In re Chaplin

• Decision Date: 20 March 1902
• Docket Number: 4,534.
• Citation: 115 F. 162
• Parties: In re CHAPLIN
• Court: U.S. District Court — District of Massachusetts

115 F. 162

In re CHAPLIN

No. 4,534.

United States District Court, D. Massachusetts.

March 20, 1902

Jesse C. Ivy, for trustee.

Charles K. Cobb, for creditor.

LOWELL District Judge.

The trustee seeks to review the decision of the referee allowing the claim of the Batchelder & Lincoln Company. That claim is made up of two parts: (1) A note for $5,800; (2) merchandise indebtedness of about $4,500.

1. The following facts are not in dispute: On January 1, 1896, the bankrupt owed the creditor $12,026.94. He had made a voluntary assignment for the benefit of his creditors, and they agreed to take 50 per cent. on their indebtedness. On January 23d the bankrupt delivered to the creditor certain notes made by the former. At the same time he agreed to hold for the creditor's benefit a note of one Stevens, made to the bankrupt, which note was afterwards transferred to the creditor. The creditor advanced money to the bankrupt to pay the composition. The amounts of the several notes and the account of the transaction were as stated in the memorandum copied below, which was made at the time between the bankrupt and Mr. Tileston, the treasurer of the creditor. This is not now disputed by the creditor, though it was not admitted at the hearing before the referee, whose attention was not particularly directed to it:

B. & L. claim	$12,026 94
C.H. Stevens note on demand	3,411 28
	----------
	2)8,615 66
	----------
50% of balance of claim........	$ 4,307 83
	----------
Loan from B. & L. Co...........	10,000 00
Bal. of claim due..............	4,307 83
	----------
	$14,307 83
Paid by check..................	6,013 47
	----------
	$ 8,294 36

In Settlement with the B. & L. Co.

Notes Dated January 23, 1896.

$1,000.00. Int. 1 mo. 3 da.... $	5 50
$1,000.00. Int. 2 mo. 3 da....	10 50
$1,000.00. Int. 3 mo. 3 da....	15 50
$1,307.83. Int. 4 mo. 3 da....	26 51
$3,986.53. Int. 4 mo. 3 da....	81 73
	---------
	$ 140 04

The creditor now further explains this transaction as follows (and, subject to some further observation, I believe the explanation is correct): The face of the Stevens note was first deducted from the general indebtedness due January 8th. One-half the balance was then figured, to determine the balance to which the creditor was entitled under the composition. The first four notes were given in payment of this balance. Ten thousand dollars was advanced by the creditor to the bankrupt, with which to pay the composition. Inasmuch as the assignee and the other creditors were not to be informed of the transaction between the creditor and the bankrupt, the creditor was paid by the assignee, in cash, 50 per cent. of its original claim, which payment was immediately treated as a re-payment of part of the loan of $10,000. The fifth and last note was given for the balance of that loan. In substance, the transaction amounted to this: Instead of 50 per cent. of its claim in cash, the creditor received $4,307.83 in notes of the bankrupt, and the Stevens note for $3,411.28, on which last note some interest was then due. Furthermore, the creditor lent the bankrupt about $4,000, for which a separate note was given. The note of $5,800 represents, by renewals, this last note of about $4,000, and a subsequent and wholly unconnected indebtedness of $1,800. Chaplin was adjudicated bankrupt on an involuntary petition filed April 9, 1901.

Upon the face of the figures the Batchelder & Lincoln Company received more than did the other creditors, but the company's counsel contends that there was no fraud in taking the Stevens note. It may have been worth less than its face value, and he argues that the fair value of the Stevens note and of the notes for $4,307.83 amounted to no more than 50 per cent. of the creditor's original claim, and so the company took no advantage of the other creditors. But the failure to explain the transaction to the assignee and to the other creditors leaves no doubt in my mind that an improper preference was made and intended. The whole transaction, including the large advance made by the creditor to the bankrupt, was so complicated that neither the creditor nor the bankrupt may have intended any serious wrong, yet a preference, fraudulent in the eye of the law, was given and received. The effect and amount of this preference must now be determined. Conflicting decisions and dicta, and the want of authority binding this court, call for a somewhat extended examination of the law. There are three parties to be considered in dealing with a transaction of this sort,-- the debtor, the preferred creditor, and the innocent creditors. The rights and liabilities of one cannot be determined satisfactorily without considering those of all the others. The attempt to deal with one party at a time has led to confusion.

