Payments on a running account, in the usual course of business,
by a person whose property had actually become insufficient to pay
his debts, where new sales succeeded payments and the net result
was to increase his estate, and the seller had no knowledge or
notice of the insolvency and no reason to believe an intention to
prefer, are not preferences, which must be surrendered as a
condition to the allowance of proof of claim under the Bankruptcy
Act of 1898.
Pirie v. Chicago Title and Trust Company, 182 U.
S. 438, in which the decision proceeded on the finding
of facts made pursuant to clause 3 of General Orders in Bankruptcy,
XXXVI, distinguished.
F. N. Woodward
et al. filed their petition in
bankruptcy, and were adjudicated bankrupts November 26, 1901. They
had become insolvent August 15, and on that day were not indebted
to G. Edwin Alden, who afterwards, in ignorance of the insolvency,
made sales to Woodward
et al. and received payments from
them therefor in the regular course of business,
Page 189 U. S. 79
and without any idea or intention on the part of Alden of
obtaining a preference thereby, the sales and payments being as
follows:
Sales
Aug. 17, 1901 Rubber . . . . . . . . . . . . . . $289.46
" 28, " " . . . . . . . . . . . . . . 657.89
Sept. 30, " " . . . . . . . . . . . . . . 644.28
Oct. 18, " " . . . . . . . . . . . . . . 535.99
Oct. 18, " Cartage. . . . . . . . . . . . . . .50
" 31, " Asbestine. . . . . . . . . . . . . 10.40
Payments
Sept. 4, 1901 Payment of bill Aug. 17. . . . . . $289.46
Sept. 28, 1901 Payment of bill Aug. 28. . . . . . 657.89
Oct. 29, 1901 Payment of bill Sept. 30 . . . . . 644.28
The merchandise sold Woodward
et al. was manufactured
by them, and the result of the transactions was to increase their
estate in value. Alden petitioned to be allowed to prove his claim
of $546.89.
The referee disallowed the claim unless at least the amount of
$633.88 was surrendered to the estate. The district judge reversed
the judgment of the referee and allowed the claim, and the decree
of the district court was affirmed by the circuit court of appeals,
118 F. 270, on the authority of
Dickson v. Wyman, 111 F.
726. Thereupon an appeal to this Court was allowed and a
certificate granted under section 25,
b, 2.
MR. CHIEF JUSTICE FULLER delivered the opinion of the Court.
The facts found established that, on August 15, the
aggregate
Page 189 U. S. 80
of the property of the bankrupts was not at a fair valuation,
sufficient in amount to pay their debts, but that Alden was
ignorant of this, and, in good faith and in the regular course of
business, sold material to the bankrupts, and received payment
therefor several times between August 15 and November 26, when the
petition was filed, on which day the amount of $546.89 for material
delivered shortly before had not been paid. All the material so
sold to them was manufactured by the bankrupts, and increased their
estate in value.
The question is whether the payments made to Alden (or either of
them) were preferences within section 60 of the Bankruptcy Act of
1898 which must be surrendered, under section 57
g, before
his claim could be allowed.
Provisions of the act bearing on the subject are given below.
*
Page 189 U. S. 81
In
Pirie v. Chicago Title & Trust Company,
182 U. S. 438, the
Circuit Court of Appeals for the Seventh Circuit had affirmed an
order of the District Court for the Northern District of Illinois
rejecting a claim of Carson, Pirie & Company against the estate
of Frank Brothers, bankrupts, and the case was then brought to this
Court on findings of fact and conclusions of law of the circuit
court of appeals, made and filed "pursuant to the requirements of
subdivision 3, Rule 36 of General Orders in Bankruptcy." The first
three of the findings were as follows:
"First. That on February 11, 1899, August Frank, Joseph Frank,
and Louis Frank, trading as Frank Brothers, were duly adjudged
bankrupts."
"Second. That for a long time prior thereto, appellants carried
on dealings with the said bankrupt firm, said dealings consisting
of a sale by said appellants to said Frank Brothers of goods,
wares, and merchandise amounting to the total sum of
$4,403.77."
"Third. That said appellants, in the regular and ordinary
Page 189 U. S. 82
course of business, and within four months prior to the
adjudication in bankruptcy herein, did collect and receive from
said bankrupts as partial payment of said account for such goods,
wares, and merchandise so sold and delivered to said Frank
Brothers, the sum of $1,336.79, leaving a balance due, owing and
unpaid, amounting to $3,093.98."
It was further found that, at the time this payment was made,
Frank Brothers were hopelessly insolvent, to their knowledge; but
that Carson, Pirie & Company had no knowledge of such
insolvency, nor had reasonable cause to believe that it existed;
nor did they have reasonable cause to believe that the bankrupts,
by the payment, intended thereby to give a preference, and that
they had refused to surrender to the trustee the amount of the
payment made to them by the bankrupts as a condition of the
allowance of their claim. Upon the facts, the circuit court of
appeals concluded as matter of law that the payment made "at the
time and in the manner above shown" constituted a preference, and
that, by reason of the failure and refusal of Carson, Pirie &
Company to surrender the preference, they were not entitled to
prove their claim.
