236

itors he has no lien as against the trustee.2 Where the State law makes invalid a vendor's lien on personal property after the vendee takes possession such lien is invalid against the trustee in bankruptcy of the vendee if the vendee is in possession at the time of the adjudication.237

(15) WAGE LIENS.-Liens for the wages of employees under a State law are not to be affected by the bankruptcy act, and such liens are to be given full force and effect,238 although such wages are entitled to priority of payment under § 64-b (5); 239 where such liens exist they must be recognized and satisfied in full out of the proceeds of the property to which they attach, without regard to the priority of other claims which precede them under the terms of such § 64-b.240

v. Harlow (Md. Ct. of App.), 39 Am. B. R. 300, 100 Atl. 102.

236. Creditor waiving a lien.- Matter of Wright & Weissinger (D. C., Mis..), 47 Am. B. R. 283, 277 Fed. 514.

237. Matter of Friend (C. C. A., 2d Cir.), 47 Am. B. R. 511, 278 Fed. 153.

238. Browder & Co. v. Hill (C. C. A., 6th Cir.), 1 Am. B. R. 619, 136 Fed. 821, where orders by a bankrupt corporation upon a merchant to supply goods to laborers as part payment of wages was held not to be assignment of wages so as to subrogate the merchant to the rights of the laborers under a statute creating a lien in favor of such laborers.

240. In re McDavid Lumber Co. (D. C., Fla.), 27 Am. B. R. 39, 190 Fed. 97. Liens of employees under State Law. - In the case of In re Yoke Vitrified Brick Co. (D. C., Kan.), 25 Am. B. R. 18, 180 Fed. 235, the court said: "When viewed in this light, it readily appears if the only prior right of payment provided for in section 64-b of the Bankruptcy Act had been debts owing to any person who by the laws of the State are entitled to priority of payment, and the State statute should receive the construction above conceded, such provision in the act would not have affected the rights of a lienholder who received his lien after

the State statute had become a law of the State. But such are not the terms of the Bankruptcy Act. Instead of claimants here demanding priority of payment of their claims under the State law in question, receiving their demands, as commanded by the terms of the statute, from the money thereof which shall first come into the hands of such receiver or assignee' (in this case, trustee), the provisions of the Bankruptcy Act are such that four classes of claimants must be first paid in full before one claiming priority of payment of his demand under the State law may be paid anything, and of the four classes of demands entitled to be so paid in preference to one claiming priority of payment under the State law are such demands as filing fees, and certain costs of administration not going to the preservation of the estate, and which do not protect or further interest of the lienholder, and which for this reason, as against his rights, cannot be ordered paid out of the estate on which his lien holds against his consent. It therefore follows, of necessity, if such demands must be paid before one demanding priority of payment under the laws of the State can be paid, and as such prior demands, which by the very terms of the act itself must be first paid, cannot be enforced against the rights of a valid lienholder, to enforce the rights

f. Effect of valid liens on distribution.— If valid, the lienor becomes a secured creditor, and must be treated as such.241

V. FRAUDULENT TRANSFER AND LIENS

a. In general.— Subsection e nullifies (1) all "conveyances, transfers, assignments or incumbrances, or any part thereof," on the bankrupt's property, (2) made or created "within four months prior to the filing of the petition," (3) "with the intent to hinder, delay or defraud his creditors;" (4) "except as to purchasers in good faith and for a present consideration." All such property so disposed of remains as a part of the estate of the bankrupt and passes to his trustee, whose duty it is to recover the same for the benefit of the creditors.242 The subsection also nullifies all conveyances, transfers and incumbrances made by the bankrupt within four months prior to the filing of the petition, "which are held null and void against the creditor of such debtor' under State laws, and provides that such property shall pass to, and be recovered by, the trustee for the benefit of the creditors. The amendment of 1903 conferred concurrent jurisdiction upon courts of bankruptcy and State courts to recover property under the subsection. A transaction may be invalid both as a preference and as a fraudulent transfer, or only as one or the other.243 b. Scope of subsection.- This subsection is somewhat out of place here. Its counterpart in the law of 1867 was both different in the minor matters of phrasing and the time limit, and in effect more favorable to the debtor than the present subsection. The important elements of proof in that law the creditor's reasonable cause to believe the debtor insolvent and that the transaction was in fraud of the act have given place to the single element of intent to hinder, delay or defraud.244 The former law here interdicted transfers 245 only. The present subsection has to do with incumbrances, too, at

of petitioners in accordance with the statute of the State, as it is contended by them should be done, would operate to affect the fixed liens thereon, and thus contravene the express provision of section 67-d of the Bankruptcy Act."

