In the absence of any proof to that effect in the record, a
promise by the bankrupt made between the petition and the discharge
to pay the balance of his provable debt to one of his creditors who
advanced money to enable him to effect a composition without
obtaining any undue preference over the other creditors will not be
regarded as an act of extortion or attempted extortion in violation
of § 29b 5 of the Bankruptcy Act, prohibiting acting or forbearing
to act in bankruptcy proceedings.
A discharge, while releasing the bankrupt from legal liability
to pay a provable debt, leaves him under a moral obligation that is
sufficient to support a new promise to pay it.
The theory of bankruptcy is that the discharge does not destroy
the debt, but does destroy the remedy.
Page 227 U. S. 626
As a general rule, the discharge, when granted, relates back to
the inception of the proceeding, and the bankrupt becomes a free
man as to new transactions as of the date of the transfer of his
property to the trustee.
This Court, by promulgating General Orders and Form in
Bankruptcy, construed § 63a 4 as confining the discharge to
provable debts existing on the day of the petition and having it
relate back thereto.
Under the Bankruptcy Act of 1898, an express promise to pay a
provable debt is good although made after the petition and before
the discharge.
Obligations created after the filing of the petition and before
the discharge are not provable under § 63, and therefore are not
included in the discharge.
As § 12 of the Bankruptcy At requires that money for effecting
the composition be deposited before the application to authorize
it, it contemplates that the bankrupt may acquire such money by use
of his credit.
171 Ala. 401 affirmed.
The facts, which involve the validity of an express promise by
the bankrupt to pay a provable debt made after the petition and
before the discharge, are stated in the opinion.
MR. JUSTICE PITNEY delivered the opinion of the Court.
Defendants in error sued plaintiff in error November 22, 1907,
in the City Court of Birmingham, Alabama, declaring upon the common
counts for moneys due December 10, 1906, and February 19, 1906, and
by an amendment declared upon a promissory note for about $250,
which was a part of a claim of the defendants in error that
antedated the bankruptcy of the plaintiff in error. The defendant
(now plaintiff in error) pleaded that, on November 22, 1905, he
filed in the district court of the United States
Page 227 U. S. 627
for the Northern District of Alabama his petition in bankruptcy;
that said court had jurisdiction of said bankruptcy proceedings,
and duly adjudicated him a bankrupt on that date; that subsequently
he offered a composition to his creditors, and the offer was
accepted and a composition made in said proceedings and duly
confirmed by said district court February 6, 1906, a certified copy
of the decree of confirmation being attached to and made a part of
the plea; that the plaintiffs were then creditors of the bankrupt,
and as such accepted the offer of composition and were paid a
dividend thereon; that the claim sued on herein is a part of and
was included in said claim on which said dividend was paid, and the
claim herein is barred by said proceedings and discharged by said
composition. The plaintiffs replied (a) that, on January 1, 1906
(which date was after the adjudication and before the discharge),
defendant promised that, if plaintiffs would lend him $500 for use
in paying the consideration of a composition with his creditors in
said bankruptcy proceedings, he, defendant, when said composition
was confirmed, would pay plaintiffs the balance of the demand sued
on, after deducting therefrom plaintiffs' share of the
consideration of such composition, and plaintiffs averred that they
accepted defendant's said offer and promise, and did so lend him
the said sum of $500 for the said purpose, and (b) for further
replication, that, after the filing of defendants' said petition in
bankruptcy, and after he had been adjudged a bankrupt, defendant
promised plaintiffs that he would pay what he owed them, being the
same demand sued on herein, when his composition in bankruptcy was
confirmed, and that plaintiffs accepted said promise. To these
replications the defendant demurred. The city court overruled the
demurrers and proceeded to a trial of the issues of fact, which
resulted in favor of the plaintiffs upon both the common counts and
the note. The defendant appealed
Page 227 U. S. 628
to the Supreme Court of Alabama, which affirmed the judgment.
171 Ala. 401. Whereupon he sued out the present writ of error.
The case is brought here under § 709, Rev.Stat., the contention
being that a right or immunity set up and claimed by the plaintiff
in error under the Federal Bankruptcy Act was denied by the state
court.
See Linton v.
Stanton, 12 How. 423;
Mays v. Fritton, 131
U.S. Appendix cxiv;
Hill v. Harding, 107 U.
