Where a creditor presents a claim to the trustee joined with a
statement that he has security upon the estate which it is his
purpose to maintain and upon which he is entitled to priority, he
institutes a proceeding in bankruptcy as distinguished from a
controversy arising in the course of bankruptcy proceedings, and an
appeal lies to the circuit court of appeals under § 25
b,
and the party aggrieved is not limited by § 24
b to a
petition for revision, and an appeal also lie to this Court, under
the rules prescribed by it, if the amount involved exceeds $2,000
and the question involved is one which gives jurisdiction to this
Court to review judgments of the state courts under § 709,
Rev.Stat., or if a certificate of a justice of this Court is made
as required by par. 2 of subd.
b of § 25.
General Order of this Court, No. 36 in bankruptcy, which
requires an appeal from a judgment of the circuit court of appeals
to be taken within thirty days, and that the court from which the
appeal lies to make findings of fact and conclusions of law within
thirty days
held to be complied with by the circuit court
of appeals making findings within such thirty days, and directing
them to be filed
nunc pro tunc as of the day of entry of
judgment, the appeal having also been taken within thirty days from
such day of entry.
Where the claimant against a bankrupt's estate asserts a lien
which would be defeated under the construction placed upon the
Bankruptcy Act by the trustee, and the lien is allowed, a federal
question is involved, which if involved in a case in the state
court would give this Court jurisdiction to review the judgment
under § 709, Rev.Stat., and the case is appealable from the circuit
court of appeals to this Court under § 25
b of the
Bankruptcy Act.
On appeals from the circuit court of appeals under §
25
b, this Court, under par. 3 of General Orders in
Bankruptcy No. 36, can only look at the facts found by the circuit
court of appeals.
An attempt to prefer is not necessarily an attempt to defraud,
nor is a
Page 213 U. S. 224
preferential transfer always a fraudulent one. The question of
fraud depend upon the motive, and in order to invalidate a
conveyance as one made to hinder, delay or defraud creditors within
the meaning of § 67
e of the Bankruptcy Act actual fraud
must be shown.
In this case, a mortgage given within four months of filing the
petition to secure advance and while the mortgagee did not know of
the mortgagor's insolvency, although the latter did, and which
mortgage was found not to have been made with intent to hinder,
delay or defraud creditors,
held not to be voidable under
§ 67
e of the Bankruptcy Law, and that the mortgagee was
entitled to priority thereon, with interest.
152 F. 943 affirmed.
The facts, which involve the construction of certain provisions
of the Bankruptcy Act, are stated in the opinion.
Page 213 U. S. 227
MR. JUSTICE DAY delivered the opinion of the Court.
Alexander Armstrong, upon a petition in voluntary bankruptcy,
was adjudicated a bankrupt by the United States District Court for
the Southern District of Iowa on August 6, 1904. Josiah Coder,
appellant, was duly elected and qualified as trustee. On August 26,
1904, William Arts, appellee, filed a claim for $104,880.46 against
the bankrupt estate on certain promissory notes, to-wit, one in the
sum of $2,700, dated May 19, 1900, due May 19, 1901; one in the sum
of $18,453, dated December 26, 1903, due March 26, 1904; one in the
sum of $20,000, dated January 29, 1904, due on demand; one in the
sum of $58,826.50, dated January 29, 1904, due January 30, 1905,
and one in the sum of $5,512.40, dated June 17, 1904, due on
demand.
It was alleged in the claim filed that the first four notes were
secured by a real estate mortgage, dated May 2, 1904, covering
2,280 acres of land in Carroll County, Iowa, and the last note by a
real estate mortgage of June 17, 1904, covering 615 1/2 acres of
land in Monona County, Iowa. The claimant asked for the allowance
of his notes against the estate, reserving all rights to his
securities in every portion thereof. The trustee filed an answer
and objections to the claim of Arts, attacking both the notes and
the mortgage, alleging, in substance, that the bankrupt was not
indebted to the claimant in the amount named; that two of the notes
were really obligations of the sons of Armstrong, signed by Arts as
surety; that the mortgage was
Page 213 U. S. 228
given to secure a preexisting indebtedness within four months of
the adjudication in bankruptcy; that, at the time of the giving of
the mortgage, the property of the bankrupt was not at a fair
valuation, sufficient to pay his debts, and that he was insolvent;
that the claimant or his agents knew the bankrupt's condition, or
had knowledge of such facts as would put them on inquiry; that the
mortgage was given with the intent and purpose to prefer claimant;
that claimant or his agents had reason to believe a preference was
intended, and that the mortgage was made and given within four
months of the adjudication in bankruptcy with the intent and
purpose to hinder, delay, or defraud creditors.
