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date is proved by the alleged bankrupt, the proceedings shall be dismissed. In such proceedings the burden of proving solvency shall be on the alleged bankrupt.
As Amended by the Chandler Act (1938). "Under the first act of bankruptcy" was substituted for "in bankruptcy instituted under the first subdivision of this section" and "in such proceedings" for "under said subdivision one." This codified points decided in West Co. v. Lea, 174 U.S. 590, 19 S.Ct. 836, 43 L.Ed. 1098 (1899), which so resolved ambiguities in the Act of 1898.
d. Whenever a person against whom a petition has been filed alleging the commission of the second, third, or fifth act of bankruptcy takes issue with and denies the allegation of his insolvency or his inability to pay his debts as they mature, he shall appear in court on the hearing, and prior thereto if ordered by the court, with his books, papers, and accounts, and submit to an examination and give testimony as to all matters tending to establish solvency or insolvency or ability or inability to pay his debts as they mature and, in case of his failure so to do, the burden of proving solvency or ability to pay his debts as they mature shall rest upon him.
See also section 21(k).
As Amended by the Chandler Act (1938). The original text stated: "Whenever a person against whom a petition has been filed as hereinbefore provided under the second and third subdivisions of this section takes issue with and denies the allegation of his insolvency, it shall be his duty to appear in court on the hearing, with his books, papers, and accounts, and submit to an examination, and give testimony as to all matters tending to establish solvency or insolvency, and in case of his failure to so attend and submit to examination the burden of proving his solvency shall rest upon him.”
The present text, together with (c), reaches all acts of bankruptcy where insolvency is a material issue. The procedure has long been approved. See West Co. v. Lea, 174 U.S. 590, 594, 19 S.Ct. 836, 43 L.Ed. 1098 (1899); In re Cochran, 16 A.B.R.,N.S., 369 (S.D.N.Y.1930); 1 Remington, Bankruptcy (4th Ed., 1934), §§ 161, 385. Previously, some courts employed an auditor where the issue was complicated, and considered his report prima facie evidence. See Ex parte Peterson, 253 U.S. 300, 40 S.Ct. 543, 64 L.Ed. 919 (1920); Newark Fire Ins. Co. v. Bisbee Linseed Co., 33 F.2d 809 (C.C.A.3d, 1929).
The Act of 1898 contained a subsection 3e relating to the possession of property. The Chandler Act (1938) transferred this into subsections 69a and b.
Sec. 4. (11 U.S.C. § 22.) Who May Become Bankrupts
a. Any person, except a municipal, railroad, insurance, or banking corporation or a building and loan association, shall be entitled to the benefits of this Act as a voluntary bankrupt.
b. Any natural person, except a wage earner or farmer, and any moneyed, business, or commercial corporation, except a building and loan association, a municipal, railroad, insurance, or banking corporation, owing debts to the amount of $1,000 or over, may be adjudged an involuntary bankrupt upon default or an im
partial trial and shall be subject to the provisions and entitled to the benefits of this Act. The bankruptcy of a corporation shall not release its officers, the members of its board of directors or trustees or of other similar controlling bodies, or its stockholders or members, as such, from any liability under the laws of a State or of the United States. The status of an alleged bankrupt as a wage earner or farmer shall be determined as of the time of the commission of the act of bankruptcy.
As Amended by the Chandler Act (1938). Section 75r in a disorderly but unequivocal way defines farmer for the purposes of section 4b. See the note to section 1(17) supra. “Any unincorporated company" and "association," previously present in the first and second sentences respectively of this subdivision, were dropped because they fall within the definition of "corporation" (section 1(8)). The last sentence was added in order to settle a split of authority: (1) time of commission of act of bankruptcy (In re Folkstad, 199 F. 363 (D.Mont., 1912), 11 Mich.L.Rev. 246 (1913)); and (2) time of incurring the obligation. See Note, 15 Ore.L.Rev. 62, 64 (1935).
A non-business association, incorporated or unincorporated, may be a voluntary, but not an involuntary, bankrupt. Apparently, an infant, not liable for debts, cannot be a voluntary or an involuntary bankrupt. Voluntary petitions have been allowed by infants liable for debts or by guardians of insane persons. The section could helpfully be more explicit as to both infants and insane persons.
Section 4 of the Act of 1898 read: "a. Any person who owes debts, except a corporation, shall be entitled to the benefits of this Act as a voluntary bankrupt.
