delivery and assignment of the policies to the creditor until after loss, when he was insolvent, the assignment thereof at that time did not constitute an act of bankruptcy, within Bankr. Act July 1, 1898, c. 541, § 3, 30 Stat. 546 [U. S. Comp. St. 1901, p. 3422], as a transfer of his property while insolvent with intent to prefer certain of his creditors. 3. SAME-PETITION-AMENDMENT.

Where a proposed amendment to an involuntary bankruptcy petition seeks to plead alleged acts of bankruptcy occurring subsequently to those stated in the original petition, which must have been known to some of the original petitioners at the time such original petition was filed, and the alleged amendment is not served on the bankrupt, and no excuse is offered why the acts sought to be so pleaded were omitted from the original petition, leave to file such amendment will be denied.

In Bankruptcy.

W. R. Richey, for petitioning creditors.

Geo. S. Mower and Johnstone & Cromer, for certain respondents.

BRAWLEY, District Judge. The above-named petitioners filed their petition January 16, 1905, against J. W. Watts, doing business. under the name of Clinton Brokerage Co., Bailey & Son, and the National Bank of Newberry, alleging, among other things, indebtedness to the petitioning creditors; that the stock of goods and merchandise belonging to Watts was entirely destroyed by fire on December 2, 1904, and that said Watts had two policies of insurance on his said stock of goods (one for $500, and one for $1,000), and that on the day of December, after the fire aforesaid occurred, he assigned said policies of insurance (the one for $1,000 to the National Bank of Newberry; the other, for $500 to Bailey & Son); that Watts was at that time insolvent, and these transfers were with intent to hinder, delay, and defraud the petitioners. The bank and Bailey & Son each filed demurrers on the ground that the petition was multifarious, in that the charge that they had received. voidable preferences was improperly incorporated in the petition to have the defendant Watts adjudged a bankrupt. Watts filed an answer in which he stated as to the alleged preference of the National Bank of Newberry that:

"When he was about to establish the Clinton Brokerage Co., and needed funds with which to buy a stock of goods, he applied to the said National Bank of Newberry for a loan for that purpose, and agreed that he would have his store fixtures and the stock of goods insured, and assign the policy of insurance, to the amount of $1,000, as collateral to secure the money advanced by the said bank; that thereupon, and in pursuance of the agreement then made, the said National Bank of Newberry lent the money, aggregating more than $1,000, that he did procure a policy of insurance to be issued, as he had agreed to do, but that he failed to make the actual transfer in writing to the said bank until in December, 1904; that, however, from the date of the issuance of the said policy of insurance he regarded it as pledged to the said bank as above set forth, and the actual transfer in writing was made in pursuance of the agreement entered into before the loan was made; and that when the said agreement was made, and when the cash advances were made to him by the said National Bank of Newberry, the respondent was not insolvent."

A similar statement was made with respect to the assignment of the insurance policy to Bailey & Son. The answer further stated

that he was engaged in successful business when his stock of goods was destroyed by fire, and that he did not intend to delay, hinder, or defraud creditors, but that the transfer of these policies was made in good faith, and in pursuance of agreements entered into before the debts were contracted. This answer was filed February 3, 1905, and, without passing upon the question raised by the demurrer, the following special order of reference was made:

"Upon reading and filing the petition in the above-stated case, and of the answer of J. E. Watts, the alleged bankrupt, it is ordered that the same be referred to Julius H. Heyward, Esq., referee, to inquire and report whether the alleged bankrupt has committed an act of bankruptcy, within the intent and meaning of the bankruptcy act, and upon said hearing the National Bank of Newberry and M. S. Bailey & Son, who have filed demurrers to said petition on the ground that the same is multifarious, shall be allowed to appear, if they be so advised; the court being of opinion that the said demurrer furnished no good reason why the inquiry herein directed should not be made."

The referee filed his report February 27, 1905, and with it the testimony which he had taken, and the facts found by him are as follows:

"That during the latter part of the month of August, A. D. 1904, the said Watts, then being about to engage in the business of buying and selling merchandise at Clinton, S. C., entered into an agreement with the National Bank of Newberry whereby the said bank agreed to advance to him cash from time to time as called for; that the said Watts agreed to give therefor, as received, his notes, indorsed by one J. D. Davenport; that the said Davenport was present when said agreement was made, and assented to the same, and it was further then agreed that the said Watts should insure his stock of goods to the amount of $1,000, and assign the policy to the bank; that about the same time a similar agreement was made by the said Watts with M. S. Bailey & Son, of Clinton, S. C., that the said Watts was then

presumably solvent, his indebtedness being insignificant."

