Where a debtor, knowing that his creditor is insolvent, accepts
a draft drawn on him by such creditor, the draft being drawn and
accepted with the purpose of giving a preference, the transaction
is a fraud on the Bankrupt Act, and the assignee in bankruptcy can
recover from the acceptor the amount of the draft.
Fox & Howard had contracted with a railroad company to
Page 88 U. S. 476
make its railroad, and on the 4th of October, 1870, employed one
N. Young as a contractor (excavator) under them. By the terms of
the contract with Young, Fox & Howard were to pay him, on the
15th of December, 1870, a certain sum per cubic yard of earth
excavated, payments to be made as follows:
"To the laborers employed in doing said work the amount
ascertained to be due to them for their services and the balance to
the said Young."
Young finished his work November 24, 1870, and being in debt to
one Burrows, as also to three other persons severally, to the
extent of $3,692, gave to him and them drafts on Fox & Howard
for different amounts, in all making that sum, payable December 15,
1870. Fox & Howard accepted the drafts in this form:
"Accepted and promised to be paid out of
any money due N.
Young, in our hands, after payment of laborer's lien and
orders previously accepted. Done this 1st day of December, at eight
o'clock P.M."
"FOX & HOWARD"
About the same time various laborers under Young, and thus
creditors of Young, also gave drafts (in all for $502), on him in
favor of Burrows, who cashed or discounted them, and by Young's
directions Fox & Howard charged him, Young, with the amount of
the drafts as cash paid to him, they agreeing, at the same time,
with Burrows, to pay to him the amount of the drafts, but not
actually paying them.
When Young gave these different drafts, he was insolvent, and on
the 7th of January, 1871, a petition in bankruptcy was filed
against him, on which he was, upon the same day, decreed a
bankrupt.
One Gardner being appointed his assignee brought this suit in
the court below, September 12, 1872, against Fox & Howard to
compel the payment to him of what they had owed Young, and had
agreed to pay to Burrows and the others, in the manner already
stated. The ground of the
Page 88 U. S. 477
suit was of course that the transactions were void under the
thirty-fifth section of the Bankrupt Act, quoted
supra,
88 U. S.
365.
The court charged the jury that before the plaintiff could
recover he was bound, under the thirty-fifth section of the act, to
show:
1st. That Young was insolvent when the drafts were given.
2d. That Fox & Howard had reasonable cause to believe him
insolvent.
3d. That the person or persons, in such case respectively, to
whom the drafts were given, had reasonable cause to believe Young
insolvent.
And further, that Fox & Howard had reasonable cause to
believe that the person or persons to whom they were so given had,
when they took the same, reasonable cause to believe Young
insolvent. But that if he satisfied the jury, by the evidence, of
all these things, the acceptances of Fox & Howard were void,
and did not amount to payments in the action.
Under these instructions, the jury found for the assignee the
amounts claimed, and Fox & Howard brought the case here on
exceptions to the charge.
Page 88 U. S. 478
MR. JUSTICE HUNT delivered the opinion of the Court.
The thirty-fifth section of the Bankrupt Act provides that a
transaction like the one under consideration here "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."
The language of the statute authorizing the assignee "to recover
the property, or the value of it, from the person so receiving it
or so to be benefited," does not create a qualification or
limitation of power. There is no implication that the party paying
is not also liable. The words are those of caution merely, and give
the assignee no power that he would not possess if they had been
omitted from the statute. In the present case, the property or
value attempted to be transferred belonged originally to the
bankrupt. On the adjudication of bankruptcy, the possession and
ownership of the same were transferred to the assignee. [
Footnote 1] The attempted transfer by
the bankrupt was fraudulent and void. It follows logically that the
debtor yet holds it for the assignee, and that the assignee may sue
him for its recovery. [
Footnote
2]
Upon principle, there would seem to be scarcely room for doubt
upon the point before us. The pretended payment or transfer or
substitution by the debtor of the bankrupt was in fraud of the act
and illegal. It was a transaction expressly forbidden by the
statute. The jury found that the insolvency of Young was known to
Fox & Howard and to
Page 88 U. S. 479
the creditors by whom the drafts were taken at the time they
were taken; that they were given by the bankrupt with intent to
create forbidden preferences, and that they were accepted by Fox
& Howard in fraud of the act. This is a transaction expressly
condemned by the statute.
