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Timestamp: 2019-04-20 21:22:15+00:00

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Charles A. Goetz became a voluntary bankrupt on October 12, 1900. George B. Keppel, the trustee, sued the Tiffin Savings Bank in an Ohio court to cancel two realestate mortgages executed by Goetz, one to secure a note for $4,000 and the other a note for $2,000. The mortgage to secure the $4,000 note was made more than four months before the adjudication in bankruptcy. The mortgage securing the $2,000 note was executed a few days before the bankruptcy, the mortgagor being at the time insolvent and intending to prefer the bank. The bank defended the suit, averring its good faith and asserting the validity of both the securities. In a cross petition the enforcement of both mortgages was prayed. The court held [197 U.S. 356, 357] the mortgage securing the $4,000 note to be valid, and the mortgage securing the $2,000 note to be void. The trustee appealed to a circuit court, where a trial de novo was had. At such trial the attorney for the bank stated to the court that the bank waived any claim to a preference as to the $2,000 note, but that he could not assent to a judgment to that effect. A judgment was entered sustaining the security for the $4,000 note and avoiding that for the $2,000 note.
The bank subsequently sought to prove that it was a creditor of the estate upon the note for $2,000, and upon two other unsecured notes, aggregating $835. The referee refused to allow the proof, upon the ground that, as the bank had compelled the trustee to sue to cancel the security, and a judgment nullifying it had been obtained, the bank had lost the right to prove any claim against the estate. The district judge, upon review, reversed this ruling. The circuit court of appeals to which the issue was taken, after stating the case as above recited, certified questions for our determination.
Messrs. John C. Royer, Henry Weller, and Bunn & Royer for Keppel.
[197 U.S. 356, 358] Messrs. George E. Seney, John L. Lott, and Milton Sayler for the bank.
'First. Can a creditor of a bankrupt, who has received a merely voidable preference, and who has in good faith retained such preference until deprived thereof by the judgment of a court upon a suit of the trustee, thereafter prove the debt so voidably preferred?
'Second. Upon the issue as to the allowance of the bank's claims, was it competent, in explanation of the judgment of the Ohio circuit court in favor of the trustee and against the bank in respect to its $2,000 mortgage, to show the disclaimer made in open court by the attorney representing the bank, of any claim of preference, and the grounds upon which the bank declined to consent to a judgment in favor of the trustee?
Before we develop the legal principles essential to the solu- [197 U.S. 356, 360] tion of the first question, it is to be observed that the facts stated in the certificate and implied by the question show that the bank acted in good faith when it accepted the mortgage and when it subsequently insisted that the trustee should prove the existence of the facts which, it was charged, vitiated the security. It results that the voidable nature of the transaction alone arose from 67e of the the act of 1898, invalidating 'conveyances, transfers, or encumbrances of his property made by a debtor at any time within four months prior to the filing of the petition against him, and while insolvent, which are held null and void as against the creditors of such debtor by the laws of the state, territory, or district in which such property is situate' [30 Stat. at L. 565, chap. 541, U. S. Comp. Stat. 1901, p. 3449], and giving the assignee a right to reclaim and recover the property for the creditors of the bankrupt estate.
Re Greth, 112 Fed. 978; Re Keller, 109 Fed. 126, 127; Re Owings, 109 Fed. 624. [197 U.S. 356, 361] to prove his claim, after the surrender of a preference by the compulsion of a decree or judgment, such decisions rest not upon an analysis of the text of the act of 1898 alone considered, but upon what were deemed to have been analogous provisions of the act of 1867 and decisions thereunder. We omit, therefore, further reference to these decisions, as we shall hereafter come to consider the text of the present act by the light thrown upon it by the act of 1867 and the judicial interpretation which was given to that act.
The text is, that preferred creditors shall not prove their claims unless they surrender their preferences. Let us first consider the meaning of this provision, guided by the cardinal rule which requires that it should, if possible, be given a meaning in accord with the general purpose which the statute was intended to accomplish.
