UNITED STATES SUPREME COURT DECISIONS ON-LINE

1. Under a sound construction of the thirty-fifth and thirty-ninth sections of the Bankrupt Act, something more than passive nonresistance in an insolvent debtor is necessary to invalidate a judgment and levy on his property when the debt is due and he has no defense.

2. In such case, there is no legal obligation on the debtor to file a petition in bankruptcy to prevent the judgment and levy, and a failure to do so is not sufficient evidence of an intent to give a preference to the judgment creditor or to defeat the operation of the bankrupt law.

3. Though the judgment creditor in such a case may know the insolvent condition of the debtor, his judgment and levy upon his property are not therefore void, and are no violation of the act.

4. A lien thus obtained by him will not be displaced by subsequent proceedings in bankruptcy, though commenced within four months after levy of the execution or rendition of the judgment.

5. Very slight circumstances, however, which tend to show the existence of an affirmative desire on the part of the bankrupt to give a preference or to clubjuris

Page 84 U. S. 474

defeat the operation of the act may, by giving color to the whole transaction, render the lien void.

6. These special circumstances must be left to decide each case as it arises. The present one held to be destitute of any such evidence, and distinguished from Buchanan v. Smith, 16 Wall. 277.

The Bankrupt Act of 1867 [Footnote 1] provides in the earlier part of it that if any persons residing within the jurisdiction of the United States shall apply by petition to the judge of the judicial district in which he has resided &c., setting forth "his inability to pay all his debts in full, his willingness to surrender all his estate and effects, for the benefit of his creditors," and his desire to obtain the benefits of the act, he may, after certain proceedings mentioned, and with certain excepted cases, obtain "a discharge from all his debts." A subsequent part of the same act provides for proceeding by creditors to obtain a decree of bankruptcy against their debtor, who has not made any such voluntary application.

After the enactment relating to the first case contemplated -- that is to say, of the debtor, himself, voluntarily applying to be decreed a bankrupt -- the act in its thirty-fifth section thus proceeds:

"SECTION 35. That if any person, being insolvent or in contemplation of insolvency, within four months before the filing of the petition by or against him, with a view to give a preference to any creditor or person having a claim against him or who is under any liability for him, procures any part of his property to be attached, sequestered, or seized on execution or makes any payment, pledge, assignment, transfer, or conveyance of any part of his property either directly or indirectly, absolutely or conditionally, the person receiving such payment, pledge, assignment, transfer, or conveyance, or to be benefited thereby, or by such attachment, having reasonable cause to believe such person is insolvent and that such attachment, payment, pledge, assignment,

Page 84 U. S. 475

or conveyance is made in fraud of the provisions of this act, the same shall be void, and the assignee may recover the property or the value of it from the person so receiving it or so to be benefited."

"And if any person, being insolvent or in contemplation of insolvency or bankruptcy, within six months before the filing of the petition by or against him, makes any payment, sale, assignment, transfer, conveyance, or other disposition of any part of his property to any person who then has reasonable cause to believe him to be insolvent or to be acting in contemplation of insolvency, and that such payment, sale, assignment, transfer or other conveyance is made with a view to prevent his property from coming to his assignee in bankruptcy or to prevent the same's being distributed under this act or to defeat the object of or in any way impair, hinder, impede, or delay the operation and effect of, or to evade any of the provisions of this act, the sale, assignment, transfer or conveyance shall be void, and the assignee may recover the property, or the value thereof as assets of the bankrupt."

"And if such sale, assignment, transfer or conveyance is not made in the usual and ordinary course of business of the debtor, the fact shall be prima facie evidence of fraud."

The thirty-ninth section, which relates to "involuntary bankruptcy," enacts thus:

"SECTION 39. That any person residing and owing debts as aforesaid who, after the passage of this act, shall depart from the state, district, or territory of which he is an inhabitant with intent to defraud his creditors, or being absent shall, with such intent remain absent, OR shall conceal himself to avoid the service of legal process, in any action for the recovery of a debt or demand provable under this act, OR shall conceal or remove any of his property to avoid its being attached, taken or sequestered on legal process, OR shall make any assignment, gift, sale, conveyance, or transfer of his estate, property, rights or credits, either within the United States or elsewhere, with intent to delay, defraud, or hinder his creditors, OR who has been arrested and held in custody under or by virtue of mesne process or execution, issued out of any court of any state, district, or territory, within which such debtor resides or has property, founded upon a demand in its nature provable against a bankrupt's

