In re Pease

• Decision Date: 01 October 1902
• Citation: 129 F. 446
• Parties: In re PEASE.
• Court: U.S. District Court — Eastern District of Michigan

129 F. 446

In re PEASE.

United States District Court, E.D. Michigan, Northern Division.

October 1, 1902

Chittenden & Chittenden, for appellant.

Chauncy H. Gage and Searl & Montfort, for appellee.

SWAN District Judge.

The bankrupt's intent to prefer Littman & Hoffstadt and the other creditors, to pay whom he borrowed the $3,500, is conclusively shown by the facts, and was known to the agent of the trust company. Nor is there any question but that the intent and effect of the mortgage was to hinder or delay, if not defraud, his creditors. In re Goldschmidt, 3 Nat.Bankr.R. 168, 169, Fed.Cas.No. 5,520; In re McLam (D.C.) 97 F. 922.

The giving of the mortgage, therefore, was an act of bankruptcy under subdivision 1, Sec. 3, c. 541, Bankr.Act July 1, 1898 30 Stat. 546, 547 (U.St.Comp.St. 1901, p. 3422), without regard to Pease's financial condition at the time. Insolvency of the debtor is not an element of that subdivision. Pease, being insolvent October 12, 1900, as is conceded, by the payment of Littman & Hoffstadt and his creditors for money borrowed, with the intent to prefer them over his other creditors, violated subdivision 2 of section 3 of the act. The act of the debtor being a preference, his intent is inferable from his act. In re Black & Secor, 1 Nat.Bankr.R. 361. Is the mortgage a lien upon the bankrupt's estate? By subdivision 'a,' Sec. 67, c 541, Bankr.Act:

'Claims which for want of record or for other reasons would not have been valid liens as against the claims of the creditors of the bankrupt shall not be liens against his estate.'

By subdivision 'd,' Sec. 67:

'Liens given or accepted in good faith and not in contemplation of or in fraud upon this act, and for a present consideration which have been recorded according to law, if record thereof was necessary in order to impart notice, shall not be affected by this act.'

By subdivision 'e,' Sec. 67:

'All conveyances, transfers, assignments or encumbrances of his property or any part thereof made or given by a bankrupt' within the specified period 'with the intent and purpose of his part to hinder, delay or defraud his creditors or any of them shall be null and void as against the creditors of such debtor, except as to purchasers in good faith and for a present fair consideration. * * * '

By subdivision 'b,' Sec. 67:

'Whenever a creditor is prevented from enforcing his rights as against a lien created or attempted to be created by his debtor, who afterwards becomes a bankrupt, the trustees of the estate of such bankrupt shall be subrogated to and may enforce such rights of such creditors for the benefit of the estate.'

It seems clear that these several subdivisions have a common purpose, and should be read together as collectively definitive of the essentials of a valid lien. It follows that no person can be a 'purchaser in good faith' of any part of the bankrupt's estate, if title or security was accepted 'in contemplation of or in fraud upon' the bankrupt act, or if for any reason it would not have been valid against the claims of creditors of the bankrupt. The propositions that advances may be lawfully made in good faith to a debtor to carry on his business, and that the lender may lawfully take security at the time for such advances without violating the bankrupt act, are beyond denial. 'It makes no difference,' says the court in Tiffany v. Boatman's Inst., 18 Wall. 375, 21 L.Ed. 868, 'that the lender had good reason to believe the borrower to be insolvent, if the loan was made in good faith, without any intention to defraud the provisions of the bankrupt act. ' This was held in construction of section 35 of the bankrupt act of 1867, 14 Stat. 534 (Rev.St. Sec. 5129), which avoided 'any conveyance, transfer or other disposition of the property of an insolvent, if the grantee had reasonable cause to believe the grantor insolvent, and that the conveyance was made to prevent the property coming to the assignee in bankruptcy, or to prevent the same from being distributed under the act, or to defraud the object of, or in any way impair, hinder, impede or delay the operation and effect of, or to evade any of the provisions of this title. ' These two elements must have concurred in the transaction to avoid the conveyance. It was not enough that the grantor was believed to be insolvent in order to defeat the title of the grantee, but it must also appear that the grantee knew that the conveyance was made with a view to effect any purpose prohibited by the act. If that is shown, it avoids the transfer. Even though a present fair consideration for property transferred to the hindrance, delay of, or in fraud upon creditors, it will not save the conveyance. 'A sale may be void for bad faith, though the buyer pays the full value of the property bought. ' This is the consequence where his purpose is to aid the seller in perpetrating a fraud upon his creditors, and where he buys recklessly, with guilty knowledge. Clements v. Moore, 6 Wall. 312, 18 L.Ed. 786; Cadogen v. Kenneth, 2 Cowp. 432; Walbrun v. Babbitt, 16 Wall. 581 (bottom), 21 L.Ed. 489.

