Buchanan v. Smith

83 U.S. 277, 21 L. Ed. 280, 16 Wall. 277, 1872 U.S. LEXIS 1158

Opinions

Mr. Justice CLIFFORD

delivered the opinion of the court.

Preferences, as well as fraudulent conveyances, are, under-certain circumstances, declared to be void if made by a debtor actually insolvent, or in contemplation of insolvency, within four months before the filing of the petition by or against him as a bankrupt.

Footnotes

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Those circumstances, so far as that rule of decision is applicable to this case, are, if the debtor procures any part of his pr’operfy within that period to be' attached, sequestered, or seized on execution 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, that such attachment, sequestration, or seizure is void, provided it also appears that the creditor making the attachment, sequestration, or seizure, or the person to be benefited thereby, had reasonable cause to believe that- the debtor was insolvent, and that the attachment, sequestration, of seizure was procured in fraud of the provisions of the Bankrupt Act.

On the 9th of September, 1869, a creditor of the corporation respondents filed a petition in bankruptcy against the company, in the office of the clerk of the District Court, and . on the twenty-fourth of the same month the.District Court adjudged the said paper manufacturing company to be bankrupts within the true intent and meaning of the Bankrupt Act. •

Pursuant to that decree the appellee, on the 10th of November following, was duly appointed assignee of the estate of the bankrupts, and the-register having charge of the case, there being no opposing interest, by'an instrument in writing under his hand assigned and conveyed to the said assignee all the property and estate, real and personal, of the bankrupts.

By virtue of that instrument of assignment and conveyance all the reaLand personal estate of the bankrupts, with all their deeds,.,books, and papers relating thereto, became vested in the appellee as such assignee. Such instrument of. assignment arid conveyance embraced the several parcels of real estate described in the bill of complaint and certain personal property at that time in the hands of an assignee appointed by the State court, or in the custody of the sheriff of the county, but which has since been in part sold by the sheriff and the proceeds have been paid into the registry of • the District Court. Five policies of insurance upon the property of the bankrupts, which had been destroyed by fire and for which losses the insurance companies were liable, were also included in the said instrument of assignment and conveyance.

Complaint is made by.the appellee in th.e bill that the respondents, or the three first named, on the 3d of August, prior to the decree adjudging the corporation respondents bankrupts, recovered two several judgments against the bankrupt company, in. t.h.e Supreme Court of the State, amounting in the aggregate to the sum of $11,815.65: that the said judgments, on the day following, were-docketed in the office of the clerk of the county, where the-judgments still remain of record, and constitute an apparent lien upon the property and estate so assigued'and conveyed to the-appellee as such assignee, and are a cloud upon his title.

Apart from that he also claims that-the same parties took out executions upon the said.judgments and delivered the same to the sheriff of the couuty, and that the sheriff, on the 11th of the same month, levied the executions upon certain personal property of the bankrupt' company which he held iu possession when.thepétitiou in bankruptcy was filed, and he alleges that the sheriff" by order of the District Court duly entered, has since sold, the said personal prqperty and paid the proceeds into the registry of the bankrupt court; that the other respondent claims that he has been appointed receiver of the several policiés of insurance, and that he has. commenced actions against the insurance compaiiies tare-cover the losses suffered by the burning.of the property covered by the said policies, in consequence of which the insurance companies refuse to pay said losses to the complainant.

Both th.e allegations of the bill and thé proofs show that the corporation respondents, on the said 3d of August and long prior thereto, were utterly insolvent and bankrupts, and the.complainant charges.that they procured and suffered the said judgments in favor of the parties named to be entered and their own property to be attached, sequestered,- and seized, as alleged, with intent'to give to those creditors a preference over their other creditors, and‘that they intended by such disposition .of their property to defeat and delay the operation of the. Bankrupt Act; that the said judgfnent creditors; throughout those proceedings, ha'd-reasonable cause- to believe that the debtor company was insolvent, and that the judgments were entered, the executions issued, an.d4the levies made in fraud-of the provisions of the Bankrupt Act, and that the proceedings were commenced and prosecuted with a view, to prevent the property from coming to the assignee in bankruptcy and from being dis tributed under said act.

Service was made and the said judgment creditors appeared and filed an answer, and a separate answer, was filed by the respondent claiming to be the receiver of the policies of insurance. Proofs were taken and the parties were heard and the court entered a decree for the complainant, and from that decree the respondents appealed to this court.

