interests, including the possible repudiation of the credit as obtained by misrepresentation. The Mercantile Company was at the time actually insolvent. The bank had the power (as distinguished from the right) to refuse checks upon its deposit balance. If the Mercantile Company proved insolvent, or the credit turned out to have been obtained by fraudulent misrepresentations, the bank had the right to so refuse. Such refusal would naturally have tended to precipitate hostile action by the creditors of the Mercantile Company, and when the condition of the company was actually learned would naturally have brought about bankruptcy proceedings. It was, to our minds, entirely proper that the Mercantile Company should, in these circumstances, arrange for a continuance of the existing status, which, should the Mercantile Company prove solvent, would be of benefit to it, and, should it prove insolvent, would merely give the bank the same rights as it would have if then existing insolvency were recognized. The transaction in no sense amounted to a hypothecation of this balance, as suggested by appellee's counsel. The fact that the bank had reason to believe the Mercantile Company was insolvent did not affect its right to set-off. In the Massey Case a portion of the deposits held applicable by way of set-off were made after the bank had knowledge of the debtor's insolvency. The testimony of the attorney of the Mercantile Company, in our opinion, distinctly repels the inference of an intent to give the bank a preference. We think the bank should have been allowed to offset the deposit balance of February 5th upon the bank's notes.

As to the balance of deposits made after February 5th:

If the bank held these deposits as trustee for the Mercantile Company, the right to set off the same against the latter's notes did not exist. Under the authority of Western Tie & Timber Co. v. Brown, 196 U. S. 502, 25 Sup. Ct. 339, 49 L. ed. 571, the bank was entitled to prove its debt with the set-off in question eliminated, but remained a debtor to the bankrupt for the amount of the deposits; and if such trust relation existed, the action taken by the court in protection of the bankrupt's estate, with respect to dividends on the bank's claim, in case of the latter's failure to make payment of the trust fund, was proper, unless as regards the award of execution for balance not covered by dividends, as to which question we do not find it necessary to express an opinion.

The alleged trust relation, including the conversion recognized

by the District Judge, rests upon the existence of an understanding between the bank and the Mercantile Company that the latter should be at liberty to withdraw the entire amount of its deposits made after February 5th, and that the bank should not be at liberty to set off against the Mercantile Company's notes any balance that should not be so drawn out, and that such deposits were not made in the ordinary course of business, but became in fact a special deposit. Upon a careful examination of the record, we are constrained to hold that the evidence does not warrant such conclusion. The referee has not found as a fact that there was any agreement to that effect between the parties, or even an understanding to that effect on the part of the bank. As we read the record, there is no direct testimony of any express agreement or mutual understanding to that effect. There is nothing in the testimony of the bank's attorney which, in our opinion, warrants such inference. On the other hand, the attorney for the Mercantile Company, while testifying to the statement to the bank's attorney that he would see that the Mercantile Company should not make withdrawals in excess of the new deposits, does not state that the bank was even asked to agree that all the new deposits might be checked against. The substance of the testimony of the Mercantile Company's attorney on this point is that he was anxious to have the banking relations continued without hostile steps upon the part of the bank, and that in order to induce the latter to continue such relations he agreed that the bank's status should not be impaired by an attempt on the part of the Mercantile Company to withdraw more than it should deposit. It is true that the Mercantile Company's attorney testified that his "idea was that the proposition was that the Block Mercantile Company should be absolutely free to withdraw every cent that it deposited after that date," and that "if there had been any scheme on the part of the bank, or anything that would have kept us from using the money during this investigation, I would have had to make some other arrangement and found another place to deposit," and that if he had understood in his own mind that his clients could not withdraw against subsequent deposits he would not have advised them to make their deposits in the same bank. To the definite question as to the bank's acceptance or rejection of the suggestion he replied:

"I want to say this: That Mr. Hirsh [the bank's attorney] was pressing me for information which I did not have, and I was

holding him up until I could get it, so it looked to me like a fair proposition. Now, as to whether that was accepted or rejected, in this way it must have been that I thought it was going to go through. I mean by that certainly I would be permitted to withdraw against deposits, or I never would have done it." And again:

"I have stated repeatedly in this examination that I could not remember what answer that Mr. Hirsh made to my suggestion, as to continuing present deposits intact and the subsequent deposits to be withdrawn."

