In re Blanchard

• Decision Date: 31 December 1907
• Citation: 161 F. 793
• Parties: In re BLANCHARD et al.
• Court: U.S. Court of Appeals — Fourth Circuit

161 F. 793

In re BLANCHARD et al.

United States District Court, E.D. North Carolina.

December 31, 1907

R. C Lawrence and J. G. McCormick, for creditors.

PURNELL District Judge.

The record is again before the court, with the indorsement 'Order sent some time ago. Do not know why record was overlooked'-- in handwriting of the district judge; but the order seems to have been lost, and, counsel having been heard, the cause must again be decided. The first question arising on the record is as to the validity of a mortgage from A. E. Howard to E. J. Johnson for $946.75, with interest from February 4, 1906, dated February 4, 1907; and, second, a mortgage from J. C. Blanchard to A. R. McEachan and J. A Johnson, October 4, 1906 for $775.

As to the first mortgage from Howard to Johnson, February 4, 1907 the facts are, as testified to by R. C. Lawrence, Esq.: In January, 1906, Howard executed to Johnson his promissory note for $775, payable January 1, 1907, for money borrowed. The mortgage executed February 4, 1907, was for the principal and interest of the note of 1906, and the sum of $125 advanced by Johnson to enable Howard to pay cost and attorney's fees in a proceeding in bankruptcy then about to be filed, and so used. Was it valid for the $125? It was made within the four months, but for a cash consideration, a loan in contemplation of bankruptcy; for it may be inferred, from the facts admitted and proved, that Johnson knew or had reason to believe the borrower was insolvent and contemplated bankruptcy, and he loaned the money for this purpose, i.e., to pay costs of filing fee expenses and attorney's fees. Attorney's fees paid by the bankrupt are not specially favored by the bankrupt act, as witness the provisions of section 60, subd. 'd' (Act July 1, 1898, c. 541, 30 Stat. 562 (U.S. Comp. St. 1901, p. 3446)):

'If a debtor shall, directly or indirectly in contemplation of the filing of a petition by or against him pay money or transfer property to an attorney and counselor at law, solicitor in equity, or proctor in admiralty for services to be rendered, the transaction shall be re-examined by the court on petition of the trustee or any creditor and shall only be held valid to the extent of a reasonable amount to be determined by the court and the excess may be recovered by the trustee for the benefit of the estate.' The trustee files no such petition in the case at bar, and, it may be inferred, will not. The mortgage was given 'with the consent of Blanchard.' The mortgage and petition in bankruptcy bear the same date, though Mr. Lawrence says the mortgage was executed the day before the petition in bankruptcy was filed. Both were prepared the same day. The referee holds that as both of these mortgages were given by the individuals comprising the copartnership on the firm's property to secure an individual indebtedness, and not executed as a firm conveyance, and the mortgage of Howard to E. J. Johnson being largely to pay a pre-existing debt, to wit, $831.75, 'the interests of the mortgagee in the fund in excess of the personal property exemption allowed by law are postponed to the rights of the firm's creditors generally, but will operate as an assignment of the personal property exemption which may be allowed to each bankrupt in the event the court should hold that the said bankrupts are entitled to their exemptions. ' This court has no jurisdiction over exemptions of bankrupts, except to allot them. In re Paramore & Ricks (D.C.) 156 F. 218.

The mortgage, executed the day before the petition to secure a preexisting debt, was a preference; and this is now admitted by counsel, and cannot be proved. Section 67c (2), providing what liens shall be disallowed by the adjudication, provides:

'If the party or parties to be benefited thereby had reasonable cause to believe the defendant was insolvent and in contemplation of bankruptcy.'

Subdivision 'd' of this section seems to be an exception:

'Being given or accepted in good faith and not in contemplation of or in fraud of this act and for a present consideration which have been recorded according to law * * * shall not be affected by this act.'

If referees will look to the bankrupt act as the chart of their duty and the law of the case, and not be confused by state decisions, it would be better for all concerned. The bankrupt act is an act of Congress passed in accordance with the Constitution (art. 1, Sec. 8, cl. 4):

'Congress shall have power to establish uniform laws on the subject of bankruptcies throughout the United States.'

And article 6 of the Constitution provides the acts of Congress which shall be passed in pursuance of the Constitution shall be the supreme law of the land.

Johnson seems, from the evidence, to have accepted the lien in good faith, not in contemplation of a fraud of the bankrupt act, and to have parted with his cash, a present consideration, and to have had his lien duly recorded, which brings the claim for $125 within the exception; but it may be said to be a 'close shave,' even were we dealing with individual estates, in which event the court would feel constrained to allow the claim to this extent against the estate of Blanchard as not affected by the adjudication. As to the ruling of the referee on this claim, he is reversed. We are dealing with partnership assets, not of the individuals.

As to the second claim, that of McEachan and Johnson, the mortgage seems to have been given and accepted before bankruptcy was contemplated, or there was any suspicion of insolvency, for...