We think it clear that the fundamental purpose of the provision in question was to secure an equality of distribution of the assets of a bankrupt estate. This must be the case, since, if a creditor having a preference retained the preference, and at the same time proved his debt and participated in the distribution of the estate, an advantage would be secured not contemplated by the law. Equality of distribution being the purpose intended to be effected by the provision, to interpret it as forbidding a creditor from proving his claim after a surrender of his preference, because such surrender was not voluntary, would frustrate the object of the provision, since it would give the bankrupt estate the benefit of the surrender or cancelation of the preference, and yet deprive the creditor of any right to participate, thus creating an inequality. But it is said, although this be true, as the statute is plain, its terms cannot be disregarded by allowing that to be done which it expressly forbids. This rests upon the assumption that the word 'surrender' necessarily implies only voluntary action, and hence excludes the right to prove where the surrender is the result of a recovery compelled by judgment or decree. [197 U.S. 356, 362] The word 'surrender,' however, does not exclude compelled action, but, to the contrary, generally implies such action. That this is the primary and commonly accepted meaning of the word is shown by the dictionaries. Thus, the Standard Dictionary defines its meaning as follows: '1. To yield possession of to another upon compulsion or demand, or under pressure of a superior force; give up, especially to an enemy in warfare; as, to surrender an army or a fort.' And in Webster's International Dictionary the word is primarily defined in the same way. The word, of course, also sometimes denotes voluntary action. In the statute, however, it is unqualified, and generic, and hence embraces both meanings. The construction which would exclude the primary meaning, so as to cause the word only to embrace voluntary action, would read into the statute a qualification, and this in order to cause the provision to be in conflict with the purpose which it was intended to accomplish,-equality among creditors. But the construction would do more. It would exclude the natural meaning of the word used in the statute, in order to create a penalty, although nowhere expressly or even by clear implication found in the statute. This would disregard the elementary rule that a penalty is not to be readily implied, and, on the contrary, that a person or corporation is not to be subjected to a penalty unless the words of the statute plainly impose it. Tiffany v. National Bank, 18 Wall. 409, 410, 21 L. ed. 862, 863. If it had been contemplated that the word 'surrender' should entail upon every creditor the loss of power to prove his claims if he submitted his right to retain an asserted preference to the courts for decision, such purpose could have found ready expression by qualifying the word 'surrender' so as to plainly convey such meaning. Indeed, the construction which would read in the qualification would not only create a penalty alone by judicial action, but would necessitate judicial legislation in order to define what character and degree of compulsion was essential to prevent the surrender in fact from being a surrender within the meaning of the section. [197 U.S. 356, 363] It is argued, however, that courts of bankruptcy are guided by equitable considerations, and should not permit a creditor who has retained a fraudulent preference until compelled by a court to surrender it, to prove his debt, and thus suffer no other loss than the costs of litigation. The fallacy lies in assuming that courts have power to inflict penalties, although the law has not imposed them. Moreover, if the statute be interpreted as it is insisted it should be, there would be no distinction between honest and fraudulent creditors, and therefore every creditor who in good faith had acquired an advantage which the law did not permit him to retain would be subjected to the forfeiture simply because he had presumed to submit his legal rights to a court for determination. And this accentuates the error in the construction, since the elementary principle is that courts are created to pass upon the rights of parties, and that it is the privilege of the citizen to submit his claims to the judicial tribunals,-especially in the absence of malice and when acting with probable cause,-without subjecting himself to penalties of an extraordinary character. The violation of this rule, which would arise from the construction, is well illustrated by this case. Here, as we have seen, it is found that the bank acted in good faith, without knowledge of the insolvency of its debtor and of wrongful intent on his part, and yet it is asserted that the right to prove its lawful claims against the bankrupt estate was forfeited simply because of the election to put the trustee to proof, in a court, of the existence of the facts made essential by the law to an invalidation of the preference.