Testimony was taken before the referee, and upon exceptions to
his findings the case went before the district judge, who set aside
the findings of the referee, made findings of fact, and entered the
following order:
"It is therefore hereby ordered, adjudged, and decreed that the
said claim of William Arts, on account of the four notes referred
to in the fourth finding of facts herein, and secured by the said
mortgage of May 2, 1904, be and the same are established against
the trustee and estate of Alexander Armstrong, bankrupt, and the
said notes and the mortgage securing the same are hereby declared
to have been a good, valid, and [enforceable] lien on the property
described in said mortgage from the time of the giving and
recording of said mortgage down to the time when said property was
sold by the trustee in bankruptcy herein, under order of this
Court, discharged and free and clear of all liens, and are now a
good, valid, and [enforceable] lien on the proceeds of the sale of
said land in the hands of the trustee. To which said order,
adjudication, and decree, and each part thereof, the trustee
excepts."
"It is further ordered, adjudged, and decreed that the said
claims of the said William Arts on account of said four notes,
aggregating, principal and interest, the sum of $97,497.40, as
found in the fifth finding of fact, herein to be paid in full to
the said William Arts, claimant, by the trustee out of the
funds
Page 213 U. S. 229
and moneys in his hands by him received on account of the sale
of the lands covered by said mortgage, and hereinbefore described,
after the payments of all prior liens and claims thereon as
determined by this Court. To which said order, adjudication, and
decree, and each part thereof, the trustee excepts."
"It is further ordered, adjudged, and decreed that the note and
claim of $5,512.40, referred to in the fourteenth finding of fact
herein, be, and the same is hereby, established as against the
trustee and the estate, and that, as to said claim, the said
William Arts will participate in said estate as a general creditor.
To which said order, adjudication, and decree, and each part
thereof, the trustee excepts."
"It is further ordered, adjudged, and decreed that the said
mortgage of June 17, 1904, given to secure said claim of $5,512.40,
be not enforced, but is hereby set aside, cancelled, and held for
naught, and treated as though never given, and the claimant Arts
take nothing under the mortgage."
The case is reported in the district court in 145 F. 202.
The trustee took the case to the Circuit Court of Appeals for
the Eighth Circuit upon petition for a review and by appeal. That
court dismissed the petition for review, and, after considering the
appeal, sustained the findings of the district court and affirmed
its judgment, except upon the matter of interest on the notes
secured by the mortgage, wherein it differed from the district
court, and held that Arts was entitled to interest on the notes, to
be paid out of the fund. 152 F. 943. This correction of interest
was made upon the petition of Arts for review. An appeal was then
taken to this Court upon a petition for allowance of appeal,
stating the allowance of the claim and the establishment of the
lien thereof. The ground of appeal alleged was that the amount in
controversy exceeded the sum of $2,000, and that it was a proper
case to appeal from the court of appeals to the Supreme Court of
the United States. The appeal was allowed within thirty days of the
entry of the decree, and afterwards, within thirty days, an order
was made
Page 213 U. S. 230
which recited that the court had made certain findings of fact
and conclusions of law, and the same was entered
nunc pro
tunc as of the date of the judgment, as follows:
"1. Alexander Armstrong filed a voluntary petition in bankruptcy
on July 27, 1904, in the District Court of the United States for
the Southern District of Iowa, and was adjudged a bankrupt thereon
on August 6, 1904."
"2. For many years prior to May 2, 1904, he had been engaged
principally in farming in Carroll County, Iowa, and on that day he
owned a tract of 80 acres of land and a tract of 2,360 acres of
land in that county, 616 1/2 acres of land in Monona County, a
residence and business lot in Glidden, Iowa, 200 or 300 head of
cattle, 30 horses, a large number of hogs, and some farm machinery.
Mortgages which amounted to about $18,000 had been recorded against
a part of the land in Carroll County, and the land in Monona County
had been traded for in April, 1904, and taken subject to one-half
of a mortgage for $40,000. All of the other property was free from
encumbrance. But the residence in Glidden was his homestead and
exempt from execution."
"3. William Arts was the sole owner of a state bank in Carroll,
Iowa, which he opened in 1898, and his son, W. A. Arts, was the
cashier. In June, 1898, the bank commenced loaning money to
Armstrong, and continued to loan moneys to him in amounts varying
from $20,000 to a few hundred dollars at a time, and to renew old
loans, until, on May 2, 1904, Armstrong owed Arts $98,503.32,
evidenced by notes, and $2,000, evidenced by an overdrawn account
in the bank. This indebtedness had been increasing steadily from
June, 1898, by reason of the new loans and the accrual of interest.
