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quired, or a general covenant for further security, will not authorize the debtor to give, and the creditor to receive, security under circumstances which would make it a preference. In other words, the general and indefinite promise is disregarded. A bona fide engagement to convey specific property, amounting to an equitable lien, will, however, be valid, and this is the test.2

In England, the courts of common law have often held that even a general and indefinite promise may validate security or payment which would otherwise be a preference, because it proves that the act was not purely voluntary (mero motu).3 In equity, as we have seen, such a promise has been held invalid, if it was to be carried out only when insolvency was imminent.1 In those cases, however, the whole property was mortgaged, which is not called a preference in England.

§ 87. Ratification before Bankruptcy. Where an insolvent debtor, more than four months before his bankruptcy, of his own motion, and without the knowledge of his creditor, made a conveyance by way of preference, it was held that a ratification by the creditor within the four months did not relate

1 Arnold v. Maynard, 2 Story R. 349, Fed. Cas. No. 561; Graham v. Stark, 3 Ben. 520, Fed. Cas. No. 5676; Ex parte Ames, 1 Lowell, 561, Fed. Cas. No. 323; Bank of Leavenworth v. Hunt, 11 Wall. 391; Brett v. Carter, 2 Lowell, 458, Fed. Cas. No. 1844; Barron v. Morris, 14 N. B. R. 371, Fed. Cas. No. 1055; Lloyd v. Strobridge, 16 N. B. R. 197, Fed. Cas. No. 8435; Burdick v. Jackson, 15 N. B. R. 318; Holmes v. Winchester, 135 Mass. 299.

2 Re Jackson Mfg. Co., 15 N. B. R. 438, Fed. Cas. No. 7153; Ex parte Izard, L. R. 9 Ch. 271; Corn v. Sims, 3 Met. (Ky.) 391; Holmes v. Winchester, 133 Mass. 140; Holmes v. Winchester, 135 Mass. 299; Burn V. Carvalho, 4 Myl. & C. 690. See Ex parte Copeland, 3 Dea. & Ch. 199;

Ex parte Carlon, 4 Dea. & Ch. 120;
Ex parte Flower, ib. 449; Jombart v.
Woollett, 2 M. & C. 389; Ex parte
Barber, 3 M. D. & De G. 174; Ex
parte Steward, ib. 265;
Ex parte
Imbert, 1 De G. & J. 152; Douglass
v. Vogeler, 6 Fed. Rep. 53.

3 Vacher v. Cocks, 1 B. & Ad. 145; Wilson v. Balfour, 2 Camp. 579; Gladstone v. Hadwen, 1 M. & S. 517; Belcher v. Prittie, 10 Bing. 408; Bills v. Smith, 6 B. & S. 314; Morris v. Venables, 15 W. R. 2; Harris v. Rickett, 4 H. & N. 1; Hunt v. Mortimer, 10 B. & C. 44; Bittlestone v. Cooke, 6 E. & B. 296; Harris v. Rickett, 1 H. & N. 1. [Re Harvey, 7 Morrell, 138, is a case where the whole property was not covered.]

* § 85.

back, and the act was avoided.1 Where a debtor, at the time of using certain bonds belonging to his cestui que trust, substituted other securities in their place, and his act was ratified within four months of his bankruptcy, the substitution was held to be good; 2 but though the law of ratification is explained in the opinion, the decision turned rather upon the argument that the true owner might have claimed the substituted security from the assignees on the principle of Taylor v. Plumer.3

On the subject of preference to a seller of goods by returning them, see infra, § 359.

§ 88. Attorneys and Counsel. In the United States it is the practice to permit a debtor to pay a reasonable retaining fee to his counsel to attend to his proceedings in bankruptcy, and this is not a preference.4

§ 89. Preferences by Corporations. When corporations are made subject to the bankrupt law, they are, as debtors, subject to all the preceding rules in respect to preferences.5

There are some decisions that trading corporations, even without the authority of a statute, are bound by a stricter rule of equality than individual debtors, and may not lawfully assign their whole property for the benefit of their creditors, unless they provide for an equal distribution among them.6 This is certainly a rule of natural justice; but it has no more application to a corporation than to an individual. Mr. Morawetz, in his valuable work on Corporations, argues ably in favor of this doctrine, as being not only just, but a fair deduction from the rule that the capital of a company is a trust fund

1 See Strain v. Gourdin, 2 Woods, 380, Fed. Cas. No. 13,521; Re Kansas City Mfg. Co., 9 N. B. R. 76, Fed. Cas. No. 7610.

2 Cook v. Tullis, 18 Wall. 332. 8 3 M. & S. 562.

4 Re Rosenfeld, 2 N. B. R. 116, Fed. Cas. No. 12,057; Re Sidle, 2 N. B. R. 220, Fed. Cas. No. 12,844; Tufts v. Matthews, 10 Fed. Rep. 609; Parsons, Petr., 150 Mass. 343; Act of 1898, § 60 d; infra, § 523.

