A general verdict in an equity case to declare a payment to be
fraudulent preference in favor of the trustee, which was only
advisory, and which was practically demanded by the instructions of
the court, cannot be treated as a finding of intent by the bankrupt
to defraud, of which intent defendant had notice.
There is a difference between intent to defraud and intent to
prefer -- the former is
malum per se and the latter
malum prohibitum, and only to the extent forbidden.
A
bona fide transfer of securities to secure a loan
made to one who immediately thereafter becomes a bankrupt is not an
illegal preference where the person making the loan has no
knowledge that the borrower intends to defraud any of his
creditors, even though he may know that the whole or part of the
money loaned is to be used to pay some of his debts.
Where error is assigned in the circuit court of appeals not only
on refusal of the trial court to set aside the verdict against, but
also for failure to enter a verdict in favor of, defendant, the
circuit court of appeals, if it finds facts justifying such action,
may reverse and order the complaint dismissed.
171 F. 518 affirmed.
Page 227 U. S. 576
The facts, which involve the determination of whether a payment
by a bankrupt constituted an illegal preference, are stated in the
opinion.
Page 227 U. S. 579
MR. JUSTICE LAMAR delivered the opinion of the Court.
Van Iderstine, trustee of Fellerman & Son, brought suit in
the United States District Court for the Southern District of New
York to set aside a transfer of accounts made to the National
Discount Company as security for a loan, alleging that it was a
fraudulent conveyance, and that the lending company was charged
with notice of Fellerman's
Page 227 U. S. 580
intent to defraud. It is unnecessary to state the facts further
than to say that Fellerman and his firm were insolvent, though
rated at $50,000 to $75,000 in the Commercial Reports. Having been
recommended by another merchant, he applied to the Discount Company
to learn the terms on which he could borrow with book accounts as
security. He was informed as to the method of doing business and
the terms on which it would lend money, which, besides interest,
included its customary charge of 5% of the face of the accounts for
services in connection with correspondence, collections, and the
like. He returned in a few days with a number of accounts, and
applied for a loan of $3,000, stating that he was pressed for funds
and needed the money for the purpose of paying a note which matured
that day. The accounts were transferred, the money was advanced,
and Fellerman used it to take up a note, in bank, which had been
indorsed by his son-in law. Two or three days afterwards, another
loan of $1,000 on similar security was made, and the parties are at
issue as to whether the money was used for paying a debt or went
into the general funds of the firm and was checked out for other
purposes. The day following the last loan, a petition in bankruptcy
was filed, and, after adjudication, a trustee was elected. He then
brought this suit to have the transfer set aside and to compel the
Discount Company to account for the collections made by it.
The district judge called in a jury to pass upon the disputed
fact. After the introduction of the evidence, which was very
conflicting, the court charged the law relating to fraudulent
conveyances and the necessity of showing that there had been an
intent on the part of Fellerman to defraud, and that the Discount
Company had knowledge of such purpose. He, however, refused to
charge that it was not fraudulent for the company to advance money
to be used by Fellerman in paying legitimate debts,
Page 227 U. S. 581
and instead instructed them that a preference was as much within
the terms of the act as though Fellerman had concealed the money
from his creditors. The jury made no special finding, but rendered
a general verdict in favor of the trustee. It was approved by the
district judge, who refused to grant a new trial and entered a
judgment against the company.
The circuit court of appeals (174 F. 518) made a statement of
fact in which if found that it was doubtful if Fellerman intended
to defraud, but, if he did, the Discount Company did not know
thereof, and was not charged with knowledge by any of the
circumstances surrounding the transaction or by the fact that
Fellerman borrowed on hard terms, upon the security of book
accounts. It therefore reversed the judgment of the district court,
and directed that the complaint be dismissed. The trustee then
brought the case here by appeal.