Armstrong first opened an account in Arts' bank in April, 1900.
Prior to that time, he had kept an account in another bank in
Carroll, in which Arts had owned a large interest up to the time he
opened his own bank, in 1898."
"4. Armstrong had the reputation of being one of the wealthiest
men in Carroll County, and no security had been required
Page 213 U. S. 231
of or given by him to Arts until May 2, 1904, when he gave a
mortgage on 2,360 acres of his land in Carroll County to secure the
payment of $98,503.32, evidenced by his notes, and this mortgage
was recorded on May 3, 1904. It was executed at the request of the
cashier of the bank, or at the request of his brother, who had been
called home by reason of the serious illness of their father,
William Arts."
"5. Armstrong was insolvent on May 2, 1904, when he gave the
mortgage to Arts, and he then knew that he was insolvent."
"6. Neither Arts nor any of his agents acting therein knew or
had reasonable cause to believe that Armstrong was insolvent when
he gave the mortgage of May 2, 1904, nor did Arts or any of his
agents acting therein then have reasonable cause to believe that it
was intended thereby to give him a preference over other creditors
by the execution of that mortgage."
"7. Armstrong did not make the mortgage of May 2, 1904, with any
intent or purpose on his part to hinder, delay, or defraud his
creditors or any of them."
"8. There is due to the appellee on the notes secured by the
mortgage of May 2; 1904, with interest to March 1, 1906, the sum of
$109,107.56, and this amount should be paid to appellee by the
appellant out of the funds and moneys in his hands which he
received on account of the sale of the lands covered by that
mortgage."
"
Conclusions of Law."
"1. The mortgage of May 2, 1904, is not voidable by the trustee
under §§ 60
a and 60
b of the Bankruptcy Law,
because neither Arts nor his agents acting therein had reasonable
cause to believe that it was intended thereby to give a
preference."
"2. The mortgage of May 2, 1904, is not null or void as against
the creditors of the mortgagor, Armstrong, under § 67
e,
because it was not made with the intent or purpose on his part to
hinder, delay, or defraud his creditors or any of them."
"3. The giving of the mortgage of May 2, 1904, to Arts did
Page 213 U. S. 232
not, as a matter of law, constitute any evidence of any intent
on the part of the bankrupt to hinder, delay, or defraud other
creditors within the meaning of § 67
e, notwithstanding the
fact that its necessary effect was to hinder and delay other
creditors, and to deprive them of an opportunity they might
otherwise have had to collect larger portions of their claims."
"4. The mortgage of May 2, 1904, though given within four months
of the adjudication in bankruptcy, to secure a preexisting
unsecured indebtedness, was valid, and the appellee should be paid
$109,107.56 out of the proceeds of the sale of the mortgaged
property."
It is contended by the appellee that the case should be
dismissed for want of jurisdiction of the circuit court of appeals
and of this Court. Questions of the jurisdiction in bankruptcy,
particularly of the appellate courts, have given rise to numerous
and not altogether reconcilable decisions. The Bankruptcy Act, as
originally passed, did not give the bankruptcy courts jurisdiction
over plenary suits to recover the property alleged to belong to the
trustee in bankruptcy, except with the consent of the defendant.
This was the subject of full consideration and determination in
Bardes v. The Bank, 178 U. S. 524.
Subsequent decisions of this Court construed the act to give the
bankruptcy courts jurisdiction over controversies concerning the
property in possession of the bankruptcy courts.
Whitney v.
Wenman, 198 U. S. 539;
Murphy v. John Hoffman Co., 211 U.
S. 562.
Section 24 of the Bankruptcy Act provides:
"
a. The Supreme Court of the United States, the circuit
courts of appeals of the United States, and the supreme courts of
the territories, in vacation in chambers and during their
respective terms, as now or as they may be hereafter held, are
hereby invested with appellate jurisdiction of controversies
arising in bankruptcy proceedings from the courts of bankruptcy
from which they have appellate jurisdiction in other cases. The
Supreme Court of the United States shall exercise a like
jurisdiction from courts of bankruptcy not within in any
Page 213 U. S. 233
organized circuit of the United States and from the Supreme
Court of the District of Columbia."