Page 84 U. S. 476

estate under this act, and for a sum exceeding $100, and such process is remaining in force and not discharged by payment or in any other manner provided by the law of such state, district, or territory applicable thereto, for a period of seven days, OR has been actually imprisoned for more than seven days in a civil action founded on contract for the sum of $100 or upwards, OR who, being bankrupt or insolvent, or in contemplation of bankruptcy or insolvency, shall make any payment, gift, grant, sale, conveyance or transfer of money or other property, estate, rights or credits, 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 to one or more of his creditors, or to any person or persons who are or may be liable for him as endorsers, bail, sureties, or otherwise, or with the intent, by such disposition of his property, to defeat or delay the operation of this act; OR who, being a banker, merchant or trader, has fraudulently stopped or suspended, and not resumed payment of his commercial paper within a period of fourteen days, shall be deemed to have committed an act of bankruptcy, and, subject to the conditions hereinafter prescribed, shall be adjudged a bankrupt on the petition of one or more of his creditors, the aggregate of whose debts provable under this act amount to at least $250, provided such petition is brought within six months after the Act of bankruptcy shall have been committed."

"And if such person shall be adjudged a bankrupt, the assignee may recover back the money or other property so paid, conveyed, sold, assigned or transferred contrary to this act, provided the person receiving such payment or conveyance had reasonable cause to believe that a fraud on this act was intended or that the debtor was insolvent. And such creditor shall not be allowed to prove his debt in bankruptcy."

These enactments being in force, one Wilson, assignee in bankruptcy of the firm of Vanderhoof Brothers, lately merchants at the City of St. Paul, filed a bill against the City Bank of the said city to determine which of the parties, complainant or defendant, was entitled to the stock of goods of the bankrupts or the proceeds thereof. The facts of the case, about which there was no dispute, were thus found by the court: clubjuris

Page 84 U. S. 477

"On the 26th of February, 1870, judgment by default was rendered by one of the district courts of the State of Minnesota in favor of the bank against Vanderhoof Brothers for the sum of $2,130. On the same day, execution was issued, and the sheriff immediately made a levy upon the whole stock of goods of the debtors, which was sold by him for $2,385, which is now in the hands of the bankrupt court to await the determination of this suit. The suit by the bank was brought on promissory notes, commercial paper made by the debtors Vanderhoof Brothers to the City Bank of St. Paul, one of which notes was more than fourteen days past due when suit was brought thereon by the bank."

"After the levy of the said execution and before the sale by the sheriff, Vanderhoof Brothers were adjudicated bankrupts on the petition of creditors filed against them after judgment had been obtained and levy made under the execution. The Vanderhoofs had no defense to the notes upon which the bank had sued them, and put in no defense. They had no property except their said stock in trade, which, at cost prices, was about equal to the amount of their liabilities."

"The debtors Vanderhoof Brothers were insolvent when said suit was brought against them by the bank, and the bank had then reasonable cause to believe it, and knew that they had committed an act of bankruptcy and that they had no property but their said stock in trade. The Vanderhoofs gave no notice to any of their creditors of the suit commenced against them by the bank, and having no defense, did not defend it nor go into voluntary bankruptcy, nor otherwise make any effort to prevent the judgment being obtained or the levy of the execution."

On this case, the following questions arose at the trial, in relation to which the judges were opposed in opinion:

"1st. Whether or not an intent on the part of said debtors, Vanderhoof Brothers, to suffer their property to be taken on legal process, to-wit, the said execution, with intent to give a preference to said bank, or with intent thereby to defeat or delay the operation of the Bankrupt Act, can be inferred from the foregoing facts?"

"2d. Whether, under said facts, the said bank, in obtaining

Page 84 U. S. 478

said judgment and making the said levy, had reasonable cause to believe that a fraud on the Bankrupt Act was intended?"

"3d. Whether, under said facts, the bank obtained by the levy of its execution a valid lien on the said goods as against the assignee in bankruptcy?"

The questions were accordingly certified here for decision. clubjuris

Page 84 U. S. 480