3.] Suffering or Permitting Preferences through Legal Proceedings.

ruptcy. (Rix v. Bank, 2 Dill. 367; Fed. Cas. 11,869; Schlitz v. Schatz, Fed. Cas. 12,459; 2 Biss. 248.)

66

Suffering or Permitting Preferences through Legal Proceedings. -Section 3a (3). The most important fact to be noticed in connection with this subdivision 3 is that intent is not expressly made an essential element to the commission of the act of bankruptcy herein defined. Next to that, it should be noted that the words used are "suffered or permitted," not "procured "—the word which was used in the act of 1841. By section 39 of the bankruptcy act of 1867, it was provided, among other things, that "a person who being bankrupt or insolvent, or in contemplation of insolvency, should permit or suffer his property to be taken on legal process with intent to give a preference to one or more of his creditors, or with intent to defeat or delay the operation of the act" was guilty of an act of bankruptcy; and by the thirty-fifth section of the same statute providing for the invalidating of preferential transfers, it was declared that any attachment or seizure under execution of such person's property, procured by him,” with a view to give a preference, should be void. Under that act it was at first held by many of the district courts, that when an insolvent debtor was sued by one creditor whose action would necessarily result in his securing judgment and subsequently levying upon and obtaining all the property of the insolvent debtor to the exclusion of other creditors, if the debtor did not take steps to go into voluntary bankruptcy and thereby prevent the prosecuting creditor from obtaining the preference which his action would give him, then the debtor must be presumed to have intended that a preference be secured. But the Supreme Court of the United States in Wilson v. City Bank, 17 Wall. 473, finally held that no intent whatever could be inferred from the mere neglect of the defendant, properly sued upon a just claim, to interpose a defense when there was no valid defense; that while, when a person does a positive act, the consequences of which he knows beforehand, he must be deemed to intend those consequences, it cannot be inferred that a man intends the conse

Suffering or Permitting Preferences through Legal Proceedings. [Ch. III.

quences of other persons' acts (for instance, the act of the plaintiff) when he contributes nothing to their success. But a study of Wilson v. City Bank shows most clearly that it turned upon the fact that intent under that statute was an essential element. Not any of the reasoning of the court in the decision in that case justifies the conclusion that under the present statute of 1898. mere suffering or permitting by an insolvent of the obtaining of a preference by a creditor through legal proceedings is not an act of bankruptcy. And with this view accords the general tenor of decisions under the new act. The following excellent summary of the act is taken from the opinion of Judge Coxe In re Rome Planing Mills (3 Am. B. R. 123; 96 Fed. 812):

"Section 3, subd. 3, provides that an act of bankruptcy by a person shall consist of his having

'Suffered or permitted, while insolvent, any creditor to obtain a preference through legal proceedings, and not having, at least five days before a sale or final disposition of any property affected by such preference vacated or discharged such preference.'

In order to succeed under this subdivision the petitioners must prove: First. That a preference was obtained by a creditor through legal proceedings. Second. That the debtor suffered or permitted the preference and did not vacate or discharge the preference at least five days before a sale or final disposition of the property affected. Third. That the debtor was insolvent at the time the preference was obtained. The burden of proof is upon the petitioners precisely as under the preceding subdivision. The debtor's intent is not made an ingredient. It is enough that the creditor has obtained a preference and that the debtor has permitted it to remain undischarged. What was the debtor's intent regarding the matter is wholly immaterial. It is not necessary that he should do any affirmative act. If he remains passive and supine and permits his property to be taken by one creditor at the expense of the others he has suffered or permitted' a preference to be obtained; this is enough. The present act differs from the act of 1867, where the language used (section 39), is procure or suffer.' The same words 'procured or suffered are found in section 60, par. a, of the present act, relating to preferred creditors, and it may be that a preference obtained through legal proceedings described in subdivision 3 of section 3 cannot be voided by the trustee pursuant to section 60; but that permitting such a preference constitutes an act of bankruptcy, there can be little doubt. In re Reichman, 91 Fed. 624; 1 Am. B. R. 17. The words legal proceedings' used in subdivision 3 of section 3 have reference to any proceedings in a court of justice interlocutory or final, by which the property of the debtor is seized and diverted from his general creditors. The observations regarding proof of insolvency under subdivision 2 are equally ap

3.] Suffering or Permitting Preferences through Legal Proceedings.

plicable to subdivision 3. It is not necessary that the creditor should wait until a sale has actually taken place. It would be a strange construction of an act designed to save and protect the debtor's estate, to hold that it can only be set in operation after the estate has been plundered and dissipated. The debtor has until five days before the day the sale is legally noticed in which to vacate or discharge the preference. If he has not done so at that time the creditor may proceed and file a petition and, upon a proper showing, may enjoin the sale. The act of bankruptcy is not consummated until the expiration of the time in which the debtor may vacate or discharge the lien, and the last day for doing this is five days before the day a sale of the property is advertised. In the case of a judgment, therefore, the petitioners must prove the entry of the judgment, the issue of an execution, the levy thereunder and the debtor's insolvency at the time of the judgment and levy. They must also prove that the property was actually sold at execution sale or that the sale was advertised for a day certain, and that the debtor had permitted the levy to stand until the sale was but five days distant."

