In re Richter's Estate

DILLON, Circuit Judge. 1. As to the Motion of Greenwald & Co. The cardinal idea of the bankrupt act isanindiscriminating distribution of all of the effects of the debtor, to all of his creditors. This legislation is essentially founded upon the doctrine that equality is equity. When a debtor finds himself embarrassed, experience has shown that there arises in his mind a strong temptation, either to conceal his property, or to distribute it as his favor or [750] his enmity, or both may dictate. When creditors perceive their debtor's embarrassment, concert of action for the mutual benefit of themselves and the debtor becomes almost impossible, and the most vigilant or the most unfeeling seek an advantage or priority by means of writs of attachments, or other legal process, or by obtaining mortgages or confessions of judgment. Recognizing the essential equality of right of all the creditors of a common debtor, and the duty of the latter, if he cannot pay all in full, to pay all in equal proportions, and the practical impossibility of accomplishing full and equal distribution without stringent provisions, the bankrupt act prohibits the debtor from making, and the creditor (having reasonable cause to believe the debtor to be insolvent) from accepting any preference, in money or property, directly or indirectly, absolutely or conditionally, which contravenes the policy of has the effect to defeat the purposes of the act. The temptation to prefer, and the danger of doing so, inhere in the situation of an insolvent debtor; and hence it is (to use language applied to purchases of trust property by trustees) “the wise policy of the law has put the sting of a disability into the temptation, as a defensive weapon against the strength of the danger which lies in the situation.” Notes to Fox v. Mackreth, 1 Lead. Cas. Eq. 161. The 18th, 23d, 29th, 35th. and 39th sections of the bankrupt act abundantly evince the anxiety of the legislature to guard against preferences, which operate as a fraud upon the policy of the act. Such preferences are not only prohibited and declared void, but certain penalties are denounced against creditors who, under the circumstances specified, accept of preferences. Thus it is declared that such a creditor shall not “vote for, or be eligible as assignee” (section 14), and “shall not prove his debt in bankruptcy” (section 39. and compare section 23), and shall be liable to the assignee for the money or property received (section 35). In the case now under consideration, the debtor, a retail merchant, three days before filing his petition to be adjudicated a bankrupt, sold his whole stock of goods to Green-wald & Co., his largest creditors. The as-signee of the bankrupt, after his appointment, commenced, under the 35th section of the bankrupt act, an action against Greenwald & Co. to recover the value of the goods which the bankrupt had transferred to them,'in fraud, as it was alleged, of the provisions of that act. The petition in that aetion made the averments required by the law; among others, Richter’s insolvency, his sale of his whole stock of goods to Greenwald & Co., out of the usual course of business, his intent to evade and defeat the bankrupt act, and the purchasers’ reasonable cause to believe their vendor to be insolvent, etc. Issue was taken upon these allegations; the jury found for the assignee, and judgment was rendered accordingly, and the amount of the judgment was paid by Greenwald & Co. to the marshal on execution, but it ■ was paid promptly on the same day the execution issued, or the next. And it is the effect of this judgment upon the rights of Greenwald & Co. as creditors of the bankrupt, that we are now to consider. And first we may remark that this judgment, as between the estate of the bankrupt and Green-wald & Co. conclusively establishes that the purchase of the stock of goods by them from the bankrupt was made in fraud of the bankrupt act. This is res judicata, and Green-wald & Co. are estopped to deny it To entitle the assignee to a recovery in that suit, he would have to establish: 1. That Richter, when insolvent, or in contemplation of insolvency, made the transfer. 2. That he made it with a view to give Greenwald & Co. a preference. 