Rubenstein v. Lottow

• Decision Date: 03 March 1916
• Citation: 223 Mass. 227,111 N.E. 973
• Parties: RUBENSTEIN v. LOTTOW.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

223 Mass. 227

111 N.E. 973

RUBENSTEIN

v.LOTTOW.

Supreme Judicial Court of Massachusetts, Suffolk.

March 3, 1916.

Appeal from Superior Court, Suffolk County; Marcus Morton, Judge.

Suit by Philip Rubenstein, trustee in bankruptcy of Julius Setlin, against Louis Lottow. Decree for plaintiff, and defendant appeals. Affirmed.

Lee M. Friedman and Samuel J. Freedman, both of Boston, for appellant.

David A. Ellis and Philip Rubenstein, both of Boston, for appellee.

RUGG, C. J.

This case was considered in 220 Mass. 156, 107 N. E. 718, where the facts as they then appeared are stated at length. In accordance with the rescript there ordered, a new trial has been had upon certain issues. The facts now disclosed, new or different from those there set forth and material to the present decision, will be adverted to, so far as necessary. Several questions are presented.

I. Were the book accounts assigned to the defendant at that time the property of Setlin, the bankrupt, or of the firm Setlin & Smith, of which he was a member? The trial judge, after a hearing at which the various persons who knew the facts have testified orally before him, has found that these accounts were the property of Setlin. Under the familiar rule, that finding will not be disturbed unless plainly wrong, although it is the duty of this court to examine the printed evidence and decide the case according to its judgment, giving due weight to the conclusions of the magistrate who saw the witnesses. A careful examination of the record convinces us that this finding ought to stand. It is not necessary, however, to analyze or to recapitulate the testimony. Jennings v. Demon, 194 Mass. 108, 80 N. E. 471;Sawyer v. Clark, 214 Mass. 124, 100 N. E. 1079;Rubenstein v. Lottow, 220 Mass. 156, 165, 107 N. E. 718.

II. The second question is whether Setlin was insolvent at the time of the assignment of these book accounts. The trial judge found that he was. This finding is assailed on the ground that in making the account of Setlin's assets and liabilities the debts of the partnership of Setlin & Smith, of which Setlin was a member, for the debts of which he of course was liable jointly with his partner, and whose debts on its dissolution he had agreed to pay, were added to Setin's personal debts. In this there was no error of law. It was the correct way to ascertain the entire indebtedness of Setlin. Francis v. McNeal, 228 U. S. 695, 700, 33 Sup. Ct. 701, 57 L. Ed. 1029, L. R. A. 1915E, 706.

III. The third question is, whether the effect of the transfer of these book accounts to the defendant ‘will be to enable’ him to obtain a greater percentage of his debt than other creditors of the same class.

It was held, when the case was here before, that individual creditors and partnership creditors were not of the same class. Following and applying that decision, the trial judge found that:

‘If the effect of the enforcement of the transfer to Lottow be determined as of July 30th, I find that Lottow would not obtain a greater percentage of his debt than other creditors of the same class. If the said effect is to be determined as of October third, I find that it would enable Lottow to obtain a much greater percentage.’

An examination of the evidence discloses no reason why this finding of fact should be overturned. The question of law which arises in the light of these facts is whether in bankruptcy the preferential character of a transfer of property is to be determined as of the date of the transfer, July 30, 1912, or of the filing of the petition in bankruptcy, October 3, 1912.

We are of opinion that the judge ruled rightly that the decisive date was that of filing the petition.

As a matter of verbal construction, the governing section of the Bankruptcy Act leads to this conclusion. The pertinent words of the Bankruptcy Act are as in the footnote.¹ They express futurity. Whether ‘the effect of the enforcement’ of the transfer ‘will be to enable’ one creditor to get a larger precentage of his debt than other like creditors by implication reaches forward to a time when an authoritative distribution can be made. Not until then can the respective percentages be determined with conclusiveness. If the time of the transfer had been the crucial time, the word ‘enables' naturally would have been used instead of the words ‘will be to enable’ found in the act. The words ‘effect of the enforcement of such * * * transfer’ also import adjudicated bankruptcy rather than the time of transfer. There can be no occasion for an ‘enforcement of * * * such transfer’ until a petition in bankruptcy. A transfer of property by a debtor to his creditor apart from statute, takes effect and is enforced automatically at once. There is no fraud at common law about such transfer not exceeding in value the amount of the debt, even though a preference of one creditor over another is thereby produced. Lyon v. Wallace, 221 Mass. 351, 108 N. E. 1075. It needs no procedure to enforce it, but becomes enforced by the mere transfer. A question touching its enforcement does not arise until adjudicated bankruptcy intervences. ‘The effect’ of the enforcement cannot be settled until then. It seems indubitably to follow that its effect must be decided upon conditions as they then exist. The words ‘creditors of the same class' betoken adjudicated bankruptcy as the time for the application of the test. These words have no meaning except in connection with administration in bankruptcy. There are no classes of creditors at common law outside the Bankruptcy Act.

The bankruptcy court necessarily decides what the percentage then due to other creditors of all classes will be. That is one of the essential steps in its procedure. It would seem a stange anomaly to compel that court to try out and decide another question of percentages relating to another time. If the defendant's contention is sound, the bankruptcy court well might be required, in the case of successive preferences, to enter into prolonged investigations as to the precise ratio to each other of the bankrupt's debts and liabilities at numerous different dates within the four months' period preceding the filing of the petition. Such judicial investigations inevitably would cause expense to the public and to the trustee representing the other creditors, and could confer no advantage on the debtor. They could benefit no one except a creditor who had accepted a preference, having reasonable cause to believe that he thereby was securing a preference from a bankrupt debtor. It cannot be presumed that such extreme solicitude at such cost would be manifested by the law for such a creditor, in the absence of words expressing an unmistakable purpose to that end. The words of the act disclose no such design. On the contrary, they tend in the opposite direction.

The interpretation urged would result in inequality of distribution of the debtor's assets among his creditors. Equality of distribution is one of the fundamental objects of a bankrupt law. The indebtedness of a business man often gradually progresses from a neascent state of insolvency to the point where a petition in bankruptcy is filed. Beginning with a bare excess of debts over assets, he may go through the gamut to a very large and disproportionate excess in this respect. Preferences during such a period of declining ratio of assets to debts, adjusted according to the theory of the law now put forward, would result in a sliding scale of inequality between the various preferred creditors, as well as inequality between all creditors who have obtained preferences and the general creditors who depend upon the equality of the law to protect their interests against the alertness of creditors seeking unequal advantages through their own keenness in scenting approaching bankruptcy.

A plausible argument in favor of the defendant's contention is grounded on the provision in section 60b (U. S. Comp. St. 1913, § 9644), that one element of a voidable preference is that the person receiving the transfer ‘shall then have reasonable cause to believe that the enforcement of * * * such transfer would effect a preference.’ In this connection the intent of the debtor is not now significant. The only elements required by the act are the fact of insolvency at the time of the transfer and the...