where a contract provides that the person to whom goods are consigned for sale shall hold the proceeds thereof in trust until all obligations of the consignee to the consignor are fully paid, the trustee in bankruptcy of the consignee does not acquire title to the proceeds of such sale in the hands of the bankrupt at the time of his adjudication,347 (III) Public notice of agency.- Where a statute provides that goods acquired or used by a trader in his business shall be deemed the property of such trader unless publicity is given to the fact that as to such goods he is an agent of the alleged owner, a failure to comply with such requirements as to publicity will cause the goods to pass to the trader's trustee in bankruptcy.348 (18) PROPERTY AFFECTED BY FRAUDULENT REPRESENTATIONS.—(I) In general. Since the trustee takes the bankrupt's property charged with all claims and equities against it,349 his title to the same is inferior to that of one who was induced to sell on materially false repsentations. In such cases, the claimant usually proceeds as in replevin.350 But, where the property is in the custody of the bankruptcy court, it is immune from replevin process in the State court.351 Other cases under the present law appear in the foot-note,352 and subsequent paragraphs. 347. Wood Co. v. Eubanks (C. C. A., 4th Cir.), 22 Am. B. R. 307, 169 Fed. 929; In re Reynolds (D. C., Ky.), 29 Am. B. R. 145, 203 Fed. 162; International Agric. Corp. v. Sparks (D. C., S. Car.), 40 Am. B. R. 80, 250 Fed. 318. 348. Matter of Chesapeake Shoe Co. (C. C. A., 4th Cir.), 10 Am. B. R. 466, 122 Fed. 594; Gillaspy v. International Harvester Co. (Miss. Sup. Ct.), 38 Am. B. R. 827, 67 So. 904; Virginia Book Co. v. Sites (C. C. A., 4th Cir.), 41 Am. B. R. 450, 254 Fed. 46; Matter of Wright & Weissenger (D. C., Miss.), 47 Am. B. R. 283, 277 Fed. 514; Vallier & Spiers Milling Co. v. Foote (D. C., Miss.), 47 Am. B. R. 501, 277 Fed. 519; In re Shumaker (D. C., Miss.), 47 Am. B. R. 504; 277 Fed. 521; Patterson-Sargent Co. v. Rumble (C. C. A., 4th Cir.), 47 Am. B. R. 507, 280 Fed 377; Nusbaum v. City Bank & Trust Co. (Va. Sup. Ct.), 47 Am. B. R. 684, 110 S. E. 363; Matter of Loeb's, Inc. (D. C., Mass.), 48 Am. B. R. 126, 279 Fed. 269. 349. See this section, "ante, subtitle "Subject to all claims, liens and equities." 350. See this section, post, subtitle Reclamation proceedings." 351. In re Russell (C. C. A., 2d Cir.), 3 Am. B. R. 658, 101 Fed. 248; In re Mertens (D. C., N. Y.), 12 Am. B. R. 698, 131 Fed. 507; Matter of Wellmade Gas Mantle Co. (D. C., Mass.), 36 Am. B. R. 354, 230 Fed. 502, affg. 36 Am. B. R. 62, and affd. 37 Am. B. R. 7, 233 Fed. 250. 352. In re Davis (D. C., N. Y.), 7 Am. B. R. 276, 112 Fed. 294; In re O'Connor (D. C., Ga.), 7 Am. B. R. 428, 114 Fed. 777; Silvey v. Tift 17 Am. B. R. 9, 123 Ga. 804, 51 S. E. 748; Knauth, Nachod & Kuhne v. Lovell (D. C., Ala.), 32 Am. B. R. 340, 212 Fed. 337; Matter of Ferrer (D. C., Porto Rico), 40 Am. B. R. 689, 10 P. R. Fed. 262; (II) Concealment of insolvency or false representation as to solvency. It is a general principle that when a person who is insolvent purchases goods with no intention of paying for the same, and conceals his insolvency and his intention not to pay, he is guilty of a fraud which entitles the vendor, if no innocent third party has acquired an interest in them, to disapprove the contract and recover the goods.353 A material misrepresentation as to financial ability relied on by the vendor justifies rescission and reclamation, even if Mulroney Mfg. Co. v. Weeks (Ia. Sup. Ct.), 44 Am. B. R. 509, 171 N. W. 36; Matter of Toole (C. C. A., 2d Cir.), 46 Am. B. R. 243, 270 Fed. 195. Fraud of bankrupt as defense.Where the bankrupts agreed to build a locomotive for certain parties and notified them that it was completed and had been shipped, and thereupon were paid the price, it appearing that no engine existed at the time it was represented as having