3. That they had at the time reasonable cause to believe he was insolvent, ahd that it was made in fraud of the act, or to defeat or evade its provisions. Having recovered, it is conclusively presumed that the assignee did establish each of these propositions, and if so, he then necessarily established that Greenwald & Co. sought to get a preference, or advantage over other creditors, which was fraudulent in the contemplation of the bankrupt act. Greenwald & Co., having accepted a fraudulent preference, the question is, how does it affect their claim or debt, and their rights as creditors? The answer to this is given in the 23d and 39th sections of the act. By the former section it is enacted that the creditor accepting a fraudulent preference, “shall not prove the debt on account of which the preference was made or given, nor shall he receive any dividend therefrom, until he shall first have surrendered to the assignee all property, money, benefit, or advantage received by him under such preference.” By the latter section named, it is enacted, without qualification, that a creditor receiving a fraudulent preference “shall not be allowed to prove his debt in bankruptcy,” and nothing is said about allowing proof of the debt, in case the creditor surrenders to the assignee the property, etc., received by way of preference. It is a settled principle of law that where there is a positive repugnancy between two sections of the same act, the last governs, as presumptively the latest expression of the legislative will. This rule is highly artificial, and is never to be applied where its application is not necessary. Another, and much more reasonable rule of law, is that a statute shall be so construed, if possible, that all of its provisions may stand; and in this case it is possible to give effect to sections 23 and 39 either first by holding the former applicable to constructive, and the latter to actual and intentional frauds; or second, by holding the former applicable alone to cases of voluntary, and the latter alone to cases of involuntary, bankruptcy; or third — which would seem to be the correct view — construing the two in pari materia, applicable to both classes of bankruptcies, and [751] to all cases falling within their terms, -which would, by construction, annex the qualification in section 23 to the proviso in section 39, •and both sections thus construed should, as far as applicable by their terms, be applied to cases arising under section 35 of the act. But this is a point on which we need not longer -dwell or give any positive opinion, since we will assume in favor of Greenwald & Co. that section 23, which relates specifically to preferences, is the one which governs their rights. By this ib is declared that whoever receives a fraudulent preference, “shall not prove the debt or claim on account of which the preference was made or given, nor receive any dividend therefrom until he shall have first surrendered to the assignee all property * * * received by him under such preference.” Under these circumstances, and with this provision in force, Greenwald & Co. made the motion to prove up the balance of their claim, of the denial of which they now complain. Note the motion: it is “for leave to prove up the balance of their claim, viz., $1,-471.88, being the amount credited Richter, October 16, 186S, when said goods were obtained.” The statute is that they shall not prove up the debt or claim on account of which the preference was given. It was this precisely which, by the motion under consideration, they sought to have done, and which the court refused to allow. It is urged by the claimants that this refusal was erroneous because they had, before the time when they made their motion, surrendered to the assignee all property received by them under the preference. This devolves upon us the duty of interpreting the meaning of the word surrender, as it is here used. And it is our opinion, that a creditor who receives goods by way of fraudulent preference, and who refuses the demand therefor which the assignee is authorized to make (section 15), denies his liability, allows suit to be commenced by the assignee, defends it, goes to trial, is defeated and judgment passes against him, which he satisfies on execution, can not be said within the meaning of the statute, to have surrendered to the assignee the property received by him under such preference. He has surrendered nothing. He accepted a fraudulent preference and defended it to the last Paying a judgment which he stoutly resisted, and from which he could not escape is not such a surrender as the statute contemplates. To hold that it was. would be against the spirit of the statute, which is to discourage preferences. Such a holding would manifestly encourage them, for if the transaction should be upheld the creditor' would profit, if overthrown, he would lose nothing, and stand upon an equal footing with those over whom he had attempted to secure an illegal advantage, and whom he lias, by litigation, delayed in The collect ion of their claims. As a further argument in favor of this view, it may be suggested that the statute equally prohibits the accepting and the giving of a fraudulent preference. The fraud of the debtor in this respect is punished by disentitling him to a discharge (suction 29). It would seem strange if the law provided no penalty against the creditor who participated in the fraud upon the act; and there is no penalty or punishment, if the view of the statute contended for by the appellants’ counsel be correct. As a further argument in support of the opinion above expressed, it may be urged that when section 23 is read in connection with sections 35 and 39, all being in pari materia, it will