The decisions under the acts of 1841 and 1867 are to the same effect as Tiffany v. Boatman's Inst., 18 Wall. 375, 21 L.Ed. 868, viz., that it is essential to the validity of security for a loan to one adjudged a bankrupt within four months thereafter that the transfer was had 'without any intention to defraud the provisions of the bankrupt act.'

In Re Butler, 4 Nat.Bankr.R. 308, 120 F. 100, the bankrupt borrowed from one Mendell, upon mortgage of his stock in trade, $1,600 to pay one Cushman, an unsecured creditor, who was pressing for payment. Kimball, a clerk or partner of Cushman's, suggested to the mortgagee the loan to Butler upon security, and to Butler, the bankrupt, that Mendell would probably lend him the money. Mendell made no inquiry into the condition of Butler's affairs, but relied mainly upon the advice of Kimball and Cushman. Judge Lowell held that the money was raised for the express purpose of paying an antecedent debt, and that the intent to prefer the creditor was plainly inferable; that the mortgage was out of the ordinary course of the business of the bankrupt, because he was a retail dealer, doing a business of about $100 a day, and a mortgage of such a trader's full stock is a confession of insolvency-- citing Nary v. Merrill, 8 Allen, 451. He dismissed the proceeds of sale of the property. The case is very like that at bar in its main features. In the latter, however, the attorney for the mortgage was also attorney for the principal preferred creditor.

In Bucknam v. Goss, 13 N.B.R. 337, Fed.Cas.No. 2,097, Judge Fox held that a mortgage given by one subsequently adjudged a bankrupt in part to prefer the mortgage as to his claim, and in part to secure a present loan made for the purpose of enabling the debtor to pay another creditor, was entirely void.

In Fox v. Gardner, 21 Wall, 475-480, 22 L.Ed. 685, it is said:

'The right of an insolvent person, before proceedings are commenced against him, to pay a just debt, honestly to sell property for which a just equivalent is received, to borrow money, and give a valid security therefor, are all recognized by the bankrupt act, and all depend upon the same principle. In each case the transaction must be honest, free from all intent to delay or defraud creditors or to give a preference, or to impair the estate. If there is fraud, trickery, or intent to delay or prefer one creditor over others, the transaction cannot stand.'

In the case of In re Soudan Mfg. Co., 113 F. 804, 51 C.C.A. 476, it was held that under section 67d of the bankrupt act the validity of a mortgage given to secure a present loan of money within four months prior to the borrower's bankruptcy does not depend upon his solvency at the time, or upon notice of his financial condition by the mortgagee, actual or constructive; but to invalidate such a mortgage it must be shown that the borrower was insolvent, that the purpose of the loan was to accomplish unlawful preference or otherwise violate the act, and that the lender knew or was chargeable with knowledge of both of such facts. In that case the mortgage was upheld upon the facts in the case, which did not imply insolvency of the borrower.

In Re Beerman, 7 Am.Bankr.R. 431, 112 F. 663, a firm creditor of an insolvent debtor a month before his bankruptcy procured a third person to lend money to pay his debt to the firm upon a mortgage upon the debtor's stock, and a bond of indemnity from the firm against loss, the lender understanding that the money was to go to the firm, and the firm received it. The mortgage was held void under the bankrupt act, since it would enable the creditor to obtain by indirection a preference which he would have been unable to get if he had dealt directly with the debtor. Upon a like state of facts Judge Coxe held a transfer of property by the bankrupt void as a preference. In re Minnie McGee, 5 Am.Bankr.R. 262, 105 F. 895.

The validity of a dealing assailed as a preference is determined by its purpose and effect, and not by its form. In Stern, Falk & Co. v. Trust Co., 7 Am.Bankr.R. 305-308, 112 F. 501, where the creditors of a bankrupt firm were disallowed because they had refused to surrender proceeds of the bankrupt's estate acquired by collusion with the assignee of the bankrupt, Judge Severens said:

'In respect to the means by which the transfer is effected there is no limitation. However devious the method, if the result is that but for the act the creditor acquires property from the debtor which is subject at law or in equity to be appropriated to the satisfaction of the debtor's obligations, that is a transfer, within the meaning of the act.'

Under the act of 1867 it...