"
b. The several circuit courts of appeal shall have
jurisdiction in equity, either interlocutory or final, to
superintend and revise in matter of law the proceedings of the
several inferior courts of bankruptcy within their jurisdiction.
Such power shall be exercised on due notice and petition by any
party aggrieved."
By paragraph
b of § 24, the circuit courts of appeals
have jurisdiction to superintend and revise in matters of law,
proceedings of the several inferior courts of bankruptcy within
their jurisdiction. The proceeding under this section is designed
to enable the circuit court of appeals to review questions of law
arising in bankruptcy proceedings, and is not intended as a
substitute for the right of appeal upon controverted questions of
fact under the right of appeal given in controversies arising in
bankruptcy proceedings (§ 24), or the special appeal given in
certain cases under § 25.
Section 25 of the act provides for appeals in bankruptcy
proceedings, and in such proceedings appeals may be taken from the
courts of bankruptcy to the circuit courts of appeals in three
classes of cases.
We are concerned in this case with the third class, "from a
judgment allowing or rejecting a debt or claim of five hundred
dollars or over." The appeal must be taken within ten days after
the judgment.
It is therefore apparent that the mode of appeal in a given case
depends upon the character of the proceeding. And the question to
be solved in such cases is does the case present a proceeding in
bankruptcy, or is it a controversy arising in bankruptcy
proceedings?
A reference to the adjudications in this Court may assist in
clearing the matter.
Hewitt v. Berlin Machine Works,
194 U. S. 296, is
an illustration of a controversy arising in bankruptcy proceedings
(§ 24
a) wherein the appeal is under § 6 of the act of
March 3, 1891. In that case, the Berlin Machine Works
Page 213 U. S. 234
asserted title to the property in the possession of the trustee,
and intervened in the bankruptcy proceedings, raising a distinct
and separable issue as to the title to property in the possession
of the trustee. This Court, speaking through the Chief Justice,
held that the case presented a controversy arising in bankruptcy
proceedings, appealable to the courts of appeal as other cases
under § 6 of the Act of March 3, 1891. Nor is the decision in the
Berlin Machine Works case inconsistent with
First
National Bank v. Chicago Title & Trust Co., 198 U.
S. 280. In that case, there was an attempt on the part
of the trustee to invoke an adjudication as to the title to
property which the district court found not to be in the possession
of the trustee, notwithstanding the petition of the trustee had
averred possession, and it was held that, when this fact appeared,
the district court had no longer jurisdiction of the case, under
the doctrine laid down in
Bardes v. Bank, supra, and ought
to have dismissed the case.
We are thus brought to the determination of the question was the
proceeding instituted by Arts a controversy arising in bankruptcy
proceedings, or did he institute a bankruptcy proceeding, properly
speaking? The answer to this question depends upon an examination
of the manner in which the jurisdiction of the bankruptcy court was
invoked for the determination of the rights involved. The record
discloses that Arts filed in due form a claim upon the promissory
notes, setting them forth in detail, asking that they be allowed as
a proper claim against the assets in the hands of the trustees to
be administered, described the mortgage as being the only security
held by him for the payment of the debt, and concluded his claims
with this statement:
"The deponent, in filing his claim herein against the bankrupt,
does so with the express understanding that he makes no waiver of
any portion of his security, and expressly reserves said security
and every portion thereof to the amount of said claim, including
the costs, if any, of collecting payment thereof out of said
property held as security."
He thus in effect presented to the trustee in bankruptcy a
Page 213 U. S. 235
claim upon his notes, joined with the statement that he had
security upon the estate which it was his purpose to maintain, and
upon which he was entitled to priority in the distribution of the
assets. He did not, as was the case in
Hewitt v. Berlin Machine
Works, supra; York Manufacturing Company v. Cassell,
201 U. S. 344;
Security Warehousing Co. v. Hand, 206 U.
S. 415, intervene in the bankruptcy proceedings for the
purpose of asserting an independent and superior title to the
property held by the trustees, claiming the right to recover the
property and to remove it from the jurisdiction of the bankruptcy
court as a part of the estate to be administered. Arts appeared in
the bankruptcy court, recognizing the title and possession of the
trustee in bankruptcy, asserted his claim upon the notes, and his
right to have the assets so administered and paid as to recognize
the validity of the lien for the security for his claim. We are of
opinion that he thus instituted a proceeding in bankruptcy, as
distinguished from a controversy arising in the course of
bankruptcy proceedings. This being the character of the proceeding,
its subsequent disposition and the appropriate appellate
jurisdiction are to be determined by the provisions of the
Bankruptcy Act governing bankruptcy proceedings.
