Case Name: J. KENYON WILSON v. Mrs. M. TAYLOR
Court: Supreme Court of North Carolina
Jurisdiction: North Carolina
Decision Date: 1911-02-22
Citations: 154 N.C. 211
Docket Number: 
Parties: J. KENYON WILSON v. Mrs. M. TAYLOR.
Judges: 
Reporter: North Carolina Reports
Volume: 154
Pages: 211–219

Head Matter:
J. KENYON WILSON v. Mrs. M. TAYLOR.
(Filed 22 February, 1911.)
1. Bankruptcy — Trustee—Bond—Evidence.
A certified copy of the bond of a trustee in bankruptcy and the order of the referee approving it is sufficient evidence of the official character of the trustee named therein and of his right to sue for and recover the property of the bankrupt.
• 2. Issues, Form of.
It is not material in what form issues are submitted to the jury, provided they are germane to the subject of the controversy and each party has a fair opportunity to present his version of the facts and his view of the law, so that the case, as to all parties, can be tried on its merits.
3. Same.
In this action brought by the trustee in bankruptcy to recover of a creditor the amount of an alleged preference under the Bankrupt Act, it was Held, that an issue, “Is the defendant indebted to the plaintiff, and, if so, in what sum?” was preferable to separate issues as to the various elements necessary under the Bankrupt Act to constitute a preference; and it appearing that the case was correctly tried under the issue submitted, the alleged preferred creditor will not be heard to complain that he had not introduced pertinent evidence because the various issues tendered by him had been refused by the court.
4. Bankruptcy — Preferences.
A preference by an insolvent debtor is given under the Bankrupt Act if, within four months before the filing of the petition in bankruptcy, or after the filing of the petition and before the adjudication, he 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.
5. Same — Inquiry—Notice Implied.
When a person receiving or to be benefited by á preference prohibited by the Bankrupt Act, or his agent acting therein, shall have had reasonable cause to believe that it was intended thereby to give a preference, it is voidable by the trustee, and he may recover the property or its value from such person.
6. Bankruptcy — Preferences—Fraud in Law — Constructive Fraud.
In order to invalidate a preference received under the provisions of the Bankrupt Act, it is not necessary to show any moral or actual fraud, as it is only a matter of constructive fraud, arising by law upon the existence of certain transactions forbidden by the act, the purpose of which is to prevent creditors from obtaining a preference over others of the same class.
7. Bankruptcy — Preference.
It is not material whether a payment or transfer prohibited by the Bankrupt Act is made directly or indirectly to the creditor whose claim is preferentially satisfied thereby, for it is sufficient if he receives the benefit of the preference.
8. Same — Inquiry—Constructive Notice.
Actual knowledge or belief of the intent to prefer is not required by the Bankrupt Act, and a reasonable cause to believe that such was the intent is sufficient. A party affected by notice must exercise ordinary care to ascertain the facts, and if he fails to investigate when put upon inquiry, he is chargeable with all the knowledge he would have acquired if he had made the ■ necessary effort to discover the truth.
9. Same — Rule of the Prudent Man.
Under the provisions of the Bankrupt Act a creditor has reasonable cause to believe his debtor intends to prefer him when such a state of facts is brought to his attention as would lead a prudent man, when put upon his guard, to the conclusion that such is his intent.
10. Same — Evidence—Notice.
In this ease there was evidence tending to show that a creditor, to whom her debt had been paid under a clause of preference in a deed of assignment, and which was sought to be recovered by the debtor’s trustee in bankruptcy, told the trustee that she was protected by the deed of assignment and admitted to him that she had been informed of her preference as a creditor, and asked and received the money for her debt by virtue of the preference: Held, upon any view of the testimony, she had knowledge of facts and circumstances from which the law clearly implies notice.
Appeal from Ward, J., at September Term, 1910, of Oam-DEN.
