A transfer of property by an insolvent, made to secure a
contemporaneous loan of money which the lender advances, and the
insolvent obtains and uses, for the discharge of a preexisting debt
of the insolvent to a third party, in which the lender has no
interest, is not a preference of the lender within § 60b of the
Bankruptcy Act, as amended February 5, 1903, 32 Stat. 797, 800.
A transfer, the intent or obviously necessary effect of which is
to deprive creditors of the benefits sought to be secured by the
Bankruptcy Act, "hinders, delays, or defrauds creditors" within the
meaning of § 67e.
An insolvent borrowed money of a relative and secured it by a
contemporaneous mortgage of all his property, which was recorded.
The money was sought, advanced, and used to satisfy one of his
preexisting debts and thus enable him to escape a criminal
prosecution. Mortgagee and insolvent both knew of the insolvency,
and the circumstances were such that both must. have anticipated
the suspension of business and bankruptcy which followed the
recording of the mortgage.
Held that these facts warranted
the district court and circuit court of appeals in concluding that
the insolvent intended to defraud his creditors within the meaning
of § 67e and that the mortgagee was not a purchaser or lienor in
good
Page 242 U. S. 439
faith (§§ 67e, 67d).
Van Iderstine v. National Discount
Co., 227 U. S. 575,
227 U. S. 582;
Coder v. Arts, 213 U. S. 223,
213 U. S.
244.
A decree avoiding a transfer a fraudulent will not be disturbed
upon the ground that it exceeds the pleading where the bill, though
attacking the transfer mainly as an unlawful preference, contains
enough, with the answer, to present the issue of fraud, where that
issue was fully tried, and the question of variance is first raised
in this Court.
212 F. 88 affirmed.
The case is stated in the opinion.
Page 242 U. S. 441
MR. JUSTICE BRANDEIS delivered the opinion of the Court.
The Bankruptcy Act, as amended Feb. 5, 1903, provides in § 60b
that if a debtor has, within four months before the filing of the
petition in bankruptcy, made a transfer which the person receiving
the same has reason to believe was intended to give a preference,
the transfer
Page 242 U. S. 442
shall be voidable, and the trustee in bankruptcy may recover the
property or its value. The act also provides in § 67e (30 Stat.
564) that, if a debtor, within four months before the filing of the
petition in bankruptcy, makes any transfer "with the intent and
purpose on his part to hinder, delay or defraud his creditors, or
any of them," it shall be null and void except as to purchasers in
good faith and for a present fair consideration, and that it shall
be the duty of the trustee to recover the same.
R. Crawley Jones was a farmer and owner of a country store. A
bank, having discounted his notes bearing indorsements which it
later concluded had been forged, demanded that Jones take up the
notes. Fearing arrest, he appealed through his father to his
brother-in-law, Dean, for a loan of $1,600, promising to secure it
by a mortgage of all his property, which he represented was worth
more than five times that amount. Dean provided the money, and on
September 3, 1909, acting in conjunction with Jones' father, "took
up" the notes. Most of them were not yet due. A mortgage deed of
trust dated September 3 was executed September 10, and recorded
September 11. It covered practically all of Jones' property,
including the stock in trade and accounts, store furnishings and
fixtures, household furniture and goods, livestock, crops standing
and cut, and the farm itself, the last subject to a prior deed of
trust. Four mortgage notes were given, payable respectively in
seven, thirty, sixty, and ninety days, with a proviso that, upon
default on any one, all should become payable. The first note --
and hence all -- was overdue when the mortgage was recorded. On
that day, Dean directed that possession of the property be taken,
which was done on September 13 (the 12th being Sunday). Jones was
at the time deeply insolvent and had many unsecured creditors. Some
of these immediately challenged the validity of the mortgage.
Within a few days, an involuntary petition in bankruptcy was filed
and
Page 242 U. S. 443
Jones was adjudicated a bankrupt. The mortgaged property was
converted into cash under an agreement with general creditors that
it should be deposited to await the ultimate determination of the
rights of the parties. It yielded only $1,634 -- leaving nothing
for the general creditors if the mortgage is held valid.
