construction. Indeed, the very existence of the bankruptcy system was for a time put in jeopardy. The reports are full of cases bearing on these much-mooted questions. The amendatory act of 1903 brought the statute back to what its framers intended it to say, and thus made most of these cases valueless. The principal evil to be corrected by the amendment of 1903 was that of secret preferences given by withholding from record instruments which by the whole. policy of recording statutes should be recorded.14 Some of the numerous cases arising prior to the amendment of 1903 are cited in the foot-note.1 15 e. Distinction between preference and fraudulent transfer.Conveyances may be fraudulent because the debtor intends to put his property beyond the reach of his creditors; or because he intends to hinder and delay them as a class; or by preferring one who is favored above the others. There is no necessary connection between the intent to prefer and that to defraud; but inasmuch as one of the common incidents of a fraudulent conveyance is the purpose on the part of the grantor to apply the proceeds in such a manner as to prefer favored persons, the existence of such intent to prefer is an important matter to be considered in determining whether there was an intent to defraud. But the two purposes are not of the same quality, either in conscience or in law, and one may exist without the other. The statute recognizes the difference between the intent to defraud and the intent to prefer, and also the difference between a fraudulent and a preferential conveyance. One is inherently and always vicious; the other innocent and valid, except when made in 14. In re Dundore (D. C., Pa.), 26 Am. B. R. 100; Loeser v. Savings Deposit Bank & Trust Co. (C. C. A., 6th Cir.), 17 Am. B. R. 628, 148 Fed. 978, revg. 15 Am. B. R. 528, 140 Fed. 674. 66 15. That partial payments in due course of trade are preferences": In re Knost (Ref., Ohio), 2 Am. B. R. 471; affd. as Strobel v. Knost (D. C., Ohio), 3 Am. B. R. 631, 99 Fed. 409; In re Conhaim (D. C., Wash.), 3 Am. B. R. 249, 97 Fed. 923; In re Fort Wayne Electric Co. (D. C., Ind.), 13 Am. B. R. 186, 96 Fed. 803; affd. as Columbus Electric Co. v. Worden (C. C. A., 7th Cir.), 3 Am. B. R. 634, 99 Fed. 400; In re Fixen (C. C. A., 9th Cir.), 4 Am. B. R. 10, 102 Fed. 296; Carson, etc., Co. v. Chicago Title & Trust Co., 182 U. S. 438, 5 Am. B. R. 814, 45 L. Ed. 1171, 21 Sup. Ct. 906; that they are not: In re Piper, 2 N. B. N. Rep. 7; In re Smoke (D. C., N. Y.), 4 Am. B. R. 434, 104 Fed. 289; In re Hall (Ref., N. Y.), 4 Am. B. R. 671; In re Ratliff (D. C., N. Car.), 5 Am. B. R. 713, 107 Fed. 780. See, for a vigorous protest against the doctrine of Carson, etc., Co. v. Chicago Title & Trust Co., In re Dickson (C. C. A., 1st Cir.), 7 Am. B. R. 186, 111 Fed. 726. There are also numerous cases pro and con, (1) whether a payment which exactly cancels one of several obligations must be surrendered; for instance, see In re Conhaim (D. C., Wash.), 3 Am. violation or express provisions of law.16 One is malum per se and the other malum prohibitum, and then only to the extent that it is prohibited. A fraudulent conveyance is void, regardless of its date; a preference is valid unless made within the prohibited date.1 II. ELEMENTS OF A VOIDABLE PREFERENCE18 a. In general.- Prior to the amendment of 1903, subsection b was regarded as broad enough to include a preference according to subsection a, as construed by the Supreme Court in Carson v. Chicago Title & Trust Co.,19 where the broad distinction was made between said subsections showing that under subsection b, a transfer from the bankrupt might be avoided by his trustee, subject to the limitation among others, that the creditor had reason to believe that a prefer B. R. 249, 97 Fed. 923; also In re Beswick (Ref., Ohio), 7 Am. B. R. 395, and Kimball v. Rosenham Co. (C. C. A., 8th Cir.), 7 Am. B. R. 718, 114 Fed. 185; In re Seay (D. C., Ga.), 7 Am. B. R. 700, 113 Fed. 969, and In re Beswick (Ref., Ohio), 7 Am. B. R. 403; and (2) whether a subsequent credit could be set off against a preference, some of which are cited later under this section. None of these cases are thought now applicable. 