He then reports that Watts begun business on September 1st, and apparently did a successful business; that on September 14, 1904, he took out a policy of insurance for $500, and on October 17th another policy for $1,000; that the entire stock of goods was destroyed by fire December 2, 1904; that after said loss by fire Watts was insolvent, having then no assets except the two claims for insurance, and a small tract of land, valued at about $50, and certain outstanding accounts, amounting to about $700; that immediately. after the fire, on December 3, 1904, Watts assigned to the National Bank of Newberry the policy of insurance for $1,000, which, it seems, had been deposited with Bailey & Son before that date. The policy for $500 was in his desk, and was destroyed, and he assigned his claim for insurance on that policy to Bailey & Son. He finds as matter of law that, under section 3 of the bankruptcy act, Watts had committed an act of bankruptcy; he having transferred, while insolvent, a portion of his property to the creditors above named, with intent to prefer, etc.; he holding that, at the time the policies were transferred, Watts was insolvent. That Watts was actually insolvent on December 3, 1904, is not disputed.

The case is before me on a review of the referee's report. In support of the referee's conclusions, two cases are relied on (Wilson Brothers v. Nelson, 183 U. S. 191, 22 Sup. Ct. 74, 46 L. Ed. 147; Iron

& Supply Co. v. Rolling Mill Co., 11 Am. Bankr. Rep. 200 [D. C.] 125 Fed. 974); and pending the argument before me the case of Johnston, Trustee, v. Huff, Andrews & Moyler Co. (lately decided by the Court of Appeals for the Fourth Circuit) 133 Fed. 704, was referred to by him as also sustaining his conclusions. In Wilson v. Nelson the debtor in February, 1885, to secure a loan then made, gave to the creditor irrevocable power of attorney to confess judgment after maturity upon a promissory note. The creditor, November 21, 1898, entered up judgment upon the note, and warrant of attorney; and immediately thereafter execution was issued thereon, and all of the debtor's property seized and sold. On December 10, 1898, a petition in bankruptcy was filed; and the court held (four of the justices dissenting) that the judgment so entered, and the levy of execution thereon, was a preference "suffered" or "permitted," within the meaning of clause 3 of section 3a of the bankruptcy act of July 1, 1898, c. 541, 30 Stat. 546 [U. S. Comp. St. 1901, p. 3422], and that the failure of the debtor to vacate and discharge it at least five days before the sale on execution was an act of bankruptcy; the ground of the decision being that, the power of attorney being irrevocable, the debtor thereby without any further act of his, "suffered" or "permitted" judgment to be entered against him within four months, the effect of which would be to enable the creditor to whom it was given to obtain a greater percentage of his debt than other creditors, and that by his failure to vacate it or file a petition in bankruptcy he confessed that he was hopelessly insolvent, and consented to the preference that he failed to vacate.

In Iron & Supply Co. v. Rolling Mill Co., the rolling mill company had given to the national bank its note December 6, 1902, pledging a large quantity of material, consisting of pig iron, etc., as security for its payment, with the privilege of selling or using any or all of said material; and in case of such sale it was to pay the cash in settlement of its debt to the bank, or transfer and deliver to it its equivalent in good accounts. It appeared from the evidence that the company sold or otherwise used said material; that it did not pay any cash therefor, or on account of said note; that on February 28, 1903, it transferred on its books a large amount of open accounts; that, of the accounts so transferred, a large amount of them accrued prior to December 6, 1902, the date of the loan and pledge referred to-the evidence not showing which particular accounts represented any part of the material pledged. The evidence showed that on February 28th the defendant was indebted to a large amount other than to the bank, among its creditors being its operatives and employés. The contention of the defendant was that by the transfer of the accounts they took the place of the material, as an exchange of securities, and that therefore such transfer was not a preference, within the purview of the bankrupt act. But the court held that the facts wholly failed to show an exchange of securities; that the accounts were not substituted or exchanged for the material, which had been sold with the consent of the bank, there being no agreement that it was to be sold for its benefit, and no covenant going to the bank for the proceeds thereof; that the specific accounts rep

resenting such proceeds were not identified, and there was no such description of them that they could be identified; that the effect of the agreement with the bank was to permit the defendant to use or sell the pledged material, and to withdraw it from the operation of the pledge, and, so far as that material was concerned, merely obligated the defendant to pay its debt to the bank with cash, or to transfer and deliver to it the equivalent in good accounts, which obligation was not performed until within four months prior to the petition in bankruptcy. The court, therefore, held that this transfer was not an exchange of one species of property for another, and at the time of such transfer the defendant was insolvent, and, being within four months preceding the bankruptcy proceedings, it gave a preference to said bank over other creditors, and was designed and calculated to have such effect.

