Blake v. Thwing

Mr. Justice Scanlan delivered the opinion of the court. This is a proceeding by the complainant, a trustee in bankruptcy, under the Bankruptcy Act of 1898. Section 67e of that act provides that all conveyances, transfers, assignments or incumbrances of his property, or any part thereof, made or given within four months prior to the filing of the petition in bankruptcy, by a person adjudged a bankrupt under the provisions of the Bankruptcy Act, “with the intent and purpose on his part to hinder, delay or defraud his creditors, or any of them, shall be null and void as against the creditors of such debtor except as to purchasers in good faith, and for a present fair considerationAnd such property so conveyed or transferred shall be and remain a part of the assets and estate of the bankrupt, and shall pass to his trustee in bankruptcy, “whose duty it shall be to recover and claim same by legal proceedings for the benefit of his creditors, and all conveyances or transfers made by the debtor which are held null and void against the creditors of such debtor by the laws of the State or district in which such property is situated, shall be deemed null and void under this Act against the creditors of such debtor if he be adjudged a bankrupt, and such property shall pass to his trustee and be by him reclaimed for the benefit of creditors.” The trustee represents the creditors and may sue to avoid any conveyance which a creditor could have avoided. Such trustee may proceed for such purpose by a hill in equity, and will not be required to seek his remedy at law. Collier on Bankruptcy, 1039. That the goods in question were disposed of to the defendant by Mitchell, the president of the bankrupt Company, through his confederate, Gaines, with the intention and purpose of hindering, delaying and defrauding the creditors of the bankrupt Company, is overwhelmingly shown by the proof in the case. The decree in the case, as to the defendant, is predicated upon the fraudulent conduct of Mitchell and Gaines. Counsel for the defendant, in their briefs, practically confine their efforts to a defense of the conduct of Thwing, and inferentially, at least, concede the fraudulent conduct of Mitchell and Gaines in the disposition of the goods. Practically, therefore, the only question of fact the chancellor had to determine was, did the defendant purchase the goods in question in good faith and “for a present fair considerationf” If, as a matter of fact, the defendant purchased the goods in question in good faith and “for a present fair consideration,” the purchase would not be in contravention of the provisions of the Bankruptcy Act and he could not be deprived of the said goods in whole or in part by the application of principles governing cases of constructive fraud. If on the other hand, as a matter of fact, the defendant did not purchase the goods in good faith and “for a present fair consideration,” the alleged sale to him would constitute a case of actual fraud, and it would be void in toto, as against the creditors of the bankrupt. Actual fraud is intentional fraud. Constructive fraud is such as the law infers from the circumstances of a particular case, regardless of the intent of the parties. The good faith of the defendant in the alleged purchase of the goods in question was a material inquiry. The defendant could only be deprived of the goods in question by a finding that he was guilty of actual fraud, that is, a want of good faith in the purchase of the goods. The chancellor erred in applying the principles of constructive fraud to this case, and the cases cited by counsel for the defendant, in support of the contention that the chancellor had the right to hold that the defendant was guilty only of constructive fraud, do not apply to a case of this character. In our determination of the question of the good faith of the defendant in. the purchase of the goods, we have been governed by certain rules laid down by the Supreme Court. In Baker v. Rockabrand, 118 Ill. 370, which was a case tried by a chancellor upon depositions, the Supreme Court said: ‘ ‘ This court has frequently said, that when the trial court saw and heard the witnesses, with the opportunity of observing them while testifying, this court would attach much weight to the finding of the trial court, and would not reverse it upon mere questions of fact unless such finding was palpably erroneous, and we are not disposed to depart from that rule. But in cases where, as in the one at bar, the evidence is in! the- form of depositions, the reason of the rule fails. This court, having the same facility of determining the truth or falsity of the testimony, must determine, from the record, the questions of fact, as shall appear just and right.” In McGinnis v. Jacobs, 147 Ill. 30, which was a case tried by the chancellor upon depositions, the Supreme Court said: “The chancellor who heard the case in the court below had therefore no better means of judging of the relative candor, fairness and credibility of the respective witnesses than we have, so that the appeal may be regarded substantially as presenting the case to us for a hearing de novo upon the same evidence heard in the court below.” The vital question of fact for us to determine, is, was the defendant a purchaser in good faith and for a present fair consideration? In the case of Houck v. Christy, 81 C. C. A. 602, 152 Fed. 612 (opinion by Judge Van Devanter), the