US SUPREME COURT DECISIONS

1. By insolvency, as used in the Bankrupt Act when applied to traders and merchants, is meant inability of a party to pay his debts as they become due in the ordinary course of business.

2. The transfer by a debtor of a large portion of his property, while he is insolvent, to one creditor without making provision for an equal distribution of its proceeds to all his creditors necessarily operates as a preference to him, and must be taken as conclusive evidence that a preference was intended unless the debtor can show that he was at the time ignorant of his insolvency and that his affairs were such that be could reasonably expect to pay all his debts. The burden of proof is upon him in such it case, and not upon the assignee or contestant in bankruptcy.

3. A creditor has reasonable cause to believe a debtor, who is a trader, to be insolvent when such a state of facts is brought to the creditor's notice respecting the affairs and pecuniary condition of the debtor as would lead a prudent businessman to the conclusion that he is unable to meet his obligations as they mature in the ordinary course of business.

4. A transfer by an insolvent debtor with a view to secure his property or any part of it, to one creditor, and thus prevent an equal distribution among all his creditors is a transfer in fraud of the Bankrupt Act.

The 35th section of the Bankrupt Act of 1867 thus enacts:

"That if any person, being insolvent or in contemplation of insolvency, with a view to give a preference to any creditor or person having a claim against him . . . makes any assignment, transfer, or conveyance of any part of his property . . . (the person receiving such assignment, transfer, or conveyance, having reasonable cause to believe such person is insolvent, and that such assignment or conveyance is made in fraud of the provisions of this act), the same shall be void, and the assignee may recover the property, or the value of it, from the person so receiving it or so to be benefited."

With this enactment in force, Martin, assignee in bankruptcy of Haines and Chetlain, filled a bill in the District Court for the Eastern District of Arkansas against J. S. Toof, C.J. Phillips, and F. M. Mahan, trading as Toof, Phillips & Co. (Haines and Chetlain being also made parties), to chanrobles.com-red

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set aside and cancel certain conveyances alleged to have been made by these last in fraud of the above-quoted act.

Haines and Chetlain were, in February, 1868, and had been for some years before, merchants doing business under the firm name of W. P. Haines & Co., at Augusta, Arkansas. On the 29th of that month, they filed a petition for the benefit of the Bankrupt Act, and on the 28th of May following were adjudged bankrupts, and the complainant was appointed assignee of their estates. On the 18th of the previous January, which was about six weeks before the filing of their petition, they conveyed an undivided half-interest in certain parcels of land owned by them at Augusta to Toof, Phillips & Co., who were doing business at Memphis, in Tennessee, for the consideration of $1,876, which sum was to be credited on a debt due from them to that firm. At the same time they assigned to one Mahan, a member of that firm, a title bond which they held for certain other real property at Augusta upon which they had made valuable improvements. The consideration of this assignment was two drafts of Mahan on Toof, Phillips & Co., each for $3,034, one drawn to the order of Haines and the other to the order of Chetlain. The amount of both drafts was credited on the debt of Haines & Co. to Toof, Phillips & Co., pursuant to an understanding to that effect made at the time. There was then due of the purchase money of the property, for which the title bond was given, about $700. This sum Mahan paid, and took a conveyance to himself from the obligor who held the fee.

The bill charged specifically that at the time these conveyances were made, the bankrupts were insolvent or in contemplation of insolvency; that the conveyances were made with a view to give a preference to Toof, Phillips & Co., who were the creditors of the bankrupts; that Toof, Phillips & Co. knew or had reasonable cause to believe that the bankrupts were then insolvent, and that the conveyances were made in fraud of the provisions of the Bankrupt Act.

It also charged that the assignment of the title bond to Mahan was in fact for the use and benefit of Toof, Phillips chanrobles.com-red

Page 80 U. S. 42

& Co., for the purpose of securing the property or its value to them in fraud of the rights of the creditors, and that this purpose was known and participated in by Mahan.

The answer, admitting a large amount of debts at the time of the conveyances in question, denied that the bankrupts were then "insolvent," asserting, on the contrary, "that at the time aforesaid, said Haines & Co. had available assets in excess of their indebtedness to the extent of $16,000." It also denied that there was a purpose to give a preference, asserting that the conveyances of the land were made because Haines & Co., not having cash to pay the debt due Toof, Phillips & Co., were willing to settle in property, and it denied that the title bond was assigned to Mahan for the benefit of Toof, Phillips & Co., or that they paid for the same, but on the contrary averred that Mahan bought the property and paid for it himself and for his own use and benefit out of his own funds.

