1. In order to render a mortgage of real estate made by an
insolvent debtor void as a preference and fraudulent conveyance,
within the meaning of the thirty-fifth section of the Bankrupt Act
of March 2, 1867, c. 176, 14 Stat. 634, it must be affirmatively
shown by his assignee in bankruptcy that the grantee had reasonable
cause to believe that the grantor was insolvent at the time he
executed the mortgage, and that it was made with intent to defeat
the bankrupt law.
2.
Grant v. National Bank, 97 U. S.
80, approved.
The facts are stated in the opinion of the Court.
MR. JUSTICE MILLER delivered the opinion of the Court.
The appellee brought his bill in chancery in the District Court
for the Northern District of Ohio, as assignee in bankruptcy of
Hubbard Colby, to set aside and avoid two mortgages, made to
appellant a short time before proceedings were commenced against
Colby as a bankrupt. The district court rendered a decree against
the assignee, which was reversed on appeal to the circuit court,
the latter holding the mortgages void under the bankrupt law. From
that decree this appeal is taken.
Mrs. Barbour was the widow of Justus S. Barbour, and guardian of
his minor children, and Colby, the bankrupt, was administrator of
said Barbour's estate. He was the brother-in-law of Mrs. Barbour,
whose husband had been dead many years;
Page 103 U. S. 294
and Colby, after administering the estate, had retained in his
hands about $24,000, which he had never paid over to her, as he
should have done.
Colby was a man of reputed wealth and the owner of much valuable
real estate, and it is obvious from the testimony that Mrs. Barbour
reposed unlimited confidence in him and relied on him for the
general management of the estate. On the eleventh day of June,
1873, Mrs. Barbour received a notice from the probate judge to make
a settlement, showing the condition of her accounts as guardian,
and to file a new bond. She filed a new bond, but did not make the
settlement. On September 20, of the same year, she received another
notice, requesting her to file a statement of her account the next
day. She swears in her testimony that she handed both these notices
to Mr. Colby, and requested him to attend to the affair, and that
she relied on him entirely in the matter. On the first day of
October, Colby made two mortgages on distinct parcels of real
estate for the purpose of securing his indebtedness to Melissa A.
Barbour, in her right as widow and as guardian of the minor
children of her husband, in the sum of $22,722.20, then in his
hands, as administrator of the estate of Justus Barbour.
Colby was adjudicated a bankrupt on a petition filed Nov. 3,
1873.
The testimony on which the decree was rendered is very
voluminous, and need not be critically examined here. We think
three propositions of fact are so clearly established that there
can be little doubt about them. They are:
1. That when Colby made the mortgages to Mrs. Barbour he was
insolvent, and knew he was in that condition.
2. That he intended by those mortgages to give Mrs. Barbour a
preference over his other creditors by securing the debt due her
and her children from him as administrator of Barbour's estate.
3. That Mrs. Barbour did not know nor have reasonable cause to
believe that Colby was insolvent when the mortgages were made and
filed for record.
It will be perceived that the conveyances which are here in
question were made, and the proceedings in bankruptcy were
commenced against Colby, before the date at which the Revised
Page 103 U. S. 295
Statutes became the law and before the act of 1874, amendatory
of the bankrupt law, was passed. The validity of these mortgages,
then, so far as they are affected by the bankrupt laws of the
United States, is to be determined by sec. 35 of the original Act
of March 2, 1867, c. 176, 14 Stat. 534. So much of that section as
relates to the question before us reads as follows:
"SEC. 35. And be it further enacted that if any person being
insolvent, or in contemplation of insolvency, within four months
before the filing of the petition by or against him, with a view to
give a preference to any creditor or person having a claim against
him, or who is under any liability for him, procures any part of
his property to be attached, sequestered, or seized on execution,
or makes any payment, pledge, assignment, transfer, or conveyance,
of any part of his property, either directly or indirectly,
absolutely or conditionally, the person receiving such payment,
pledge, assignment, transfer, or conveyance, or to be benefited
thereby, or by such attachment, having reasonable cause to believe
such person is insolvent, and that such attachment, payment,
pledge, assignment, or conveyance is made in fraud of the
provisions of this act, the same shall be void, and the assignee
may recover the property, or the value of it, from the person so
receiving it, or so to be benefited."
