The Law and Practice in Bankruptcy Under the National Bankruptcy Act of 1898

wife of the bankrupt joined to release her dower, revives the wife's right of dower.327

328

h. Miscellaneous invalid transfers or incumbrances.-(1) IN GENERAL. The books are already well filled with precedents. All turn on their own facts. It is impossible to deduce hard and fast rules. The more important cases are classified in the succeeding paragraphs.

(2) REVIVAL OF OUTLAWED DEBT.-An insolvent person, intending to go through bankruptcy, may make an acknowledgment of an existing indebtedness, the right to recover which is barred by the statute of limitations, but against which the statute has not been pleaded, so as to take the indebtedness out of the operation of the statute, without making the transaction fraudulent under this subsection.329

(3) TRANSFERS EFFECTING PREFERENCE.—An insolvent debtor has the jus disponendi of his property until the commencement of proceedings in bankruptcy against him. So a preference of one creditor over others by a payment or by security, which is free from actual or constructive fraud, and from any purpose to affect other creditors injuriously beyond the necessary effect of the security or preference, is valid and lawful, and the fact that a creditor is so preferred is not in itself sufficient to show evidence of an intent to hinder, delay or defraud creditors so as to make the transaction void or voidable under this subsection.330 Yet, when the preferential transaction is so

327. Matter of Lingafelter (C. C. A., 6th Cir.), 24 Am. B. R. 656.

328. For instance, In re Little River Lumber Co. (D. C., Ark.), 1 Am. B. R. 483, 92 Fed. 585 and In re Head (D. C., Ark.), 7 Am. B. R. 556, 114 Fed. 489; In re Faulhaber Stable Co. (C. C. A., 2d Cir.), 22 Am. B. R. 381, 170 Fed. 68. See also for decisions on this general subject, Harvey v. Smith (Sup. Jud. Ct., Mass.), 7 Am. B. R. 497, and In re Standard Laundry Co. (C. C. A., 9th Cir.), 8 Am. B. R. 538, 116 Fed. 476, affg. 7 Am. B. R. 254, 112 Fed. 126; Henderson v. Garner (Ala. Sup. Ct.), 39 Am. B. R. 792, 75 So. 387; Matter of Hawkins (D. C., Ga.), 40 Am. B. R. 271, 243 Fed. 792; Matter of Guyton (D. C., Ala.), 47 Am. B. R. 568, 276 Fed. 616; Matter of Thomas Electric Corp. (C. C. A., 7th Cir.), 49 Am. B. R. 216, 283 Fed. 392.

329. Matter of Banks (D. C., N. Y.), 31 Am. B. R. 270, 207 Fed. 662; Matter of Blankenship (D. C., Cal.), 33 Am. B. R. 756, 220 Fed. 395; Matter of Salmon (C. C. A., 2d Cir.), 41 Am. B. R. 45, 249 Fed. 300, revg. 38 Am. B. R. 692, 239 Fed. 413.

330. Coder v. Arts (C. C. A., 8th Cir.), 18 Am. B. R. 513, 519, 152 Fed. 943, modifying 16 Am. B. R. 583, 145 Fed. 202, affd. 213 U. S. 223, 22 Am. B. R. 1, 53 L. Ed. 772, 29 Sup. Ct. 436; Beservey v. Roby (C. C. A., 8th Cir.), 28 Am. B. R. 529, 198 Fed. 844, holding that where bankrupt's real estate was heavily incumbered by different mortgages and bankrupt conveyed a part of such real estate to a mortgagee holding a mortgage in a large amount past due, in consideration of his discharging the liens upon all the property and the payment of a small sum

manipulated or when it is carried along into such later steps as to attempt to defeat the recovery of the preference by the trustee, it results that the parties are engaged in an attempt to defeat the intended operation of the Bankruptcy Act itself, and that they have placed themselves within the condemnation of subsection e of this section,331

