George West Company v. Lea/Opinion of the Court

The facts stated in the certificate of the circuit court of appeals are substantially as follows:

Lea Bros. & Co. and two other firms filed on December 18, 1898, a petition in the district court of the United States for the Eastern district of Virginia, praying that an alleged debtor, the George M. West Company, a corporation located in Richmond, Va., be adjudiciated a bankrupt, because of the fact that it had, on the date of the filing of the petition, executed a deed of general assignment, conveying all its property and assets to Joseph V. Bidgood, trustee. The George M. West Company pleaded, denying that at the time of the filing of said petition against it the corporation was insolvent, within the meaning of the bankrupt act, and averring that its property, at a fair valuation, was more than sufficient in amount to pay its debts. The prayer was that the petition be dismissed. The court rejected this plea, and adjudicated the West Company to be a bankrupt. The cause was referred to a referee in bankruptcy, and certain creditors secured in the deed of assignment, who had instituted proceedings in the law and equity court of the city of Richmond, under which that court had taken charge of the administration of the estate and trust under the deed of assignment, were enjoined from further prosecuting their proceedings in the state court under said deed of assinment. 91 Fed. 237. From this decree an appeal was allowed to the circuit court of appeals for the Fourth circuit. On the hearing of said appeal the court, desiring instructions, certified the case to this court. The certificate recites the facts as above stated, and submits the following question: 'Whether or not a plea that the party against whom the petition was filed 'was not insolvent, as defined in the bankrupt act, at the time of the filing of the petition against him,' is a valid plea in bar to a petition in bankruptcy filed against a debtor who has made a general deed of assignment for the benefit of his creditors.'

The co tentions of the parties are as follows: On behalf of the debtor it is argued that under the bankrupt act of 1898 two things must concur, to authorize an adjudication of involuntary bankruptcy: First, insolvency in fact; and, second, the commission of an act of bankruptcy. From this proposition the conclusion is deduced that a debtor against whom a proceeding in involuntary bankruptcy is commenced is entitled, entirely irrespective of the particular act of bankruptcy alleged to have been committed, to tender, as a complete bar to the action, an issue of fact as to the existence of actual insolvency at the time when the petition for adjudication in involuntary bankruptcy was filed. On the other hand, for the creditors it is argued that while solvency is a bar to proceedings in bankruptcy predicated upon certain acts done by a debtor, as to other acts of bankruptcy, among which is included a general assignment for the benefit of creditors, solvency at the time of the filing of a petition for adjudication is not a bar, because the bankrupt act provides that such deed of general assignment shall, of itself alone, be adequate cause for an adjudication in involuntary bankruptcy, without reference to whether the debtor by whom the deed of general assignment was made was in fact solvent or insolvent.

A decision of these conflicting contentions involves a construction of section 3 of the act of 1898 (30 Stat. 546). The full text of the section in question is printed in the margin.

It will be observed that the section is divided into several paragraphs, denominated as a, b, c, d, and e. Paragraph a is as follows: 'Sec. 3. Acts of Bankruptcy. (a) Acts of bankruptcy by a person shall consist of his having (1) conveyed, transferred, concealed, or removed, or permitted to be concealed or removed, any part of his property with intent to hinder, delay, or defraud his creditors, or any of them; or (2) transferred, while insolvent, any portion of his property to one or more of his creditors with intent to prefer such creditors over his other creditors; or (3) suffered or permitted, while insolvent, any creditor to obtain a preference through legal proceedings, and not having at least five days before a sale or final disposition of any property affected by such preference vacated or discharged such preference; or (4) made a general assignment for the benefit of his creditors; or (5) admitted in writing his inability to pay his debts and his willingness to be adjudged a bankrupt on that ground.'

It is patent on the face of this paragraph that it is divided into five different headings, which are designated numerically from 1 to 5. Now, the acts of bankruptcy embraced in divisions numbered 2 and 3 clearly contemplate, not only the commission of the acts provided against, but also cause the insolvency of the debtor to be an essential concomitant. On the contrary, as to the acts embraced in enumerations 1, 4, and 5, there is no express requirement that the acts should have been committed while insolvent. Considering alone the text of paragraph a, it results that the nonexistence of insolvency at the time of the filing of a petition for adjudication in involuntary bankruptcy because of the acts enumerated in 1, 4, or 5, which embrace the making of a deed of general assignment, does not constitute a defense to the petition, unless provision to that effect be elsewhere found in the statute. This last consideration we shall hereafter notice.

