Bankruptcy, Preference. Agency. Attorney at Law. Where a creditor of one who is insolvent receives from the debtor within four months of his being adjudicated a bankrupt a payment which enables such creditor to obtain a greater percentage of his debt than any other of the creditors of the insolvent of the same class, such a payment can be recovered by a trustee of the bankrupt, afterwards appointed, as a preference under § 60, a, b, of the bankruptcy act of 1898 as amended by the U.S. Sts. of 1903, c. 487, § 13, and of 1910, c. 412, § 11, if such creditor when he receives such payment has information which should lead to knowledge that the payment will effect a preference, although by an honest error of judgment he misinterprets this information and forms the opinion that the payment will not effect a preference.
The fact, that an attorney for a creditor, at the time of receiving for his client from a debtor a payment on account of an overdue debt, is told facts showing that the debtor is insolvent and, understanding the purpose as well as the legal effect of the payment, declares himself willing to take the hazard of a recovery of the amount of the payment by a trustee in bankruptcy if the debtor is adjudicated a bankrupt within four months, will warrant a finding, in an action by a trustee in bankruptcy of the debtor afterwards appointed to recover the amount of the payment as a preference, that the attorney had reasonable cause to believe that when the payment was made the debtor was insolvent and that the payment was a preference; and such knowledge of the attorney is binding upon the creditor under the bankruptcy act of 1898, § 60, b, as amended by the U.S. Sts. of 1903, c. 487, § 13, and of 1910, c. 412, § 11.
At the trial of an action by a trustee in bankruptcy to recover the amount of an alleged preference under the bankruptcy act of 1898, § 60, a, b, as amended by the U.S. Sts. of 1903, c. 487, § 13, and of 1910, c. 412, § 11, there was evidence that the insolvent debtor, when he owed various creditors $6,500 and possessed assets worth $4,500, sold half of his assets for $1,500 and from the proceeds paid $626 to the defendant, to whom he owed $816. Held, that a finding was warranted that the payment to the defendant enabled him to obtain a greater percentage of his debt than any other of the creditors of the same class.
BRALEY, J.
It having appeared, that at a fair valuation the bankrupt's property at the date of transfer was insufficient in amount to pay its debts, the judge was warranted in finding it to have been insolvent as defined by the act itself. U.S. St. of 1898, c. 541, § 1, cl. 15. Eau Claire National Bank v. Jackman, 204 U.S. 522, 532. See Bailey v. Wood, 211 Mass. 37, 44, 45.
But, even if the corporation was insolvent, the plaintiff must show, that "the person receiving it or to be benefited thereby, or his agent acting therein, shall then have reasonable cause to believe that the enforcement of such . . . transfer would effect a preference." U.S. St. of 1898, c. 541, § 60, b, as amended by U.S. St. of 1910, c. 412, § 11. Kaufman v. Tredway, 195 U.S. 271. Beals v. Quinn, 101 Mass. 262. Otis v. Hadley, 112 Mass. 100.
The bankrupt's property had been attached by the defendant to enforce payment of an antecedent unsecured indebtedness for goods sold and delivered, and after effecting a sale of nearly one half of the manufacturing plant the bankrupt transferred within four months prior to the date of adjudication, and in part satisfaction of the debt, three promissory notes received in part payment from the purchaser.
Where there is reasonable cause to believe, that at the date of transfer within the statutory period the debtor is insolvent, and payment is accepted of a debt overdue, it is immaterial whether the creditor actually believes what may have been disclosed as to the true state of affairs. If he prefers to draw inferences favorable to himself, and to ignore information which would have led to knowledge that his debtor was in failing circumstances, he cannot set up his own judgment to the contrary even if honestly entertained, as a reason why he should be permitted to retain a prohibited advantage. Forbes v. Howe, 102 Mass. 427. Whipple v. Bond, 164 Mass. 182. In re George, 1 Lowell, 409, 411. Toof v. Martin, 13 Wall. 40.
By the express words of the amendatory act which are merely declaratory of the rule of law, that knowledge possessed by an agent may be imputed to his principal, the defendant is bound by the information acquired by its attorney who made the attachment and acted for it in effecting the settlement. Rogers v. Palmer, 102 U.S. 263. Sartwell v. North, 144 Mass. 188. The judge from the statements of the bankrupt's officers well might find, that the defendant's attorney upon being fully informed as to the impaired resources of the bankrupt company, and understanding the object as well as the legal effect of the transfer, expressed himself as willing to take the hazard of a recovery back by the trustee, if bankruptcy intervened.
The bankrupt and the defendant must be presumed to have known, that what had been done resulted in a preference, even if the form of transfer consisted of securities received by the bankrupt from a third party. Sawyer v. Turpin, 2 Lowell, 29. Western Tie Timber Co. v. Brown, 196 U.S. 502, 509. Dickinson v. National Security Bank of Richmond, 49 C.C.A. 84; 110 Fed. Rep. 353. U.S. St. of 1898, c. 541, § 60, a, b, as amended by the U.S. Sts. of 1903, c. 487, § 13, and of 1910, c. 412, § 11.
It is maintained, however, that the evidence does not disclose the class of creditors to which the defendant belonged, and there is no preference, because it cannot be determined whether a greater percentage of its debt had been obtained than the amount which other creditors of the same class would receive. U.S. St. of 1898, c. 541, § 60, a. The defendant at the date of the transaction ranked with the class of unsecured creditors shown by the list of accounts payable, which apparently were provable debts. It is not even suggested that they could have been paid in full by the bankrupt, although entitled to share equally with the defendant in the distribution of its property. Nor is it contended, that the trustee has received sufficient assets to enable him to satisfy fully the claims which have been allowed. Kimball v. Dresser, 98 Maine, 519. A transfer of the character shown materially diminished the bankrupt's estate. If allowed to stand it would defeat the purpose of the bankruptcy act, which, after priorities are satisfied, is the distribution of the bankrupt's property equally among all his creditors whether secured or unsecured. U.S. St. of 1898, c. 541, §§ 63, 64, 67, and the several subsections. In re Hapgood, 2 Lowell, 200. Swarts v. Fourth National Bank of St. Louis, 54 C.C.A. 387; 117 Fed. Rep. 1. Jackman v. Eau Claire National Bank, 125 Wis. 465, 479. National Bank of Newport v. National Herkimer County Bank, 225 U.S. 178.
The plaintiff accordingly can recover the amount of the notes with interest from the date of the preferential payment. Clarion Bank v. Jones, 21 Wall. 325.
Exceptions overruled.