1 Robbins.

Empire State Trust Co. v. Fisher Co.

Broadway Trust Company, such intention on his part does not injure the security unless the Broadway Trust Company or its officers were aware that such was the intention of the Fisher company.

It must be observed here that the giving of the present mortgage was not a voluntary act on the part of the Fisher company, such as characterizes the giving of a security to a favored creditor. The parties were at arms' length. The trust company was suing for its debt and hastening judgment as rapidly as possible. It is to be presumed that its counsel knew that the judgment would be of little value, unless promptly paid, if the company were thrown into bankruptcy within four months after its recovery.

This indicates that they did not fear bankruptcy, but went about collecting their debt in the usual way.

Mr. Fisher, plainly, then yielded to pressure, and gave the mortgage as the best, and, under the circumstances, the only thing he could do, and the trust company accepted it in the ordinary way that any creditor would accept security for a debt.

I can see no difference in the giving of this mortgage and the giving of that to the Empire Trust Company, except that in one case the money was paid and advanced at the time of the giving of the mortgage, and in the other it had been advanced previously.

On this topic another section of the Bankrupt act is subsection a, of section 60, of chapter 6, in which the question of preferred creditors is treated:

"A person shall be deemed to have given a preference if, being insolvent, he has, within four months before the filing of the petition, or after the filing of the petition and before the adjudication, 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."

Now, it is to be observed that a necessary element in the preference there defined is that the debtor shall be insolvent.

Empire State Trust Co. v. Fisher Co.

67 Eq.

As I have already determined that as a matter of fact there was no insolvency, as defined by the same act, at the date of the giving of this mortgage, there was therefore no preference under that section.

The next subsection states the effect of such preference:

"If a bankrupt shall have given a preference, 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."

I find that as a matter of fact, as already stated, the trust company had no reason to believe that it was being preferred by this mortgage. It was simply having its debt secured, not necessarily to secure the trust company against present insolvency, but naturally and properly and lawfully, under the Bankrupt act, to secure it against possible or probable future insol

vency.

No doubt the officers of the trust company felt that the business methods of Mr. Fisher were not good, and that he was going behind, and that ordinary prudence required that they should have security.

The taking of security by a money-lender for money loaned, either presently or previously, is not, I repeat, evidence that the lender believes that the borrower is insolvent.

We have two elements lacking, both of which are necessary in order to bring the present case within that section, viz., actual insolvency and belief in such insolvency by the creditor.

Another clause of the Bankrupt act which may be supposed to have some bearing upon the present case is subsection c of section 67, chapter 7, which is 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 a 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 and that its existence and enforcement will

1 Robbins.

Empire State Trust Co. v. Fisher Co.

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.”

I do not find the present case within either the letter or the equity of that subsection.

Then we have subsections d and e of that section:

"Liens given or accepted in good faith and not in contemplation of or in fraud upon this act, and for a present consideration, which have been recorded according to law, if record thereof was necessary in order to impart notice, shall not be affected by this act."

Subsection e deals with conveyances which are void at common law because made for the purpose of hindering, delaying or defrauding creditors.

As I have stated above, I find no such element in this case. It will be observed that the language used in indicating the state of mind of the grantee or mortgagee whose security is declared voidable is that he had reasonable cause to believe the defendant was insolvent and in contemplation of bankruptcy; and, in another place, that he had reasonable cause to believe that the grantor or mortgagor intended to give a preference.

This language, "had reasonable cause to believe," was dealt with by the supreme court of the United States, in Grant v. Bank, 97 U. S. 80, in an opinion by Mr. Justice Bradley. He there shows a clear distinction between suspecting the person to be insolvent and believing him to be insolvent. He uses this language: "Dicta are not wanting which assume that it has the same meaning as if it had read 'having reasonable cause to suspect such a person is insolvent.' But the two phrases are distinct in meaning and effect. It is not enough that a creditor has some cause to suspect the insolvency of his debtor, but he must have such a knowledge of facts as to induce a reasonable belief of his debtor's insolvency, in order to invalidate a security taken for his debt. To make mere suspicion a ground of nullity in such a case, would render the business transactions of the community altogether too insecure. It was never the intention.