This testimony, in our opinion, falls short of evidencing a contract or understanding whereby the Mercantile Company should, under any and all circumstances, have the right to draw out all the new deposits, or whereby the new deposits should be held in any way as a special deposit differing from the ordinary bank deposit. The attorney of the Mercantile Company seems not unnaturally to have assumed that so long as the Mercantile Company was continuing to do business in the usual way, and in advance of a development of its insolvency, checks on the bank account would be honored. But we find no agreement or mutual understanding to that effect. Such course was in fact taken; for it was not until after the accounting of the Mercantile Company's affairs was completed, showing that its financial condition was much worse than believed by its attorney on February 5th, and suggesting probable insolvency, and indicating that a portion at least of the credit extended to the Mercantile Company was procured by false representations, that the bank refused to honor further checks. In our opinion there was, to say the least, no room for finding an understanding between the bank and the bankrupt that the bank waived its right of set off on account of any balance that might remain after such situation was found to exist. Nor do we think that the fact that the bankrupt's business was during the examination of its affairs being managed by subordinates, rather than by its usual officers, changed the nature of the deposits from the ordinary relation.

It follows, from the views we have expressed, that the order of the District Court should be reversed, with directions to allow the balance claimed in full after the application thereon, by way of set-off, of the entire amount of bankrupt's deposit balance in the bank." 27

27-See Heyman v. Third Nat. Bank, 216 Fed. 685.

SECTION IV

EXEMPTIONS

CHICAGO, B. & Q. R. CO. v. HALL

229 U. S. 511, 57 L. ed. 1306, 33 Sup. Ct. 885
[See this case given on page 497, ante.]

In re COHN

171 Fed. 568

(District Court, D. North Dakota, S. E. D. July 28, 1909)

AMIDON, District Judge. The above bankrupt filed his voluntary petition in bankruptcy on the 5th day of December, 1908. About the 1st of July, 1908, he made final proof upon a government homestead, and received his final receipt entitling him to a patent therefor. All debts scheduled by the bankrupt were incurred prior to the date of his making such final proof. In his schedules he claimed the homestead as exempt both under the laws of North Dakota and under § 2296 of the Revised Statutes of the United States (U. S. Comp. St. 1901, p. 1398). The trustee set the land off to him as his homestead, under the state laws. One of his creditors filed exceptions before the referee to this action of the trustee, and asked that an order be entered denying the bankrupt's right to the land as a homestead, and directing the trustee to take possession of the same and apply it to the satisfaction of the bankrupt's debts. This question was fully presented before the referee, by counsel for the respective parties, upon voluminous testimony. As the result of such hearing, the referee found that the bankrupt prior to the time of the filing of his petition in bankruptcy had removed from the state of North Dakota, in which the homestead is situated, and taken up his residence in the city of Minneapolis, in the state of Minnesota, and that he had thereby abandoned his homestead as an exemption under the laws of the state of North Dakota, and lost all right to claim the same as exempt under those laws; but the referee further held that the homestead was exempt from the claims of all creditors whose indebtedness was incurred prior to the date of the making of final proof, and entered an order so

declaring, and directing that the homestead be applied only to the payment of those debts, properly proven, which had arisen since the bankrupt made final proof for his homestead. A creditor whose claim accrued prior to the making of such final proof excepted to this order of the referee, and at his request the order has been certified to the court for review.

The bankrupt has filed no exceptions to the order of the referee, and cannot therefore be heard to object to any of its provisions. If this were not the case, it is quite likely that he would have just cause to complain of the order because it limits his exemption from debts to those which accrued prior to the making of his final proof; whereas, § 2296 of the Revised Statutes declares that the homestead shall not "in any event become liable to the satisfaction of any debt contracted prior to the issuing of the patent therefor." There is no evidence presented here showing that any patent has ever been issued. It is the issuance of the patent which fixes the time when the property shall become liable to subsequent debts of the homesteader. Barnard v. Boller, 105 Cal. 214, 38 Pac. 728; Wallowa National Bank v. Riley, 29 Or. 289, 45 Pac. 766, 54 Am. St. Rep. 794.

Counsel for the objecting creditor contends that § 2296 of the Revised Statutes is repealed by §§ 6 and 70, subd. 5, of the bankruptcy act (Act July 1, 1898, c. 541, 30 Stat. 548, 565 [U. S. Comp St. 1901, pp. 3424, 3451]). § 6 simply provides that the bankruptcy act shall not affect the allowance to bankrupts of the exemptions which are prescribed by state laws. Plainly this section deals solely with state laws. It is declaratory in its character. Its purpose is to save exemptions allowed by state laws, not to abolish those allowed by federal law. Its language is affirmative, and ought not to be given a negative effect, in the absence of a clear manifestation of such a legislative purpose. Potter's Dwarris, 69. § 70 declares that the trustee shall be vested with the title of the bankrupt (except property which is exempt), to all "(5) property which prior to the filing of the petition he could by any means have transferred, or which might have been levied upon and sold under judicial process against him." The land in question does not come within the provisions of either branch of this section. Down to the time of final proof, the entryman could not transfer his homestead. §§ 2288 and 2291, Rev. St. (U. S. Comp. St. 1901, pp. 1385, 1390). Nor could any of the creditors whose claims have been proven have levied upon or sold the homestead for the collec