1. A creditor has reasonable cause to believe his debtor
"insolvent" in the sense of the Bankrupt Act when such a state of
facts is brought to his notice respecting the affairs and pecuniary
condition of his debtor, as would lead a prudent businessman to the
conclusion that he, the debtor, is unable to meet his obligations
as they mature in the ordinary course of business.
2. A debtor "suffers" or "procures" his property to be seized on
execution when, knowing himself to be insolvent, an admitted
creditor who has brought suit against him -- and who he knows will,
unless he applies for the benefit of the Bankrupt Act, secure a
preference over all other creditors -- proceeds in the effort to
get a judgment until one has been actually got by the perseverance
of him the creditor and the default of him the debtor.
3. Such effort by the creditor to get a judgment, and such
omission by the debtor to "invoke the protecting shield of the
Bankrupt Act" in favor of all his creditors, is a fraud on the
Bankrupt Act, and invalidates any judgments obtained.
4. The fact that the debtor, just before the judgments were
recovered, may have made a general assignment which he meant for
the benefit of all his creditors equally does not change the case.
Such assignment is a nullity.
The Cascade Paper Manufacturing Company of Penn Yan, New York,
had for a long time purchased things used in the manufacture of
paper, of Buchanan & Co., merchants in the City of New York,
and had habitually given notes in payment.
Page 83 U. S. 278
Its dealings with them were considerable, and its credit so good
that it was not limited as to time; that when extensions were asked
they were given, and that up to March 3, 1869, its notes had never
lain over or been protested for nonpayment. The notes of the
company were endorsed by its officers individually, except in one
instance, when accident prevented. On the 3d of March, 1869,
however, the company were unable to meet a note to Buchanan &
Co., which came due on that day, and telegraphed the fact to these
last, adding that they had sent that day a draft for half the
amount, and a new note at thirty days for the balance. Buchanan
& Co. replied (apparently by telegraph on the same day), that
they would protect the note; but in a letter of March 4 reciting
these facts (apparently not having received the promised half
remittance and new note), they say:
"We are much disappointed at not receiving anything from you
today. What does it mean? We had used the note, and it was not at
all convenient for us to take care of it at so short notice. We
shall certainly expect to hear from you by next mail."
On the 21st of March, 1869, the company's mills were destroyed
by fire. The loss was about $80,000; the insurance $45,000 or
$47,000. From that time, the company did no more business; and,
as it afterwards appeared, it was from that time
insolvent. At the time of the fire, Buchanan & Co. held
six notes of the company, to-wit:
One for $1,000, due March 25, 1869.
One for $2,501, due April 2, 1869.
One for $1,141, due April 6, 1869.
One for $2,293.19, due May 4, 1869.
One for $2,305.94, due June 4, 1869.
One for $2,318.69, due July 3, 1869.
Two days after the fire the company wrote to Buchanan & Co.,
informing them of the fact, and, apparently, of the magnitude of
their loss. These last replied March 23, expressing sympathy, and
"a trust that when you get things more settled,
they may not
turn out as bad as you now expect."
Page 83 U. S. 279
They promised in the same letter to take care of the note of the
company due the 25th, and to advise in a few days about the other
coming due April 2.
Just before this fire, Mr. Goodwin, one of the firm of Buchanan
& Co., had set off on a tour of business, westward. He reached
Penn Yan immediately after the fire, and had an interview with the
officers of the company, who informed him of the amount of their
loss and insurance, and spoke of the notes, and said,
"On account of our misfortune of burning, we shan't be able to
meet those notes. Of course we can't get the insurance money in,
and you will have to be easy with us, and wait; but will get your
pay in full."
They said that all they wanted was their insurance money to pay
all they owed, and as soon as they got that, they would commence to
pay. They asked to have the notes renewed, which was afterwards
done. They said the concern would be solvent if they got their
insurance money, and expressed their expectation of getting it. No
statement was made of the company's debts, and Buchanan & Co.,
according to their own positive testimony, had no knowledge of any
particulars, or of the fact of their debts beyond supposition.
The following letters from Buchanan & Co. now were written.
What replies, if any came back, did not appear.
"NEW YORK, March 29, 1869"
"THE CASCADE PAPER COMPANY"
"GENTLEMEN: In relation to renewal of notes, we shall do
everything we reasonably can, though we cannot really afford to
renew a single one. You must take into consideration that our Mr.