It amounts simply to this: the debtor of the bankrupt seeks to
protect himself against an admitted debt by pleading a payment or
substitution which was in fraud of the Bankrupt Act, and therefore
void. The proposition carries its refutation on its face. Fox &
Howard were indebted to the bankrupt and can only discharge
themselves by a payment or satisfaction which the law will
sanction. A payment or transfer condemned by the express terms of
the Bankrupt Act cannot protect them.
It is to be observed, also, that when the bankruptcy proceedings
were begun Fox & Howard had never, in fact, paid to Burrows and
his associates the amount of the drafts accepted by them. They had
simply promised to pay them, if there should prove upon settlement
of their accounts with the bankrupt to be so much money due to him.
This presents them in a still less favorable condition. They owe
money to the bankrupt. They are sued for it by his assignee in
bankruptcy. As a defense, they allege that they have made an
agreement with Burrows and others, with the assent of the bankrupt,
to pay the amount of the debt to them. They allege an agreement
merely. This agreement has already been shown to be illegal. The
assignee, representing the creditors as well as the bankrupt, is
authorized to set up such illegality. The bankrupt perhaps could
take no action to avoid this agreement, but his assignee has
undoubted authority to do so. When the assignee sets up this
illegality and sustains it by proof of the facts referred to, the
whole foundation of the defense falls.
It is well settled that a debtor may pay a just debt to his
creditor at any time before proceedings in bankruptcy are taken. It
is also true that a valid agreement to substitute another person as
creditor may be made, and may be pleaded as a discharge of the debt
in the nature of payment. It is
Page 88 U. S. 480
not, however, payment in fact, and is binding only when the
contract is fair and honest and binding upon the first
creditor.
The right of an insolvent person before proceedings are
commenced against him to pay a just debt, honestly to sell property
for which a just equivalent is received, to borrow money and give a
valid security therefor, are all recognized by the Bankrupt Act,
and all depend upon the same principle. In each case, the
transaction must be honest, free from all intent to defraud or
delay creditors, or to give a preference, or to impair the estate.
[
Footnote 3]
If there is fraud, trickery, or intent to delay or to prefer one
creditor over others, the transaction cannot stand.
It is urged that Fox & Howard are liable upon the drafts to
the creditors of Young, in whose favor the acceptances were given.
Should this be so it would but add another to that large class of
cases in which persons endeavoring to defraud others are caught in
their own devices. The law looks with no particular favor on this
class of sufferers.
In the present case, however, there seems to be no such
difficulty. The acceptances were a part of an illegal contract, and
no action will lie upon them in favor of those making claim to
them. They are guilty parties to the transaction and can maintain
no action to enforce it. [
Footnote
4] The law leaves these parties where it finds them, giving aid
to neither. The drafts cannot pass into the hands of
bona
fide holders, as by the terms of the acceptances they are to
remain in the possession of Fox & Howard until they can be paid
by authority of law. When Fox & Howard pay to the assignee the
debt due from them to Young they will pay it to the party entitled
to receive it and will have discharged their liability.
Judgment affirmed.
[
Footnote 1]
Section 14 of the Bankrupt Act.
[
Footnote 2]
See Bolander v. Gentry, 36 Cal. 105;
Hanson v.
Herrick, 100 Mass. 323.
[
Footnote 3]
See Cook v.
Tullis, 18 Wall. 332;
Tiffany v. Boatman's
Institution, 18 Wall. 376.
[
Footnote 4]
Nellis v. Clark, 20 Wendell 24;
S.C., 4 Hill
424;
Randall v.
Howard, 2 Black 585;
Kennett v.
Chambers, 14 How. 38.
