CHAPTER V. PREFERENCES. - § 61. Preferences at Law. The law creating the technical and conventional fraud known as a preference is a natural consequence of the working of a bankrupt or insolvent law, and was originally established by the courts, and afterwards adopted by the statutes. If all creditors are to be treated alike, a debtor cannot be permitted, after he becomes or expects to become insolvent, to treat them unequally. The common law, assuming that all men are and forever must be solvent, refuses to declare that it can be wrong to pay an honest debt. A debt is a valuable consideration, and a conveyance made bona fide to pay or secure a debt equally with one for a new consideration is valid, though the motive be to forestall a creditor who is proceeding to collect his debt by legal diligence.1 Equity follows the law in this respect.2 Even when a debtor admits his insolvency by assigning his property for the benefit of his creditors, he may, at common law and in equity, prefer such of them as he pleases.3 § 62. Preferences in Equity. The bankrupt laws have taught the injustice of preferences, and courts of equity will 1 Holbird v. Anderson, 5 T. R. 235; Pickstock v. Lyster, 3 M. & S. 371; Wood v. Dixie, 7 Q. B. 892; Darvill v. Terry, 6 H. & N. 807; Vane v. Rigden, L. R. 5 Ch. 663; Middleton v. Pollock, 2 Ch. D. 104; Westbury v. Clapp, 12 W. R. 511; Brashear v. West, 7 Pet. 608; Brooks v. Marbury, 11 Wheat. 78; Hatch v. Smith, 5 Mass. 42; Rockwell v. Wilder, 4 Met. 556; National M. & T. Bank v. Eagle Sugar Refinery, 109 Mass. 38; Wilkes v. Ferris, 5 Johns. 335; Wintringham v. Lafoy, 7 Cow. 735; Wilt v. Franklin, 1 Binn. 502; Covanhovan v. Hart, 21 Penn. St. 495; Uhler v. Maulfair, 23 Penn. St. 481; York Cy. Bank v. Carter, 38 Penn. St. 446; Voorhees v. Blanton, 83 Fed. Rep. 234, 239; Eldridge v. Phillipson, 58 Miss. 270. 2 Murray v. Riggs, 15 Johns. 571. 8 Brinley v. Spring, 7 Maine, 241; Haven v. Richardson, 5 N. H. 113; Grover v. Wakeman, 4 Paige, 23, 11 Wend. 187; Ingraham v. Wheeler, 6 Conn. 277. now, as far as they have the power, discountenance them by requiring creditors' bills, in certain classes of cases, to be brought for the benefit of all creditors of equal rank,1 and by themselves distributing assets equally when once they obtain jurisdiction of a firm or a corporation or estate which is insolvent.2 In many of the States statutes have been passed requiring general assignments to be equal in their operation. But these laws are easily evaded by making partial and particular assignments; and besides, they cannot operate beyond the territory of the State which has enacted them. The need of a real and effectual equality has been one of the prevailing motives with Congress in passing a general bankrupt law. There are also statutes of a more general character prohibiting preferences by limited partnerships and by corpo rations. The most remarkable extension of the law is shown by the decisions of late in the United States, that when a corporation is about to stop payment it cannot lawfully prefer its directors, even though there is no bankrupt law governing the case. The reasoning of these decisions would equally invalidate preferences to shareholders. The subject is considered more fully in later sections of this work.3 - § 63. Law of Preference in the United States and England. The law of preference has received a much more logical and complete development in the United States than in England. To exhibit this difference at a glance, I give the definition of a preference as generally received in each country. In England (at least until some late decisions), a preference, voidable by assignees in bankruptcy, is where a debtor, in contemplation of a technical judicial bankruptcy, voluntarily and mero motu makes payment or gives security to an existing creditor without any demand on his part. 1 Warraker v. Pryer, 2 Ch. D. 109; Re Royle, 5 Ch. D. 540. 2 Thompson v. Bennett, 6 Ch. D. 739, and cases cited in the argument. 8 See infra, § 90. 4 See Nunes v. Carter, L. R. 1 P. C. 342, 348, per Lord Westbury. In the United States, a voidable preference exists where a debtor, being insolvent, or contemplating insolvency or bankruptcy, makes a payment, or gives security to a creditor with intent to give him a preference over the other creditors, and the preferred creditor knows of or has reason to believe the intent. The difference between these definitions (and it is a very wide one in practice) is that under the former a positive technical bankruptcy must be in the mind of the debtor, and he must volunteer the payment or security; while by the latter an intent to prefer is the controlling consideration, and this may of course exist though the preference is not purely voluntary, and though a technical bankruptcy is not contemplated. In both countries bankruptcy must follow, or no case can be made out, for it is only against assignees in bankruptcy that any such fraud is possible. One principal reason for the difference between the law in England and in America is that our statutes defined preferences as early as 1841, and were amended from time to time, and the courts followed the statutes. In England, the laws concerning insolvent debtors