Where a bill in chancery was filed by the assignee of a bankrupt
claiming certain shares of bank stock, the same being also claimed
by the bank and by other persons who were all made defendants, and
the answer of the bank set forth apparently valid titles to the
stock, which were not impeached by the complainant in the
subsequent proceedings in the cause nor impeached by the other
defendants, the circuit court decreed correctly in confirming the
title of the bank.
Page 54 U. S. 152
A power of attorney to confess a judgment is a security within
the second section of the Bankrupt act, 5 Stat. 442.
And this security is void if given by the debtor in
contemplation of bankruptcy. But by these terms is meant an act of
bankruptcy on an application by himself to be decreed a bankrupt,
and not a mere state of insolvency.
In this case there is evidence enough to show that the debtor
contemplated a legal bankruptcy when the power of attorney was
given.
It is not usury in a bank which has power by its charter to deal
in exchange to charge the market rates of exchange upon time
bills.
On 27 May, 1842, John Mahard, Jr., filed his petition in
bankruptcy, and on 20 July, 1842, was declared a bankrupt.
Nathaniel C. McLean was appointed his assignee in
bankruptcy.
John Mahard had been transacting business at Cincinnati with his
brother, William Mahard, under the firm of J. & W. Mahard, and
at New Orleans, under the firm of Mahard & Brother.
On 12 August, 1842, William Mahard filed his petition in
bankruptcy.
On 5 January, 1843, McLean filed his bill in the circuit court
against a great number of persons, who had outstanding liens on the
property of John Mahard, Jr., at the time of his filing his
petition in bankruptcy. They were the President, Directors, and
Company of the Lafayette Bank of Cincinnati; the President,
Directors, and Company of the Northern Bank of Kentucky; Andrew
Johnson; John S. Buckingham; Mark Buckingham; the Ohio Life
Insurance and Trust Company; the President, Directors, and Company
of the Bank of the United States, incorporated by the State of
Pennsylvania; the President, Directors, and Company of the
Commercial Bank of Cincinnati; the President, Directors, and
Company of the Franklin Bank of Cincinnati; James Dundas, Mordecai
D. Lewis, Samuel W. Jones, Robert L. Pitfield, and Robert Howell,
assignees &c.; John Mahard, Sen., John McLaughlin, George Milne
and James Keith, partners, doing business in the firm name of Geo.
Milne & Co., Charles B. Dyer, Frederick Trow, John C. Avery,
late sheriff, and John H. Gerard, present Sheriff of Hamilton
County.
The assignee, McLean enjoined proceedings in the state courts
where the parties were prosecuting their several liens, and brought
all matters connected with the bankrupts into the circuit court of
the United States.
In the progress of the cause, a number of collateral matters
were brought into the case, but the facts upon which the questions
arose before this Court are stated in the opinion, to which the
reader is referred.
Page 54 U. S. 163
MR. JUSTICE CURTIS delivered the opinion of the Court.
Nathaniel C. McLean as the assignee of John Mahard, Jr., a
bankrupt, filed his bill in the Circuit Court of the United States
for the District of Ohio for the purpose of relieving property of
the bankrupt from encumbrances thereon alleged to have been created
in fraud of the Bankrupt act. A final decree having been entered in
the cause, John S. Buckingham and Mark Buckingham, parties
defendant to the bill, have prosecuted this appeal.
They allege that the decree of the circuit court was erroneous
in three particulars.
The first is that the title of John S. Buckingham to forty-nine
shares of the stock of the Lafayette Bank has been declared
Page 54 U. S. 164
to be subject to an encumbrance thereon in favor of the bank,
whereas John S. Buckingham had the better title thereto.
The amended bill states
"That said Mahard, before and at the time of filing his petition
to be declared bankrupt, was the owner of forty-nine shares, of one
hundred dollars each, of the capital stock of the Lafayette Bank of
Cincinnati; that the said Lafayette Bank and John S. Buckingham set
up some claim to said forty-nine shares of stock, of the particular
nature of which your petitioner is ignorant. And your petitioner
charges that neither said Lafayette Bank nor John S. Buckingham
have any valid legal claim to said shares of stock, but that
petitioner, assignee &c., is justly entitled thereto."
