long been the law and makes it an act of bankruptcy. The court has said: "The language of subsection 1 of section 3 is the familiar language of statutes against conveyances fraudulent as against creditors and we think there can be no doubt that Congress intended the words employed should have the same construction and effect as have for a long period of time been attributed to those words.57 And so construed, the test of conveyances intended by subsection 1 of section 3 is that of the bona fides of the transfer."58

Fraudulent transfers have been divided into those that are for value or apparent value and those that are gratuitous. A voluntary transfer of property is looked upon as a fraudulent conveyance when made by creditor while insolvent upon the theory that a person "must be just before he is generous."

(c) Insolvency as an element in this act of bankruptcy. Insolvency is not an element in this act of bankruptcy. One court has said:59

"Some acts of bankruptcy must be committed while the person is insolvent. The first act of bankruptcy defined may be committed by the person charged when perfectly solvent. If a solvent person conveys or transfers, conceals or removes, or permits to be concealed or removed any part of his property with the intent to hinder, delay or defraud his creditors, or any of them he commits an act of bankruptcy; and if within the

57. Githens v. Shiffler, 112 Fed. 505.

58. Lansing Boiler & E. Works v. Jos. T. Ryerson & Son, 128 Fed. 701.

59. In re Larkin, (D. C., N. Y.) 168 Fed. 100.

ensuing four months, he becomes insolvent and a petition is therefor filed against him such petition may allege such acts as the act of bankruptcy, and the person may be adjudged a bankrupt accordingly."

Solvency at the time the petition is filed is a defense when this is the act of bankruptcy alleged. The act provides "a petition may be filed against a person who is insolvent and who has committed an act of bankruptcy within four months after the commission of such act." If a person has made such fraudulent transfers but still is perfectly solvent when the petition is filed, there is no ground for putting him into bankruptcy as his estate will pay one hundred cents on the dollar. But in considering whether a debtor is insolvent property fraudulently conveyed or concealed is to be ignored, as we have seen in the last section defining insolvency.60 If, therefore, such property were still concealed or conveyed, one's solvency would have to be determined by leaving it entirely out of consideration. If the trustee in bankruptcy could thereafter recover such property again, the estate might pay debts in full.

Sec. 40. PREFERENTIAL PAYMENTS OR TRANSFERS. Where within four months before the petition is filed, the debtor, being insolvent, intentionally prefers one or more creditors over the others, this is an act of bankruptcy.

One purpose of the bankruptcy act being to secure an equal division of an insolvent debtor's property among creditors, it is clear that if the debtor at or

60. In re Hines, 144 Fed. 142.

about the tirne the petition is filed could prefer one creditor over another by paying him all or a large portion of his property, the debtor could thus defeat the purpose of the bankruptcy act. It is therefore provided that preferential payments and tranfers, shall, if the debtor intends them as preferences, constitute acts of bankruptcy, and shall also, if the creditor knew or had reasonable cause to know that a preference was intended, be set aside.

To constitute an act of bankruptcy the debtor must have intended a preference.61 But if he must be taken to have known from the facts that a preference would naturally result from the payment he must be taken to have intended a preference. He must know that if being insolvent he pays a creditor in full, he is preferring such creditor over others.62

A preference results whenever by the payment or transfer the creditor gets more than he would get if the debtor's assets were then divided among the creditors in proportion to their unsecured claims.63

Thus D owes A, B, and C, $10,000, $5,000, and $2,000 respectively. All are unsecured and have no priority or lien. D has only $5,000 in assets. This makes him insolvent. He pays C $1,000. This gives C a preference, because C thereby is paid 50 per cent of his claim, which necessarily depletes D's assets to such an extent that there is not enough left to pay A and B 50 per cent of their claims. Therefore D has preferred C and if he intended or must from the

61. In re McLoon, 162 Fed. 575.

62. In re Smith, 176 Fed. 426.

63. Pirie v. C. T. & T. Co., 182 U. S. 438.

circumstances be supposed to have intended a preference, A and B can allege this payment as an act of bankruptcy and put D in bankruptcy and the amount paid C can be recovered for division among A, B and C provided C knew or had reasonable cause to know that a preference was intended.

A preference may be made by transfer of cash or any property.

In order that a preference might exist, a debt must first exist, then a payment thereof made. A strictly cash transaction in which no credit is given, but value is given for value, cannot involve a preference. Thus if D buys goods from C on the usual credit, a debt exists, the payment of which may be a preference, but if D purchases from C strictly for cash, there is no preference. The transaction constitutes no act of bankruptcy and cannot be set aside. There must be depletion of the estate to constitute a preference.64 Giving security as by chattel mortgage constitutes a preference where the debt is already in existence.65

Sec. 41. PREFERENCES SECURED THROUGH LEGAL PROCEEDINGS. Suffering a preference to be secured through legal proceedings while one is insolvent is an act of bankruptcy and entitles the creditors to file a petition upon action thereupon within four months from the time such preference is secured.

This act of bankruptcy consists in a failure to prevent a preference by one creditor over the others

64. Root Mfg. Co. v. Johnson, 219 Fed. 397.

65.

Felbach Co. v. Russell, 233 Fed. 412.

through legal proceedings. This act of bankruptcy differs essentially from the others in that it consists of no positive act on the part of the insolvent. The terms "suffering" and "permitting" as here used from the context indicate more than a mere permission; a debtor is deemed to have suffered a preference through legal proceedings though it is absolutely impossible for him to prevent the preference.66

What constitutes a preference through legai proceedings is thus illustrated. D becomes insolvent and C one of his creditors secures a judgment against him. This judgment in itself is not an act of bankruptcy. But, proceeding upon his judgment, C takes out execution, and the sheriff seizes and prepares to sell certain property. Unless C vacates or discharges the preference at least five days before the sale is set to occur, an act of bankruptcy has been committed.

Sec. 42. GENERAL ASSIGNMENTS FOR BENEFIT OF CREDITORS AND RECEIVERSHIPS AS ACTS OF BANKRUPTCY. Assignments for the benefit of creditors and receiverships on account of insolvency, are acts of bankruptcy.

If a debtor assigns all his property to a trustee or assignee that the trustee or assignee may divide it among his creditors, this is at once an act of bankruptcy and a transaction that may be set aside.67 Το hold otherwise would be to give the debtor the power to put his property in such a shape that the bankruptcy law could not apply to it.

66. Wilson Bros. v. Nelson, 183 U. S. 191.

67. Lennox v. Allen Lane Co., 167 Fed. 114.