went to his store and went through his books. He made an estimate of his stock at $65,000 and his bills receivable at $10,000, and he submitted to the officers of the appellant a list of his liabilities, which were about $19,000. The appellant undertook to help the bankrupt dispose of his business, and finally a purchaser was found at a price of $36,500. The appellant advised the bankrupt to offer his creditors 50 cents on the dollar. It was arranged that the money paid for the business should be held in escrow at the bank until July 20, when a bill of sale was to be given and title was to be passed to the buyer. On July 19 the officers of the bank advised the bankrupt and the purchaser that the sale could not go through, because the escrow provided that, if claims exceeding $30,000 were filed against the escrow, "the sale was off." But on July 20, 1921, the escrow was distributed by the appellant, by drawing cashier's checks, one of which was drawn in favor of the appellant for $32,950; the balance of $1,100 was paid to the bankrupt. Thereafter the eastern creditors drew on the bankrupt through the appellant bank for the 50 cents on the dollar of their accounts. The bankrupt paid thereon $800, but the bank refused to honor or pay any of the drafts. The petition in bankruptcy was thereupon filed against the bankrupt. The trustee in bankruptcy brought in the court below a suit against the appellant to recover the amount so paid to it as a voidable preference. The appellant in its answer Idenied that the bank knew or had reasonable cause to believe that the bankrupt was insolvent, or that the payment of the money to it would effect a preference, and it set up other defenses which will be referred to hereafter. Upon the pleadings and the proof the court decreed that the trustee recover from the appellant the sum of $34,315, with interest and costs. From that decree the appeal is taken.

Before GILBERT, Ross and RUDKIN, Circuit Judges.

Paul Barksdale D'Orr and A. L. Abrahams, for appellant.

W. T. Craig and Paul W. Sampsell, for appellee.

GILBERT, Circuit Judge (after stating the facts as above): The evidence makes it clear and convincing beyond any doubt that the appellant, from and after the time when its officers visited the bankrupt's store and investigated the condition of his business, was fully aware that he was insolvent and that the payment of its claims against him would effect a preference.

But the appellant sets up the defense that the $36,500 so deposited with it was received by it in the ordinary course of banking business, and that on July 20, 1921, there was due and owing from the bankrupt to the appellant $31,000, and that the

appellant, as it might lawfully do, set off the bankrupt's indebtedness to it against its indebtedness to the bankrupt, thereby reducing the appellant's indebtedness to the bankrupt to the sum of $5,500. It is sufficient, in answer to this contention, to point to the fact that the $36,500 so held by the bank was not received in the ordinary course of business between the bank and the bankrupt. It was the deposit of a third party, and it was received in trust. It was deposited with instructions to pay the same to the order of the bankrupt upon receipt by the depositor of the bill of sale of the bankrupt's property, but with the following condition:

"Should attachment suit or bankruptcy proceedings be filed, or claims aggregating more than $36,500 be filed with you against the said J. A. Magassin, prior to July 20, 1921, the foregoing sum of $36,500, if same has been paid to you, is to be returned to me at my option on demand."

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The money so deposited and the debt due from the bankrupt to the bank were not in the nature of "mutual credits" and debts," within the meaning of section 68a of the Bankruptcy Act (Comp. St. § 9652.) The right of set-off attaches upon the moneys of a customer deposited with a bank "in the usual course of business for advances which are supposed to be made upon their credit." Michie, Banks and Banking, § 134. As to the fund which represented the proceeds of the bankrupt's business, the relation between the appellant and the bankrupt was not that of banker and depositor, but that of bailee and bailor. The statute of California (Civil Code, § 3054) relied upon by the appellant is but expressive of the law merchant, and does not affect the situation. As to the funds so placed in the control of the bank it is well settled that there was no right of set-off. Libby v. Hopkins, 104 U. S. 303, 26 L. Ed. 769; Alvord v. Ryan (C. C. A., 8th Cir.), 32 Am. B. R. 1, 212 Fed. 83, 128 C. C. A. 539; Lehigh Valley Coal Sales Co. v. Maguire, 251 Fed. 581, 163 C. C. A. 575; First Nat. Bank v. Ilarper, (C. C. A., 9th Cir.), 43 Am. B. R. 82, 254 Fed. 641, 166 C. C. A. 139.

All the elements of a voidable preference are found here. There was a transfer to the appellant of the bankrupt's money. A transfer includes every method of parting with property as

a payment. Bankruptcy Act, § 1, subd. 25 (Comp. St. §9585.) In order to make a "transfer," it is immaterial in what form the payment is made, whether by cash, or check, or order. For v. Gardner, 21 Wall. 475, 22 L. Ed. 685; Mechanics' Bank v. Ernst (U. S. Sup. Ct.), 31 Am. B. R. 302, 231 U. S. 60, 34 Sup. Ct. 22, 58 L. Ed. 121; In re The Leader (D. C., Ark.), 26 Am. B. R. 668, 190 Fed. 624. Here it was accomplished by the appellant's cashier's check. It was done within four months prior to bankruptcy. At the time of the transfer the bankrupt was hopelessly insolvent. The transfer operated as a preference, whereby the bank would be enabled to obtain a greater percentage of its debt than other creditors of the same class would receive. The appellant and its officers, not only had reasonable cause to believe, but they had positive knowledge, that the enforcement of the transfer would effect a preference. The decree is affirmed.