We are of opinion that, originally considered, the surrender clause of the statute was intended simply to prevent a creditor from creating inequality in the distribution of the assets of the estate by retaining a preference, and at the same time collecting dividends from the estate by the proof of his claim against it, and consequently that whenever the preference has been abandoned or yielded up, and thereby the danger of inequality has been prevented, such creditor is entitled to stand [197 U.S. 356, 364] on an equal footing with other creditors and prove his claims.
Is the contention well founded that this meaning which we deduce from the text of the surrender clause of the present act is so in conflict with the rule generally applied in bankruptcy acts, and is, especially, so contrary to the act of 1867 and the construction given to it, that such meaning cannot be considered to have been contemplated by Congress in adopting the present act, and hence a contrary interpretation should be applied?
Thus the English rule substantially conformed to the construction we have given to the bankruptcy act before us.
Neither our bankrupt act of 1800 (2 Stat. at L. 19, chap. 19) nor that of 1841 (5 Stat. at L. 440, chap. 9) contained a surrender clause, or any provision generally denying the right of a creditor of a bankrupt to prove his debt in the event that he had received a preference. But, under those acts, bankruptcy courts must necessarily have exercised the power of protecting the estate by preventing a creditor having an otherwise provable debt, who retained that which belonged to the estate, from at the same time taking dividends from it.
Passing the present consideration of the judicial construction given to the act of 1867, and treating, as we believe should be done, the restriction as to the proof of debts expressed in 39 as applicable to voluntary as well as involuntary bankruptcy, we think, as a matter of original interpretation, the surrender clause of the act of 1867 not only fortifies, but ab- [197 U.S. 356, 367] solutely sustains, the construction which we have given to the surrender clause of the act of 1898. Whilst the surrender clause of the act of 1867 changed the method of procedure prevailing under the English rule, and presumptively also obtaining under the acts of 1800 and 1841, by which a creditor holding a preference might prove his claim, but was allowed to obtain no advantage from so doing until he had surrendered his preference, it cannot, we think, in reason be considered that this mere alteration in the practice to be followed was intended in and of itself to impose a penalty upon a creditor who did not voluntarily surrender his preference. And this we think is demonstrated when it is seen that, after making the change as to the procedure in the proof of debts by preferred creditors, there was subsequently embodied in 39 an express prohibition, in the nature of a penalty, forbidding the proof of debt by a creditor who came within the purview of the section. Either that provision solely related to proof of debts embraced in the previous surrender clause or it did not. If it did, then the expression of the penalty in 39 indicates that it was not deemed that the surrender clause contained provision for the penalty, otherwise 39 would in that regard be wholly superfluous. If, on the other hand, it be considered that 39 embraced other debts or claims against the estate than those to which the surrender clause related, then the expression of the penalty in 39, under the rule of expressio unius, could not by implication be read into the previous surrender clause. That is to say, if 23 and 39 of the act of 1867 be considered as not in pari materia, then it follows that the former,-the surrender clause,- standing alone, did not impose the penalty or forfeiture provided for in the latter. If they were in pari materia, then the penalty, whilst applicable and controlling as to both, because of its expression in the later section, cannot be said to have existed alone in and by virtue of an earlier section, wherein no penalty was expressed.
The decisions of the lower Federal courts interpreting the [197 U.S. 356, 368] sections in question, as they stood prior to the amendment of 39 by the act of 1874, hereafter to be referred to, were numerous, and we shall not attempt to review them in detail. They will be found collected in a note contained in the eleventh edition of Bump on Bankruptcy, pp. 550 et seq. Disregarding the discord of opinion shown by those decisions concerning what constituted an involuntary surrender,-that is, whether it was involuntary if made at any time after suit brought by the assignee, or was only so after recovery by the force of a judgment or decree,-and putting out of view also the differences of opinion which were engendered by the fact that the forfeiture imposed by 39 was found in that portion of the act of 1867 which related to involuntary bankruptcy, we think the decisions under the act of 1867, prior to the amendment of 1874, may be classified under four headings.
