    of 740-1 

additional    721 

MASCULINE  GENDER,  words  importing,  how  construed 720 

MEETINGS,  bankrupt  to  attend  creditors',  etc 724 

of  bankrupt's  creditors 741 

holders  of  secured  claims  not  entitled  to  vote  at 742 

MINORS,  time  for  claiming  dividend 748 

NEWSPAPERS,  designation  of,  to  publish  bankruptcy  notices 733 

NOTICES,  to  creditors 743 

to  creditors  not  joined  in  petition 744 

petitions  not  to  be  dismissed  without 744 

NUMBER,  words  importing  plural,  how  construed 720 

singular,  how  construed 720 

OATH,  definition  of 720 

by  whom  administered  in  bankruptcy  matters 730 

of  office  of  referees 734 

OFFICER,  definition   of 720 

PAPERS,  of  trustees,  open  to  inspection,  etc 739 

PARTNERSHIP,  may  be  adjudged  bankrupt 724 

PERSONS,  definition  of 720 

PETITION,  definition  of 720 

of  "A  person  against  whom  a  petition  has  been  filed" 719 

against  insolvent,  when  filed 722 

from  when  to  date 722 

involuntary  bankruptcy,  service  of 729 

to  be  adjudged  voluntary  bankrupt,  who  may  file 744 

involuntary  bankrupt    744 

to  be  in  duplicate 744 

notice  to  creditors  not  joined 744 

hearings    on 744 

PLEADING   AND   PRACTICE,   involuntary   bankruptcy,   service    of 

petition    729 

voluntary  bankruptcy,  hearing  on  filing  petition 729 

involuntary  bankruptcy,  jury  trials 729-30 

oaths   and  affirmations 730 

evidence 730 

reference  of  cases  after   adjudication 731 

transfer  of  cases  to  different  referee 731 

jurisdiction  of  United  States  and  State  courts 731 

suits  of  trustees,  where  brought 731 


760  IxNDEX  TO  BANKRUPTCY  ACT 

PAGE 

appellate    courts,   jurisdiction    of 731-3 

appeals  and  writs  of  error 732 

arbitration  of  controversies 732-3 

compromise  733 

notices,  how  published 733 

punishment  for  misappropriating  property,  etc 733 

rules,  forms,  and  orders,  promulgation  of 733 

computation    of    time 733 

transfer  of  cases 734 

POLICY  OF  INSURANCE,  of  bankrupt,  how  may  be  retained 750 

POSSESSION,  of  bankrupt's  property,  when  taken 749-50 

release  of,  on  giving  bond 750 

PREFERENCE,    defined 745 

transferring  property,  etc.,  while  insolvent 722 

through   legal    proceedings 722 

PREFERRED  CREDITORS,  claims  not  to  be  allowed  unless  preference 

surrendered     742 

who   deemed   such,   etc 745 

when  preference  voidable 745 

giving  further  credit,  etc 745 

set-off  of  new  credit 745 

PROOF,  against  bankrupt,  of  creditors'  claims,  of  what  to  consist ....   742 

time   of 743 

PROPERTY   (see  Estates). 

PROVABLE   CLAIMS 746 

PURCHASER,  for  value,  etc.,  title  obtained  by  lien,  etc,  not  affected.  .   749 