"b. Any natural person, except a wage-earner or a person engaged chiefly in farming or the tillage of the soil, any unincorporated company, and any corporation engaged principally in manufacturing, trading, printing, publishing, or mercantile pursuits, owing debts to the amount of one thousand dollars or over, may be adjudged an involuntary bankrupt upon default or an impartial trial, and shall be subject to the provisions and entitled to the benefits of this Act. Private bankers, but not national banks or banks incorporated under State or Territorial laws, may be adjudged involuntary bankrupts."
There were also amendments in 1903, 1910, 1932 and 1935, which put the section in substantially its present form.
a. A partnership, including a limited partnership containing one or more general partners, during the continuation of the partnership business or after its dissolution and before the final settlement thereof, may be adjudged a bankrupt either separately or jointly with one or more or all of its general partners.
As Amended by the Chandler Act (1938). This formerly read: "A partnership, during the continuation of the partnership business, or after its dissolution and before the final settlement thereof, may be adjudged a bankrupt."
A limited partner is not in reality a partner but rather an investor compensated by a share of profits instead of interest. A limited partnership with only one general partner should be regarded as an individual proprietorship rather than as a partnership.
b. A petition may be filed by one or more or all of the general partners in the separate behalf of a partnership or jointly in behalf of a partnership and of the general partner or partners filing the same: Provided, however, That where a petition is filed in behalf of a partnership by less than all of the general partners, the petition shall allege that the partnership is insolvent. A petition may be filed separately against a partnership or jointly against a partnership and one or more or all of its general partners.
Added by the Chandler Act (1938). Previously, in Virginia, North Carolina, and California separate petitions were required against a partnership and its individual members, whereas in New Hampshire, New York, and Pennsyl vania and other eastern states a joint petition was permitted. The latter practice has been adopted above.
The proviso was necessitated by the decision in Meek v. Centre County Bank. Co., 268 U.S. 426, 45 S.Ct. 560, 69 L.Ed. 1028. (1925), in which the Supreme Court held that there was no provision for an involuntary petition by a partner against the firm and that a partner could not file a voluntary petition for the firm without the consent of the other partners. The present language represents a compromise in considering the proceedings by less than all the partners so far involuntary as to require an allegation of insolvency, but so far voluntary as to obviate the need of an act of bankruptcy. Section 18 provides for service of the petition on nonconsenting partners and the right to file an answer controverting the allegation of insolvency.
The last sentence of section 5(b) establishes the same practice in involuntary and voluntary cases.
c. The creditors of the bankrupt partnership shall appoint the trustee, who shall be the trustee of the individual estate of a general partner being administered in the proceeding: Provided, however, That the creditors of a general partner adjudged a bankrupt may, upon cause shown, be permitted to appoint their separate trustee for his estate. In other respects, so far as possible, the partnership estate shall be administered as herein provided for other estates.
Added by the Chandler Act (1938). The present language conforms with the practical interpretation (See In re Beck, 6 A.B.R. 554 (D.Mass., 1901); In re Currie, 28 A.B.R. 834 (E.D.Mich., 1910)) of the original text which read: "The creditors of the partnership shall appoint the trustee; in other respects so far as possible the estate shall be administered as herein provided for other estates."
d. The court of bankruptcy which has jurisdiction of one of the general partners may have jurisdiction of all the general partners and of the administration of the partnership and individual property.
The trustee or trustees shall keep separate accounts of the partnership property and of the property belonging to the individual general partners.
f. The expenses shall be paid from the partnership property and the individual property in such proportions as the court shall determine.
g. The net proceeds of the partnership property shall be appropriated to the payment of the partnership debts and the net proceeds of the individual estate of each general partner to the payment of his individual debts. Should any surplus remain of the property of any general partner after paying his individual debts, such surplus shall be added to the partnership assets and be applied to the payment of the partnership debts. Should any surplus of the partnership property remain after paying the partnership debts, such surplus shall be distributed among the individual partners, general or limited, or added to the estates of the general partners, as the case may be, in the proportion of their respective interests in the partnership and in the order of distribution provided by the laws of the State applicable thereto.
h. The court may permit the proof of the claim of the partnership estate against the individual estates, and vice versa, and may marshal the assets of the partnership estate and individual estates so as to prevent preferences and secure the equitable distribution of the property of the several estates.
i. Where all the general partners are adjudged bankrupt, the partnership shall also be adjudged bankrupt. In the event of one or more but not all of the general partners of a partnership being adjudged bankrupt, the partnership property shall not be administered in bankruptcy, unless by consent of the general partner or partners not adjudged bankrupt; but such general partner or partners not adjudged bankrupt shall settle the partnership business as expeditiously as its nature will permit and account for the interest of the general partner or partners adjudged bankrupt.
