1. Under a sound construction of the thirty-fifth and
thirty-ninth sections of the Bankrupt Act, something more than
passive nonresistance in an insolvent debtor is necessary to
invalidate a judgment and levy on his property when the debt is due
and he has no defense.
2. In such case, there is no legal obligation on the debtor to
file a petition in bankruptcy to prevent the judgment and levy, and
a failure to do so is not sufficient evidence of an intent to give
a preference to the judgment creditor or to defeat the operation of
the bankrupt law.
3. Though the judgment creditor in such a case may know the
insolvent condition of the debtor, his judgment and levy upon his
property are not therefore void, and are no violation of the
act.
4. A lien thus obtained by him will not be displaced by
subsequent proceedings in bankruptcy, though commenced within four
months after levy of the execution or rendition of the
judgment.
5. Very slight circumstances, however, which tend to show the
existence of an affirmative desire on the part of the bankrupt to
give a preference or to
Page 84 U. S. 474
defeat the operation of the act may, by giving color to the
whole transaction, render the lien void.
6. These special circumstances must be left to decide each case
as it arises. The present one held to be destitute of any such
evidence, and distinguished from
Buchanan
v. Smith, 16 Wall. 277.
The Bankrupt Act of 1867 [
Footnote 1] provides in the earlier part of it that if any
persons residing within the jurisdiction of the United States shall
apply by petition to the judge of the judicial district in which he
has resided &c., setting forth "his inability to pay all his
debts in full, his willingness to surrender all his estate and
effects, for the benefit of his creditors," and his desire to
obtain the benefits of the act, he may, after certain proceedings
mentioned, and with certain excepted cases, obtain "a discharge
from all his debts." A subsequent part of the same act provides for
proceeding by creditors to obtain a decree of bankruptcy against
their debtor, who has not made any such voluntary application.
After the enactment relating to the first case contemplated --
that is to say, of the debtor, himself, voluntarily applying to be
decreed a bankrupt -- the act in its thirty-fifth section thus
proceeds:
"SECTION 35. That if any person, being insolvent or in
contemplation of insolvency, within four months before the filing
of the petition by or against him,
with a view to give a
preference to any creditor or person having a claim against
him or who is under any liability for him,
procures any
part of his property to be attached, sequestered, or seized on
execution or makes any payment, pledge, assignment, transfer, or
conveyance of any part of his property either directly or
indirectly, absolutely or conditionally, the person receiving such
payment, pledge, assignment, transfer, or conveyance, or to be
benefited thereby, or by such attachment, having reasonable cause
to believe such person is insolvent and
that such attachment,
payment, pledge, assignment,
Page 84 U. S. 475
or conveyance is made in fraud of the provisions of this
act, the same shall be void, and the assignee may recover the
property or the value of it from the person so receiving it or so
to be benefited."
"And if any person, being insolvent or in contemplation of
insolvency or bankruptcy, within six months before the filing of
the petition by or against him, makes any payment, sale,
assignment, transfer, conveyance, or other disposition of any part
of his property to any person who then has reasonable cause to
believe him to be insolvent or to be acting in contemplation of
insolvency, and that such payment, sale, assignment, transfer or
other conveyance is made with a view to prevent his property from
coming to his assignee in bankruptcy or to prevent the same's being
distributed under this act or to defeat the object of or in any way
impair, hinder, impede, or delay the operation and effect of, or to
evade any of the provisions of this act, the sale, assignment,
transfer or conveyance shall be void, and the assignee may recover
the property, or the value thereof as assets of the bankrupt."
"And if such sale, assignment, transfer or conveyance is not
made in the usual and ordinary course of business of the debtor,
the fact shall be
prima facie evidence of fraud."