16. Right to prefer. It is not a fraud at common law for a debtor in straightened circumstances to prefer one or more creditors, though payments so made render it impossible to pay other creditors. If the sole object of the transfer is to pay or secure the payment of a debt, the transaction is valid at common law. Lyon v. Wallace, 35 Am. B. R. 688, 108 N. E. 1075; and see Kentucky Bank & Trust Co. v. Pritchett (Okla. Sup. Ct.), 33 Am. B. R. 190, 143 Pac. 338. Until the commencement of bankruptcy proceedings a debtor has the right to dispose of his property, the right to receive and pay his debts with it and the right to receive and pay one of his creditors in preference to others, provided the payment or security is not violative of any act of Congress or law of the State. Johnson, Baillie Shoe Co. v. Bardsley (C. C. A., 8th Cir.), 38 Am. B. R. 492, 237 Fed. 763. Before a bankrupt has been adjudicated as such he has the right to deal with his property as he may see fit, so long as he does not give a preference to any creditor or impair the value of his estate. O'Connell v. City of Worcester (Mass. Sup. Ct.), 38 Am. B. R. 913, 114 N. E. 201. There is no provision of the Bankruptcy Act which forbids a debtor to transfer his property for the purpose of raising money to pay his debts, except as provided in this section. Taylor v. Carraway (D. C., N. Car.), 49 Am. B. R. 139, 282 Fed. 876. 17. Van Iderstine v. National Discount Co., 227 U. S. 575, 29 Am. B. R. 478, 57 L. Ed. 652, 33 Sup. Ct. 343; Kentucky Bank & Trust Co. v. Pritchett (Sup. Ct., Okla.), 33 Am. B. R. 190, 143 Pac. 338; Watson v. Adams (C. C. A., 6th Cir.), 39 Am. B. R. 473, 242 Fed. 441; Smith v. Coury (D. C., Me.), 41 Am. B. R. 219, 247 Fed. 168. Williams 18. In England, see Bankruptcy (12th ed.), p. 294. also this section, ante, subtitle parative legislation." on See "Com In Canada, see Duncan on Bankruptcy, p. 339. 19. 182 U. S. 438, 5 Am. B. R. 814, 45 L. Ed. 1171, 21 Sup. Ct. 906. ence was intended, while under subsection a the intent of the bankrupt was not material.20 The amendment of 1903 provided in effect that, in order to make a payment a preference, it must have been made by the debtor with intent to prefer, and the creditor who received it must have had reasonable cause to believe that a preference was intended,21 and the amendment of 1910 still further emphasized the importance of the effect of the payment, by making it a preference, if the creditor receiving it had reasonable cause to believe that a preference would be thereby effected, instead of reasonable cause to believe that a preference was intended as provided by the amendment of 1903. Since these amendments a preference consists in a person (1) while insolvent and (2) within four months of the bankruptcy, (3) procuring or suffering a judgment to be entered against himself or making a transfer of his property, (4) the effect of which will be to enable one creditor to obtain a greater percentage of his debt than any other creditor of the same class. Such a preference is voidable at the instance of the trustee, if (5) the person receiving it or to be benefited thereby has (6) reasonable cause to believe that the enforcement of the judgment or transfer will result in a preference.22 If any of these elements is wanting, a preference 20. In re Andrews (C. C. A., 1st Cir.), 10 Am. B. R. 387, 144 Fed. 922, affd. 14 Am. B. R. 247, 135 Fed. 599. 21. Rutland Co. Nat. Bank v. Graves (D. C., Vt.), 19 Am. B. R. 446, 156 Fed. 168; In re Leach (C. C. A., 6th Cir.), 22 Am. B. R. 599, 171 Fed. 622. 