The answer of the bank responds to this allegation in the
bill
"That said John Mahard was the owner of forty-nine shares of the
capital stock of the bank of these respondents, on each of which
the sum of one hundred dollars had been paid; that he became the
owner of said shares, so far as these respondents are advised, on
the 13th day of September, 1841, and afterwards transferred the
same to the cashier of said bank as collateral security for the
debt of J. & W. Mahard to these respondents, and these
respondents now claim to have the control of said shares in virtue
of said transfer, and also in virtue of their lien upon the capital
stock of said bank, owned by debtors to the same, which lien is
created and confirmed by the charter granted to these respondents
by the Legislature of the State of Ohio."
John S. Buckingham and Mark Buckingham both demurred to this
amendment of the bill. Their demurrer was overruled, but no answer
to this particular allegation was filed by either of them, and the
record contains no evidence, introduced by any party touching the
title to this stock. In this state of the record, it is most
manifest only one decree could be made. The bank, in response to
the allegations of the bill, having disclosed two titles to this
stock, either of which was sufficient, if valid, and the assignee
having shown nothing to impeach either title, his claim could not
be allowed, and John S. Buckingham, being entirely silent
respecting the charge in the bill that he makes some claim to this
stock. does in effect make none in this cause, and cannot complain
of a decree for not awarding to him what he does not appear to have
claimed.
The second objection made by the appellants to the decree is
that it declares their title to certain moneys, made by the levy of
an execution in their favor on personal property of the bankrupts,
to be invalid as against the assignee.
On the 7th of April, 1842, a power of attorney to William M.
Corry, Esq., to confess a judgment against the mercantile firm
Page 54 U. S. 165
of the bankrupts in favor of John S. Buckingham for the sum of
fourteen thousand eight hundred dollars was executed by John
Mahard, Jr., for himself and his co-partner, William Mahard, who
was at the time in New Orleans. By virtue of this power, a judgment
for that sum was confessed on 8 April. On 20 April, William Mahard,
by an instrument under seal which recited the substance of this
power, and that it was given with his concurrence, confirmed and
ratified it as his act. On 22 May, 1842, execution was taken out
and levied on personal property of the judgment debtors. On 27 May,
1842, John Mahard, Jr., filed his petition and was subsequently
decreed a bankrupt thereon. The judgment, though confessed in favor
of John S. Buckingham alone, was founded on a debt due to both the
appellants, who were
bona fide creditors of J. & W.
Mahard.
The question is whether these proceedings came within the second
section of the Bankrupt Act, 5 Stat. 442. This section
provides:
"That all future payments, securities, conveyances, or transfers
of property, or agreements, made, or given by any bankrupt, in
contemplation of bankruptcy, and for the purpose of giving any
creditor, endorser, surety, or other person any preference or
priority over the general creditors of such bankrupt, shall be
deemed utterly void, and a fraud upon this act."
By the law of Ohio, a judgment creates a lien on the real estate
of the judgment debtor, and the levy of an execution creates one on
his personal estate levied on. A power of attorney to confess a
judgment, whenever a judgment is taken under it, does in fact
operate to create a security upon the debtor's real estate, and
when an execution issues on that judgment, to create a lien on the
personal estate levied on. It is true these liens arise by
operation of law from the judgment and execution and its levy,
which are the acts of officers of the law, and not of the debtor.
But the power of attorney is designed to and does produce those
acts, which depend upon it for their validity, and therefore
through those acts does create the security. The operation of law
is always necessary to give effect to any form of security, which
indeed is but the legal consequence of the act of the party, and
the lien created by a judgment is none the less the legal
consequence of the act of the party because it is necessary that
after the power is executed, a judgment should be rendered. When it
is rendered, the creditor has a security, by operation of law,
through the act of the debtor, and therefore such a security may be
correctly said, in the language of this section, to be made or
given by the debtor.
