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CHAPTER 4.

ACTS OF BANKRUPTCY.

A. Introductory.

Sec. 36. IN GENERAL. In an involuntary petition it is necessary for the creditors to allege some act of bankruptcy. What shall constitute an act of bankruptcy is set out specifically by the law.

Our National Bankruptcy Law provides that a debtor may be made an involuntary bankrupt when an act of bankruptcy has been committed by him. It is not

enough that a debtor be unable to pay his debts. An act of bankruptcy may be considered as the indication to the world that the bankrupt is a fit subject for the bankruptcy courts.

The acts of bankruptcy are here enumerated. The law provides: "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 his 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 pro

ceedings, 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, being insolvent, applied for a receiver or trustee for his property or because of insolvency, a receiver or trustee has been put in charge of his property under the laws of a state, or of the United States; or

(5) Admitted in writing his inability to pay his debts and his willingness to be adjudged a bankrupt on that ground.

We will consider these "acts of bankruptcy" seriatim.

Usually an act of bankruptcy involves a transaction which may be set aside, but whether it may be avoided is an entirely different question from whether it is an act of bankruptcy.

Sec. 37. INSOLVENCY DEFINED; WHEN AN ESSENTIAL ELEMENT IN BANKRUPTCY. Insolvency is defined by the Bankruptcy Law, in the quotation, below. It usually exists whenever any act of bankruptcy is committed and is an essential element in most acts of bankruptcy.

We have heretofore noticed the difference between insolvency and bankruptcy-that the former term denotes a financial condition, through which by the indulgence of creditors one can often come successfully without having his business life, his property or his debts in any way affected, while the latter signifies judicial proceedings for the purpose of dividing among

his creditors the property of one, insolvent, whose debts thereupon become discharged. Bankruptcy is, in fact, the relief offered to the creditors of an insolvent debtor and to the debtor himself.

It is sufficient to notice here in reference to insolvency as an element of bankruptcy that it is usually essential. Why it might be held unessential is considered hereafter when we consider the act of bankruptcy in detail.

Insolvency is defined by the bankruptcy law to be as follows:

"A person shall be deemed insolvent within the provisions of this act whenever the aggregate of his property, exclusive of any property which he may have conveyed, transferred, concealed or removed, or permitted to be concealed or removed, with intent to defraud, hinder or delay his creditors, shall not, at a fair valuation, be sufficient in amount to pay his debts."54

Under our former bankruptcy law in force 18671879, one was insolvent when he stopped payments in the ordinary course of trade. In fact, this has been the test of all bankruptcy laws until the present.

To determine whether one is now insolvent we inquire whether all his property including his exemptions, exclusive of property fraudulently conveyed by him, when taken at a fair valuation, before bankruptcy proceedings were begun, is not of sufficient value to pay his debts.55

If a debtor would defend against bankruptcy proceedings on the ground that he is not an insolvent

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he must definitely and affirmatively put in the defense; if he does not deny it in the manner set out Ly the law, he will be taken to have admitted it. If he does deny it he may have a trial, with a jury if he makes a special demand for the jury.

Sec. 38. WITHIN WHAT TIME ACT OF BANKRUPTCY MUST BE COMMITTED. The act of bankruptcy upon which the petition is based must have been committed some time within four months prior to the date of the day upon which the peition is filed.

An "act of bankruptcy" is (usually) not anything wrong either in a moral or civil sense. When one goes into bankruptcy he goes, not as a punishment for some wrong committed, nor to afford a remedy for some past act of indebtedness, but for the purpose of relief from a then existing condition in reference to his solvency. It is, therefore, provided that the act of bankruptcy committed by him shall be one in respect to his then condition. The law sets four months as a reasonable period. Creditors cannot allege an act of bankruptcy unless they file their petition within four months after the time in which it occurred.

It is provided, 'however, that in case of a transfer or assignment for the purpose of delaying, defrauding or defeating creditors, or to an assignee for division among creditors, the four months shall be counted as from the time when such transfer is recorded, or if not recorded, from the time the beneficiary takes notorious possession of such property, or the creditors have actual notice of the transfer.56

56. In re Bechhaus, 177 Fed. 141.

B.

The Particular Acts of Bankruptcy.

Sec. 39. FRAUDULENT TRANSFERS. A removal, concealment or transfer of a debtor's property with intent to defraud creditors if made within four months prior to the filing of the petition is an act of bankruptcy.

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A removal, concealment or transfer made or permitted by a debtor with intent to defraud his creditors is an act of bankruptcy under the present act.

A fraudulent transfer in the law of bankruptcy has two aspects of importance. It is an act of bankruptcy and it is a transaction to be set aside by the trustee in his recovery of assets whenever the transferee is actually or constructively, a party to the fraud. As an act of bankruptcy, it must occur within the four months period immediately prior to the filing of the petition. As a transaction to be set aside the only limitation is that which would be imposed were creditors seeking to set it aside had not bankruptcy intervened. In this section we consider the fraudulent transfer as an act of bankruptcy, but we will also necessarily say much that will be important under the other heading and therefore at that time our task will be much simplified by a mere reference back to this section.

(2) Fraudulent removals, concealments and transfers defined.

A fraudulent disposition or transfer of property is a transfer made with the intent to hinder, delay or defraud creditors. The Bankruptcy law creates no new offense against creditors, but adopts one which has

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