This action, was brought by the plaintiff, as trustee in bankruptcy of J. W. Taylor, to recover of the defendant the sum of $901, alleged to have been paid to the defendant, as a preferred creditor, by C. H. Spencer, assignee, under a general assignment executed by Taylor for tbe benefit of,Ms creditors. Tbe defendant in ber answer denied ber liability to tbe plaintiff and tendered separate issues as to tbe bankruptcy, tbe appointment of tbe plaintiff as trustee, tbe assignment of Ms property by Taylor witbin four months before tbe filing of tbe petition in bankruptcy, tbe payment to ber by Taylor, through bis as-signee, of $901 witMn tbe said, time, tbe knowledge of defendant or reasonable cause to believe that it was intended thereby to give ber a preference, and tbe amount plaintiff is entitled to recover. Tbe court refused to submit these issues, but substituted for them tbe following issue: “Is tbe defendant indebted to tbe plaintiff? If so, in what sum?” Defendant excepted.
Plaintiff introduced in evidence duly certified copies of tbe following papers filed in tbe bankruptcy proceedings: Subpoena, order to show cause, order of reference, order of adjudication, notice to trustee of bis appointment, bond of trustee and order of referee approving tbe bond of tbe trustee. Defendant objected to tbe introduction of these papers, not, however, upon tbe ground that they were not properly authenticated, but because they were not sufficient in law to prove tbe appointment of tbe plaintiff as trustee without a copy of that part of tbe record showing tbe appointment of tbe plaintiff as trustee by tbe creditors, with tbe approval of tbe referee in bankruptcy. Tbe objection was overruled, and tbe defendant excepted.,
Tbe evidence tended to show that at tbe time J. W. Taylor made tbe assignment for tbe benefit of bis creditors bis indebtedness amounted to $12,000 and bis assets to $1,855. Tbe defendant was preferred in tbe assignment to tbe amount of ber claim, which was $901, and it and the other preferred debts, amounting to $559.19, were paid to tbe creditors by tbe assignee, and tbe balance, $391.21, paid to tbe trustee in bankruptcy. It was admitted that, at tbe time J. W. Taylor executed tbe assignment, be was insolvent. C. H. Spencer, tbe assignee, testified that be paid tbe $901 to tbe defendant through J. ■W. Taylor, who delivered tbe checks to ber. One of tbe checks was signed by him as assignee. Tbe defendant asked tbe trustee to send ber a check for tbe amount due ber, and after seeing ber be did so. While be could not say that sbe bad seen tbe assignment or knew of it, sbe received tbe money from bim as due to ber under tbe assignment. He further testified as follows: “Tbe amount of assets collected was $1,855, and I paid tbe $901 out of this. Tbe indebtedness was by note. I did not tell her of tbe assignment and its provisions; she came to me and said sbe bad been informed that sbe was a preferred creditor, and asked me to pay ber over tbe money. Sbe told me sbe was protected, and I said it was so. Sbe took from míe tbe money with that understanding. Sbe knew little or nothing about business.”
Tbe court charged tbe jury that, “If they found all tbe facts to be as testified, their answer to tbe issue would be Yes, in tbe sum of $850,, with interest from 28 August, 1909.” Defendant excepted. Tbe jury rendered a verdict for tbe amount stated in tbe instruction. Defendant’s motion for a new trial having been overruled and judgment entered upon tbe verdict, sbe appealed to this Court.
W. M. Bond, and Q. E. Thompson for plaintiff.
E. FI Aydlett and J. G. B. Ehringham for defendant.

Opinion:
Walker, J.,
after stating tbe case: Tbe first exception of tbe defendant, that there was not sufficient evidence of tbe appointment and qualification of tbe plaintiff as trustee, cannot be sustained. Under tbe Bankrupt. Act, tbe trustee qualifies by giving bis bond and having tbe same approved by tbe referee. It is tbe duty of the referee, immediately upon tbe appointment and approval of tbe trustee, to notify bim of bis appointment, and tbe trustee thereupon is required to give notice of bis acceptance or rejection of tbe trust. If be accepts tbe trust, be must file an official bond, as prescribed by tbe act, and this must be approved by tbe court, or referee. Bankruptcy Act, sec. 50b; General Orders in .Bankruptcy, No. 16; Love-land on Bankruptcy, sec. 142, pp. 852 and 1149. Tbe act further provides that "a certified copy of tbe order approving tbe bond of a trustee shall constitute conclusive evidence of tbe vesting in bim of tbe title to tbe property of tbe bankrupt, and if recorded shall impart tbe same notice that a deed from tbe bankrupt to tbe trustee, if recorded, would have imparted bad not bankruptcy proceedings intervened." 2 Remington on Bankruptcy, p. 1766. If tbe other records introduced in evidence were not sufficient to prove tbe official character of tbe plaintiff and to establish bis right to sue for and recover tbe property of tbe bankrupt, tbe provision to which we have just referred fully answers this objection of tbe defendant, as tbe plaintiff introduced a certified copy of tbe bond and tbe order of approval.
