In which the doctrines of the preceding case are affirmed and
applied to the case of a note with warrant to confess judgment,
given five months before the petition of bankruptcy was filed
against the debtor, the case showing affirmatively that no fraud
was intended when the note with warrant was given, and that the
creditor had no reason to believe that the debtor was
insolvent.
Taylor, prior to the 4th of August, 1868, was and at the time of
this suit still continued to be a wholesale drygoods merchant in
Pittsburgh, Pennsylvania.
Sweeney, prior to the same day, was, and until January 13, 1869,
continued to be, a retail merchant residing and
Page 88 U. S. 379
doing business in Freeport, Pennsylvania. For sometime prior to
the said 4th of August, 1868, and up to January 1, 1869, Sweeney
was a customer of Taylor in the purchasing of merchandise on credit
according to the usual course of the business.
On the 4th of August, 1868, Sweeney was in debt to Taylor in an
account then due for merchandise previously purchased in the
ordinary course of business, and on that day, according to the
custom of said Taylor and in the ordinary course of business,
closed the account by executing and delivering to Taylor a note,
with warrant of attorney, for $800, the balance of the account,
embracing the amount of a small bill of goods, about $13, that day
sold said Sweeney, payable four months after date, with interest.
After this, Sweeney continued to purchase from Taylor merchandise
as before, all of which had now been paid for, but he paid nothing
on the note.
It was the regular custom of Taylor to close such accounts by
taking notes with warrant of attorney.
The note remained unpaid, and on the 1st of January, 1869, was,
by an agent of Taylor, delivered to Taylor's attorneys for
collection (he having demanded payment a day or two before), and
was by them entered of record and judgment confessed by virtue of
the warrant of attorney, and on the same day a writ of
fieri
facias was issued thereon and delivered to the sheriff, which
became a lien under the laws of Pennsylvania upon the goods and
chattels of Sweeney, and upon the 4th day of January, 1869, an
actual levy was made in pursuance of said writ upon the personal
estate of Sweeney, consisting of drygoods, groceries &c., in
his store at Freeport, being all he had, the store being closed and
sold out on the execution (he having no real estate), and, in
accordance with said law, the goods and chattels were sold by the
sheriff on the 13th day of January, 1869, and on the 18th of
January, 1869, the sum of $860 paid over by the sheriff to Taylor's
attorneys, who paid it to him, Taylor. Neither Taylor nor his
counsel became the purchasers of any property thus sold by the
sheriff.
Page 88 U. S. 380
It appeared from the evidence that at the time of taking the
note and confessing judgment thereon, there was no fraud or
collusion intended by either Taylor or Sweeney, and Taylor
testified that he did not know or have any reasonable cause to
believe that Sweeney was bankrupt or insolvent or contemplated
bankruptcy or insolvency or any fraud on the Bankrupt Law.
On the 15th of January, 1869, two days after the sale, a
petition in bankruptcy was filed in the United States District
Court at Pittsburgh against Sweeney, by Hanlon and others, his
creditors, and on the same day an injunction was awarded which was
never served personally on Taylor or in any manner upon his
attorneys, but was served on the sheriff on the 18th January, 1869,
after the money had been paid over. There was no evidence given to
show that at the time of receiving the money, either Taylor, his
attorney, or the sheriff had any notice of said writ of injunction
or proceedings in bankruptcy.
On the 2d of February, 1869, Sweeney was adjudged bankrupt in
default of appearance to the rule to show cause, and on the 30th
day of March, 1869, Watson was chosen his assignee, to whom an
assignment was duly made by the register.
Watson, the assignee, now brought
assumpsit in the
court below to recover the value of the personal property sold
under the confession of judgment, and on the trial these questions
occurred and were certified to this Court:
1. Whether the confession of judgment, execution, levy, and
sale, as proved, constituted an indirect transfer of the property
with a view to give a preference within the meaning of the
thirty-fifth section of the Bankrupt Act.
