Sec. 38. Fraudulent Transfers

A removal, concealment or transfer of a debtor's property with intent to defraud creditors if made within four months prior to the filing of the petition is an act of bankruptcy.

(1) In general.

A removal, concealment or transfer made or permitted by a debtor with intent to defraud his creditors is an act of bankruptcy under the present act.

A fraudulent transfer in the law of bankruptcy has two aspects of importance. It is an act of bankruptcy and it is a transaction to be set aside by the trustee in his recovery of assets whenever the transferee is actually or constructively, a party to the fraud. As an act of bankruptcy, it must occur within the four months period immediately prior to the filing of the petition. As a transaction to be set aside the only limitation is that which would be imposed were creditors seeking to set it aside had not bankruptcy intervened. In this section we consider the fraudulent transfer as an act of bankruptcy, but we will also necessarily say much that will be important under the other heading and therefore at that time our task will be much simplified by a mere reference back to this section.

(2) Fraudulent removals, concealments and transfers defined.

A fraudulent disposition or transfer of property is a transfer made with the intent to hinder, delay or defraud creditors. The Bankruptcy law creates no new offense against creditors, but adopts one which has long been the law and makes it an act of bankruptcy. The court has said: "The language of subsection 1 of section 3 is the familiar language of statutes against conveyances fraudulent as against creditors and we think there can be no doubt that Congress intended the words employed should have the same construction and effect as have for a long period of time been attributed to those words.80 And so constructed, the test of conveyances intended by subsection 1 of section 3 is that of the bona fides of the transfers."81

79. In re Triangle S. S. Co., (D. C. S. D.) 267 Fed. 303.

Fraudulent transfers have been divided into those that are for value or apparent value and those that are gratuitous. A voluntary transfer of property is looked upon as a fraudulent conveyance when made by creditor while insolvent upon the theory that a person "must be just before he is generous."

(3) Insolvency as an element in this act of bankruptcy.

Insolvency is not an element in this act of bankruptcy. One court has said :82

"Some acts of bankruptcy must be committed while the person is insolvent. The first act of bankruptcy defined may be committed by the person charged when perfectly solvent. If a solvent person conveys or transfers, conceals or removes, or permits to be concealed or removed any part of his property with the intent to hinder, delay or defraud his creditors, or any of them he commits an act of bankruptcy; and if within the ensuing four months, he becomes insolvent and a petition is therefor filed against him such petition may allege such acts as the act of bankruptcy, and the person may be adjudged a bankrupt accordingly."

80. Githens v. Staffer, (D. C. Pa.) 112 Fed. 505.

81. Lansing Boiler & E. Works v. Jos. T. Ryerson & Son, 128 Fed. 701.

82. In re Larkin (D. C. N. Y.) 168 Fed. 100.

Solvency at the time the petition is filed is a defense when this is the act of bankruptcy alleged. The act provides "a petition may be filed against a person who is insolvent and who has committed an act of bankruptcy within four months after the commission of such act." If a person has made such fraudulent transfers but still is perfectly solvent when the petition is filed, there is no ground for putting him into bankruptcy as his estate will pay one hundred cents on the dollar. But in considering whether a debtor is insolvent property fraudulently conveyed or concealed is to be ignored, as we have seen in the last section defining insolvency.83 If, therefore, such property were still concealed or conveyed, one's solvency would have to be determined by leaving it entirely out of consideration. If the trustee in bankruptcy could thereafter recover such property again, the estate might pay debts in full.

Sec. 39. Preferential Payments Or Transfers

Where within four months before the petition is filed, the debtor, being insolvent, intentionally prefers one or more creditors over the others this is an act of bankruptcy.

(1) Preference of creditor is act of bankruptcy.

One of the main purposes of the Bankruptcy Law being to secure an equal distribution of an insolvent's estate among his creditors, a transfer or payment by him while insolvent to any creditor, is logically considered an act of bankruptcy, justifying the other creditors by acting diligently (i. e. within four months) to put the estate in bankruptcy.

83. In re Hines, (D. C. Ore.) 144 Fed. 142.

(2) Preference as act of bankruptcy as distinguished from preference which trustee may have set aside.

The preference, as an act of bankruptcy, consists in having "transferred while insolvent, any portion of his property, to one or more of his creditors, with intent to prefer such creditors over his other creditors."84 The law also provides, as we shall consider at length hereafter, that a preference made to a debtor, within four months immediately prior to the filing of the petition shall be avoidable by the trustee, if the debtor "shall then have reasonable cause to believe" that the enforcement of the transfer would effect a preference.85 The effect of preference to constitute an act of bankruptcy which looks to the bankrupt's intent, and its effect to constitute an avoidable transfer which looks to the creditor's intent must be kept in mind. A preference might be an act of bankruptcy when it could not be avoided by the trustee, and a preference that could be avoided might not constitute the act of bankruptcy upon which the proceedings are founded.86

(3) Intention to create preference requisite.

Under the language of the law, a preference is not an act of bankruptcy unless the bankrupt have an intent to prefer.87 It is true, however, that every person must be intended to presume the necessary consequences of his act. If he is insolvent and knows that he is insolvent and pays a creditor the full amount of his debt, or any amount which gives that creditor in fact a substantial preference, he must be taken to have intended a preference. And yet there may be preferences without intention to create them.88

84. Bankr. Act 1898, SEC. 3.

85. Id., SEC. 60b.

86. In re Smith, (D. C. N. Y.) 176 Fed. 426; Pirie v. C. T. & T. Co. 182 U. S. 438, 455.

87. Goodlander-Robertson Lumber Co. v. Atwood, (C. C. A. 4th Cir.) 152 Fed. 978.

(4) Preference may be by transfer of property or payment of money.

It is not merely the payment of a debt in cash, but any transfer in property by which a creditor obtains a greater percentage than others would get were the bankrupt's then assets divided among them, constitutes a preference.

(5) Creditor must get greater percentage.

To constitute a preference the payment made must be one that so reduces the estate that the other creditors would not get so great a percentage as the preferred creditor were the debtor's then assets divided among them.

(6) No preference unless prior debt.

To constitute a preference of a creditor there must be a payment of a debt. "When one gives an insolvent present value for a transfer of property or when he makes an exchange of property there is no preference."89 In such a case there is a transfer of values. And it is immaterial in such a case that the property transferred does not bring full value. An insolvent person who is not yet bankrupt is not precluded from making transfer, buying and selling, borrowing money and giving valid, unimpeachable security therefor.

88. Goodlander-Robertson Lumber Co. v. Atwood, (C. C. A. 4th Cir.) 152 Fed. 978; In re Hallin, (D. C. Mich.) 199 Fed. 806; In re Columbia Real Estate Co., (D. C. N. Y.) 205 Fed. 980.

89. Ernst v. Mechanic's Bank, (C. C. A. 2nd Cir.) 201 Fed. 664.

A preference means a diminution in value of the estate by a payment of a pre-existing debt. See further of this in discussion whether preferences can be set aside, section 54 post.

(7) Insolvency as an element in this act of bankruptcy.

A debtor cannot commit this act of bankruptcy unless he is insolvent.