241. See under section 57, ante, title "Proof of secured priority and preferred claims."

242. Closely related to this clause is § 70-a (4), vesting title in the trustee of property transferred by the bankrupt in fraud of creditors; and

also 70-e, authorizing the trustee to avoid any transfer which any creditor of the bankrupt might have avoided. See also Reggs v. Price (Mo. Sup. Ct.), 43 Am. B. R. 413, 210 S. W. 420, citing Collier on Bankruptcy (11th ed.) 1062.

243. Dean v. Davis, 242 U. S. 438, 38 Am. B. R. 664, 37 Sup. Ct. 30, affg. 31 Am. B. R. 808, 212 Fed. 88.

244. In re McLam (D. C., Vt.), 3 Am. B. R. 245, 97 Fed. 922.

245. See Bankr. Act, § 1 (25) for elastic meaning now given the word.

least so far as such liens result from the voluntary act of the debtor, that is, mortgages, pledges and the like, as distinguished from judgments, attachments, and other liens through legal proceedings.246

c. Necessity for insolvency. It is not necessary in order to avoid a transfer under the first part of subdivision e as a transfer made to hinder and delay creditors that the transferor at the time of the transfer was insolvent,247 but, intent to hinder, delay, or defraud being necessary,248 insolvency will usually be an element of proof. Under the second part of the subdivision insolvency is expressly required. This, however, is not important in view of the broader provisions of § 70-e, post.

250

d. "Within four months prior to filing the petition."- The meaning of these words has already been considered.249 A transfer is not voidable under this section unless it appears that it was made within four months prior to the filing of the petition in bankruptcy. The practitioner should also note that, if the period has elapsed, there may still be a remedy under the State law, as pointed out by § 70-e.251 There is a clear distinction between the creation of a lien within the four months' period and the enforcement of one previously

66

246. See under this section, post, title, Liens through legal proceedings."

247. Pollock v. Jones (C. C. A., 4th Cir.), 10 Am. B. R. 616, 124 Fed. 163; Senft v. Lewis (C. C. A., 2d Cir.), 39 Am. B. R. 240, 239 Fed. 116; Spencer v. Nekemoto (D. C., Hawaii), 24 Am. B. R. 517; Holbrook v. International Trust Co. (Sup. Jud. Ct., Mass.), 33 Am. B. R. 808, 107 N. E. 665. Compare In re McLam (D. C., Vt.), 3 Am. B. R. 245, 97 Fed. 922; also In re Soudans Mfg. Co. (C. C. A., 7th Cir.), 8 Am. B. R. 45, 113 Fed. 804.

248. See under this section, post, subtitle "Intent to hinder, delay or defraud."

249. See discussion under section 60 of this work, subtitle, "Within four months;" and also under section 3, subtitle, "Time with which petition must be filed."

250. Little v. Holly Brooks Hardware Co. (C. C. A., 5th Cir.), 13 Am. B. R. 422, 133 Fed. 874; Manning v. Evans (D. C., N. J.), 19 Am. B. R. 217,

222, 156 Fed. 106; Woodward v. Snow (Mass. Sup. Jud. Ct.), 44 Am. B. R. 96, 124 N. E. 35; In re Ceballos & Co. (D. C., N. J.), 20 Am. B. R. 459, 161 Fed. 445; In re Shinn (D. C., N. J.), 25 Am. B. R. 833, 185 Fed. 990.

Written agreement evidencing prior parol assignment.- Where petitioner sold merchandise to bankrupt anterior to the four months' period and subsequently, within. such prohibitive period, received a written agreement and assignment of bankrupt's book accounts, as security for the payment of the purchase price of the goods, evidence examined and held, insufficient to sustain the findings of the referee that prior to the sale there was a parol assignment of the accounts operating in praesenti. In re Stiger (D. C., N. J.), 22 Am. B. R. 253, 202 Fed. 791.