First. The cases which held that the prohibition of 39 against the proof of debt operated as a bar to such proof, even although there was a voluntary surrender, where the preference had the characteristics pointed out in 39. These cases were, however, contrary to the great weight of authority under the act, and the construction which they enforced may be put out of view.
Second. Those cases which, whilst treating the surrender clause as giving a creditor an alternative which he might exercise without risk of penalty or forfeiture, yet held that by the operation of 39 upon the surrender clause the creditor lost the option to prove his claim, when the surrender was compelled by a judgment or decree at the suit of the assignee. The cases enforcing this interpretation constituted the weight of authority, and such construction may, therefore, be said to have been that generally accepted, and, in our judgment, was the correct one.
Thus clearly pointing out that by the surrender clause alone the creditor would not be debarred from proving his claim, if in fact there had been a surrender, whether voluntary or not, but that, as a result solely of the prohibition of 39, the creditor would be barred after recovery by the assignee.
Third. Cases which treated the surrender clause as in and of itself forbidding a surrender after recovery, because the recovery authorized by 35 was the antithesis of the surrender and precluded a surrender after recovery. This class of cases in effect treated the prohibition expressed in 39 as unnecessary, quoad the subject-matters to which 23 and 35 were addressed. The cases, however, were few in number, and are illustrated by the case of Re Tonkin, 4 Nat. Bankr. Reg. 52, Fed. Cas. No. 14,094.
As an alternative, however, to this view, and treating the sections referred to as in pari materia, it was reiterated that 23 was limited and controlled by the penalty provided in 39.
Plainly, this amendment not only abolished the penalty provided in 39 as originally enacted, since it allowed a creditor to prove his claim for the whole amount thereof after recovery against him if he had not been guilty of actual fraud, and, even in case of actual fraud, after recovery, permitted him to prove for a moiety. The amendment clearly also was repugnant to that construction of the act of 1867 given in some of the cases to which we have referred under the third classification, wherein in the reasoning employed it was assumed that a forfeiture or penalty might to implied alone from the terms of the surrender clause, irrespective of the operation of 39. This results from the very words of the amendment, which says, 'and this limitation on the proof of debts shall apply,' etc., showing that the restriction on the right to prove after a compulsory yielding up of a preference was deemed by Congress to result not from the surrender clause, but from the limitation expressly declared by 39 as amended, which operated a qualification of the broad terms of the surrender clause. It manifestly also arises from the fact that, whilst Congress plainly intended by the amendment to make a change in the rigor of the rule previously obtaining, the phraseology of the surrender clause as originally found in the act was not altered.
After the adoption of the amendment of 1874 it is true that in one or two instances it was held that the amendment, instead of mitigating the severity of 39 as it stood before the amendment, had increased it by adding an additional limitation, viz., prohibiting a preferred creditor who had been guilty of actual fraud from proving for more than one half of his claim, even where he had volutarily surrendered his [197 U.S. 356, 372] preference. But these were isolated cases, since practically the otherwise universl construction was that the amendment was remedial and intended by Congress to mitigate, even in cases of actual fraud, the severity of the prohibition of 39 as originally enacted.
And such construction was also expounded in the following cases: Re Currier (1875) 2 Low. Dec. 436, Fed. Cas. No. 3,492; Burr v. Hopkins (1875) 6 Biss. 345, Fed. Cas. No. 2,192, per Drummond, J.; Re Black (1878) 17 Nat. Bankr. Reg. 399, Fed. Cas. No. 1,459, per Lowell, J.; Re Newcomer (1878) 18 Nat. Bankr. Reg. 85, Fed. Cas. No. 10,148, per Blodgett, J.; Re Kaufman ( 1879) 19 Nat. Bankr. Reg. 283, Fed. Cas. No. 7,627, per Nixon, D. J.; Re Cadwell (1883) 17 Fed. 693, per Coxe, J.