Buchanan has recently met with a greater loss by fire, with less
than half the amount of insurance you have, and we really need all
the money we can command. We have taken care of the $1,000 note due
25th, and you will please send us now note with your individual
endorsements, and at as short time as possible. Can't you possibly
take care of the one due April 2d and 6th? You see our position,
and we trust you will meet the matter accordingly."
"Yours truly,"
"BUCHANAN & CO."
Page 83 U. S. 280
"NEW YORK, April 2, 1869"
"THE CASCADE PAPER COMPANY."
"GENTLEMEN: Your note for $2,501 is payable today, and up to
this time (2 P.M.) we hear nothing from you in regard to it. We
shall be obliged to have it protested if we do not hear from you in
time. You have not sent us new endorsed note for the $1,000 payable
March 25. We trust in these matters you will only rely upon us, as
a question of necessity, and not of convenience. Money is very
tight, and we need all that is due us."
"Yours truly,"
"BUCHANAN & CO."
"NEW YORK, April 30, 1869"
"THE CASCADE PAPER COMPANY"
"GENTLEMEN: Yours of 29th instant, with enclosure, at hand. We
are surprised that you should request us to extend your note due
May 4, for your superintendent, Mr. Joy, gave the writer to
understand most distinctly that should be paid when due. This he
said to him when at your place in March. Mr. Joy then said if we
would renew some notes due about that time (which we did)
everything would be met promptly after that. We have been obliged
to use that note due the 4th proximo, and we are not in a position
to take it up. Our payments about this time are exceedingly large,
much greater than usual, and we have need of every dollar we can
raise to pay our own liabilities. We cannot, therefore, renew your
note. You certainly can in some way, with your connections, raise
the money, and, if necessary, you ought to be willing to make any
sacrifice to do it. If in no other way, we should suppose you could
get an advance for the amount you need on your insurance policies.
At any rate, gentlemen, you must in some way contrive to pay the
note, for we are not in a position to renew it for you."
"Yours truly,"
"BUCHANAN & CO."
"NEW YORK, June 5, 1869"
"MR. W. C. JOY,"
"Superintendent of the Cascade Paper Company"
DEAR SIR: We were very much surprised and very greatly
incommoded by getting notice this morning of protest of your note
due yesterday, 4th instant, for $2,305.94. Have telegraphed you for
explanation, and up to this time, 2 1/2 o'clock, have received
Page 83 U. S. 281
no reply. This note had been discounted, and as we had heard
nothing from you to the contrary, we supposed, of course, it would
be paid. You promised us when we had to take up the last one, that
after that all your notes would be promptly met. Please attend to
it at once, and send funds. What are we to expect in regard to your
note due us next week, the 7th instant, for $4,701.42? We assure
you we are not in a position to take care of that. You must provide
the funds to pay that. You have no idea how short we are just at
this time, and what a disappointment and trouble it has been for us
today to take care of your note due yesterday. Let us hear from you
at once.
"Yours truly,"
"BUCHANAN & CO."
"NEW YORK, June 9, 1869"
"MR. W. C. JOY"
"Superintendent of the Cascade Paper Company"
"DEAR SIR: Since writing you yesterday, we learn the Manhattan
Insurance Company paid you some time since about $5,000. Under the
circumstances, think you should have paid us something on
account."
"As we understand the matter, there is, beside the Buffalo
company, unpaid as follows:"
Home, N.H. . . . . . . . . . . . $10,000
Columbia, N.Y. . . . . . . . . . 3,000
Market, N.Y. . . . . . . . . . . 3,000
Atlantic. . . . . . . . . . . . . 3,000
"On which there is due about $18,500."
"We do not know how serious the difficulties in the way of
collecting from these companies may be, but from such information
as we have been able to obtain, fear you may underrate them. Under
the circumstances we think you should assign your claims against
these companies to us, or at least enough of them to cover our
claim, which, in round figures, is about $12,000."
"The chances of collection in our hands will be quite as good as
in yours, and probably a good deal better. If you are correct in
assuming that their refusal to pay is the result of Woodruff's
interference and management, the assignment to us would be the very
best means you can adopt to avoid litigation and loss. We suppose
you have a board of trustees, and that in case
Page 83 U. S. 282
you make the assignment it will be proper to have a meeting and
authorize some officers of the company to execute the assignment.
Please let us hear from you by first mail."
"Yours truly,"
"BUCHANAN & CO."