Most or all of the defences which it becomes material to consider consist of denials that the charges contained in the bill of complaint are true, and in that respect the two answers are substantially alike. Briefly described the answers deny that the corporation respondents did procure or suffer the said judgments to be entered, or their property to be taken upo.u legal process issued upon said judgments, with} intent thereby to give to. those judgment creditors a preference over their other creditors, or with intent to defeat or delay, by such disposition of their property, the operation of the Bankrupt Act; or that they had reasonable cause to believe that the respondent company was insolvent, or that the judgments were entered or the executions.issued or the-levies made in fraud of the provisions of the Bankrupt Act; or that such proceedings were instituted with' a view to prevent the property of the bankrupts from coming to the assignee in bankruptcy, or to prevent the same from being distributed uuderthe said act, as charged in the bill of complaint.

Fraudulent preference is the gravamen of the charge, and the complainant, as the assignee of the estate of the bankrupts, prays that the said judgments and all the proceedings in the suits may be decreed to be void and of no effect, and that the judgments, executions, and levies may be vacated aud set aside, and that it may be decreed that he, as such assignee, is entitled to have and receive all the real and personal estate, of the bankrupts free and clear of any lieu by virtue of the said judgments, or of any of the aforesaid proceedings, and for an injunctioi

Three things must concur to entitle the complainant, as' such assignee, to the decree as prayed in the bill of complaint; (1:) That the corporation' respondents, within four months before the- filing, of the petition against them in bankruptcy, did procure or suffer their property, or some part thereof, to be attached,.sequestered, or seized on execution by the said judgment creditors, with a view to give a preference to such creditors by such .attachment, sequestration or seizure, over their other creditors. (2.J That the corporation respondents were insolvent at that .time, or in contemplation of insolvency. (3.) That the judgment creditors, at the time their debtors, the corporation respondents, procured or suffered such attachment, sequestration, or seizure of the aforesaid property belonging to the said debtors, had reasonable cause to believe that the debtors whose property was so attached, sequestered, or seized, were insolvent, and that they procured or suffered such attachment, sequestration, or seizure of such property to be made to secure such preference and in fraud of the provisions of the Bankrupt Act.

■ Equal distribution of the property of the bankrupt, pro rata, is the main purpose which the Bankrupt Act seeks to accomplish, and it is clear to a demonstration that the end and aim of those who framed the act must be defeated in this cáse if the proceedings of the judgment creditors are sustained, as they have perfected liens,'by those proceedings, upon all or' nearly'all of the visible property of the bankrupts.

Until the debtor commits an act of bankruptcy it is doubtless true that any creditor may. lawfully sue out any proper process to enforce the .payment of debts overdue, and may proceed to judgment, execution, seizure, and sale of his property; but it is equally true that the appointment of an assignee under a decree in bankruptcy relates back to the commencement of the bankrupt proceedings, and that the instrument required to be executed, under the' hand of the judge or register, assigns and couveys to the assignee all the estate, real and personal, of the bankrupt, including equitable as well as legal rights, and interests and things in action as well as those in possession, which belonged to the debtor at the time the'petition in bankruptcy was filed in the District Court.*

■ Conceded, as that proposition must be, it is obvious that the judgmeut creditors could not acquire any interest in the property of the debtor by virtue of the order of the State court extending the powers of the receiver, previously appointed to collect.the several amounts due from the insurance companies, to all the other estate, real, personal, and fhixed, of the bankrupts, as it is admitted in the answer that the order in question was passed subsequent to the filing of. the petition in bankruptcy, which, is the foundation of the decree adjudging the. corporation respondents to be bankrupts. 'Suppose it were otherwise, still the same conclusión must follow, as the- court is of the opinion that all the essential allegations of the bill of complaint are established.

Much discussion to show that the paper company was insolvent is certainly unnecessary, as the answer admits the fact to be 'as alleged in the bill of complaint. They failed to meet their paper at maturity as early as the-4th of March, 1869, as conclusively appears from the letter of the principal appellants to the treasurer of the company, acknowledging the-receipt of-a telegram From him to the effect that the company could not pay their note falling due on that day.

