Debus v. Yates

• Decision Date: 17 August 1910
• Citation: 193 F. 427
• Court: U.S. District Court — Eastern District of Kentucky
• Parties: DEBUS v. YATES.

193 F. 427

DEBUS v. YATES.

United States District Court, E.D. Kentucky.

August 17, 1910

Maxwell & Ramsey and George B. Martin, for plaintiff.

Hager &amp Stewart and Simeon S. Willis, for defendant.

COCHRAN District Judge.

This cause is under submission for final decree. It is a suit brought by Louis K. Debus, trustee in bankruptcy of Jay H Northrup, against Frank H. Yates, to recover a vacant lot of ground in the city of Louisa, Lawrence county, Ky., as a voidable preference under section 60b of the bankrupt act. The lot fronts 78 feet 3 inches on Madison street, and is sometimes referred to as three lots, though it is all under one fence. The recovery is sought conditionally upon payment to Yates of the sum of $178.31 and interest from October 24 1906, or subject to a lien in his favor therefor. The lot was transferred to him by the bankrupt and his wife July 28 1906, by deed then executed and delivered, but not lodged for record by him until October 29, 1906. The petition in bankruptcy was filed November 17, 1906. The making of the transfer and its lodging for record, therefore, were both within four months before the filing of the petition.

At the time of the making of the transfer Yates was a creditor of the bankrupt. Theretofore, to wit, in February, 1904, he had sold to the Whitehouse Cannel Coal Company, a Kentucky corporation, of which the bankrupt was general superintendent and treasurer and principal stockholder, a stock of goods purchased by him in connection with the purchase of a building in that city for the use of the Louisa National Bank, of which he was a director, for the sum of $1,321.69, and had received therefor the four months note of the company, indorsed by the bankrupt. This note he discounted with the bank, receiving the proceeds, and the company paying the discount. Thereafter seven times and every four months the note was renewed; the parties thereto always being the same, and the company paying the discount. The last renewal was made June 24, 1906, and was outstanding on July 28, 1906, at the time of the transfer, to become due October 24, 1906. The consideration of the transfer was $1,500, recited in the deed to have been paid cash in hand, of which $1,321.69 was paid by Yates assuming payment of the note, and the balance of which, $178,31, he paid in cash. He did not, however, pay the $178.31 at once on delivery of the deed or to the bankrupt. He paid it at the same time he paid the note, which was October 24, 1906, when it became due, and he paid it to M. F. Conley, cashier of the bank; the payment being to him individually and not as cashier. Just how this came about is not explained in the evidence. The reasonable inference is that at the time of the delivery of the deed, when he assumed payment of the note, he assumed payment of the balance to Conley on account of the bankrupt. It is thus seen that to the extent of $1,321.69 the consideration for the transfer was a past debt.

At this point I cease narrating the facts relevant to the controversy, to consider generally what is essential to make a transfer of property by a bankrupt a voidable preference under section 60b of the bankrupt act, to resume the narration after I have reached a conclusion in regard thereto. To this end the subject of transfer preferences generally, and that first under the bankrupt act as it stood prior to the amendments of 1903, and then as it stood as thus amended, should first be dealt with.

The bankrupt act defines a preference without reference to any consequence following therefrom. This it does in section 60a. It does so by providing therein when a debtor shall be deemed to have given a preference. As it stood before being so amended, it provided that a debtor should be deemed to have given a transfer preference when, being insolvent, he made a transfer of any of his property, the effect of the enforcement of which would be to enable one of his creditors to obtain a greater percentage of his debt than any other of his creditors of the same class. Insolvency, as provided by section 1 (15), exists when the debtor's property, excluding that fraudulently transferred, is insufficient to pay his debts. There were thus two elements in the definition, to wit: (1) The making by the debtor of a transfer of certain of his property, the effect of which would be to enable one of his creditors to obtain such greater percentage; and (2) existing insolvency on the debtor's part at the time the transfer was made. By 'one of his creditors' is meant one then holding a past debt against him. It does not include one who, for the first time, credits him on the faith of a transfer then made. In the case of In re Clifford, 136 F. 475, Judge Reed, referring to section 60a, said:

'The purpose of this section is to prohibit the giving of a preference by a bankrupt to existing creditors, and it does not apply to transactions whereby the bankrupt receives a present consideration for the transfer.'