If a debtor, entering into composition with his creditors, secretly pays one of them more than the amount stated in the composition, the preference so given is deemed fraudulent. 1 Story, Eq.Jur. (13th Ed.) 384. This is true even if the preferred creditor provides the money for the payment of the composition offer. Wood v. Barker, L.R. 1 Eq. 139. If the preference consists of a note or other obligation given by the debtor, the debtor has a good defense to a suit by the preferred creditor on the obligation. If the note has been transferred to a bona fide holder for value, and so the debtor is compelled to pay it, he can recover the amount so paid from the preferred creditor. If the preference consists of money or other property, that money or property can be recovered back directly by the debtor from the creditor. The preference thus given is deemed fraudulent and voidable for two reasons: The first, because the transaction is deemed to be an oppression of the debtor by the creditor; the second and more important, because it is deemed to be a fraud committed by both the debtor and the preferred creditor upon the other creditors who are ignorant of the preference. 'Every composition deed is in its spirit, if not in its terms, an agreement between the creditors themselves, as well as between them and the debtor. It is an agreement that each shall receive the sum or the security which the deed stipulates to be paid or given, and nothing more, and that upon this consideration the debtor shall be wholly discharged from all the debts there owing to the creditors who signed the deed. ' Breck v. Cole, 4 Sandf. 79, 83. The wrong done to the innocent creditors is at once less and greater than that done to the debtor himself. On the one hand, they sustain no direct loss. They have compounded their claims for so much, and they receive the amount of the composition. The preference is not taken directly from their pockets, as it is taken from the pocket of the debtor. On the other hand, the creditors are innocent, and are ignorant of the inequality created. The debtor knows it, has consented to it, may have procured it. He may even have induced the favored creditor to enter into the agreement for a preference, in order to get his assent to a proposed composition, which assent the creditor had a perfect right to withhold. It is for the benefit of the innocent creditors that the debtor should be able to resist the payment of the preference, and to recover back any payment that has been made. A composition is ordinarily assented to by creditors in order that their debtor may continue a business from which they hope to derive a profit. See Cockshott v. Bennett, 2 Term R. 763. This profit will be the greater, and they may deal with him the more safely, the larger are his assets. It is for their interest that these assets should not be lessened by the payment of the preference, and that they should be increased by the debtor's recovery back of a preference once paid. This is a better reason for requiring equality in a composition than is the supposed right of one creditor to have all other creditors suffer equally with himself. Knight v. Hunt, 5 Bing. 432; Ex parte Oliver, 4 De Gex & S. 354; Jackman v. Mitchell, 13 Ves. 581. It may reasonably be surmised that this interest of the innocent creditors in the debtor's estate, even more than a supposed oppression of the debtor, has led the courts to determine that a debtor, though guilty of the fraud, is not in parti delicto with the preferred creditor, and so may recover back the preference. It has been said, indeed, that there can be no recovery by the debtor where the payment was voluntary, but this statement has been greatly modified. See Atkinson v. Denby, 6 Jurl. & N. 778; Id., 7 Hurl. & N. 934; Crossley v. Moore, 40 N.J.Law, 27. At all events, the voluntariness of the payment should not prevent a recovery by the debtor's trustee in bankruptcy. He represents the creditors, and is not in delicto at all. As to them, the preference is none the less a fraud because voluntarily given by the debtor. See Bean v. Brookmire, 2 Dill. 108, Fed. Cas. No. 1,170; Middleton v. Lord Onslow, 1 P.Wms. 768; Eastabrook v. Scott, 3 Ves. 456; Alsager v. Spalding, 4 Bing.N.C. 407.

Thus far the decisions mainly agree. If, however, the only penalty for the preference given and received is a liability to repay it by the creditor preferred, manifestly there is little to deter that creditor from receiving, and nothing to prevent the debtor from giving, the preference. The former can but lose it. In no case will he be worse off than if he had been honest. The latter is provided with an opportunity to play fast and loose with the preferred creditor, as well as with creditors who are innocent. Many courts have declared,...