Wilson Brothers v. Cassius B. Nelson , 183 U.S. 191 ( 1901 )

Mr. Justice Gray,

after making the above statement, delivered the opinion of the court.

On February 5,1885, Nelson, in consideration of so much money then lent to him by Sarah Johnstone, executed and delivered to her his promissory note for the sum of $896.0, payable in five years with interest until paid. Attached to that note was an irrevocable power of attorney, executed by Nelson, in the usual form, authorizing any attorney of a court of record in his name to confess judgment thereon after its maturity. The interest on the note was paid until November 1,1898. At that date Nelson, as he well knew, was, and long had been, ánd ever since continued to be, insolvent. On November 21,1898, Sarah Johnstone caused judgment to be duly ■ entered in a court of Wisconsin upon the note and the warrant of. attorney for the face of the note and costs. Upon that judgment, execution was issued to the sheriff, who on the same day levied on Nelson’s goods, and on December 15, 1898, sold the goods by auction, and applied the proceeds thereof in part payment of the judgment. This proceeding left Nelson without means to meet any other of his obligations. The judgment was entered, and the levy made, without the procurement of Nelson, and without his knowledge or consent. The judgment and levy were unassailable in law,, and could not have been vacated or discharged by any legal proceedings, except by his voluntary petition in bankruptcy. On December 10,1898, a petition in bankruptcy was filed against Nelson; and the questions certified present,in various forms, the question whether Nelson committed an act of bankruptcy, within the meaning of section 3, cl. 3, of the Bankrupt Act of 189§.

In considering these questions, strict regard must be had to the provisions of that act, which, as this court has already had occasion to observe, differ in important respects from those of the earlier bankrupt acts. Bardes v. Hawarden Bank, 178 U. S. 524; Bryan v. Bernheimer, 181 U. S. 188; Wall v. Cox, 181 U. S. 244; Pirie v. Chicago Co., 182 U. S. 438.

In section 3 of the Bankrupt Act of July 1, 1898, c. 541, acts of bankruptcy are defined as follows : “ Acts of bankruptcy by a person shall consist of his having (1) conveyed, transferred, concealed or removed, or permitted to be concealed or removed, any part of his property with intent to hinder, delay or defraud bis creditors, or any of them or (2) transferred, while insolvent, any portion of his property to one or more of his creditors with intent to prefer such creditors over his other creditors; or (3) suffered or permitted, while insolvent, any creditor to obtain a preference through legal proceedings, and not having, at least five days before a sale or final disposition of any property affected by such preference, vacated, or discharged such preference ; or (4) made a general assignment for the benefit of his creditors; or (5) admitted in writing his inability to pay his debts and his willingness to be adjudged á bankrupt on that ground.”

In' the first and second of these an intent on the part of the bankrupt, either to hinder, delay or defraud his creditors, or to prefer over other creditors, is necessary to constitute the act of bankruptcy. But in the third, fourth and fifth no such intent is required.

The third, which is that in issue in the case at bar, is in these words: “ (3) suffered or permitted, while insolvent, any creditor to obtain a preference through legal proceedings, and not having, at least five days béfore a sale or final disposition of any property affected by such preference, vacated or discharged such preference.”

By the corresponding provision of the Bankrupt Act of 1867, any person who, being bankrupt or insolvent, or in contemplation of bankruptcy or insolvency, “ procures or suffers his property to be taken on legal process, with intent to give a preference to one or more of his creditors,” “ or with the intent, by such disposition of his property, to defeat or delay the operation of this act,” was deemed to have committed an act of bankruptcy. Act of March 2, 1867, c. 176, § 39, 14 Stat. 536; Eev. Stat. § 5021.

The act of 1898 differs from that of 1867 in wholly omitting the clauseswith intent to give a preference to one. or more of his creditors ” or “ to defeat or delay the operation of this act; ” and in substituting for the words “ procures or suffers his property to be taken on legal process,” the words “ suffered or permitted, while insolvent, any creditor to' obtain a preference through legal proceedings,” and not having, five days before a sale-of the property affected, “vacated or discharged such preference.”

There is a similar difference in the two statutes in regard to the preferences declared to be avoided.

The act of 1867 enacted that if any person, being insolvent, or in contemplation of insolvency, within four months before the filing of the petition by or against him, “ with a view to give a preference to any creditor or person having a claim against him, or who is under any liability for him, procures or suffers any part of his property to be attached, sequestered or seized on execution,” or makes any payment, pledge or conveyance of any part of his property, the person receiviug such payment, pledge or conveyance, or to be benefited thereby, “or by such attachment,” having reasonable cause to believe that such person is insolvent and that the same is made in fraud of this act, the same should be void and the assignee might recover the property.. Act of March 2,1867, c. 176, § 35, 14 Stat. 534: Rev. Stat. § 5128.

The corresponding provisions of the act of 1898 omit the requisite of the act of 1867, í{.with a view to give a preference.”