be seen that the surrender provided for in section 23 is an act to be done by the creditor before the recovery of a judgment against him, as provided by section 35. That is, the assignee may demand of the creditor the property received by him; if he surrenders it, he stands upon the same plane as the creditors, and may prove his debt and receive his dividends. If he refuses to surrender it, the assignee may sue as provided in section 35, and if he recovers, and payment be made on an execution, this is not a surrender (which implies voluntary action on the part of the creditor), but a refusal to surrender. So that the bankrupt act says decisively to every person who, under the circumstances specified, has received a preference: “Surrender what you have received and you shall lose nothing. If you refuse, and the assignee recovers the property or its value, you shall get nothing. Make your election.” When this election may be made we are not now required to decide, further than to hold that it is too late to make it after the recovery of judgment by the assignee. In re Tonkin [Case No. 14,094]. 2. As to the Motion of the Assignee. It will be recollected that the balance of the debt due Greenwald & Co. after deducting the goods purchased, viz., $1,529.04, was proved up and allowed against the estate of the bankrupt prior to the determination of the action of the assignee against Greenwald & Co., for the value of the goods purchased by the latter of the bankrupt. After the judgment in favor of the assignee, the latter moved the district court “to vacate and set aside” the allowance of the sum of $1,529.64, and for an order “directing the as-signee not to pay over any dividend” to Greenwald & Co. on this claim. The twenty-third section of the act declares that if any person shall accept a preference contrary to the provisions of the act, he “shall not prove the debt on account of which the preference was made or given, nor shall he receive any dividend therefrom, until he shall first have surrendered to the assignee all property, etc., * * * received by him under- such preference.” The court sustained the motion of the assignee, and made an [752] order that he pay no dividends to Greenwald & Co. on that part of their claim which had been previously allowed. If the debt of Greenwald & Co. was single and entire, the effect of the judgment recovered against them by the assignee was to establish, as an adjudicated fact, that they had received a fraudulent preference in respect to such debt; and if so, they are not entitled to receive any dividend, though their claim may have been previously allowed, they having failed, as above held, to surrender to the assignee the property received under the preference they accepted from their debtor. The statute is express that such creditor shall neither prove his debt nor receive any dividend therefrom, until he shall have first surrendered, etc. This leaves no room for construction, and the mere fact that the claim was proved up before the register, anterior to the time when the assignee recovered the judgment which established the fraudulent character of the preference, is immaterial. And here it is proper to be noticed that it Is “the debt or claim on account of which the preference was made or given” that shall not be proved, or be entitled to dividends, not some other and unconnected debt. If the debt is single and entire, the illegal preference affects the whole of it, though the property received does not equal it in value. But otherwise, if in their origin or by contract, the debts of the creditor are not single and entiie, but divided or divisible and disconnected, and the creditor receives a preference distinctly as to one and not the other; for here he would be entitled to dividends on the one and not on the other. See Secor v. Sturgis, 16 N. Y. 548; Sweeny v. Daugherty, 23 Iowa, 291. The claim of Greenwald & Co. as filed with the register, consisted of a running and apparently continuous account, made up of items of goods purchased at various times. Prima facie, as stated, it constituted but one “debt or claim” within the meaning of the bankrupt act, and hence there was no error in the ruling of the court that, by reason of the fraudulent preference they had accepted, they were not entitled to any dividend in respect to their debt. If they had applied to show that the debt preferred was disconnected from, and not the same debt as that which was proved up, the court would doubtless have granted the application, but apparently it was otherwise, and the court ruled correctly. Its ruling on the motion under consideration is affirmed. It would still be in the power of the district court to allow Greenwald & Co. to show, if they can, that the debt on account of which they received the preference is not the same as that which they proved before the register. If this is shown, the order made would be set aside; if not, it would of course stand. The orders appealed from are both affirmed. Affirmed.