In Johnston, Trustee, v. Huff, Andrews & Moyler Co., one White had an agreement with the Norfolk & Western Railway Company to furnish supplies and board to its employés; the railway company agreeing to deduct from the wages of the men employed by it the amount due by each of them to White, to pay that amount to him; White making out a statement each month of the amount due by each employé. White, in order to obtain money necessary to carry on his business, arranged for a credit with the Huff, Andrews & Moyler Company, and on January 30, 1902, gave them an order on the treasurer of the Norfolk & Western Railway Company for the payment of any and all moneys that "may now be due or may hereafter become due as boarding boss." There was a mutual agreement between them and White, when the order was given, that it should not be presented to the railway company, as that company objected to orders being given on it, and during the year 1902 White collected from the railway company over $13.000 for his own use. The order held by the Huff, Andrews & Moyler Company was not presented until December 26, 1902, and on December 27th White filed his petition in bankruptcy. In its opinion the court says:

"That it was the understanding and intention that the order should not put the funds payable by the railway company out of the control of White until some financial emergency arose, is perfectly obvious."

It cites Justice Swayne's opinion in Christmas v. Russell, 14 Wall. 84, 20 L. Ed. 762, that "an agreement to pay out of a particular fund, however clear in its terms, is not an equitable assignment." The court also cites Wilson v. Nelson, 183 U. S. 191, 22 Sup. Ct. 74, 46 L. Ed. 147. I sat in that case, and concurred in the opinion, but do not conceive that it supports the position of the referee here. As the court says: "It was expressly agreed that the order should not be presented, and the assignor was permitted to collect funds for nearly a year-the funds now claimed to have been assigned." The money due by the railway company to White was, as the court says, "a fund which is substantially the bankrupt's only asset." It constituted his basis of credit, and could have been reached by legal process. It was a fund which was at all times available for the payment of his debts, and, if it had been known that

it had been assigned, other creditors might have protected themselves; and the court therefore held that, as this agreement could only take effect on the day of presentation, the delay in presenting it until the day before the bankruptcy must be held to have been a transfer on that day for a pre-existing debt, and hence a preference. An analysis of the facts in the case now under consideration shows that the cases are clearly distinguishable. Here the debtor agreed to insure for the protection of his creditor, in order to obtain the money loaned. He could not have obtained the advances otherwise, and the agreement to transfer the policy of insurance was clearly an equitable assignment. This policy of insurance was not an asset on the faith of which he received other credit. There was no proof that other creditors sold him goods on the faith of the insurance policy. There was no agreement that the assignment of the policy should not be disclosed. There was no reason why other creditors should not have protected themselves in the same way. There was no agreement to hold it in suspense for the benefit of the bankrupt until the eve of filing the petition in bankruptcy. It was not an asset available for creditors until the fire, and an effective transfer of the policy could not have been made before the fire, because most of the standard forms of policy forbid an assignment before a loss. It was not an asset that could have been reached by any process by the other creditors before the fire. It was not an agreement that was prejudicial to other creditors when made.

I have reviewed these cases at greater length than I would have otherwise thought necessary, out of respect to the learned referee, to whose opinions I generally attach much weight, but they do not support the conclusions reached by him.

The bankrupt act of July 1, 1898, c. 541, § 67d, 30 Stat. 564 [U. S. Comp. St. 1901, p. 3449], provides that "liens given or accepted in good faith and not in contemplation of or fraud upon this act, and for a present consideration, * shall not be affected by it." The testimony supports the answer of the defendant Watts that the money was advanced to him in good faith at a time when he was solvent, to be used in his business; that there was an agreement at that time that his stock of goods was to be insured, and that the policies were to be assigned as security for the loan. There was a present consideration, and an agreement to assign the policies, which, on principle and on authority, created an equitable lien upon the money due on the policies of insurance. Chief Justice McIver, in Swearingen v. Ins. Co., 52 S. C. 315, 29 S. E. 722, says:

"While a policy of insurance is purely a personal contract between the insurer and the assured, and hence the mortgagee of the premises insured, merely as such, has no interest, either in law or equity, in a policy of insurance taken out by the mortgagor in his own name and for his own benefit, yet if the mortgagor is bound, either by covenant in the mortgage or otherwise-for example, by a valid verbal agreement-to keep the property insured, as a further security for the payment of the mortgage debt, then the mortgagee is entitled to an equitable lien upon the money due on the policy of insurance, even though taken out in the name of the mortgagor. This rule is recognized in Wheeler v. Ins. Co., 101 U. S., at page 442, 25 L. Ed 1055, where Mr. Justice Bradley thus tersely states it: 'If the mortgagor

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