The thirty-ninth section, which relates to "involuntary
bankruptcy," enacts thus:
"SECTION 39. That any person residing and owing debts as
aforesaid who, after the passage of this act, shall depart from the
state, district, or territory of which he is an inhabitant with
intent to defraud his creditors, or being absent shall, with such
intent remain absent, OR shall conceal himself to avoid the service
of legal process, in any action for the recovery of a debt or
demand provable under this act, OR shall conceal or remove any of
his property to avoid its being attached, taken or sequestered on
legal process, OR shall make any assignment, gift, sale,
conveyance, or transfer of his estate, property, rights or credits,
either within the United States or elsewhere, with intent to delay,
defraud, or hinder his creditors, OR who has been arrested and held
in custody under or by virtue of mesne process or execution, issued
out of any court of any state, district, or territory, within which
such debtor resides or has property, founded upon a demand in its
nature provable against a bankrupt's
Page 84 U. S. 476
estate under this act, and for a sum exceeding $100, and such
process is remaining in force and not discharged by payment or in
any other manner provided by the law of such state, district, or
territory applicable thereto, for a period of seven days, OR has
been actually imprisoned for more than seven days in a civil action
founded on contract for the sum of $100 or upwards, OR who, being
bankrupt or insolvent, or in contemplation of bankruptcy or
insolvency, shall make any payment, gift, grant, sale, conveyance
or transfer of money or other property, estate, rights or credits,
or give any warrant to confess judgment;
or procure or
suffer his property to be taken on legal process,
with intent
to give a preference to one or more of his creditors, or to
any person or persons who are or may be liable for him as
endorsers, bail, sureties, or otherwise, or with the intent, by
such disposition of his property, to defeat or delay the operation
of this act; OR who, being a banker, merchant or trader, has
fraudulently stopped or suspended, and not resumed payment of his
commercial paper within a period of fourteen days, shall be deemed
to have committed an act of bankruptcy, and, subject to the
conditions hereinafter prescribed, shall be adjudged a bankrupt on
the petition of one or more of his creditors, the aggregate of
whose debts provable under this act amount to at least $250,
provided such petition is brought within six months after the Act
of bankruptcy shall have been committed."
"And if such person shall be adjudged a bankrupt, the assignee
may recover back the money or other property so paid, conveyed,
sold, assigned or transferred contrary to this act, provided the
person receiving such payment or conveyance had reasonable cause to
believe that a fraud on this act was intended or that the debtor
was insolvent. And such creditor shall not be allowed to prove his
debt in bankruptcy."
These enactments being in force, one Wilson, assignee in
bankruptcy of the firm of Vanderhoof Brothers, lately merchants at
the City of St. Paul, filed a bill against the City Bank of the
said city to determine which of the parties, complainant or
defendant, was entitled to the stock of goods of the bankrupts or
the proceeds thereof. The facts of the case, about which there was
no dispute, were thus found by the court:
Page 84 U. S. 477
"On the 26th of February, 1870, judgment by default was rendered
by one of the district courts of the State of Minnesota in favor of
the bank against Vanderhoof Brothers for the sum of $2,130. On the
same day, execution was issued, and the sheriff immediately made a
levy upon the whole stock of goods of the debtors, which was sold
by him for $2,385, which is now in the hands of the bankrupt court
to await the determination of this suit. The suit by the bank was
brought on promissory notes, commercial paper made by the debtors
Vanderhoof Brothers to the City Bank of St. Paul, one of which
notes was more than fourteen days past due when suit was brought
thereon by the bank."
"After the levy of the said execution and before the sale by the
sheriff, Vanderhoof Brothers were adjudicated bankrupts on the
petition of creditors filed against them after judgment had been
obtained and levy made under the execution. The Vanderhoofs had no
defense to the notes upon which the bank had sued them, and put in
no defense. They had no property except their said stock in trade,
which, at cost prices, was about equal to the amount of their
liabilities."
"The debtors Vanderhoof Brothers were insolvent when said suit
was brought against them by the bank, and the bank had then
reasonable cause to believe it, and knew that they had committed an
act of bankruptcy and that they had no property but their said
stock in trade. The Vanderhoofs gave no notice to any of their
creditors of the suit commenced against them by the bank, and
having no defense, did not defend it nor go into voluntary
bankruptcy, nor otherwise make any effort to prevent the judgment
being obtained or the levy of the execution."
On this case, the following questions arose at the trial, in
relation to which the judges were opposed in opinion:
"1st. Whether or not an intent on the part of said debtors,
Vanderhoof Brothers, to suffer their property to be taken on legal
process, to-wit, the said execution, with intent to give a
preference to said bank, or with intent thereby to defeat or delay
the operation of the Bankrupt Act, can be inferred from the
foregoing facts?"
"2d. Whether, under said facts, the said bank, in obtaining
Page 84 U. S. 478
said judgment and making the said levy, had reasonable cause to
believe that a fraud on the Bankrupt Act was intended?"
"3d. Whether, under said facts, the bank obtained by the levy of
its execution a valid lien on the said goods as against the
assignee in bankruptcy?"
The questions were accordingly certified here for decision.
Page 84 U. S. 480
MR. JUSTICE MILLER delivered the opinion of the Court.
The questions presented to this Court by the certificate of
division require, for a satisfactory answer, a careful
consideration and construction of sections thirty-five and
thirty-nine of the Bankrupt Law with reference to the general
spirit and purpose of that law. In looking to these, the first and
most important consideration which demands our attention is the
discrimination made by the act between the cases of voluntary and
involuntary bankruptcy. In both classes of cases, undoubtedly the
primary object is to secure a just distribution of the bankrupt's
property among his creditors,
Page 84 U. S. 481
and in both the secondary object is the release of the bankrupt
from the obligation to pay the debts of those creditors.