Tbe issue submitted by tbe court to tbe jury enabled tbe defendant to present fully her side of tbe case and required tbe jury to answer affirmatively every question embraced in tbe issues tendered by tbe defendant before they could render a verdict against her. If one issue will fulfill tbe purpose of affording to each party a fair opportunity of developing bis case, it is much better to submit tbe case to tbe jury in that way than to multiply issues which may tend to confusion. Why require tbe jury to answer many issues, when tbe answer to one will do, if that one presents fully all matters in controversy? We do not think tbe defendant was prejudiced in tbe least by tbe ruling of tbe court as to tbe issues. If tbe defendant did not go upon tbe stand and testify herself and offer other witnesses in her own behalf, and thus avail herself of tbe fair opportunity she bad of making good her defense, it was her own fault, and she cannot be beard now to say that she did not do so because tbe issues tendered by her were not accepted. Deaver v. Deaver, 137 N. C., 246; In re Herring's Will, 152 N. C., 258. We repeat what was said in Deaver's case, supra: "It is not material in what form issues are submitted to tbe jury, provided they are germane to tbe subject of tbe controversy and each party has a fair opportunity to present bis version of tbe facts and bis view of tbe law, so that tbe case, as to all parties, can be tried on tbe merits."
Tbe last exception presents tbe real question in tbe case. Was tbe evidence offered sufficient to show a preference voidable under tbe bankrupt law ? To which we must give an affirmative answer. A person is deemed to have given a preference if, being insolvent, be has within four months before tbe filing of the petition, or after the filing of the petition and before the adjudication, 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. Bankrupt Act, sec. 60a; Brandenburg on Bankruptcy (3 Ed.), secs. 946 and 947. In the case of a transfer, the four months do not expire until that period has elapsed after the registration of the instrument, if required to be recorded. In the case of a preference, if the person receiving it, or to be benefited thereby, or his agent acting therein, shall have had reasonable cause to believe that it was intended thereby to give a preference, it shall be voidable by the trustee, and he may recover the property or its value from such person. Bankrupt Act, sec. ,60b; Brandenburg, sec. 961. It appears in this ease, without any serious controversy as to the facts, that while J. "W. Taylor was insolvent he made a transfer, or assignment, which is the same thing, of all his property for the benefit of his creditors, with a preference in favor of the defendant to the full amount of his indebtedness to her, and after paying the preferred debts, the residue was not sufficient to pay the other creditors. The result, therefore, was that the defendant was given a greater percentage of her claim than some of the other creditors in the same class with her, and this transfer was made and registered within four months before the filing of the petition and the adjudication of bankruptcy. It follows from these undisputed facts that if the defendant had reasonable cause to believe that result was intended, the preferential payment she received was void under "the bankrupt law, and she is liable to the plaintiff, as trustee in bankruptcy, for the amount thereof. It is not necessary, in order to invalidate the preference, that there should have been any moral or actual fraud. It is simply a constructive fraud, arising by law upon the existence of certain facts and forbidden by it. There is nothing dishonest or illegal in a creditor's obtaining payment of a debt due him from a failing or embarrassed debtor, nor in his attempting, by proper and ordinary effort, to secure an bonest debt; but sucb an act may afterwards become constructively fraudulent and illegal, by reason of tbe filing of a petition and an adjudication in bankruptcy. It is voidable by tbe trustee of tbe bankrupt's estate because tbe law says it shall be so, regardless of tbe moral quality of tbe act or intent, or tbe motive of tbe debtor, however bonest it may have been. Tbe law considers only tbe ultimate effect of such act as being-inconsistent with tbe very purpose and policy of tbe Bankrupt Act, which is tbe equal and equitable distribution of tbe bankrupt's estate