333

(4) TRANSFER TO SECURE MONEY TO PAY EXISTING DEBTS.—A transfer made to secure a loan will not be set aside as fraudulent merely because the transferee knew that the proceeds of the loan were to be used in payment of an existing debt.332 As stated by the Supreme Court: "Making a mortgage to secure an advance with which the insolvent debtor intends to pay a pre-existing debt does not necessarily imply an intent to hinder, delay or defraud creditors. The mortgage may be made in the expectation that thereby the debtor will extricate himself from a particular difficulty and be enabled to promote the interest of all other creditors by continuing his business. The lender who makes an advance for that purpose with full knowledge of the facts may be acting in perfect 'good faith.' But where the advance is made to enable the debtor to make a preferential pay

in cash, in order to avoid such transfer under subsection e, actual fraud in fact, as distinguished from constructive fraud, must be shown; Sargent v. Blake (C. C. A., 8th Cir.), 20 Am. B. R. 115, 121, 160 Fed. 57; Coder v. Arts, 213 U. S. 223, 22 Am. B. R. 1, 53 L. Ed. 772, 29 Sup. Ct. 436; Watson v. Adams (C. C. A., 6th Cir.), 39 Am. B. R. 473, 242 Fed. 441; Matter of Braus (C. C. A., 2d Cir.), 40 Am. B. R. 668, 248 Fed. 55; Potter v. American Ptg. & Lith. Co. (Ia. Sup. Ct.), 40 Am. B. R. 854, 165 N. W. 1044; Chapman v. Hunt (C. C. A., 2d Cir.), 42 Am. B. R. 509, 254 Fed. 768, revg. 41 Am. B. R. 482, 248 Fed. 160; Richardson v. Germania Bank (C. C. A., 2d Cir.), 45 Am. B. R. 351, 263 Fed. 320; Surratt v. Eskridge (Va. Sup. Ct. of App.), 47 Am. B. R. 719, 108 S. E. 671. Contra: In re Hill (D. C., Cal.), 15 Am. B. R. 499, 140 Fed. 984; Morgan v. First Nat. Bank (C. C. A., 4th Cir.), 16 Am. B. R. 639, 145 Fed. 466.

Preference made for purpose of continuing business.-A preferential pay

ment made by an insolvent in the hope and for the purpose of thereby continuing his business is not really fraudulent though it is under certain circumstances voidable by the trustee. Matter of Soforenko (D. C., Mass.), 32 Am. B. R. 32, 210 Fed. 562.

331. Watson v. Adams (C. C. A., 6th Cir.), 39 Am. B. R. 473, 242 Fed. 441.

332. Van Iderstine v. National Discount Co., 227 U. S. 575, 582, 29 Am. B. R. 478, 57 L. Ed. 652, 33 Sup. Ct. 343, affg. 23 Am. B. R. 345, 174 Fed. 518; Matter of Soforenko (D. C., Mass.), 32 Am. B. R. 32, 210 Fed. 562. Compare Matter of Anderson (D. C., R. I.), 41 Am. B. R. 731, 252 Fed. 272; In re Kullberg (D. C., Minn.), 23 Am. B. R. 758, 176 Fed. 585; Johnstone v. Babb (C. C. A., 4th Cir.), 38 Am. B. R. 715, 240 Fed. 668; Matter of Lake Chelan Land Co. (C. C. A., 9th Cir.), 44 Am. B. R. 14, 257 Fed. 497.

333. Dean v. Davis, 242 U. S. 438, 38 Am. B. R. 664, 667, 37 Sup. Ct. 30, affg. 31 Am. B. R. 808, 212 Fed. 88.

11 334

ment with bankruptcy in contemplation, the transaction presents an element upon which fraud may be predicated. The fact that the money advanced is actually used to pay a debt does not necessarily establish good faith. It is a question of fact in each case what the intent was with which the loan was sought and made. Applying 6th Cir.), 20 Am. B. R. 919, 24 L. R. A. (N. S.), 184, 89 C. C. A. 605, 163 Fed. 155; Stedman v. Bank of Monroe (C. C. A., 8th Cir.), 9 Am. B. R. 4, 54 C. C. A. 269, 117 Fed. 237; Re Soudan Mfg. Co. (C. C. A., 7th Cir.), 8 Am. B. R. 45, 51 C. C. A. 476, 113 Fed. 804.