The meaning of the amendment of 1874 was considered by the court of appeals of New York in the case of Jefferson County Nat. Bank v. Streeter, 106 N. Y. 186, 12 N. E. 706. The New York court expressly adopted the construction given in the cases to which reference has just been made, and its action in so doing was affirmed by this court in Streeter v. Jefferson County Nat. Bank, 147 U.S. 40 , 37 L. ed. 70, 13 Sup. Ct. Rep. 236.
It follows that the construction which we at the outset gave to the text of the act of 1898, instead of being weakened, is absolutely sustained by a consideration of the act of 1867, both before and after the amendment of 1874, and the decisions construing the same, since in the present act, as we have said, there is nowhere found any provision imposing even the modified penalty which was expressed in the amendment of 1874. The contention that, because the act of 1898 contains a surrender clause, therefore it must be assumed that [197 U.S. 356, 373] Congress intended to inflict the penalty originally imposed by 39 of the act of 1867, must rest upon the erroneous assumption that that penalty was the result of the surrender clause alone. But this, as we have seen, is a misconception, since from the great weight of judicial authority under the act of 1867, as well as by the express enactment of Congress in the amendment of 1874 and the decisions which construed that amendment, it necessarily results that the penalty enforced under the act of 1867 arose not from the surrender clause standing alone, but solely from the operation upon that clause of the express prohibition contained in 39 of that act. When, therefore, Congress in adopting the present act omitted to reenact the provision of the act of 1867, from which alone the penalty or forfeiture arose, it cannot in reason be said that the omission to impose the penalty gives rise to the implication that it was the intention of Congress to re-enact it. In other words, it cannot be declared that a penalty is to be enforced because the statute does not impose it.
And, irrespective of this irresistible implication, a general consideration of the present act persuasively points out the purpose contemplated by Congress in refraining from re-enacting the penalty contained in 39 of the act of 1867. Undoubtedly the preference clauses of the present act, differing in that respect from the act of 1867, as is well illustrated by the facts of this case, include preferences where the creditor receiving the same acted without knowledge of any wrongful intent on the part of the debtor, and in the utmost good faith. Pirie v. Chicago Title & T. Co. 182 U.S. 454 , 45 L. ed. 1179, 21 Sup. Ct. Rep. 906. Having thus broadened the preference clauses so as to make them include acts never before declared by Congress to be illegal, it may well be presumed that Congress, when it enacted the surrender clause in the present act, could not have contemplated that that clause should be construed as inflicting a penalty upon creditors coming within the scope of the enlarged preference clauses of the act of 1898, thereby entailing an unjust and unprecedented result. [197 U.S. 356, 374] Our conclusion, therefore, is that the first question propounded must to answered in the affirmative, and that the two other questions require no response.
And it is ordered accordingly.
I am unable to agree with the construction given to the sections of the bankruptcy act under consideration, and, because of the importance of the questions involved, have deemed proper a statement of the conclusions reached.
Notwithstanding the first question propounded by the court of appeals presupposes that the $2,000 mortgage was a preference within the meaning of the bankrupt act, it is argued on behalf of the creditors that, although the mortgage made a few days prior to the bankruptcy proceedings and when the bankrupt was insolvent, was void under 6343 of the Revised Statutes of Ohio, as amended April 26, 1898 (93 Ohio Laws, p. 290), read in connection with 67, paragraph e, of the bankruptcy act, it did not constitute a preference which must be surrendered preliminary to proof of the creditor's claim because there was no actual transfer of any property to the creditor, and the only thing obtained was a void mortgage.
