Folkerth, Justin H.

Neffner, Howard W.

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NOTES AND COMMENTSBANKRUPTCYBANKRUPTCY PREFERENCES- TIME OF DETERMINING-VOIDABILITYSections 6o (a) and 6o (b) of the Bankruptcy Act, i i U.S.C.A.96 (a) and 96 (b) deal with preferences. Sec. 6o (a) defines a prefer-ence and Sec. 6o (b) lays down the test for determining whether ornot the preference is voidable at the instance of the trustee in bank-ruptcy. In Palmer Clay Products v. Brown, 8o L.Ed. 466, 56 S. Ct.450 (1936) a payment on account was received by a creditor withinfour months of the bankruptcy of the debtor, at a time when the debtorcould have paid all his creditors the same proportion of their claims.It was held that the payment was preferential.Where the transfer is for a present consideration it cannot operateas a preference, even though the debtor is then insolvent, for the estateof the bankrupt would not be diminished or depleted to the prejudice ofthe creditors. Samples v. Getrman-McDonnell-Summers Drug Co. et al.14 Fed. (2d) 170 (D.C. Okl. 1926) ; Johnson v. Burke Manor Bldg.Corp. 48 Fed. (2d) 1031 (C.C.A. 7 th 1931); In re Finley 6 Fed.Supp. 105 (D.C. N.C. 1933); Goldstein v. Rusch 56 Fed. (2d) 1O(C.C.A. 2d 1932); McClure v. Heim-Overly Realty Co. 71 Fed.(2d) IOO (C.C.A. 8th 1934).When a transfer is made for a past consideration, three theorieshave been advanced for determining whether or not a preference iscreated. 3 U. of Ch. L. Rev. 138; 20 Va. L. Rev. 583. One line ofcases has held that no preference has been given if at the time of thetransfer the debtor could have paid all the other creditors of the sameclass the same proportion of their claims, Haas v.Sachs 68 Fed. (2d) 623(C.C.A. 8th 1933);Doggett v. Chelsea Trust Co. 73 Fed. (2d)614 (C.C.A. ISt 1934); Latrobe et al. v. J. H. Cross Co. 29 Fed.(2d) 210 (D.C. Pa. 1928). Other courts have held such a transferto be preferential if it would be so at the time the insolvent was adjudgedbankrupt. Commerce-Guardian Trust & Savings Bank v. Delvin6 Fed. (2d) 518 (C.C.A. 6th 1925); Swift v. Higgins 72 Fed. (2d)791 (C.C.A. 9 th 1934). And it has been argued that the preferen-tial character should be determined at the date of final distribution ofthe bankrupt estate. See W. S. Peck & Co. v.Whittmer, 231 Fed. 893(C.C.A. 8th 1916); Slayton v. Drown, 93 Vt. 290, 17o Ad. 307(1919); Remington, 3rd Ed. Sec. 1813, 20 Va. L. Rev. 583.The Palmer case, has settled this conflict, the court there saying:"Whether a creditor has received a preference is to be determined, notby what the situation would have been if the debtor's assets had beenliquidated and distributed among his creditors at the time the allegedpreferential payment was made, but by the actual effect of the paymentas determined when bankruptcy results." This decision, however, willbe nullified, if a bill now in the Judiciary Committee of the House ofRepresentatives becomes law. This bill, H.R. 10382, in effect adoptsthe third theory set out above that the preferential character should bedetermined at the date of final distribution of the bankrupt estate.A closely related problem of preferences was presented in HartfordAccident & Indemnity Co. v. Coggin, 78 Fed. (2d) 471 (C.C.A. 4 th,1933) where an unrecorded mortgage was given in North Carolinamore than four months before bankruptcy. Recording was made orpossession was delivered within four months. The state law permittedbut did not require recording except as to judgment creditors or subse-quent purchasers without notice. The court held that the transfer couldnot be avoided by the trustee in bankruptcy. While such a preferentialtransfer is an act of bankruptcy under Sec. 3 (a) 2, II U.S.C.A. 21(a) 2, and is actionable for a period of four months subsequent to thepossession or recording under Sec. 3 (b), x i U.S.C.A. 21 (b), Collieron Bankruptcy, 3rd Ed., p. i82b; Glenn on Liquidation, Sec. 199; c.f.,Remmington on Bankruptcy 4 th Ed., Sec. 197, it is not so clear that itis voidable under Sec. 6o (b). This section provides that, "If a bank-rupt shall . . . have made a transfer of any of his property, and if atthe time of the transfer . . . . or of the recording or registering ofthe transfer if by law recording or registering thereof is required, andthe transfer shall then operate as a preference, it shall be voidable by thetrustee."In Carey v. Donohue, 240 U.S. 430, 36 S. Ct. 386, 6o L. Ed.726, L.R.A. 19 17A 295 (1916), it was said that unless recording wasrequired in order to make a transfer valid as against those concerned inthe distribution of the bankrupt's estate, that is, as against creditorsincluding those whose position the trustee is entitled to take by virtueof Sec. 47 (a) 2, 1I U.S.C.A. 75 (a) 2, such a transfer cannot beavoided if made prior to the four months period.At the time of the Carey v. Donohue decision and until 1926, sec-tions 6o (a) and 6o (b) read alike in that neither section had any277NOTES AND COMMENTS278 LAW JOURNAL-MAY, 1936provision as to permissive recording. In 1926 Congress amended sec-tion 6o (a) to provide for permissive recording. By its terms Sec. 6o(a) refers only to the running of the four months period in identifyingthe transfer as a preference. It does not state what preferences arevoidable. Accordingly, the provision regarding required recording inSec. 