Benedict v. . Deshel

This action was brought by the plaintiff as trustee in bankruptcy of the Union Cloak and Suit Company, a domestic corporation, to recover from the defendants, who were creditors of that corporation, certain moneys paid by it to them in alleged violation of the provisions of the Bankruptcy Act relating to preferences. At the Trial Term the defendants had a verdict and the judgment entered upon it was affirmed at the Appellate Division. The order of affirmance is not in the record, but there is evidence to support the contentions of fact advanced by the defendants, so that, if the case was submitted to the jury with correct instructions as to the law and sound rulings upon objections to the reception and exclusion of evidence, the verdict is conclusive whether its affirmance was unanimous or not.

The case turns upon the construction of section 60 of the National Bankruptcy Act, and the specific question involved is presented by exception taken by the plaintiff to the charge of the court to the jury.

Section 60 of the act referred to consists of two subdivisions and reads as follows:

"A. 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 of 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.

"B. If a bankrupt shall have given a preference within four months before the filing of a petition, or after the filing of the petition and before the adjudication, 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."

The learned trial court charged the jury that plaintiff's right to recover depended upon three distinct facts, each of which he was bound to establish by evidence. First. "That the Union Cloak and Suit Company was insolvent on July 3rd, 1901."Second. "That in transferring to the defendant the $1,000.00, the said Company intended to give a preference to the defendant."Third. "That at the time of receiving from the Union Cloak and Suit Company the transfer of the $1,000.00 on July 3rd, 1901, the defendant had reasonable cause to believe that said Company was insolvent and intended to give them, the defendants, such preference."

The first and third instructions above quoted were concededly correct, but plaintiff's counsel excepted to the second instruction, and that presents the question in the case.

Is it incumbent upon a trustee, in an action to avoid an alleged preferential payment by an insolvent debtor to his creditor, to prove the intent of the debtor to give a preference, as well as the creditor's reasonable ground to believe that a preference was intended to be given? The language of the statute (subdivision B) makes it perfectly clear that a preferential payment by an insolvent debtor to his creditor cannot be avoided by a trustee in bankruptcy unless he can prove that the creditor receiving it "shall have reasonable cause to believe that it was intended thereby to give a preference." In the case at bar the courts below have gone a step further and have held that such an action cannot be maintained without affirmative proof of the debtor's intent to give a preference. It is practically conceded that this interpretation of the statute rests upon judicial construction rather than direct language, and the argument by which it is sought to be supported is that a creditor's reasonable cause to believe that, in the payment to him it was intended to give a preference, can only be predicated upon the existence of such an intent in the mind of the debtor. It is contended that it would be paradoxical to hold that the creditor should have reasonable ground to believe in the debtor's intent to give a preference unless that intent, in fact, exists and is disclosed by proof. The difficulty with this argument is that it ignores the explicit language of the statute (subdivision A), by which the debtor's intent is removed from the sphere of speculation or evidence into the category of established fact. In unmistakable language Congress has said that when an insolvent debtor makes a transfer of property, the effect of which will be to enable any one of his creditors to obtain a greater percentage of his debt than any other creditor of the same class, "thedebtor shall be deemed to have given a preference." Shall this language be held to be meaningless? Shall it be expunged from the statute by judicial construction? If it does not disclose the legislative intent to fix by law that which would otherwise be the subject of controversy, what purpose does it serve? The only answer to these queries is found in the rather metaphysical contention, already alluded to, that if the debtor's intent depends upon his act, without reference to his state of mind, it is quite superfluous to ascertain the creditor's reasonable ground for belief as to the character and purpose of the debtor's act. This argument, it seems to us, is more refined than sound. The statute deals with three distinct legal entities concerned in the administration of a bankrupt's estate: 1. The debtor. 2. The trustee. 3. The creditor. As to the debtor, the statute declares that a payment under certain conditions shall be held to be preferential. He is not to be heard upon the question of his intent. The effect of his act is fixed by law. That is the scope and purport of subdivision A. The next section, subdivision B, declares, in effect, that a preferential payment is not voidper se, but voidable by the trustee upon a certain condition. And what is the condition? Simply that the trustee shall establish that the creditor had reasonable cause to believe that the payment to him was intended as a preference. In other words, the trustee's remedy is not absolute, but is made to depend upon proof of the knowledge or belief with which the creditor took the payment.