But in case of voluntary bankruptcy, the aid of the law is
invoked by the bankrupt himself, with the purpose of being
discharged from his debts as his principal motive, and in the
other, the movement is made by his creditors with the purpose of
securing the appropriation of his property to their payment, the
discharge being with them a matter of no weight, and often
contested.
There is a corresponding difference in the facts on which the
action of this Court can be invoked in these different classes of
bankruptcy. When the party himself seeks the aid of the court, the
averment he is required to make is a very simple one -- namely that
"he is unable to pay all his debts in full and is willing to
surrender all his estate and effects for the benefit of his
creditors, and desires to obtain the benefit of the act" -- that
is, to be discharged from the claims of his creditors. On filing a
petition containing this request, he is declared by the court a
bankrupt. The allegation cannot be traversed, nor is any issue or
inquiry as to its truth permitted. The administration of his
effects proceeds thereafter under the direction of the court, and
may end in paying all his debts with a surplus to be returned to
the bankrupt, or the result may be nothing for the creditors, and
the unconditional release of the bankrupt.
But while the debtor may on this broad basis call on the court
to administer his estate, the creditor who desires to do the same
thing is limited to a few facts or circumstances the existence of
which are essential to his right to appeal to the court. And when
any one of these facts is set forth in a petition to the court by
the creditor, the truth of the allegation may be denied by the
debtor, and on the issue thus found, he may demand the verdict of a
jury.
The reason for this wide difference in the proceedings in the
two cases is obvious enough. When a man is himself willing to refer
his embarrassed condition to the proper court with a full surrender
of all his property, no harm can come to anyone but himself, and
there can be no solid objection
Page 84 U. S. 482
to the course he pursues. But when a person claims to take from
another all control of his property, to arrest him in the exercise
of his occupation, and to impair his standing as a businessman --
in short, to place him in a position which may ruin him in the
midst of a prosperous career -- the precise circumstances or facts
on which he is authorized to do this should not only be well
defined in the law, but clearly established in the court.
It is the thirty-ninth section of the Bankrupt Act which lays
down in nine or ten subdivisions the facts and circumstances which
give a man's creditors the right to have him declared a bankrupt
and his property administered in a bankruptcy court. One of them is
the case of a person who, being bankrupt or insolvent or in
contemplation of insolvency, shall make any payment, gift, grant,
sale, conveyance, or transfer of money or other property, estate,
rights, or credits, or give any warrant to confess judgment or
procure or suffer his property to be taken on legal process with
intent to give a preference to one or more of his creditors, or to
any person or persons who may be liable for him as endorsers, bail
sureties, or otherwise, or with intent by such disposition of his
property to defeat or delay the operation of the act. And the same
section declares that if such person shall be adjudged a bankrupt,
the assignee may recover back the money or property so paid,
conveyed, sold, assigned, or transferred contrary to the act
provided the person receiving such payment or conveyance had
reasonable cause to believe that a fraud on the Bankrupt Act was
intended or that the debtor was insolvent.
The case before us is one of involuntary bankruptcy, but there
is no question here whether the party was rightfully declared a
bankrupt. The statement of facts shows that the debtors were
insolvent when the bank commenced its proceedings in the state
court, and that the bank had then reasonable cause to believe they
were insolvent, and knew that they had committed an act of
bankruptcy, to-wit, had permitted one of their notes to go unpaid
more than fourteen days after it was due.
Page 84 U. S. 483
It is maintained that under these circumstances, the bankrupt
"suffered his property to be taken on legal process with intent to
give a preference to the bank, and to defeat or delay the operation
of the act." Undoubtedly the facts stated bring the bank within the
proviso as to knowledge of the debtor's insolvency, and if the
debtor suffered his property to be taken within the meaning of the
statute with intent to defeat or delay the operation of the act,
then the assignee should recover the property. So that this
sufferance and this intent on the part of the bankrupt are the
matters to be decided. The first and principal question on which
the judges became divided is whether such intent is to be inferred
from the facts stated.