5 Re Jaycox et al., 13 Blatch. 70, Fed. Cas. No. 7238; Sawyer v. Hoag, 17 Wall. 610.

6 Dabney v. Bank, 3 So. Car. 124; Consolidated Co. v. Varnish Co., 43 Fed. Rep. 204; Farmers' Co. v. San Diego Co., 45 Fed. Rep. 518; Sutton Mfg. Co. V. Hutchinson, 63 Fed. Rep. 496; 2 Morawetz, Corp., 2d ed., §§ 787, 788; Taylor, Corp., 4th ed., § 668, n. 1.

for its creditors.1 This rule, however, only means that the assets shall not be distributed to shareholders to the injury of creditors, and has no bearing on the rights of creditors inter sese. Accordingly, the decided weight of authority is that until proceedings are taken by bill or otherwise to wind up a corporation, it may prefer what honest creditors it will. Thus Kent: "A corporation may also, like an individual, give preferences among creditors when honestly and fairly intended and done. This doctrine is well established in equity."4

§ 90. Preference by Corporation of its Directors. - It has been held in England that though pressure by a creditor relieves the debtor from all imputation of an intent to prefer him, the directors of a corporation cannot exert pressure upon the corporation, because the situation of the parties is not sufficiently adverse. That was a case of the conveyance of the whole property to secure all the directors, but was very properly treated as a preference.

In this country, a corporation was bankrupt, and had secured one of its directors, but more than four months before the

1 Morawetz, 1st ed., §§ 581, 582.

2 Graham v. R. R. Co., 102 U. S. 148; Wabash Ry. Co. v. Ham, 114 U. S. 587; Fogg v. Blair, 133 U. S. 534, 541; Smith Purifier Co. v. McGroarty, 136 U. S. 237, 241.

8 Catlin v. Eagle Bank, 6 Conn. 233; Smith v. Skeary, 47 Conn. 47; Town v. Bank of River Raisin, 2 Douglass, 530. Arthurs v. Comm. Bank, 9 Sm. & M. 394; Dana v. Bank of the United States, 5 W. & S. 223; Buell v. Buckingham, 16 Iowa, 284; Wilkinson v. Bauerle, 41 N. J. Eq. 635; Vail v. Jameson, ib. 648; Bergen v. Porpoise Fishing Co., 42 N. J. Eq. 397; Allis v. Jones, 45 Fed. Rep. 148; Ringo v. Biscoe, 13 Ark. 563; Reichwald v. Commercial Co., 106 Ill. 439; Planters' Bank v. Whittle, 78 Va. 737; Warner v. Mower, 11 Vt. 385; Whitwell v. Warner, 20 Vt. 425; Warfield v. Marshall Co., 72 Iowa, 666; Rollins v. Shaver Co., 80 Iowa, 380; Sargent v. Webster,

13 Met. 497; Glover v. Lee, 140 Ill. 102; Bank v. Salt Co., 90 Mich. 345; Foster v. Mullanphy Co., 92 Mo. 79; Prouty v. Prouty Co., 155 Pa. St. 112; Pyles v. Furniture Co., 30 W. Va. 123; Pond v. Framingham R. R. Co., 130 Mass. 194; Coats v. Donnell, 94 N. Y. 168; Sanford Tool Co. v. Howe, 157 U. S. 312, 318; Gottlieb v. Miller, 47 Ill. App. 588; Butler v. Land Co., 139 Mo. 467; Pairpoint Co. v. Watch Co., 161 Pa. St. 17. [It is doubtful which doctrine is supported by the greater weight of authority. See Taylor, Corp., 4th ed., § 668, and an article by Judge Thompson, "The Power of Corporations to prefer Creditors," 27 Am. L. Rev. 846. See also 5 Thompson, Corp., §§ 64926520, and note to Lyons Co. v. Perry Co., 22 L. R. A. 802.]

4 2 Kent Com. 315, note g.

5 Gaslight Imp. Co. v. Terrell, L. R. 10 Eq. 168.

bankruptcy, and the act was, therefore, not a statutory prefer· ence; but the court held that it was voidable notwithstanding.1

This decision, though just, may be doubted, upon the authority of the cases above cited;2 for if the company is under no obligation to treat all the creditors alike, independently of the bankrupt law, the directors are under no greater disability than other creditors, and a statutory preference must be shown in order to hold them. Two decisions of the Supreme Court were cited in this case, which afford some remote analogy, but their facts were widely different. In connection with this case Mr. Morawetz cites Richards v. N. H. Ins. Co., where an assessment was voted to pay all the debts of the company, and the court held that it was a breach of duty on the part of the directors to pay their own debts first out of the avails of this assessment.