22. The text is cited with approval in the case of Brown v. City National Bank (N. Y. Supp. Ct.), 26 Am. B. R. 638, 72 N. Y. Misc. 201, 131 N. Y. Supp. 92; Craig v. Sharp (Mo. Ct. of App.), 45 Am. B. R. 137, 219 S. W. 95; Matter of Blakeslee (Ref., N. Y.), 46 Am. B. R. 183; Gray v. Tantleff (D. C., N. Y.), 47 Am. B. R. 225, 273 Fed. 524. And see Newman v. Tootle-Campbell Dry Goods Co. (Mo. Kans. City Ct. of App.), 31 Am. B. R. 399, 160 S. W. 825, specifying the elements of a voidable preference; Mayes v. Palmer (C. C. A., 8th Cir.), 31 Am. B. R. 225, 208 Fed. 97; Sparks v. Marsh (D. C., Ark.), 24 Am. B. R. 280, 177 Fed. 739; In re Starkweather & Albert (D. C., Mo.), 30 Am. B. R. 743, 206 Fed. 797; Heyman v. Third Nat. Bank (D. C., N. J.), 32 Am. B. R. 716, 216 Fed. 685; Sheetz v. Walter Boyd Saddlery Co. (Kan. Sup. Ct.), 33 Am. B. R. 32, 147 N. W. 897; Russell's Trustees v. Mayfield Lumber Co. (Ky. Ct. of App.), 32 Am. B. R. 357, 164 S. W. 783; Kentucky Bank & Trust Co. v. Pritchett (Sup. Ct., Okla.), 33 Am. B. R. 190, 143 Pac. 338; Abele v. Beacon Trust Co. (Mass. Sup. Jud. Ct.), 40 Am. B. R. 743, 117 N. E. 833; Smith v. Coury (D. C., Me.), 41 Am. B. R. 219, 247 Fed. 168; In re Sayed (D. C., Mich.), 26 Am. B. R. 444, 185 Fed. 962. In the case of Boswell National Bank v. Simmons (C. C. A., 8th Cir.), 26 Am. B. R. 865, 190 Fed. 735; Marsh v. Walters (C. C. A., 6th Cir.), 34 Am. B. R. 85, 220 Fed. 805; Peterson v. Nash Bros. (C. C. A., 8th Cir.), 7 Am. B. R. 181, 112 Fed. 311; Swarts v. Fourth Nat. Bank (C. C. A., 8th Cir.), 8 Am. B. R. 673, 117 Fed. 1; McElvain v. Hardesty (C. C. A., 8th Cir.), 22 Am. B. R. 320, 109 Fed. 32; In re Carlile (D. C., N. cannot be set aside if otherwise valid under the State law.23 The burden of proving 'he existence of the essential elements of a transfer is upon the trustee seeking to avoid it." The practitioner should always have in mind that, under the present law, many transfers are preferences in name but not in fact.25 To be the latter, the remedy prescribed in subsection b must at least be available. The transfers must, in short, be voidable. Of the multitude of cases under the present law, only those including the element of reasonable cause to believe,26 are, therefore, still in point. The others, since the changes made in § 57-g, are of value only by way of possible suggestion. Car.), 29 Am. B. R. 373, 199 Fed. 612; Putnam v. U. S. Trust Co. (Mass. Sup. Ct.), 36 Am. B. R. 658, 111 N. E. 969; Matter of Star Spring Bed Co. (C. C. A., 3d Cir.), 45 Am. B. R. 650, 265 Fed. 133, affg. 43 Am. B. R. 328, 257 Fed. 176; Abdo v. Townshend (C. C. A., 4th Cir.), 49 Am. B. R. 148, 282 Fed. 476. The bankruptcy law recognizes two kinds of preferences those which a creditor in good faith may accept, and retain, and those which are forbidden and therefore voidable. The constitutive elements of a preference of the latter class are: First, the insolvency of the debtor at the time of the preference; second, the giving of the preference within four months of the filing of the petition in bankruptcy; third, the effect of securing to the favored creditor a greater percentage of his debt than other creditors of the same class may obtain from the estate of the debtor; and, fourth, that the preferred creditor when he received the preference, knew, or had reasonable cause to believe, that it was the purpose of his debtor to give him a preference over other creditors of the same class. Wolff Mfg. Co. v. Batheal Shoe Co. (Mo. Kan. City Ct. of App.), 35 Am. B. R. 895, 180 S. W. 396. Grounds of attack upon transfer.— By the express authority of the bankruptcy act, the trustee may attack any transfer alleged to be voidable as a preference if made within the period fixed by law. It is only when the trus tee attacks a transfer or mortgage on other grounds that State laws and decisions apply as to the validity of a transfer. A trustee may attack a transfer as a voidable preference concededly valid on all other grounds. Williams v. German American Trust Co. (C. C. A., 8th Cir.), 33 Am. B. R. 600, 219 Fed. 507. Attempted compromise of claims.