Court Opinion

ID: 8630186
Source: CourtListenerOpinion
Date Created: 2022-11-24 19:36:23.745924+00
Date Added: 2024-06-11T16:55:44.521639
License: Public Domain

DILLON, Circuit Judge.
This is a bill by trustees in bankruptcy to avoid a deed of real estate, made by the bankrupt to the defendant The bill is based upon the second clause of the 35th section of the bankrupt act, and charges that the sale was made in contravention thereof. Darby, the grantor, at the time the deed was executed, was a private banker, and continued in business for over two months afterwards. The defendant, the grantee, was not a creditor of Darby, and has paid the consideration for the purchase, by assuming a valid mortgage upon the property for $150,000, and by giving his check for $50,000, on which the money was received by Darby and used in his business. An agent of Darby offered the property for sale, and the same was purchased at the price of $200,000, which was the highest sum the defendant would give for it. The property was in the hands of another agent for sale at $250,000, but he had not found a purchaser at that sum. It is not claimed that there was any fraud in fact in the transaction, or that there was any collusion between the defendant and Darby to defraud the creditors; but it is maintained by the complainants that the defendant’s purchase is prohibited by, and operates as a fraud upon, the bankrupt act.'
It quite satisfactorily appears that at the time of the sale Mr. Darby did not contemplate insolvency or going into bankruptcy, but that his expectation was that he would *1186be able by the sale of this property and by the aid of the rents and income of other property, and by the sale ■ thereof as advantageous opportunity offered. ,to keep on in business and pay all of his debts. But it is clear,' also, that he was technically, if not really insolvent, at the time the deed was made, although he was generally believed to be possessed of considerable wealth and property.
By the bankrupt act a sale, or conveyance of property by a person who is insolvent to a person who has then reasonable cause to believe him to be insolvent, and to believe that such sale or conveyance is made with a view to prevent his property from coming to his assignee in bankruptcy, or to defeat the object, or to evade the act, is declared to be void; and it is provided in such case, that the assignee may recover ■ the property or its value as assets of the bankrupt. (Section 35.)
The district court dismissed the bill on the ground that upon the proofs it did not appear that Lucas had reasonable cause to believe that Darby, in making the sale, intended to contravene the bankrupt act. Upon an attentive examination of the evidence it is our opinion that Mr. Lucas did not know or believe Darby to be insolvent, but on the contrary believed him to be a man of considerable estate over his liabilities, and it is quite clear, we think, that he acted in good faith and without any belief that a fraud upon the bankrupt act was intended. In point of fact, no fraud upon it was intended, either by Darby or Lucas.
But the real inquiry is not what Mr. Lucas's actual belief was; but whether he had good grounds or reasonable cause to believe, under all the circumstances, considering Mr. Darby’s general reputation as a man of considerable wealth and property, his known integrity and energy, tile nature of his business, the defendant’s want of any intimate familiarity with the exact state of Mr. Darby’s affairs, and his ignorance of any change in them, we cannot say that the defendant had reasonable cause to believe Mr. Darby’s purpose in selling was to evade or defeat the bankrupt act, and on this ground we are content to affirm the decree below. It is due, however, to the counsel for the complainants, that we should notice briefly the view they urge in favor of a reversal of the decree. Darby being shown to have been insolvent when the deed to the defendant was made, they claim that there are but two questions left: 1. Had Mr. Lucas reasonable cause to believe he was insolvent. 2. Was the conveyance made with a view to defeat the bankrupt act?
Assuming it to be shown that Mr. Lucas had reasonable cause to believe Mr. Darby to be insolvent, they claim that the latter could not under any circumstances make a sale of property to the former; and that any sale of property, although for full value, and although no actual fraud upon creditors was intended or effected, is necessarily void under the bankrupt law. The position assumed is thus stated in the printed argument submitted to the court:
“Whenever a merchant, trader, or banker is insolvent, that is, is unable to pay his debts in the usual course of business, and when the facts show that he is unable to-pay his debts in full, the law requires him to file his petition to be adjudicated a bankrupt. It is his duty so to do, and all persons who have reasonable cause to believe the debtor to be insolvent, are under obligations to do nothing to prevent or induce him to refrain from filing his petition to be adjudicated a bankrupt, in order that his property may be equally divided amongst his creditors. If the debtor fail to discharge his duty as aforesaid, and if any person deal with the person as aforesaid, both are guilty of a fraud upon the bankrupt law, and are subject to its provisions and penalties.”
