Court Opinion

ID: 8864607
Source: CourtListenerOpinion
Date Created: 2022-11-26 18:00:30.611185+00
Date Added: 2024-06-11T17:05:57.167565
License: Public Domain

HAWLEY, District Judge
(orally). It has been held that no transfer of property, lien, or incumbrance, by mortgage or otherwise, is to be avoided by any adjudication in involuntary bankruptcy, unless made or created subsequent to the passage of the bankrupt act. In re Brown, 91 Fed. 358. But it by no means follows that, because a bona fide debt was created before the passage of the act, a mortgage or lien of- any kind could be given after the passage of the act to ' secure such a debt, so as to avoid, any proceeding instituted by the petitioning creditors to have an adjudication in bankruptcy against the party giving the mortgage. In re Sievers, 91 Fed. 366, 369. If the mortgage in question was given for the purpose of hindering, delaying, and defrauding other creditors of Nathan, there cannot be any controversy as to the power of the court to enjoin Cohn, pending involuntary proceedings against Nathan, from disposing of any of the property in his possession or under his control. In re Abbott, 1 Hask. 250, Fed. Cas. No. 10; In re Brooks, 91 Fed. 508. That Cohn knew that Nathan was insolvent, and expected that proceedings in bankruptcy had been, or would soon be, instituted by other creditors of Nathan, is clearly shown by his testimony. The mortgage, as between Nathan and Cohn, was valid; but from the evidence introduced upon this hearing it cannot be said that Nathan/executed the mortgage upon all his personal property, and authorized Cohn to sell the same at private tale, for the honest purpose of discharging his indebtedness, and in the confident expectation that by so doing he could continue his business, and it is only upon that theory, if at all, that the transaction could Ire upheld as against other creditors. Tiffany v. Lucas, 15 Wall. 410. The giving of such a mortgage to secure Cohn, and to give him a preference over other creditors, was of itself an act of bankruptcy. Bankrupt Act 1898, c. 541, sube. 3, § 3, subds. a-c; Id. sube. 7, § 67. The filing of the petition by the creditors was, as is said in Bank v. Sherman, 101 U. S. 403, 406, “a caveat to all the world. It was, in effect, an attachment and injunction. Thereafter all the property rights of the debtor were ipso facto in abeyance until the final adjudication. " * * Those who dealt with his property in the interval between the filing of the petition and the final adjudication did so at their peril.” See, also, In re Brooks, supra. The law *593as declared in numerous cases, under prior acts of bankruptcy (and equally applicable (o the act of 1898), is* well settled that a sale or other disposition, out of the usual cojirse of business, of all oí one’s stock in trade, to a person who knows the seller’s insolvency, is prima facie evidence that the sale was fraudulent. Ashby v. Steere, 2 Woodb. & M. 347, Fed. Cas. No. 576; Babbitt v. Walbrun, 1 Dill. 19, Fed. Cas. No. 694; Id. Fed. Gas. No. 695; Lawrence v. Graves, Id. 8,138; Martin v. Toof, Id. 9,167; Toof v. Martin, 13 Wall. 40, 48; Bison v. Knapp. 1 Dill. 187, Fed. Cas. No. 11,861; Wakeman v. Hoyt, Fed. Cas. No. 17,051.
In Ashby v. Steere, supra, the court said that:
“If the debtor elected to pay a relative to whom he was indebted; if the transfer or conveyance was done secretly; if it was out of the usual course of business, in a now, extraordinary, or unusual manner; if it was just in the hurry of going into insolvency, a day or two, or an hour or two, before making the petition; * * * or if the debtor should convey away the whole of his property on the eve of bankruptcy, — any of these circumstances would tend to show his intention to prefer the creditor to whom the payment or transfer was made.”
