PIUS A. MILLER, TRUSTEE IN BANKRUPTCY OF J. L. BUTT, V. IDA S. MARTIN.*

U. S. District Court, Middle District of Pennsylvania, January 29, 1927.

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No. 43.

SUITS AND ACTIONS BY AND AGAINST TRUSTEE-EVIDENCE-BURDEN OF PROOFTRUSTEE TO ESTABLISH ELEMENT OF VOIDABLE PREFERENCE.

Payments by a bankrupt to a creditor within four months preceding bankruptcy are presumed legal and the burden is on a trustee to overcome this presumption and establish the essential elements of a voidable preference by proving insolvency of the bankrupt at the time the transfer was made, and establish the existence of other creditors of the same class and that the payment operated to give them a lesser percentage of their debts than the creditor receiving the payment and also that such creditor had reasonable cause to believe that the payment would effect a preference. (See Collier, 13th Ed., p. 1327(g); Am. B. R. Digest, § 679.) SAME-EVIDENCE-INFERENCE FROM PROVED FACTS REGARDING PAYMENTS BY

BANKRUPT.

Where, in a proceeding to set aside a transfer as preferential, two inferences of substantially equal weight may reasonably be drawn from the proved facts, that inference must prevail which sustains the transfer. (See Collier, 13th Ed., p. 1327 (g); Am. B. R. Digest, § 677.) PREFERENCES-CREDITOR'S REASONABLE CAUSE FOR BELIEF-MERE SUSPICION DOES NOT AMOUNT TO REASONABLE CAUSE FOR BELIEF.

The phrase "reasonable cause to believe," as applied to a preference, means, not mere suspicion, but such knowledge of the facts as to induce a reasonable belief, or cause for well grounded belief.

(See Collier, 13th Ed., p. 1304 (5); Am. B. R. Digest, § 511.) SAME EVIDENCE INSUFFICIENT TO SHOW REASONABLE CAUSE FOR BELIEF. In an action by a trustee in bankruptcy to set aside a conveyance of real estate made by the bankrupt within four months prior to the adjudication, it is held that the evidence is insufficient to establish that the transferee had reasonable cause to believe that the bankrupt was insolvent at the time of the transfer.

(See Collier, 13th Ed., p. 1327(g); Am. B. R. Digest, § 514.)

Suit in equity by trustee in bankruptcy to set aside conveyance of real estate. Bill dismissed.

Wm. Arch McClean, for plaintiff.

17 F. (2d) 291.

Vincent K. Keesey, for defendant.

JOHNSON, District Judge:

The plaintiff in this case is seeking to set aside the conveyance of real estate made to the defendant, through her attorney, by J. L. Butt. On February 4, 1924, J. L. Butt executed and delivered a deed to J. Donald Swope, attorney for defendant, for two parcels of real estate situate in Gettysburg, Adams county, Pa. On February 21, 1924, J. Donald Swope, attorney for defendant, executed and delivered a deed for the same real estate to Ida S. Martin, defendant.

It is contended by the plaintiff, first, that on February 4, 1924, the date of the execution of the deed in question, J. L. Butt was insolvent; and, secondly, that the conveyance of the said two tracts of real estate by J. L. Butt to J. Donald Swope, attorney for defendant, depleted the estate to which his creditors were entitled, and that such transfer enables the defendant to obtain a greater percentage of her debts than the other creditors in the same class; and, thirdly, that J. Donald Swope, attorney for defendant, and the defendant Ida S. Martin, had reasonable cause to believe that J. L. Butt was insolvent, and that the conveyance would effect a preference in favor of Ida S. Martin, defendant; fourthly, that the conveyance was made within four months prior to the bankruptcy of J. L. Butt.

From the plaintiff's bill of complaint, the answer thereto, and the testimony taken thereon, the court arrives at the following findings of fact:

(1) J. L. Butt, a resident of Gettysburg, Adams county, in the Middle district of Pennsylvania, filed his petition to be adjudged a voluntary bankrupt in the District Court of the United States for the Middle District of Pennsylvania on March 25, 1924.

(2) On March 25, 1924, the said J. L. Butt was adjudicated a voluntary bankrupt, and the case was referred to J. Donald Swope, referee in bankruptcy, with his office in Gettysburg aforesaid.

(3) At the meeting of the creditors at the office of the referee on April 14, 1924, Pius A. Miller, the plaintiff, was elected trustee of the estate of said J. L. Butt, bankrupt.

(4) The plaintiff accepted the trusteeship, was duly qualified, and proceeded to perform the duties of his office.

(5) On February 4, 1924, the said J. L. Butt was indebted to Ida S. Martin, the defendant, in the sum of $11,800 or $12,000.

(6) On February 4, 1924, J. L. Butt and his wife executed and delivered to J. Donald Swope, who was acting as attorney for Ida S. Martin, defendant, their deed, conveying two certain parcels of real estate, situate in Gettysburg aforesaid.

(7) The said deed was entered for record in the office of the recorder of deeds in and for said Adams county in Deed Book 95, p. 257, and conveyed the following described real estate:

Lot No. 1. Beginning at a corner of lot formerly of Sarah A. Butt, No. 2, herein; thence along said lot formerly of Sarah A. Butt, east, 142 feet, to an alley; thence along said alley, south, 29 feet 9 inches; thence by lot of Henry Dustman, west, 142 feet, to Carlisle street; thence along Carlisle street, north, 29 feet 9 inches, to the place of beginning, containing 26.3 perches, neat measure.