"NEW YORK, June 12, 1869"
"G. R. YOUNG, ESQ.,"
"President of the Cascade Paper Company"
"DEAR SIR: We hold the following notes of the Cascade Paper
Company, payable to the order of yourself and Mr. W. C. Joy, and
endorsed by you both,
viz.:"
One due May 4 at Metropolitan Bank, N.Y. . . $ 2,293.19
" June 4 " " " " . . 2,305.94
" " 7 " " " " . . 4,701.42
" July 4 " " " " . . 2,318.69
----------
$11,619.24
"For the note due May 4, we hold as collateral another note of
the company for $2,318.70, due July 1st, endorsed same as the
others. All the above notes excepting the one due July 4 have been
protested for nonpayment. We have from time to time renewed all
these notes at the request of Mr. Joy and Mr. Raplee, treasurer of
your company, for reasons given by them at the time. The last
excuse given us was that they were waiting for their insurance
money. Now as the company have, to our knowledge, collected a large
portion of their insurance money, some $20,000 or more, we think we
are entitled to our money and that we are, under all the
circumstances, very unfairly treated. We have this day written Mr.
Joy, as superintendent of the company, requesting him to remit us
by return mail at least one-half of the amount of our account, and
at the same time informing him if it was not done, we should at
once instruct our lawyers to commence suits against yourself and
Mr. Joy as endorsers. We thought it best to inform you how this
matter stood as you might not be fully informed in regard to
it."
"Yours truly,"
"BUCHANAN & CO."
"In the month of June or July," as was testified by the
superintendent of the company, "it became apparent to its officers
that the company could not meet its engagements."
Page 83 U. S. 283
On the 19th of the June thus spoken of by the superintendent --
that is to say June, 1869 -- Buchanan & Co. brought suit in the
supreme court of New York against the company and the individual
endorsers, Joy and Young, the former superintendent and the latter
president of the company, upon the two notes which had fallen due
June 4 and June 7, respectively, and immediately after the two
notes due July 1 and July 3 fell due, a suit was brought upon those
notes also.
"At the time the suits were commenced," testified the
superintendent
in May, 1870, when he was examined, "I
should say,
from my present standpoint, the company was
insolvent." There was no proof in the present proceeding that, when
these suits were brought, any debts of the company had matured,
except those of Buchanan & Co., and $229 due one Jones.
Each member of the firm of Buchanan & Co., which consisted
of four persons, was examined as a witness, and they all testified
that their information and belief was, that the company was
perfectly solvent, and intended to pay everybody in full; that they
commenced the suit because they thought that the company's delay
had been unreasonable and unnecessary; that the officers of the
company were keeping the insurance money, which ought to be paid to
them, and speculating with it, and because the company had
promised to pay as soon as they got the insurance money, and had
collected nearly $30,000 of it without paying anything; that the
suits were not brought nor anything done subsequently, under any
understanding, request, or suggestion of the company; but, on the
contrary, that the company requested them to wait longer, and
begged them not to think of bringing a suit; that they brought the
suit for the purpose of getting their pay by any legal means; that
they did not consider the question whether other parties would get
their pay or not, for that they did not know that the company owed
anybody else.
It appeared in the evidence that the company pleaded in the
suits on the notes a misnomer in abatement, and that
Page 83 U. S. 284
Buchanan & Co. made a motion to correct the misnomer, and to
strike out the answer as "sham," and for judgment on it as
"frivolous." The motion to amend was granted. The company's counsel
then insisted that the plaintiffs must reserve their complaint as
amended, and the company have the usual time to answer. In a
discussion before the court upon this point, the plaintiff's
counsel (according to his statement as given in the present suit)
insisted as a matter of argument that where delay was the only
object sought by a defendant which did not deny its obligation,
delay might work injury to the plaintiffs by enabling other parties
to gain a priority
in case of insolvency. And he suggested
insolvency as a possible inference, from the application for delay,
for the court to consider upon such a motion. He did not assert it
as a fact, and as he testified he had no knowledge or information
on the subject and no decided belief on the subject of their
solvency or insolvency. The company's counsel emphatically denied
the suggestion of insolvency, and objected to any such inference's
being drawn. The judge said there was no proof on the subject, and
gave the company ten days to answer. The company's counsel
testified that the statement of insolvency was positively made by
the counsel of Buchanan & Co., but admitted that there was
nothing in the papers one way or the other upon the subject; that
it became a matter of argument upon the assertions of counsel made
in court, the plaintiff's counsel saying that the company was
insolvent and the company's counsel saying that he did not believe
it was insolvent, and he admitted that he did, in fact, believe
they were solvent, and did say that he so believed in the argument.
