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CHAPTER III.

BANKRUPTS.

SEC. 3. Acts of Bankruptcy.-a Acts of bankruptcy by a person shall consist of his having (1) conveyed, transferred, concealed, or removed, or permitted to be concealed or removed, any part of his property with intent to hinder, delay, or defraud his creditors, or any of them; or (2) 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; or (3) suffered or permitted, while insolvent, any creditor to obtain a preference through legal proceedings, and not having at least five days before a sale or final disposition of any property affected by such preference vacated or discharged such preference; or (4) made a general assignment for the benefit of his creditors; or (5) admitted in writing his inability to pay his debts and his willingness to be adjudged a bankrupt on that ground.

b 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. Such time shall not expire until four months after (1) the date of the recording or registering of the transfer or assignment when the act consists in having made a transfer of any of his property with intent to hinder, delay, or defraud his creditors or for the purpose of giving a preference as hereinbefore provided, or a general assignment for the benefit of his creditors, if by law such recording or registering is required or permitted, or, if it is not, from the date when the beneficiary takes notorious, exclusive, or continuous possession of the property unless the petitioning creditors have received actual notice of such transfer or assignment.

c It shall be a complete defense to any proceedings in bankruptcy instituted under the first subdivision of this section to allege and prove that the party proceeded against was not insolvent as defined in this act at the time of the filing the petition against him, and if solvency at such date is proved by the alleged bankrupt the proceedings shall be dismissed, and under said subdivision one the burden of proving solvency shall be on the alleged bankrupt.

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§ 3.1

Construction of the Section.

d Whenever a person against whom a petition has been filed as hereinbefore provided under the second and third subdivisions of this section takes issue with and denies the allegation of his insolvency, it shall be his duty to appear in court on the hearing, with his books, papers, and accounts, and submit to an examination, and give testimony as to all matters tending to establish solvency or insolvency, and in case of his failure to so attend and submit to examination the burden of proving his solvency shall rest upon him.

e Whenever a petition is filed by any person for the purpose of having another adjudged a bankrupt, and an application is made to take charge of and hold the property of the alleged bankrupt, or any part of the same, prior to the adjudication and pending a hearing on the petition, the petitioner or applicant shall file in the same court a bond with at least two good and sufficient sureties who shall reside within the jurisdiction of said court, to be approved by the court or a judge thereof, in such sum as the court shall direct, conditioned for the payment, in case such petition is dismissed, to the respondent, his or her personal representatives, all costs, expenses, and damages occasioned by such seizure, taking, and detention of the property of the alleged bankrupt.

If such petition be dismissed by the court or withdrawn by the petitioner, the respondent or respondents shall be allowed all costs, counsel fees, expenses, and damages occasioned by such seizure, taking, or detention of such property. Counsel fees, costs, expenses, and damages shall be fixed and allowed by the court, and paid by the obligors in such bond.

Analogous Provisions of Former Acts.

R. S., § 5021 (amended by act of June 22, 1874, ch. 390, § 12, and by act of July 26, 1876, ch. 234, § 1); act of 1867, § 39 (amended by act of July 27, 1868, 2); act of 1841, § 7; act of 1800, §§ 1, 2.

Construction of the Section.-This section relates to involuntary bankruptcy. There was some conflict of authority as to the proper construction to be given to similar provisions in former bankruptcy acts. On principle and highest authority, though, we should say that as the section sets forth acts which justify a court in depriving one of his property, being in derogation of common-law rights, it should be construed strictly. Though the

Construction of the Section.

Ch. III.

general purpose of the act is remedial, this section is almost penal in character. It ought not to be enlarged by construction to include acts that may be within the reason of the law, but which are not within the words of the statute according to a reasonable construction. The facts and circumstances justifying one person in instituting a proceeding to take from another all possession and control of his property and to stop him in the pursuit of his business, ought to be defined by law with exactness, and the law should not be construed to include cases not clearly within its scope. (Wilson v. City Bank, 17 Wall. 473; 9 N. B. R. 97; s. c. below, I Dill. 476; Fed. Cas. 17,797; 5 N. B. R. 270; Jones v. Sleeper, Fed. Cas. 7,496; 2 N. Y. Leg. Obs. 131; Act of 1841.)

And this seems to be the construction which has been placed upon the present law. In the case of the Empire Metallic Bedstead Co. C. C. A. 2d Circuit (3 Am. B. R. 575; 39 C. C. A. 372; 98 Fed. 981), the question was whether an application under the New York Statute for a dissolution of a corporation and the appointment of a receiver was an act of bankruptcy. The petition of the creditors in bankruptcy alleged that the statutory procedure was equivalent to a general assignment and hence an act of bankruptcy. But the Circuit Court of Appeals refused to recognize "equivalency" of result and said that it was not the province of a court to "enlarge the classification because the omitted class seems to partake of the sin of the named class."