If it were not so, one of the acts of bankruptcy described in
the first section of this statute would make a valid title to
the
Page 54 U. S. 166
creditor. It is an act of bankruptcy for the debtor willingly to
procure his goods or lands to be attached, distrained, sequestered,
or taken on execution. It cannot be supposed that what was in
itself an act of bankruptcy and done for the purpose of giving a
preference over the general creditors was intended to be left valid
and effectual to defeat one of the two great objects of the law,
which were to grant a discharge to honest debtors who should
conform to its provisions and to distribute their property ratably
among all their creditors.
But if a judgment confessed by the debtor through a power of
attorney be not a security given by him, there is nothing in this
act which defeats a preference thus created, and the provisions of
this second section become practically inoperative in respect to
all property of the debtor which may be bound by a judgment, or
even by the levy of an execution, since a speedy and well known
mode of preferring a creditor by confessing a judgment is left open
to all debtors who may desire to give preferences, even in
contemplation of bankruptcy. This consequence, while it would not
justify a forced construction of the words used in the act, does
certainly require that the utmost meaning and effect fairly
attributable to them should be laid hold of to prevent so great a
mischief.
The language employed in the English bankrupt acts shows that
under that system, a judgment is treated as a security. The 21
James I, c. 19, § 9, uses the language "that, if any person have a
security for his debt by judgment, statute," &c.. The revising
act, 6 Geo. 4, c. 16, § 108, provides that
"No creditor, having security for his debt &c., shall
receive more than a ratable part of such debt except in respect to
any execution or extent served and levied by seizure upon or any
mortgage or lien upon any part of the property of such bankrupt
before the bankruptcy."
Thus classing judgments with mortgages, under the word
securities. And the Irish Bankrupt act, 11 & 12 Geo. 3, c. 8, §
5, enacted, that "nothing herein contained shall extend to any
security by judgment, obtained before the bankrupt became a
trader." Mr. Eden (Eden on Bankruptcy 285) remarks concerning the
difference in phraseology between the 21 James I and 6 Geo. IV that
the general term "security" employed by the latter would
necessarily include all the particulars enumerated in the old
statute -- that is, security necessarily includes judgments. In
many of the states, a bond and warrant of attorney to enter up
judgment is a usual mode of taking security for a debt, and
judgments thus entered are treated as securities, and an equitable
jurisdiction exercised over them by courts of law. In some states,
they operate only as a lien on the lands of the debtor, in others,
on his personal estate
Page 54 U. S. 167
also;
Brown v. Clarke,
4 How. 4, and wherever by the local law a judgment or an execution
operates to make a lien on property, we are of opinion it is to be
deemed a security, and when rendered upon confession, under a power
given by the debtor for that purpose, it is a security made or
given by him within the meaning of the Bankrupt Act, and is void if
accompanied by the facts made necessary by that act to render
securities void. These facts are that the security was given
"in contemplation of bankruptcy, and for the purpose of giving
any creditor, endorser, surety, or other person, a preference or
priority over the general creditors of such bankrupt."
The inquiry whether this security was given in contemplation of
bankruptcy involves the question what is meant by those words. It
is understood that while the Bankrupt Law was in operation,
different interpretations were placed upon them in different
circuits. By some judges they were held to mean contemplation of
insolvency -- of a simple inability to pay, as debts should become
payable -- whereby his business would be broken up; this was
considered to be a state of bankruptcy, the contemplation of which
was sufficient. By other judges it was held that the debtor must
contemplate an act of bankruptcy or a voluntary application for the
bankrupt law.
In re Pearce, 6 Law 261;
In re
Rowell, 6 Law 298;
Jones v. Howland, 8 Met. 377;
Taylor v. Whitehouse, 5 Humph. 340.
It is somewhat remarkable that this question should be presented
for the first time for the decision of this Court after the law has
been so long repealed and nearly all proceedings under it
terminated. Perhaps the explanation may be found in the fact that
when securities have been given within two months before the
presentation of a petition by or against the debtor, the evidence
would usually bring the case within either interpretation of the
law. However this may be, it is now presented for decision, and we
are of opinion that, to render the security void, the debtor must
have contemplated an act of bankruptcy or an application by himself
to be decreed a bankrupt.