Empire State Trust Co. v. Fisher Co.

67 Eq.

of the framers of the act to establish any such rule. A man may have many grounds of suspicion that his debtor is in failing circumstances, and yet have no cause for a well-grounded belief of the fact. He may be unwilling to trust him further; he may feel anxious about his claim, and have a strong desire to secure it, and yet such belief as the act requires may be wanting. Obtaining additional security, or receiving payment of a debt, under such circumstances, is not prohibited by the law."

Further on he speaks of the policy of the law in this connection.

On this topic we have the headnote of the case of Tiffany v. Lucas, 15 Wall. 410, which, in the following language, indicates the scope of the opinion: "A sale by a person in fact insolvent, and made within six months of a bankruptcy subsequently decreed, is not necessarily and without regard to its character void, under the thirty-fifth section of the Bankrupt act.

"If it was made in good faith, for the honest purpose of discharging debt, and in the confident expectation that by so doing the person could continue his business, it will be upheld. On the contrary, if he made it to evade the provisions of the Bankrupt act, and to withdraw his property from its control, and the vendee either knew or had reasonable cause to believe that the vendor's intention was of this character, it will be avoided.

"Thus two things must concur to avoid the sale—the fraudulent design of the bankrupt and the knowledge of it on the part of the vendee, or reasonable cause to believe it existed."

Those cases dealt with the language and provisions in the old Bankrupt act similar to that of our present act.

Some of the provisions of the present act were brought under consideration by the supreme court of the United States in the case of Pirie v. Chicago Title and Trust Co., 182 U. S. 438.

There merchants, being quite conscious that they were insolvent, made a payment to a creditor on account of his debt within four months of their bankruptcy, which payment created a preference, to its extent, to those creditors. The latter had no reasonable cause to believe that their debtors were insolvent. It was held that the creditors were entitled to retain the pay

1 Robbins.

Empire State Trust Co. v. Fisher Co.

ment so made, but were precluded from receiving a dividend on the balance of their claim.

The force and effect of subsection d of section 67 of the act above quoted must necessarily have been drawn into consideration by Vice-Chancellor Emery in Congleton v. Schreihofer, 54 Atl. Rep. 144.

There a conveyance was made by the bankrupt to his sister of land in payment of a long pre-existing debt and the conveyance was sustained, and it was distinctly held that the fact that it was given for a pre-existing debt was no reason why it should be declared void in favor of the creditors under the Bankrupt law. He also holds that such a conveyance could not be considered void because made for the purpose of hindering, delaying and defrauding his creditors generally.

No authority was cited to me for the position that the fact that the consideration for the mortgage here in question was money previously advanced, could have the effect of invalidating it. The words "for a present consideration," found in subsection d of section 67, would seem to include a past consideration existing at the present time, and the section would seem to be aimed at a mortgage or conveyance given to secure a consideration afterwards to be advanced.

From among the numerous other cases cited to me by counsel, I select the following as bearing upon the subject:

Crawford v. Taylor, 6 Gill & J. 323; 26 Am. Dec. 579, was, like the present, a suit by a trustee in insolvency (not bankruptcy) to set aside a transfer of property by the insolvent, and the points decided by the supreme court of Maryland are set forth in the headnote, thus:

"A voluntary assignment, or an assignment with an intent to give an undue preference to a creditor by a debtor in contemplation of bankruptcy, is void. An assignment is not voluntary when made under the urgent demands of the creditors.

"That the claim is not due for the security of which the assignment was made, does not vitiate it."

The insolvent laws of Maryland, like the bankrupt laws of the United States, provided that any deed of assignment, &c.,