been shipped, but that subsequently two were built, either of which would answer the contract, it was held that the bankrupt and his assignee were both estopped by the fraud of the bankrupt from denying that one of the engines then in their possession was the property of the parties who had thus been defrauded. In re McKay & Aldus, 3 N. B. R. 50, 1. Lowell, 345. Compare Kelly v. Scott, 40 N. Y. 595, citing Mitchell v. Winslow, 2 Story, 630. Where a party fraudulently induces an owner to part with his title to goods, the defrauded party having the right to disaffirm the contract and to recover the goods, may assert that right against the trustee in bankruptcy as well as against the bankrupt himself. Donaldson v. Farwell, 15 N. B. R. 277, Fed. Cas. 3,983, 5 Biss. 451, affd. 93 U. S. 631, 23 L. Ed. 993; In re Gany (D. C., N. Y.), 4 Am. B. R. 576, 103 Fed. 930; In re Spann (D. C., Ga.), 25 Am. B. R. 551, 183 Fed. 819; Gillespie v. Piles & Co. (C. C. A., 8th Cir.), 24 Am. B. R. 502, 178 Fed. 886. 353. Donaldson v. Farwell, 93 U. S. 631, 23 L. Ed. 993; Ash v. Putnam, 1 Hill (N. Y.) 302; Devoe v. Brandt, 53 N. Y. 462; Carter v. Lipsey, 70 Ga. 417; Matter of Marks & Co. (C. C. A., 2d Cir.), 33 Am. B. R. 275, 218 Fed. 453; Matter of Collins (D. C., Ala.), 39 Am. B. R. 510, 242 Fed. 975; Jones v. Hobbie Grocery Co. (C. C. A., 5th Cir.), 40 Am. B. R. 415, 246 Fed. 431; Matter of Liebig and Kochman (C. C. A., 2d Cir.), 42 Am. B. R. 535, 255 Fed. 458. The amendment of 1910 to section 47-a (2) of the Bankruptcy Act does not prevent the maintenance of reclamation proceedings against the trustee of a bankrupt by the seller of merchandise when the sale was procured through the fraud of the buyer. Matter of Collins (D. C., Ala.), 39 Am. B. R. 510, 242 Fed. 975. Purchase on verge of bankruptcy; fraudulent, concealment of financial condition. Where, at the time of the delivery of goods purchased by a bankrupt, the bankrupt knew that he was insolvent but concealed his financial condition, and a few days after, while all the goods purchased were on hand and most of them in the original packages in which they had been delivered, the bankrupt filed his petition in bankruptcy, he was guilty of a fraud which authorized the vendors to ask for a rescission, and a delivery to them of the proceeds of the goods which had been sold by the trustee in bankruptcy. In re Spann (D. C., Ga.), 25 Am. B. R. 551, 183 Fed. 819. not fraudulent.354 For instance, it is well settled that false representations as to the financial status of a buyer, made as a basis of credit, and but for which the sale would not have been made, entitles the seller to reclaim the goods thereby obtained, 355 It has been held that the false representation need not be the sole and exclusive consideration for the credit, but only a material consideration; also, that false representations to a mercantile agency are enough.35 But in order that goods may be reclaimed because of false representations as to financial condition the representations must be the basis of the credit extended and, therefore, where the sales were induced because of former and existing relations between the parties, the 354. Matter of New York Commercial Co. (C. C. A., 2d Cir.), 35 Am. B. R. 779, 228 Fed. 120. 355. Matter of Patterson & Co. (D. C., Tex.), 10 Am. B. R. 748, 125 Fed. 562; In re Weil (D. C., N. Y.), 7 Am. B. R. 90, 111 Fed. 897; In re Epstein (D. C., Ark.), 6 Am. B. R. 60, 109 Fed. 878; Matter of Watmough (D. C., Ohio), 32 Am. B. R. 59, 210 Fed. 539; Jones v. Hobbie Grocery Co. (C. C. A., 5th Cir.), 40 Am. B. R. 415, 246 Fed. 431; Matter of Arkin Dress Co., Inc.. (C. C. A., 2d Cir.), 41 Am. B. R. 827, 253 Fed. 926. Basis of credit.