S. 631;
Rector v. City Deposit Bank,
200 U. S. 405.
It is not contended that the record imports a secret or
fraudulent agreement between the bankrupt and the plaintiffs at the
expense of other creditors. The state court construed the
replications as not averring secrecy or fraud, saying (171 Ala.
408):
"That an advantage accrued to plaintiffs as the result of the
loan is true; but that it came as a result of fraud, collusion, or
extortion, cannot be read from these replications. On the contrary,
the advantage, so far as the pleadings show, was the result of the
advancement made by way of the loan described. There is nothing in
the replications on which to rest a conclusion that anything other
than the loan induced the promise relied on for recovery here."
This construction of the pleadings is not disputed here. We
therefore are not in this case concerned with the general equitable
principle that composition agreements are invalid if based upon or
procured by a secret arrangement with one or more favored
creditors, in violation of the equality and reciprocity upon which
such an agreement is avowedly based. Story, Eq.Jurisp. (9th ed.),
§§ 378, 379;
Clarke v.
White, 12 Pet. 178,
37 U. S. 199;
Wood v. Barker, L.R. 1 Eq. 139;
McKewan v.
Sanderson, L.R. 20 Eq. 65;
Bissell v. Jones, L.R. 4
Q.B. 49;
Ex Parte Nicholson, L.R. 5 Ch. 332;
Crossley
v. Moore, 40 N.J.L. 27, 34;
Feldman v. Gamble, 26
N.J.Eq. 494;
Dicks v. Andrews, 132 Ga. 601, 604.
Page 227 U. S. 629
Of the questions raised, only three deserve notice.
(1) It is contended that the transaction set up in the former of
the two replications mentioned was in violation of the prohibition
of § 29b 5 of the Bankruptcy Act (30 Stat. c. 541, pp. 544, 554),
which declares that
"a person shall be punished, by imprisonment for a period not to
exceed two years, upon conviction of the offense of having
knowingly and fraudulently . . . extorted or attempted to extort
any money or property from any person as a consideration for acting
or forbearing to act in bankruptcy proceedings."
It is sufficient to say that we are unable to see in this record
anything of extortion or attempted extortion.
(2) It is contended as to both replications that, although a
debt barred by discharge in bankruptcy may be revived by a new
promise made after the discharge, this cannot be done by a new
promise made in the interim between the adjudication and the
discharge.
It is settled, however, that a discharge, while releasing the
bankrupt from legal liability to pay a debt that was provable in
the bankruptcy, leaves him under a moral obligation that is
sufficient to support a new promise to pay the debt. And in reason
as well as by the greater weight of authority, the date of the new
promise is immaterial. The theory is that the discharge destroys
the remedy, but not the indebtedness; that, generally speaking, it
relates to the inception of the proceedings, and the transfer of
the bankrupt's estate for the benefit of creditors takes effect as
of the same time; that the bankrupt becomes a free man from the
time to which the discharge relates, and is as competent to bind
himself by a promise to pay an antecedent obligation, which
otherwise would not be actionable because of the discharge, as he
is to enter into any new engagement. And so, under other bankrupt
acts, it has been commonly held that a promise to pay a provable
debt, notwithstanding the discharge,
Page 227 U. S. 630
is as effectual when made after the filing of the petition and
before the discharge as if made after the discharge.
Kirkpatrick v. Tattersall, 13 Mees. & W. 766;
Otis
v. Gazlin, 31 Me. 569;
Hornthal v. McRae, 67 N.C. 21;
Fraley v. Kelly, 67 N.C. 78;
Hill v. Trainer, 49
Wis. 537;
Knapp v. Hoyt, 57 Ia. 591;
Lanagin v.
Nowland, 44 Ark. 84;
Wiggin v. Hodgdon, 63 N.H. 39;
Griel v. Solomon, 82 Ala. 85;
Jersey City Ins. Co. v.
Archer, 122 N.Y. 376.
Our attention is not called to any decision in point arising
under the present Bankruptcy Act, but we deem it clear that the
same rule should be applied. If there is any distinction between
this and former acts that would require a different rule, it must
arise from the time to which the discharge is made to relate. As to
this, § 17 of the Act of 1898 declares that "a discharge in
bankruptcy shall release a bankrupt from all his provable debts,"
with certain exceptions not now pertinent. For the definition of
"provable debts" we are referred to § 63, which is set forth in
full in the margin.