The thirty-fifth section of the act, which is designed to
prevent fraudulent preferences of a person in contemplation of
insolvency or bankruptcy, declares that any attachment or seizure
under execution of such person's property,
procured by him
with
a view to give such a preference, shall be void if
the act be done within four months preceding the filing of the
petition in bankruptcy by or against him. Though the main purpose
of the thirty-ninth section is to define acts of the trader which
make him a bankrupt, and that of the thirty-fifth is to prevent
preferences by an insolvent debtor in view of bankruptcy, both of
them have the common purpose of making such preferences void and
enabling the assignee of the bankrupt to recover the property, and
both of them make this to depend on the intent with which the act
was done by the bankrupt and the knowledge of the bankrupt's
insolvent condition by the other party to the transaction. Both of
them describe substantially the same acts of payment, transfer, or
seizure of property so declared void. It is therefore very strongly
to be inferred that the act of
suffering the debtor's
property to be taken on legal process in section thirty-nine is
precisely the same as procuring it to be attached or seized on
execution in section thirty-five. Indeed, the words
procure and
suffer are both used in section
thirty-nine.
What, then, is the true meaning of that phrase in the act?
Page 84 U. S. 484
In both cases, it must be accompanied with an intent. In section
thirty-five, it is to give a preference to a creditor; in section
thirty-nine, it must be to give a preference to a creditor, or to
defeat or delay the operation of the Bankrupt Act. In both, there
must be the positive purpose of doing an act forbidden by that
statute, and the thing described must be done in the promotion of
this unlawful purpose.
The facts of the case before us do not show any positive or
affirmative act of the debtors from which such intent may be
inferred. Through the whole of the legal proceedings against them,
they remained perfectly passive. They owed a debt which they were
unable to pay when it became due. The creditor sued them and
recovered judgment, and levied execution on their property. They
afforded him no facilities to do this, and they interposed no
hindrance. It is not pretended that any positive evidence exists of
a wish or design on their part to give this creditor a preference
or oppose or delay the operation of the Bankrupt Act.
There is nothing morally wrong in their course in this matter.
They were sued for a just debt. They had no defense to it, and they
made none. To have made an effort by dilatory or false pleas to
delay a judgment in the state court would have been a moral wrong
and a fraud upon the due administration of the law. There was no
obligation on them to do this, either in law or in ethics. Any
other creditor whose debt was due could have sued as well as this
one, and any of them could have instituted compulsory bankrupt
proceedings. The debtor neither hindered nor facilitated any one of
them. How is it possible from this to infer logically an actual
purpose to prefer one creditor to another or to hinder or delay the
operation of the Bankrupt Act?
It is said, however, that such an intent is a legal inference
from such inaction by the debtor, necessary to the successful
operation of the Bankrupt Law; that the grand feature of that law
is to secure equality of distribution among creditors in all cases
of insolvency, and that, to secure this, it is the legal duty of
the insolvent, when sued by one creditor in an
Page 84 U. S. 485
ordinary proceeding likely to end in judgment and seizure of
property, to file himself a petition of voluntary bankruptcy, and
that this duty is one to be inferred from the spirit of the law,
and is essential to its successful operation.
The argument is not without force, and has received the assent
of a large number of the district judges, to whom the
administration of the Bankrupt Law is more immediately
confided.
We are, nevertheless, not satisfied of its soundness.
We have already said that there is no moral obligation on the
part of the insolvent to do this unless the statute requires it,
and then only because it is a duty imposed by the law. It is
equally clear that there is no such duty imposed by that act is
express terms. It is therefore an argument solely of implication.
This implication is said to arise from the supposed purpose of the
statute to secure equality of distribution in
all cases of
insolvency, and to make the argument complete, it is further
necessary to hold that this can only be done in bankruptcy
proceedings under that statute. Does the statute justify so broad a
proposition? Does it in effect forbid all proceedings to collect
debts in cases of insolvency in other courts and in all other modes
than by bankruptcy? We do not think that its purpose of securing
equality if distribution is designed to be carried so far.
As before remarked, the voluntary clause is wholly voluntary. No
intimation is given that the bankrupt
must file a petition
under any circumstances. While his
right to do so is
without any other limit than his own sworn averment that he is
unable to pay all his debts, there is not a word from which we can
infer any legal obligation on him to do so. Such an obligation
would take from the right the character of a privilege, and confer
on it that of a burdensome and often ruinous duty.
It is, in its essence, involuntary bankruptcy. But the
initiation in this kind of bankruptcy is, by the statute, given to
the creditor, and is not imposed on the debtor. And it is only
given to the creditor in a limited class of cases. The argument we
are combating goes upon the hypothesis that
Page 84 U. S. 486
there is another class given to the creditor by inference --
namely where the debtor ought himself to go into court as a
bankrupt and fails to do it. We do not see the soundness of this
implication from anything in the statute.