It was a slip to say that section 60a prohibits anything. It merely defines. Under the act of 1867 (Act March 2, 1867, c. 176, 14 Stat. 517), in the case of Tiffany v. Institution, 18 Wall. 375, 21 L.Ed. 868, Mr. Justice Davis said:

'The preference at which this law is directed can only rise in case of an antecedent debt.'

It is questionable whether the element of insolvency belongs to a logical definition of a preference, and whether, in including it, the section is not somewhat arbitrary. It is possible, however, that a transfer cannot have such effect, unless at the time the debtor is insolvent. I have not thought this matter out. As thus defined a preference was purely objective. It was not concerned with any mental state of either the debtor or creditor. And it is certain that under this section there is no such thing as a preference unless the transfer was in payment of or to secure a past debt existing at the time it was made, and at that time the debtor was insolvent. It was not possible for the transfer to be a preference if made to secure a present loan, or if at the time it was made the debtor was solvent.

As stated, subdivision 60a was confined solely to defining a preference. It had nothing to do with providing any consequence thereof. Its consequences were covered by other provisions of the bankrupt act. Three consequences were so provided. In one instance only was consequence given to a preference as thus defined by itself-- i.e., with no accompanying fact-- and that was when the creditor who had received it asserted a claim against the bankrupt estate. It was provided by section 57g that his claim should not be allowed unless he surrendered his preference. In the case of Pirie v. Chicago Title & Trust Company, 182 U.S. 438, 21 Sup.Ct. 906, 45 L.Ed. 1171, the Supreme Court held that such consequence should be given to the preference alone, and it would seem that it was immaterial when it was given. Collier on Bankruptcy (6th Ed.) p. 439, says that it was thereby held that 'any payment by debtor to creditor after, though without knowledge of, actual insolvency, * * * even though lacking intent and made years before,' had to be surrendered by the creditor before he could have his claim allowed. Such a preference may be termed an obstructive preference, in that, unless surrendered, it is in the way of allowing any claim to the creditor receiving it.

In the other two instances in which consequence was given to such a preference, it was not given to it by itself, but only in connection with accompanying facts. By section 3a(2) it was made an act of bankruptcy. In order that it might have such consequence, it was essential that two other facts, in addition to that of preference, exist.

It must have been given with an intent to prefer, and eitherfour months must not have elapsed since it was given, or, if the transfer was recordable, four months must not have elapsed since it was recorded, or, if nonrecordable, fur months must not have elapsed since possession was taken before the petition was filed. This is said apart from the fact of actual notice. The fact that it was given with such intent, and the further fact that it was given in such time, or that such time had not elapsed since it was recorded or possession taken under it, had to accompany the fact of the preference in order that it have the consequence of being an act of bankruptcy.

By section 60b it was made voidable. Here, for it to have such consequence, it had to be accompanied at least by the facts that the creditor had reasonable cause to believe that it was intended thereby to give a preference, and that it was made within four months before the filing of the petition, or after the filing thereof and before the adjudication. It was not sufficient that the petition was filed within four months after the transfer was recorded, if recordable, or possession taken under it, if it was not. It had to be filed within four months after it was given. So that it was possible for a preference to be an act of bankruptcy and yet not be voidable. In order that it be an act of bankruptcy, the mental state of the debtor, and not of the creditor, was a mater. But in order that it be voidable apparently the mental state of neither was essential. It was sufficient that there was reasonable cause to believe that the debtor had the mental state of intending to prefer when he gave the preference. It would seem, however, that the mental state, at least of the debtor, was an essential fact in order to a voidable preference, as well as to an act of bankruptcy. And such seems to be the underlying presupposition of the opinion of the Supreme Court as delivered by Mr. Justice McKenna in the case of Pirie v. Chicago Title & Trust Company, supra. The preference involved there,...