'a. A person shall be deemed to have given a preference if, being insolvent, he has procured or suffered a judgment to be entered against himself in favor of any person, or made a transfer of any of his property, and the effect of the enforcement of such judgment or transfer will be to enable any one of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class.
In 1, 25, of the act of 1898, a 'transfer' is defined to include the sale and every other and different mode of disposing of or parting with the property or the possession of property, absolutely or conditionally, as a payment, pledge, mortgage, gift, or security.
This definition of a transfer covers a mortgage given for the [197 U.S. 356, 376] security of a debt in express terms, and 60 provides that preferences shall include transfers, the effect of the enforcement of which would be to enable any one of the bankrupt's creditors to obtain a greater percentage of his debt than other creditors of the same class.
It is true that if the mortgage is void it can have no effect to diminish the estate of the bankrupt, but upon its face the mortgage is good as against the bankrupt and the creditors of the estate.
It is said that, the mortgage being void, the creditor had nothing to surrender, but this assumes the invalidity of the security. Until set aside or voluntarily surrendered it is a good encumbrance upon the property, whether regarded as a conditional conveyance or as a mere security for the debt. It could be set aside by the trustee upon proof of insolvency of the bankrupt and other conditions named in the act at the time of giving it; otherwise it would stand as a valid security, unless the creditor should elect to surrender it and make proof of his claim as a general creditor.
The answer to the first question requires a consideration of 57g of the act of 1898, which, as it stood prior to the amendment of February 5, 1903 (32 Stat. at L. 797, chap. 487),1 read: 'The claims of creditors who have received preferences shall not be allowed unless such creditors shall surrender their preferences.' May a creditor who has received a preference, voidable by the act, contest the validity thereof, and, if it is declared invalid, still prove his debt upon surrender of his preference as though no contest had been had?
It was held by this court in Pirie v. Chicago Title %& t. c/o. 182 U.S. 438 , 45 L. ed. 1171, 21 Sup. Ct. Rep. 876, that a creditor who had received a [197 U.S. 356, 377] preference, although he did not have reason to believe that one was intended, could only keep the property transferred upon condition of refraining from proof of the balance of his debt.
It was pointed out in that case, in the opinion of the court Mr. Justice McKenna, that 60 in its various provisions permitted a creditor who had innocently received a preference to hold it if he chose, and it could only be recovered by the trustee in the event that he had reasonable cause to believe that a preference was intended, in which case the trustee might recover the property or its value. But the innocent creditor might keep the property transferred to him, although a preference within the definition of the act, upon terms of nonparticipation in the bankrupt estate in the general distribution to the creditors.
Section 23 of the bankruptcy act of 1867 provided: 'Any person who, after the approval of this act, shall have accepted any preference, having reasonable cause to believe that the same was made or given by the debtor contrary to any provision of this act, shall not prove the debt or claim 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.' Section 57g of the present act, prior to the amendment of February 5, 1903, required broadly that claims of creditors who have received preferences shall be surrendered, and that the same shall not be allowed unless this is done.
Under the former act the surrender was required of creditors who had accepted preferences, having reasonable cause to believe the same contrary to the provisions of the act, and such creditor could not receive any dividend until he had first surrendered the preference. In passing the act of 1898, Congress doubtless had before it prior legislation on the subject, and particularly the act of 1867, the most recent enactment on the subject.
Section 57g provides that all preferences, whether innocent [197 U.S. 356, 378] or otherwise, shall be surrendered before the creditor can prove his claim, and the right of proof is not postponed until the surrender, but claims are not to be allowed unless creditors shall surrender their preferences. The element of time is indicated in the word 'until,' which means to the time of, or up to, while the use of 'unless' more emphatically denies the right of proving the claim, save or except upon terms of relinquishing the preference.