- Where the evidence showed that a creditor, who sought to reclaim property sold on credit just before the buyer became bankrupt, had solicited the order from the bankrupt and extended credit upon the bankrupt's statement that he had accounts receivable sufficient to pay all obligations, but without reference to a financial statement made by the bankrupt seven months prior thereto, it was held that such evidence was insufficient to show reliance by the creditor on the previous financial statement in making the sale. Matter of B. & R. Glove Corp. (C. C. A., 2d Cir.), 48 Am. B. R. 329, 279 Fed. 372. False representation as to solvency. - In the case of In re Hamilton Furniture, etc., Co. (D. C., Ind.), 9 Am. B. R. 65, 117 Fed. 774, the rule was laid 356 down that where a party by fraudu lently concealing his insolvency and his intent not to pay for goods, induces the owner to sell them to him on credit, the seller, if no innocent third party has acquired an interest in them, is entitled to disaffirm the contract and recover the goods. In re Hildebrant (D. C., N. Y.), 10 Am. B. R. 184, 120 Fed. 992; In re O'Connor (D. C., Ga.), 9 Am. B. R. 18, 114 Fed. 777; Silvey v. Tift, 17 Am. B. R. 9, 123 Ga. 804,. 51 S. E. 748; Matter of Levi (D. C., N. Y.), 16 Am. B. R. 756, 148 Fed. 654, holding that in the absence of fraud in making the statement, reclamation should not be allowed; In re Rose (D. C., Pa.), 14 Am. B. R. 345, 135 Fed. 888, in which case it was held that the return of goods should not be permitted where the evidence is insufficient as to the making of a false verbal statement to a commercial agency; Levi v. Picard (D. C., N. Y.), 17 Am. B. R. 439, 148 Fed. 654; Matter of Johnson (D. C., Ohio), 30 Am B. R. 787. 356. In re Gany (D. C., N. Y.), 4 Am. B. R. 576, 103 Fed. 930. 357. In re Epstein (D. C., Ark.), 6 Am. B. R. 60, 109 Fed. 878; In re Roalswick (D. C., Mont.), 6 Am. B. R. 752, 110 Fed. 639; In re Weil (D. C., N. Y.), 7 Am. B. R. 90, 111 Fed. 897; Matter of Berg (Ref., Mass.), 25 Am. B. R. 170. goods cannot be reclaimed.358 And where it appears that the financial statement was incomplete rather than false and fraudulent, and the subsequent conduct of the bankrupt accorded with honesty and good faith, the bankrupt could not be said to have made a false or fraudulent financial statement.359 A depositor of a bankrupt bank may institute reclamation proceedings against the bankrupt's trustee to recover money deposited in the bank on the ground of fraud if he establishes the insolvency of the bankrupt at the time the deposit was made, and that the bankrupt knew that he was insolvent and the depositor did not.360 (III) Intent not to pay. It is not necessary, in order to constitute fraud authorizing rescission of a sale, that the financial statement shall have been made by the bankrupt with intent not to pay, but it may be rescinded, regardless of his intent about paying, if induced by his false and fraudulent representations.361 Knowledge of inability to pay when the purchase is made is equivalent to purchase with intent not to pay, and such purchase is constructively fraudulent.362 Good faith which rests only on ignorance due to a wilful, or reckless, or despairing failure to face the facts is, in proceedings of this sort, the legal equivalent of actual fraud, and entitles the seller to reclaim his goods.363 On the other hand, a merchant is not obliged to close his 358. Matter of Wilson-Nobles-Barr Co. (D. C., Wash.), 42 Am. B. R. 252, 256 Fed. 966. Goods obtained by fraud.- The trustee holds the goods affected with the fraud of the bankrupt. Neither law nor morals will justify the trustee in holding goods obtained by the fraud of the bankrupt for the benefit of other creditors. Creditors have no right to profit by the fraud of the bankrupt to the wrong and injury of the party who has been deceived and defrauded. In re Hamilton Furniture, etc., Co. (D. C., Ind.), 9 Am. B. R. 65, 117 Fed. 774. 359. Ellet-Kendall Shoe Co. v. Ward (C. C. A., 8th Cir.), 26 Am. B. R. 114, 187 Fed. 982. 