Sec. 54. PROPERTY TRANSFERRED OR MONEY PAID AS A PREFERENCE. Where property is transferred or money paid by the bankrupt within four months preceding the filing of the petition in bankrupty, and the recipient knew or had reasonable cause to know that a preference was intended, the transaction may be set aside by the trustee.

Inasmuch as a main object of the bankruptcy law is to secure an equal distribution of the bankrupt's estate among his creditors, it follows that this object could be easily defeated if we should allow the bankrupt upon becoming insolvent to make a payment or a transfer of property to one or several of his creditors which would stand against the trustee when appointed. Consequently, the law says that payments which amount to preferences within a period of four months prior to the time the petition is filed shall be set aside upon suit by the trustee for that purpose, provided the creditor to whom such preference was made knew or had reasonable cause to know that a preference was intended.77 He does have reasonable cause to believe that a preference was intended whenever he knows that the debtor is insolvent.78 We do not inquire as to preferences made before the four months period because there being nothing illegal or immoral about a preference, it would tend to unsettle business too much to allow payments to be inquired into except as made in reference to the bankrupt's present financial condition and therefore the law limits the inquiry to the short period of four months prior to the time a petition is filed.

77. Id., Sec. 60 b.

78. Coder v. Arts, 152 Fed. 943; s. c., 213 U. S. 223.

Any conveyance made which would amount to giving the creditor a preference over the others, whether made in direct satisfaction of the debt or to secure it is voidable, if the creditors know or should know that a preference is intended.

As we have seen there cannot be a preference unless there is a creditor to whom it is made. Cash transactions cannot be disturbed. Thus D is insolvent, but not yet bankrupt. He buys property from A, paying A cash. A is never a creditor and the payment is not a preference. From B he borrows money giving B at the time the loan is made, a mortgage as security. The mortgage cannot be disturbed. Had D bought the property from A on credit, and then paid for it the payment would be a preference because it would be a payment to a creditor. Or if B had loaned the money without security, and then had terwards prevailed on D to secure him, that would be a preference. If a mortgage is given to secure a past indebtedness and also a present indebtedness, it will be upheld to the extent of the present consideration only, provided, of course, proceedings are begun within four months. As it has been stated before in this text (in connection with Acts of Bankruptcy) there cannot be a preference unless there is a diminution in the value of the estate.79 And within this rule there is no preference merely because the bankrupt in his exigency may sell at a low price.

Sec. 55. FRAUDULENT CONVEYANCES. A conveyance made by a debtor in fraud of his creditors may be set aside by the trustee in bankruptcy.

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

We have seen that fraudulent conveyances may be grouped under two headings: Those without consideration, and those for value. In the first case, the conveyance may be set aside because the transferee has given nothing, when the giver was at the time insolvent and therefore had no right to deprive his creditors of their debts, by giving away his property; in the second case, we found that the transfer was avoidable whenever the transferee was a party to the fraud. In both of these cases, the trustee may act for the creditors and set aside the fraudulent conveyance, as property belonging to the estate.

In Globe Bank v. Martin,80 the court decides that when any creditor has a right to attach the transfer as fraudulent, the trustee may do so, and the assets so recovered become assets for the benefit of all the creditors even though some of them might not have had the right to set aside the conveyance under the state statute. In this case, the Kentucky statute, which was relied upon by the trustee as giving him his right, as it was such statute through which the creditors would have to have proceeded, gave the right to existing creditors for their benefit, and not to future creditors but the court decided that where such creditors had not perfected their lien by proceedings brought more than four months prior to the bankruptcy, all creditors including creditors becoming such after the fraudulent transfer, would share in the assets.

Sec. 56. INSURANCE POLICIES. Insurance policies which have any value to the bankrupt pass to the trustee,

80. Globe Bank v. Martin, 236 U. S. 288; See also In re Kohler, (C. C. A. 6th Cir.) 159 Fed. 871.

but the bankrupt can prevent this by paying the cash value to the trustee.

Insurance policies (except where not exempt by law) pass to the trustee. The law provides "that whenever any bankrupt shall have any insurance policy which has a cash surrender value payable to himself, his estate, or personal representatives, he may within thirty days after the cash value has been ascertained

pay or secure to the trustee the sum so ascertained, and continue to hold, own and carry such policy free from the claims of creditors

"81

If the insurance policy have no surrender value it will not pass to the trustee.82

If the policy is exempt by the law of the state it will not pass to the trustee.83

Sec. 57. PROPERTY HELD BY BANKRUPT CLAIMED BY THIRD PERSONS. Property held by the bankrupt and claimed by third persons does not pass to the trustee if the third person could have claimed it against the creditors.

Property held by the bankrupt which is claimed by third persons must be delivered to the third persons except where the creditors, had there been no bankruptcy, could have ignored the real ownership and levied upon it as the bankrupt's property.84 We have these situations.

81. Id., Sec. 70, d. 5.

82.

Burlingham v. Crouse, 228 U. S. 459. 83. Holden v. Stratton, 198 U. S. 202. 84. Bankr. Act, 1898, Sec. 70 d. (5).

(1) Property which the Bankrupt Holds as Bailee. This is property to which the trustee does not get title. Thus, A, a wagon manufacturer, sends to D, a hardware retailer, a number of wagons for D to sell upon commission as A's agent. D goes into bankruptcy with some of the wagons in his possession. A can reclaim them and is not restricted to putting in a claim for dividends.85 Had A sold the wagons to D on credit A would have been a general creditor and could not claim the wagons as he would have parted with the title.

Such, also, would be the rule in any ordinary case of bailment where other parties had for honest. purposes allowed D to be in posssesion of their property. Property which the bankrupt has sold, but which he has not delivered, is property that will not pass to the trustee unless the transaction is in legal theory fraudulent. We learn in sales that where one sells property and retains the possession, continuing to deal with the property as his own, the creditors can ignore the sale. So the property would pass to the trustee had the title therein not vested in the purchaser, that is, if the bankrupt had a contract to sell it, but had not as yet really sold it, so that the purchaser could not have said it was his.

(2) Property which Bankrupt Holds as Trustee. The property which the bankrupt holds merely as trustee, his trustee in bankruptcy gets no title to. Thus if D holds certain money left with him by A and in which D has no interest, A can obtain an order upon the trustee in bankruptcy to have it turned over to him

85. In re Columbus Buggy Co,, 142 Fed. 159; Franklyn v. Stoughton Wagon Co., 168 Fed. 857.