The general verdict of the jury cannot be treated as a finding
that there was an intent to defraud of which the Discount Company
had knowledge. For whatever view they may have taken on that issue,
the verdict in favor of the trustee was practically demanded by the
instructions given. For the district court charged in effect that
the transfer was to be treated as a fraudulent conveyance if the
Discount Company made the loan with the knowledge that the money
was to be used in paying an existing debt. The finding can
therefore be treated as the jury's observance of the instructions,
since it was admitted that Fellerman, in applying for the loan,
stated that he needed the money for the purpose of paying a debt
due that day in bank. In the absence of any other special finding
in the case, and bearing in mind that the verdict of the jury was
only advisory, the case being one in equity, we agree with the
circuit court of appeals, which held that the Discount Company had
no knowledge of any intent on the part of Fellerman to defraud. If
so, its decree
Page 227 U. S. 582
directing the complaint to be dismissed must be affirmed unless,
as matter of law, the transfer is to be treated as a fraudulent
conveyance in view of the fact that the company knew that the money
was to be used in paying an existing debt.
Conveyances may be fraudulent because the debtor intends to put
the property and its proceeds beyond the reach of his creditors, or
because he intends to hinder and delay them as a class, or by
preferring one who is favored above the others. There is no
necessary connection between the intent to defraud and that to
prefer, but inasmuch as one of the common incidents of a fraudulent
conveyance is the purpose on the part of the grantor to apply the
proceeds in such manner as to prefer his family or business
connections, the existence of such intent to prefer is an important
matter to be considered in determining whether there was also one
to defraud. But the two purposes are not of the same quality,
either in conscience or in law, and one may exist without the
other. The statute recognizes the difference between the intent to
defraud and the intent to prefer, and also the difference between a
fraudulent and a preferential conveyance. One is inherently and
always vicious, the other innocent and valid except when made in
violation of the express provisions of a statute. One is
malum
per se and the other
malum prohibitum -- and then
only to the extent that it is forbidden. A fraudulent conveyance is
void regardless of its date; a preference is valid unless made
within the prohibited period. It is therefore not, in itself,
unlawful to prefer, nor fraudulent for one, though insolvent, to
borrow in order to use the money in making a preference. So that,
even if the Discount Company knew that Fellerman borrowed the money
in order to pay off an honest debt, the transfer would not have
been subject of attack by the trustee, except for the fact that a
petition in bankruptcy was filed within four months thereafter. But
the institution of
Page 227 U. S. 583
such proceedings did not relate back and convert a lawful
transfer into a fraudulent conveyance.
Cases under the present statute, like
In re Beerman,
112 F. 663, relied on by the trustee, relate to transactions in
which the mortgagee was practically the representative of the
preferred creditor, and where, consequently, the conveyance was as
much subject to attack as though it had been made directly to him.
But here, the Discount Company was not a creditor of Fellerman
& Son, and had no relation with the persons to whom the money
was paid.
National Bank of Newport v. National Bank of
Herkimer, 225 U. S. 178. The
transfer therefore was not a preference to the Discount Company,
and could not be set aside without proof that it knew that
Fellerman not only intended to pay some of his creditors, but to
defraud others. The difference between the two classes of cases is
authoritatively recognized by
Coder v. Arts, 213 U.
S. 223, where it was said that "an attempt to prefer is
not to be confounded with an intent to defraud, nor a preferential
transfer with a fraudulent one."
The circuit court of appeals applied this principle in the
present case. Having found that the Discount Company had no
knowledge of any intent to defraud, and the evidence supporting
that finding, the conveyance cannot be set aside, whether the money
was used to pay an existing debt, or, as claimed, a part was
deposited with the general funds of the firm.
It is contended that, even if the finding of the circuit court
of appeals was correct, it should not have ordered the complaint to
be dismissed, since the company itself only asked for a new trial.
But error was assigned not only on the refusal to set aside the
verdict, but on the failure to enter a decree in favor of the
Discount Company. The facts found by the circuit court of appeals
warranted a dismissal of the complaint, and the decree is
Affirmed.