If Congress should have reversed the order of things by providing that upon proof of the debtor's intent to create a preference, any payment made by him within the prohibited time and under the forbidden conditions should be void, regardless of the creditor's knowledge or belief in the matter, no one could deny that it would have been a valid exercise of legislative power, however unreasonable or unequitable it might prove in its practical application to individual instances. The present statute does not differ in principle from the illustration cited. In each case the condition affixed to the remedy ignores the state of mind of one of the parties to the transaction and renders his act dependent upon the purpose of the other. We think, therefore, that when a trustee in bankruptcy has proven that a debtor who is insolvent has made a payment, the effect of which will be to give one creditor a preference over others of the same class, and has supplemented this by evidence from which a jury would have the right to find that the creditor receiving the payment had reasonable ground to believe that it was intended thereby to give a preference, he has established all that the statute requires in support of his cause of action. He need not go further, as the plaintiff herein was required to do, and seek to prove the intent of the debtor in making the payment.

This seems to be the view of this statute taken by the Supreme Court of the United States in Pirie v. Chicago Title TrustCo. (182 U.S. 438). That was an action in which the claim of Pirie Company had been allowed for goods sold to the bankrupts, and a dividend paid thereon in the bankruptcy proceedings. The Chicago Title Trust Co. asked for a reconsideration of the claim and its rejection on the ground that Pirie Company had, within four months prior to the filing of the petition in bankruptcy, received large preferential payments. The question directly involved was whether the creditors could keep their dividends, but underlying this was the construction of several sections of the bankruptcy statute, among them the one here under consideration. The court there said: "Subdivisions `A' and `B' are concerned with a preference given by a debtor to his creditor. Subdivision A defines what shall constitute it, and Subdivision B states a consequence of it — gives a remedy against it. The former defines it to be a transfer of property which will enable him to whom the transfer is made to obtain a greater percentage of his debt than other creditors. The latter provides a consequence to be that transfers may be avoided by the trustee and the property or its value recovered, provided, however, that the preference was given within four months before the filing of the petition in bankruptcy or before the adjudication, and the creditor had reason to believe a preference was intended. So far so clear. If the conditions mentioned exist, the preference may be avoided. But if the person receiving the preference did not have cause to believe it was intended, what then? It follows that the condition being absent, its effect will be absent. In other words, he may keep the property transferred to him whether it be a complete or partial discharge of his debt."

And again: "It is further contended, `that to constitute a preference under the Bankruptcy Act within either 57 (g) or 60 (a) at least, the intent on the part of the bankrupt to prefer must be present.' In support of this it has been said that an act of bankruptcy consists under Section 3 (2) of a transfer by a debtor, while insolvent, of any portion of his property to one or more of his creditors, with intent to prefer such creditors over other creditors, and in such a case a petition in involuntary insolvency may be filed against him. Section 3, B. It is hence deduced, reading those provisions with Section 60 (a), that preferences under the latter may be taken with the intent declared in the former, because it is not reasonable to assume that Congress intended that there should be preferences which were not acts of bankruptcy. The claim overlooks the fact that the language of Section 3 (2) implies a difference between a preference and the intent with which it is given, and besides confounds the different purposes of the sections and their different conditions. It was for Congress to decide whether the consequences to a debtor of being forced into bankruptcy so far transcended the consequences to a creditor by a surrender of his preference, as to make the former depend upon an intent to offend the provision of the Statute and the latter not so depend. And we see nothing unreasonable in the distinction or purpose. Nor does the contention of appellants find support in the provisions of the Act of 1867, and the cases of Mays v. Fritton, 20 Wall. 414, and Wilson v. City Bank, 17 Wall. 473. In that Act there was a careful expression of the intent of the debtor (Section 5021, Rev. Stat.) and as careful an expression of the state of mind of the preferred creditor. Sections 5084, 5128."

If, as we think, the construction of section 60, subdivisions A and B of the bankruptcy statute, was necessarily involved in the case from which we have quoted, that construction should be followed by this court even though it might entertain different views as to the meaning of the statute. (York v.Conde, 147 N.Y. 486.)

In view of these conclusions it is unnecessary to discuss the conflicting decisions under this statute, in the Appellate Divisions of our several departments. We hold that it was error for the trial court to charge the jury that it was incumbent upon the plaintiff to prove that the Union Cloak Suit Company, in making its preferential payment to the defendants, intended thereby to give a preference. It follows that the judgment herein should be reversed and a new trial granted, with costs to abide the event.

PARKER, Ch. J., GRAY, O'BRIEN and MARTIN, JJ., concur; HAIGHT and CULLEN, JJ., dissent.

Judgment reversed, etc.