It is true that Arts asserted both a debt and a lien to secure
the same. In such cases, the procedure as to the debt or claim
governs, with incidental right to consider and determine the
validity and priority of the lien asserted upon the property in the
hands of the bankrupt's trustee. This method of procedure was
recognized in
Hutchinson v. Otis, 190 U.
S. 552. In that case, Otis, Wilcox & Company, having
a claim for $4,421.64, had sued and attached the bankrupt's
property within four months of filing the petition in bankruptcy.
Otis, Wilcox & Company, supposing their attachment good, took
judgment by default, and collected their debts from the attached
parties, the trustee agreeing to save them harmless from liability;
satisfaction was entered in each suit. Subsequently the trustee
demanded payment of these debtors of the bankrupt, and, as they had
no defense, Otis, Wilcox & Company paid to the trustee
Page 213 U. S. 236
the amount of the debts. Otis, Wilcox & Company then filed a
claim in bankruptcy, which was allowed in the lower court, and they
asserted a lien upon the bankrupt estate. After disposing of the
question of the effect of the satisfaction, and deciding that the
claim was provable, speaking of the asserted lien, this Court
said:
"Under the circumstances of this case, it seems to us that the
petition [asserting the lien] was incident to the claim,
Cunningham v. German Insurance Bank, 101 F. 977,
S.C., 103 F. 932, and was a bankruptcy proceeding under §
2, cl. 7, within the meaning of § 25, regulating appeals in
bankruptcy proceedings, and that the decree upon it was not 'a
judgment allowing or rejecting a debt or claim of five hundred
dollars or over,' within § 25
a, 3, and was not an
independent ground of appeal.
See In re Whitener, 105 F.
180, 186;
In re Worcester County, 102 F. 808, 813;
In
re Rouse, Hazard & Company, 91 F. 96;
In re York,
4 N.B.R. 479, 483. If the question should be held to come up as
incident to the appeal on the proof,
Cunningham v. German
Insurance Bank, supra, we see no error in the decree of the
district court."
The contest in the
Otis case, as in this, was over the
claim presented, and, incidentally, to establish a lien upon the
bankrupt's estate.
It is insisted, however, that inasmuch as the trustee in the
case at bar made no objection to the amount found due upon the
notes by the district court, and only sought by his appeal to
further contest the right to the security asserted by Arts, that
his sole remedy was under § 24
b -- to have a revision in
the circuit court of appeals by a petition filed for that purpose,
and that the circuit court of appeals should have dismissed the
attempted appeal. But we are of opinion that the character of the
proceeding must be determined by the nature of the claim set up
against the trustee in bankruptcy, and as § 25
a, 3, gives
an appeal to the court of appeals from a judgment allowing or
rejecting a debt or claim of $500 or over, that the appeal
Page 213 U. S. 237
was properly allowed in this case, and brought before the
circuit court of appeals the validity of the claim and the lien
asserted securing the debt.
The question remains, has this Court jurisdiction by appeal from
the circuit court of appeals? This depends upon subdivision b of §
25, giving an appeal, under such rules as may be prescribed by this
Court, where the amount in controversy exceeds the sum of $2,000,
and the question involved is one which might have been taken on
appeal or writ of error from the highest court of the state to this
Court, or where some Justice of this Court shall make a
certificate, as required under paragraph 2 of subdivision
b. As there is no such certificate, the question is, was
the appeal taken within the time prescribed by the rules of this
Court, and is the question involved one which might have been taken
on appeal or writ of error from the highest court of the state to
this Court? The General Order in bankruptcy No. 36 provides that
appeals under the act from the circuit court of appeals to this
Court shall be taken within thirty days after the judgment or
decree, and that in every such case,
"the court from which the appeal lies shall at or before the
time of entering its judgment or decree, make and file a finding of
the facts, and its conclusions of law thereon, stated separately,
and the record transmitted to the Supreme Court of the United
States in such an appeal shall consist only of the pleadings, the
judgment or decree, the finding of facts, and the conclusions of
law."
The appeal was taken within the thirty days. The circuit court
of appeals made the findings of fact and conclusions of law part of
the record by an order, made within thirty days, directing the same
to be filed
nunc pro tunc as of the date the judgment
entered. It is insisted that this is not a compliance with the rule
that requires the findings to be made at or before the time of
entering its judgment or decree. But we think that the court must
be presumed to have acted within its authority to correct the
record by this order, made within the time allowed for an appeal,
to make it show the findings at or before the time of entering the
judgment.