Under the common law, conveyances by a debtor to
bona
fide creditors are valid, though the debtor has become
insolvent and failed, and makes the conveyance for the sole purpose
of giving a preference over his other creditors. This common law
right, it was the object of the second section of the act to
restrain, but at the same time in so guarded a way as not to
interfere with transactions consistent with the reasonable
accomplishment of the objects of the act. To give to these words,
contemplation of bankruptcy, a broad scope, and somewhat loose
meaning, would not be in furtherance of the general purpose with
which they were introduced.
Page 54 U. S. 168
The word "bankruptcy" occurs many times in this act. It is
entitled "An act to establish a uniform system of bankruptcy." And
the word is manifestly used in other parts of the law to describe a
particular legal status, to be ascertained and declared by a
judicial decree. It cannot be easily admitted that this very
precise and definite term is used in this clause to signify
something quite different. It is certainly true in point of fact,
that even a merchant may contemplate insolvency and the breaking up
of his business, and yet not contemplate bankruptcy. He may
confidently believe that his personal character, and the state of
his affairs, and the disposition of his creditors are such that
when they shall have examined into his condition they will extend
the times of payment of their debts, and enable him to resume his
business. A person, not a merchant, banker &c., and
consequently not liable to be proceeded against and made a
bankrupt, though insolvent, may have come to a determination that
he will not petition. The contemplation of one of these states not
being in fact the contemplation of the other, to say that both were
included in a term which describes only one of them, would be a
departure from sound principles of interpretation. Moreover, the
provisos in this section tend to show what was the real meaning of
this first enacting clause. The object of these provisos was to
protect
bona fide dealings with the bankrupt more than two
months before the filing of the petition by or against him provided
the other party was ignorant of such an intent on the part of the
bankrupt, as made the security invalid under the first enacting
clause. And the language is
"provided that the other party to any such dealings or
transactions had no notice of a prior act of bankruptcy, or of the
intention of the bankrupt to take the benefit of this act."
These facts, of one of which a
bona fide creditor must
have notice, to render his security void, if taken more than two
months before the filing of the petition, can hardly be supposed to
be different from the facts which must exist to render the security
void under the first clause, or, in other words, if it be enough
for the debtor to contemplate a state of insolvency, it could
hardly be required that the creditor should have notice of an act
of bankruptcy, or an intention to take the benefit of the act. It
would seem that notice to the creditor of what is sufficient to
avoid the security, must deprive him of its benefits, and
consequently, if he must have notice of something more than
insolvency, something more than insolvency is required to render
the security invalid, and that we may safely take this description
of the facts which a creditor must have notice of to avoid the
security, as descriptive also of what the bankrupt must contemplate
to render it void.
Page 54 U. S. 169
In construing a similar clause in the English bankrupt law,
there have been conflicting decisions. It has been held that
contemplation of a state of insolvency was sufficient.
Pulling
v. Tucker, 4 B. & Ald. 382;
Poland v. Glyn, 2
Dow. & Ry. 310. But both the earlier and later decisions were
otherwise, and in our judgment they contain the sounder rule.
Fidgeon v. Sharpe, 5 Taunt. 545;
Hartshorn v.
Slodden, 2 Bos. & Pul. 582;
Gibbins v. Phillipps,
7 B. & C. 529;
Belcher v. Prittie, 10 Bing. 408;
Morgan v. Brundrett, 5 Barn. & Ad. 297.
And
see the opinion of Patteson, J., in the last case.