As Amended by the Chandler Act (1938). d, e, f, g, h, and i of section 5 correspond to the former c, d, e, f, g, and h. The last sentence of g, the first sentence of i, and the word "general" in the second sentence of i were added. Section 5g reads into the Bankruptcy Act the order of distribution provided by state law. The Uniform Partnership Act has been adopted in twenty-five jurisdictions including Alaska, and the Uniform Limited Partnership Act has been adopted in twenty-six states and also in Alaska and Hawaii.
j. The discharge of a partnership shall not discharge the individual general partners thereof from the partnership debts. A general partner adjudged a bankrupt either in a joint or separate proceeding may, pursuant to the provisions of this Act, obtain a discharge from both his partnership and individual debts.
Added by the Chandler Act (1938). Section 5 originally contained no provision for discharge. Section 14, which dealt inclusively with discharges, related to partnership cases only by indirection. Under the entity doctrine, the discharge of a partnership released the entity alone, but not the individual partners, from their liability for firm debts. Rowland v. Lovett, 45 Ga.App. 123, 163 S.E. 511 (1932). And it was held that an adjudication of a partnership of itself did not carry with it an adjudication of the individual partners. Liberty National Bank v. Bear, 276 U.S. 215, 48 S.Ct. 252, 72 L.Ed. 536 (1928). The second sentence of section 5j resolved a conflict in the cases. (1) No adjudication was necessary for a discharge of both individual and firm
debts provided the individual estate was drawn into the partnership proceedings. Armstrong v. Norris, 40 A.B.R. 735 (C.C.A.8th, 1917). Contra: Horner v. Hammer, 40 A.B.R. 817 (C.C.A.4th, 1918) (2) The adjudication of the individual, but not of the partnership, did not discharge him from firm debts. In re Meyers, 2 A.B.R. 707, 3 A.B.R. 260 (S.D.N.Y., 1899). Contra: Gordon v. Texas Co., 45 A.B.R. 157 (Me.Sup.Jud.Ct., 1920) (no firm assets, firm creditors scheduled and received notice).
k. If a limited partnership is adjudged bankrupt, any limited partner who is individually liable under the laws of the United States or of any State for any of the partnership debts shall be deemed a general partner as to such debts and, if he is insolvent, shall be subject to the provisions and entitled to the benefits of this Act, as in the case of a general partner.
Added by the Chandler Act (1938).
Sec. 6. (11 U.S.C. § 24.) Exemptions of Bankrupts
This Act shall not affect the allowance to bankrupts of the exemptions which are prescribed by the laws of the United States or by the State laws in force at the time of the filing of the petition in the State wherein they have had their domicile for the six months immediately preceding the filing of the petition, or for a longer portion of such six months than in any other State: Provided, however, That no such allowance shall be made out of the property which a bankrupt transferred or concealed and which is recovered or the transfer of which is avoided under this Act for the benefit of the estate, except that, where the voided transfer was made by way of security only and the property recovered is in excess of the amount secured thereby, such allowance may be made out of such excess.
As Amended by the Chandler Act (1938). "The greater portion thereof" was replaced by "a longer portion of such six months than in any other State." Cf. section 2(1) note, ante.
The provision in respect to exemptions prescribed by laws of the United States was added.
The proviso is added. It resolves a conflict in the cases. In favor of an exemption in case of a preference: e.g., In re Ziff, 225 F. 323 (M.D.Ala., 1915). Contra: e.g., In re Coddington, 126 F. 891 (M.D.Pa., 1904). In favor of exemption out of fraudulently conveyed property: e.g., In re Thompson, 115 F. 924 (S.D.Ga., 1902). Contra: e.g., In re Patton, 11 A.B.R.(N.S.) 682 (M.D.Tenn., 1928). For cases for and against exemption out of concealed property, see Hyman v. Stern, 43 F.2d 666 (C.C.A.4th, 1930); 3 Remington, Bankruptcy (3d Ed.1923), sec. 1357.
The exception in favor of security transfers was probably not intended to cover cases of actual fraud. It would have been safer to have conformed to the proviso in section 67d (6) expressly excluding such cases. The 1939 edition of this pamphlet observed that a "liberal" construction of this proviso in favor of the bankrupt would invite employment of security transactions as vehicles of fraud. In re Grisanti, 58 F.Supp. 646 (W.D.Ky.1945) goes to mitigate this risk. When an intrafamily mortgage to secure contem poraneous and subsequent advances was set aside as fraudulent except to