time when his right accrued or his knowledge of the fraud. Snedicor v. Watkins, 71 Ala. 48 (see also Smith v. Hall, 103 Ala. 235); Robbins v. Sackett, 23 Kan. 301; Welcker v. Staples, 88 Tenn. 49. See also Bobb v. Woodward, 50 Mo. 95; Potter v. Adams, 125 Mo. 118. In Indiana the rule is the same, unless there has been some trick to prevent inquiry or some act of positive concealment. Law v. Smith, 4 Ind. 56; Musselman v. Kent, 33 Ind. 452; Lemster v. Warner, 137 Ind. 79. See also Sankey v. McElevey, 104 Pa. 265; Scranton, etc. Co. v. Lackawanna, etc. Co. 107 Pa.

136.

But in most jurisdictions time does not run against the creditor until he has had notice of the fraud. This is so provided by statute in many States, and is the prevailing rule in equity without the aid of a statute. An overruled decision by Lord Mansfield that fraud is a good replication to a plea of the Statute of Limitations in an action at law has also had some following in this country. See Wood on Limitations, §§ 274-276. A creditor who might by due diligence have discovered the facts has been held not within this protection. Little v. Reynolds, 101 Ga. 594; Wright v. Davis, 28 Neb. 479. But see contra, Way v. Cutting, 20 N. H. 187; Preston v. Cutter, 64 N. H. 461 (conf. Hathaway v. Noble, 55 N. H. 508). Likewise the recording of the deed alleged to be fraudulent has been held to affect creditors constructively with notice. Sims v. Gray, 93 la. 38; Cockrell's Exec. v. Cockrell, (Ky.) 15 S. W. Rep. 1119; Rogers v. Brown, 61 Mo. 187; Hughes v. Littrell, 75 Mo. 573; Potter v. Adams, 125 Mo. 118; Gillespie v. Cooper, 36 Neb. 775.

Furthermore, though the fraud be discovered, time does not begin to run unless the creditor has at that time a right to begin proceedings to avoid the transfer. A judgment against the debtor is a prerequisite to such proceedings at common law. 14 Am. and Eng. Encyc. of Law (2d ed.), 315. There is, therefore, no right until the judgment is obtained. Accordingly, as held in the principal case, time does not begin to run until that moment. Brown v. Campbell, 100 Cal. 635; Jones v. Reed, 1 Humph. 335 (changed by statute, Ramsey v. Quillen, 5 Lea, 184); Compton v. Perry, 23 Tex. 414; Martel v. Somers, 26 Tex. 551. In Alabama, Arkansas, Indiana, Maryland, Massachusetts, Mississippi, North Carolina, Ohio, South Carolina, Tennessee, Virginia, West Virginia, at least, by statute, a creditor may set aside a fraudulent conveyance without first getting judgment. See 14 Am. and Eng. Encyc. of Law (2d ed.), 319. In such States the statute begins to run immediately from the time of the discovery of the fraud. Combs v. Watson, 32 Ohio St. 228; Ramsey v. Quillen, 5 Lea, 184; McBee v. Burden, 7 Lea, 731; Welcker v. Staples, 88 Tenn. 49. In some cases relief has been denied by courts of equity because of laches, though no Statute of Limitations had run. Frenche v. Kitchen, 53 N. J. Eq. 37; Hathaway v. Noble, 55 N. H. 508; Eigelberger v. Kibler, 1 Hill Ch. 113. See also Bank of Charleston v. Dowling, 52 S. C. 345.

SECTION II.

PREFERENCES.1

INTRODUCTORY NOTE.

THE English law in regard to preferences affords little assistance in the consideration of the American law. The early bankruptcy statutes did not forbid preferences, and they were first declared invalid on the ground that they were fraudulent. Lord Mansfield is regarded as the originator of this doctrine. See Worsley v. De Mattos, 1 Burr. 467; Alderson v. Temple, 4 Burr. 2235; Martin v. Pewtress, 4 Burr. 2477; Harman v. Fishar, Cowp. 117; Rush v. Cooper, Cowp. 629. As the doctrine was of judicial creation, and as the basis of it was that the debtor was committing a fraud, it was natural that somewhat narrow limits should be set. Especially it seemed that if the debtor did not wish to give a creditor an unfair advantage, there could be no fraud on his part and hence no fraudulent preference. It was necessary, therefore, that the preferential payment or transfer should be (1) made in contemplation of bankruptcy and (2) made voluntarily