It appears by the record that the bankrupt company was engaged in the manufacture-of paper; that they had for a long time purchased goods for the purpose of the principal -appellants on credit; that the appellants at that time held six notes against them, some of which were overdue; that the mills of the company, on the 20th of the sanie month, were destroyed by fire, which --prevented the company from trausqcting any- further business.

Correspondence .immediately ensued between the appellants and the .bankrupt company or their superintendent. Two days after the.fire the company informed the appellants of their misfortune, and the appellants replied on the following day, promising to talce care of one of their notes and to advisé them,-in a few days, as to another which would fall due in a short time. Immediately one of the appellants visited the superintendent of the bankrupt company for the purpose of ascertaining the extent of their loss and whether they would be able to take care of th-qir unpaid notes.

Application was soon after made to the appellants by the company that they should consent to renew the notes, and for an'extension of the time;of payment, which, led to further correspondence and to some-crimination, the appellants •charging that the officers of the company had promised that all the notes should be promptly met, and that they had failed to make good their promise, and insisting that they must provide funds for .that purpose. Urgent demands to that effect were made by the appellants, as appears hy the letters given in evidence,.but the bankrupts failed to supply the necessary funds, and the appellants, though they at first refused so to do, finally consented to renew all of the notes except two, reducing the number from six to four, as-appears.by their own testimony. .

Those four notes were as follows: (1.) Note dated April 2d, 1869, for $4701.42, payable in sixty-three days from date. (2.) Note dated May 4th, 1869, for $2318.70, payable in fifty-five days front date. (3.) Note dated November 6th,-1868, for $2305.94, payable June 4lh next after its date. (4.) Note dated November 16th, 1868, for $2318.69, payablé the 3d of July next.after its date.

Repeated, demands for payment having been ineffectual, the appellants, on the 9th of June subsequent to the fire, suggested to the superintendent of the company that the fiiances of collecting the insurance-money would bo better if the policies were placed in their hands, and urged that the company should assign their claims under the policies of. insurance to them, “ or at least enough of them to cover our claim; v'hich in round numbers is about $12,000.” Such a course, it was suggested .in the same letter, would be the very best means they (the company) could adopt to avoid Uti gallon and loss, which affords convincing eyidence that it was the purpose and intention of the appellants to secure a preference over the other creditors of the company.

Persuasion having failed'to- accomplish the purpose, the appellants, in a letter dated three days later aud addressed to the president of the company, presented a schedule of the notes renewed and unpaid, complaining that they had been very unfairly treated, aud informed him.that unless one-half of the amount due to them was remitted by return mail, they should instruct their attorneys to commence suits against him and the superintendent of the company as indorsers of the notes. Instead of yielding at that'time to the threat of the appellants, the corporation bankrupts, on the 21st of July following, made, executed, and delivered to one Benjamin Hoyt an indenture of assignment, wherein :they pretended to convey to the said assignee all their real and personal property in trust., to convert the same into money, and with the proceeds to pay the debts of" the company.

Extended discussion of that transaction, however, is quite unnecessary, as both parties agree that the said assignment was made in contemplation of insolvency, contrary to the provisions of the revised statutes of the State, and to hinder, delay, and defraud creditors. Whether the instructions were given to the attorneys, as threatened, does not appear, but it does appear that the notes overdue were protested and that those notes, on the 19th of the same month, were put in suit against the bankrupt company, and that a second suit was commenced against the company upon the other two notes immediately after they fell due.

Enough appears both in the pleadings and proofs to show that those suits, on the 3d.of August following, were pending in the State court, and that the principal appellants on that day recovered judgment in both suits against the corporation defendants. Judgment in one of the suits was rendered for the sum of $7118.14, and in the other for the sum of $4197.51, as appears by the record. Both judgments were entered and perfected on the same day, and on the following day transcripts thereof were duly filed and the re spective judgments were duly-docketed in the office of the clerk of the county, so as to become, at least in form, a lien on all the estate, real and personal, belonging to the. bankrupt corporation.

Argument to show that the purpose of the principal appellants in attaching, sequestering, and seizing the property of the bankrupt company, as charged in the bill of complaint, was to obtain a preference over the other creditors of the company, is hardly necessary, as the charge is fully proved, and it is equally certain that the debtors throughout the entire period from the commencement to the close of those proceedings’were hopelessly insolvent, and the acts, conduct, and declarations of the appellants, in the judgment of this court., afford the most convincing proof that they had reasonable cause to believe, even if they did not positively know, that such was the actual pecuniary condition of their debtors.