The result arising from considering the paragraph in question would not be different if it be granted arguendo that the text is ambiguous, for then the cardinal rule requiring that we look beneath the text for the purpose of ascertaining and enforcing the intent of the lawmaker would govern. Applying this rule to the enumerations contained in paragraph a, it follows that the making of a deed of general assignment, referred to in enumeration 4, constitutes in itself an act of bankruptcy, which per se authorizes an adjudication of involuntary bankruptcy entirely irrespective of insolvency. This is clearly demonstrated from considering the present law in the light afforded by previous legislation on the subject.

Under the English bankruptcy statutes (as well that of 1869 of those upon which our earlier acts were modeled), and our own bankruptcy statutes down to and including the act of 1867, the making of a deed of general assignment was deemed to be repugnant to the policy of the bankruptcy laws, and, as a necessary consequence, constituted an act of bankruptcy, per se. This is shown by an examination of the decisions bearing upon the point, both English and American. In Globe Ins. Co. v. Cleveland Ins. Co., 14 N. B. R. 311, 10 Fed. Cas. 488, the subject was ably reviewed, and the authorities are there copiously collected. The decision in that case was expressly relied upon in Re Beisenthal, 14 Blatchf. 146, Fed. Cas. No. 1,236, where it was held that a voluntary assignment, without preferences, valid under the laws of the state of New York, was void as against an assignee in bankruptcy; and this latter case was approvingly referred to in Reed v. McIntyre, 98 U.S. 513. So, also, in Boese v. King, 108 U.S. 379, 385, 2 Sup. Ct. 765, it was held, citing (page 387, 108 U.S., and page 771, 2 Sup. Ct.) Reed v. McIntyre, that whatever might be the effect of a deed of general assignment for the benefit of creditors, when considered apart from the bankrupt act, such a deed was repugnant to the object of a bankruptcy statute, and therefore was, in and of itself alone, an act of bankruptcy. The foregoing decisions related to deeds of general assignment made during the operation of the bankrupt act of 1867 (14 Stat. 536), or the amendments thereto of 1874 and 1876 (18 Stat. 180; 19 Stat. 102). Neither, however, the act of 1867, nor the amendments to it, contained an express provision that a deed of general assignment should be a conclusive act of bankruptcy. Such consequence was held to arise, from a deed of that description, as a legal result of the clause in the act of 1867 forbidding assignments with 'intent to delay, defraud or hinder' creditors, and from the provision avoiding certain acts done to delay, defeat, or hinder the execution of the act. Rev. St. 5021, pars. 4, 7. Now, when it is considered that the present law, although it only retained some of the provisions of the act of 1867, contains an express declaration that a deed of general assignment shall authorize the involuntary bankruptcy of the debtor making such a deed, all doubt as to the scope and intent of the law is removed. The conclusive result of a deed of general assignment under all our previous bankruptcy acts, as well as under the English bankrupt laws, and the significant import of the incorporation of the previous rule, by an express statement, in the present statute, have been lucidly expounded by Addison Brown, J., in Re Gutwillig, 90 Fed. 475, 478.

But it is argued that, whatever may have been the rule in previous bankruptcy statutes, the present act, in other than the particular provision just considered, manifests a clear intention to depart from the previous rule, and hence makes insolvency an essential prerequisite in every case. To maintain this proposition, reliance is placed upon paragraph c of section 3, which reads as follows:

'(c) It shall be a complete defense to any proceedings in bankruptcy instituted under the first subdivision of this section to allege and prove that the party proceeded against was not insolvent as defined in this act at the time of the filing the petition against him, and if solvency at such date is proved by the alleged bankrupt the proceedings shall be dismissed, and under said subdivision one the burden of proving solvency shall be on the alleged bankrupt.'

The argument is that the words 'under the first subdivision of this section' refer to all the provisions of paragraph a, because that paragraph, as a whole, is the first part of the section, separat ly divided, and, although designated by the letter a, it is nevertheless to be considered, as a whole, as subdivision 1. But whether the words 'first subdivision of this section,' if considered intrinsically and apart from the context of the act, would be held to refer to paragraph a as an entirety, or only to the first subdivision of that paragraph, need not be considered. We are concerned only with the meaning of the words as used in the law we are interpreting. Now, the context makes it plain that the words relied on were only intended to relate to the first numerical subdivision of paragraph a. Thus, in the last sentence of paragraph c the matter intended to be referred to by the words 'first subdivision of this section,' used in the prior sentences, is additionally designated as follows, 'and under said subdivision one,' etc.,-language which cannot possibly be, in reason, construed as referring to the whole of paragraph a, but only to subdivision 1 thereof.

