Wilson v. City Bank

ON certificate of division in opinion between the judges of the Circuit Court for the District of Minnesota; the case being thus:

The Bankrupt Act of 1867 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, sequenstered, 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, 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 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 prim a 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 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 indorsers, 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 bank 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:'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 $2130. 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 $2385, 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 defence to the notes upon which the bank had sued them, and put in no defence. 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 defence, 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 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.

Mr. E. G. Rogers, for the assignee in bankruptcy:

I. Being insolvent, the Vanderhoofs suffered their entire stock of goods to be seized on execution on the judgment by default, obtained against them by the bank, with intent to give a preference to the bank over their other creditors, and in fraud of the thirty-fifth and thirty-ninth sections of the Bankrupt Act.

(1.) They suffered their property to be seized on execution.

(2.) This was a transfer of the property, within the meaning of the thirty-fifth and thirty-ninth sections of the act.

The bank stands in no better position than if the Vanderhoofs had paid the debt in money or in goods.

(3.) It was a transfer out of the usual and ordinary course of Vanderhoof Brothers' business, and, therefore, prim a facie fraudulent.

(4.) The necessary consequence of Vanderhoof Brothers suffering their entire stock in trade, and their entire property to be levied on, was to break up their business and put it out of their power to pay their other creditors. It appropriated their whole property to the payment of a single creditor, putting the property into the hands of that creditor, enabling him to pay himself in full, without regard to whether other creditors were paid or not, and thereby necessarily gave a preference to that creditor.

It was an act of bankruptcy, and under the circumstances it was almost inevitable that the other and unpreferred creditors should proceed against Vanderhoof Brothers in bankruptcy (as has actually been the case), in which event the effect of suffering the levy is to impede, hinder, and delay the operation of the Bankrupt Act.

Vanderhoof Brothers must be presumed to have intended these natural and legal consequences of their conduct; they might have prevented them by filing their petition in voluntary bankruptcy. Not having done so, but having suffered a creditor to obtain a preference which they might have prevented, they must be presumed to have intended to give such preference.

II. The bank having knowledge of the Vanderhoofs' acts of bankruptcy, and having also at least reasonable cause to believe the firm insolvent, had also reasonable cause to believe that a fraud upon the Bankrupt Act was intended by them, and in fact did themselves intend to obtain a preference in fraud of the act.

1. It follows as a necessary conclusion that if the bank had reasonable cause to believe the Vanderhoofs insolvent, 'they had reason to believe that the Vanderhoof Brothers in neglecting to make payment of their debts, in submitting to suit and in neglecting to take the steps contemplated by the Bankrupt Act for the purpose, and equal benefit of all their creditors according to the plain intent and purport of the law, were acting in fraud of the law itself.'

They had reason to believe that if they seized all the Vanderhoof goods on execution, the bank would obtain a preference over their other creditors, and thereby a fraud on the act would be perpetrated. They as well as the Vanderhoofs must be presumed to have intended the consequences of their conduct, and these consequences were to give the bank a preference, and to prevent the property from being distributed equally among all Vanderhoof Brothers' creditors under the provisions of the Bankrupt Act.

2. The transfer effected by the levy being out of the usual and ordinary course of Vanderhoof Brothers' business, was prim a facie evidence to the bank of fraud.

III. The bank, after acts of bankruptcy of the Vanderhoofs, of which it had full knowledge, and with reasonable cause to believe the Vanderhoofs insolvent, could not by proceeding in a State court obtain a valid lien and seize the property of the bankrupts to the exclusion of their other creditors. This is said by the Supreme Court of the United States, in Shawhan v. Wherritt, to be 'the chief and important question involved' in that case, and it was there held that such a proceeding on the part of the creditor was a fraud upon the Bankrupt Act, and therefore void.

Mr. Harvey Officer, contra, citing Wright v. Filley, as in point, and other cases.

Mr. Justice MILLER delivered the opinion of the court.