The judgment below was affirmed by this Court, and it was held
that a payment of money was a transfer of property, and when made
on an antecedent debt by an insolvent was a preference within
section 60
a, although the creditor was ignorant of the
insolvency, and had no reasonable cause to believe that a
preference was intended. The estate of the insolvent, as it existed
at the date of the insolvency, was diminished by the payment, and
the creditor who received it was enabled to obtain a greater
percentage of his debt than any other of the creditors of the same
class.
In the present case, all the rubber was sold and delivered after
the bankrupts' property had actually become insufficient to pay
their debts, and their estate was increased in value thereby to an
amount in excess of the payments made. The account was a running
account, and the effect of the payments was to keep it alive by the
extension of new credits, with the net result of a gain to the
estate of $546.89, and a loss to the seller of that amount, less
such dividends as the estate might
Page 189 U. S. 83
pay. In these circumstances, the payments were no more
preferences than if the purchases had been for cash, and, as parts
of one continuous
bona fide transaction, the law does not
demand the segregation of the purchases into independent items so
as to create distinct preexisting debts, thereby putting the seller
in the same class as creditors already so situated, and impressing
payments with the character of the acquisition of a greater
percentage of a total indebtedness thus made up.
We do not think the slight variation in the dates of sales and
payments affords sufficient ground for the distinction put forward
by counsel between the payments of September 4 and 28 and the
payment of October 29 (which he concedes should be upheld) in their
relation to the rubber furnished August 17 and 28 and September 30.
All the material was sold and delivered after August 15, and
neither of the items can properly be singled out as constituting
outstanding indebtedness, payment of which operated as a
preference.
The facts as found in
Pirie v. Chicago Title & Trust
Company, were so entirely different from those existing here
that this case is not controlled by that. In view of similar vital
differences, it has been held by the Circuit Court of Appeals for
the First Circuit,
Dickson v. Wyman, 111 F. 726; Second
Circuit,
In re Sagor and Brother, 9 Am.Bank.Rep. 361;
Third Circuit,
Gaas v. Ellison, 114 F. 734; Eighth
Circuit,
Kimball v. Rosenham Company, 114 F. 85, that
payments on a running account, where new sales succeed payments,
and the net result is to increase the value of the estate, do not
constitute preferential transfers under section 60
a.
Judgment affirmed.
MR. JUSTICE WHITE and MR. JUSTICE McKENNA, not being able to
concur in the reasons by which the Court, in the opinion just
announced, distinguishes this case from that of
Pirie v.
Chicago Title & Trust Co., and deeming the latter case
controlling in this, dissent.
* SECTION. 1
a. The words and phrases used in this act
and in proceedings pursuant hereto shall, unless the same be
inconsistent with the context, be construed as follows: . . . (9)
"creditor" shall include anyone who owns a demand or claim provable
in bankruptcy, and may include his duly authorized agent, attorney,
or proxy; (10) "date of bankruptcy," or "time of bankruptcy," or
"commencement of proceedings," or "bankruptcy," with reference to
time, shall mean the date when the petition was filed; (11) "debt"
shall include any debt, demand, or claim provable in bankruptcy; .
. . (15) a person shall be deemed insolvent within the provisions
of this act whenever the aggregate of his property, exclusive of
any property which he may have conveyed, transferred, concealed, or
removed, or permitted to be concealed or removed, with intent to
defraud, hinder, or delay his creditors, shall not at a fair
valuation, be sufficient in amount to pay his debts.
"SEC. 3
a. Acts of bankruptcy by a person shall consist
of his having (1) conveyed, transferred, concealed, or removed, or
permitted to be concealed or removed, any part of his property with
intent to hinder, delay, or defraud his creditors, or any of them;
or (2) transferred, while insolvent, any portion of his property to
one or more of his creditors with intent to prefer such creditors
over his other creditors; or (3) suffered or permitted, while
insolvent, any creditor to obtain a preference through legal
proceedings, and not having at least five days before a sale or
final disposition of any property affected by such preference,
vacated or discharged such preference; or (4) made a general
assignment for the benefit of his creditors; or (5) admitted in
writing his inability to pay his debts and his willingness to be
adjudged a bankrupt on that ground."
"SEC. 60
a. A person shall be deemed to have given a
preference if, being insolvent, he has procured or suffered a
judgment to be entered against himself in favor of any person, or
made a transfer of any of his property, and the effect of the
enforcement of such judgment or transfer will be to enable any one
of his creditors to obtain a greater percentage of his debt than
any other of such creditors of the same class."
"
b. If a bankrupt shall have given a preference within
four months before the filing of a petition, or after the filing of
the petition and before the adjudication, and the person receiving
it, or to be benefited thereby, or his agent acting therein, shall
have had reasonable cause to believe that it was intended thereby
to give a preference, it shall be voidable by the trustee, and he
may recover the property, or its value from such person."
"
c. If a creditor has been preferred, and afterwards,
in good faith, gives the debtor further credit, without security of
any kind, for property which becomes a part of the debtor's
estates, the amount of such new credit remaining unpaid at the time
of the adjudication in bankruptcy may be set off against the amount
which would otherwise be recoverable from him."
"SEC. 57
g. The claims of creditors who have received
preferences shall not be allowed unless such creditors shall
surrender their preferences."
"SEC. 68
a. In all cases of mutual debts or mutual
credits between the estate of a bankrupt and a creditor, the
account shall be stated and one debt shall be set off against the
other, and the balance only shall be allowed or paid."