* Of the
several
Page 227 U. S. 631
classes of liabilities, those in clauses 1, 2, and 3 are in
terms described as existing at or before the filing of the
petition. Clause 5 relates to liabilities "founded upon provable
debts reduced to judgment after the filing of the petition," etc.,
plainly meaning that they arose before its filing. Clause 4
describes simply debts that are "founded upon an open account, or
upon a contract, express or implied," not in terms referring to the
time of the inception of the indebtedness. But, reading the whole
of § 63, and considering it in connection with the spirit and
purpose of the act, we deem it plain that the debts founded upon
open account or upon contract, express or implied, that are
provable under § 63a 4 include only such as existed at the time of
the filing of the petition in bankruptcy. This Court in effect
adopted that construction when, in promulgating the General Orders
and Forms in Bankruptcy, 1898, under the authority conferred by §
30, a form of discharge was prescribed (Forms in Bankruptcy, No.
59), by which it is ordered that the bankrupt
"be discharged from all debts and claims which are made provable
by said acts against his estate, and which existed on the ___ day
of ___, A.D. ___, on which day the petition for adjudication was
filed him; excepting such debts as are by law excepted from the
operation of a discharge in bankruptcy."
And the forms prescribed for proof of debts all declare that the
indebtedness existed "an and before the filing of the said
petition." Forms 31 to 36, inclusive. The General Orders and Forms,
etc., are to be found in 172 U.S. Appendix; 89 F., Preface; 32
C.C.A., Preface; 3 Foster's Fed.Pract. (4th ed.) 2526, 2559,
2572.
The view above expressed as to clause 4 of § 63a is the same
that has been generally adopted in the federal district courts.
In re Burka, 104 F. 326;
In re
Page 227 U. S. 632
Swift, 112 F. 315, 321;
In re Adams, 130 F.
381;
Coleman Co. v. Withoft, 195 F. 250, 252,
and see
In re Roth, 181 F. 667, 673.
And so, upon the whole matter, we conclude that, under the
present act an express promise to pay a provable debt is good
although made after the filing of the petition and before
discharge.
3. What has been said disposes at the same time of the
contention that the promises set up in the two replications under
consideration were discharged by the confirmation of the
composition. As these obligations were entered into after the
adjudication of bankruptcy, they were, of course, not provable
under § 63, and only provable debts are discharged.
With respect to the money loaned to the bankrupt for use in
paying the consideration of the composition, it is perhaps
worthwhile to remark that § 12 of the act, in prescribing the time
and mode of offering terms of composition, plainly contemplates
that a composition in money may be offered, and expressly
prescribes that an application for the confirmation of a
composition may be made after, but not before,
"the consideration to be paid by the bankrupt to his creditors,
and the money necessary to pay all debts which have priority, and
the cost of the proceedings, have been deposited in such place as
shall be designated by, and subject to the order of, the
judge."
And the same section provides that, "upon the confirmation of a
composition, the consideration shall be distributed as the judge
shall direct, and the case dismissed."
The act, of course, contemplates that the bankrupt may acquire
the money required for the purposes of the composition by the use
of his credit.
Judgment affirmed.
*
"SEC. 63. DEBTS WHICH MAY BE PROVED. --
a. Debts of the
bankrupt may be proved and allowed against his estate which are (1)
a fixed liability, as evidenced by a judgment or an instrument in
writing, absolutely owing at the time of the filing of the petition
against him, whether then payable or not, with any interest thereon
which would have been recoverable at that date, or with a rebate of
interest upon such as were not then payable and did not bear
interest; (2) due as costs taxable against an involuntary bankrupt
who was at the time of the filing of the petition against him,
plaintiff in a cause of action which would pass to the trustee, and
which the trustee declines to prosecute after notice; (3) founded
upon a claim for taxable costs incurred in good faith by a creditor
before the filing of the petition in an action to recover a
provable debt; (4) founded upon an open account, or upon a
contract, express or implied, and (5) founded upon provable debts
reduced to judgments after the filing of the petition and before
the consideration of the bankrupt's application for a discharge,
less costs incurred and interests accrued after the filing of the
petition and up to the time of the entry of such judgments."
"
b. Unliquidated claims against the bankrupt may,
pursuant to application to the court, be liquidated in such manner
as it shall direct, and may thereafter be proved and allowed
against his estate."