'Section 60 of the act of 1898, relating to “preferred creditors,” begins by providing that “a person shall be deemed to have given a.preference, if, being insolvent, he has procured or suffered a judgment to be entered against himself in favor of any person, or made a transfer of any ff his property, and the effect of the enforcement of such judgment or transfer will' be to enable any one of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class.” •

Section 67, relating to “ liens,” provides, in subdivision c, as follows: “A lien created by, or obtained in, or pursuant to, any suit or proceeding at law or'in equity, including an attachment upon mesne process, or a judgment by confession, which was begun against a person within four months before the filing of the petition in bankruptcy, by or against such person, shall be dissolved by the adjudication of such person to be a bankrupt, if (1) it appears that said lien was obtained and permitted while the defendant was insolvent, of that its existence and enforcement will work a preference, or (2) the party or parties to be benefited thereby had reasonable cause to believe the defendant was insolvent and in contemplation of bankruptcy, or (3) that such lien was sought and permitted in fraud of the provisions of this act.”

The same section provides, in subdivision f, “ that all levies, judgments, attachments or other liens, obtained through legal proceedings against a person who is insolvent, at any time within four months prior to the filing of a petition in bankruptcy against him, shall be deemed null and void, in case he is adjudged a bankrupt.” This provision evidently includes voluntary, as well as involuntary bankrupts; for the first clause of the first section of the act, defining the meaning of words and phrases used in the act, declares that “ ‘ a person against whom a petition has been filed ’ shall include a person who has filed a voluntary petition.”

Taking together all the provisions of the act of 1898 on this subject, and contrasting.them with the provisions of the act of 1867, there can be no doubt of their meaning.

The third clause of section 3, omitting the word “ procure,” and the phrase “ intent to give a preference,” of the former statute, makes it an act of bankruptcy if the debtor has “ suffered or permitted, while insolvent, any creditor to obtain a preference through legal proceedings,” and has not “ vacated or discharged such preference ” five days before a sale of the property. By section 60, he is “ deemed to have given a preference ” if, being insolvent, he has “ suffered a judgment to be entered against himself in favor of any person,” “ and the effect of the enforcement of such judgment” “ will be to enable any one of his creditors to obtain a greater percentage of his debt ” than other creditors. By section 67, subdivision c, a lien obtained in any suit, “ including an attachment upon mesne process, or a judgment by confession,” begun within four months before the filing of the petition in bankruptcy, is dissolved by the adjudication in bankruptcy, not only if “ such lien was sought and permitted in fraud of the provisions of' this act,” but also if “its existence and enforcement will work a preference.” And by subdivision f of the same section “ all levies, judgments, attachments or other liens, obtained through legal proceedings against a person who is insolvent,” within the four months, shall be deemed null and void in case he is adjudged a bankrupt. ■

The act of T898 makes the result obtained by the creditor, and not the specific intent of the debtor, the essential fact.

In the ca.se at bar, the warrant of attorney to confess judgment was indeed given by the debtor nearly thirteen years before. But being irrevocable and continuing in force, the debtor .thereby, without any further act of his, “ suffered or permitted” a judgment to be entered against him, within four months before the filing of the petition in bankruptcy, the effect of the enforce,ment of which judgment would be to enable the creditor to Whom.it was given to obtain a greater. percentage of his debt than other creditors; and the lien obtained by which, in a proceeding begun within the four months, would be dissolved by the adjudication in bankruptcy, because “its existence and enforcement will work a preference.” And the debtor did not, within five days before the sale of the property on execution,-vacate or discharge such preference, or file a petition in bankruptcy. By failing to do so, he confessed that he was hopelessly insolvent, and consented to the preference that he failed to vacate.

The cases on which the appellee relies, of Wilson v. City Bank, 17 Wall. 473; Clark v. Iselin, 21 Wall. 360, and National Bank v. Warren, 96 U. S. 539, have no application, because they were decided under the act of 1867, which expressly required the debtor to have acted- with intent to give a preference.

The case of Buckingham v. McLean, 13 How. 150, arose under the still earlier Bankrupt Act of August 19, 1841, c. 9, § 2. 5 Stat. 442. And the point there decided was that a power of attorney to confess a judgment was an act of the bankrupt creating a “ security,” which that bankrupt act in express terms declared void only if made in contemplation of bankruptcy and for the purpose of giving a preference or priority over general creditors.

The careful change in the language of the provisions of the Bankrupt Act of 1898 from those of the former Bankrupt Acts upon the subject must have been intended by Congress to prevent a debtor from giving a creditor an irrevocable warrant of. attorney which would enable him, at any time, during the insolvency of the debtor, and within four months before a petition in bankruptcy, to obtain a judgment and levy the execution on all the property of the bankrupt, to the exclusion of his other creditors.

The answer to the second and third questions certified must he that the judgment so entered and the levy of the execution thereon were a preference “ suffered or permitted” by> Nelson, within the meaning of clause 3 of section 3 of the Bankrupt Act; and that the faihíre of Nelson to vacate and discharge, at least five days before the sale- on execution, the preference so obtained, was an act of bankruptcy; and it becomes unnecessary to answer the first question. Second and third questions answered in the affirmative;