This is, besides, more abundantly shown by paragraph d, which provides as follows:

'(d) Whenever a person against whom a petition has been filed as hereinbefore provided under the second and third subdivisions of this section takes issue with and denies the allegations of his insolvency, it shall be his duty to appear in court on the hearing with his books, papers and accounts and submit to an examination, and give testimony as to all matters tending to establish solvency or insolvency, and in case of his failure to so attend and submit to examination the burden of proving his solvency shall rest upon him.'

This manifestly only refers to enumerations 2 and 3 found in paragraph a, which, it will be remembered, make it essential that the acts of bankruptcy recited should have been committed by the debtor while insolvent. Indeed, if the contention advanced were followed, it would render section 3, in many respects, meaningless. Thus, if it were to be held that the words 'first subdivision of this section,' used in paragraph c, referred to the first division of the section (that is, to paragraph a as a whole), it would follow that the words 'second and third subdivisions of this section,' used in paragraph d, would relate to the second and third divisions of the section (that is, to paragraphs b and c). But there is nothing in these latter paragraphs to which the reference in paragraph d could possibly apply, and therefore, under the construction asserted, paragraph d would have no significance whatever. To adopt the reasoning referred to would compel to a further untenable conclusion. If the reference in paragraph c to the 'first subdivision of this section' relates to paragraph a in its entirety, then all the provisions in paragraph a would be governed by the rule laid down in paragraph c. The rule, however, laid down in that paragraph, would be then in irreconcilable conflict with the provisions of paragraph d, and it would be impossible to construe the statute harmoniously without eliminating some of its provisions.

Despite the plain meaning of the statute as shown by the foregoing considerations, it is urged that the following provision contained in paragraph b of section 3 operates to render any and all acts of bankruptcy insufficient, as the basis for proceedings in involuntary bankruptcy, unless it be proven that at the time the petition was filed the alleged bankrupt was insolvent. The provision is as follows: 'A petition may be filed against a person who is insolvent and who has committed an act of bankruptcy within four months after the commission of such act.' Necessarily if this claim is sound, the burden in all cases would be upon the petitioning creditors to allege and prove such insolvency. The contention, however, is clearly rebutted by the terms of paragraph c, which provides as to one of the classes of acts of bankruptcy, enumerated in paragraph a, that the burden should be on the debtor to allege and prove his solvency. So, also, paragraph d, conforming in this resp ct to the requirements of paragraph a, contemplates an issue as to the second and third classes of acts of bankruptcy, merely with respect to the insolvency of the debtor at the time of the commission of the act of bankruptcy. Further, a petition in a proceeding in involuntary bankruptcy is defined in section 1 of the act of 1898, enumeration 20, to mean 'a paper filed * *  * by creditors alleging the commission of an act of bankruptcy by a debtor therein named.' It follows that the mere statement in the statute, by way of recital, that a petition may be filed 'against a person who is insolvent and who has committed an act of bankruptcy,' was not designed to superadd a further requirement to those contained in paragraph a of section 3, as to what should constitute acts of bankruptcy. This reasoning also answers the argument based on the fact that the rules in bankruptcy promulgated by this court provide in general terms for an allegation of insolvency in the petition, and a denial of such allegation in the answer. These rules were but intended to execute the act, and not to add to its provisions by making that which the statute treats in some cases as immaterial a material fact in every case. Therefore, though the rules and forms in bankruptcy provide for an issue as to solvency in cases of involuntary bankruptcy, where by the statute such issue becomes irrelevant, because the particular act relied on in a given case conclusively imports a right to the adjudication in bankruptcy if the act be established, the allegation of insolvency in the petition becomes superfluous, or, if made, need not be traversed.

Out conclusion, then, is that as a deed of general assignment for the benefit of creditors is made by the bankruptcy act alone sufficient to justify an adjudication in involuntary bankruptcy against the debtor making such deed, without reference to his solvency at the time of the filing of the petition, the denial of insolvency by way of defense to a petition based upon the making of a deed of general assignment is not warranted by the bankruptcy law, and therefore that the question certified must be answered in the negative.

And it is so ordered.