UNITED STATES SUPREME COURT DECISIONS ON-LINE

1. Suit in chancery by an assignee in bankruptcy to recover the proceeds of goods sold under judgment in a state court against the bankrupt taken by confession when both parties knew of the insolvency.

Such a judgment, though taken before the first day of June, 1867, is an unlawful preference under the 35th section of that act if taken after the enactment of the bankrupt law.

2. The proceeds of the sale of the bankrupt's goods being in the hands of one sued as it defendant, another person who had a like judgment and execution levied on the same goods is not a necessary party to this suit, being without the jurisdiction. The rule laid down as to necessary parties in chancery.

3. The proceeds of the sale being in the hands of the bank, though it had given the sheriff a certificate of deposit, the assignee was not obliged to move against the sheriff in the state court to pay over the money to him, but had his option to sue the bank which had directed the levy and sale and held the proceeds in its vaults.

4. The defendant having money received as collections for the bankrupt delivered it to the sheriff, who levied the defendant's execution on it and applied it in satisfaction of the same. This is a fraudulent preference, or taking by process under the act, and does not raise the question whether, if the defendant had retained the money, it could be set off in this suit against the bankrupt's debt to the defendant.

5. So taking a check from the bankrupt and crediting the amount of the check then on deposit, on the bankrupt's note the day before taking judgment, was a payment by way of preference and therefore void, and does not raise the question of setoff.

The Bankrupt Act of the United States enacts by its 35th section that if any person being insolvent or in contemplation of insolvency, within four months before the filing of a petition by or against him, with a view to give a preference to any creditor having a claim against him procures his property to be seized or makes any payment, transfer &c., thereof, directly or indirectly, the person receiving such payment, clubjuris

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transfer &c., having reasonable cause to believe the debtor to be insolvent, and that the payment, conveyance &c., is in fraud of the act, the same shall be void, and the assignee may recover the property or its value.

Similarly, its 39th section provides that if any person being insolvent or in contemplation thereof should make any payment or transfer of money or property, or give any warrant to confess judgment, or procure or suffer his property to be taken on legal process with intent to give a preference or to defeat or delay the operation of the act, the money or property might be recovered back if the person receiving the payment or conveyance had reasonable cause to believe that a fraud on the act was intended, and that the debtor was insolvent.

The 20th section of the act provides "that in all cases of mutual debts or mutual credits between the parties, the account between them shall be stated, and one debt set off against the other."

The act was approved on the 2d of March, 1867. But a proviso at the end of its 50th section provides, "that no petition or other proceeding under this act shall be filed, received, or commenced before the 1st day of June, A.D. 1867."

With this statute and this proviso as part of it in force, Hitchcock & Endicott, traders in Chicago, and keeping their bank account with the Traders' National Bank there -- the bank being in the habit of discounting their notes and collecting their drafts -- were requested by the bank, on the 6th of May, 1867, to furnish them with a statement of their affairs, the firm being at this time confessedly debtors of the bank, and in a much embarrassed and really insolvent condition. A statement was soon furnished by the bookkeeper which on the 24th of May was discovered by the bank to be untrue, the liabilities of the firm being set down in it much below their reality. Thereupon, on the 28th May, the bank brought a suit against Hitchcock & Endicott in which, on an allegation of fraud, a capias was issued for the arrest of Hitchcock. To avoid this arrest, the firm gave the bank a note, payable on demand, for the whole amount clubjuris

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of their debt, which was $6,707.43, with a warrant of attorney to confess judgment, and on the next day, the 29th, the bank entered a judgment in one of the state courts of Illinois for the debt, and $50 attorney's fee, less $325.20, the amount which the firm had in deposit account with the bank on that day. For this $325.20, the firm drew a check in favor of the bank, in virtue of which check, the sum just named was endorsed on the note as a credit. Execution for $6,438 was immediately (May 29th) issued on this judgment and levied on a stock of goods belonging to the firm. In what was thus done the president of the bank acknowledged that he was aware of the insolvent condition of Hitchcock & Endicott, and had instituted his proceeding after taking the opinion of counsel, and learning from this source that the bankrupt law did not affect such cases until after the first day of June, the earliest time at which proceedings could be commenced under that law.

On the 30th of May, Hotchkiss & Sons, of Connecticut, obtained a judgment against the same parties for a much smaller debt, on which execution was also issued and levied on the same goods.

On the 25th of June, some other creditors of Hitchcock & Endicott filed a petition in the District Court for Northern Illinois, praying to have them declared bankrupt, and on the 10th of July they were so declared, one Campbell being appointed the assignee in bankruptcy. On the 21st of the following August, the goods of the firm were sold under the execution of the bank. At the same time, the bank caused to be sold under the same execution a certain sum of $943, which it had received on the 12th of June by way of collections made by it in the ordinary course of business, of drafts belonging to the firm. The net sum raised by the execution on the goods was $6,062.43. On the 21st of August, while things were standing in this way -- the sheriff having as yet made no return of his execution -- Campbell, the assignee in bankruptcy, filed a bill in chancery, in the district court below, against the bank and Hotchkiss & Sons, alleging that each of them had obtained from Hitchcock & clubjuris

Page 81 U. S. 90

Endicott fraudulent preferences, and that the several judgments in their favor were void. Hotchkiss & Sons being nonresidents, no service was made on them. The bill prayed that the judgments be set aside and that the defendants be ordered to pay over to the assignee the value of the goods sold under the two executions. With this bill thus pending, the sheriff (who as already mentioned, had not made any return to his execution) deposited $6,500 raised under the bank's execution on the goods in the bank itself, receiving from it a "certificate of deposit," that he had deposited the sum named "to the credit of himself subject to his order on the return of this certificate." There was, however, an arrangement made by the bank with the sheriff that the money should remain with the institution as a deposit, to be used by it until the suit brought by Campbell should be decided, and that if it was decided in favor of the bank that the money should, in that case, be returned to the sheriff, but if decided against the bank, that then it should abide whatever decision was made. The balance ($562.43) of the $6,062.43, the net proceeds of the execution of the goods, the sheriff retained in his own hands.

The execution in favor of Hotchkiss came to nothing, the property levied on in virtue of it being levied on subject to the prior execution of the bank.

Pleadings being made up and evidence taken, the bill was dismissed as to the nonresidents and unserved defendants, Hotchkiss & Sons. On the other part of the case, the court was of opinion that Hitchcock & Endicott were insolvent on the 28th of May, 1867; that the Traders' Bank had reason to suspect and believe the fact of such insolvency; that under such circumstances the firm gave to them the note and warrant of attorney in question; that on the 29th of May the bank appropriated as part payment of this note $325.20, then on deposit to the credit of the firm; that the payment of $325.20 upon the note and the judgment in favor of the bank were alike void, as fraudulent preferences.

The decree ordered that the assignee recover from the bank the $325.20 and interest from May 29, 1867, also an clubjuris

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amount equal to the judgment and costs rendered in favor of the bank with interest from May 29, 1867, amounting in all to $7,903.12.

This decree being affirmed in the circuit court the case was brought here on error. clubjuris

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