adopted a definition like that which the courts had given; and no bankrupt act defined preferences until 1869, and although that definition agrees with ours, the habits of the courts had become inveterate, and they imported into the word "preference" all the limitations of the old decisions. Lately there have been some decisions which, if followed, may bring the English law into substantial conformity with ours.1 § 64. Worseley v. DeMattos; Alderson v. Temple. The law of preference, as I have said, was established by the courts. A single decision against such a preference was made in 1680;2 but it was overlooked, and Lord Mansfield put the doctrine upon the footing which it maintained in England down to 1869. In Worseley v. DeMattos,3 that eminent judge reviewed 1 See infra, § 72. 2 Hinton's Case, Freeman, 270. 8 1 Burr. 467. the few decisions upon the subject, -except Hinton's Case, which he overlooked, and declared that a mortgage by a debtor of his whole property to secure his bankers was fraudulent and an act of bankruptcy. The decision was put very distinctly and strongly upon the circumstance that all the debtor's effects were transferred. "There is a great difference," said Lord Mansfield, "between the conveyance of all and of a part. A conveyance of a part may be public, fair, and honest; as a trader may sell; so he may openly transfer many kinds of property by way of security; but a conveyance of all must either fraudulently be kept secret; or produce an immediate absolute bankruptcy." And the last words of the opin"The determination here, is upon the assignment of ion are: ALL." 2 1 The distinction here so strongly insisted on, in language which is often quoted in the books, between the conveyance of all and of a part is unsound as a legal distinction, though as evidence of intent it has value. The true question is one of preference, which may be effected by a conveyance of part, and may not be by the conveyance of all, according to circumstances. The next case is Alderson v. Temple, which is considered the leading case on this subject. The assignees brought trover for a promissory note of £600, signed by A. and B., to the order of the bankrupts, and indorsed by them, and sent by mail to the defendant, a creditor. The jury found that the note was given in exchange for two notes of the bankrupts which had not been paid; that it was sent to the defendant by the bankrupts in contemplation of their insolvency and subsequent failure; and that it had not reached the defendant at the time of the bankruptcy. The associate justices found for the assignees on the ground that the transaction was not complete at the date to which the title of the assignees related. Lord Mansfield refused to rest his decision upon that point, though he admitted its validity, and held that the indorsement itself was fraudulent. After referring to Worseley v. DeMattos and 1 1 Burr. 478. 2 1 Burr. 484. 8 4 Burr. 2235. other cases, he says, among other things: "If a bankrupt, in course of payment, pays a creditor, this is a fair advantage in the course of trade; or if a creditor threatens legal diligence, and there is no collusion; or begins to sue a debtor, and he makes an assignment of part of his goods." As to the case before him, "This was not done in a course of trade; for there never was any dealing between the parties in sending indorsed notes. There was no application made by the defendant. And it was done with a view to positive iniquity; for the bankrupts had received this note from Bryer and Everard for notes of the same value; and knowing they should become bankrupts the next day, to defeat Bryer and Everard of setting off their notes against it, indorse this note to another person. And there was no way of doing justice to Bryer and Everard, but supporting the claim now made by the assignees." § 65. The English Doctrine. The judges, not excepting Lord Mansfield himself, appear to have been alarmed at their audacity in establishing this new fraud, and they proceeded to confine it within narrow and inadequate limits. They held that the course of trade must not be interfered with; and that it was usual in trade for a creditor to demand security for a debt whether due or not; for a surety to do the like; and for a creditor to receive payment in kind: therefore the payment or security must be purely voluntary and unsolicited; any threat, promise, or simple demand will save it. Then, that an intent to prefer could not exist, except it were the sole motive for the act, or, as a learned judge afterwards put it, the motive of the motive; nor unless a technical bankruptcy was contemplated, for there could be no fraud intended upon 1 Arbouin v. Hanbury, Holt N. P. De Tastet v. Carroll, 1 Stark. 88; Doe 575, see reporter's note. v. Gillett, 2 C. M. & R. 579 ; Van Cas2 Thompson v. Freeman, 1 T. R. 155; teel v. Booker, 2 Ex. 691. Cosser v. Gough, ib. 156, note c. Smith v. Payne, 6 T. R. 152; Hartshorn v. Slodden, 2 B. & P. 582; Crosby v. Crouch, 2 Camp. 165, 11 East, 256. Ex parte Griffith, 23 Ch. D. 69, per Bowen, J. [The preference must now be the dominant motive. Re Bell, 10 Morrell, 15; Re Clay, 3 Manson, 31; Re Eaton (1897), 2 Ex parte Scudamore, 3 Ves. 85; Q. B. 16.] |