Source: https://supreme.justia.com/cases/federal/us/242/438/
Timestamp: 2019-04-23 06:12:27+00:00

Document:
A transfer of property by an insolvent, made to secure a contemporaneous loan of money which the lender advances, and the insolvent obtains and uses, for the discharge of a preexisting debt of the insolvent to a third party, in which the lender has no interest, is not a preference of the lender within § 60b of the Bankruptcy Act, as amended February 5, 1903, 32 Stat. 797, 800.
A transfer, the intent or obviously necessary effect of which is to deprive creditors of the benefits sought to be secured by the Bankruptcy Act, "hinders, delays, or defrauds creditors" within the meaning of § 67e.
faith (§§ 67e, 67d). Van Iderstine v. National Discount Co., 227 U. S. 575, 227 U. S. 582; Coder v. Arts, 213 U. S. 223, 213 U. S. 244.
A decree avoiding a transfer a fraudulent will not be disturbed upon the ground that it exceeds the pleading where the bill, though attacking the transfer mainly as an unlawful preference, contains enough, with the answer, to present the issue of fraud, where that issue was fully tried, and the question of variance is first raised in this Court.
shall be voidable, and the trustee in bankruptcy may recover the property or its value. The act also provides in § 67e (30 Stat. 564) that, if a debtor, within four months before the filing of the petition in bankruptcy, makes any transfer "with the intent and purpose on his part to hinder, delay or defraud his creditors, or any of them," it shall be null and void except as to purchasers in good faith and for a present fair consideration, and that it shall be the duty of the trustee to recover the same.
Jones was adjudicated a bankrupt. The mortgaged property was converted into cash under an agreement with general creditors that it should be deposited to await the ultimate determination of the rights of the parties. It yielded only $1,634 -- leaving nothing for the general creditors if the mortgage is held valid.
Davis, the trustee in bankruptcy, brought a bill in equity to set aside the mortgage. The district court granted the relief prayed for, and its decree was affirmed by the circuit court of appeals. Both courts found the facts to be in substance as above stated and held the mortgage void under § 67e as having been made by Jones "with the intent and purpose on his part to hinder, delay or defraud his creditors," to one not a "purchaser in good faith" within the meaning of the act. The circuit court of appeals held the mortgage void also as a preference under § 60b. 212 F. 88. The case comes to this Court upon appeal, Dean contending that the mortgage is not invalid under either § 60b or § 67e.
The mortgage was not voidable as a preference under § 60b. Preference implies paying or securing a preexisting debt of the person preferred. The mortgage was given to secure Dean for a substantially contemporary advance. The bank, not Dean, was preferred. The use of Dean's money to accomplish this purpose could not convert the transaction into a preferring of Dean, although he knew of the debtor's insolvency. Mere circuity of arrangement will not save a transfer which effects a preference from being invalid as such. National Bank v. National Herkimer County Bank, 225 U. S. 178, 225 U. S. 184. But a transfer to a third person is invalid under this section as a preference only where that person was acting on behalf of the creditor, as in In Re Beerman, 112 F. 663, and Walters v. Zimmerman, 208 F. 62, 220 F. 805. Here, Dean acted on the debtor's behalf in providing the money and taking up the notes.
"within four months prior to the filing of the petition, with the intent and purpose on his part to hinder, delay or defraud his creditors, or any of them . . . except as to purchasers in good faith and for a present fair consideration."