Davis, the trustee in bankruptcy, brought a bill in equity to
set aside the mortgage. The district court granted the relief
prayed for, and its decree was affirmed by the circuit court of
appeals. Both courts found the facts to be in substance as above
stated and held the mortgage void under § 67e as having been made
by Jones "with the intent and purpose on his part to hinder, delay
or defraud his creditors," to one not a "purchaser in good faith"
within the meaning of the act. The circuit court of appeals held
the mortgage void also as a preference under § 60b. 212 F. 88. The
case comes to this Court upon appeal, Dean contending that the
mortgage is not invalid under either § 60b or § 67e.
The mortgage was not voidable as a preference under § 60b.
Preference implies paying or securing a preexisting debt of the
person preferred. The mortgage was given to secure Dean for a
substantially contemporary advance. The bank, not Dean, was
preferred. The use of Dean's money to accomplish this purpose could
not convert the transaction into a preferring of Dean, although he
knew of the debtor's insolvency. Mere circuity of arrangement will
not save a transfer which effects a preference from being invalid
as such.
National Bank v. National Herkimer County Bank,
225 U. S. 178,
225 U. S. 184.
But a transfer to a third person is invalid under this section as a
preference only where that person was acting on behalf of the
creditor, as in
In Re Beerman, 112 F. 663, and
Walters
v. Zimmerman, 208 F. 62, 220 F. 805. Here, Dean acted on the
debtor's behalf in providing the money and taking up the notes.
Page 242 U. S. 444
But, under § 67e, the basis of invalidity is much broader. It
covers every transfer made by the bankrupt
"within four months prior to the filing of the petition, with
the intent and purpose on his part to hinder, delay or defraud his
creditors, or any of them . . . except as to purchasers in good
faith and for a present fair consideration."
As provided in § 67d, only "liens given or accepted in good
faith and not in contemplation of or in fraud upon this act" are
unassailable. A transfer the intent (or obviously necessary effect)
of which is to deprive creditors of the benefits sought to be
secured by the Bankruptcy Act, "hinders, delays or defrauds
creditors" within the meaning of § 67e.
Van Iderstine v.
National Discount Co., 227 U. S. 575,
227 U. S. 582,
points out the distinction between the intent to prefer and the
intent to defraud. A transaction may be invalid both as a
preference and as a fraudulent transfer. It may be invalid only as
a preference or only as a fraudulent transfer. Making a mortgage to
secure an advance with which the insolvent debtor intends to pay a
preexisting debt does not necessarily imply an intent to hinder,
delay, or defraud creditors. The mortgage may be made in the
expectation that thereby the debtor will extricate himself from a
particular difficulty and be enabled to promote the interest of all
other creditors by continuing his business. The lender who makes an
advance for that purpose with full knowledge of the facts may be
acting in perfect "good faith." But where the advance is made to
enable the debtor to make a preferential payment with bankruptcy in
contemplation, the transaction presents an element upon which fraud
may be predicated. The fact that the money advance is actually used
to pay a debt does not necessarily establish good faith. It is a
question of fact in each case what the intent was with which the
loan was sought and made.
We cannot say that the facts found by the district court and
affirmed by the circuit court of appeals were
Page 242 U. S. 445
not supported by the evidence, nor that these courts erred in
concluding upon this evidence that the mortgage was made with the
purpose and intent to hinder, delay, or defraud Jones' creditors,
and that Dean was not, as against general creditors, "a purchaser
in good faith." Jones knew that he was insolvent. He knew that he
was making a preferential payment. He must have known that
suspension of his business and bankruptcy would result from giving
and recording a mortgage of all his property to secure a note which
had matured before the mortgage was executed. The lower courts were
justified in concluding that he intended the necessary consequences
of his act, that he willingly sacrificed his property and his other
creditors to avert a threatened criminal prosecution, and that
Dean, who, knowing the facts, cooperated in the bankrupt's
fraudulent purpose, lacked the saving good faith.
The conclusion reached by the lower courts is supported by many
decisions of the several district courts and circuit courts of
appeal which are referred to in the margin.
* It is in harmony
with both the
Van Iderstine
Page 242 U. S. 446
case and
Coder v. Arts, 213 U.
