Counting Preferred Creditors in Computing Number of Creditors. [Ch. VI.

debt of the petitioning creditor is equal to the amount required by the statute, and his petition alleges the other material facts, he has an absolute right to have an adjudication upon it by the court. Although he may be the only creditor and may have ample remedies in courts of law or equity, that fact furnishes no ground for refusing to adjudicate (in re W. Alexander, supra) and this is true, even though it be shown that the proceedings in bankruptcy would be detrimental to the interests of the debtor. If the petitioner's debts really amount to the sum mentioned in the statute, the fact that the debtor has tendered payment is insufficient to prevent an adjudication. This results in part from the fact that if the debtor is insolvent, payment in full would be a preference. (In re Ouimette, Fed. Cas. 10,622; 3 N. B. R. 566; s. c. 1 Saw. 47; in re Williams, Fed. Cas. 17,703; 3 N. B. R. 286; s. c. I Low. 406.) But if a payment of the indebtedness is actually accepted after the filing of the petition, it may be set up and is a sufficient defense. If it is a preference accepted knowingly, it estops the petitioner.

Counting Preferred Creditors in Computing the Number of Creditors. The question whether preferred creditors are to be counted in determining the number and amount of outstanding claims against the bankrupt differs somewhat from the question whether such creditors may be petitioners. The courts which hold that they may be petitioners have imposed as the condition of their doing so the surrender by them of the property preferentially transferred; and further hold that the filing of a petition by a preferred creditor is in itself a waiver of the preference. But until they do surrender their preference, under section 57 (g), their claims are not provable, and therefore, on principle and authority, and in accordance with the statutory definition in section I (9), they should not be regarded as creditors. (In re Israel, Fed. Cas. 7,111; 12 N. B. R. 204; s. c. 3 Dill. 511; in re Currier, Fed. Cas. 3.492; 13 N. B. R. 68; Clinton v. Mayo, Fed. Cas. 2.899: 12 N. B. R. 39.) And see under present act In re Rogers Milling Co. (4 Am. B. R. 540; 102 Fed. 687.)

Attaching Creditors.-Under the former act there was a conflict of authority as to whether creditors, who had secured attachments upon the bankrupt's property within four months prior to the filing of the petition, were to be counted in the number of creditors. It was held in re Scrafford (Fed. Cas. 12,556; 15 N. B. R. 104; s. c. reversing the same case, Fed. Cas. 12,557; 14 N. B. R. 184), that they could not be so reckoned; the contrary was held in re Broich (15 N. B. R. 11). In both of these cases the attaching creditors appeared in opposition to the petition and claimed the right to oppose the adjudication, even without a surrender of their liens. We consider the rule laid down in re Scrafford as more just. A creditor who has secured an attachment or other lien pursuant to legal proceedings is substantially a preferred creditor, if the proceedings were instituted within four months before the petition. It is true, such liens are made void by the adjudication of bankruptcy per se (section 67 [c]); but until that time, at least, they have all the elements of preferential transfers. Until there is a surrender of the property attached or subjected to the lien, the attaching creditor would probably not be allowed to prove his claim in bankruptcy. Until he could prove it, he would not be a "creditor," as that word is used in the Bankruptcy Act. (Compare section I [9].)

But under the present act Referee Eastman of the Northern District of Illinois, whose report in this respect has been approved by the district judge, without opinion has held, In re Cain, 2 Am. B. R. 378, that preferential payments made within four months of bankruptcy in violation of the Bankruptcy Act are to be counted in determining the amount of the debts of the bankrupt. The part of the opinion which passes on the law is herewith quoted.

"The point is made by the attorneys for the alleged bankrupt. that the statute implies the present debts. in speaking of the amount of indebtedness necessary to give jurisdiction in involuntary cases. It uses the word 'owing' debts to the amount of one thousand dollars, and, therefore it is claimed that it means only those debts which exist at the time of the filing of the petition, irrespective of what creditors the debtor may have paid off in violation of the: Bankruptcy Act, are to be counted.

Under the Bankruptcy Law of 1867, it was an important matter to determine the number and amount of the creditors, and contest arose as to whether creditors, who had commenced attachment proceedings, or who had received preferences by transfer or otherwise, should be counted in estimating the number of creditors, as in some instances bankruptcy proceedings would have been defeated if such parties were to be excluded.

In re Scrafford, 15 N. B. R. 104; 21 Fed Cas. 866. Judge Dillon held that where it was denied by the bankrupt that the petitioners constituted the requisite one-fourth in number and one-third in amount, and in support of that contention counted creditors who had levied attachments on the debtor's property within four months, it being contended by the petitioning creditors that all those who held such attachment should be excluded from the court, made use of the following language:

'One object of the Bankruptcy Law is to secure an equal distribution of the estate of the bankrupt amongst all of his unsecured creditors, and in order the more effectually to accomplish this, creditors who have obtained preferences are excluded from participation in the proceedings until after the election of an assignee. I can see no reason why attaching creditors should not be governed by the same rules which apply to other creditors, whose debts are secured by preferences which the adjudication will defeat. Indeed, as all attachments levied within four months between the filing of the petition in bankruptcy would be dissolved, ipso facto, by an assignment under the bankruptcy proceedings. persons holding liens by such attachments would seem to have a peculiar interest in defeating an adjudication, and for this reason should not be reckoned, for the purpose of those proceedings, as creditors of the alleged bankrupt. Of course they could not be counted if the attachments were sued out with a view of obtaining a preference over other creditors; and as, in most cases, a ground of attachment is also an act of bankruptcy, the presumption would be strong that such was the object of an attaching creditor. A person with a knowledge that his debtor has committed an act of bankruptcy, should not be permitted by attachment to hold a preference over the creditors. I do not think that creditors, any more than the debtor, should be permitted thus to defeat the object of the Bankruptcy Law. A secured creditor cannot vote for assignee, nor can he have his debtor adjudged a bankrupt. If he cannot be counted in favor of the proceedings to put the debtor into bankruptcy because he is secured, there is no principle upon which he could be counted against them.'