2. Whether the confession of judgment, execution, levy, and sale
aforesaid constituted a transfer or other disposition of the
property with a view to give a preference.
3. Whether, if the facts aforesaid constituted a transfer or
other disposition within the meaning of the Bankrupt Act, it was
made at the date of the warrant of attorney or at or after the time
of confessing the judgment.
Page 88 U. S. 381
4. Whether, from the debtor's default in payment of the debt,
the warrant of attorney, the confession of judgment, execution, and
levy as aforesaid, the execution creditor had reasonable cause to
believe that the debtor was insolvent and that the proceedings were
in fraud of the Bankrupt Act.
5. Whether the entry of judgment in the state court and the
proceedings therein, as aforesaid, constitute a bar to the present
suit.
MR. JUSTICE STRONG delivered the opinion of the Court.
In this case, the proceedings in bankruptcy were commenced on
the 15th of January, 1869. On the 4th of August, 1868, more than
five months before the petition was filed, the bankrupt gave to the
defendant his promissory note containing a warrant to confess a
judgment thereon. By virtue of the warrant, a judgment was entered
on the 1st day of January, 1869, and the execution, levy, and sale
immediately followed. Were there nothing more in the case, what we
have just decided in
Clark v. Iselin would determine that
no preference within the meaning of the Bankrupt Act was given. The
case, however, shows affirmatively that no fraud or collusion was
intended either at the time when the note was given or when the
judgment was entered, and that the creditor had no reason to
believe the debtor was insolvent.
The first, second, and fourth questions are therefore answered
in the negative, and, being thus answered, the other questions
become immaterial.
MR. JUSTICE HUNT (with whom concurred JUSTICES CLIFFORD and
MILLER) dissenting, in this case of
Watson v. Taylor, as
in the preceding one of
Clark v. Iselin:
The importance of the principle involved in the decision
Page 88 U. S. 382
of these cases justifies a statement of the position of those
who do not concur in the decision.
Stated in brief words, the decision is this: a merchant in
solvent circumstances may give his creditor a warrant to confess a
judgment, which may be held by him, concealed from the knowledge of
every other person; the debtor may continue his business for an
indefinite time, buying other goods of the same creditor, paying
for the new purchases, but paying nothing on the judgment debt, and
when he becomes insolvent, judgment may be perfected on the warrant
of attorney so given, execution issued, and the proceeds of the
property sold paid to the judgment creditor in preference to and in
exclusion, if need be, of all other creditors.
In the case of Iselin, the warrant of attorney was held by him
unacted upon for two months, and in the case of Taylor, for five
months. The precise time is not important. If the power to enter
the judgment may remain unexercised for five months and be enforced
after insolvency has occurred, there is no limit to the time except
such as may arise from the statute of limitations. In the case of
Iselin, the confession was given to secure a debt then created. In
the case of Taylor, it was given to secure an antecedent debt. The
decision therefore embraces as well the case of a debt past due at
the time of giving the confession as of a debt then created.
1st. This decision impresses me as being in violation of the
whole spirit and intent of the Bankrupt Law and as calculated to
destroy its beneficial effect.
The first principle of this law is to secure an equal
distribution of the property of a bankrupt among all his creditors.
Its first intent was to destroy the system of preferences allowed
in most of the states by which in the act of bankruptcy, as it were
"in articulo mortis," a debtor could give all his property
to favored creditors. It was intended to prevent this vicious
system and, in the language of the act,
"to secure the rights of all parties and the due distribution of
assets among all the creditors without any priority or preference
whatever except wages not exceeding $50."