Page 213 U. S. 238
Is the case one which might have been taken to this Court upon
appeal or writ of error from the highest court of the state? We are
of opinion that it is. In determining the validity of the lien
asserted to secure the claim, a construction of the Bankruptcy Act
is directly involved. A construction of the act is insisted upon by
the appellant which would defeat the lien. On the other hand, the
construction contended for by the appellee would give the lien
validity. In such a case, had the case been in the state court, it
might have been brought here for review under § 709 of the Revised
Statutes.
Rector v. City Deposit Bank Co., 200 U.
S. 405;
St. Louis & Iron Mountain R. Co. v.
Taylor, 210 U. S. 281,
210 U. S. 293.
It is contended that a contrary ruling was made in
Chapman v.
Bowen, 207 U. S. 89. But,
in concluding the opinion of the Court in that case, MR. CHIEF
JUSTICE FULLER said:
"The decision below proceeded on well settled principles of
general law, broad enough to sustain it without reference to
provisions of the Bankruptcy Act. And moreover, even if it could be
held that, by his claim Bowen asserted any right within the meaning
of § 709, Rev.Stat., the decision was in his favor, and the
trustee's bare denial of the claim could not be relied on under
that statute.
Jersey City & Bergen Railroad Company v.
Morgan, 160 U. S. 288."
We therefore reach the conclusion that the claim presented
instituted a proceeding in bankruptcy, and, being for over $500, it
was appealable to the circuit court of appeals, bringing to that
court the validity of the asserted lien, and that appeal lies to
this Court under § 25
b, as the claim exceeded $2,000, and,
with the lien asserted thereon, presented a case for the
construction of the Bankruptcy Act which might have been brought
here under § 709 of the Revised Statutes had the case been decided
by the highest court of the state. We therefore entertain the case
upon its merits, and will proceed to examine the validity of the
lien asserted under the mortgage to Arts upon the facts found by
the circuit court of appeals.
In an appeal of this character, we can look only at the
facts
Page 213 U. S. 239
found by the circuit court of appeals. General Orders in
Bankruptcy 36, paragraph 3. The question before us is, upon the
findings of fact made by the circuit court of appeals, should the
mortgage to Arts of May 2, 1904, securing the sum of $98,503.32,
have been invalidated? The mortgage was placed on a large tract of
land in Carroll County, Iowa. The record discloses that this was
not all the property of the bankrupt. Just what the other property
was worth above encumbrances does not definitely appear. It does
appear, however, that the bankrupt owned a residence and business
lot in Glidden, Iowa, 200 or 300 head of cattle, 30 horses, a large
number of hogs, and some farm machinery, unencumbered. And it is
specifically found that, although Armstrong was insolvent on May 2,
1904, and knew that he was insolvent, neither the mortgagee nor any
of his agents knew or had reasonable cause to believe that
Armstrong was then insolvent; nor did Arts or any of his agents
then have reasonable cause to believe that it was intended thereby
to give a preference over other creditors by the execution of the
mortgage. It is further specifically found that Armstrong did not
make the mortgage in question with any intent or purpose on his
part to hinder, delay, or defraud his creditors, or any of them.
The decision of the case requires consideration of certain sections
of the Bankruptcy Act. Section 60, subdivision
a,
provides:
"A person shall be deemed to have given a preference if, being
insolvent, he has, within four months before the filing of the
petition, or after the filing of the petition, and before the
adjudication, procured or suffered a judgment to be entered against
himself in favor of any person, or made a transfer of any of his
property, and the effect of the enforcement of such judgment or
transfer will be to enable any one of his creditors to obtain a
greater percentage of his debt than any other of such creditors of
the same class."
Such preferences may be set aside under the condition named in
subdivision
b of § 60, which is as follows:
"If a bankrupt shall have given a preference, and the person
receiving it, or to be benefited thereby, or his agent acting
Page 213 U. S. 240
therein, shall have had reasonable cause to believe that it was
intended thereby to give a preference, it shall be voidable by the
trustee, and he may recover the property or its value from such
person."
Manifestly this conveyance could not be set aside under the
provisions of § 60
b. For, while it is true that, under the
facts found, the conveyance might be deemed a preference, as a
transfer of property which would have the effect of enabling one
creditor to obtain a larger percentage of his debt or claim than
other creditors of the same class, yet, as it is distinctly found
that neither the mortgagee nor his agent had any reasonable cause
to believe that it was intended to give a preference, the same
could not be avoided under § 60
b.
