Benedict v. Deshel

• Decision Date: 08 December 1903
• Citation: 177 N.Y. 1,68 N.E. 999
• Parties: BENEDICT v. DESHEL et al.
• Court: New York Court of Appeals Court of Appeals

177 N.Y. 1

68 N.E. 999

BENEDICT

v.DESHEL et al.

Court of Appeals of New York.

Dec. 8, 1903.

Appeal from Supreme Court, Appellate Division, First Department.

Action by Edward G. Benedict, trustee in bankruptcy of the Union Cloak & Suit Company, against Jacob Deshel and others. From a judgment of the Appellate Division (79 N. Y. Supp. 205) affirming a judgment for defendants and from an order denying a new trial, plaintiff appeals. Reversed.

Haight and Cullen, JJ., dissenting.

J. Woolsey Shepard and Joseph McElroy, Jr., for appellant.

Morris Hillquit, for respondents.

WERNER, J.

This action was brought by the plaintiff, as trustee in bankruptcy of the Union Cloak & Suit Company, a domestic corporation, to recover from the defendants, who were creditors of that corporation, certain moneys paid by it to them in alleged violation of the provisions of the bankruptcy act relating to preferences. At the Trial Term the defendants had a verdict, and the judgment entered upon it was affirmed at the Appellate Division. The order of affirmance is not in the record, but there is evidence to support the contentions of fact advanced by the defendants, so that, if the case was submitted to the jury with correct instructions as to the law and sound ruliings upon objections to the reception and exclusion of evidence, the verdict is conclusive, whether its affirmance was unanimous or not.

The case turns upon the construction of section 60 of the national bankruptcy act (Act July 1, 1898, c. 541, 30 Stat. 562 [U. S. Comp. St. 1901, p. 3445]), and the specific question involved is presented by exception taken by the plaintiff to the charge of the court to the jury. Section 60 of the act referred to consists of two subdivisions and reads as follows:

‘(a) 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 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.

‘(b) 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 a preference, it shall be voidable by the trustee, and he may recover the property or its value from such person.’

The learned trial court charged the jury that plaintiff's right to recover depended upon three distinct facts, each of which he was bound to establish by evidence: First. ‘That the Union Cloak & Suit Company was insolvent on July 3rd, 1901.’ Second. ‘That in transferring to the defendant the $1,000 the said company intended to give a preference to the defendant.’ Third. ‘That at the time of receiving from the Union Cloak & Suit Company the transfer of the $1,000 on July 3, 1901, the defendant had reasonable cause to believe that said company was insolvent, and intended to give them, the defendants, such preference.’ The first and third instructions above quoted were concededly correct, but plaintiff's counsel excepted to the second instruction, and that presents the question in the case. Is it incumbent upon a trustee, in an action to avoid an alleged preferential payment by an insolvent debtor to his creditor, to prove the intent of the debtor to give a preference, as well as the creditor's reasonable ground to believe that a preference was intended to be given? The language of the statute (subdivision ‘b’) makes it perfectly clear that a preferential payment by an insolvent debtor to his creditor cannot be avoided by a trustee in bankruptcy unless he can prove that the creditor receiving it ‘shall have reasonable cause to believe that it was intended thereby to give a preference.’ In the case at bar the courts below have gone a step further, and have held that such an action cannot be maintained without affirmative proof of the debtor's intent to give a preference. It is practically conceded that this interpretation of the statute rests upon judicial construction, rather than direct language, and the argument by which it is sought to be supported is that a creditor's reasonable cause to believe that, in the payment to him it was intended to have a preference, can only be predicated upon the existence of such an intent in the mind of the debtor. It is contended that it would be paradoxical to hold that the creditor should have reasonable ground to believe in the debtor's intent to give a preference unless that intent in fact exists and is disclosed by proof. The difficulty with this argument is that it ignores the explicit language of the statute (subdivision ‘a’), by which the debtor's intent is removed from the sphere of speculation or evidence into the category of established fact. In unmistakable language Congress has said that when an insolvent debtor makes a transfer of property, the effect of which will be to enable any one of his creditors to obtain a greater percentage of his debt than any other creditor of the same class, ‘the debtor shall be deemed to have given a preference.’ Shall this language be held to be meaningless? Shall it be expunged from the statute by judicial construction? If it does not disclose the legislative intent to fix by law that which would otherwise be the subject of controversy, what purpose does it serve? The only answer to these queries is found in the rather metaphysical contention, already alluded to, that, if the debtor's intent depends upon his act, without reference to his state of mind, it is quite superfluous to ascertain the creditor's reasonable ground for belief as to the character and purpose of the debtor's act. This argument, it seems to us, is more refined than sound. The statute deals with three distinct legal entities concerned in the administration of a bankrupt's estate: (1) The debtor. (2) The trustee. (3) The creditor. As to the debtor, the statute declares that a payment under certain conditions shall be held to be preferential. He is not to be heard upon the question of his intent. The effect of his act is fixed by law. That is the scope and purport of subdivision ‘a.’ The next section (subdivision ‘b’) declares, in effect, that a preferential payment is not void per se, but voidable by the trustee upon a certain condition. And what is the condition? Simply that ...