— In order to render void as preferences payments made to defendants in an attempted compromise of their claims, by the application to their claims of certain insurance moneys, it must be established (1) that bankrupt was insolvent at the time of the transfer; (2) that the defendants obtained a greater percentage of their indebtedness than other creditors of the same class; (3) that the preference was given within four months before the filing of the petition in bankruptcy; and (4) that defendants had reasonable cause to believe that a preference was intended. Shultz v. Boyt Saddlery Co. (Sup. Ct., Iowa), 33 Am. B. R. 32, 147 N. W. 897. 23. Russell v. Mayfield Lumber Co. (Ct. of App., Ky.), 32 Am. B. R. 357, 164 S. W. 783; Wrenn v. Citizens Nat. Bank (Conn. Sup. Ct.), 47 Am. B. R. 155, 114 Atl. 120. 24. See this section, post, subtitle "Evidence and burden of proof." 25. For an unusual case, see In re Chaplin (D. C., Mass.), 8 Am. B. R. 121, 115 Fed. 162. 26. See this subject, generally, under this section, post. b. While insolvent.- (1) IN GENERAL.- The method of determining the question of insolvency has already been considered under § 1, ante. The rules which are applicable generally in determining this question are also applicable in determining whether a transfer is preferential because made at a time when the bankrupt was insolvent, as the word "insolvent" has the same meaning in this section as that given it by § 1 (15)," that is that a person shall be deemed insolvent whenever the aggregate of his property, exclusive of any property which he may have conveyed or transferred with intent to defraud his creditors, shall not, at a fair valuation, be sufficient in amount to pay his debts. (2) TIME OF INSOLVENCY. If the debtor was not insolvent when the transfer was made it will not operate as a preference although made within four months before the filing of a petition in bankruptcy against him.28 The question of solvency must be determined as of the date when the payments or transfers were made.29 If the levy 27. Marvin v. Anderson (Wis. Sup. Ct.), 6 Am. B. R. 520, 87 N. W. 226; In re Chappell (D. C., Va.), 7 Am. B. R. 608, 113 Fed. 545; Des Moines Savings Bank v. Morgan Jewelry Co. (Iowa Sup. Ct.), 12 Am. B. R. 781, 123 Iowa 432, 99 N. W. 121; Benjamin v. Chandler (D. C., Pa.), 15 Am. B. R. 439, 142 Fed. 217; Huttig Mfg. Co. v. Edwards (C. C. A., 8th Cir.), 20 Am. B. R. 349, 160 Fed. 619; Stern v. Paper (C. C. A., 8th Cir.), 28 Am. B. R. 592, 198 Fed. 642, affg. 25 Am. B. R. 451, 183 Fed. 228; Ogden v. Reddish (D. C., Ky.), 29 Am. B. R. 531, 200 Fed. 977; Newman v. Tootle-Campbell Dry Goods Co. (Mo. Ct. of App.), 31 Am. B. R. 399, 160 S. W. 825; Matter of Walker Starter Co. (C. C. A., 7th Cir.), 37 Am. B. R. 122, 235 Fed. 285; McGill v. Commercial Credit Co. (D. C., Md.), 39 Am. B. R. 702, 243 Fed. 637; Hicks Company, Ltd. v. Moore (C. C. A., 5th Cir.), 44 Am. B. R. 384, 261 Fed. 773; Schuetle & Co. v. Schwank (Pa. Sup. Ct.), 45 Am. B. R. 373, 265 Pa. 576, 109 Atl. 531; Summerville v. Stockton Milling Co. (Cal. Sup. Ct.), 142 Cal. 529, 76 Pac. 243; Empire State Trust Co. v. Fisher Co. (N. J. Ct. of Ch.), 67 N. J. Eq. 88, 57 Atl. 502. Contra, Simpson v. Western Hardware & Metal Co. (Wash. Sup. Ct.), 40 Am. B. R. 213, 167 Pac. 113. See also Bankr. Act, § 1 (15), and discussion thereunder. For rule under former law, see Toof v. Martin, 13 Wall. 40; Wager v. Hall, 16 Wall. 584. 28. In re Leech (C. C. A., 6th Cir.), 22 Am. B. R. 599, 171 Fed. 622; McAleer v. People's Bank (Ala. Sup. Ct.), 42 Am. B. R. 581, 80 So. 94; Farmers' National Bank v. Slaton (Ky. Ct. of App.), 41 Am. B. R. 650, 203 S. W. 565; Matter of Looschen Piano Case Co. (D. C., N. J.), 43 Am. B. R. 733, 259 Fed. 931; Hicks Company, Ltd. v. Moore (C. C. A., 5th Cir.), 44 Am. B. R. 384, 261 Fed. 773, citing Collier on Bankruptcy (11th ed.) 869. 29. De Laval Separator Co. v. Jones (Me. Sup. Ct.), 41 Am. B. R. 440, 102 Atl. 968; Matter of Keller (D. C., Mich.), 42 Am. B. R. 601, 252 Fed. 942; In re Wittenberg, etc., Co. (D. C., Wis.), 6 Am. B. R. 271, 108 Fed. 593; Butler Paper Co. v. Goembel (C. C. A., 7th Cir.), 16 Am. B. R. 26, 143 Fed. 295; Sabin v. Camp (D. C., Oreg.), 3 Am. B. R. 578, 98 Fed. 974; SheppardStrassheim Co. v. Black (C. C. A., 7th Cir.), 33 Am. B. R. 574, 211 Fed. 643; |