The act of making these mortgages by Colby, though he knew that
he was insolvent and knew that he was preferring Mrs. Barbour as a
creditor at the expense of others, is not forbidden by the common
law, and is not a violation of the statute laws of most of the
states of the Union. Nor is it an act forbidden by any general rule
of morals or of abstract justice. It was in fact a meritorious act
aside from the positive rule established by the bankrupt law. He
had long had this money of a confiding widowed sister-in-law and
her orphan children, and while holding it in a fiduciary capacity,
he had used it for his own purposes. He saw her called to account
for it by the probate court, and knew he was unable to refund it.
He also saw the gulf of bankruptcy before him, and before he was
buried beneath its waters, he determined at least to secure this
debt -- the creation of a trust reposed in him. Who shall arraign
him for it in the court of conscience?
If, then, it was forbidden neither by the common law nor by
Page 103 U. S. 296
the statute of the state, nor by the highest sense of honor, it
must be made to appear clearly that it is void under the section of
the bankrupt law which we have quoted, or else it must stand.
It is a fundamental condition of the right of the assignee to
avoid such a conveyance that the person receiving it or to be
benefited thereby should have had reasonable cause to believe that
the person making such conveyance was insolvent and that it was
made in fraud of the Bankrupt Act.
The obvious meaning of this provision is to require the
concurrence of the creditor who gets security for his debt in the
purpose of defeating the Bankrupt Act. Such person must have
reasonable cause to believe the grantor in the conveyance was
insolvent at the time it was executed and that it was made with
intent to defeat the bankrupt law. Both these must exist as facts
which the grantee had reasonable cause to believe. And so careful
was Congress to protect the rights acquired by an honest creditor
that unless bankrupt proceedings are commenced by or against the
debtor within four months after such a preference, it should stand
good, though the creditor knew the debtor was insolvent and knew
that the conveyance was intended to defeat the purpose of the
bankrupt law in securing equality of distribution of the debtor's
property. And this period was reduced by the act of 1874 to two
months.
It has never been denied, so far as we are advised, that it is
necessary for the assignee of the bankrupt, in attacking such a
conveyance, to prove the existence of this reasonable cause of
belief of the debtor's insolvency in the mind of the preferred
party.
The testimony fails to establish that Mrs. Barbour had any
reasonable cause to believe this of Colby. She was a widow, devoted
to her children. Her business affairs were managed for her by
others. Colby was her brother-in-law and friend, and had been the
friend of her deceased husband. He had been reputed for many years
to be a wealthy man. He was known to be the owner of valuable real
estate. All this was well understood by Mrs. Barbour, while she did
not know, and had no reason to suspect, that he was largely in
debt, and his real estate covered by mortgages. Up to the time of
the failure
Page 103 U. S. 297
of the First National Bank of Mansfield, Sept. 26, 1873, very
few persons had any doubt of Colby's entire solvency. The rapid
succession of events in the locality where he and Mrs. Barbour
resided, and their influence upon his condition, as described by
some of the witnesses, might well have been matters of which she
was ignorant. She swears that she was not aware of the effect of
these matters on him, and no one is able to say that she had any
reason to be. Nothing was brought to her notice or attention which
would suggest a suspicion of his insolvency, and her confidence in
him was clearly not shaken.
In
Grant v. National Bank, 97 U. S.
80, this Court said:
"The act very wisely, as we think, instead of making a payment
or a security void for a mere suspicion of the debtor's insolvency,
requires for that purpose that his creditor should have some
reasonable cause to believe him insolvent. He must have knowledge
of some fact or facts calculated to produce such a belief in the
mind of an ordinarily intelligent man."
P.
97 U. S. 82.
Tested by this rule, which, we think, is the sound one, there is no
evidence of any such knowledge brought home to Mrs. Barbour. In
fact, we do not believe that at the time the deeds were executed
she even suspected Colby's insolvency or contemplated his
failure.
It results from this view of the case that the decree of the
circuit court must be reversed and a decree rendered establishing
the validity of the mortgages to her and adjusting the rights of
the parties on that basis.
So ordered.