Appended to the bill were several interrogatories, the first of which inquired whether, at the time of making the transfers to Toof, Phillips & Co., the indebtedness of W. P. Haines & Co. was not known to be greater than their immediate ability to pay, and to this Toof, Phillips & Co. answered that at the time of making these transfers, they did not believe Haines & Co. were able to pay their debts in money, but that they were able to do so on a fair market valuation of the property they owned and of their assets generally.

Chetlain, one of the bankrupts, testified that on the 18th of January, 1868, Haines & Co. could not pay their notes as they came due; that previous to this time, they had contemplated bankruptcy, and that he had had several conversations with Mr. F. M. Mahan relative to their finances, and had told him the amount, or near the amount, of their debts. His advice was to get extensions, and he would help them get through; that after his promises to advance them more goods, they concluded not to go into bankruptcy, but to go on in business; that he told Mahan that Haines & Co. could not pay out, and in a conversation with him previous to the transfer of the real estate, he, Chetlain, told Mahan that chanrobles.com-red

Page 80 U. S. 43

such was the state of the finances of Haines & Co. that if he would assume their liabilities and give them a receipt, Haines & Co. would turn over all their assets to him. He did not accept.

He also testified that about the 1st of January, 1868, the sheriff levied on the goods belonging to Haines & Co. in their storehouse in Augusta on an execution in favor of one Weghe, which caused them to suspend business for a few days until the levy was dissolved by order of the sheriff at or about the 15th day of January, 1868. Mahan was in Augusta at the time of this levy, and Haines & Co. had an interview with him in regard to it.

During the entire autumn and winter preceding these transfers, Haines & Co. did not pay, except to Toof, Phillips & Co., more than $500 on all their debts, and in the latter part of December, 1867, and the first part of January, 1868, some of the creditors sent agents to collect money from them, but got none, because Haines & Co. had no funds to pay them.

A witness, Frisbee, testified that he had assisted Mr. Haines in making up his balance sheet "about the 1st of January, 1868, and that the result was that their available assets were not sufficient to pay their debts."

Another witness, an agent for an express company, testified that he received, about the last of December, 1867, or January, 1868, notes from Toof, Phillips & Co. and another firm against Haines & Co. for collection; that he presented them for payment to Haines & Co., and that they said they could not pay them at that time. They did not pay them to him. He knew something of the financial condition of Haines & Co., and of their debt to Toof, Phillips & Co., and of complaints of other parties, and something of their business through the country, and from all these facts he thought it doubtful about their being able to pay their debts. This was during the months of December, 1867, and January, 1868; and he wrote to Toof, Phillips & Co. that he thought they had better look to their interests, as his conviction was that it was doubtful about their being able to collect their chanrobles.com-red

Page 80 U. S. 44

debt from Haines & Co. Shortly after writing this letter, Mahan came round to look after the matter.

The property described in the title bond assigned to Mahan, which he stated that he purchased as an investment on private account for $7,000, was shown by the testimony of Chetlain to have been worth only $4,000, and by the testimony of a witness, Hamblet, to have been worth only $3,500, and it was valued by the bankrupts in their schedules at $4,000. Both of the bankrupts testified that it was understood at the time the title bond was assigned to Mahan that the amount of the two drafts given by him on Toof, Phillips & Co. for it should be credited to Haines & Co. on their indebtedness to that firm.

The schedules of the bankrupts annexed to their petition showed that their debts at the time of their transfers to Toof, Phillips & Co. exceeded $59,000, while their assets were less than $32,000.

On the other hand, there was some testimony to show that some persons thought that they could get through, &c.

The district court decreed the conveyances void, and that the title of the property be vested in the assignee, the latter to refund the amount of the purchase money advanced by Mahan to obtain the deed of the land described in the title bond, less any rents and profits received by him or Toof, Phillips & Co. from the property. This decree the circuit court affirmed.

In commenting upon the answer of Toof, Phillips & Co., already mentioned, which, in reply to the interrogatory, "whether at the time of the transfer to them, the indebtedness of Haines & Co. was not greater than their ability," admitted that they did not believe Haines & Co. "able to pay their debts in money," the circuit court said:

"Here is a direct confession of a fact that in law constitutes insolvency, and it is idle for the defendants to profess ignorance of the insolvency of the bankrupts in face of such a confession. If the bankrupts could not pay their debts in the ordinary course of business -- that is, in money as they fell due -- they were insolvent, and if the defendants did not know that this constituted

Page 80 U. S. 45

insolvency within the meaning of the Bankrupt Act, it was because they were ignorant of the law."

But that court examined all the testimony, and in affirming the decree of the district court rested that case upon it as well as upon this answer. From the decree of the circuit court, Toof, Phillips & Co. brought the case here. chanrobles.com-red

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