360. In re Stewart (D. C., N. Y.), 24 Am. B. R. 474, 178 Fed. 463; In re Kenyon (D. C., Ohio), 19 Am. B. R. 194, 156 Fed. 863, in which case the right to rescind a deposit contract with a bank and recover the money VOL. II-23 deposited was recognized, but it was held that the depositor waived his right to rescind by retaining the certificate of deposit and making no offer to surrender it. See also cases cited ante, subtitle "mingling trust funds." 361. Ellet-Kendall Shoe Co. v. Ward (C. C. A., 8th Cir.), 26 Am. B. R. 114, 187 Fed. 982; Matter of Underwood & Daniel (D. C., Ga.), 32 Am. B. R. 779, 215 Fed. 279; Matter of Gurvitz (D. C., Mass.), 47 Am. B. R. 311, 276 Fed. 931. 362. Matter of Siegel Co. (D. C., Mass.), 35 Am. B. R. 130, 223 Fed. 369; Gillespie v. Piles & Co. (C. C. A., 8th Cir.), 24 Am. B. R. 502, 178 Fed. 886; Jones v. Hobbie Grocery Co. (C. C. A., 5th Cir.), 40 Am. B. R. 415, 246 Fed. 431. Compare Matter of Golub (D. C., Mass.), 39 Am. B. R. 810, 245 Fed. 512. 363. Matter of Hugel Co. (D. C., Mass.), 35 Am. B. R. 128, 223 Fed. doors as soon as he becomes aware of his insolvency. If he faces his situation and really believes that he can pull out by keeping on, his purchases made for that purpose are not fraudulent provided that his belief is not illusory merely and without any reasonable ground for it.364 If there was no concealment of the fact of insolvency indicating that the purchaser designed to acquire the goods without paying for them, there is no fraud justifying reclamation.365 (IV) Proof of insolvency, or of intent not to pay. Whether or not proof of insolvency is essential depends upon the character of the representation which institutes the sale. If the representation consists of a statement as to solvency, it would be necessary to prove insolvency to justify a reclamation of the goods sold;366 and also the concealment from the claimant of the fact of insolvency, and the intention on the part of the bankrupts at the time of the sale not to pay for the goods.367 If, on the other hand, a solvent purchaser falsely represents the extent of his assets with the purpose of obtaining credit, and the seller, relying on this false representation, lets him have the goods when otherwise he would have declined the sale and insolvency thereafter ensues causing loss to the seller, proof of 369; Matter of Gurvitz (D. C., Mass.), 47 Am. B. R. 311, 276 Fed, 931. 364. Matter of Empire Grocery Co. (D. C., Mass.), 47 Am. B. R. 332, 277 Fed. 73. Reasonable expectation of ability to pay. In case of Matter of Berg (Ref., Mass.), 25 Am. B. R. 170, the court dismissed the petition of reclamation upon the proof that the bankrupt, when he purchased the goods, had reasonable expectations that he would be able to pay for them and did not know that he was insolvent. See also In re Roalswick (D. C., Mont.), 6 Am. B. R. 752, 110 Fed. 639; In re Davis (D. C., N. Y.), 7 Am. B. R. 276, 112 Fed. 294. Evidence of fraudulent purchase.— In a proceeding to reclaim certain property on the ground that the purchase was fraudulent in that the purchaser, now bankrupt, was insolvent and had no reasonable expectation of being able to make payment when due, it appeared that at the time of the purchase and delivery the bankrupt was doing a large and active business; that although insolvent, in fact, it had excellent credit at a bank which was its principal creditor; that by the bank's failure, which was not anticipated, the purchaser was forced into bankruptcy. Held, on all the evidence, that the bankrupt was not without reasonable expectation of paying for the property in question. Schroth v. Monarch Fence Co. (C. C. A., 6th Cir.), 36 Am. B. R. 258, 229 Fed. 549. See also Matter of Baskin (D. C., Ohio), 44 Am. B. R. 536. 365. In re Marengo County Mercantile Co. (D. C., Ala.), 29 Am. B. R. 46, 190 Fed. 474. 366. Matter of Marks & Co. (C. C. A., 2d Cir.), 33 Am. B. R. 275, 218 Fed. 453; Matter of N. Y. Commercial Co. (C. C. A., 2d Cir.), 35 Am. B. R. 779, 228 Fed. 120. 367. Matter of Marks & Co. (C. C. A., 2d Cir.), 33 Am. B. R. 275, 218 Fed. 453. |