We do not construe the act as intended to cover
all
cases of insolvency, to the exclusion of other judicial
proceedings. It is very liberal in the classes of insolvents which
it does include, and needs no extension in this direction by
implication. But it still leaves, in a great majority of cases,
parties who are really insolvent to the chances that their energy,
care, and prudence in business may enable them finally to recover
without disastrous failure or positive bankruptcy. All experience
shows both the wisdom and justice of this policy.
Many find themselves with ample means, good credit, large
business, technically insolvent -- that is, unable to meet their
current obligations as fast as they mature. But by forbearance of
creditors, by meeting only such debts as are pressed, and even by
the submission of some of their property to be seized on execution,
they are finally able to pay all, and to save their commercial
character and much of their property. If creditors are not
satisfied with this and the parties have committed an act of
bankruptcy, any creditor can institute proceedings in a bankrupt
court. But until this is done, their honest struggle to meet their
debts and to avoid the breaking up of all their business is not, of
itself, to be construed into an act of bankruptcy or a fraud upon
the act.
It is also argued that inasmuch as to lay by and permit one
creditor to obtain judgment and levy on property necessarily gives
that creditor a preference, the debtor must be supposed to intend
that which he knows will follow.
The general legal proposition is true that where a person does a
positive act the consequences of which he knows beforehand, that he
must be held to intend those consequences. But it cannot be
inferred that a man intends, in the sense of desiring, promoting,
or procuring it, a result of other persons' acts when he
contributes nothing to their success or
Page 84 U. S. 487
completion, and is under no legal or moral obligation to hinder
or prevent them.
Argument confirmatory of these views may be seen in the fact
that all the other acts or modes of preference of creditors found
in both the sections we have mentioned, in direct context with the
one under consideration, are of a positive and affirmative
character, and are evidences of an active desire or wish to prefer
one creditor to others. Why, then, should a passive indifference
and inaction, where no action is required by positive law or good
morals, be construed into such a preference as the law forbids?
The construction thus contended for is, in our opinion, not
justified by the words of either of the sections referred to, and
can only be sustained by imputing to the general scope of the
Bankrupt Act a harsh and illiberal purpose, at variance with its
true spirit and with the policy which prompted its enactment.
Undoubtedly very slight evidence of an affirmative character of
the existence of a desire to prefer one creditor, or of acts done
with a view to secure such preference, might be sufficient to
invalidate the whole transaction. Such evidence might be sufficient
to leave the matter to a jury or to support a decree, because the
known existence of a motive to prefer or to defraud the Bankrupt
Act would color acts or decisions otherwise of no significance.
These cases must rest on their own circumstances. But the case
before us is destitute of any evidence of the existence of such a
motive unless it is to be imputed as a conclusion of law from facts
which we do not think raise such an implication.
These latter considerations serve to distinguish the present
case from that of
Buchanan v. Smith, [
Footnote 2] decided at the last term and which may
seem to conflict in some of the expressions used in that opinion
with those found in this. That was a bill in chancery involving
several distinct issues of fact, on which much and conflicting
testimony was given, and the contention was mainly as to what was
established by the
Page 84 U. S. 488
evidence. There was satisfactory proof that the creditor, before
pursuing his remedy in the state court, had urgently sought to
secure a preference by obtaining from the debtor a transfer of
certain policies of insurance on which a loss was due. The case was
also complicated by an assignment made by the debtor under which
the assignee took possession before the creditor procured his
judgment in the state court. That case was well decided on the
evidence before the court. But in the case now before us, the
questions we have discussed are presented nakedly and without
confusion by facts found by the court and undisputed, and we have
been compelled, on careful consideration of the Bankrupt Act, to
the following conclusions:
1. That something more than passive nonresistance of an
insolvent debtor to regular judicial proceedings, in which a
judgment and levy on his property are obtained, when the debt is
due and he is without just defense to the action, is necessary to
show a preference of a creditor or a purpose to defeat or delay the
operation of the Bankrupt Act.
2. That the fact that the debtor under such circumstances does
not file a petition in bankruptcy is not sufficient evidence of
such preference or of intent to defeat the operation of the
act.
3. That though the judgment creditor in such case may know the
insolvent condition of the debtor, his levy and seizure are not
void under the circumstances, nor any violation of the Bankrupt
Law.
4. That a lien thus obtained by him will not be displaced by
subsequent proceedings in bankruptcy against the debtor, though
within four months of the filing of the petition.
These propositions require the questions certified to us to be
answered as follows:
The first and second in the NEGATIVE, and the third in the
AFFIRMATIVE.
[
Footnote 1]
14 Stat. at Large 534.
[
Footnote 2]
83 U. S. 16 Wall.
277.