S. 223,
213 U. S. 244,
upon which appellant particularly relies. In each of these cases,
this Court refused to hold fraudulent in law a transfer which the
circuit court of appeals had found to be innocent in fact. In the
Van Iderstine case, where a pledge was held valid, the
circuit court of appeals had expressly found that the pledgee was
without knowledge of the debtor's fraudulent intent, if such there
was. In
Coder v. Arts, where a mortgage was held valid,
the circuit court of appeals had found that, in making the
mortgage, the debtor had no intent to hinder, delay, or defraud
creditors, and this Court said that,
"in view of the finding of the circuit court of appeals, it may
be that [he], though including in the conveyance a large amount of
his property, acted in good faith, with a view to preserving his
estate and enabling him to meet his indebtedness."
This Court, while declaring the question of invalidity under §
67e was to express its dissent from the view
"that the giving of the mortgage and its effect upon other
creditors could not be
Page 242 U. S. 447
considered as an item of evidence in determining the question of
fraud."
Dean contends also that relief should not have been granted
under § 67e because the bill was framed under § 60b. The objection
was not taken in the district court, although the question of
invalidity under § 67e was elaborately discussed on demurrer to the
bill as well as upon final hearing. Twenty-five other errors were
assigned on the appeal to the circuit court of appeals. This
objection was not raised then. It was insisted only that the
evidence did not warrant the finding of fraudulent intent. Section
60b seems to have been mainly in the mind of the pleader when the
bill of complaint was drafted, but not exclusively, for it alleges
that the plaintiff as trustee was entitled "to recover property
transferred by said bankrupt in fraud of his creditors." The answer
expressly alleges that the mortgage was accepted
"without any intent or purpose of aiding said Jones to defraud,
delay, or hinder his creditors, and not in contemplation of or in
fraud of the Bankruptcy Act, or any of its provisions, believing
him to be solvent, and that he would continue his business."
The issue of fraudulent transfer was presented by the pleadings,
was fully tried, and was found against the appellant. No error was
committed.
Decree affirmed.
* Cases holding that a mortgage is a fraudulent conveyance where
taken as security for a loan which the lender knows is to be used
to prefer favored creditors, in fraud of the act:
Parker v.
Sherman, 212 F. 917;
In re Soforenko, 210 F. 562;
Johnson v. Dismukes, 204 F. 382;
Lumpkin v.
Foley, 204 F. 372;
In re Lynden Mercantile Co., 156
F. 713;
Roberts v. Johnson, 151 F. 567;
In re
Pease, 129 F. 446.
See also Walters v. Zimmerman,
s.c. on appeal, 208 F. 62, 220 F. 805.
Cases upholding the mortgage security because the lender did not
know that the insolvent borrower intended to make improper payments
to favored creditors, thus indicating that the mortgage would be
fraudulent if such additional fact were shown:
Griffinstead v.
Union Savings & Trust Co., 190 F. 546;
Powell v. Gate
City Bank, 178 F. 609;
In re Kullberg, 176 F. 585;
Ohio Valley Bank Co. v. Mack, 163 F. 155;
Stedman v.
Bank of Monroe, 117 F. 237;
In re Soudan Mfg. Co.,
113 F. 804.
In accord with this view are also the decisions which hold that
a general assignment for the benefit of creditors, though without
preferences, is void under § 67e because its necessary effect is to
hinder, delay, or defraud creditors in their rights and remedies
under the Bankruptcy Act.
In re Gutwillig, 90 F. 475, 92
F. 337;
Davis v. Bohle, 92 F. 325;
Rumsey &
Sikemier Co. v. Novelty & Machine Mfg. Co., 99 F. 699.
See Randolph v. Scruggs, 190 U. S. 533,
190 U. S. 536;
George M. West Co. v. Lea Bros., 174 U.
S. 590,
174 U. S.
596.
It is difficult to reconcile the following cases or dicta in
them with the great weight of authority and the decisions of this
Court:
Re Baar, 213 F. 628;
In re Hersey, 171 F.
1004;
Sargent v. Blake, 160 F. 57;
In re Bloch,
142 F. 674;
Githens v. Shiffier, 112 F. 505.