Attempt is made to satisfy'the court that the debtors themselves did not know that they were insolvent, but the theory, in view of the evideuce, is not supported, and must be rejected as improbable and as satisfactorily disproved.

Even suppose that is so, still it is insisted by the appellants that the decree is erroneous because it is not proved, as they contend, that the bankrupts procured or suffered their property to be attached, sequestered, or’seized by the appellants, as charged in the bill of complaint, within the true intent and meaning of the Bankrupt Act. Properly viewed, they insist- that their acts and conduct only show that they have used the process of the State courts, as they had a right to do, to collect their debts due from the insolvent company, and they submit the proposition that a creditor may lawfully do all he might have done before the Bankrupt Act was passed to collect his debts, providedEe has no active or passive assistance from his debtor, whom he has reasonable cause to believe to be insolvent, to help him to secure such a preference over the other creditors of the debtor.

Creditors, it is conceded, are forbidden to sue out State process, within the said four months, and employ it to create and perfect such liens on the' property of théir debtor, by his active or passive assistance, but the proposition submitted is that whatever they can obtain of their insolvent debtor, in that way, under such process, by their own energy and activity, in spite of the debtor, they may lawfully retain, and that such liens are not displaced or dissolved by any subsequent bankrupt proceedings.

Strong doubts are entertained whether the proposition could be sustained, even if the theory of fact which it assumes was fully proved, as the fourteenth section of the Bankrupt Act provides to the effect that the required instrument of assignment, when duly executed, shall, vest in said assignee the title to all the property and estate of the bankrupt, although the same is then attached on mesne process as the property of the debtor, where the attachment was made within four months next preceding the conimencement of the bankrupt proceedings, but it is not necessary to decide that question at this time, as the. evidence is full to the point that the judgment creditors ,in this case did have the passive assistance of the bankrupt debtors in obtaining their judgments and in perfecting their liens, under the State process and laws, upon all the property, real and per-, sonal, of their debtors.

Throughout it was plainly the purpose of the principal appellants to obtain a preference over the other creditors of. the bankrupt company, either by payment or assignment, and it must be conceded that the officers of the company for a time refused or declined to comply with any such request or intimation or in ariy way to promote their purpose,-but the facts and circumstances disclosed in the record fully warrant the conclusion of the Circuit Court that they ultimately acquiesced in what was done by the appellants, even if they did not actively promote the consummation of the several measures which they, the appellants, adopted to perfect liens upon all the visible property of the bankrupt, company, unless it exceeded in value the amount of their judgments.*

Sufficient is'showu to satisfy the court that those having, charge of the affairs of the corporation respondents knew that they were insolvent, and that they.also knew that it was tlie purpose and intent of the principal áppellants to secure a preference over-the other creditors of the bankrupt" corporation. Insolvent as they-knew the company to be, they could not,-as reasonable men, expect that all the debts of. the company would be paid, and they must have known-that the appellants would secure a preference over all the other creditors of the company if .they suffered them, without invoking the protecting shield of the' Bankrupt Act, to recover judgments in the two pending suits, and to perfect the .other measures which they subsequently adopted to give effect to their liens upon all the property of the corporación bankrupts.*

Tested by these considerations the court is of the opinion that the findings of the Circuit Court were correct, and that the allegations of the bill of complaint are sustained, as follows: (1.) That the corporation respondents, within four months before the filing of the petition against them iii bankruptcy, did procure or suffer their property to be attached, sequestered, or. seized on execution by the principal appellants, with a.view to give a preference to such creditors by such attachment, sequestration, or seizure, over their other creditors. (2.) That the corporation respondents were insolvent at that time, or in contemplation of insolvency. (3.) That the judgment creditors, at the time their said debtors procured or suffered such attachment, sequestration, or seizure of the aforesaid property belonging to the said debtors, had reasonable cause to believe that the said debtors whose property was so attached, sequestered, or seized were insolvent, and .that they procured or suffered such attachment, sequestration, Gr. seizure of such property to be made to secure-such preference, and in fraud of the provisions of the Bankrupt Aet.†

Insolvency in the sense of the Bankrupt Act means that the party whose business affairs are in question is unable to pay his debts as they become due in the ordinary course of his daily transactions, and a creditor may be said to have reasonable cause to believe his debtor to be insolvent when such a state of facts is brought to his notice respecting the affairs and pecuniary condition of his debtor, in a case like the present, as would lead a prudent business man to the conclusion that he, the debtor, is unable to meet his obligations as they mature in the ordinary course of business.

