In re Maher

DODGE, District Judge. The referee has reported that the specifications of objection which were relied on before him are not sustained. Those specifications were that within four months before the filing of their petition the bankrupts had transferred property or had made money payments to certain persons with intent to hinder, delay, or defraud their creditors. The evidence in the case establishes, at most, that within the four mouths referred to and while insolvent the bankrupts transferred property at various times to one of their creditors with intent to prefer that creditor over their other creditors, such as would make the transfers acts of bankruptcy under section 3a (2), Bankr. Act July 1, 1898, [508] c. 541, 30 Stat. 546 [U. S. Comp. St. 1901, p. 3422]. The transfers referred to consisted in payments of money on account of existing indebtedness. It is contended that they were transfers with intent to hinder, delay, and defraud the bankrupts’ creditors, such as are made a ground for refusal of discharge by section 14b (4), Act Feb. 5, 1903, c. 487, 32 Stat. 797 [U. S. Comp. St. Supp. 1905, p. 684].. I find nothing in the evidence which would in any case warrant a finding that the bankrupts’ intent regarding the payments was an intent to hinder, delay, or defraud creditors in any other sense than that it was an intent to prefer the creditor paid. Assuming that the effect of the payments was to enable the creditor paid to obtain a greater percentage of his debt than other creditors of the same class, they were preferences according to the definition given in section 60a, Act Feb. 5, 1903, c. 487, 32 Stat. 799 [U. S. Comp. St. Supp. 1905, p. 689]. It is apparently not contended, and in any case the evidence does not show, that the creditor had reasonable cause to believe that it was intended to give a preference by the payments. Therefore they were not voidable by the trustee under section 60b, nor were they preferences such as the creditor is required to surrender as a condition of proving his debt by section 57g. If, therefore, the evidence be regarded as having established an intent on the bankrupts’ part to prefer the creditor who received the payments, the question will be whether they are thereby shown to have been made with intent to hinder, delay, or defraud creditors within the meaning of section 14b (4). In other words, as applied to a payment to one creditor by an insolvent, is an intent on his part to prefer that creditor, but fraudulent in no other sense, within the meaning of “intent to hinder, delay, or defraud his creditors,” as those words are used in section 14b (4) ? In section 3a (1) and (2), where the purpose is to make preferential transfers by an insolvent and also fraudulent transfers, both of them acts of bankruptcy, the two kinds of transfer are separately mentioned and differently described. In section 57g, where the purpose is to require a creditor who has been the recipient of either a preferential or a fraudulent transfer to surrender what he has received as a condition of the allowance of his claim against the-estate, the same thing is done by reference to the different sections which make preferential transfers voidable (section 60b) and fraudulent transfers void or voidable (section 67e). If the purpose of section 14b (4) is to make a preferential transfer equally a ground of objection to a discharge with a fraudulent transfer, it is difficult to understand why the same course was not there followed, or why the use of that language only which is elsewhere used to describe fraudulent transfers only was alone relied on to accomplish the purpose. The indication, therefore, from the language used, that section 14b (4) is not intended to accomplish any such result, but is intended to make only fraudulent transfers in the ordinary sense, not including preferential transfers, grounds for refusing discharge, seems to me to be very strong. The difference between the two kinds of transfer just referred [509] to is and always has been a difference perfectly well recognized and understood. It hitó been repeatedly discussed by the courts, as in Githens v. Shiffler (D. C.) 112 Fed. 505, where it was said, “An intent to prefer is not to be confounded with an intent to defraud nor a preferential transfer with a fraudulent one.” It is difficult to believe that they have been thus confounded in the act. ‘ Under Bankruptcy Act March 2, 1867, c. 176, preferential transfers were equally with fraudulent transfers objections to the bankrupts’ discharge. Section 29 (14 Stat. 531), which made them so, separately and specifically mentions and describes both kinds. See Rev. St. § 5110, cl. 5, where the language is: “If ttie bankrupt üas given any fraudulent preference * * * or has made any fraudulent payment, gift, transfer, conveyance or assignment oil any part of his property,’’ etc. See, also, clause 9, of the same section. The present act, as originally passed and as it stood until 1903, did not admit either preferential or fraudulent transfers as grounds of objection. So clearly and fully has the referee set forth in his report the history of the amendments to section 14, which relate to this subject, in each successive stage of the discussion regarding them prior to their enactment in 1903, that I find no occasion to do more than to refer to his statement, so far as that history is concerned. 