This argument was made on the 19th or 20th of July.
On the 19th of July, a judgment against the company for $229 was
recovered by one Jones, which was subsequently satisfied on
execution. But Buchanan & Co. testified that they had no
knowledge or information of these facts.
On the 21st of July, 1869, the company made a general assignment
of all their property and effects to one Benjamin Hoyt in trust to
pay their creditors. This assignment was
Page 83 U. S. 285
made under advice of reputable counsel, who advised the company
that they might lawfully make it, and that it would be valid. "The
company supposed," according to the testimony of their
superintendent,
"that the title to all their property would pass to Hoyt, and
they intended to have it so pass by the assignment. They intended
it should so pass before Buchanan & Co. could get their
judgments and issue executions. They knew when the assignment was
executed that this firm would shortly be entitled to enter
judgments, and it was the intention on the part of the company in
making the assignment to Hoyt to prevent them from gaining a
preference by means of their judgments. They expected and intended
that no property would be left on which they could get any lien.
They did not expect or intend that Buchanan & Co. should get a
preference over their other creditors; but intended by the
assignment to secure an equal distribution of their property to
their creditors, and to prevent any creditor from getting a
preference. The officers of the company consulted together in
reference to the assignment. There was not any difference of
view."
The members of the firm of Buchanan & Co. testified that no
information of this assignment was given to them, and that they had
no knowledge of it until after their liens had attached as
hereinafter mentioned.
On the 3d of August, no defenses having been entered in any of
the suits, Buchanan & Co. recovered judgments against the
company in them by default, and against Joy & Young, endorsers
on the notes. On the same day, their attorneys sent transcripts of
the judgments to the clerk of Yates County, in which the company's
real estate was situated, to be docketed by him, and the same were
docketed by him on the 4th day of August.
On the same 3d day of August, the attorneys of Buchanan &
Co. also issued executions on the two judgments to the Sheriff of
Yates County, wherein personal property of the company was
situated, which executions were received by the sheriff on the 4th
of August, and were sufficient in form to become liens on that day
under the statutes of the State
Page 83 U. S. 286
of New York, upon all the personal property of the defendants
within that county. On the 4th of August, Buchanan & Co.
commenced, under the said judgments, certain proceedings
supplementary to execution (which are the substitute under the New
York code for a creditor's bill), and thereby obtained an equitable
lien upon all the choses in action of the company, which
proceedings subsequently resulted in the appointment of B. Buchanan
(a member of the firm) as receiver.
The different members of the firm testified that at the time of
commencing the suits and at the time of recovering and docketing
the judgments, issuing the executions and commencing the
supplementary proceedings, they did not actually believe that the
company was insolvent or in contemplation of insolvency, and so far
as they were aware, neither of them had any reasonable cause so to
believe, but, on the contrary, their belief in fact was, and as
they supposed their information warranted the belief, that the
company was perfectly solvent. They each further testified that so
far as they were aware, they had no cause to believe that the
company had any intention, view, or desire of giving a preference
to their firm or making any disposition of property in its favor or
in fraud of the Bankruptcy Act; but, on the contrary, they in fact
believed that the company was resisting their proceedings with the
purpose of delaying, and so far as possible preventing their
obtaining payment of their claims; that their information and
belief was that the company did all it could to prevent the
judgments, executions, and receiverships; that they thought it a
part of the company's plan not to give them a preference or allow
them to get any if it could help it; that it was doing all it could
to prevent their getting any preference; and that they had no facts
nor any cause to believe that it was showing or permitting them any
favor.
The Sheriff of Yates County, on receiving the executions, August
4, called upon the officers of the company, and they all said that
an execution could not touch the property; that they had made an
assignment, and that it was in Hoyt's
Page 83 U. S. 287
hands, and they supposed that that would exempt the property
from levy. They objected to the levy. The sheriff also called on
Hoyt, who said there was a general assignment of the company made
to him, that he had possession of all the property, and that he
thought the sheriff had no right to make a levy. So the sheriff did
not levy at that time.