The reliance in this case is upon § 67
e of the act.
This section, so far as it is necessary to consider it, reads as
follows:
"
d. Liens given or accepted in good faith, and not in
contemplation of or in fraud upon this act, and for a present
consideration, which have been recorded according to law, if record
thereof was necessary in order to impart notice, shall not be
affected by this act."
"
e. That all conveyances, transfers, assignments, or
encumbrances of his property, or any part thereof, made or given by
a person adjudged a bankrupt under the provisions of this act,
subsequent to the passage of this act, and 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,
shall be null and void as against the creditors of such debtor,
except as to purchasers in good faith and for a present fair
consideration, and all property of the debtor conveyed,
transferred, assigned, or encumbered as aforesaid shall, if he be
adjudged a bankrupt, and the same is not exempt from execution and
liability for debts by the law of his domicil, be and remain a part
of the assets and estate of the bankrupt, and shall pass to his
said trustee, whose duty it shall be to recover and reclaim the
same by legal proceedings or otherwise for the benefit of the
creditors. "
Page 213 U. S. 241
It is the contention of the appellant that, as the necessary
consequence of the giving of the mortgage under consideration was
to hinder, delay, or defraud creditors of the bankrupt in the
collection of their debts, Armstrong must be presumed to have
intended such consequences, and the mortgage is therefore
voidable.
A consideration of the provisions of the bankruptcy law as to
preferences and conveyances shows that there is a wide difference
between the two, notwithstanding they are sometimes spoken of in
such a way as to confuse the one with the other. A preference, if
it have the effect prescribed in § 60, enabling one creditor to
obtain a greater portion of the estate than others of the same
class, is not necessarily fraudulent. Preferences are set aside
when made within four months, with a view to obtaining an equal
distribution of the estate, and in such cases it is only essential
to show a transfer by an insolvent debtor to one who, himself or by
his agent, knew of the intention to create a preference. In
construing the Bankruptcy Act, this distinction must be kept
constantly in mind. As was said in
Githens v. Shiffler,
112 F. 505: "An attempt to prefer is not to be confounded with an
attempt to defraud, nor a preferential transfer with a fraudulent
one." In
In re Maher, 144 F. 503-505, it was well said by
the District Court of Massachusetts:
"In a preferential transfer the fraud is constructive or
technical, consisting in the infraction of that rule of equal
distribution among all creditors which it is the policy of the law
to enforce when all cannot be fully paid. In a fraudulent transfer
the fraud is actual -- the bankrupt has secured an advantage for
himself out of what in law should belong to his creditors, and not
to him."
Is the conveyance voidable under subdivision
e, § 67?
Under the terms of that subdivision a fraudulent conveyance is made
void as to creditors, except as to grantees in good faith and for a
present fair consideration. The provision saving conveyances to
purchasers in good faith and for a present fair consideration
prevents such conveyances from being declared void
Page 213 U. S. 242
by the act, although they have been made by the bankrupt with
the intent on his part to hinder, delay, or defraud his creditors.
But the act does not dispense with the necessity of showing, to
avoid a conveyance or transfer under § 67
e, that the
bankrupt had the actual intent to hinder, delay, or defraud
creditors. What is meant when it is required that such conveyances,
in order to be set aside, shall be made with the intent on the
bankrupt's part to hinder, delay, or defraud creditors? This form
of expression is familiar to the law of fraudulent conveyances, and
was used at the common law, and in the statute of Elizabeth, and
has always been held to require, in order to invalidate a
conveyance, that there shall be actual fraud, and it makes no
difference that the conveyance was made upon a valuable
consideration, if made for the purpose of hindering, delaying, or
defrauding creditors. The question of fraud depends upon the
motive. Kerr, Fraud & Mistake, 196, 201. The mere fact that one
creditor was preferred over another, or that the conveyance might
have the effect to secure one creditor and deprive others of the
means of obtaining payment, was not sufficient to avoid a
conveyance; but it was uniformly recognized that, acting in good
faith, a debtor might thus prefer one or more creditors.
Stewart v. Dunham, 115 U. S. 61;
Huntley v. Kingman & Co., 152 U.