As provided in § 67d, only "liens given or accepted in good faith and not in contemplation of or in fraud upon this act" are unassailable. A transfer the intent (or obviously necessary effect) of which is to deprive creditors of the benefits sought to be secured by the Bankruptcy Act, "hinders, delays or defrauds creditors" within the meaning of § 67e. Van Iderstine v. National Discount Co., 227 U. S. 575, 227 U. S. 582, points out the distinction between the intent to prefer and the intent to defraud. A transaction may be invalid both as a preference and as a fraudulent transfer. It may be invalid only as a preference or only as a fraudulent transfer. Making a mortgage to secure an advance with which the insolvent debtor intends to pay a preexisting debt does not necessarily imply an intent to hinder, delay, or defraud creditors. The mortgage may be made in the expectation that thereby the debtor will extricate himself from a particular difficulty and be enabled to promote the interest of all other creditors by continuing his business. The lender who makes an advance for that purpose with full knowledge of the facts may be acting in perfect "good faith." But where the advance is made to enable the debtor to make a preferential payment with bankruptcy in contemplation, the transaction presents an element upon which fraud may be predicated. The fact that the money advance is actually used to pay a debt does not necessarily establish good faith. It is a question of fact in each case what the intent was with which the loan was sought and made.
not supported by the evidence, nor that these courts erred in concluding upon this evidence that the mortgage was made with the purpose and intent to hinder, delay, or defraud Jones' creditors, and that Dean was not, as against general creditors, "a purchaser in good faith." Jones knew that he was insolvent. He knew that he was making a preferential payment. He must have known that suspension of his business and bankruptcy would result from giving and recording a mortgage of all his property to secure a note which had matured before the mortgage was executed. The lower courts were justified in concluding that he intended the necessary consequences of his act, that he willingly sacrificed his property and his other creditors to avert a threatened criminal prosecution, and that Dean, who, knowing the facts, cooperated in the bankrupt's fraudulent purpose, lacked the saving good faith.
"in view of the finding of the circuit court of appeals, it may be that [he], though including in the conveyance a large amount of his property, acted in good faith, with a view to preserving his estate and enabling him to meet his indebtedness."
considered as an item of evidence in determining the question of fraud."
"without any intent or purpose of aiding said Jones to defraud, delay, or hinder his creditors, and not in contemplation of or in fraud of the Bankruptcy Act, or any of its provisions, believing him to be solvent, and that he would continue his business."
The issue of fraudulent transfer was presented by the pleadings, was fully tried, and was found against the appellant. No error was committed.
* Cases holding that a mortgage is a fraudulent conveyance where taken as security for a loan which the lender knows is to be used to prefer favored creditors, in fraud of the act: Parker v. Sherman, 212 F. 917; In re Soforenko, 210 F. 562; Johnson v. Dismukes, 204 F. 382; Lumpkin v. Foley, 204 F. 372; In re Lynden Mercantile Co., 156 F. 713; Roberts v. Johnson, 151 F. 567; In re Pease, 129 F. 446. See also Walters v. Zimmerman, s.c. on appeal, 208 F. 62, 220 F. 805.
Cases upholding the mortgage security because the lender did not know that the insolvent borrower intended to make improper payments to favored creditors, thus indicating that the mortgage would be fraudulent if such additional fact were shown: Griffinstead v. Union Savings & Trust Co., 190 F. 546; Powell v. Gate City Bank, 178 F. 609; In re Kullberg, 176 F. 585; Ohio Valley Bank Co. v. Mack, 163 F. 155; Stedman v. Bank of Monroe, 117 F. 237; In re Soudan Mfg. Co., 113 F. 804.
In accord with this view are also the decisions which hold that a general assignment for the benefit of creditors, though without preferences, is void under § 67e because its necessary effect is to hinder, delay, or defraud creditors in their rights and remedies under the Bankruptcy Act. In re Gutwillig, 90 F. 475, 92 F. 337; Davis v. Bohle, 92 F. 325; Rumsey & Sikemier Co. v. Novelty & Machine Mfg. Co., 99 F. 699. See Randolph v. Scruggs, 190 U. S. 533, 190 U. S. 536; George M. West Co. v. Lea Bros., 174 U. S. 590, 174 U. S. 596.
It is difficult to reconcile the following cases or dicta in them with the great weight of authority and the decisions of this Court: Re Baar, 213 F. 628; In re Hersey, 171 F. 1004; Sargent v. Blake, 160 F. 57; In re Bloch, 142 F. 674; Githens v. Shiffier, 112 F. 505.

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