It has been distinctly held in England that directors of an insolvent company may be preferred, like any other creditors, unless they come within the prohibition of the statute.5

At common law, a partner may prefer his copartner at the expense of the creditors of both.6

So

In many of the States the statute law prohibits preferences by corporations, though permitting them to individuals. for national banks, by Rev. Stats., § 5242, there is a special law of preference which enables the receiver to avoid payments, etc., made after "an act of insolvency, or in contemplation thereof," even when the preferred creditor is not a party to and has no notice of the technical fraud. Payments of the banks' circulating notes are excepted, because they have priority by law.

1 Bradley v. Farwell, 1 Holmes, 433, Fed. Cas. No. 1779. See Lippincott v. Shaw Co., 25 Fed. Rep. 577, and cases cited in 5 Thompson, § 6503; Howe v. Sanford Tool Co., 44 Fed. Rep. 231; Bradley v. Converse, 4 Cliff. 375, Fed. Cas. No. 1776; Corbett v. Woodward, 5 Sawy. 403, Fed. Cas. No. 3223; Adams v. Kellor Co., 35 Fed. Rep. 433.

2 Supra, § 89.

3 Koehler v. Black River Falls Co., 2 Black, 715; Drury v. Cross, 7 Wall. 299; and see Jackson v. Ludeling, 21 Wall. 616.

4 43 N. H. 263.

5 Poole, Jackson, & Whyte's Case, 9 Ch. D. 322.

6 Rockwell v. Wilder, 4 Met. 556. 75 Thompson, Corp., § 6493.

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§ 91. Preference by Partners. Acts of preference by partners may be avoided in the same manner as those of individuals; and the assignees of the firm may avoid preferences to joint and to separate creditors.1 If, however, only one of several partners is bankrupt, his assignee cannot avoid a preference given to a joint creditor out of joint funds, because he does not fully represent the joint creditors.2 But if the preference was also a fraud on the solvent partner, as where the bankrupt partner fraudulently paid his separate debt out of joint funds, the latter may join with the assignee in an action against the preferred creditor, - one plaintiff relying on the fraud, and the other on the preference.3

Any contrivance by which a preference is given is voidable. Therefore, though insolvent partners have an undoubted right to dissolve their partnership, yet if they do so within the time limited by the statute, with intent to convert joint into separate assets, and thus work out a preference for the separate creditors through the marshalling adopted in bankruptcy, or if, with like intent, they give a joint promise for a separate debt, or vice versa, the trustees may avoid these acts as preferences, and distribute the assets without reference to them.4

It appears to have been ruled that, if one partner dies after the firm has given a preference, and the survivors become bankrupt, there is no power to recover the property illegally transferred. This is a mistake. The surviving members rep

1 Hague v. Rolleston, 4 Burr. 2174; Burt v. Moult, 1 Cr. & M. 525; Craven v. Edmondson, 6 Bing. 734.

2 Amsinck v. Bean, 22 Wall. 395; Fern v. Cushing, 4 Cush. 357, 358; Cunningham v. Munroe, 15 Gray, 471, 479; Forsaith v. Merritt, 1 Lowell, 336, Fed. Cas. No. 4946; Re Shepard, 3 Ben. 347, Fed. Cas. No. 12,754.

8 Heilbut v. Nevill, L. R. 4 C. P. 354, 5 C. P. 478; Johnson v. Hersey, 10 Cent. L. J. 387; Burt v. Moult, 1 Cr. & M. 525.

Ex parte Shouse, Crabbe, 482, Fed. Cas. No. 12,815; Collins v. Hood,

4 McLean, 186, Fed. Cas. No. 3015;
Re Byrne, 1 N. B. R. 464, Fed. Cas.
No. 2270; Re Waite, 1 Lowell, 207,
Fed. Cas. No. 17,044; Phillips v.
Ames, 5 Allen, 183; Re Johnson, 2
Lowell, 129, Fed. Cas. No. 7369; Ex
parte Snowball, L. R. 7 Ch. 534; Re
Parker, 6 Sawyer, 248; Re Lane, 2
Lowell, 333, Fed. Cas. No. 8044. See
Wilson v. Robertson, 21 N. Y. 587;
Menagh v. Whitwell, 52 N. Y. 146.
See infra, § 468.

5 Withrow v. Fowler, 7 N. B. R. 339, Fed. Cas. No. 17,919.

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