RECEIVERS,  courts  of  bankruptcy  to  appoint 721 

additional   compensation  of 721 

RECORDS,  in  bankruptcy  proceedings,  of  referees,  etc 735 

REFEREE,  definition  of 720 

in  bankruptcy  proceedings,  creation  of  office,  etc 734 

duties    of 735 

compensation   of 735 

contempt    before 736 

reference  of  cases  to 731 

transfer  of  cases  from  one  to  another 731 

RULES,  in  bankruptcy  matters  to  be  prescribed  by  Supreme  Court. .   733 

SECURED  CREDITOR,  definition  of 720 

when  not  entitled  to  vote 742 

allowance  of  claims  of 742 

value  of  securities  held  by 742 

claims  secured  by   individual  undertaking,  etc 743 

SEIZURE,  of  bankrupt's  property,  to  prevent  deterioration,  etc 749-50 

SET-OFFS,  between  bankrupt  and  creditor 749 

SOLVENCY,  a  complete  defense  to  bankruptcy  proceedings 722 

STATES,   definition   of 720 

proceedings  under  insolvent  laws  of,  not  affected 751 

SUITS,  by  and  against  bankrupts '. 726 

not  to  abate  on  death  of  trustee 737 


INDEX  TO  BANKRUPTCY  ACT  761 

PAGE 

upon  bonds  of  trustees  and  referees,  when  brought 740 

lien  created  pursuant  to,  when   dissolved 748 

SUPREME  CX)URT  OF  THE  UNITED  STATES,  appellate  jurisdiction 

over  courts  of  bankruptcy,  etc 731-2 

over  circuit  courts  of  appeals 732 

certification  of  cases  to,  by  United  States  courts 732 

to  prescribe  rules,  forms,  and  orders  for  bankruptcy  courts 733 

SURETIES  (see  Bonds),  on  bonds  of  trustees  and  referees 740 

liability  of,  not  affected  by  bankrupt's  discharge 728 

TAXES,  owing  by  bankrupt,  payment  of 746 

TERRITORIES,  district  courts  of,  made  courts  of  bankruptcy 720 

TIME,  bankruptcy  act,  computation  of  days 733 

when  to  take  eflFect 751 

TIME  OF  BANKRUPTCY,  definition  of 719 

TITLE,  to  bankrupt's  property  vested  in  trustee 750 

TRANSFER,   definition   of 720 

of  cases  commenced  in  different  courts 734 

subsequent  to  act,  etc.,  to  defraud,  void 748-9 

void  under  State  laws 750-1 

TRIALS,  by  jury,  in  involuntary  bankruptcy  cases 729-30 

TRUSTEE,   definition    of 720 

in  bankruptcy  proceedings,  creation  of  office 734 

appointment;   qualifications   736 

death  or  removal 737 

in  bankruptcy  proceedings,  specification  of  duties 737 

compensation    738-9 

additional    721 

accounts  and  papers,  open  to  inspection,  etc 739 

appearance  of    726 

time  of  bringing  suit  against 726 

in  settling  partnership  estate,  appointment  of 724 

may  compromise  controversies,  etc 733 

title  of  property  vested  in 7^ 

UNITED  STATES  COURTS  (see  Courts). 

VENUE,  transfer  of  cases  from  one  court  of  bankruptcy  to  another. .  .   722 

VOLUNTARY  BANKRUPT,  who  may  become 723 

VOTING,  at  creditors'  meetings 742 

holders  of  secured  claims  not  entitled 742 

WAGE-EARNER,  definition  of 720 

WAGES,  entitled  to  priority  of  payment 746 

WIFE  of  bankrupt  may  be  examined 730 

WITNESSES,  in  bankruptcy  proceedings,  refusing  to  testify,  etc ....   736 
WORDS  (see  Definitions). 

importing  masculine  gender 720 

plural   number 720 

singular   number 720 

WRITS  OF  ERROR,  when  allowed  to  review  decisions  of  bankruptcy 

courts    732 

H.  &  A.  Bankruptcy — 49 


TABLE  OF  CASES 


[references  are  to  pages.] 

Allen,  Be   553      Dimock  v.  Revere  Copper  Co. .....  670 

Allen  &  Co.  v.  Ferguson 711      Dunbar  v,  Dunbar   424,  707 


Baker,  Be 650 

Baldwin  v.  Short 204 

Bank  of  Dearborn  v.  Matney. ...   65 

Banks,  Be 318 

Beasley  v.  Coggins 565 

Beckham  v.  Drake 536 

Beckhaus,  Be 255 

Benson  v.  Benson 202 

Bibb  V.  Freeman 192 

Blair,  Be 51 

Bluthenthal  v.  Jones 686 

Boese  v.  King 16 

Boonville  Nat.  Bank  v.  Blakey.  .380 

Brackett  v.  Watkina 130 

British,  etc.,  Co.  v.  Stuart 443 

Brown  &  Adams  v.  Button  Co.. .  .401 
Brown    &    Brown    Coal    Co,    t. 

Antezak   680 

Burlingham  v.  Crouse 522 

Cadogan  v.  Kennett 157 

Carlile,  Be 351 

Central  National  Bank  v.  Hume.  137 

Chandler,  Be 663 

Chicago,  B.  &  Q.  E.  Co.  v.  Hall 

497,  647 

Church  V.  Chapin  183 

Citizens'  Banking  Co.  v.  Eavenna 

National  Bank 266 

Citizens'  Loan  Assn.  v.  E.  E.  Co.675 

Clarke  v.  Larremore 587 

Clarke  v.  Eogers 310 

Coflan,  Be 492 

Cohn,  Be 647 

Columbus  Buggy  Co.,  Be 550 

Courtenay     Mercantile     Co.     ▼. 