When the attorneys of Buchanan & Co. sent the transcripts of
judgments to the Clerk of Yates County on the 3d of August, they
wrote him a letter in which they requested him to docket the
judgments and also to inform them whether there were any other
judgments against any of the defendants or any assignment or
transfer of property by any of them, and if so for a memorandum
thereof. The clerk sent back the letter with a memorandum of a
judgment recovered by Jones against the company for $229, July 19,
and also of "general assignment, dated July 21, 1869, B. L. Hoyt,
assignee." This letter was received by Buchanan & Co.'s
attorneys August 5. This was the first information, as they
testified, which they or their attorneys, so far as they knew, had
ever received of the existence of the assignment or of any judgment
against the company other than their own. The attorneys sent for a
copy of the assignment and received it on the 7th of August. Mr.
Goodwin, one of the firm, went at once to Penn Yan to investigate
the circumstances. He arrived there on the 9th and remained there
till the 13th. On arriving at Penn Yan, he saw the sheriff, who
informed him that the company had made an assignment and there was
not anything to levy on. He also saw Mr. Hoyt, who asserted that
the property had vested in him as assignee. He also saw the
officers of the company, who said that they had made an assignment
of the property which the company formerly owned, and that the
assignment was good and valid. Under advice of counsel, Goodwin
directed the sheriff to levy, and gave him the bond of indemnity
required by him. The sheriff levied on the personal property of the
company August 13.
By orders of the supreme court made in the supplementary
proceedings August 13 and 16, Buchanan was appointed
Page 83 U. S. 288
receiver of the unpaid policies of insurance held by said
company, and on the 20th, 21st, and 23d of August commenced suits
on them against the insurers, to recover the losses due the
company, which suits were still pending.
On the 9th of September, a petition in bankruptcy was filed
against the company, on which, September 24, it was adjudicated
bankrupt, and one Smith appointed its assignee.
The inventory of the assets and liabilities of the firm filed
July 21, 1869, showed:
Liabilities . . . . . . . . . . . $74,775.00
Assets. . . . . . . . . . . . . . 41,435.00
----------
Deficit . . . . . . . . . . . . . $33,340.00
Among the assets were:
Cash in hands of Treasurer . . . . $6,554.70
Claims against insurance
companies for loss by fire . . . 14,545.30
Hereupon Smith filed a bill in the court below against Buchanan
& Co., which, after setting forth the appointment of the
complainant as assignee, alleged that the judgments in favor of
Buchanan & Co. against the company were suffered and procured
by the company with intent to give that firm a preference over the
other creditors of the company, and with intent to hinder, delay,
and impair the operation of the Bankrupt Act, and that that firm,
when they entered their judgments and issued their executions, had
reasonable cause to believe that the company was insolvent, and
that a fraud on the act was intended.
The bill also alleged the illegality of the appointment of the
defendant, Buchanan, as receiver of the insurance claims.
The answer set forth the recovery of the judgments, the issuing
of the executions, the levies thereunder, and the appointment of
the receiver, and put in issue all the allegations of fraud in the
recovery of the judgment, and any knowledge on the defendants' part
of the insolvency of the company.
The court below gave judgment for the complainant,
Page 83 U. S. 289
granting the relief asked in the bill, and setting aside the
judgments under which the defendants claimed their lien.
From that decree this appeal was taken.
It was admitted on both sides in the argument that by the terms
of the Bankrupt Act it was necessary that three things should
concur to entitle the complainant, as assignee, to the decree
prayed in the bill:
1st. That the company, 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 Buchanan &
Co., with a view to give them a preference.
2d. That the company was insolvent at that time, or in
contemplated insolvency.
3d. That Buchanan & Co., at the time the company "procured
or suffered" such attachment, sequestration, or seizure of their
property (if they did so "procure or suffer" it) had reasonable
cause to believe that the company was insolvent, and that they
procured or suffered such attachment, sequestration, or seizure of
their property to be made to secure such preference and in fraud of
the provisions of the act.
Page 83 U. S. 297
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. [
Footnote 1]
Those circumstances, so far as that rule of decision is
applicable to this case, are, if the debtor procures any part of
his property 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
Page 83 U. S. 298
to believe that the debtor was insolvent, and that the
attachment, sequestration, or 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 real and 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 and
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 the 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
the supreme court of the state,
Page 83 U. S. 299
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 assigned 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 county, 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 in possession when the petition
in bankruptcy was filed, and he alleges that the sheriff, by order
of the district court duly entered, has since sold the said
personal property 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 policies of insurance, and that
he has commenced actions against the insurance companies to recover
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 the allegations of the bill and the 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 judgment
creditors, throughout those proceedings, had reasonable cause to
believe that the debtor company was insolvent, and that the
judgments were entered, the executions issued, and the 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
Page 83 U. S. 300
coming to the assignee in bankruptcy and from being distributed
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 defenses 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 upon 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 under the 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 and 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 lien by virtue of the said judgments, or of any of the
aforesaid proceedings, and for an injunction.