In view of the purpose of the bankruptcy act to make an equal distribution of the bankrupt's estate among creditors of the same class and to avoid preferences made within four months, I think, having in view the first question put by the circuit court of appeals, that the sections of the law in question must be construed to put a creditor or who has received a merely voidable preference, which could be recovered from him by the trustee, to his election between striving to retain that which he has received, and voluntarily surrendering his preference, and filing his claim that he may participate with other unsecured creditors in the general distribution of the estate.
The law looks to a prompt, equal, and inexpensive distribution of the estate among those entitled thereto, and I do not think it was intended to permit a creditor to take the chances of litigation with the trustee, and, when defeated, still have the right to 'surrender' his preference and participate in the distribution of the general estate. I think the surrender contemplated by the law is not the capitulation which comes after unsuccessful resistance, but is intended to require the creditor, who must be ppresumed to know the law, to make a prompt election and to stand or fall upon the choice made. In other words it was not intended to permit a creditor who hoids security liable to defeat under the law to keep it if he can maintain it by successful contest, and, if not, to have the same right and privilege as to proof of his debt that he would have if he promptly availed himself of the privilege of surrender, which the law gives to one who would place himself upon a general equality with other creditors of the estate. [197 U.S. 356, 379] These conclusions are sustained by a consideration of the terms of the law under discussion, as well as the adjudicated cases which have arisen under it. The act of 1898 made important changes when compared with the bankrupt law of 1867. As we have already seen, 23 of the latter act limited the requirement as to the surrender of preferences to those made or given contrary to the provisions of the act. Section 35 of the same law gave the right to the assignee in bankruptcy to set aside illegal preferences, and 39, after enumerating certain transactions which should amount to acts of bankruptcy, including fraudulent conveyances as therein described, provided that whenever the beneficiary had reasonable cause to believe that a fraud upon the act was intended, or the debtor was insolvent, the assignee might recover the property, and the creditor should not be allowed to prove his debt in bankruptcy. In 1874 (18 Stat. at L. 178, chap. 390), 39 of the act was amended, and, instead of prohibiting a creditor who had received a conveyance in fraud of the act from proving his debt, it was provided that such creditor should not, in case of actual fraud on his part, be allowed to prove for more than a moiety of his debt, and this limitation should apply to cases of voluntary as well ws involuntary bankruptcy.
It will not, in my view, aid in the determination of the proper construction of the act of 1898 to review the numberous and conflicting decisions made under the act of 1867 as to the effect of these various provisions upon the right of the creditor to prove his claim. The great weight of authority is that one who had a voidable preference under the act could not be permitted to prove his claim after a judgment had been rendered against him in a contest with the trustee.
Presumably with the provisions of the act of 1867 before it, providing that in certain cases of fraudulent conveyance the creditor could not prove his claim in bankruptcy, first as to the whole, and later as to a half of the debt, and the limitations of the requirement to surrender preferences to those made in violation of the act, Congress laid aside these requirements, [197 U.S. 356, 380] and broadly provided in 57g of the act of 1898 that all preferences must be surrendered as a condition of proof of claims against the estate. The innocent holder of a preference could not be deprived of his right of election between proof of his debt and the surrender of his preference. He who had a voidable preference might surrender it and prove his debt. If he did not 'surrender,' the trustee could recover the preference, and the privilege of proof which was conditioned upon surrender no longer existed.
Prior to the amendment of 1903 this court in the case of Pirie v. Chicago Title & T. Co. already referred to, decided that the requirement extended to all menner of preferences, whether innocently received or otherwise, and this was the law until the amendment of 1903.
Therefore the sole question here is: What is meant by the term 'surrender' as used in the act of 1898?
'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 [197 U.S. 356, 381] goods by way of fraudulent preference, and refuses the demand therefor which the assignee is authorized to make ( 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, cannot be said, within the meaning of the statute to have surrendered to the assignee the property received by him under such preference.
To the same effect is Re Owings, 109 Fed. 623, and in Re Greth, 112 Fed. 978, 7 Am. Bankr. Rep. 598, the cases are reviewed and the same conclusion reached.