The reasoning of that case, if applied to the matter in hand would seem to suggest the converse, viz.: that in ascertaining the number of creditors which the bankrupt was owing at the time of the filing of the petition, the one who has secured a preference which it is assumed is voidable, would be counted. Otherwise, as suggested in the case cited, the object of the law in providing for an equal distribution of the estate of the bankrupt amongst all his creditors would be defeated. I do not think that the voidable transaction should be treated as valid whereby the bankrupt could prevent the adjudication."

§ 59.] Secured Creditors - Exclusion of Employes — Dismissal of Petition.

Secured Creditors.-By the express provision of the statute, secured creditors may now be petitioners; but only the excess of their claim over the value of the securities held by them is considered as the debt due to them.

Exclusion of Employes. Section 59e.-The statute provides that the claims of employes and of relatives within the third degree shall be excluded in computing the number of creditors. Under an analogous provision in the former act excluding creditors holding claims amounting to less than two hundred and fifty dollars, it was held by nearly all the courts that there was nothing in the language of the act excluding such persons from being counted in computations as to the amount of the bankrupt's debts. But under the present act the amount of the claims of creditors, other than the petitioners, is entirely immaterial. Only the number is considered; and even that is not material, if there are three petitioners with claims aggregating five hundred dollars. It will be noted that by the terms of the present statute such persons are excluded only in case they have not joined in the petition. The manifest purpose of the statute is to prevent an insolvent debtor from stopping an adjudication against himself by the creation of a number of small debts to persons related to or dependent upon him. As to the determination of degrees of relationship by the rule of the common law, compare notes to section 35.

Dismissal of Petition. Section 59g.-This subdivision as to the notice to the creditors is mandatory and the notice to be given is the notice provided in section 58. See Neustadter v. Chicago Drygoods Co. (3 Am. B. R. 96; 96 Fed. 830), which holds that the provisions of law contained in section 58 (8) and in section 59g mean dismissals which in effect withdraw the case without the decision of the court as to its merits and do not require notice to the creditors who have not appeared at trials or hearings in involuntary cases. But even where a majority of the petitioning creditors consent to the dismissal of the petition for involuntary bankruptcy the remaining minority have the right to insist upon

Dismissal of Petition

Estoppel of Creditors to Petition. [Ch. VI.

an adjudication if an act of bankruptcy has been committed. The leading case on this subject under the present act is In re Cronin (3 Am. B. R. 552; 98 Fed. 584). The following is from the opinion of Lowell, J., in that case:

"If a respondent has committed an act of bankruptcy, and the statutory number of his creditors has duly petitioned for his adjudication as a bankrupt, the court must make the adjudication, even though it is satisfied that a compromise offered by the respondent would be for the best interest of the creditors. Bankruptcy is not a remedy like an injunction or the appointment of a receiver, granted in the discretion of a court of equity. The distribution of a debtor's assets is to be made in bankruptcy if he has committed an act of bankruptcy, and the other statutory requisites have been complied with. Fraud, oppression, or even mistake may, in some cases, be sufficient grounds for dismissal of the petition; but none of these grounds exist here. Lowell. Bankr. p. 39; King v. Henderson (1898). App. Cas. 720. Is the condition altered by the fact that the majority of the petitioners have come to desire a dismissal of the petition, which dismissal is resisted by the minority? Will the assent of a majority of the petitioners enable the court to act for the interest of the creditors by dismissing the petition, or has the minority the right to insist upon an adjudication, if an act of bankruptcy has been committed? I think that in this case the right of the minority is absolute. After petitioners have joined a petition, they cannot ordinarily withdraw against the wishes of their fellow petitioners. Lowell, Bankr. p. 34; In re Heffron. 10 N. B. R. 213, Fed. Cas. 6321; In re Sargent, 13 N. B. R. 144, Fed. Cas. 12361. In re Indianapolis, C. & L. R. Co. 5 Biss. 287, Fed. Cas. 7023. the court did, indeed, dismiss an involuntary petition, against the objection of two creditors, but only after payment in full had been secured to the objectors; and Judge Drummond said: I think that the Bankrupt Court, as a court of equity. has a full, equitable discretion upon this subject, and can allow a case to be withdrawn from it. provided it is done without prejudice to the interests of any of the parties, debtors or creditors, who are before it. And in this case I think it was competent for the Bankrupt Court to allow the case to be withdrawn from it. protecting the interests of the different non-assenting creditors.""

Estoppel of Creditors to Petition.-Even creditors holding provable claims may not always be petitioners in bankruptcy. Like parties to legal proceedings in general, they are subject to the principles and doctrines of estoppel. Applying these principles, it has been generally held that a creditor who has given his consent to an act is estopped from thereafter urging it as an act of bankruptcy. (In re Israel, Fed. Cas. 7.111; 12 N. B. R. 204; S. C. 3 Dill. 511; in re Schuvler. Fed. Cas. 12,494; 2 N. B. R. 549; s. c. 3 Ben. 200; in re Currier, Fed. Cas. 3,492; 13 N. B. R. 68;