. Such a party, that is, a creditor securing a preference from his debtor'over the other creditors of the debtor, cannot be said to have had reasonable cause to believe that his debtor was insolvent at the time unless such was the fact, but if it appears that the debtor givihg the preference, whether a merchant or trading company, was actually insolvent and that the means of knowledge upon the subject were at hand, and that such facts and circumstances were known to the creditor securing the preference, as clearly ought to hav.e put him, as a prudent man, upon inquiry, it would seem to be a just- rule of law to hold that he had reasonable cause to believe that the debtor was insolvent, if'it appears that he might have ascertained the fact by reasonable inquiry. Ordinary prudence is required of a creditor under such circumstances, and if he fails to investigate when put upon inquiry he is chargeable with all the knowledge it is reasonable to .suppose he would have acquired if he had performed his duty.* * Such proceedings, therefore, must be held invalid, as they were promoted and prosecuted by the parties acting in fraud of the Bankrupt Act, and inasmuch as that conclusion affects the judgments recovered by the appellants, it-will not be necessary to bestow much consideration upon the subsequent proceedings to perfect the liens or to the order for the appointment of a receiver, or to the second order extending his jurisdiction and. enlarging his powers. Evidently the judgments must be set aside as being superseded by the.proceedings in bankruptcy, and if so,it is quite clear that all the subsequent proceedings founded-upon those judgments become inoperative and ineffectual to prevent the assignee in bankruptcy from exercising the same power and dominion over all the property and estate of the bankrupts, as he might have exercised if such judgments had never been rendered, or no such subsequent proceedings had ever taken place. Creditors issuing executions on judgments obtained upon demands long overdue against a bankrupt, who has been pressed in repeated instances to pay or secure the demands and has failed to do so because of his inability, must, be held to have had reasonable cause to believe that his debtor was insolvent.*

It was suggested at the argument that the appointment of the receiver was an independent order of the State court, and that the action of the State court must- be regarded as valid until it is set aside by some direct proceeding, but’it is a sufficient anqwer to that objection to say that the State statute under which the appointment was made has no application whatever to corporations, and that the proceeding must be regarded as wholly unauthorized and void.† Judgment creditors of a corporation, it is held, do not obtain a preference by such a proceeding, but must proceed according to the provisions of the article relative to the sequestration of the property and effects of corporations for the benefit of creditors.‡

Viewed in any light the court is of the opinion that neither the decree of the State court appointing the receiver nor the order enlarging his powers, nor any of his proceedings under those powers, afford any defence to the bill of complaint.

Decree affirmed.

14 Sta't. at'Large, 534. ■

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14 Stat, at Large, 522.

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Hilliard on Bankruptcy, 3d ed., 822-330.

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Marshall v. Lamb, 5 Adolphus & Ellis, New Series, 126.

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Shawhan v. Wherritt, 7 Howard, 644; Fernald v. Gay, 12 Cushing, 596, Scammon, Assignee, v. Cole et al., 5 National Bankrupt Register, 257; Same ease, 3 Id 100; Smith, Assignee, v. Buchanan, 4 Id. 133; Same case, 8 Blatchford, 153.

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Toof v. Martin, Assignee, 13 Wallace, 40; Scammon, Assignee, v. Cole, 5 National Bankrupt Register, 263.

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Wilson v. City Bank, Ib. 270; Foster v. Goulding, 9 Gray, 52.

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Code, 292, 294; Hinds v. Railroad Co., 10 Howard’s Practice Report, 487; Sherwood v. Railroad Co., 12 Id. 136.

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Sessions Acts, 1825, p. 449; 2 Revised Statutes, 463; Morgan v. Railroad, 10 Paige’s Chancery, 290; Loring w. Gutta-Percha and Packing Co., 36 Barbour, 32

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Wilson v. Brinkman, Ib. 149; Giddings v. Dodd, 1 Dillon, 115.