251. Compare In re Adams (Ref., N. Y.), 1 Am. B. R. 94; In re Grahs (Ref., Ohio), 1 Am. B. R. 465; In re Taylor, 95 Fed. 956.

acquired,252 so that where a mortgage was given prior to such period, the mortgagee may, if authorized by the terms of the mortgage, take possession of the property, or do any other act with a view of enforcing the mortgage, at any time prior to the adjudication.253

254

e. Intent to hinder, delay or defraud.-(1) IN GENERAL.- The words "with intent to hinder, delay or defraud," as used in subsection e, have their immemorial meaning. They have already been considered under sections three and fourteen. The cases under the former law, found in the foot-note,255 are thought still applicable, though used in that statute in defining an act of bankruptcy. Transfers by this subsection are only those fraudulent and therefore voidable at common law, or, what is the same thing, such as constitute acts of bankruptcy under § 3 of the act.256 By "common law" must be understood the rules of property growing out of the Statutes of Elizabeth,257 as affected by similar statutory enactments in force in the State wherein the transaction complained of took place.258 Knowledge of, or participation in the fraud by the creditor is not essential.259

252. Thompson v. Fairbanks, 196 U. S. 516, 13 Am. B. R. 437, 49 L. Ed. 577, 25 Sup. Ct. 306.

253. Woods v. Klein, 22 Am. B. R. 722, 223 Pa. St. 257, 72 Atl. 523, citing Metcalf v. Barker, 187 U. S. 165, 9 Am. B. R. 36, 47 L. Ed. 122, 23 Sup. Ct. 67; Davis v. Billings (Pa. Sup. Ct.), 38 Am. B. R. 957, 99 Atl. 163. See also under section 60, ante, subtitle "Possession within four months' period."

254. See Githens v. Shiffler Bros. (D. C., Pa.), 7 Am. B. R. 453, 112 Fed. 505.

255. Sedgwick v. Place, Fed. Cas. 12,620; In re Cowles, Fed. Cas. 3,297; In re McKibben, Fed. Cas. 8,859; In re Williams, Fed. Cas. 17,703; Curran v. Munger, Fed. Cas. 3,487.

256. Wright v. Sampter (D. C., N. Y.), 18 Am. B. R. 355, 152 Fed. 196; Underleak v. Scott (Sup. Ct., Minn.), 28 Am. B. R. 926, 134 S. W. 731; Baldwin v. Kingston (D. C., N. J.), 40 Am. B. R. 641, 247 Fed. 163; In re Grocers' Baking Co. (D. C., Ala.), 46 Am. B. R. 150, 266 Fed. 900.

It is not a fraud at common law for
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a debtor who is in straitened circumstances to prefer one or more creditors, though such payment may render it impossible to pay anything to his other creditors. Nor does it make any difference that both the creditor and the debtor know that the effect of such appropriation will be to deprive other creditors of the power of reaching the debtors' property by legal process in satisfaction of their claims. If there is no secret trust agreed upon or understood between the debtor and creditor, but the sole object of the transfer of property is to pay or secure the payment of a debt, the transaction is valid at common law. Lyon v. Wallace (Mass. Sup. Ct.), 35 Am. B. R. 688, 108 N. E. 1075.

257. 13 Eliz. ch. 5; 27 Eliz. ch. 4 29 Eliz. ch. 5. See also Moore, Fraudulent conveyances, p. 10.

258. In re Bloch (C. C. A., 2d Cir.), 15 Am. B. R. 751, 142 Fed. 674; Wright v. Sampter (D. C., N. Y.), 18 Am. B. R. 355, 152 Fed. 196.

259. Sherman v. Luckhardt (Sup. Ct., Kan.), 11 Am. B. R. 26, 67 Kan. 682, overruling 9 Am. B. R. 307.

(2) NECESSITY FOR INTENT TO DEFRAUD. It is only an intent to hinder, delay and defraud creditors unlawfully, and not every intent to hinder or delay them in collecting, or to prevent them from collecting their claims that avails to avoid a transfer.260 An intent to defraud is the test; if the transaction was in good faith, there is no fraud.201 Thus where a bankrupt conveys property in trust to secure a person who has indemnified a surety company on a bond discharging a lien of attachment the transfer is valid, where there is no evidence of a preference or a fraud upon the creditors.262 A transfer by an alleged bankrupt to secure funds to be used by a third person on specified contracts, is not rendered fraudulent by the fact that such third person, with the