As to the first requisite, in several cases it was held necessary that the debtor should in fact intend to become a bankrupt. Morgan v. Brundrett, 5 B. & Ad. 289; Atkinson v. Brindall, 2 Bing. N. C. 225; Abbott v. Burbage, 2 Scott, 656; Strachan v. Barton, 11 Ex. 647. Other cases held it sufficient if the debtor was in such a condition of utter insolvency that no reasonable man could fail to anticipate bankruptcy. Gibson v. Muskett, 4 M. & G. 160; Gibson v. Boutts, id. 169; Ex parte Simpson, De G. 9; Aldred v. Constable, 4 Q. B. 674. But mere insolvency certainly was always insufficient.

The second requisite has given rise to a great number of decisions involving somewhat artificial distinctions. If the payment was made because of pressure on the part of the creditor the transaction cannot be avoided. Van Casteel v. Booker, 2 Ex. 691. If the debtor was induced by several considerations, among others a desire to prefer, the question is whether that was the dominant motive. Ex parte Griffith, 23 Ch. D. 69; Re Eaton, [1897] 2 Q. B. 16. If, however, the object of the debtor was to escape a criminal prosecution (Ex parte Taylor, 18 Q. B. D. 295; Sharp v. Jackson, [1899] A. C. 419), or to protect a surety from liability (Re Mills, 58 L. T. N. s. 871), or to avoid the bar of the Statute of Limitations (Re Lane, 23 Q. B. D. 74), or to fulfil a supposed legal duty (Re Fletcher, 9 Mor. 8; Re Vingoe, 1 Man. 416), there is no preference. A valid bill of sale given to correct a mistake invalidating a former one is not a preference. Re Tweedale,

1 For convenience of treatment this section covers the subject of preferences regarded not only as acts of bankruptcy, but from other points of view.

[1892] 2 Q. B. 216. Nor does payment by a trader of bills of exchange in due course raise any inference of an intention or view to prefer "because in the ordinary course of business a man must either meet his bills or put up his shutters." Re Clay, 3 Mans. 31. But if the payment of a bill is out of the usual course of business it is otherwise. Re Eaton, [1897] 2 Q. B. 16.

There was no statutory provision in the English bankruptcy acts in regard to preferences until the act of 1869 was passed. Section 92 of that act, which is substantially reproduced, except in one particular, in section 48 of the present act, passed in 1883, provides for the avoidance of preferences. The latter section reads as follows:

"(1) Every conveyance or transfer of property, or charge thereon made, every payment made, every obligation incurred, and every judicial proceeding taken or suffered by any person unable to pay his debts as they become due from his own money in favour of any creditor, or any person in trust for any creditor, with a view of giving such creditor a preference over the other creditors, shall, if the person making, taking, paying, or suffering the same, is adjudged bankrupt on a bankruptcy petition presented within three months after the date of making, taking, paying, or suffering the same, be deemed fraudulent and void as against the trustee in bankruptcy. (2) This section shall not affect the rights of any person making title in good faith and for valuable consideration through or under a creditor of the bankrupt."

In section 92 of the act of 1869 the proviso at the end of the section was that the section should "not affect the rights of any purchaser, payee, or incumbrancer in good faith for valuable consideration.' These words were held to include and protect a creditor who had received payment in ignorance that his debtor was insolvent or intended to prefer him. Butcher v. Stead, L. R. 7 H. L. 839. Under the present act such a construction seems impossible.

The provisions of section 92 of the act of 1869 and section 48 of the act of 1883, abrogated the necessity for a payment to be made in contemplation of bankruptcy in order to be a fraudulent preference substituting as requirements that the payment must be made when the debtor is unable to pay his debts when they become due and actually becomes bankrupt within three months. But the requirement of voluntary action on the part of the debtor is still in full force, "With a view of giving such creditor a preference has been held to mean "with the dominant motive of giving such a preference." See cases above cited. Almost these identical words in the American statutes have received a very different construction, as the cases printed below indicate. What has been said hitherto relates to the right on the part of a trustee in bankruptcy to avoid and recover a preferential payment or transfer. But preferences are, since the act of 1883, also important as acts of bankruptcy. Although the framer of the act of 1869 believed that that act not only invalidated preferences, but also made them acts of bankruptcy, Eden on Bankruptcy, 25, the court held otherwise.