We will not stop to discuss the correctness of these views as respects dealing* between a bankrupt and his creditors. In the cause before us the purchase was made by one not a creditor, and it is maintained that such a purchase is constructively fraudulent if the purchaser had reasonable cause to believe that the vendor was insolvent; that is, unable to meet his debts in the usual course of business. In other words, it is claimed that a person who is insolvent owes a duty to his creditors to go at once into voluntary bankruptcy, and that this duty is of such a nature that he cannot lawfully make any sale of his property with a view to extricate himself from his embarrassment. That a person who is known or believed to be in embarrasséd circumstances, may, in good faith, borrow money and give at the time a valid security for it upon his property, was held by this court in Darby v. Boatman’s Sav. Inst. [Case No. 3,571], at the last term.
And for the same reasons such a person may in good faith make a sale of property for a consideration received at the time, although the purchaser may know or have cause to believe the vendor is insolvent. In such a case, all depends upon the good faith of parties. If the vendor’s purpose in selling is to defraud his creditors, or if it is to work a fraud upon the law by illegal payments, preferences, or the like, and the purchaser knows, or has good grounds or reasonable cause to believe that such is the purpose of the vendor, then his purchase is void.
But it would nevei do to hold, because a man is unable to meet his debts as they mature, that he is disabled from making a fair and honest sale of his property with a view to keep out of bankruptcy. The notion is a mistaken one -which supposes that the law makes it the duty of such a person not to sell, but at once to go to the *1187bankrupt court and ask to be adjudged a bankrupt. It is true that the law declares that such a person shall not make any preferences. It is also true that, ordinarily, creditors may force such a person into bankruptcy. But it is not true that he cannot by means of pledges or sales of his property fairly made, endeavor to keep along in business, and to avoid, if possible, going into bankruptcy. On this point we concur in the views expressed by the learned judge of the district court in dismissing the bill. If therefore it was an established fact that Lucas had reasonable cause to believe Darby was insolvent, our opinion would still be that the bill ought to be dismissed because the sale was fairly made by Darby from the conviction that it would enable him to keep along in business, and the property was purchased by Lucas with no good ground to believe that Darby intended to delay, defeat, or evade the bankrupt act, or that such would be the effect of the transaction. Affirmed.
. [NOTE. Complainants took an appeal to the supreme court, which affirmed the decree. Tiffany v. Lucas. 15 Wall. (82 U. S.) 410. Mr. Justice Davis, delivering the opinion of the court, said: “The law does not recognize that every sale of property by an embarrassed person is necessarily in fraud of the bankrupt act. If it were so, no would know with whom he could safely deal, and, besides, a person in this condition would have no encouragement to make proper efforts to extricate himself from difficulty. It is for the interest of the community that every one should continue his business, and avoid, if possible, going into bankruptcy; and yet how could this result be obtained if the privilege were denied a person, who was unable to command ready money to meet his debts as they fell due, of making a fair disposition of his property in order to accomplish this object? It is true he may fail, notwithstanding all his efforts, in keeping out of bankruptcy, and in that case any sale he has made within six months of that event is subject to examination. If it shall turn out on that examination that it was made in good faith, for the honest purpose of discharging his indebtedness, and in the confident expectation that by so doing he could continue his business, it will be upheld. On the contrary, if he made it to evade the provisions of the bankrupt act, and to withdraw his property from its control, and his vendee either knew, or had reasonable cause to believe, that his intention was of this character, it will be avoided. Two things must concur to bring the sale within the prohibition of the law.—the fraudulent design of the bankrupt. and the knowledge of it on the part of the vendee, or reasonable cause to believe that it existed.”]