To this end the whole machinery of the act is directed. To
accomplish
Page 88 U. S. 383
this end, all attachments made within four months of the
bankrupt proceedings are annulled, however vigilant the creditor,
however honest his debt; all offsets in favor of debtors of the
bankrupt purchased after bankruptcy, are disallowed; no discharge
is to be granted to the bankrupt if within four months he has
procured his property to be attached or seized on execution or if
in contemplation of bankruptcy he has made any conveyance, pledge,
or transfer, directly or indirectly, absolutely or conditionally,
for the purpose of preferring one creditor over another. With the
same view, it is further provided that payments within six months,
or, in certain cases, within four months, with a view to giving a
preference, or if he procures his property to be attached, or makes
pledges, assignments, or transfers, where the person receiving them
has reason to believe there is insolvency, and that it is in fraud
of this act -- all these acts are void, and the creditor may be
compelled to refund to the assignee the money received by him, and
if the transaction is not in the usual course of business, the fact
shall be
prima facie evidence of fraud.
How can the spirit of this act be carried out if the debtor is
allowed to give a secret preference to one creditor by which his
debt is free from the hazards of trade and is secure whatever may
happen? The favored creditor lends his debtor other moneys from day
to day. He sells him other goods as his occasions require. Other
creditors buy, sell, et credit, all is fair to the view, all stand
upon an apparent equality. Each one supposes that he understands
that no preference can by law be given, but that by law all will
share alike in the event of a calamity. A calamity does occur, and
through a concealed instrument, not possible to be known to others,
by which the favored creditor has had the power to precipitate the
crisis whenever his interests required it and to delay it until
that time came. The judgment by confession for a debt long since
mature is now entered of record, execution is issued, and his debt
is paid in preference of or to the exclusion of all others. A
Bankrupt Act which permits such a result cannot be said to be
Page 88 U. S. 384
based upon the principle of an equal distribution of all the
assets among all the creditors.
If the creditor had desired to bring his debt within the
protection of the law and to make it like a mortgage, a lien upon
the real estate of the debtor, he should have entered it of record
in the clerk's office. Until so entered, while kept in his safe or
his pocket, it is not a mortgage or judgment or lien of any
character. He simply has the means or the power of giving himself a
lien upon land by filing his judgment or upon goods by issuing
execution. Of itself, unexecuted, the confession has no force or
virtue.
But, secondly, I am of the opinion that the proceeding in
question is forbidden by the terms of the thirty-fifth section of
the Bankrupt Law. [
Footnote 1]
It is there enacted that if any person, being insolvent, within
four months before the bankruptcy proceedings, with a view to give
a preference to any creditor, "procures any part of his property to
be seized on execution," the same shall be void and the assignee
may recover the value of the same.
Every person is deemed to contemplate the natural result of his
acts, and is responsible for all the results that legitimately
follow them. A debtor who confesses a judgment cannot be heard to
say that he did not contemplate the issuing of an execution
thereon. A judgment is given that execution may follow thereon. An
execution is the only mode by which the benefit of the judgment can
be obtained. This principle is so plain that we could hardly expect
to find a decision supporting it. It so happens, however, that the
precise proposition was involved in the case of the
Clarion
Bank v. Jones, recently decided by this Court. [
Footnote 2]
Whoever, therefore, procures judgment to be entered against
himself upon which execution is issued and levied, procures his
goods to be seized on execution within the provision of the
statute. In the case just cited, Mr. Justice Clifford uses the
following language:
"1. That everyone is presumed to intend that which is
Page 88 U. S. 385
the necessary and unavoidable consequence of his acts, and that
the evidence introduced that the debtor signed and delivered to the
defendants the judgment note payable one day after date, giving to
them the right to enter the same of record and to issue execution
thereon without delay, for a debt which was not then due, affords a
strong ground to presume that the debtor intended to give the
creditor a preference, and that the creditor intended to obtain it,
and that it is wholly immaterial whether the preference was
voluntary or was given at the urgent solicitation of the
creditor."