HERMAN G. GERDES, TRUSTEE IN BANKRUPTCY OF ABRAHAM LUSTGARTEN, BANKRUPT, V. ABRAHAM LUSTGarten.

U. S. Supreme Court, November, 1924.

No. 70.

Rev'g 1 Am. B. R. (N. S.) 23.

DISCHARGE OPPOSITION ΤΟ DISCHARGE GROUNDS OF OPPOSITION FALSE STATEMENT TO SECURE CREDIT.

Where a bankrupt makes a financial statement for the purpose of obtain ing credit, which provides that it shall be binding for continuing credit unless changed, and that the bankrupt will notify the creditor of any change in his financial conditions, and a creditor thereafter relies upon such statement, while it is in force, in making a loan to the bankrupt. the latter's discharge will be refused if the statement was false, without regard to the time that has elapsed since it was made; the lapse of time being only material in determining whether credit was extended within the period intended, and whether the creditor in fact extended credit on the faith of the statement.

(See Collier, 13th Ed., p. 555; Am. B. R. Digest, § 1020.)

On writ of certiorari to the United States Circuit Court of Appeals for the Second Circuit. Reversed and remanded.

Moses Cohen, for petitioner.

Lawrence J. Bershad, for respondent.

Mr. Justice SANFORD delivered the opinion of the court. Lustgarten, the respondent, was adjudged bankrupt in an involuntary proceeding in the Southern District of New York. He duly filed an application for discharge. Two creditors filed objections, specifying four grounds of opposition,1 which were referred to the referee.2 Thereupon an order was made directing the trustee to prosecute the specifications at the expense of the

estate.

Only two of them are here involved: one alleging that Lustgarten had failed to keep proper books of account, and the other that he had obtained credit from the Corn Exchange Bank, an objecting creditor, upon a false statement in writing.

Section 14b of the Bankruptcy Act, as amended by the Act of June 25, 1910, c. 412, 36 Stat. 838, provides that the judge, on hearing a bankrupt's application for discharge and the pleas and proofs made in opposition thereto, shall "discharge the applicant unless he has . . (2) with intent to conceal his financial condition failed to keep books of account or records from which such condition might be ascertained; or (3) obtained money or property on credit upon a materially false statement in writing, made by him to any person or his representative for the purposeof obtaining credit from such person.

No evidence was introduced before the referee under the specification of opposition relating to the books of account. As to the obtaining of credit, it was shown that on January 6, 1920, Lustgarten gave the bank a signed statement setting forth his financial condition on December 15, 1919, and showing a net worth of more than $58,000. This statement recited that it was made "for the purpose of obtaining loans," and stated that: "This statement is to be regarded by Abraham Lustgarten and by The Corn Exchange Bank as continuous and binding, and to form a true statement as to the assets and liabilities of the undersigned, and other matters, to be relied upon by The Corn Exchange Bank upon

1 Gen. Ord. No. 32.

2 Gen. Ord. No. 12, cl. 3.

application by the undersigned, for all loans until another statement in writing shall be substituted for this, or this statement recalled. And further, whenever my financial condition is changed materially from the financial condition shown in the above statement, I agree to notify the said bank at once of such change, whether applications for further loans are made or not." There was conflicting evidence as to whether or not the statement as to Lustgarten's financial condition was materially false. In October and November, 1920, and February, 1921, the bank, on his applications, made him three loans, aggregating $11,000. He had meanwhile given the bank no notice of any change in his financial condition; and there was no evidence that it had in fact substantially changed.

The referee reported that, without deciding the " difficult " question of fact whether Lustgarten's statement to the bank was false when given, and assuming that the bank had relied upon it in extending the credits, he was of opinion that it had no right so to do, since in view of the financial depression prevailing in 1920, the "reasonable time" for which the statement remained a tinuing statement" had expired when the credits were extended; and he recommended that the discharge be granted.

The District Court, at a hearing on the referee's report-apparently assuming, but not deciding, that the financial statement was false and that the bank had relied upon it-held that as the statement was a continuing one and provided for notice of any material changes, the bank had a right to rely upon it until such notice was given. The court also considered the specification relating to the books of account,3 and upon the evidence that had been taken before the referee upon a closely related specification not here involved, held that the fact that the books did not show an indebtedness which Lustgarten claimed to have owed his nephew, constituted a failure to keep proper books and that the intent to conceal his financial condition was reasonably to be inferred. The discharge was accordingly denied.

On an appeal by Lustgarten from this order, the Circuit Court

8 No reason was stated for considering this specification, which, apparently, had not been relied on before the referee.

4 The referee had found that this other specification was not sustained by the proof; and it was disregarded by the District Court.