334. Mortgages taken as security for loans. The following cases were classified in the margin to the case of Davis v. Dean, 242 U. S. 438, 38 Am. B. R. 664, 668, 37 Sup. Ct. 30. Cases holding that a mortgage is a fraudulent conveyance where taken as security for a loan which the lender knows is to be used to prefer favored creditors in fraud of the act: Parker

v. Sherman (C. C. A., 2d Cir.), 32 Am. B. R. 393, 129 C. C. A., 437, 212 Fed. 917, affg. 29 Am. B. R. 862, 201 Fed. 155; Re Soforenko (D. C., Mass.), 32 Am. B. R. 32, 210 Fed. 562; Johnson v. Dismukes (C. C. A., 5th Cir.), 29 Am. B. R. 686, 122 C. C. A. 552, 204 Fed. 382; Lumpkin v. Foley (C. C. À., 5th Cir.), 29 Am. B. R. 673, 122 C. C. A. 542, 204 Fed. 372; Re Lynden Mercantile Co. (D. C., Wash.), 19 Am. B. R. 444, 156 Fed. 713; Roberts v. Johnson (C. C. A., 4th Cir.), 18 Am. B. R. 132, 81 C. C. A. 47, 151 Fed. 567; Re Pease (D. C., Mich.), 12 Am. B. R. 66, 129 Fed. 446. See also Walters v. Zimmerman, s. c. on appeal (D. C., Ohio), 30 Am. B. R. 776, 208 Fed. 62, (C. C. A., 6th Cir.), 136 C. C. A. 409, 220 Fed. 805.

Cases upholding the mortgage security because the lender did not know that the insolvent borrower intended to make improper payments to favored creditors — thus indicating that the mortgage would be fraudulent if such additional fact were shown: Grinstead v. Union Sav. & T. Co. (C. C. A., 9th Cir.), 27 Am. B. R. 123, 111 C. C. A., 398, 190 Fed. 546; Powell v. Gate City Bank (C. C. A., 8th Cir.), 24 Am. B. R. 316, 102 C. C. A. 55, 178 Fed. 609; Re Kullberg (D. C., Minn.), 23 Am. B. R. 758, 176 Fed. 585; Ohio Valley Bank Co. v. Mack (C. C. A.,

In accord with this view are also the decisions which hold that a general assignment for the benefit of creditors, though without preferences, is void under section 67-e because its necessary effect is to hinder, delay or defraud creditors in their rights and remedies under the bankruptcy act. Re Gutwillig (D. C., Ia.), 1 Am. B. R. 78, 90 Fed. 475, affd. 1 Am. B. R. 388, 34 C.. C. A. 377, 63 U. S. App. 191, 92 Fed. 357; Davis v. Bohle (C. C. A., 8th Cir.), 1 Am. B. R. 412, 34 C. C. A. 372, 92 Fed. 325; Rumsey & Sikemier Co. v. Novelty & Mach. Mfg. Co. (D. C., Mo.), 3 Am. B. R. 704, 99 Fed. 699. See Randolph v. Scruggs, 190 U. S. 533, 536, 10 Am. B. R. 1, 47 L. Ed. 1165, 1169, 23 Sup. Ct. 710; George M. West Co. v. Lea Bros., 174 U. S. 590, 596, 2 Am. B. R. 463, 43 L. Ed. 1098, 1100, 19 Sup. Ct. 836.

