Hardy v. Gray

• Decision Date: 21 February 1906
• Docket Number: 593.,592
• Citation: 144 F. 922
• Parties: HARDY v. GRAY et al. POWERS et al. v. SAME. In re ANDREWS.
• Court: U.S. Court of Appeals — First Circuit

144 F. 922

HARDY v. GRAY et al. POWERS et al. v. SAME. In re ANDREWS.

Nos. 592, 593.

United States Court of Appeals, First Circuit.

February 21, 1906

Lee M Friedman (Morse & Friedman, on the brief), for appellants.

Alexander Whiteside (Burton P. Gray and Percy D. Atherton, on the brief), for appellees.

Before COLT and PUTNAM, Circuit Judges, and ALDRICH, District Judge.

PUTNAM Circuit Judge.

These two cases are appeals from the District Court for the District of Massachusetts, sitting in bankruptcy, disallowing two claims offered in proof, on the ground that preferences had been received by the two creditors which had not been returned. The referee allowed the claims, and the court reversed the referee. One of the creditors, now appellants is Horace C. Hardy, and the other is the copartnership of Powers & Mayer, each residing in the city of New York, and having his business establishment there. The bankrupt is Frank A. Andrews, residing, and who did business as a jeweler, in the city of Boston. The provision of the statute immediately involved is subdivision 'g' of section 57 of the bankruptcy law of July 1, 1898 (30 Stat. 560, c. 541 (U.S. Comp. St. 1901, p. 3443)) amended by section 12 of the act of February 5, 1903 (32 Stat. 799, c. 487 (U.S. Comp. St Supp. 1905, p. 688)), so as to read as follows 'The claims of creditors who have received preferences, voidable under section sixty, subdivision b, or to whom conveyances, transfers, assignments, or incumbrances, void or voidable under section sixty-seven, subdivision e, have been made or given, shall not be allowed unless such creditors shall surrender such preferences, conveyances, transfers, assignments, or incumbrances.'

Subdivision 'g,' before it was amended, read as follows:

'The claims of creditors who receive preferences shall not be allowed unless such creditors shall surrender their preferences.'

The pith of the amendment so far as concerns these appeals, is the reference to section 60, subd. 'b' (30 Stat. 562 (U.S. Comp. St. 1901, p. 3445)), as follows:

'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.'

Prior to this amendment, this subdivision was regarded as broad enough to include a preference according to subdivision 'a' of section 60 of the same act, as construed in Pirie v. Chicago Title & Trust Company, 182 U.S. 438, 21 Sup.Ct. 906, 45 L.Ed. 1171. There the broad distinction was made between subdivisions 'a' and 'b' of section 60, so that it was stated at pages 446 and 447 of 182 U.S., pages 910, 911, of 21 Sup.Ct. (45 L.Ed. 1171) that, under subdivision 'b,' a transfer from the bankrupt may be avoided by the trustee, subject, however, to the limitation, among others, that the creditor had reason to believe that a preference was intended, while it was held at pages 451 of 182 U.S., page 911, of 21 Sup.Ct. (45 L.Ed. 1171) and sequence that, under subdivision 'a,' the intent is not material. Consequently, four judges dissenting, such a construction was given subdivision 'a' that, in connection with subdivision 'g' of section 57, as it stood before it was amended by the act of February 5, 1903, the claim of a creditor who had received a transfer from an insolvent person who afterwards became bankrupt, could not be proved without first surrendering what was received by the transfer, provided the transfer operated, as a matter of fact, to give him a greater percentage than other creditors of the same class might ultimately receive, and this without regard to the actual intention of the parties. When, however, subdivision 'g' of section 57 of the act of 1898 was, by the amendment of 1903, limited to the circumstances of subdivision 'b' of section 60, the expressions contained in the opinion in Pirie v. Chicago Title & Trust Company, 182 U.S. at pages 446 and 447, 21 Sup.Ct.at pages 910, 911, 45 L.Ed. 1171, applied to the extent of making it one of the conditions to the barring of a creditor from proving his claim that he 'had reason to believe that a preference was intended. ' Thus, as the statutes now stand, so far as concerns any alleged preferences involved in these appeals, all artificiality has disappeared, and the word preference, as well as the word intended, may be read with their natural meaning, subject, of course, to the general rules of virtue of which, under certain circumstances, an act from which a result ensues may sometimes be held to contemplate and purpose the result.

