Babbitt v. Walbrun

DILLON, Circuit Judge. The question is whether the instructions to the jury, referred to in the statement of the case, are correct; and this involves a construction of the-35th section of the bankrupt act [of March 2, 1867; 14 Stat. 517, c. 176.] The second branch of this section is in these words: “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 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 Luna 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.” It is to be read, however, in connection with the first subdivision of the same section, and with section 23 and section 39 (latter part) of the same act, these being in pari materia. The court instructed that “if the sale was not in Mendelson’s ordinary and usual course of business, then it was fraudulent.” The court should have said, not that it was fraudulent, but that such .a fact was prima facie evidence that it was fraudulent. The sale by Mendelson to Summerfield would be fraudulent if the following facts concurred: 1st. If Mendelson was insolvent, or contemplated insolvency or bankruptcy. NOTE, [from original report.] At the April term, 1871, this cause came once more before the court, the plaintiff having again recovered: and the rulings in the court below being in accordance with the foregoing opinion, the judgment was affirmed, [Case 695, and the judgment of the circuit court thereafter affirmed by the supreme court in 16 Wall, (83 U. S.) 577.] 2d. If Summerfield, when he bought the goods, had reasonable cause to believe him to be insolvent, and to be acting in contemplation of insolvency, and that the sale was made by Mendelson with a view to prevent, etc., or to defeat, etc., or to evade, etc., the provisions of the bankrupt act. Sales so made are void and in fraud of creditors and their rights under the bankrupt law. And as against the immediate vendee and all actual participators, such a sale, if made out of the usual and ordinary course of business (as where an insolvent merchant, as in the case at bar, sells out all his stock and property), is prima facie evidence of fraud; that is, of the foregoing elements constituting a fraudulent sale. But it is only prima facie, and the presumption may be rebutted by evidence aliunde to be produced by the vendee. Now the second instruction, viewed in the light of the above exposition of the meaning of the statute, is erroneous, in that it omits, in speaking of the facts which make Walbrun & Co.’s purchase fraudulent, some of the essential elements of fraud. This court cannot agree with the learned judge of the district court in the views of the law expressed in the third instruction. It directs the jury that if the defendants knew that the sale by Mendelson to Summer-field was not made in the ordinary and usual course of business, they (the defendants) are affected with the legal fraud, and that if they afterwards obtained the goods in any way, and converted them, they are responsible. The error is in holding that such a sale is necessarily fraudulent, instead of presumptively fraudulent. Besides, when it is proposed to affect a second vendee, such vendee must be shown to have participated in the original fraudulent sale, or it must be shown that he knew, or at least had reasonable cause to know, the facts which made the first sale fraudulent. The mere fact, without more, that the second vendee knew that the first sale embraced all the stock of the seller, is not enough to make his purchase fraudulent in law. The title of the second vendee can only be impeached when it is shown that he participated in the fraudulent sale, or if this is not shown, then by showing that his purchase was actually mala fide; that is, made with knowledge that the sale to the first vendee was fraudulent; and the mere fact that the second vendee knew that the sale to the first vendee was made out of the ordinary course of business, will not alone defeat the title of the second vendee. It is only a circumstance proper as evidence to go to the jury on the question of the bona tides of the purchase by the second vendee. The distinction is to be observed between fraud and the evidence which goes to establish fraud. It is proper to observe that the term “fraud,” as used in the sentence of the 35th section under consideration, relates to both classes of cases mentioned therein. The first class is confined to preferences, and the second to sales, etc., other than by way of preference. See Bean v. Brookmire, [Case No. 1,168.] 2 (.Sections 23 and 29 are reconcilable, by confining the latter to actual frauds as con-tradistinguished from constructive frauds.] Since the views of his honor below are not fully coincident with those above, the judgment of the district court is reversed, and the case remanded for a new trial. Judge TREAT concurs. Reversed. Footnotes [2] [From 4 N. B. R. 121.]