FRANK W. EATON, TRUSTEE IN BANKRUPTCY, V. STANDARD OIL Co. OF NEW YORK.*

Connecticut Supreme Court of Errors, March, 1924.

PREFERENCES CONSTITUENT ELEMENTS OF VOIDABLE PREFERENCE.

In order to recover a preference, the trustee must prove to the satisfaction of the court five separate propositions, namely; insolvency of the debtor, a transfer of his property, the transfer to be within four months before the filing of his petition in bankruptcy, its effect enabling a creditor to obtain a greater percentage of his debt than any other creditor of the same class, and that such creditor should then have reasonable cause to believe that the transfer would effect a preference.

(See Collier, 13th Ed., p. 1248; Am. B. R. Digest, § 482.)

SAME CONSTITUENT ELEMENTS OF VOIDABLE PREFERENCE EVIDENCE INSUFFICIENT TO SHOW REASONABLE CAUSE TO BELIEVE.

Evidence examined and held insufficient to sustain a finding that a creditor had reasonable cause to believe that a payment by the debtor would effect a preference.

(See Collier, 13th Ed., p. 1298; Am. B. R. Digest, § 514.)

SUITS AND ACTIONS BY AND AGAINST TRUSTEE-EVIDENCE AS TO PREFERENTIAL TRANSFER.

In an action to recover a preference alleged to have been made on December 28, 1920, evidence of the amount received for the property of the bankrupt at an auction sale by the trustee on July 23, 1921, and of an appraisal made in April, 1921, is not admissible, in the absence of a showing as to the amount of stock on hand at the time of adjudication, and what was bought and sold by the receiver.

(See Collier, 13th Ed., p. 24(5); Am. B. R. Digest, § 677.)

Action to recover alleged preference. Judgment for defendant, and plaintiff appeals. No error.

Argued before WHEELER, C. J., and BEACH, CURTIS, KEELER, .and KELLOGG, JJ.

Frank P. McEvoy, for appellant.

John H. Cassidy, for appellee.

121 Atl. 23.

KELLOGG, J.:

The plaintiff, as trustee of the bankrupt estate of one Charles F. Cleary, who had on December 31, 1920, filed a voluntary petition in bankruptcy and was adjudicated a bankrupt, brings this action under subdivisions (a) and (b) of section 60 of the Bankruptcy Act of 1898 (30 U. S. Statutes at Large, 562), as amended by the Act of 1903 (32 U. S. Stat. 799), and further amended by the Act of June 25, 1910 (36 U. S. Stat. 842), and appearing in U. S. Compiled Statutes 1918, § 9644, to recover the amount of approximately $600 claimed to have been transferred and paid over by the said Cleary to the defendant on or about the 28th of December, 1920, and within four months before the filing of the petition in bankruptcy; said payment and transfer being alleged to have been made when Cleary was insolvent, and with the effect that the defendant obtained a greater percentage of its debt than any other creditor of the said defendant of the same class, and it being further alleged that at the date of said transfer and payment by the said Cleary to the defendant, the defendant had reasonable grounds to believe that said transfer and payment would effect a preference within the meaning of the Act of Congress relating to bankruptcy. The answer denies these allegations. Subdivisions (a) and (b) of the Bankruptcy Act, as finally amended by the Act of 1910, read as follows:

"a. A person shall be deemed to have given a preference if, being insolvent, he has, within four months before the filing of the petition, or after the filing of the petition and before the adjudication, procured or suffered a judgment to be entered against himself in favor of any person, or made a transfer of any of his property, and the effect of the enforcement of such judgment or transfer will be to enable any one of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class. Where the preference consists in a transfer, such period of four months shall not expire until four months after the date of the recording or registering of the transfer, if by law such recording or registering is required.

"b. If a bankrupt shall have procured or suffered a judgment to be entered against him in favor of any person or have made a transfer of any of his property, and if, at the time of the transfer, or of the entry of the judgment, or of the recording or registering of the transfer if by law recording or registering thereof is required, and being within four months before the filing of the petition in bankruptey or after the filing thereof and before the adjudication, the bankrupt be insolvent and the judgment or transfer

then operate as a preference, and the person receiving it or to be benefited thereby, or his agent acting therein, shall then have reasonable cause to believe that the enforcement of such judgment or transfer would effect a preference, it shall be voidable by the trustee and he may recover the property or its value from such person. And for the purpose of such recovery any court of bankruptcy, as hereinbefore defined, and any state court which would have had jurisdiction if bankruptcy had not intervened, shall have concurrent jurisdiction.''

"In order to show that a preference voidable under section 60 of the federal Bankruptcy Act has been given, it is necessary to prove that the debtor was insolvent, that he made a transfer of his property, that such transfer was made within four months before the filing of his petition in bankruptcy, that its effect was to enable a creditor to obtain a greater percentage of his debt than other creditors of the same class, and that such creditor should have reasonable ground to believe that the transfer would effect a preference." Wrenn, Trustee, v. Citizens' National Bank, 96 Conn.