S. 527.
We are of opinion that Congress, in enacting 67
e, and
using the terms "to hinder, delay, or defraud creditors," intended
to adopt them in their well known meaning as being aimed at
conveyances intended to defraud. In § 60 merely preferential
transfers are defined, and the terms on which they may be set aside
are provided; in 67
e, transfers fraudulent under the well
recognized principles of the common law and the statute of
Elizabeth are invalidated. The same terms are used in § 3,
subdivision 1, in which it is made an act of bankruptcy to transfer
property with intent to hinder, delay, or defraud creditors. Such
transfers have been held to be only those which are actually
fraudulent. It was so held in
Lansing Boiler & Engine Works
v. Ryerson, 128 F. 701. Considering the language,
Page 213 U. S. 243
which is identical with that in § 67
e, the circuit
court of appeals, speaking through Judge Severens, said:
"The language of subsection 1 of section 2 is the familiar
language of statutes against conveyances fraudulent as against
creditors, and we think there can be no doubt that Congress
intended the words employed should have the same construction and
effect as have for a long period of time been attributed to those
words.
Githens v. Shiffler, 112 F. 505. And, so construed,
the test of the conveyances intended by subsection 1 of section 3
is that of the
bona fides of the transfer. Loveland,
Bank., 2d ed. § 51. For it is the well settled law that a
conveyance made in good faith, whether for an antecedent or present
consideration, is not forbidden by such statutes, notwithstanding
the effect may be that it hinders or delays creditors by removing
from their reach assets of the debtor."
And to the same effect is the decision of the Circuit Court of
Appeals of the Second Circuit in
In re Bloch, 142 F. 676,
in which that court had occasion to consider the meaning of §
67
e as applicable to 57
g of the act as amended
1903, requiring the surrender of preferences voidable under § 60,
subdivision
b, or of fraudulent conveyances voidable under
§ 67
e, in order to make proof of a claim, and, in
considering § 67
e, Judge Townsend, speaking for the court,
said:
"We think Congress must be presumed to have intended by the
introduction of § 67
e to require a surrender only of such
transfers as would have been fraudulent at common law, or would
constitute an act of bankruptcy under § 3 of the act. In
Githens v. Shiffler, supra, the bankrupt used the proceeds
of a sale of property to prefer certain creditors. The court, upon
a review of the authorities, held that § 3 applied only to those
transfers which, according to the established course of authority,
constituted a fraudulent transfer at the time of the passage of the
Bankruptcy Act, and held that a mere preferential transfer, as
distinguished from a fraudulent one, was not an act in bankruptcy
under said § 3. "
Page 213 U. S. 244
"The question as to whether a transfer is made with intent to
hinder, delay, or defraud depends upon whether the act done is a
bona fide transaction. Loveland on Bankruptcy 391;
Cadogan v. Kennett, 2 Cowp. 435;
Lansing Boiler &
Engine Works v. Ryerson, supra. An intent to defraud is the
test of the right to avoid a transfer under § 67
e."
In dealing with this question this Court said, in
Thompson
v. Fairbanks, 196 U. S. 516:
"There is no finding that, in parting with the possession of the
property, the mortgagor had any purpose of hindering, delaying, or
defrauding his creditors or any of them. Without a finding to the
effect that there was an intent to defraud, there was no invalid
transfer of the property within the provisions of § 67
e of
the bankruptcy law."
That it is essential to show actual fraud in order to invalidate
conveyances under § 67
e is the view of the text writers
upon this subject. Loveland on Bankruptcy, 3d ed., 476; Collier on
Bankruptcy, 6th ed., 562; 1 Remington on Bankruptcy § 1498.
We do not agree, if such is to be held the effect of the third
conclusion of law in the finding of the court of appeals, that the
giving of the mortgage and its effect upon other creditors could
not be considered as an item of evidence in determining the
question of fraud. What we hold is that, to constitute a conveyance
voidable under § 67
e, actual fraud must be shown.
How, then, stands the case at bar? As we have already said, we
must decide this case upon the facts found in the circuit court of
appeals, and it is therein found that, in making the mortgage in
question, Armstrong had no intention to hinder, delay, or defraud
his creditors. In view of the finding of the circuit court of
appeals, it may be that Armstrong, 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. Such conveyances were valid at the common law and
under the statute from which this feature of the law was taken, and
while Congress, in the
Page 213 U. S. 245
Bankruptcy Act, strikes down preferential conveyances which come
within its terms where the party preferred has good reasons to
believe that a preference is intended, it has not declared voidable
merely preferential conveyances made in good faith, and in which
the grantee, as is found in this case, was ignorant of the
insolvency of the grantor, and had no reason to believe that a
preference was intended. Nor do we think the circuit court of
appeals erred in holding that, inasmuch as the estate was ample for
that purpose, Arts was entitled to interest on his mortgage debt.
Finding no error in the judgment of the court of appeals, the same
is
Affirmed.