The only case decided under the act of 1898, which has come to my attention sustaining a contrary view, is Re Richard, 94 Fed. 633, 2 Am. Bankr. Rep. 506, in which it was decided that, notwithstanding the preference was set aside after a fruitless fight with the trustee, the creditor might prove his claim.
'To sustain the contention that the bank did not surrender its preference, it is urged that the bank did not at once, on demand of the assignee, turn over the goods levied on, but litigated the matter with the assignee in both the district and the circuit courts, and that the proceeds of the executions were not relinquished until final judgment was entered against the bank.
This definition is given in support of the contention that a surrender may sometimes be made involuntarily. This is doubtless true, and obviously the term may have different meanings when used in different connections. It may be that an army may surrender a fort after a most vigorous contest, while there is still the choice between further resistance and [197 U.S. 356, 384] yielding the fortress to an enemy; but the most liberal meaning of the term could hardly describe as a surrender the occupation which a victorious army has gained of a fort after it has ejected the enemy from its walls and is securely intrenched therein without leave of those who have been forcibly driven out.
The bankrupt law contemplates that a secured creditor who holds a secuity voidable under the law, and which he should put into the common fund as a condition of the right to participate with other unsecured creditors in the division of the estate, must make his choice while he has yet something to give for the privilege of being taken from the class of those who have a security which may be taken from them, and placed in a class, always favored in the bankrupt law, who shall share in the equal distribution of the bankrupt's estate, freed from fraudulent conveyances and voidable preferences.
The complete answer to the argument that one who has received a preference which he must give up before proof as a general creditor has the right to try out with the trustee the question of the validity of the preference, and then surrender, is that when the judgment of the law has taken the preference from him he has nothing left to surrender, and if then so disposed the creditor cannot surrender a thing which has been wrested from him by the strong hand of the law.
I think the construction here given comports with the purposes and carries into effect the design of the act as expressed [197 U.S. 356, 385] by its terms. It is true that in the present case, after resisting the attack upon the $2,000 mortgage in the court of common pleas, and when the judgment had gone against the bank, it did not appeal, and its counsel in the circuit court disclaimed intention to insist upon the preference of the $2,000 mortgage, but even then refused consent to a decree against the mortgage; and in our opinion the time of election was before judgment in the court of original jurisdiction wherein the mortgage was contested and defeated. It is unnecessary to consider whether an election to surrender the preference can be made after issue joined and before judgment. In this case a trial was had upon the merits. The judgment rendered was vacated by the appeal, and in the appellate court, notwithstanding the qualified disclaimer of counsel for the bank, a final judgment was rendered against the mortgage.
These considerations lead to the conclusion that the first and second questions should be answered in the negative.
The importance of the ruling just made is shown in its application, not only to the act of 1898 as it originally stood, but to the act as it now stands since the amendment of February 5, 1903, which only requires a surrender of preferences when the same are in violation of subdivision b of 60, or void or voidable under 67, subdivision e. The reasoning of the majority of the court permits the holder of a preference, no matter how fraudulent, to contest with the trustee when his preference is attacked, and, when convicted of fraud and an intention to defeat the purposes of the law, to 'surrender' that which the law has declared he cannot hold, and prove his debt as a general creditor. To permit this seems to me to defeat the purpose of the act, and to encourage the very thing the surrender clause was intended to promote,-a prompt and inexpensive distribution of the estate. The fraudulent transferee, although he has lost his suit, has taken no risk, and may still prove his claim on an equality with unpreferred creditors over whom he has sought an illegal advantage. I cannot agree [197 U.S. 356, 386] with this construction, and therefore dissent from the judgment and reasoning of the majority of the court.
I am permitted to state that Mr. Justice Harlan, Mr. Justice Brewer, and Mr. Justice Brown concur in this dissent.
[ Footnote 1 ] U. S. Comp. St. Supp. 1903, p. 415.

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