On the 25th of February, 1869, Dibblee gave to Mr. Iselin what
is termed in the State of New York a confession of judgment for
$54,000. The paper contained an acknowledgment of indebtedness to
that amount. It carried an authority to enter judgment for that sum
in the supreme court of the State of New York. Until so entered, it
had no force or effect in any degree or in any form. It created no
lien on lands until so entered. It could give no lien on goods
until so entered and an execution issued in the ordinary form of
law. It was not a mortgage or judgment. It created no lien or
encumbrance. It may be compared to an agreement to give a mortgage
under certain circumstances. Such an agreement might be made of
value, but it is nothing of itself. [
Footnote 3]
Dibblee gave a power or authority simply, by which the creditor
was authorized to give to himself a judgment and execution. This is
conceded in general terms. It is sought to annul its effect,
however, by reference to the fact that when the confession was
executed or the authority given, Dibblee was solvent and might
lawfully confess a judgment. If this be conceded, it does not aid
the argument. If he had entered up the judgment on the 25th of
February by virtue of an authority then given, it might have been
valid, but he did not exercise the authority until the 30th of
April. At that time, Dibblee was insolvent, to the knowledge of
Iselin. The authority given on the 25th of February was a
Page 88 U. S. 386
continuing authority. It was not in its effect an act then and
there done and ended, and of which the force was then and there
exhausted. It was not an act then and there perfected, like a
mortgage or deed. The paper given was nothing of itself, but it
gave to the creditor power and authority to create a judgment. This
authority was not exhausted on the 25th of February, when the paper
was executed. It continued every day to be a subsisting power, and
every moment of the day. On the 30th of April, 1869, it was a power
and authority then subsisting and in force. The judgment entered in
the clerk's office on that day was entered by force of a power of
attorney in the exercise of authority given by Dibblee and that day
existing in full force. The cases of
Bennett v. Davis,
[
Footnote 4] and
Nichols v.
Chapman, [
Footnote 5] show
that if Dibblee had died at any time before the judgment had been
actually entered up, the judgment could not have been perfected.
His death would work a revocation of the authority. From this we
conclude 1, that the paper was of itself no lien or security; 2,
that it was merely a power of attorney which, like every other
power of attorney, is revoked by the death of the grantor. While
the debtor lived, and in this case on the 30th of April, the
authority to enter judgment on that day continued, and on that day
the power and authority were carried into execution. On that day,
however, the debtor was a bankrupt.
These suggestions are equally applicable in the case of
Taylor.
No case has been cited which gives the authority of this Court
to the principle held by the majority of the Court in the present
case. The case of
Buckingham v. McLean, [
Footnote 6] not cited, is the only one I have
been able to find giving apparent countenance to it. The language
of MR. JUSTICE CURTIS in that case is broad enough to cover it. The
case there under consideration did not require or justify the
examination of the question now before us. The question was whether
the fact of the debtor's insolvency should refer to
Page 88 U. S. 387
the time when the confession was given and was entered of
record, or when the execution was issued, and it was held that the
first named was the time to be inquired about. The execution was
issued on the 22d of April. The confession was signed on the 7th of
May and entered of record on the next day, and the twenty-four
hours had made no change in the debtor's affairs. He was solvent on
both of those days. On the 22d of April, he was insolvent. The
distinction, so important in the present case, between the
condition of affairs when the judgment was authorized and the
condition months later, when the judgment was entered of record,
did not and could not arise.
Except for the judgment of a majority of my brethren to the
contrary, I should say that it was plain 1st, that the judgment was
entered by virtue of an authority from the debtor when he was
insolvent to the knowledge of the creditor, and 2d that this was a
procuring by the debtor of the seizure of his property on
execution, which cannot be sustained under the Bankrupt Law.
Great as is my deference to the opinions of my associates, I am
not able in this case to yield my judgment.
[
Footnote 1]
See the section quoted,
supra, 88 U. S. 361 --
REP.
[
Footnote 2]
Supra, 88 U. S.
337.
[
Footnote 3]
Bank of Leavenworth v.
Hunt, 11 Wall. 391.
[
Footnote 4]
3 Cowen 68.
[
Footnote 5]
9 Wendell 452.
[
Footnote 6]
54 U. S. 13 How.
150.