374, 114 Atl. 120.

It is therefore clear that the plaintiff must prove to the satisfaction of the court five separate propositions in order to render a preference voidable, namely-insolvency of the debtor, a transfer of his property, the transfer to be within four months before the filing of his petition in bankruptcy, its effect enabling a creditor to obtain a greater percentage of his debt than any other creditor of the same class, and that such creditor should then have reasonable cause to believe that the transfer would effect a preference. A failure to prove any one of these five requisites must result in a finding that the preference, if any, is not voidable.

That there was a transfer, that it was within the limited time, and that it gave this creditor a greater percentage of his debt than other creditors of the same class, seems to be without dispute. As to the insolvency and that the creditor should at the time of the transfer have reasonable cause to believe that the transfer would effect a preference, the court has found that there was nothing said or done by Cleary to indicate to the defendant's agent that he (Cleary) was insolvent, that the plaintiff offered no evidence to prove that at the time the money was paid to the defendant's agent the aggregate of Cleary's assets, taken at a fair valuation, was less than the aggregate of his liabilities, and further, at the time of the payments, the said Cleary was not insolvent, and neither the defendant nor its representative had reasonable cause to believe that Cleary was insolvent, and that the payments would

effect a preference within the meaning of the Act of Congress relating to bankruptcy.

The plaintiff has made no effort to correct the finding of the court in this case, but relies upon the authority of Neff v. Neff, 96 Conn. 273, 114 Atl. 126, and Hayden, Trustee, v. Allyn et al., 55 Conn. 280, 11 Atl. 31, and Adams v. Turner, 73 Conn. 38, 46 Atl. 247, to have the conclusions of the court reviewed as a question of law from the subordinate facts found, and there can be no doubt that such action can be taken by this court.

A careful examination of all subordinate facts as found by the court discloses that the claims filed with the referee in bankruptcy exceeded the inventory taken by Cleary at about the time of the payments to the defendant by approximately $2,000, and that therefore it could possibly be found that Cleary was actually insolvent at the time of these payments, but these subordinate facts do not disclose that, at the time of the payments to the defendant, it then had reasonable cause to believe that these payments would effect a preference. It is found that the location of Cleary's business was a very good one and the volume of business done by him was large, that his stock of merchandise was new and clean and his business well kept and conducted, that he stated to the defendant's agent and the officer attending him that there was no necessity of making an attachment against his property, that he was financially able to pay the bill of the defendant, and that he had a large number of credits outstanding.

Inasmuch as this court cannot find from the subordinate facts that the court erred in its second and third conclusions relating to the belief of the defendant as to the insolvency of Cleary and an illegal preference, the plaintiff has failed to prove one, at least, of the propositions necessary to effect a voidable preference.

Two rulings in evidence were also complained of by the plaintiff-one the rejection of evidence showing the amount received by the trustee in bankruptcy upon the sale by auction on July 23, 1921, of the property of the bankrupt then in the hands of the trustee, and the other the exclusion of the appraisal of the estate of the bankrupt on April 6, 1921. The evidence in each case was offered tending to prove the insolvency of the bankrupt on December 28, 1920. The court has found that the plaintiff conducted

this business of the bankrupt from his appointment as receiver on December 31, 1920, for some period of time, and sold quantities of merchandise at retail until the said 23d day of July, 1921, when the stock of merchandise was sold at public auction. The record discloses that the evidence offered in regard to the sale by auction was excluded at the time by the court, subject to the furnishing by the plaintiff of additional information as to the amount of stock on hand, at the time of adjudication, and what was bought and sold by the receiver. No evidence was afterward offered by the plaintiff concerning the additional information, and without this the amount received from the sale over six months later could give no basis for determining the value of the bankrupt's merchandise in the previous December. This evidence was rightly excluded.

Also the same condition applies to the evidence offered of the appraisal in April, 1921. There was no evidence offered as to the amount of sales by the receiver for the prior three months, and therefore the appraisal by itself could be of no value in determining the status of the bankrupt's estate in December, 1920. There is no error.

The other judges concurred.

FRANCIS H. NULL, TRUSTEE OF THE ESTATE OF SIMON ROSENTHAL, BANKRUPT, V. FIRST NATIONAL BANK OF TIPTON.* Indiana Appellate Court, April, 1924.

No. 11704.

PREFERENCES-NECESSITY FOR DIMINISHING ESTATE-PAYMENT BY THIRD PERSON-NO PREFERENCE IS SHOWN BY WIFE RECEIVING PART OF PROCEEDS OF SALE OF HUSBAND'S REAL PROPERTY IN CONSIDERATION OF RELEASE OF DOWER AND PAYING THEREFROM MORTGAGE GIVEN WITHIN FOUR MONTHS' PERIOD.

Where a wife, with knowledge of her husband's insolvency, agreed to release her inchoate dower in certain real property in consideration that the proceeds of the sale, after paying two mortgages, should be turned

143 N. E. 522.

73-N. S. VOL. IV.