Finch 369 

Crawford  v.  Burke 396 

Crumbaugh  v.  Kugler  178 

Cutting,  Be   291 


Eagles,  Be 476 

Earle  v.  Maxwell 512 

Evans  v.  Staalle 678 

Everett  v.  Judson 530 

First  National  Bank.  v.  Bamum.  61 
First  National  Bank  v.  Glass.  ..150 
First  National  Bank  v.  Staake.  .592 
Flickinger  v.  First  Nat.  Bank. . .  71 

Ford  Lumber  Co.  v.  Curd 213 

Francis  v.  McNeal 96 

Freeman  v.  Pope 165 

Funk,  Be 89 

Garneau,  Be 47 

Gaj,Be 545 

Gazlay  v.  WiUiams 518 

Gee  V.  Gee 708 

Germania  Savings  Bank  v.  Loeb.638 

Ghazal,  Be 507 

Gibson  v.  Carruthers 532 

Gilpin  V.  Merchants'  Nat.  Bank. 664 

Goding  V.  Eoscenthal 420 

Gold,  Be 557 

Goodlander-Eobertson  Co,  v,  At- 

wood    342 

Gormley  v.  Potter   190 

Gowing  V,  Eich 121 

Grant  Shoe  Co.  v.  Laird 409 

Great  Western  Mfg.  Co.,  Be 295 

Griffin,  Be 660 

( 
Hanover  Nat.  Bank  v.  Moyses. . .     1 

Hargadine,  etc.,  Co.  v.  Hudson.  .688 

Harlan  v.  Maglaughlin 233 

Harper,  Be    608 

Hawkins  v.  Lamed  25 

Hayer  v.  Comstoek 420 

Henderson  v,  Mayer 578 

Hewitt  V.  Boston  Strawboard  Co.357 


763 


764 


TABLE  OF  CASES 


[references 

HineB,  Be ..Ill 

Holloway  v.  Millard 220 

Hoxie,  Ee 653 

Huttig  Mfg.  Co.  V.  Edwards 117 

Inman  &  Co.,  Re 451 

Jaquith  v.  Alden 272 

Jenkyn  v.  Vaughan 223 

Johnson,  Be  171 

Johnson  v.  Collier 486 

Johnson  v.  Crawford 26 

Johnson  v.  Silsbee 132 

Keppel  V.  Tiffin  Savings  Bank.  ..360 

Kimmel  v.   M  'Right    127 

Kiskadden  v.  Steinle 620 

Knapp  V.  Milwaukee  Trust  Co. . .  573 

Levy,  Be 659 

Libby  v.  Hopkins 599 

Lockwood  V.  Exchange  Bank.  . .  .501 

Loeser  v.  Savings  Bank 248 

Lynch 's  Admr.  v.  Murray 217 

McCormick  v.  Solinsky 660 

McDavid  Lumber  Co.,  Be 472 

McDonald  v.  TeflPt-Weller  Co. .  . .   83 
Macon  Grocery  Co.  v.  Beach.  . .  .344 

Martin  v.  Maxwell 512 

Mathews  Consolidated  Slate  Co., 

Be 54 

Mayer  v.  Hellman   12 

Messengill,  Be 655 

Meux  V.  Howell 161 

Meyer 's  Estate,  Be 516 

Missouri-American  Co.  v.  Shoe  Co.366 
Moch  V.  Market  Street  Bank. . .  .411 

Neff,  Be  448 

New  York  County  Bank  v.  Mas- 

sey    275,  638 

Noreutt  v  Dodd 128 

Norfolk  &  W.  B.  Co.  v.  Graham . .  627 

Old  Town  Bank  v.  McCormick..   35 


ARE  TO  PAGES.] 

Page  V.  Edmunds 509 

Peters  v.  United  States 698 

Phillips  V.  Dreher  Shoe  Co 413 

Plotke,  Re 42 

Pope  V.  Title  Guaranty  &  S.  Co.. 582 

Eeade  v.  Livingston    227 

Reznek,  Be 591 

Richardson  v.  Shaw 300 

Rider,  Be   656 

Roth  &  Appel,  Be 434 

Rouse-Hazard  Co.,  Be   466 

Santa  Rosa  Bank  v.  White 692 

Schwaninger,.  Be 101 

Sexton  V.  Dreyfus 463 

Shelley  v.  Boothe 200 

Sherman  v,  Luckhardt   561 

Shropshire,    Woodliflf    &    Co.    v. 

Bush 470 

Sibley  v.  Nason 542 

Spalding,  Be   373 

State  Bank  of  Chicago  v.  Cox. .  .488 

Swarts  V.  Fourth  Nat.  Bank 326 

Swarts  V.  Siegel 415 

Syracuse  Paper  &  Pulp  Co.,  Be.  .481 

Thompson  v.  Fairbanks  ...282,  577 

Thompson  v.  Judy 694 

Tiffany  v.  Milk  Co 73 

Toof  V.  Martin   334 

Twyne's  Case    153 

Wadsworth  v,  Schisselbauer 244 

Wagner  v.  Burnham 633 

Walrath,  Be 79 

Ward,  Re 91 

Warth,  Be 707 

Washington  Nat.  Bank  v.  Beatty.239 

West  Co.  V.  Lea 104 

Wetmore  v.  Markoe 384 

Whiting,  Be    606 

Wilmington  Hosiery  Co.,  Be  . . .  .377 

Wilson  V.  Walrath   208 

Wilson  Bros.  v.  Nelson 261 

Zavelo  V.  Reeves 391,  653,  711 


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