Page 83 U. S. 301
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) 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 case 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 conveys to the
assignee all the estate, real and personal, of the bankrupt,
including
Page 83 U. S. 302
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. [
Footnote 2]
Conceded, as that proposition must be, it is obvious that the
judgment 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 mixed, 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
conclusion 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 same month, were destroyed by fire, which prevented
the company from transacting 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
Page 83 U. S. 303
of their misfortune, and the appellants replied on the following
day, promising to take care of one of their notes and to advise
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 their
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 by 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 2, 1869,
for $4,701.42, payable in sixty-three days from date; (2) note
dated May 4, 1869, for $2,318.70, payable in fifty-five days from
date; (3) note dated November 6, 1868, for $2,305.94, payable June
4 next after its date; (4) note dated November 16, 1868, for
$2,318.69, payable 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 chances of collecting
the insurance money would be 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, which 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
litigation
Page 83 U. S. 304
and loss, which affords convincing evidence 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 and addressed to the
president of the company, presented a schedule of the notes renewed
and unpaid, complaining that they had been very unfairly treated,
and 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
endorsers 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 $7,118.14, and in the other for the sum of $4,197.51, 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 respective
Page 83 U. S. 305
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 evidence, 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, provided he 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
Page 83 U. S. 306
and perfect such liens on the property of their 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 commencement 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 personal, 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 any
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.
[
Footnote 3]
Page 83 U. S. 307
Sufficient is shown 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 the purpose and
intent of the principal appellants 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 corporation bankrupts. [
Footnote 4]
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 in 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, or
seizure of such property to be made to secure such preference, and
in fraud of the provisions of the Bankrupt Act. [
Footnote 5]
Page 83 U. S. 308
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 businessman 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 giving 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 have 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. [
Footnote 6] 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
Page 83 U. S. 309
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. [
Footnote 7]
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 answer 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. [
Footnote 8] 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. [
Footnote 9]
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 defense to the bill of complaint.
Decree affirmed.
[
Footnote 1]
14 Stat. at Large 534.
[
Footnote 2]
14 Stat. at Large 522.
[
Footnote 3]
Hilliard on Bankruptcy, 3d ed., 322-330.
[
Footnote 4]
Marshall v. Lamb, 5 Adolphus & Ellis' New Series
126.
[
Footnote 5]
Shawhan v.
Wherritt, 7 How. 644;
Fernald v. Gay, 12
Cushing 596;
Scammon v. Cole, 5 N.B.R. 257;
Same
Case, 3
id. 100;
Smith v. Buchanan, 4
id. 133;
Same Case, 8 Blatchford 153.
[
Footnote 6]
Toof v. Martin,
13 Wall. 40;
Scammon v. Cole, 5 N.B.R. 263.
[
Footnote 7]
Wilson v. City Bank, ib., 270;
Foster v.
Goulding, 9 Gray 52.
[
Footnote 8]
Code § 292, 294;
Hinds v. Railroad Co., 10
Howard's Practice Report 487;
Sherwood v. Railroad Co., 12
id. 136.
[
Footnote 9]
Sessions Acts, 1825, p. 449; 2 Revised Statutes 463;
Morgan
v. Railroad, 10 Paige's Chancery 290;
Loring v.
Gutta-Percha and Packing Co., 36 Barb. 32.
BRADLEY, J.:
I dissent from the opinion of the Court just read. In my
opinion, an adversary suit against an insolvent person may be
prosecuted to judgment up to the very moment of bankruptcy. The
diligent debtor cannot be deterred from such prosecution by a
knowledge that his debtor is insolvent, or by any apprehensions
that bankrupt proceedings may be in contemplation. He is not bound,
himself, to petition against his debtor in bankruptcy, nor does the
neglect of his debtor to file such a petition deprive him of his
fairly gained preference, unless complicity between them can be
shown, of which in my opinion there was no evidence in this
case.
JUSTICES MILLER and DAVIS did not sit.