among bis creditors, subject only to tbe preferences or priorities therein allowed. Brandenburg, sees. 962, 966. "The acts mentioned in this section are not sucb as were forbidden by tbe common law, or generally by tbe. statutes of tbe States; nor are they acts which in their nature are immoral or dishonest. In order to carry out tbe spirit of tbe bankrupt system — an equal division of tbe bankrupt's property among bis creditors — Congress has adopted a conventional rule to determine tbe validity of these preferences. It has prescribed a limit of four months. Any (forbidden) transfer made within that time is fraudulent and voidable. It is not so because sucb preferences are morally wrong, but because tbe act says they are." Bean v. Brookmire, Fed. Cases, No. 1168; In re Cobb, 96 Fed. Rep., 821. Nor is it material whether tbe payment or transfer is made directly or indirectly to tbe creditor, whose claim is preferentially satisfied thereby. If be receives tbe benefit of tbe preference, as tbe defendant did in this case, it is sufficient. Goldman v. Smith, 93 Fed. Rep., 182; Brandenburg, sec. 69. Tbe form of tbe transfer or payment is not considered, but tbe substance of tbe transaction and its effect in preventing an equal division of tbe debtor's property among bis creditors, subject to preferences lawfully acquired under tbe law and recognized in tbe act as valid. Tbe payment, therefore, to tbe defendant by tbe assignee was, in legal effect, a payment to her by tbe bankrupt, as much so as if be bad made tbe payment himself to her.
Actual knowledge of tbe intent to prefer is not required, nor even a belief, but simply reasonable cause to believe that sucb was the intent. A party who may be affected by notice must exercise ordinary care to ascertain the facts, and if he fails to investigate when put upon inquiry, he is chargeable with all the knowledge he would have acquired if he had, made the necessary effort to discover the truth. Bunting v. Ricks, 22 N. C., 130; Hulbert v. Douglass, 94 N. C., 122; Bryan v. Hodges, 107 N. C., 492; Hill v. R. R., 143 N. C., 539; McIver v. Hardware Co., 144 N. C., 489. This just and reasonable doctrine has been applied in cases where it was sought to fix a creditor of a bankrupt or a purchaser from him with knowledge or notice of the latter's intent in dealing with him, or to show that the creditor or purchaser had reasonable cause to believe in the existence of the debtor's intent to prefer or to defraud. Buchanan v. Smith, 16 Wall., 277; Wager v. Hall, ibid., 584; Harrell v. Beall, 17 Wall., 590. A creditor has reasonable cause to believe his debtor intends to prefer him when .such a state of facts is brought to his attention as would lead a prudent man, when put on his guard, to the conclusion that such is his intent. Toof v. Martin, 13 Wall., 40; Bank v. Cook, 95 U. S., 342. Applying these principles to the facts of the case, it cannot be questioned, we think, that the defendant had at least reasonable cause to believe that the bankrupt intended to prefer her, as his creditor, when the payment was made. If we are to judge by what she did and by her own words, the transaction is condemned. She told the trustee that she was protected, and admitted to him that she had been informed of her preference as a creditor, asked that the money be paid to her — -virtually asserting her right thereto — and received it from the trustee with the understanding that it was paid to her by reason of her preferential right as a creditor. The trustee stated that "She received it as money due her under the preference in the assignment." If the jury found these to be the facts from the testimony, under the instruction of the court, she had not only reasonable cause to believe that the money was paid with intent to prefer her, but actual notice of the fact; and it is not denied, nor could it be, that the money was, in fact, so paid to her. But in any view of the testimony, even if construed most favorably for tbe defendant, sbe bad knowledge of facts and circumstances from wbicb tbe law clearly implied notice.
But if tbe defendant is to be considered as having derived ber right to tbe money from tbe assignee and under tbe assignment, tbe result will be tbe same. Sbe necessarily knew that sbe bad been preferred, and ber title to tbe money must fail by the very terms of tbe bankrupt law.
Our conclusion is that there was no error committed in tbe trial below.
No error.