Considering, then, that it is necessary to show that the debtor
contemplated an act of bankruptcy or a decree adjudging him a
bankrupt on his own petition, at what time in this case must he
have had this in contemplation? He gave the power of attorney on 7
April; the judgment was confessed and entered up on the next day;
the execution was taken out and levied, and the lien created
thereby, on 22 May, and five days afterwards, being less than two
months after the execution of the power, the debtor presented the
petition under which he was decreed a bankrupt. The only act done
by the debtor was the execution and delivery of the power of
attorney. It was a security by him made or given, only by reason of
that instrument. What followed were acts of the creditor and of
officers of the law, with which the debtor is no more connected
than with the delivery by a creditor of a deed to the office of the
register, to be recorded, or the act of the register in recording
it. It would seem that if the intent of the debtor is to give a
legal quality to a transaction, it must be an intent accompanying
an act done by himself, and not an intent or purpose arising in his
mind afterwards, while third persons are acting; and that,
consequently, we must inquire whether the debtor contemplated
bankruptcy when he executed the power. It is true this construction
would put it in the power of creditors, by taking a bond and
warrant of attorney while the debtor was solvent and did not
contemplate bankruptcy, to enter up a judgment and issue execution,
and by a levy acquire a valid lien, down to the very moment when
the title of the assignee began. But this was undoubtedly so under
the statute of James, which, like ours, contained no provision to
meet this mischief; and it became so great that, by the 108th
section of the revising act of 6 Geo. 4, it was enacted that
"no creditor, though for a valuable consideration, who shall sue
out execution on any judgment obtained by default, confession, or
nil dicit shall avail himself of such execution, to the
prejudice of other fair creditors, but shall be paid ratably with
such creditors."
If the Bankrupt act of 1841 had continued to exist, a
Page 54 U. S. 170
similar addition to its provisions would doubtless have become
necessary.
It remains to inquire whether the debtor in this case, in point
of fact, contemplated bankruptcy, and designed to give a preference
to the appellants, when he executed the power on 7 April.
It has been stated at the bar that by some accident, much of the
evidence bearing on this question was lost, and is not inserted in
the record. We have no doubt of the fact, but this question must be
decided here upon what remains, and we think there is sufficient
now on the record to show that bankruptcy was in contemplation when
the power was given. The petition to be decreed a bankrupt was
filed only fifty days after the date of the power. No material
change in the state of the debtor's affairs appears to have
occurred between 7 April and t27 May. The only property which came
into the hands of the assignee, uncovered by valid liens of
particular creditors, was the thirteen hundred dollars made by this
execution out of property already encumbered by a mortgage to
another creditor, for the sum of upwards of fourteen thousand
dollars, dated on 18 March preceding, and which has been adjudged
by the circuit court to be void under the second section of the
Bankrupt act, and no appeal taken.
The bankrupt was a member of a mercantile firm doing business in
Cincinnati and New Orleans, and the commercial paper of this firm
to a very large amount had been protested for nonpayment, and was
known to the bankrupt to have been so, before this power was given.
Holding an execution for $14,800, the appellants were able to make
upon it only $1,300. Both the mercantile firm and the individual
bankrupt were in a state of deep, and so far as appears,
irretrievable insolvency, and there is no reason to doubt the
bankrupt knew these facts. Though a competent witness for the
appellants on the question of his own intent, and able to give
decisive evidence, if believed, he has not been examined, nor is
there any evidence in the record to control the strong presumption
that the purpose he executed on 22 May, by filing his petition,
existed in his mind fifty days before, when his circumstances were
the same, and the inducements to take advantage of the act were is
great, as at the time he actually attempted to do so.
It is true the appellants say in their answers they did not know
or believe, when the power was given, and do not now believe, the
debtor then contemplated bankruptcy. But their answer, though
responsive in this particular to the bill, is entitled to little
weight concerning the state of mind of the debtor, no reasons being
given for their belief and none of the facts explained
Page 54 U. S. 171
from which an opposite inference is to be drawn,
13 U. S. 9
Cranch 160, and their own state of mind is not material, because
the petition was filed within two months after the date of the
power.
It has been suggested that the execution of the power of
attorney by Mahard was in itself an act of bankruptcy, because he
thereby procured his goods to be taken on execution. But the act
requires that this should be done willingly or fraudulently. The
Buckinghams being
bona fide creditors, there is no ground
upon which this act can be deemed fraudulent unless it was done in
contemplation of bankruptcy and with intent to give a preference,
and this would bring us back to the inquiry whether such
contemplation and intent existed, and it is explicitly denied by
the answers of the Buckinghams that the power was executed by
Mahard willingly, it having been done under strong pressure by
them, and only at last because a suit was threatened if he did not
comply. There is no evidence to control these statements in their
answers, so that we cannot say that
per se the giving of
the power was an act of bankruptcy. 1 Deacon's B.L. 446;
Thompson v. Freeman, 1 T.R. 155;
Hunt v.