SECT. II.] CHICAGO TITLE, ETC. Co. v. ROEBLING'S SONS CO.

287-40

Ex parte Hodgkin, L. R. 20 Eq. 746; Ex parte Stubbins, 17 Ch. D. 58. The act of 1883 in section 4, however, expressly names preferences as acts of bankruptcy.

Doubtless a chief reason for the simpler and more satisfactory law of preference in this country is that the question was dealt with fully by statute before it had been partially treated by the courts. Section 2 of the act of 1841 defined and forbade preferences, and the act of 1867, copying the insolvent law of Massachusetts and adopting a construction of the meaning of the words copied similar to that laid down by the Massachusetts courts, fixed the American law in the shape which in most respects it now has under the law of 1898.

SECTION II. (continued).

(a) INSOLVENCY.

CHICAGO TITLE & TRUST CO. v. JOHN A. ROEBLING'S
SONS CO.

DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS,
FEBRUARY 8, 1901.

[Reported in 107 Federal Reporter, 71.]

KOHLSAAT, District Judge. The questions of fact herein, as found by the master, will be taken as the ultimate facts in the case, no good grounds to the contrary being shown. Upon these facts there is but one proposition of law to be passed upon by the court, which will be stated in general terms as follows: Where the property of the bankrupt before insolvency consists chiefly of a manufacturing plant and raw materials for use in said plant, the fair valuation of which depends in large part upon the fact that said plant is a going concern, and such fair valuation as a going concern brings the entire fair value of the assets of said bankrupt to a total in excess of the bankrupt's liabilities, would the fact that a judgment creditor caused a levy under his judgment to be made upon such plant, and its sale under such levy, thus destroying the value of said plant as a going concern, and bringing the total value of the assets of said bankrupt, including the sum realized from the sale of the plant under said levy, to a figure below the bankrupt's liabilities, create a preference in favor of said judgment creditor, which could be recovered by the bankrupt's trustee, when such judgment creditor has reasonable cause to believe that such levy and sale would cause the insolvency of the bankrupt as aforesaid? While I regret to be forced to the conclusion, yet I am of the opinion that, under the wording of the present bankruptcy act, and especially the proper interpretation of the words "being insolvent," such action on

40

the part of a judgment creditor would not create a preference recoverable by the trustee under the terms of the act. The exceptions to the master's report will therefore be overruled, the report confirmed, and the petition of the trustee be dismissed for want of equity.1

SECTION II. (continued).

(b) INTENT TO PREFER.

MUNDO v. SHEPARD.

SUPREME JUDICIAL COURT OF MASSACHUSETTS, DECEMBER 10, 1895JUNE 10, 1896.

[Reported in 166 Massachusetts, 323.]

BILL in equity, filed July 2, 1894, by the assignee in insolvency of Adelaide C. Clark, to set aside an assignment of certain accounts made by the insolvent as security for a debt due to the defendants.

The case was heard in the Superior Court, before DEWEY, J., who dismissed the bill, and, at the request of the plaintiff, reported the case for the determination of this court, in substance as follows:

The insolvent, Adelaide C. Clark, was, in 1893, a dressmaker and milliner doing business in Boston, and being at that time indebted for goods sold to her by the defendants, Shepard, Norwell, and Company, in the sum of about $1,700, she, on May 6, 1893, assigned to them as security for her indebtedness certain accounts due and owing to her, amounting in all to about $2,100, it being understood that the surplus of such accounts when collected was to be returned to Mrs. Clark if additional credit to that amount had not been furnished to her. Thereafter, on October 12, 1893, Mrs. Clark filed a voluntary petition in insolvency, and the plaintiff was appointed assignee.

Mrs. Clark testified that she carried on a large business as dressmaker and milliner in Boston; that at the time of the assignment to the defendants her assets were from $9,000 to $11,000, and her liabilities were about $16,500; that of the latter amount $6,500 were debts due mostly for merchandise; that her creditors included many of the large dry goods houses in Boston; that she kept no regular books of account, and she estimated her assets and liabilities from investigations made at the time of the hearing; that most of these liabilities were

1 See Duncan v. Landis, 106 Fed. Rep. 839, 858 (C. C. A.). Under the English acts, the United States act of 1867, and the Massachusetts Insolvent Law, it was uniformly held that insolvency, on the part of a trader at least, meant an inability to pay his debts as they matured, irrespective of the value of the debtor's property. The cases are collected in Lowell, Bankruptcy, § 41.