Sec. 55. Fraudulent Conveyances

A conveyance made by a debtor in fraud of his creditors may be set aside by the trustee in bankruptcy.

We have seen that fraudulent conveyances may be grouped under two headings: Those without consideration, and those for value. In the first case, the conveyance may be set aside because the transferee has giving nothing, when the giver was at the time insolvent and therefore had no right to deprive his creditors of their debts, by giving away his property; in the second case, we found that the transfer was avoidable whenever the transferee was a party to the fraud. In both of these cases, the trustee may act for the creditors and set aside the fraudulent conveyance, as property belonging to the estate.

In Globe Bank v. Martin,129 the court decides that when any creditor has a right to attach the transfer as fraudulent, the trustee may do so, and the assets so recovered become assets for the benefit of all the creditors even though some of them might not have had the right to set aside the conveyance under the state statute. In this case, the Kentucky statute, which was relied upon by the trustee as giving him his right, as it was such statute through which the creditors would have to have proceeded, gave the right to existing creditors for their benefit, and not to future creditors, but the court decided that where such existing creditors had not perfected their lien by proceedings brought more than four months prior to the bankruptcy, all creditors including creditors becoming such after the fraudulent transfer, would share in the assets.

127. Root Mfg. Co. v. Johnson, (C. C. A. 7th Cir.) 219 Fed. 397.

128. In re Grocer's Baking Co. (D. C. Ala.) 266 Fed. 900; Jaquith v. Alden, 189 U. S. 78.

129. Globe Bank v. Martin, 236 U. S. 288; In re Kohler, (C. C. A. 6th Cir.) 159 Fed. 871.

The right to set aside a fraudulent transfer is not, however, limited (as in the case of avoidable preferences) to four months. The question is, have the creditors when the petition is filed a right, under the state law, to set aside a fraudulent transfer. If so, the right passes to the trustee in bankruptcy.130

A transfer may be fraudulent even when not so in fact, if under the rules of law it is to be deemed fraudulent by reason of the facts. Thus under the "Bulk Sales Act" of some states a transfer of a stock in trade is made fraudulent as to creditors and voidable by them unless the creditors of the seller are given notice before the consideration passes. Such a transaction could therefore be attached by the trustee who would succeed to the rights of the creditors in that respect. So where a seller sells personal property under absolute sale and retains possession, this is deemed absolutely fraudulent in some states, and in others presumptively fraudulent, as to the creditors of the seller. The trustee would succeed to the rights of the creditors of such seller in the event of his bankruptcy.131

130. Stillwegen v. Clum, 245 U. S. 60S.

Sec. 56. Property Held By Bankrupt Claimed By Third Person

131a Property held by bankrupt and claimed by third person does not pass to trustee if the third person could have claimed it against the creditors.

Property held by the bankrupt which is owned by third persons must be delivered to them except where the creditors, had there been no bankruptcy, could have, ignored the real ownership and levied upon it as the bankrupt's property.

The proceedings to recover such property are known as Reclamation Proceedings.

(1) Property held by bankrupt as bailee.

Property in the bankrupt's hands which he holds merely as a bailee, does not pass to the trustee but may be reclaimed by the owner. It is everywhere the law that merely putting one's property in another's possession for lawful purposes does not estop the owner from asserting his title to such property as against the creditors of the party who has the possession. The exigencies of commerce require this to be the law. Property must be placed with others for various purposes - it may be loaned to another; it may be left for safe keeping or on deposit; it may be placed with another for repairs; it may be left with another as collateral; it may be to enable the other as a means to accomplish his agency (as a sample case); it may be consigned to another for sale by him for the use of the consignor. In these and other

131. See In re Robinson Machine Co. (D. C. Mich.) 268 Fed. 165.

131a. For property held by bankrupt in trust see SEC. 53.

cases of bailment - i. e. where there is transfer of possession only and not of ownership - the bankruptcy of the bailee (party in possession) does not operate to divest the bailor of his right to the property, for he is the owner thereof. He is entitled to the specific goods.

(2) Consignments.

A consignment is a bailment and included under the general rule of the above paragraph, but may be specially mentioned because it so frequently arises. A consignment exists where goods are sent to another to be sold by him, for the consignor and in effect as the consignor's agent, all unsold goods to be returned to the consignor. It must be distinguished from a sale on credit, in which case the title passes to the purchaser and the seller becomes a general creditor. It must also be distinguished from a conditional sale in which the vendor retains title though giving possession to the vendee, but retains it merely for purposes of security. A consignment exists whenever the vendor retains title generally, making the vendee merely his agent for purposes of selling the goods, remitting the proceeds (less his commission) and returning all goods that are unsold. The fact that the consignee pays the freight, rent, insurance and other expenses, will not prevent the transaction from being on consignment.

If the goods are on consignment the consignor may reclaim them in bankruptcy.132

(3) Property acquired by bankrupt as conditional vendee.

Conditional sales in which the property is delivered to the buyer and title for purposes of security is retained in the seller are transactions which are good in all their provisions when only buyer and seller are involved, but to be good in most states against creditors must be recorded. Therefore if not recorded, the trustee takes title to property so purchased by the bankrupt, although the seller has for purposes of security reserved title. In Illinois, recording such a transaction will not keep creditors from levying on the property as assets of the buyer and the trustee gets title.

132. In re Columbus Buggy Co. 142 Fed. 159; Franklyn v. Stoughton Wagon Co. 168 Fed. 857.

Illustrating this section, A sells and delivers property to D, and to secure himself for all or part of the unpaid purchase price makes it a part of the contract of purchase that he shall retain the title until D has paid as agreed upon. In this case D has the apparent ownership and in most states, A cannot enforce his title where the rights of third persons intervene unless he has recorded the transaction, just as he must record chattel mortgages. Unless recorded, therefore, the trustee gets title.133

(4) Property owned by bankrupt subject to chattel mortgage.

A chattel mortgage must be properly executed and recorded, or possession taken thereunder in order to be good against third persons. If the petition is filed before this is done, the property is not subject to the chattel mortgage in the hands of the trustee; and also if judgment creditors procure liens prior to the recording of the chattel mortgage or the taking of the possession, they have superior rights over the chattel mortgage which the filing of the bankruptcy petition will not deprive them of even if it does dissolve their liens for the purpose of making them general creditors.

133. In re Nelson, (D. C. S. Dak.) 191 Fed. 233; In re Mina, (D. C Pa.) 270 Fed. 969.

(5) Property held in trust by bankrupt. (See SEC. 53.)