In Toof v. Martin, 13 Wall. 48, the court said:
“The transfer, in any ease. l>y a debtor, of a largo portion of his property, while he is insolvent, to one creditor, without making provision for an equal distribution of its proceeds to all his creditors, necessarily operates as a preference to him, and must he taken as conclusive evidence that a preference was intended, unless the debtor can show that he was at the time ignorant of bis insolvency, and 1bat his affairs were such that lie could reasonably expect to pay all his debts. The burden of proof is upon him in such case, and not upon the assignee or contestant in bankruptcy.”
In Wakeman v. Hoyt, Thompson, Circuit Justice, said:
“Why is giving a preference to be considered a fraud on this act? Because the act contemplates an equal distribution, it is a fraud because it counteracts the policy of the law. Though it may not be fraudulent in a moral point of view, it must be fraudulent if it contravenes the policy of the law. So, when the trader procures the levy of an execution on his property, it is favoring one creditor over the other. This would not be a fraud, if it were not for the bankrupt law. It is precisely as honest an act for the debtor to procure an attachment or execution, to be levied on his property by a creditor, as it is to secure to him a preference by means of the conveyance. It is fraudulent only because it counteracts the policy of the law, and this is equally true in the one case as in the other. 1 am, therefore, in this view of the case, of opinion that a conveyance or assignment by a trader of all his property, to secure a preference to particular creditors, is, per se, a fraud upon the act of congress and an act of bankruptcy.”
In the disposition of property among creditors equality is equity. It is the genius and purpose of the act of 1898 to secure this result as far as possible from the moment its aid is invoked, whether by the debtor or by his creditors. Its exercise is vital to the ends of justice, and is necessary in order to enable the courts to enforce and make effective the various provisions of the act. The policy of the bankrupt act is to secure an equal distribution of the assets of the bankrupt among all his creditors, and a court of bankruptcy in which the bankrupt proceedings are pending, in order to preserve the property and protect the rights of all the creditors, has the unquestioned jurisdiction and power to enjoin any disposition thereof which would be in violation of the spirit, intent, and purpose of the act. In re Galen-*594dar, Fed. Cas. No. 2,308; In re Camp, Id. 2,346; In re Holland, Id. 6,605; In re Smith, Id. 12,993, 12,994; Bush, Bankr. 411; Blake, Moffit & Towne v. Francis-Valentine Co., 89 Fed. 691, 693, 694, and authorities there cited.
If there had been no sale, or pretended sale, of the goods by Cohn, it is clear that the mere execution and delivery of the mortgage by Nathan, and possession of the property by Cohn, would justify the court, bankruptcy proceedings having been commenced by other creditors against Nathan, in issuing the injunction as prayed for by the petitioning creditors.
But it is seriously argued that no injunction, should issue against Cohn, as he had sold all the property included in the mortgage prior to actual notice of.the filing of the petition by the creditors against M. Nathan to have him declared a bankrupt. On the other hand, it is contended by the petitioning creditors that there was no sale of the property; that the pretended sale was simulated and carried out as a mere pretense of avoiding and preventing the petitioning creditors from securing the property under the bankruptcy proceeding. There is much in the testimony that tends strongly to sustain this view. The sale was mostly made on credit, to be paid for when the purchaser sold the property. Of the amount of cash received from the sale, to wit, $403, the sum of $200 was paid by Cohn to his sister^ Mrs. Nathan. He testified that he gave her the money because she was in immediate need of funds on account of her husband’s serious illness. He also paid his attorney the sum of $120, and to the physician in attendance upon his brother-in-law, Nathan, the sum of $40. He sold to Hausman, who is not engaged in merchandising, a bill of goods for $875, receiving therefor, in cash, the sum of $10, the balance to be paid when the purchaser sold the property. This property was stored in a cellar of one Manheim, and the purchaser soon after the sale departed on a visit to the East. The'purchasers to whom Cohn delivered the property have not been made parties to this proceeding, and no order has been asked for against them. Under the circumstances above stated, taken in connection with all the facts produced at this hearing, it is not by any means clear that Cohn has made such a disposition of all the property that it can be said he has no longer any control over it. In the light of all the facts, I am of opinion that the injunction against Cohn should be issued as prayed for by the petitioners. It is so ordered.