1 agree with the referee in the belief that the intent of Congress thereby disclosed in enacting section 14b (4) was (1) not to make both preferential transfers and fraudulent transfers grounds of objection, as they had been under the act of 1867; (2) to make fraudulent transfers only grounds of objection; (3) not to include preferential transfers in the language finally adopted for the above purposes, and now forming section 14b (4). The conclusions reached by a consideration of previous legislation and of the history of the amendment referred to are thus in accord with the conclusion above reached by examination of its language as it now stands in the bankruptcy act, and the relation which that language bears to other provisions found elsewhere in the act, concerning the two kinds of transfers and the effect to be given to each, respectively. Transfers with intent to prefer a creditor are often referred to as “fraudulent preferences.” While fraud, in one sense, is no doubt involved in all such transfers, it is fraud of a different kind from that involved in transfers “with intent to hinder, delay or defraud creditors” according to the ordinary meaning of those words. In a preferential transfer the fraud is constructive or technical, consisting in the infraction of that rule of equal distribution among all creditors, which it is the policy of the law to enforce when all cannot be fully paid. In a fraudulent transfer the fraud is actual, the bankrupt has secured an advantage for himself out of what in law should belong to his creditors, and not to him. In this familiar distinction there is found, as it seems to me, a further and strong ground for the belief that language commonly employed for the purpose of describing, transfers objectionable for fraud of the latter kind and such transfers only is not used in section l ib (4) in that wider sense [510] necessary to make it include transfers objectionable only for fraud of the former kind. Thus, in construing the act of 1867, Judge Lowell declined to say that the words, “Any fraud whatever contrary to the true intent of this act,” in the section which defined the grounds upon which discharge was to be refused, included' merely technical frauds created by the section declaring what should be acts of bankruptcy. The words might no doubt, it was said, “include all frauds in fact whether specifically defined in any part of the statute or not, but hardly [to] mere acts of. bankruptcy as such.” Re Locke, 1 Low. 293, 296, Fed. Cas. No. 8,439. For the reasons above stated, I agree with the. referee that a preference is not made a bar to a discharge by the act. I have thus far assumed that the transfers relied on in this case were in fact preferences made with intent to prefer the creditor who received them. If such an intent is to be found, it must rest mainly upon the presumption which arises from the fact that this particular creditor was paid when the bankrupts knew or ought to have known that they were insolvent and unable to pay all their creditors. The bankrupts were insolvent, and must be held to have known that they were insolvent. I find nothing, however, in the evidence which adds to the force of the presumption referred to, and, on the contrary, much that tends to weaken its force. The continuance of the bankrupts' business depended upon this creditor. He furnished the material they used, and they had been in his debt for material from .time to time furnished by him ever since they began business in 1902, paying him from time to. time on account as they were able. At the tittA of the payments in question they had been running behind, their indebtedness to him had been increasing, but they were hoping to obtain some profitable contracts which would enable them to continue their business with ultimate profit, instead of loss. The payments made to the creditor during the last four months before bankruptcy were made, as previous payments had been made, on account, as they were able to obtain money, in order that he might continue to supply them with the material without which they could not continue their business. They were not payments of the whole indebt-, jdness due the creditor or of any considerable part of it. " On the contrary, they did not amount to $1,000 in all, whereas the whole indebtedness amounted to several thousands. The payments were in amounts of from $100 to $250 each, at intervals of a month or thereabout. Chargeable as the bankrupts were with knowledge of their insolvent condition, they were not contemplating any stoppage of their business or bankruptcy, but were hoping and doing their best to continue. It was only after the payments had been made that they were compelled to stop, because the creditor referred to then at last declined to go on supplying them with their material. Upon all the evidence, I do not think the bankrupts are shown to have designed any advantage to the creditor who received these payments. I also agree with the referee that the payments are not shown to have reduced the assets available to creditors, but that their effect, [511] on the contrary, appears to have been to prevent an earlier withdrawal of the credit and source of supply upon which the bankrupts were then relying. I adopt the referee’s conclusion that the specifications are not sustained. Discharge ordered.