(b) If a bankrupt shall have given a preference1 and 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. And, for the purpose of such recovery, any court of bankruptcy, as hereinbefore defined, and any State court which would have had jurisdiction if bankruptcy had not intervened, shall have concurrent jurisdiction.* (c) If a creditor has been preferred, and afterwards in good faith gives the debtor further credit without security of any kind for property which becomes a part of the debtor's estates, the amount of such new credit remaining unpaid at the time of the adjudication in bankruptcy may be set off against the amount which would otherwise be recoverable from him. (d) If a debtor shall, directly or indirectly, in contemplation of the filing of a petition by or against him, pay money or transfer property to an attorney and counselor at law, solicitor in equity, or proctor in admiralty for services to be rendered, the transaction shall be re-examined by the court on petition of the trustee or any creditor and shall only be held valid to the extent of a reasonable amount to be determined by the court, and the excess may be recovered by the trustee for the benefit of the estate. § 2. What is a preference; history and comparative legislation. -A preference is a "conventional fraud;" the debtor merely prefers to pay one creditor more than, or to the exclusion of, others. At common law, such a payment or transfer was not even constructively fraudulent, though as early as 1635, preferential transfers were regulated by statute and, for more than a century, were punishable as crimes. The modern doctrine that preferences 2 * Amendments of 1903 in italics. 1. Here the words "within four months before the filing of the peti tion, or after the filing of the petition and before the adjudication," were stricken out of the amendatory act of 1903, and inserted in subs. a. 2. See Preferences to creditors, chapter XI, section 1, supra. are wrongs on other creditors was first declared by Lord Mansfield. It was not reduced to a bankruptcy law definition until in the English act of 1869, although the Insolvent Debtor Acts, be ginning with that of 1824, contained clauses declaring what were preferences in cases where debtors other than traders sought the refuge of the courts. The statutory definition in England is the result of more than a century of decisions of the courts construing the word "preference" and the elements of proof. The elements of a preference under the English statute are: (1) a payment or transfer or conveyance (2) by a person unable to pay his debts as they become due, (3) with a view of giving the person to whom it is made an advantage over other creditors, provided (4) such payment is made within three months of the bankruptcy.5 The English law specifically protects payments in due course of trade, and has since the middle of the eighteenth century; hence, what are known as "protected transactions." The first definition of preferences in a bankruptcy law in the United States appeared in that of 1841. The definition in the law of 1867 was identical with the present English definition, except that the time limit was four months instead of three, and that on the part of the creditor are required the additional elements of (1) reasonable cause to believe that the debtor was insolvent, and (2) knowledge that the payment was in fraud of the act.s 3. The present definition; the elements of a preference; subs. a.—Since the amendatory act of 1903, a preference consists in a person, (1) while insolvent and (2) within four months of the bankruptcy, (3) procuring or suffering a judgment to be entered against himself or making a transfer of his property, (4) the effect of which will be to enable one creditor to obtain a greater 3. Worsely v. de Mattos, 1 Burr. 467; Anderson v. Temple, 4 Burr. 2235. 4. See In re Hall, 4 Am. B. R. 671, for a historical review. 5. Act of 1883, section 48. 6. Act of 1883, section 49. 8. Act of 1867, section 35, R. S. section 5128. The amendatory act of 1874 changed "belief" of a fraud on the act to "knowledge." percentage of his debt than any other creditor of the same class. Such a preference is voidable at the instance of the trustee, if (5) the person recovering it or to be benefited thereby has (6) reasonable cause to believe that it was thereby intended to give a preference. These elements of proof are discussed in detail in the sections immediately following. Briefly, the present definition differs from the English definition in (1) the elimination of "intent" and the substitution of "the result of the act," and (2) in making the preference period four months instead of three; while, when considered as an act that is voidable, it differs from that of our law of 1867, not only in substituting the result for the intent save in so far as the latter is an element of "reasonable cause to believe," but also in requiring the attacking trustee to show only that the creditor had reasonable cause to believe that a preference was intended instead of the more difficult elements of proof indicated in the preceding section. The present law, too, distinguishes between a mere preference in fact and one that is voidable.10 It makes many of the cases under the former law inapplicable. Subdivision a has been held to be a definition of " preference,"11 but it has been questioned whether this is altogether accurate. 12 A preference which amounts to an act of bankruptcy must still show intent, 13 and the so-called definition is not exactly consistent with another subsection. 