Irving Trust Co. v. Chase Nat. Bank

• Decision Date: 29 May 1933
• Docket Number: No. 242.,242.
• Citation: 65 F.2d 409
• Parties: IRVING TRUST CO. v. CHASE NAT. BANK.
• Court: U.S. Court of Appeals — Second Circuit

65 F.2d 409 (1933)

IRVING TRUST CO. v. CHASE NAT. BANK.

No. 242.

Circuit Court of Appeals, Second Circuit.

May 29, 1933.

Bernard A. Grossman, of New York City, for appellant.

Rushmore, Bisbee & Stern, of New York City (S. S. Jennings, Jr., of New York City, of counsel), for appellee.

Before L. HAND, SWAN, and CHASE, Circuit Judges.

SWAN, Circuit Judge.

The complaint alleges that the bankrupt corporation, while insolvent and within ten days prior to filing its voluntary petition in bankruptcy, paid its note for $4,000 held by the Chase National Bank, which note was indorsed by two of the bankrupt's officers and directors. It alleges that the payment was made when said officers knew that the bankruptcy of the corporation was imminent, and "with intent and purpose on the part of said Martin Bernstein, Inc., of hindering, delaying and defrauding its creditors," and "with the intent and purpose of benefiting its individual officers and directors, by relieving them of personal liability" with respect to said note; and that the payment was received by the bank in good faith and without knowledge "of the matters set forth herein, except the making and repayment of the loan." Recovery of the payment is prayed on the ground that it was void under section 67e of the Bankruptcy Act (11 USCA § 107 (e). In brief, the complaint sets forth the giving of a preference, but not a voidable preference, to the bank, and seeks to recover it as a fraudulent conveyance by adding an allegation of the bankrupt's intent, unknown to the bank, thereby to hinder, delay, and defraud other creditors. The court below held the complaint insufficient, and the correctness of that ruling is the only issue on appeal.

The Bankruptcy Act recognizes, as did the common law, a distinction between a preferential transfer and a fraudulent conveyance. Section 60 (11 USCA § 96) deals with preferences, subdivision (a) defining them and subdivision (b) specifying the conditions under which they may be recovered by the trustee in bankruptcy. Not all are voidable; only those to creditors charged with knowledge. It is conceded that the complaint does not allege the giving of a voidable preference. Section 67e (11 US CA § 107 (e) deals with the recovery by the trustee of fraudulent conveyances made within four months prior to the filing of the petition in bankruptcy. All transfers of his property by the bankrupt within this period, if made "with the intent and purpose on his part to hinder, delay, or defraud his creditors, or any of them," are declared void, "except as to purchasers in good faith and for a present fair consideration." It is difficult to imagine a preferential transfer which does not incidentally hinder and delay creditors, for, whenever an insolvent debtor pays one of his creditors in full, he thereby puts the cash or property so used beyond the reach of execution by the others. Pro tanto every preference hinders and delays them. If the debtor is aware that it will necessarily have that result, the transfer would seem to be made with an intent to hinder, delay, and defraud the other creditors; yet the securing or paying of an actual debt, in good faith, without any design injurious to creditors beyond that implied in giving the preference, was not deemed a fraudulent conveyance under the principles of the common law and the statute of Elizabeth. Stewart v. Dunham, 115 U. S. 61, 66, 5 S. Ct. 1163, 29 L. Ed. 329; Huntley v. Kingman, 152 U. S. 527, 532, 14 S. Ct. 688, 38 L. Ed. 540; Davis v. Schwartz, 155 U. S. 631, 640, 15 S. Ct. 237, 39 L. Ed. 289. Nor is it so under the Bankruptcy Act. This was definitely declared in Coder v. Arts, 213 U. S. 223, at page 242, 29 S. Ct. 436, 444, 53 L. Ed. 772, 16 Ann. Cas. 1008, where Mr. Justice Day said:

"We are of opinion that Congress, in enacting § 67e, and using the terms `to hinder, delay, or defraud creditors,' intended to adopt them in their well-known meaning as being aimed at conveyances intended to defraud. In § 60 merely preferential transfers are defined, and the terms on which they may be set aside are provided; in § 67e, transfers fraudulent under the well-recognized principles of the common law and the statute of Elizabeth are invalidated."

He then quoted with approval similar statements from Lansing Boiler & Engine Works v. Ryerson, 128 F. 701, 703 (C. C. A. 6), and In re Bloch, 142 F. 674, 676 (C. C. A. 2), and concluded that "to constitute a conveyance voidable under § 67e, actual fraud must be shown" (page 244 of 213 U. S., 29 S. Ct. 436, 444).

The rule of Coder v. Arts, that a mere preference is not voidable as a fraudulent conveyance, has been frequently reaffirmed. Van Iderstine v. Nat. Discount Co., 227 U. S. 575, 583, 33 S. Ct. 343, 57 L. Ed. 652; Dean v. Davis, 242 U. S. 438, 446, 37 S. Ct. 130, 61 L. Ed. 419; Buffum v. Peter Barceloux Co., 53 S. Ct. 539, 77 L. Ed. ___; Richardson v. Germania Bank, 263 F. 320 (C. C. A. 2). But the Supreme Court decisions have not elucidated the circumstances under which it may be accompanied by an actually fraudulent intent such as will bring it under section 67e. If the preferential payment were to be held on a secret trust for the debtor, no doubt this might convert it into a fraudulent conveyance, as suggested by this court in Van Iderstine v. Nat. Discount Co., 174 F. 518, 522. Similarly, a pledge to a creditor may be but a step in a general plan to defraud other creditors, as in Buffum v. Peter Barceloux Co., supra. These are cases where both the transferor and the transferee participate in a design to hinder the former's creditors; hence there is no difficulty in avoiding the transaction as a fraud, though technically it takes the form of a preference.

But the appellant contends that, even where the transferee in no sense participates in the intent of the transferor, but is merely a creditor accepting payment of an honest debt without knowledge that a preference will result or that the debtor was actuated by a purpose other than to pay the debt, the transaction can be set aside upon making proof that in fact the debtor not only intended to prefer the favored creditor, but also intended to defraud his other creditors. How...