Many courts, however, have favored a liberal construction. In the case of In re Muller (Deady, 519; Fed. Cas. No. 9,912), the Court says: "Counsel have insisted that this is a special proceeding, purely statutory, and that the bankruptcy act is to be construed most strictly against the petitioning creditor and in favor of the bankrupt. In the opinion of the court this view of the matter is not supported by reason or authority. The act does not attempt to punish the bankrupt, but to distribute his property fairly and impartially among his creditors, to whom in justice it belongs. It is remedial and seeks to protect the honest creditor from being over-reached and defrauded by the unscrupulous. It is intended to relieve the honest but unfortunate debtor from the

§3.] Acts of Bankruptcy - Fraudulent Transfers, Concealments, etc.

burden of liabilities which he cannot discharge, and allow him to commence the business of life anew. Such a statute is not to be construed strictly, but according to the fair import of its terms with a view to effect its objects and to promote justice." (See also favoring a liberal construction, In re Silverman, 4 N. B. R. 523; s. c. 2 Abb. C. C. 243.)

Acts of Bankruptcy.—It is to be first observed in the analysis of this section that the insolvency of the debtor is an essential concomitant in the act of bankruptcy only in subdivisions 2 and 3 relating to transfers with an intent to give preferences to creditors over other creditors and the suffering or permitting a creditor to obtain a preference by legal proceedings. But by paragraph (c) it is provided that solvency at the date of the filing of the petition in bankruptcy against him shall be a complete defense to proceedings instituted under subdivision 1, which relates to fraudulent conveyances made with intent to hinder, delay or defraud the bankrupt's creditors or any of them. In subdivisions 4 and 5 it is immaterial whether insolvency exists at the time of the act of bankruptcy or of the filing of the petition or not. This is an important distinction which will be referred to hereafter under the head of general assignments as acts of bankruptcy. (See, for analysis of this section, West Co. v. Lea, U. S. Supreme Court [1899] 2 Am. B. R. 463; 174 U. S. 590.) It is to be remembered in this connection that insolvency as defined by the Bankruptcy Act, Section 1 (15) is as follows: "A person shall be deemed insolvent within the provisions of this Act whenever the aggregate of his property, exclusive of any property which he may have conveyed, transferred, concealed or removed or permitted to be concealed or removed with intent to defraud, hinder or delay his creditors shall not at a fair valuation be sufficient in amount to pay his debts." See discussion as to the meaning of this definition under section I ante.

First Class of Acts of Bankruptcy-Fraudulent Transfers, Concealments, etc., with Intent to Hinder, Delay or Defraud. Section. 3a (1) By Section 1 (25) “transfer" is defined to include " the

Fraudulent Transfers, Concealments, etc.

[Ch. III. sale and every other mode of disposing of or parting with property or the possession of property, absolutely or conditionally, as a payment, pledge, mortgage, gift or security." Such transfers are declared void if made within four months of bankruptcy by Section 67e post (q. v.). Even if made sooner than four months prior to bankruptcy, they may be avoided by the trustee suing in equity as the representative of creditors (section 70e post).

The acts referred to in this subdivision are: those transfers or conveyances made with intent to defraud, delay or hinder creditors which under the statute of 13 Eliz. ch. 5 (and the common law), were declared void, which statute has been adopted with few changes in nearly every state of the Union. They include all those transfers in which the lack of a change of possession or of delivery, or the want of consideration, as well as other facts, prove or tend to prove an intent to defraud, delay or hinder creditors. Just what acts and circumstances attending the transactions will furnish a legal presumption of the existence of this fraudulent intent, is largely a question, not of the law of bankruptcy, but of the law of fraudulent assignments, and the decisions upon cases of that character will be applicable.

Such acts must be accompanied by an intent to hinder, delay, or to defraud. Intent is a fact to be proven (In re Cowles, I N. B. R. 280; Fed. Cas. 3,297; In re Goldschmidt, Fed. Cas. 5,520; 3 N. B. R. 165; s. c. 3 Ben. 379; Ecfort v. Greely, 6 N. B. R. 433; Fed. Cas. 4,260; Perry v. Langley, 2 N. B. R. 596; s. c. 8 A. L. Reg. 427); but it need not be established by direct proof; in fact, it is hardly susceptible of direct proof. As the mind manifests itself only by outward acts, intent must be inferred from other facts which are proven. (Van Wyck v. Seward, 18 Wend. 374, 395; Newman v. Cordell, 43 Barb. 456.) Intent can be evidenced only by one's acts or admissions. Oral or written admissions that an intent exists, are almost conclusive evidence. All the circumstances accompanying the act and tending to explain the intent, are admissible in evidence. The intention may be inferred from the act itself as a necessary consequence of it, or it may be established by admissions and dec

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