14 It is a definition, however, when applied to a transaction voidable under subdivision b. The view that sub 9. In re Belding, 8 Am. B. R. 718, 116 Fed. 1016, a preference is none the less a preference because the bankrupt first gave the creditor not the property itself, but a lien thereon, and the creditor subsequently sold the property and realized on the lien in order to pay the debt. See Stern v. Mayer, 16 Am. B. R. 763, 113 App. Div. (N. Y.) 181, 98 N. Y. Supp. 1028; In re Beerman, 7 Am. B. R. 431, 112 Fed. 662; Stern v. Louisville Trust Co., 7 Am. B. R. 305, 112 Fed. 501. For a case where nearly all the elements were lacking, see Brown v. Guichard, 7 Am. B. R. 515. 10. See In re Chaplin, 8 Am. B. R. 121, 115 Fed. 162, an unusual case. 11. See Preference, chapter XXI, section 7, supra. 12. In re Piper, 2 N. B. N. Rep. 7, it is merely a "rule of evidence." See also Stern v. Louisville Trust Co., 7 Am. B. R. 305, 112 Fed. 501. 13. See section 3a (2), chapter XXI, secs. 17-19, and the cases cited. 14. Section 67e (1), chapter XXII. Compare In re McLam, 3 Am. B. R. 245. section a defined a preference led to the doctrine that payments on account or partial payments in due course of trade after insolvency were preferences without either knowledge of insolvency on the part of the debtor, or reasonable cause to believe that a preference was intended on the part of the creditor; a doctrine that reversed the rule that good faith was the test and rendered cash transactions in business not only the safest course, but, in effect, essential. As a consequence, the meaning of both subsection b and subsection c was greatly enlarged by judicial construction. The amendatory act of 1903 has rendered most of these cases inapplicable and valueless. 15 § 4. Being insolvent. The word "insolvent" has the same meaning here as elsewhere in the act.16 The burden of showing it is on him who alleges it.17 The debtor must have been insolvent at the time the preference was committed.18 If the levy following the judgment causes the insolvency, it is not enough.19 But insolvency must be alleged and found as a fact; mere belief is not enough,20 nor is danger of insolvency as a coming result.21 The schedule of liabilities filed by the bankrupt is admissible on the issue of insolvency.22 As to sufficiency of evidence as to insolvency consult cases cited in the note below.23 15. Collier, Bankr., 6th ed., p. 474, and cases there cited. 16. Bankr., Act, 1898, section 1(15). See Insolvency, chapter XXI, section 4, supra. See also Benjamin v. Chandler, 15 Am. B. R. 439, 142 Fed. 217. Compare In re Alexander, 4 Am. B. R. 376, 102 Fed. 464; Marvin v. Anderson, 6 Am. B. R. 520. 17. In re Chappell, 7 Am. B. R. 608, 113 Fed. 545. 18. In re Arkonia Fabric Mfg. Co., 18 Am. B. R. 470, 151 Fed. 914, evidence held to show that corporation was insolvent at date of transfer of its machinery, etc.; Butler Paper Co. v. Goembel (C. C. A.), 16 Am. B. R. 26, 143 Fed. 295; In re Wittenberg, etc., Co., 6 Am. B. R. 271, 108 Fed. 593. Compare Sabin v. Camp, 3 Am. B. R. 578, 98 bed. 974. 19. Chicago Title & Trust Co. v. Roebling's Sons, 5 Am. B. R. 368, 107 Fed. 71. See also Clarion Bank v. Jones, 21 Wall. (U. S.) 325; Otis v. Hadley, 112 Mass. 100. 20. Wagner v. Hall, 16 Wall. (U. S.) 584. Compare also In re Linton, 7 Am. B. R. 676. 21. Beals v. Quinn, 101 Mass. 262. 22. In re Docker-Foster Co., 10 Am. B. R. 584, 123 Fed. 190; Hackney v. Hargreaves, 13 Am. B. R. 676, 3 Neb. (Unoff.) 676. 23. Ridge Ave. Bank v. Sunheim, 16 Am. B. R. 863, 145 Fed. 798; Ben 25 § 5. Within four months.-This means within four months of the inception of the proceeding, in the words of the statute "before the filing of the petition." The method of computing time is fixed by another section of the statute, which is self-explanatory when enumerated by days,24 and the same rule is applied when the time is enumerated by months and years.2 Fractions of a day are disregarded.26 If a preference was given before the passage of the bankruptcy law, it cannot be disturbed.27 Nor can it if done in pursuance of a valid contract more than four months old.28 But a transfer, which otherwise constitutes a voidable preference, is not validated by the fact that it was executed in the performance of a contract to do so made more than four months prior to the filing of the petition.29 The period ordinarily begins to run from the moment the judgment or transfer takes effect.30 Where possession is taken by the creditors of an insolvent debtor's property within four months befiore the filing of the petition, under an agreement, whereby a lien was created in favor of the creditors upon such property in case of a failure of the debtor to comply with the terms of such agreement, such assumption of possession will constitute an unlawful preference notwithstanding the fact that the agreement jamin v. Chandler, 15 Am. B. R. 439, 142 Fed. 217. 24. Bankr. Act, 1898, section 31 provides that "whenever time is enumerated by days in this act, or in any proceeding in bankruptcy, the number of days shall be computed by excluding the first and including the last, unless the last fall on a Sunday or holiday, in which event the day last included shall be the next day thereafter which is not a Sunday or a legal holiday." See also Whitley, etc., Co. v. Roach, 8 Am. B. R. 505; In re Wolf, 2 Am. B. R. 322, 94 Fed. 382. 25. Compare In re Stevenson, 2 Am. B. R. 66, 94 Fed. 110. 26. In re Warner, 16 Am. B. R. 519, 144 Fed. 987. 27. In re Terrill, 4 Am. B. R. 145, 100 Fed. 778. 28. Sabin v. Camp, 3 Am. B. R. 578, 98 Fed. 974. But compare In re Sheridan, 3 Am. B. R. 554, 95 Fed. 406. 29. In re Great Western Mfg. Co., 18 Am. B. R. 259, 152 Fed. 123. 30. See Lawyer v. Turpin, 91 U. S. 114; In re Foster, Fed. Cas. No. 4.964. An order on a creditor for the payment of money due the bankrupt is a transfer of the fund from the day of its presentation. Johnston v. Huff (C. C. A.), 13 Am. B. R. 287, 133 Fed. 704; In re Hines, 16 Am. B. R. 495, 144 Fed. 142, 147, 543. |