It is difficult to reconcile the following cases or dicta in them with the great weight of authority and the decisions of this court: Re Baar (C. C. A., 2d Cir.), 32 Am. B. R. 465, 130 C. C. A. 292, 213 Fed. 628; Re Hersey (D. C., Iowa), 22 Am. B. R. 863, 171 Fed. 1004; Sargent v. Blake (C. C. A., 8th Cir.), 20 Am. B. R. 115, 17 L. R. A. (N. S.), 1040, 87 C. C. A. 213, 160 Fed. 57, 15 Ann. Cas. 58; Re Bloch (C. C. A., 2d Cir.), 15 Am. B. R. 748, 74 C. C. A. 250, 142 Fed. 674; Githens v. Shiffler (D. C., Pa.), 7 Am. B. R. 453, 112 Fed. 505.

the rule just quoted, a mortgage taken to secure a loan with knowledge by the mortgagee that the proceeds of the loan were to be used by the insolvent mortgagor to make preferential payments to certain creditors in contemplation of bankruptcy is invalid.335

(5) CHATTEL MORTGAGES AND BILLS OF SALE. Here the cases are quite numerous and in each instance turn upon the requirements of the State law.336 Any chattel mortgage which was ineffectual as against creditors under the law of the State of the transaction, is ineffectual as against the bankrupt's trustee.337 Reclamation pro

335. Matter of Soforenko (D. C., Mass.), 32 Am. B. R. 32, 210 Fed. 562; Smith v. Coury (D. C., Me.), 41 Am. B. R.. 219, 247 Fed. 168.

Advances to prevent bankruptcy until after four months. In a suit by a trustee in bankruptcy to recover book accounts assigned by the bankrupt to the defendant because of advances, evidence held to show that the defendant made the advances for the purpose of keeping the bankrupt from going into bankruptcy before the ex'piration of four months from the time of other illegal preferences to the defendant. This is a fraud upon the law, and property assigned by the bankrupt for such purpose may be recovered by the trustee. Rubenstein v. Lottow (Mass. Sup. Ct.), 35 Am. B. R. 243, 220 Mass. 156.

Mortgage to secure advances to pay pre-existing debt.-A mortgage, executed by an insolvent debtor within four months of bankruptcy, covering all his property, to secure notes representing a loan with which the mortgagee had taken upon notes discounted by a bank and on which the debtor was threatened with arrest for forgery, held, on all the evidence, to constitute a fraudulent transfer, void under section 67-e of the bankruptcy act. Dean v. Davis, 242 U. S. 438, 38 Am. B. R. 664, 37 Sup. Ct. 230, and cases cited in marginal note.

336. In re Adams (Ref., Mich.), 2 Am. B. R. 415; In re Leigh (Ref., Col.), 2 Am. B. R. 606; Stroud v. McDaniel (C. C. A., 4th Cir.), 5 Am. B. R. 695,

106 Fed. 493; In re Shirley (C. C. A., 6th Cir.), 7 Am. B. R. 209, 112 Fed. 301; In re Platts (D. C., S. Dak.), 6 Am. B. 568, 110 Fed. 126; In re Ronk (D. C., Ind.), 7 Am. B. R. 31, 111 Fed. 154; In re Pekin Plow Co. (C. C. A., 8th Cir.), 7 Am. B. R. 369, 112 Fed. 308; In re Soudans Mfg. Co. (C. C. A., 7th Cir.), 8' Am. B. R. 45, 113 Fed. 804; Dodge v. Norlin (C. C. A., 8th Cir.), 13 Am. B. R. 177, 133 Fed. 363; Bank of Dillon v. Murchison (C. C. A., 4th Cir.), 31 Am. B. R. 740, 213 Fed. 147; In re Hickerson (D. C., Idaho), 20 Am. B. R. 682, 688, 162 Fed. 345; In re Harnden (D. C., N. Mex.), 29 Am. B. R. 507, 200 Fed. 175; ScandinavianAmerican Bank v. Sabin (C. C. A., 9th Cir.), 36 Am. B. R. 151, 227 Fed. 579. As to binding effect of State law and decisions, compare In re Hull. (D. C., Vt.), 8 Am. B. R. 302, 115 Fed. 858, with In re Josephson (D. C., Ga.), 8 Am. B. R. 423, 111 Fed. 404. The latter case is thought the more reliable. Matter of Petersen (D. C., Nev.), 40 Am. B. R. 653, 252 Fed. 846, 849; Matter of Taylor Corporation (C. C. A., 2d Cir.), 40 Am. B. R. 659, 248 Fed. 223; Matter of Mitchell Motor & Service Co. (D. C., Wash.), 46 Am. B. R. 716, 274 Fed. 492. See also under this section ante, subtitle State law controls."