And see to same effect In re Meyers (1 Am. B. R. 1, referee's decision); In re Moyer (I Am. B. R. 577; 93 Fed. 188); In re Collins (2 Am. B. R. 1, referee's decision). In re Rome Mills, supra, was a case where there was a levy under a judgment. It was sent back to the referee to take further proof on question of insolvency and finally the respondent was adjudged a bankrupt upon the further report of the referee. (3 Am. B. R. 766.) In re Moyer arose in the Eastern District of Pennsylvania, and was a case where the debtor while insolvent having borrowed money of relatives gave notes containing warrants of attorney to confess judgment, and subsequently and within four months before the filing of an involuntary petition, the debtor being insolvent, the holder of the notes entered judgment and levied on the debtor's goods. It was held that the debtor "suffered" the taking of the judgment and the levy, and by not paying the same, committed an act of bankruptcy. The Court (per McPherson, J.) observed:

"The question presented by these facts is important. If the Bankrupt Act of March 2, 1867, were still in force, the construction announced by the Supreme Court in Wilson v. Bank, 17 Wall. 473, and in Clark v. Iselin, 21 Wall. 360, would probably require us to decide that Moyer did not commit an act of bankruptcy. He was passive during the proceedings in November, and did not in any degree procure the entry of the judgments or the issue of

Suffering or Permitting Preferences through Legal Proceedings. [Ch. III, execution with intent to secure a preference to the creditors controlling this process. But, as we understand the Bankrupt Act of 1898, its provisions are essentially different from the earlier act, and require the court to come now to a different conclusion. Clause 3 of section 3 declares that it shall be an act of bankruptcy if a person has suffered or permitted, while insolvent, any creditor to obtain a preference through legal proceedings, and not having at least five days before a sale or final disposition of any property affected by such preference, vacated or discharged such preference.' It will be observed that this clause says nothing about the bankrupt's intent to enable the creditor to secure a preference; neither does it use the word 'procure' which might seem to imply that the debtor must take some part in bringing the preference about. The dominant fact seems to be the actual result that has been attained by the creditor. If, through legal proceedings, he has succeeded in obtaining a preference,-that is (referring to section 60 for a description of preferred creditors), if the debtor is insolvent, and has either 'procured or suffered a judgment to be entered against himself, . . . and the effect of the enforcement of such judgment . . . 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,'-if this is the actual result of legal proceedings taken against an insolvent debtor, the clause in question requires the debtor to vacate or discharge such preference within a specified time, and, if he fails so to do, declares that he has committed an act of bankruptcy. How he is to vacate or discharge the preference is not specified; but the silence of the clause upon this point presents no difficulty. Legal proceedings are of many kinds, differing in the different States; but, whatever kind may be employed by the creditor, if the result of the proceedings gives him a preference over other creditors of the same class, the insolvent debtor is thereupon charged with a clearly implied duty to vacate or discharge the preference within the time allowed him by the act. For example, if he has a defence to the debt he may set it up; or, if he can overthrow the preference because the creditor's procedure has been defective, he may choose that method of attack. If neither of these weapons is available, he has still at command one sufficient weapon, of which he cannot be deprived, he can apply promptly to the court in bankruptcy, and ask that his property should be ratably divided among his creditors. If he fails to move his inaction is properly regarded as a confession that he is hopelessly insolvent, and as conclusive proof that he consents to the preference that he has declined to strike down. This construction of the statute seems to us to be the natural meaning of the clause in question, and to be in harmony with the general purpose of the act. A similar conclusion was reached a month or two ago in the District Court for the Eastern District of Missouri in in re Reichfman, 91 Fed. 624; 1 Am. B. R. 17."

On the other hand the District Court for the Western District of Wisconsin has followed Wilson v. Bank and held that to make the entry of judgment an act of bankruptcy there must be some

3.]

Assignments for Benefit of Creditors.

fault on the part of the judgment debtor by way of procuring or suffering the act to be done. In re Nelson, I Am. B. R. 63; 98 Fed. 76. The facts in this case were very similar to those in that of In re Moyer except that in the case of In re Nelson no execution was issued and there was no threatened sale. It is therefore distinguishable from the other cases though the opinion seems to proceed upon the grounds above stated. See In re Thomas, 103 Fed. 272; 4 Am. B. R. 571.)

Assignments for Benefit of Creditors. Section 3a (4).-The provisions contained in subdivision (4) settle a question as to which there was great conflict of authority under the former act which contained no express enactment upon the subject. Although late in the history of that act the majority of the courts were inclined to hold any assignment for the benefit of creditors an act of bankruptcy, whether such assignment created preferences or not, yet for a long period there was an array of authority of almost equal number and weight which held a contrary opinion, and the question could hardly be considered a settled one under that act.

Under the present act it is very clear that a general assignment for the benefit of creditors is an act of bankruptcy, although made without preferences, without actually intending to defraud creditors, and without insolvency. (In re Gutwillig, 1 Am. B. R. 388; 34 C. C. A. 377; 92 Fed. 337; West Co. v. Lea, 2 Am. B. R. 463; 174 U. S. 594; 19 Sup. Ct. 836.) But such an assignment is voidable and not void and is good except as against proceedings instituted in bankruptcy. (Patty-Joiner & Eubank Co. v. Cummins, Texas Sup. Ct. June 1900; 4 Am. B. R. 269; 57 S. W. 566.) There is a very clear distinction between a voluntary common law general assignment which is what is meant by this section (though in many of the States the method of making such assignment is regulated by statute), by which all the debtor's property is absolutely assigned by him in trust for his creditors, and a state insolvency law which provides for the discharge of the debtor. Proceedings under state insolvency laws, since the pas