6o (b), which alone states what preferential transfers are voidable,is not affected by the broadening of the scope of Sec. 6o (a) to includepermissive recording. If in fact the greater power to avoid preferencesnow exists in favor of the trustee, by virtue of the amendment to Sec.6o (a), it does not appear to have been successfully exercised. Thereported cases with some few exceptions, stay well within the rule ofCary v. Donohue, supra. Stover v. Valley Nat. Bank, 48 Fed. (2d)54 (C.C.A. 3rd 193); Bank of Wadesboro v. Little 71 Fed. (2d)513 (C.C.A. 4th 1934); Northern Bond & Mortgage Co. v. King,24 Fed. (2d), i56 (C.C.A. 7 th 1928); In re Gibson et al, 65 Fed.(2d) 921 (C.C.A. 6th 1933); In re Cunningham 64 Fed. (2d) 296(C.C.A. 4 th 1933); First Nat. Bank of Lincoln v. Live Stock Nat.Bank 3 Fed. (2d) 416 (C.C.A. 8th 1929); Lewis v. Ornstein12 Fed. (2d) 652 (C.C.A. 2nd 1926); Credito Y Ahorro Ponceno v.Gorbia, 25 Fed. (2d) 817 (C.C.A. 1st 1928); McLaughlin, Amend-ments of the Bankruptcy Act, 4o Harv. L. Rev. 374, 377.As stated above, a few courts have refused to follow the rule of theCarey case. They contend that sections 6o (a) and (b) should be readtogether. This contention leads to the result that, where recording ofa transfer is permitted by state law, the transfer is voidable by thetrustee, if recording is so delayed as to take place within four months offiling the petition in bankruptcy. These courts say that unless such aconstruction is given to the 1926 amendment to Sec. 6o (a) it is anullity. In re Jackson, (Dist. Ct., W.D. Ark. Fort Smith Div.) 9 Fed.Supp. 719 (1935); Matter of Bowles (Ref., Dist. Ct. Nebr. OmahaDiv.) 14 Am. B.R. (N.S.) 133 (1928), and see Foltz v. Davis 68Fed. (2d) 495 (C.C.A. 7th 1934); and Matter of Wood (WesternDiv. of Texas, Ref.) 21 Am. B.R. (N.S.) 502 (932). The effectof the proposed legislation H.R. io382, supra, is the adoption of thisminority holding.The Hartford case, therefore, in holding that a preferential transfermade prior to four months of filing the petition in bankruptcy butrecorded on possession taken within four months of such filing is notvoidable by the trustee in bankruptcy, though the North Carolina lawpermitted recording, follows the rule of the Carey case and is in linewith the majority of the cases in point.NOTES AND COMMENTS 279No other section of the Bankruptcy Act seems available to thetrustee. If the transfer has been effected prior to bankruptcy, he hasno lien under Sec. 47 (a) 2; and his derivative powers under Sec.70 (e), I I U.S.C.A. 107 (e), to exercise the rights of creditors understate law would be applicable only to transfers made prior to four monthsof bankruptcy and voidable under state law.HOWARD W. NEFFNER.JUSTIN H. FOLKERTH.PRIORITY OF MUNICIPAL CORPORATIONS IN BANKRUPTCYThe City of Lincoln, Nebraska, a municipal corporation, soughtpriority in its claim of $45,000 with interest against the Lincoln TrustCompany, bankrupt. The City based its contention on-Sec. 64b(7) ofthe Bankruptcy Act and also claimed that the bankrupt had custody ofthe fund as a trust fund. The district court and the circuit courtdecided that the city was not within Sec. 64b(7) and the circuit courtheld that there was no trust fund. Held: that a city as a municipalcorporation is entitled to priority under Sec. 64b(7) if as a matter oflocal law the municipality was accorded priority. The case was re-manded to try the issue of local law. City of Lincoln, Neb. et al. v.L. Z. Ricketts, Trustee, etc., 56 S. Ct. 507 (U.S. Law Wk. Mar. 3,1936, Index 607).For an adequate understanding of this problem, the history of stateand federal priority in bankruptcy is necessary. The United States isaccorded priority in insolvent debtor's estates by R.S. Sec. 3466-67(31 U.S.C.A. 191-192) and sureties are subrogated to this priority byR.S. Sec. 3468 (31 U.S.C.A. 193). This statute is the same in sub-stance as that passed as early as 1797- It has been held that the UnitedStates has no sovereign prerogative of priority but its priority is derivedsolely from Congressional enactment. United States v. The State Bankof North Carolina, 6 Pet. 29, 8 L. Ed. 308 (1832). The SupremeCourt has held that R.S. Sec. 3466-68 is in pari materia with the Bank-ruptcy Act and that the Bankruptcy Act of 1898 relegates the priorityof R.S. Sec. 3466-68, if recognized at all in bankruptcy (which pointthe court did not have to decide under the circumstances), to fifth placein payment of claims under Sec. 64b(5) of the Bankruptcy Act of 1898(Now 64 b(7). Guarantee Title and Trust Go. v. Title Guaranteeand Surety Co., 224 U.S. 152 (1912).Contrary to the view of some writers and lower courts, but support-

Bankruptcy Preferences -- Time of Determining -- Voidability

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Bankruptcy Preferences -- Time of Determining -- Voidability

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