We must, however, call attention to the fact that the act of 1898 has given an artificial meaning to the word 'insolvent,' thereby complicating very much the construction of the statutes as applied to alleged preferences, and rendering to a large extent inapplicable the decisions of courts of authority on statutes where the word insolvency is to be read in its ordinary business sense. What we refer to is paragraph 15 of section 1 (30 Stat. 544 (U.S. Comp. St. 1901, p. 3418)) as follows:

'A person shall be deemed insolvent within the provisions of this act whenever the aggregate of his property, exclusive of any property which he may have conveyed, transferred, concealed or removed, or permitted to be concealed or removed, with intent to defraud, hinder or delay his creditors, shall not, at a fair valuation, be sufficient in amount to pay his debts.'

This has established so artificial a rule that the usual indicia by virtue of which a man is regarded as insolvent, and, consequently, by virtue of which a creditor may be said to have reason to believe that he is insolvent, or the reverse, become, to a very large extent, of no importance. This fact was illustrated by In re Pettingill & Co. (D.C.) 135 F. 218, a case which came before us incidentally under the same title in (C.C.A.) 137 F. 840. There, marked and numerous indications of insolvency in the natural business sense of the word existed, but it was justly said that 'grounds for reasonable belief in a present inability to pay debts in the course of business are not necessarily grounds for believing that a man's property at a fair valuation is not sufficient to pay his debts.'

The learned judge of the District Court found in the pending cases that the bankrupt was in fact insolvent within the meaning of the existing statutes at the time of the alleged preferences in question. We do not understand that this is disputed. He also found that the debtor knew that he was insolvent. This is disputed. Evidently he also found that the creditors had reasonable cause to believe that the debtor was insolvent. Then he proceeded:

'If the debtor is insolvent, he intends preference by any payment of a pre-existing debt. If the creditor has reasonable cause to believe that the debtor is insolvent, then the creditor has reasonable cause to believe that a preference is intended. Under the circumstances here presented, the court has to determine only if these two creditors severally had reason to believe the bankrupt was insolvent at the time the payments were made to them by him. If the question is answered in the affirmative as to either, that creditor must surrender his preference.'

It appears to us that, by this, the learned judge eliminated the element of actual intention on the part of the debtor to give a preference. In other words, the rule laid down is apparently that, so long as the debtor is insolvent, and knows that he is insolvent, and makes a payment of a pre-existing debt, the intent to prefer is a presumption of law. Whatever may have been the meaning of the learned judge, we understand that on the whole, he held the view of the law which the trustees squarely took before us; that is to say, 'that all that it is necessary for them to prove is that Powers & Mayer and Hardy had reasonable cause to believe that Andrews was insolvent on the dates in question. ' Following this out, the trustees proceeded to argue at length against the proposition that, to prove a preference, it is necessary to show that the debtor actually intended to give one, and that the creditor had reasonable cause to believe that there was this actual intention.

Under subdivision 'b' of section 60 of the act of 1898 adopted, as we have shown, by section 12 of the act of 1903, it can hardly be said that a creditor had reasonable cause to believe that a preference was intended until it is shown that there was such an intention on the part of the debtor. Let us first take its natural reading. We have shown that an element expressly contained therein is that the creditor 'shall have had reasonable cause to believe that it was intended thereby to give a preference. ' Naturally and justly it would be said that no one could be charged with a reasonable cause to believe something unless the something existed to which the belief was supposed to relate. It is true that the ordinary rule that a person who does an act is supposed to contemplate what results therefrom, applies to cases of this class, but only as an element; and it cannot apply even as an element unless the party who does the act has a knowledge of the essential facts which tend to produce the resulting consequences, or at least has a reasonable cause to believe them, or purposely shuts his eyes. Therefore the question is whether the authorities support the position taken by the trustees, as we have explained it, notwithstanding the natural reading of the statute as amended in 1903 is as we...