Court said: “One is not a purchaser in good faith, if he purchases with knowledge of the fraudulent intent of the vendor, or under such circumstances as should put him upon inquiry as to the object for which the vendor sells. Jones v. Simpson, 116 U. S., 609, 614; 29 L. Ed., 742. Apart from what Christy had learned through his connection with the bank, he and Cover knew that Stephenson, the bankrupt, was engaged in a business in which men usually have creditors; that he had been recently incumbering his property for small amounts; that he was hastily disposing of all of it for much less than its fair value; that he was insisting that he be paid in cash, which it is easy to conceal from creditors, and that the transaction was altogether unusual. Plainly, therefore, they had knowledge of what reasonably should have put them, as prudent men, upon inquiry as to his solvency and purpose, and were chargeable with all the knowledge which would have been acquired by prosecuting the inquiry with reasonable diligence; which they didn’t do. Wager v. Hall, 16 Wall. 584; 21 L. Ed., 504; Shauer v. Alterton, 151 U. S. 607, 614; 38 L. Ed., 286; Walker v. Collins, 50 Fed., 737. Moreover we think the evidence before recited brings the case well within the rule that badges of fraud altogether inconclusive, if separately considered, may by'their number and joint operation, especially when corroborated by moral coincidences, be sufficient to constitute conclusive proof of fraudulent intent on the part of both vendor and vendee. Castle v. Bullard, 23 How., 172; 16 L. Ed., 424; Wager v. Hall, 16 Wall., 584; 21 L. Ed., 504.” In Dokken v. Page, 77 C. C. A. 674, 147 Fed. 438, Eighth Circuit Court of Appeals, it is said, page 439: “It is full time that speculating purchasers from insolvent debtors should know that under the bankrupt act they cannot stop their ears and shut their eyes lest they may hear or see that such a merchant as Tveten was selling out his1 entire- stock of goods in order to defeat his creditors in the collection of their just claims. Sijch speculators on chance seem to think that they can escape the statute by studiously and cunningly placing themselves in a position to half satisfy conscience by saying: ‘Didn’t know the vendor was bankrupt. He did not so inform me; and I did not ask him. I did not know about his creditors, as I did not examine Ms books. I did not take an inventory of the goods or carefully examine them as I had a general knowledge of their character, and did not look further’-—and the like.” • Proof of actual knowledge by the purchaser of the intention of the bankrupt in the sale of the goods is not necessary. It is sufficient to charge one with notice if the facts and circumstances surrounding the transaction are of a character to put a reasonably prudent man upon inquiry, and a purchaser, under such circumstances, is charged with notice of what such inquiry, reasonably and diligently pursued, might have revealed. Houck v. Christy, supra; National Bank of Commerce v. Brunswick Tobacco Works Co., 155 Mo. 602. The good faith of the defendant is not determined solely by his testimony on that subject, but it is to be determined from all the facts and circumstances in the case. It may be ascertained by inference, from the circumstances surrounding the transaction. Kennard v. Curran, 239 Ill. 129. We have carefully studied the record in this case, and we have come to the conclusion that the evidence proves conclusively that the defendant Thwing did not purchase the goods from the bankrupt, or its confederate, Gaines, in good faith, and “for a present fair consideration. ” bio reasonable inference can be drawn from all the facts and circumstances in evidence than that the bankrupt and its confederate, Gaines, conspired with the defendant to defraud the creditors of the bankrupt, and that the alleged sale of the goods in question to the defendant was a result of said conspiracy. It is impossible, without extending this opinion to an unwarranted length, to give in detail the many facts and circumstances that have forced us to the conclusion we have reached. Under section 67e of the Bankruptcy Act, the fraudulent sale of the goods to the defendant (not a purchaser in good faith) as against the creditors of the bankrupt was null and void, and the defendant, an active participant in the fraud on the creditors, is not entitled to be reimbursed for any money he may have actually paid for the goods. The loss of the amount paid by him is the penalty the law inflicts npon him for his participation in the fraud upon the creditors. To refund to the defendant the money he may have paid would be to remove all risk of loss to a fraudulent grantee. Ott v. Doroshow, 147 Fed. 763; Biggins v. Lambert, 213 Ill. 625; Beidler v. Crane, 135 Ill. 92; 14 Am. & Eng. Encyc. Law, 344. It follows from what we have said that the complainant is entitled to the entire net proceeds of the sale of the goods. The decree of the Superior Court is, therefore, reversed and the cause is remanded with directions to the chancellor to enter a decree in the case finding the equities with the complainant and awarding him the entire proceeds from the sale of the goods, less the court costs and charges. The motion of the defendant to tax the complainant for the cost to the defendant of printing an additional abstract of the record in this case is denied. Decree reversed and cause remanded with directions.