337. In re First National Bank of Canton (C. C. A., 6th Cir.), 14 Am. B. R. 180, 135 Fed. 62; In re Birck & Co. (C. C. A., 7th Cir.), 15 Am. B. R. 694, 142 Fed. 438, holding that under the Illinois statute a chattel mortgage is

ceedings will not lie to recover possession of personal property sold under a bill of sale, but retained by the bankrupt; in such a case the transaction was not a sale and was invalid as against execution creditors and the trustee because the title was separated from the possession and no notice thereof was given.338 Matters dealing with the effect of failure to file or record chattel mortgages have already been considered. Likewise the validity of a mortgage on a shifting stock

of merchandise.340

344

341

(6) TRANSFERS TO RELATIVES. -Voluntary settlements are avoided in terms by the English 342 and Canadian acts.343 We have no similar provision, but judicial construction has made our rule substantially the same. If made by an insolvent husband to his wife they are held void. Conveyances of real estate made by bankrupts to their wives, four months prior to the filing of a petition in bankruptcy, and without a present consideration, are void, since it may be implied from the circumstances of the transaction that they were made with intent to hinder and defraud creditors.345 No matter how devious the

void as against the mortgagor's trustee, where such mortgage was given to secure notes containing no mention upon their face that they were secured by an instrument in the form of a chattel mortgage. In re Shaw (D. C., Me.), 17 Am. B. R. 196, 146 Fed. 243; In re Chadwick (D. C., Ohio), 15 Am. B. R. 528, 140 Fed. 674; Matter of Petersen (D. C., Nev.), 40 Am. B. R. 653, 252 Fed. 846, 849; Park v. South Bend Chilled Plow Co. (Tex. Ct. of Civ. App.), 41 Am. B. R. 23, 199 S. W. 843.

Mortgage in form of receipt.— Matter of Hallbauer (D. C., Fla.), 46 Am. B. R. 130, 275 Fed. 125.

338. In re Grozinger (D. C., Pa.), 28 Am. B. R. 732, 193 Fed. 935; Matter of Wegman Piano Co. (D. C., N. Y.), 34 Am. B. R. 490, 221 Fed. 128.

Bill of sale.- Provisions of a bill of sale to a bankrupt examined and held not to create or reserve a lien superior to the rights of the trustee in bankruptcy. Matter of Cooper (D. C., Ia.), 35 Am. B. R. 321, 216 Fed. 309. A bill of sale executed by a corporation while it is insolvent, to secure a loan is invalid under this section. In re Arkonia

Fabric Mfg. Co. (D. C., Pa.), 18 Am. B. R. 470, 151 Fed. 914.

339. See under this section, ante, subtitle "Chattel mortgages," and also. under section 60, ante.

340. See under this section, ante, subtitle "Mortgagor in possession with power of sale."

341. See also under section 70, post, subtitle "Voluntary transfers; transfers to wife or children."

342. Eng. Bankr. Act, 1914, § 42; Williams, Bankruptcy Practice (12th ed.), p. 284.

343. Can. Bankr. Act, 1919, § 29; Duncan, Bankruptcy Law of Canada, p. 326.

344. In re Skinner (D. C., Ia.), 3 Am. B. R. 163, 97 Fed. 190; In re Grahs (Ref., Ohio), 1 Am. B. R. 465; Kehr v. Smith, 20 Wall. 31; Sedgwick v. Place, Fed. Cas. 12,622; Pratt v. Curtis, Fed. Cas. 11,375; Antrim v. Kelly, Fed. Cas. 404. Compare Conron v. Cauchois (C. C. A., 2d Cir.), 39 Am. B. R. 780, 242 Fed. 999.

345. Henkel v. Seider (D. C., N. Y.), 20 Am. B. R. 773, 163 Fed. 553; Fouche v. Shearer (D. C., Ga.), 22 Am.

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