Mortimer, 10 B. & C. 44;
Morgan v. Brundrett, 5
B. & Ad. 297.
We have therefore found it necessary to go into the inquiry
whether the bankrupt did in fact contemplate bankruptcy when the
power was given, and intend to give a preference thereby, and being
of opinion that he did, there is no error in the decree of the
circuit court in this particular.
The third objection made to the decree of the court below is
that it established the validity of sundry mortgages on the
property of the bankrupts, held by certain banking corporations. It
is alleged by the appellants that these mortgages were void, on
account of usury; that though, by the statute law of Ohio, a
usurious contract is valid, for the principal sum lent, with lawful
interest thereon, yet, if a banking corporation make a usurious
contract, it is utterly void, because such a banking corporation
has no lawful authority to make such a contract, exceeds its powers
by attempting to do so, and consequently neither party is bound
thereby.
We have not thought it necessary to examine this position,
because we are of opinion that usury in either of these mortgages
is not proved.
The power of these banking corporations to deal in exchange is
not controverted. There is no usury on the face of anyone of these
transactions. It is incumbent on the party who charges usury to
prove it, and where it is alleged to consist in taking excessive
rates of exchange or in resorting to the form of a bill of exchange
in order to keep out of sight a usurious compensation for the
simple loan of money, these facts must be proved.
Page 54 U. S. 172
Andrews v.
Pond, 13 Pet. 65;
Creed v. Commercial
Bank, 11 Ohio 489. The answer of each bank denies such intent,
and avers that the exchange charged in each case was the customary
and regular rate at the time of the discount of each bill. There is
not evidence to prove the contrary. Indeed it was agreed by the
counsel on both sides, during the argument, that the rates charged
were the usual and customary prices of exchange between Cincinnati,
where the bills were drawn, and New Orleans, where they were
payable, at the times they were discounted. The counsel for the
appellants urged that the rates were higher than were charged on
sight bills. But these were time bills, and it is no proof of usury
that the banks did not take the market rates on sight bills which
they did not discount, if they took only the market rates on those
they did discount. It was also insisted that the banks did not buy
these bills, but were the first takers for loans of money made to
the drawers. But we are unable to perceive how the fact that the
banks were the first takers can be of any importance in this case,
nor do we deem it material that the bills were discounted for the
drawers.
The reason why the addition of the current rate of exchange to
the legal rate of interest does not constitute usury is that the
former is a just and lawful compensation for receiving payment at a
place where the money is expected to be less valuable than at the
place where it is advanced and lent. And this reason exists when
the lender discounts the drawer's bill as well as when he buys a
bill in the market of the payee. In neither case is it usury to
take the regular and customary compensation for the loss in value
by change of place of payment. It is argued that no usage, or
custom can make an unlawful contract valid. This must be admitted.
But the contract is not unlawful unless more than six percent has
been reserved or taken for interest; if more has been reserved or
taken, not for the loan and forbearance but for a change in the
place of payment, then the contract is lawful, and in determining
whether the excess over six percent has been reserved for interest
or as a just compensation for changing the place of payment, the
custom, or the market value of this change, is evidence of the real
intent of the parties, and so evidence of the validity of the
contract.
Our opinion is that usury was not made out in either of these
mortgages and that there was no error in the decree of the court
below declaring their validity. The decree of the circuit court is
affirmed with costs.
Order
This cause came on to be heard on the transcript of the record
from the Circuit Court of the United States for the district
Page 54 U. S. 173
of Ohio, and was argued by counsel. On consideration whereof, it
is now here ordered, adjudged, and decreed, by this Court, that the
decree of the said circuit court in this cause, be, and the same is
hereby affirmed with costs.