In re Walton , 29 F. Cas. 128 ( 1860 )

DEADY, District Judge.

I concur in the conclusions of fact and law as found by the. register and in his opinion in support thereof. When the question was first raised as to the right of Allen & Lewis and Henry Failing to prove their debts, I inclined to the opinion that a creditor who had taken a preference contrary to the act, might in any case be allowed to prove his debt upon the surrender of the property, benefit or advantage obtained by him under such preference, as provided in section 23. But after long and careful deliberation. I am forced to come to a different conclusion. I am now satisfied that to allow these creditors to surrender their unlawful preference, and come in and prove their debts under section 23 would be to violate both the letter and spirit of the act. It may be admitted that section 23 is of general application, in both voluntary and involuntary cases, except as otherwise provided in section 39. But the special provision in the latter section, declaring that a creditor shall not be allowed to prove his debt in a particular case, so far, excludes the operation of the general words of the former. Now this special provision of section 39 covers this case at every point, and therefore takes it out of section 23.

[This cause was subsequently affirmed by the circuit court. Case unreported.]

Walton and Son, being insolvent, confessed a judgment, and procured and suffered their property to be taken on legal process, with intent to give a preference to A. & L. and H. F. This being the ease, the section declares, that if the person receiving such preference “had reasonable cause to believe that a fraud on the act was intended or that the debtor was insolvent,” that the assignee may recover back the money or property paid or transferred contrary to the act, and that “such creditor” — that is, the creditor receiving such preference, with reasonable cause to believe, etc.— “shall not be allowed to prove his debt in bankruptcy.” These creditors, by their agent, had not only reason to believe, but knew, that at the time of giving this preference, Walton and Son were insolvent, and that in so doing they intended a fraud upon the act — that is, intended to evade its provisions by preventing their property from being distributed among their general creditors under it. To these acts or conduct, section 39 attaches certain consequences: First — The preferred creditors may be compelled by the assignee to restore the money or property received under the preference. Second — Such creditors are prohibited from proving their debts in bankruptcy. The first of these provisions is remedial, and furnishes the means whereby the wrong committed in giving and receiving a preference may lie corrected. But the second is preventive, and intended to deter creditors from receiving preferences for fear of losing or forfeiting their debts thereby. Of the two it is the more important and more likely to prevent violations or evasions of the act in this respect. The liability to these consequences or penalties arises upon the same facts — the creditors taking a preference contrary to the act — but the right to enforce the one does not depend upon the enforcement of the other. They are distinct and cumulative. The assignee may recover back the money or property without objecting to the proof of debt, or the proof of debt may be excluded where there has been no such recovery. .

What use these creditors may have ultimately intended to make of their preference is immaterial. Let it be admitted that they intended so far as the/ know, to share the proceeds of their executions with their fellow creditors, pro rata. The law does not trust the legal rights of one portion of the creditors to the judgment or good intentions of the others. AYhile, as a matter of fact, it may have been safe to do so in this case, in a majority of others it might or would not. Besides a mere intention or even proposition on their part to admit the rest of the creditors to a share of the property was not a contract with such creditors which the latter could enforce. Such intention or proposition could have been changed or withdrawn by A. and L. and H. F. at any time before it was realized or accepted, with impunity. In legal effect, the transaction as claimed by these creditors, was nothing more or less than obtaining a preference contrary to the act, with intention to make such arrangement with the general creditors as the parties taking the preference might think proper under the circumstances This would be to make themselves judges in their own case. An order will be made rejecting these claims, and directing the register to refuse to allow them to be proved, and that A. and L. and H. F. be adjudged to pay the costs and expenses of this proceeding.