Lot No. 2. Beginning on the east side of Carlisle street, at the northwest corner of lot of J. L. Butt, lot No. 1 herein; thence fronting on Carlisle street, north, 72 feet, to the lot formerly of Rev. Samuel Smith, now E. M. Bender; thence by said lastmentioned lot, east, 142 feet, to a public alley; thence by said public alley, south, 72 feet, to lot of J. L. Butt, No. 1 herein; thence by said lot No. 1, 142 feet to the place of beginning.

(8) The consideration money in the said deed, and known as a consideration for the conveyance of the said real estate, was $10,000, and receipt for the same is acknowledged by the grantors.

(9) On February 21, 1924, the said J. Donald Swope and his wife executed and delivered to Ida S. Martin their deed, conveying the premises described in paragraph 7 foregoing; said deed being entered for record in the office of the recorder of deeds in and for Adams county on June 12, 1924.

(10) J. Donald Swope, on February 4, 1924, when he received the deed in question from said J. L. Butt, and on February 21, 1924, when he executed and delivered the said deed to Ida S. Martin, defendant, was attorney for Ida S. Martin, and acting for her in the entire transaction, receiving the deed and said described property for her, and executing and delivering the said deed for the said property to her.

(11) On February 4, 1924, the said J. Donald Swope was employed as attorney by Ida S. Martin, defendant, to collect from

said J. L. Butt a sum of money, to wit, $11,800 or $12,000, which the said J. L. Butt owed the said Ida S. Martin, and the execution and delivery of the deed in question was the result of said attorney's efforts to make the collection.

(12) On February 4, 1924, the said J. L. Butt, grantor in the said deed of that date, was insolvent.

(13) On February 4, 1924, J. Donald Swope, grantee in said deed of February 4, 1924, did not have reasonable cause to believe that his grantor, J. L. Butt, was insolvent.

(14) On February 21, 1924, the said J. L. Butt was insolvent. (15) On February 21, 1924, Ida S. Martin, defendant, grantee in said deed of that date, did not have reasonable cause to believe that the said J. L. Butt, her debtor, was insolvent.

(16) The said conveyances in question of February 4, 1924, and of February 21, 1924, were not made for the purpose of giving a preference to Ida S. Martin, defendant, and to enable her to obtain out of the estate of the said J. L. Butt a larger sum of money than other creditors of the grantor of the same class would obtain.

From the foregoing findings of fact, the court arrives at the following conclusions of law:

(1) On February 4, 1924, the said J. L. Butt was insolvent. (2) Neither Ida S. Martin, defendant, nor her attorney, J. Donald Swope, had reasonable grounds to believe that on February 4, 1924, the said J. L. Butt was insolvent.

(3) On February 4, 1924, neither Ida S. Martin nor her attorney, J. Donald Swope, had any knowledge or any reasonable grounds for believing that the said conveyances from J. L. Butt to J. Donald Swope would effect a preference in favor of Ida S. Martin, defendant, over the other creditors of said J. L. Butt of the same class.

(4) The deeds in question are valid. The bill of complaint, praying the court to declare them void, and to direct the said Ida S. Martin to convey said real estate to said Pius A. Miller, trustee, must be dismissed..

Since the conveyances in question were made within four months of the adjudication of the bankruptcy of J. L. Butt, and since J. L. Butt was insolvent at the time of the conveyances in question, the real question in this case is whether J. Donald Swope,

attorney for Ida S. Martin, or Ida S. Martin, had reasonable cause to believe that such transfer of property by J. L. Butt would effect a preference in favor of Ida S. Martin. The law is properly laid down in Collier on Bankruptcy (13th Ed.) p. 1328, as follows:

"The law presumes that such payments are legal, and the burden of proof is on the trustee, seeking to recover them, to overcome this presumption, and establish the essential elements of a voidable preference. He must prove the insolvency of the debtor at the time the security was given, or the transfer made or recorded, and establish the existence of other creditors of the same class at that time, and that the enforcement of the security or transfer will operate to give them a lesser percentage of their debts than the creditor who receives the transfer or security; and he must also prove the existence of the 'reasonable cause to believe,' and that the payment diminished the estate of the bankrupt. All this must be done by a fair preponderance of all the evidence in the case, and, where inferences from proved facts are to be drawn, the rule obtains that, if two inferences of substantially equal weight may reasonably be drawn from the proved facts, then that inference shall prevail which sustains the transfer or security."

*

* * was enacted, the phrase

"When the bankruptcy law 'reasonable cause to believe,' as applied to a preference, had been judicially defined to mean, not mere suspicion, but such knowledge of the facts as to induce a reasonable belief, or cause for wellgrounded belief, and such definition followed the phrase into the statute." City National Bank v. Slocum (C. C. A., 6th Cir.), 47 Am. B. R. 47, 272 F. 11; citing Grant v. National Bank, 97 U. S. 80, 24 L. Ed. 971; Stucky v. Masonic Bank, 108 U. S. 74, 2 S. Ct. 219, 27 L. Ed. 640; In re Eggert (C. C. A., 7th Cir.), 4 Am. B. R. 449, 102 F. 735; Carey v. Donohue (C. C. A., 6th Cir.), 31 Am. B. R. 210, 209 F. 328; Baxter v. Ord (C. C. A., 6th Cir.), 39 Am. B. R. 273, 239 F. 503.

"In order to invalidate, as a fraudulent preference, within the meaning of the Bankruptcy Act [Comp. St. §§ 9585-9656], a security taken for a debt, the creditor must have had such a knowledge of facts as to induce a reasonable belief of his debtor's insolvency. It is not sufficient that he had some cause to suspect such insolvency." Grant v. National Bank, 97 U. S. 80, 24 L. Ed. 971.

In Grant v. National Bank, 97 U. S. on page 81, 24 L. Ed. 971, Mr. Justice Bradley, in delivering the opinion of the court, said: